Attached files
file | filename |
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EX-10.2 - EX-10.2 - GeoEye, Inc. | w80179exv10w2.htm |
EX-10.1 - EX-10.1 - GeoEye, Inc. | w80179exv10w1.htm |
EX-32.2 - EX-32.2 - GeoEye, Inc. | w80179exv32w2.htm |
EX-31.1 - EX-31.1 - GeoEye, Inc. | w80179exv31w1.htm |
EX-31.2 - EX-31.2 - GeoEye, Inc. | w80179exv31w2.htm |
EX-32.1 - EX-32.1 - GeoEye, Inc. | w80179exv32w1.htm |
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Washington, D.C. 20549
Form 10-Q
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2010 | ||
OR
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number
001-33015
GeoEye, Inc.
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
Delaware | 20-2759725 | |
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
21700 Atlantic Boulevard | 20166 | |
Dulles, VA (Address of principal executive offices) |
(Zip Code) |
(703) 480-7500
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
|
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of shares outstanding of Common Stock, par value
$0.01, as of November 5, 2010 was 22,114,179 shares.
TABLE OF
CONTENTS
In this quarterly report, GeoEye, the
Company, we, our, and
us refer to GeoEye, Inc. and its subsidiaries.
We own or have rights to various copyrights, trademarks, and
trade names used in our business, including the following:
GEOEYE®;
IKONOS®;
MJ
HARDEN®;
ORBIMAGE®;
ORBVIEW®;
ROADTRACKER®;
GEOEYE
FOUNDATIONtm;
GEOPROFESSIONALtm;
GEOSTEREOtm;
GEOFUSEtm;
EYEQtm;
EYEONtm;
SEASTARsm;
SEASTAR FISHERIES INFORMATION
SERVICEsm;
MARINE INFORMATION
SERVICEsm;
MASTERCASTtm;
OCEAN MONITORING
SERVICEsm;
ORBBUOYtm;
ORBMAPtm;
TRUSTED IMAGERY
EXPERTStm;
and VESSEL
TRACKINGtm;
2
PART I
FINANCIAL INFORMATION
Item 1. | Financial Statements. |
GEOEYE,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
September 30, |
December 31, |
|||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 246,701 | $ | 208,872 | ||||
Short-term investments
|
50,159 | | ||||||
Accounts receivable trade and unbilled receivables
(net of allowances: 2010 $1,480; 2009
$923)
|
39,561 | 32,578 | ||||||
Income tax receivable
|
19,257 | 40,237 | ||||||
Restricted cash
|
3,953 | 52,268 | ||||||
Prepaid expenses
|
6,976 | 5,898 | ||||||
Other current assets
|
8,291 | 10,938 | ||||||
Total current assets
|
374,898 | 350,791 | ||||||
Property, plant and equipment, net
|
28,891 | 25,381 | ||||||
Satellites and related ground systems, net
|
603,347 | 505,035 | ||||||
Goodwill
|
34,264 | 34,264 | ||||||
Intangible assets, net of accumulated amortization:
2010 $14,757; 2009 $12,775
|
9,703 | 11,685 | ||||||
Non-current restricted cash
|
11,808 | 13,653 | ||||||
Other non-current assets
|
4,720 | 6,398 | ||||||
Total assets
|
$ | 1,067,631 | $ | 947,207 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities:
|
||||||||
Accounts payable and accrued expenses
|
$ | 41,505 | $ | 33,997 | ||||
Current portion of deferred revenue
|
50,899 | 52,221 | ||||||
Current deferred tax liabilities
|
3,945 | 4,744 | ||||||
Current portion of
long-term
debt
|
| 497 | ||||||
Total current liabilities
|
96,349 | 91,459 | ||||||
Long-term debt
|
382,492 | 380,594 | ||||||
Long-term deferred revenue, net of current portion
|
170,468 | 192,313 | ||||||
Non-current income tax reserve
|
728 | 248 | ||||||
Deferred tax liabilities
|
2,078 | 2,078 | ||||||
Other non-current liabilities
|
431 | 560 | ||||||
Total liabilities
|
652,546 | 667,252 | ||||||
Commitments and contingencies
|
| | ||||||
Stockholders equity:
|
||||||||
Series A convertible preferred stock
|
1 | | ||||||
Common stock
|
221 | 199 | ||||||
Additional paid-in capital
|
356,647 | 227,988 | ||||||
Retained earnings
|
58,216 | 51,768 | ||||||
Total stockholders equity
|
415,085 | 279,955 | ||||||
Total liabilities and stockholders equity
|
$ | 1,067,631 | $ | 947,207 | ||||
See Notes to Unaudited Condensed Consolidated Financial
Statements.
3
GEOEYE,
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Revenues
|
$ | 86,452 | $ | 79,941 | $ | 247,802 | $ | 197,853 | ||||||||
Operating expenses:
|
||||||||||||||||
Direct costs of revenue (exclusive of depreciation and
amortization)
|
26,722 | 23,836 | 77,905 | 70,235 | ||||||||||||
Depreciation and amortization
|
16,363 | 16,347 | 48,585 | 40,743 | ||||||||||||
Selling, general and administrative
|
14,219 | 12,042 | 41,384 | 33,594 | ||||||||||||
Total operating expenses
|
57,304 | 52,225 | 167,874 | 144,572 | ||||||||||||
Income from operations
|
29,148 | 27,716 | 79,928 | 53,281 | ||||||||||||
Interest expense, net
|
(5,719 | ) | (8,659 | ) | (21,714 | ) | (22,839 | ) | ||||||||
Other non-operating expense
|
(16,047 | ) | | (24,466 | ) | | ||||||||||
Gain from sale of investment
|
700 | | 700 | | ||||||||||||
Loss from early extinguishment of debt
|
| | (37 | ) | | |||||||||||
Write-off of prepaid financing costs
|
(6,412 | ) | | (6,412 | ) | | ||||||||||
Income before provision for income taxes
|
1,670 | 19,057 | 27,999 | 30,442 | ||||||||||||
Provision for income taxes
|
(8,046 | ) | (6,530 | ) | (21,452 | ) | (10,100 | ) | ||||||||
Net (loss) income
|
(6,376 | ) | 12,527 | 6,547 | 20,342 | |||||||||||
Preferred stock dividends
|
(99 | ) | | (99 | ) | | ||||||||||
(6,475 | ) | 12,527 | 6,448 | 20,342 | ||||||||||||
Income allocated to participating securities
|
| | (27 | ) | | |||||||||||
Net (loss) income available to common stockholders
|
$ | (6,475 | ) | $ | 12,527 | $ | 6,421 | $ | 20,342 | |||||||
Earnings (loss) per share
|
||||||||||||||||
Basic
|
$ | (0.30 | ) | $ | 0.67 | $ | 0.30 | $ | 1.10 | |||||||
Diluted
|
$ | (0.30 | ) | $ | 0.61 | $ | 0.29 | $ | 0.99 | |||||||
Shares used to compute basic earnings (loss) per share
|
21,792 | 18,617 | 21,544 | 18,544 | ||||||||||||
Shares used to compute diluted earnings (loss) per share
|
21,792 | 20,646 | 21,982 | 20,491 |
See Notes to Unaudited Condensed Consolidated Financial
Statements.
4
GEOEYE,
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended |
||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities:
|
||||||||
Net income
|
$ | 6,547 | $ | 20,342 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Depreciation and amortization
|
48,585 | 40,743 | ||||||
Non-cash recognition of deferred revenue
|
(23,755 | ) | (17,166 | ) | ||||
Non-cash amortization of deferred costs
|
3,218 | 1,045 | ||||||
Amortization of debt discount and prepaid financing costs
|
2,657 | 2,648 | ||||||
Amortization of premium/discount on investments
|
29 | | ||||||
Loss from early extinguishment of debt
|
37 | | ||||||
Bad debt expense and other
|
866 | 288 | ||||||
Change in fair value of financial instrument
|
24,466 | 12 | ||||||
Write-off of prepaid financing costs
|
6,412 | | ||||||
Gain from sale of investment
|
(700 | ) | | |||||
Stock-based compensation
|
4,685 | 1,495 | ||||||
Changes in assets and liabilities:
|
||||||||
Accounts receivable and other current assets
|
(8,963 | ) | (19,701 | ) | ||||
Net transfer from (to) restricted cash
|
1,869 | (18,949 | ) | |||||
Other assets
|
(67 | ) | (3,177 | ) | ||||
Accounts payable and accrued expenses
|
7,860 | (8,225 | ) | |||||
Income taxes receivable/payable and reserves
|
20,661 | 36,570 | ||||||
Deferred revenue and other long-term liabilities
|
588 | 33,352 | ||||||
Net cash provided by operating activities
|
94,995 | 69,277 | ||||||
Cash flows from investing activities:
|
||||||||
Capital expenditures
|
(149,174 | ) | (61,731 | ) | ||||
Net transfer from restricted cash
|
47,757 | | ||||||
Proceeds from sale of investment
|
1,700 | | ||||||
Redemptions of short-term investments
|
| 3,813 | ||||||
Purchases of short-term investments
|
(50,188 | ) | | |||||
Net cash used in investing activities
|
(149,905 | ) | (57,918 | ) | ||||
Cash flows from financing activities:
|
||||||||
Proceeds from issuance of convertible preferred stock, net
|
78,000 | | ||||||
Prepaid financing costs
|
(4,530 | ) | | |||||
Proceeds from exercise of stock options and warrants
|
19,269 | 5,496 | ||||||
Net cash provided by financing activities
|
92,739 | 5,496 | ||||||
Net increase in cash and cash equivalents
|
37,829 | 16,855 | ||||||
Cash and cash equivalents, beginning of period
|
208,872 | 106,733 | ||||||
Cash and cash equivalents, end of period
|
$ | 246,701 | $ | 123,588 | ||||
Supplemental disclosures of cash flow information:
|
||||||||
Interest paid, net of capitalized interest
|
$ | 18,927 | $ | 31,443 | ||||
Income taxes paid
|
3,914 | 129 | ||||||
Transfer of derivative liability to preferred stock value
|
26,560 | | ||||||
Non-cash surrender of common stock to cover tax liability
|
(42 | ) | (277 | ) | ||||
Non-cash issuance of common stock for services provided
|
250 | |
See Notes to Unaudited Condensed Consolidated Financial
Statements.
5
GEOEYE,
INC.
(1) | General |
Business
GeoEye is a leading commercial provider of high-accuracy,
high-resolution Earth imagery, as well as a provider of image
processing services and imagery information services to
U.S. and foreign government defense and intelligence
organizations, domestic federal and foreign civil agencies and
commercial customers. We own and operate three Earth-imaging
satellites, GeoEye-1, IKONOS and Orbview-2, and three airplanes
with advanced high-resolution imagery collection capabilities.
GeoEye-1 is the worlds highest resolution and most
accurate commercial Earth-imaging satellite. In addition to our
imagery collection capacities, we are a global leader in the
creation of enhanced satellite imagery information products and
services. We operate four
state-of-the-art
high-resolution image processing and production facilities. Our
St. Louis facility processes imagery from numerous
commercial and government sensors, in addition to our own, to
produce a variety of value-added products. We believe we are the
only major commercial imagery satellite operator who can produce
imagery from multiple satellite sources in addition to our own.
Our satellite and aerial imagery products and services provide
our customers with timely and accurate location intelligence,
enabling them to analyze geospatial information and monitor and
map areas of interest to their needs and demands. We serve a
growing global market that requires high-resolution imagery and
precision mapping products for applications such as national
defense and intelligence, online mapping, environmental
monitoring and resource management, energy exploration, asset
monitoring, urban planning, infrastructure planning and
monitoring, disaster preparedness and emergency response. We
believe the combination of our highly accurate satellite and
aerial imaging assets, our high-resolution image processing and
production facilities, especially our multi-source production
capability, and our color digital imagery library differentiate
us from our competitors. This enables us to deliver a
comprehensive range of imaging products and services to our
diverse customer base.
Basis
of Presentation
The condensed consolidated financial statements of GeoEye have
been prepared in accordance with the rules and regulations of
the U.S. Securities and Exchange Commission, or SEC. The
financial information included herein, other than the condensed
consolidated balance sheet as of December 31, 2009, has
been prepared without audit. The condensed consolidated balance
sheet as of December 31, 2009, has been derived from, but
does not include, all the disclosures contained in, the audited
consolidated financial statements for the year ended
December 31, 2009. In the opinion of management, these
unaudited condensed consolidated financial statements include
all adjustments and accruals that are necessary for a fair
presentation of the results of all interim periods presented
herein and are of a normal recurring nature.
These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and
accompanying notes included in GeoEyes Annual Report on
Form 10-K
for the year ended December 31, 2009. The results of
operations for the interim period presented are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2010.
Additionally, certain amounts in the prior period have been
reclassified to conform to the current period presentation.
Principles
of Consolidation
The condensed consolidated financial statements include the
accounts of GeoEye and all of its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in
consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States,
or GAAP, requires management to make judgments, estimates and
assumptions that affect the
6
amount reported in the Companys condensed consolidated
financial statements and accompanying notes. Actual results
could differ materially from those estimates.
Restricted
Cash
The Company is party to irrevocable standby letters of credit,
in connection with contracts between GeoEye and third parties,
in the ordinary course of business to serve as performance
obligation guarantees. As of September 30, 2010, the
Company had $15.8 million classified as restricted cash as
a result of the irrevocable standby letters of credit.
Approximately $4.0 million is available within one year and
is classified as current, and the remaining $11.8 million
is available through 2022.
In connection with the issuance of the 2015 Notes in 2009 (see
Note 8), the Company deposited $47.8 million of the
net proceeds into a restricted cash account. During the third
quarter of 2010, these restricted proceeds were used to finance
a portion of the costs of constructing a new high-resolution
satellite.
Investments
We record our investments in debt securities at amortized cost
or fair value, and classify these securities as short-term
investments on the consolidated balance sheet when the original
maturities at purchase are greater than ninety days but less
than one year.
The Companys short-term investments consist of debt
securities which include commercial paper, corporate bonds,
agency notes, variable rate demand notes and certificates of
deposit. Investments in debt securities that the Company has the
positive intent and ability to hold to maturity are recorded at
amortized cost and classified as
held-to-maturity.
Investments in debt securities that are not classified as
held-to-maturity
are carried at fair value and classified as
available-for-sale.
We evaluate our investments for
other-than-temporary
impairment on a quarterly basis.
Other-than-temporary
impairment occurs when the fair value of an investment is below
our carrying value, and we determine that difference is not
recoverable in the near future. Factors we consider to make such
determination include the duration and severity of the
impairment, the reason for the decline in value and the
potential recovery period, and our intent to sell, or whether it
is more likely than not that we will be required to sell the
investment before recovery of the amortized cost basis.
As of September 30, 2010, we categorized our investments as
either
available-for-sale
or
held-to-maturity,
and all of these outstanding short-term investments mature
within one year. Although the variable-rate demand notes have
long-term contractual maturity dates of 20 to 30 years, the
interest rates reset weekly. Despite the long-term nature of the
underlying securities, they are classified as short-term due to
our ability to quickly liquidate or put back these securities.
As of December 31, 2009, we had no investments.
Preferred
Stock
In September 2010, the Company issued Series A Convertible
Preferred Stock, or the Preferred Stock, par value of $.01 per
share. Cumulative dividends on the Preferred Stock are payable
at a rate of 5% per annum of the $1,000 liquidation preference
per share. At the Companys option, dividends may be
declared and paid in cash out of funds legally available, when,
as and if declared by the Board of Directors of the Company. If
not paid in cash, an amount equal to the cash dividends due is
added to the liquidation preference. Dividends payable in cash
are recorded in current liabilities. All dividends payable,
whether in cash or as an addition to the liquidation preference,
are recorded as a reduction to our retained earnings.
Earnings
per Share
Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number
of common shares outstanding during the period. Net income
available to common shareholders is equal to net income less
preferred stock dividends and income allocated to participating
securities. The Companys preferred shares are
participating securities. Diluted earnings per share is
calculated by dividing net income available to common
shareholders as adjusted for the effect of dilutive common
equivalent shares by the
7
weighted average number of common and dilutive common equivalent
shares outstanding during the year. Common equivalent shares
consist of the common shares issuable upon the conversion of the
convertible preferred shares (using the if-converted method) and
those issuable related to stock options, deferred stock units,
employee stock purchase plan shares and non-vested stock (using
the treasury stock method).
New
Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board, or
FASB, issued revised guidance on revenue from multiple
deliverable arrangements including principles and application
guidance on whether multiple deliverables exist, how the
arrangement should be separated and the allocation of the
consideration. Additionally, this revised guidance requires an
entity to allocate revenue in multiple-element arrangements
using estimated selling prices of deliverables if
vendor-specific or other third-party evidence of value is not
available. The new guidance is to be applied on a prospective
basis for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010, with earlier adoption permitted. We are currently
evaluating the impact of this accounting guidance and do not
expect any significant impact on our consolidated financial
statements.
In October 2009, the FASB revised its guidance on accounting for
revenue that contains tangible products and software. The new
guidance revised the scope of software revenue guidance, such
that software included together with tangible products would not
be included within its scope. The revised guidance is to be
applied on a prospective basis for revenue arrangements entered
into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. We
are currently evaluating the impact of this accounting guidance
and do not expect any significant impact on our consolidated
financial statements.
In January 2010, the FASB issued new guidance that requires new
disclosures for fair value measurements and provides
clarification for existing disclosures requirements. More
specifically, it requires reporting entities to 1) disclose
separately the amount of significant transfers into and out of
Level 1 and Level 2 fair-value measurements and to
describe the reasons for the transfers, and 2) provide
information on purchases, sales, issuances and settlements on a
gross basis rather than net in the reconciliation of
Level 3 fair-value measurements. This guidance is effective
for interim and annual reporting periods beginning after
December 15, 2009, except for the Level 3 fair-value
measurements disclosures that are effective for fiscal years
beginning after December 15, 2010. The adoption of the
updated guidance did not have an effect on the Companys
consolidated results of operations, financial condition or cash
flow during the first nine months of 2010.
In March 2010, the Patient Protection and Affordable Care Act,
or PPACA, and the Health Care and Education Reconciliation Act
were both signed into law. While the new law may impact our
healthcare plan, we currently believe this impact will not be
material. We will continue to review the impact of the new
healthcare legislation.
(2) | NextView Program |
The U.S. governments National Geospatial-Intelligence
Agency, or NGA, announced in March 2003 that it intended to
support, through the NextView program, the continued development
of the commercial satellite imagery industry. The NGA also
announced that it intended to award two imagery providers with
contracts to support the engineering, construction and launch of
the next generation of imagery satellites. On September 30,
2004, the NGA awarded us a contract as the second provider under
the NextView program and, as a result, we contracted for the
construction of a new satellite, GeoEye-1. Under the NextView
program, we began delivering imagery to the NGA from our IKONOS
satellite in February 2007 and from our GeoEye-1 satellite in
the first quarter of 2009. GeoEye-1 was launched in September
2008 and started commercial operations and obtained
certification from the NGA in February 2009, at which point the
satellite commenced full operations. Total capitalized costs
(including financing and launch insurance costs) of the GeoEye-1
satellite and related ground systems incurred were
$478.3 million.
Under the NextView contract, the NGA agreed to support the
project with a cost share totaling approximately
$237.0 million spread over the course of the project
development and subject to various milestones. On March 19,
2009, the NGA had paid the Company its cost share obligation in
full. GeoEye had deferred recognition of the cost share amounts
from the NGA as revenue until GeoEye-1s in-service date in
February 2009. We recognize this
8
revenue on a straight-line basis over the expected nine-year
depreciable operational life of the satellite. During the three
and nine months ended September 30, 2010, we recognized
$6.0 million and $18.1 million of deferred revenue
under the NextView contract, respectively. The Company built,
launched and deployed GeoEye-1 for less than the maximum cost
specified in the NGA contract. As a result, we credited a
portion of the NGAs cost share payments, approximately
$20.0 million, against imagery purchase obligations during
2009.
On December 9, 2008, we entered into the NextView Service
Level Agreement, or SLA, with the NGA under which the NGA
agreed to purchase GeoEye-1 imagery from us through
November 30, 2009. On September 1, 2009, the NGA
extended the SLA through March 31, 2010. In addition, the
NGA, on March 1, 2010, modified the SLA, giving it the
option to extend the term of the SLA beyond March 31,
2010. The SLA was extended through August 31, 2010. The
NextView SLA provided for monthly payments of
$12.5 million, subject to a maximum reduction of 10% based
on performance metrics. Under the NextView SLA, to the extent
that less than $12.5 million was paid by the NGA in any
month, the shortfall was used to fund an extension of the
contract. On August 6, 2010, the NGA awarded us a new
contract under the EnhancedView program, which includes the
EnhancedView SLA on terms similar to the NextView SLA. The
EnhancedView SLA replaced the NextView SLA portion of the
NextView program as of September 1, 2010. We recognized
$25.0 million and $99.6 million of imagery revenue
under the NextView SLA during the three and nine months ended
September 30, 2010, respectively and $38.1 million and
$87.1 million of imagery revenue during the three and nine
months ended September 30, 2009, respectively.
(3) | EnhancedView Program |
On August 6, 2010, the NGA awarded us a contract under its
EnhancedView program that is worth up to $3.8 billion,
assuming the NGA exercises all of its options and we perform as
specified. The award provides for a new satellite imagery
delivery SLA; the engineering, construction and launch of
GeoEye-2; the design and procurement of associated ground
station equipment; and the design and procurement of additional
infrastructure to support government operations, value-added
products and other services, including web-based delivery of
information. This competitively awarded contract supports the
EnhancedView program by providing products and services that
will help meet the increasing geospatial intelligence needs of
the intelligence community and the Department of Defense.
The award provides for a new satellite imagery delivery SLA with
the NGA valued at up to $2.8 billion. The EnhancedView SLA
initially provides for continued monthly payments by the NGA of
up to $12.5 million ($150 million per year), subject
to a maximum reduction of 10% based on performance metrics.
Under the EnhancedView SLA, when GeoEye-2 becomes operational,
which we currently expect will occur in 2013, payments under the
award will increase by an additional $15.3 million per
month ($183.6 million per year). The term of the
EnhancedView SLA is one year, with nine one-year renewal options
exercisable by the NGA. Imagery deliveries under the
EnhancedView SLA began on September 1, 2010, and the
imagery is collected by the Companys existing satellite
constellation, with GeoEye-2 to collect additional imagery when
it becomes operational.
As part of the EnhancedView Agreement, the NGA has agreed to
contribute up to $337.0 million of the overall construction
and launch costs of the GeoEye-2 satellite and associated ground
station equipment. The contribution will be made in two cost
share payments: the first payment of approximately
$111.0 million when the GeoEye-2 satellite is delivered to
integration and test; and the second payment, and balance of the
cost share, when the GeoEye-2 satellite becomes operational.
The award also provides for up to an estimated
$702.0 million for value-added products and services and
our EyeQ Web Mapping Services to be delivered over the life of
the EnhancedView SLA. This award component includes funding for
the design and procurement of additional infrastructure to
support government operations.
This program replaced the NextView program, except that GeoEye
will continue to fulfill existing NextView value-added product
and services orders until such orders are complete. New
value-added product and services orders are expected to be
placed under the EnhancedView contract. The NextView SLA portion
of the NextView program was replaced by the EnhancedView SLA as
of September 1, 2010. We recognized $12.3 million of
imagery revenue under the EnhancedView SLA during the three and
nine months ended September 30, 2010, respectively.
9
(4) | Investments |
As of September 30, 2010, short-term investments consisted
of the following (in thousands):
Amortized |
Gross Unrecognized |
Estimated |
||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Available-for-sale
securities:
|
||||||||||||||||
Variable-rate demand notes
|
10,000 | | | 10,000 | ||||||||||||
Held-to-maturity
securities:
|
||||||||||||||||
Commercial paper
|
19,940 | | (1 | ) | 19,939 | |||||||||||
Corporate bonds
|
5,219 | 6 | | 5,225 | ||||||||||||
Agency notes
|
5,000 | 1 | | 5,001 | ||||||||||||
Certificates of deposit
|
10,000 | | | 10,000 | ||||||||||||
Total short-term investments
|
50,159 | 7 | (1 | ) | 50,165 | |||||||||||
As of September 30, 2010, there were no
other-than-temporary
impairments of the Companys investments.
(5) | Property, Plant and Equipment |
Property, plant and equipment consisted of the following (in
thousands):
September 30, |
||||||||
2010 | December 31, 2009 | |||||||
Land and buildings
|
$ | 7,285 | $ | 7,239 | ||||
Furniture, computers and equipment
|
39,833 | 31,970 | ||||||
Leasehold improvements
|
3,428 | 3,342 | ||||||
Vehicles and airplanes
|
2,228 | 2,096 | ||||||
Accumulated depreciation
|
(26,916 | ) | (20,419 | ) | ||||
Subtotal
|
25,858 | 24,228 | ||||||
Property, plant and equipment in process
|
3,033 | 1,153 | ||||||
Property, plant and equipment, net
|
$ | 28,891 | $ | 25,381 | ||||
We record property, plant and equipment at cost. We also
capitalize certain internal and external costs incurred to
develop software for internal use. Costs of major enhancements
to internal use software are capitalized, while routine
maintenance of existing software is charged to expense as
incurred. Depreciation expense related to property, plant and
equipment was $2.3 million and $2.1 million for the
three months ended September 30, 2010 and 2009,
respectively, and $6.7 million and $5.5 million for
the nine months ended September 30, 2010 and 2009,
respectively.
(6) | Satellites and Related Ground Systems |
Satellites and related ground systems consist of the following
(in thousands):
September 30, |
||||||||
2010 | December 31, 2009 | |||||||
Satellites
|
$ | 414,158 | $ | 416,658 | ||||
Ground systems
|
83,728 | 83,728 | ||||||
Accumulated depreciation
|
(104,733 | ) | (64,827 | ) | ||||
Subtotal
|
393,153 | 435,559 | ||||||
Satellites and ground systems in process
|
210,194 | 69,476 | ||||||
Satellites and related ground systems, net
|
$ | 603,347 | $ | 505,035 | ||||
10
The capitalized costs of the Companys satellites and
related ground systems include internal and external direct
labor costs, internally developed software, material and
depreciation costs related to assets that support the
satellites construction and development. The cost of the
Companys satellites and related ground systems also
includes capitalized interest incurred during the construction,
development and initial in-orbit testing period. The launch
insurance premiums, including the period from launch through
in-orbit calibration and commissioning, have been capitalized as
part of the cost of the satellites and are amortized over the
useful life of the satellites.
As of September 30, 2010 and December 31, 2009, we
have incurred total capitalized costs of $204.0 million and
$66.8 million, respectively, related to the Companys
development efforts for EnhancedView, primarily consisting of
costs for the construction of GeoEye-2.
The Company maintains insurance policies for GeoEye-1 with both
full coverage and total-loss-only coverage in compliance
with our indentures. As of September 30, 2010, we carried
$250.0 million in-orbit insurance on GeoEye-1, comprised in
part of $187.0 million of full coverage to be paid if
GeoEye-1s capabilities become impaired as measured against
a set of specifications. Of such coverage, $137.0 million
expires December 1, 2010; and $50.0 million expires
September 6, 2011. We also carry $63.0 million of
insurance in the event of a total loss of the satellite, which
expires December 1, 2010. The IKONOS satellite is insured
for $20.0 million of in-orbit coverage, which expires on
December 1, 2010.
Total satellite and related ground systems depreciation expense
was $13.4 million and $13.6 million for the three
months ended September 30, 2010 and 2009, respectively, and
$39.9 million and $33.2 million for the nine months
ended September 30, 2010 and 2009, respectively.
(7) | Income Taxes |
The Companys effective tax rate was 39.5% and 37.0% before
discrete items for the nine months ended September 30, 2010
and 2009, respectively. Income tax expense was $8.0 million
and $6.5 million including discrete items for the three
months ended September 30, 2010 and 2009, respectively.
Income tax expense was $21.5 million and $10.1 million
including discrete items for the nine months ended
September 30, 2010 and 2009, respectively. The
Companys effective tax rate exclusive of discrete items
differs from the federal tax rate due to state and local income
taxes, the recording of unrecognized tax benefits, adjustments
to our recorded valuation allowance and permanent book/tax
difference items.
The impact of the Preferred Stock issuance (see
Note 9) relating to the fair value adjustment of the
Preferred Stock Commitment of approximately $26.6 million
is not deductible for tax purposes and contributes to an overall
effective tax rate of 76.6% for the nine months ended
September 30, 2010.
(8) | Long-Term Debt |
On October 9, 2009, the Company issued $400.0 million
aggregate principal, net of original issue discount of
$20.0 million, of 9.625% Senior Secured Notes due
October 1, 2015, or the 2015 Notes. Interest is payable on
the 2015 Notes semi-annually in arrears on April 1 and October 1
of each year. At any time on or after October 1, 2013, the
Company may redeem, on one or more occasions, all or part of the
2015 Notes at 104.813% of principal for the subsequent
12-month
period and at 100% of principal on October 1, 2014, and
thereafter. Proceeds from the sale of the 2015 Notes were used
in part to redeem all of our Senior Secured Floating Rate Notes
due 2012, or the 2012 Notes.
In August 2010, the Company completed the exchange of
$400.0 million aggregate principal amount of its 2015
Notes, for notes that have been registered under the Securities
Act of 1933, or the Securities Act, as amended. The terms of the
registered notes are the same as the terms of the original
notes, except that they are now registered under the Securities
Act. The transfer restrictions, registration rights and
additional interest provisions are not applicable to the
registered notes.
The 2015 Notes issued by the Company are unconditionally
guaranteed jointly and severally, on a senior secured
first-priority basis, by all existing and future domestic
restricted subsidiaries of the Company, or the Guarantor
Subsidiaries. The 2015 Notes and the guarantees are secured by a
lien on substantially all of the assets of the Company and the
guarantors. Except for a minor investment in a foreign
subsidiary, the Company does not have any independent assets or
operations other than its ownership in all of the capital stock
of its Guarantor Subsidiaries. Since inception, all of the
Companys operations have been conducted through its
wholly-owned subsidiaries.
11
See Note 15, Subsequent Event, for further description of
our long-term debt.
Interest
Expense, Net
The composition of interest expense, net, was as follows (in
thousands):
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest expense
|
$ | 10,647 | $ | 8,695 | $ | 31,906 | $ | 26,098 | ||||||||
Capitalized interest
|
(4,806 | ) | | (9,980 | ) | (2,919 | ) | |||||||||
Interest income
|
(122 | ) | (36 | ) | (212 | ) | (340 | ) | ||||||||
Total interest expense, net
|
$ | 5,719 | $ | 8,659 | $ | 21,714 | $ | 22,839 | ||||||||
Interest expense, net, primarily includes interest expense on
our 2015 Notes as well as interest on our previously redeemed
2012 Notes for the three and nine months ended
September 30, 2010 and 2009, respectively. Interest
expense, net, also includes amortized prepaid financing costs
and amortization of debt discount.
(9) | Convertible Preferred Stock |
On March 4, 2010, the Company entered into a binding
commitment with Cerberus Capital Management, L.P. to purchase
preferred stock and provide debt financing, the proceeds of
which were to be used for development and launch of GeoEye-2.
Subsequently, on March 22, 2010, the Company entered into a
Stock Purchase Agreement and a Note Purchase Agreement with
Cerberus Satellite LLC, or Cerberus. This additional financing
related to the development and launch of GeoEye-2 was necessary,
because the original proposal for EnhancedView required that,
upon a successful contract award, the Company would need to
provide a letter of credit for the full amount of any potential
cost share award for the development of GeoEye-2 that would be
received from the NGA for a period of up to three years after
the NGAs certification of the satellites imagery.
Under the Stock Purchase Agreement, Cerberus agreed to purchase
from the Company and the Company agreed to sell to Cerberus,
subject to certain conditions including a successful contract
award requiring a letter of credit, up to 115,000 shares of
a newly issued series of convertible preferred stock of the
Company, having an initial liquidation preference of $1,000 per
share. If the Company received a contract award without the
letter of credit requirement, the Company would no longer be
obligated to issue 115,000 shares of Preferred Stock to
Cerberus, but Cerberus would have the option to purchase
80,000 shares of the Preferred Stock. Under the terms of
the Note Purchase Agreement, at the Companys option, and
assuming a letter of credit requirement, Cerberus also agreed to
provide the Company with debt financing of $100.0 million,
contingent upon the Company receiving an award from the NGA with
a letter of credit requirement. This letter of credit
requirement was subsequently eliminated.
The Company was awarded the EnhancedView contract without the
letter of credit requirement, thus the debt financing of
$100.0 million was not issued and the Notes Purchase
Agreement expired. During the first quarter of 2010, the Company
had paid a non-refundable commitment fee of 2%, or
$2.0 million, of the face value of the Cerberus debt
financing, and incurred other costs related to the debt
financing. These costs incurred with respect to the Note
Purchase Agreement were written off at the time of the contract
expiration. Therefore, total unamortized prepaid financing costs
of $6.4 million, including the non-refundable commitment
fee, were expensed in the third quarter of 2010.
The Preferred Stock Commitment represented an arms length
exchange of value between the Company and Cerberus that
contained multiple elements. The Preferred Stock Commitment was
comprised of a Contingent Forward Sale of 115,000 shares of
Preferred Stock, a Contingent Written Call option on
80,000 shares of Preferred Stock and a $2.3 million
contingent fee payment by the Company. All elements of the
Preferred Stock Commitment were executed together in
contemplation of each other as a single unit of account with
three distinct mutually exclusive settlement alternatives and
represented an obligation of the Company to issue shares of
Preferred Stock that were redeemable for cash by the Company
upon conditional events that were outside of the Companys
control.
12
We determined that this financial instrument, not in the form of
a share, contained a conditional obligation on the part of the
Company to redeem its equity shares by transferring assets in
the future and was therefore, presented as a liability and was
initially and subsequently measured at fair value until Cerberus
purchased the preferred stock on September 22, 2010.
On September 22, 2010, we consummated the preferred stock
issuance pursuant to the Stock Purchase Agreement with Cerberus.
Pursuant to the terms of the Stock Purchase Agreement and as a
result of the EnhancedView award by the NGA being made without
the letter of credit requirement, Cerberus purchased
80,000 shares of Preferred Stock having a liquidation
preference of $1,000 per share. This resulted in net proceeds to
the Company of $78.0 million, after discounts and before
issuance costs.
The Preferred Stock is convertible on issuance, at the option of
the holders. The liquidation value of $1,000 per preferred
share, and the conversion rate of $29.76 per common share, allow
the Preferred Stock to be initially convertible into
2.7 million shares of common stock of the Company. The
Preferred Stock represents an ownership interest assuming
conversion of such Preferred Stock to the Companys common
stock, of approximately 11% as of September 30, 2010.
On or after September 22, 2016, and, subject to the right
of the holder to first convert into common stock of the Company,
the Company may at its option redeem the Preferred Stock, in
whole or in part, provided the weighted average trading price
for the common stock of the Company is equal to or greater than
$52.08 for a period of 30 or more consecutive trading days
immediately preceding the call for redemption, and the common
stock underlying the Preferred Stock is registered on an
effective registration statement.
The holders of the Preferred Stock are entitled to receive
cumulative dividends payable quarterly at the rate of 5% per
annum of the liquidation preference of $1,000 per share. At the
Companys option, dividends may be declared and paid in
cash out of funds legally available when, as and if declared by
the Board of Directors of the Company. Dividends are payable
quarterly in arrears on January 1, April 1, July 1 and
October 1 with the first dividend payable on October 1,
2010. If not paid in cash, an amount equal to the cash dividend
due will be added to the liquidation preference. The Preferred
Stock shall also participate in dividends on common stock, if
declared. In the event of a change in control of the Company,
the dividends payable to the Preferred Stock holders shall be
increased to 15% per annum. The Company declared a dividend on
the Preferred Stock on September 30, 2010 and paid
$0.1 million on October 1, 2010. The dividend payable
as of September 30, 2010 was included under current
liabilities as of that date.
The holders of the Preferred Stock will vote with the common
stock on an as-converted basis, but no holder of Preferred Stock
may vote more than the equivalent of 19.99% of the
Companys outstanding voting securities. As long as
Cerberus either (i) owns at least 50% of the Preferred
Stock (or common stock issuable upon conversion thereof) or
(ii) owns Preferred Stock representing at least 7.5% of the
Companys outstanding voting securities, on a
fully-converted basis, it will be entitled to appoint one
director to the Companys Board of Directors. In addition,
as long as Cerberus either (i) owns at least 50% of the
Preferred Stock (or common stock issuable upon conversion
thereof) or (ii) owns Preferred Stock representing at least
5% of the Companys outstanding voting securities, on a
fully-converted basis, it will be entitled to appoint one
observer to attend all meetings of the Companys Board of
Directors. On October 27, 2010, a Cerberus representative
was appointed to the Companys Board of Directors.
In the event of a change in control of the Company, the holders
of Preferred Stock will have the option to exchange their
Preferred Stock and receive either (i) the amount and form
of consideration that would have been received had such
Preferred Stock been converted to common stock immediately prior
to consummation of such transaction or (ii) cash in an
amount equal to 115.0% of the then-applicable liquidation
preference of such Preferred Stock, plus any declared but unpaid
dividends. Until the redemption price is paid in full, the
conversion amount submitted for redemption may be converted, in
whole or in part, by the holder into shares of common stock of
the Company.
The Preferred Stock will rank senior upon liquidation to any
other series of capital stock or other equity securities of the
Company. In the event of a liquidation event, the holders of the
Preferred Stock shall be entitled to receive, in cash, an amount
per preferred share equal to the liquidation preference amount
of $1,000 per share plus accrued dividends. This shall be paid
out of the assets of the Company, whether from capital or from
earnings
13
available for distribution to its stockholders, before any
amount shall be paid to the holders of capital stock of the
Company.
Until converted by the holders of the Preferred Stock or
redeemed by the Company, the Preferred Stock shall be recorded
within the permanent equity section of the consolidated balance
sheet of the Company as all the redemption conditions are solely
within the control of the Company. On September 22, 2010,
the Preferred Stock Commitment was valued at $26.6 million
and the change in the value from June 30, 2010, of
$16.0 million was recorded as a non-operating expense in
the third quarter 2010. The fair value of the Preferred Stock
Commitment on that date of $26.6 million was then
transferred to additional paid-in capital and included in the
basis of the Preferred Stock.
(10) | Fair Value Measurements |
The Company applies authoritative accounting guidance for fair
value measurements of financial and nonfinancial assets and
liabilities. The guidance defines fair value as the price that
would be received in the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. The guidance requires disclosure of the
extent to which fair value is used to measure financial assets
and liabilities, the inputs utilized in calculating valuation
measurements, and the effect of the measurement of significant
unobservable inputs on earnings, or changes in net assets, as of
the measurement date. There is an established hierarchy for
inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs
by requiring that the most observable inputs be used when
available. There are three levels of inputs that may be used to
measure fair value:
Level 1: quoted prices (unadjusted) in
active markets for identical assets or liabilities
Level 2: observable prices that are based
on inputs not quoted on active markets, but corroborated by
market data
Level 3: unobservable inputs are used
when little or no market data is available
GeoEyes financial instruments include cash and cash
equivalents, short-term investments, restricted cash, accounts
receivable, accounts payable, accrued liabilities and debt. The
carrying amounts of cash and cash equivalents,
available-for-sale
short-term investments, restricted cash, accounts receivable,
accounts payable and accrued liabilities approximate their
respective fair values due to the short-term nature of these
instruments. The Company records debt at cost, net of debt
discount and issuance costs.
At September 30, 2010, financial assets and liabilities
that were required to be measured for disclosure purposes at
fair value on a recurring basis consisted of cash and cash
equivalents,
available-for-sale
short-term investments, restricted cash, accounts receivable,
accounts payable, accrued liabilities and debt.
The following table provides information about the financial
assets and liabilities measured at fair value on a recurring
basis (in thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||
Carrying |
Estimated |
Carrying |
Estimated |
|||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Available-for-sale
securities
|
10,000 | 10,000 | | | ||||||||||||
Senior Secured Notes (due 2015)
|
382,492 | 438,000 | 380,594 | 411,500 | ||||||||||||
Senior Secured Floating Notes (due 2012)
|
| | 500 | 500 |
As of September 30, 2010, our financial assets that are
required to be measured for disclosure purposes at fair value
are our short-term investments in variable-rate demand notes. We
classified these securities as Level 2 instruments due to
the usage of quoted market prices and observable market data.
The Company issued $400.0 million of 2015 Notes, due
October 1, 2015, and used a portion of the proceeds to
repurchase $249.5 million of the 2012 Notes with
$0.5 million remaining outstanding until January 2010. We
classify the 2015 Notes within Level 2 as the valuation
inputs are determined based on quoted prices and market
observable data. The fair value of the 2012 Notes as of
December 31, 2009, was determined based on market trades of
the 2012 Notes and was classified within Level 2.
14
(11) | Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses consisted of the following
(in thousands):
September 30, |
||||||||
2010 | December 31, 2009 | |||||||
Accounts payable and accrued expenses
|
$ | 11,577 | $ | 14,196 | ||||
Accrued payroll
|
10,285 | 10,077 | ||||||
Accrued expenses subcontractors
|
294 | 1,023 | ||||||
Accrued interest payable
|
19,250 | 8,701 | ||||||
Dividends payable
|
99 | | ||||||
Total accounts payable and accrued expenses
|
$ | 41,505 | $ | 33,997 | ||||
(12) | Stockholders Equity |
Earnings
per Share
Basic earnings per share, or EPS, is computed based on the
weighted-average number of shares of the Companys Common
Stock outstanding. Diluted EPS is computed based on the
weighted-average number of shares of the Companys Common
Stock outstanding and other dilutive securities. Securities
which contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating
securities and are required to be included in the computation of
basic EPS and diluted EPS pursuant to the two-class method. We
determined our preferred stock is a participating security.
The following is a reconciliation of the numerators and
denominators of the basic and diluted EPS computations (in
thousands):
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator for basic and diluted earnings (loss) per share:
|
||||||||||||||||
Net (loss) income
|
$ | (6,376 | ) | $ | 12,527 | $ | 6,547 | $ | 20,342 | |||||||
Preferred stock dividends
|
(99 | ) | | (99 | ) | | ||||||||||
$ | (6,475 | ) | $ | 12,527 | $ | 6,448 | $ | 20,342 | ||||||||
Income allocated to participating securities(1)
|
| | (27 | ) | | |||||||||||
Net (loss) income available to common stockholders
|
$ | (6,475 | ) | $ | 12,527 | $ | 6,421 | $ | 20,342 | |||||||
Denominator:
|
||||||||||||||||
Weighted average shares outstanding used to compute basic
earnings (loss) per share
|
21,792 | 18,617 | 21,544 | 18,544 | ||||||||||||
Dilutive effect of:
|
||||||||||||||||
Warrants
|
| 1,841 | 152 | 1,732 | ||||||||||||
Stock options, deferred stock units, employee stock purchase
plan shares and non-vested stock
|
| 188 | 286 | 215 | ||||||||||||
Weighted average shares outstanding and dilutive securities used
to compute diluted earnings (loss) per share
|
21,792 | 20,646 | 21,982 | 20,491 | ||||||||||||
(1) | For the three months ended September 30, 2010, participating securities were not included in the calculations of (loss) earnings per share, as we were in a loss position and their inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2009, we did not have any participating securities. |
15
For the three months ended September 30, 2010,
2.7 million potential common shares from the conversion of
preferred stock and 0.4 million stock options, deferred
stock units, employee stock purchase plan shares and non-vested
stock were not included in the calculation of diluted EPS as we
were in a loss position and their inclusion would have been
anti-dilutive. For the nine months ended September 30,
2010, 2.7 million potential common shares from the
conversion of preferred stock and 0.3 million stock options
were excluded from the calculation of diluted EPS, as their
inclusion would have been anti-dilutive. For the three and nine
months ended September 30, 2009, 0.1 million and
0.2 million stock options, respectively, were excluded from
the computation of dilutive EPS as the exercise price exceeded
the average market price during the period.
Changes
in Stockholders Equity
Changes in stockholders equity for the nine months ended
September 30, 2010, consisted of the following (in
thousands):
Balance at January 1, 2010
|
$ | 279,955 | ||||||
Net income for the nine months ended September 30, 2010
|
6,547 | |||||||
Warrant exercises
|
18,323 | |||||||
Issuance of common stock
|
1,195 | |||||||
Surrender of common stock to cover employees tax liability
|
(42 | ) | ||||||
Foreign currency translation adjustment
|
(39 | ) | ||||||
Stock-based compensation
|
4,685 | |||||||
Issuance of preferred stock
|
104,560 | |||||||
Preferred stock dividends
|
(99 | ) | ||||||
Balance at September 30, 2010
|
$ | 415,085 | ||||||
During 2010, we granted a total of 0.3 million shares of
non-vested stock which vest over three- to four-year periods and
0.3 million stock options which vest over a four-year
period. In addition, we granted 0.1 million restricted
stock units to executive officers as part of a Long Term
Incentive Plan, or LTIP. These restricted stock units have both
performance and service requirements that vest over a two-year
period and are subject to a three-year restriction on the sale
or transfer of the shares.
In June 2010, the stockholders approved the 2010 Omnibus
Incentive Plan, or the 2010 Plan, which provides for the
granting of a maximum of 1.45 million additional shares of
the Companys Common Stock to participants under the 2010
Plan.
Comprehensive
(Loss) Income
For the three and nine months ended September 30, 2010 and
2009, there were no material differences between net (loss)
income as reported and comprehensive (loss) income.
Warrants
There were no outstanding warrants as of September 30,
2010. Of the outstanding warrants as of December 31, 2009,
1.8 million were exercised for shares of the Companys
Common Stock at $10 per share through March 25, 2010. The
remaining warrants, which were immaterial, expired unexercised
on March 25, 2010.
(13) | Significant Customer and Geographic Information |
The Company operates in a single industry segment, in which it
provides imagery, imagery-processing services and imagery
information products and services to customers around the world.
For the three months ended September 30, 2010 and 2009,
GeoEye recognized revenue related to contracts with the
U.S. government, the Companys largest customer, of
$55.2 million and $53.6 million, representing 64% and
67% of total revenues, respectively. For the nine months ended
September 30, 2010 and 2009, the Company recognized revenue
of $164.9 million and $129.7 million under its
contract with the U.S. government, representing
16
67% and 66% of total revenues, respectively. GeoEye had no other
customers for whom revenues exceeded 10% of total revenues
during the three or nine months ended September 30, 2010 or
2009.
The Company has two product lines, which are: (a) Imagery,
including the NextView cost share, and (b) Production and
Other Services.
Total revenues were as follows (in thousands):
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30 | September 30 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Imagery
|
$ | 66,696 | $ | 62,092 | $ | 187,426 | $ | 150,776 | ||||||||
NextView cost share
|
6,038 | 6,038 | 18,114 | 15,023 | ||||||||||||
Production and other services
|
13,718 | 11,811 | 42,262 | 32,054 | ||||||||||||
Total revenues
|
$ | 86,452 | $ | 79,941 | $ | 247,802 | $ | 197,853 | ||||||||
Total domestic and international revenues were as follows (in
thousands):
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30 | September 30 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Domestic
|
$ | 62,523 | $ | 57,919 | $ | 184,409 | $ | 139,276 | ||||||||
International
|
23,929 | 22,022 | 63,393 | 58,577 | ||||||||||||
Total revenues
|
$ | 86,452 | $ | 79,941 | $ | 247,802 | $ | 197,853 | ||||||||
Our property, plant and equipment and ground systems are held
domestically.
(14) | Commitments and Contingencies |
Contractual
Obligations
The following table summarizes our contractual obligations at
September 30, 2010:
Payments Due by Year | ||||||||||||||||||||||||||||
Less than |
1 to 2 |
2 to 3 |
3 to 4 |
4 to 5 |
||||||||||||||||||||||||
Contractual Obligations
|
1 Year | Years | Years | Years | Years | Thereafter | Total | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Long-term debt obligations
|
$ | | $ | | $ | | $ | | $ | | $ | 400,000 | $ | 400,000 | ||||||||||||||
Operating lease obligations
|
2,107 | 2,582 | 2,430 | 2,559 | 2,406 | 18,376 | 30,460 | |||||||||||||||||||||
Interest expense on long-term debt(1)
|
38,500 | 38,500 | 38,500 | 38,500 | 38,500 | 19,250 | 211,750 | |||||||||||||||||||||
Purchased obligations(2)
|
42,066 | 83,874 | 27,920 | | | | 153,860 | |||||||||||||||||||||
Total contractual obligations
|
$ | 82,673 | $ | 124,956 | $ | 68,850 | $ | 41,059 | $ | 40,906 | $ | 437,626 | $ | 796,070 | ||||||||||||||
(1) | Represents contractual interest payment obligations on the $400.0 million outstanding principal balance of our 2015 Notes, which bear interest at a rate per annum of 9.625%. | |
(2) | Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that are enforceable and legally binding. As of September 30, 2010, purchase obligations include ground systems, communication services and EnhancedView-related commitments. |
In addition to the above, the Company has entered into
commitments subsequent to September 30, 2010, totaling up
to $278.2 million, primarily in purchase obligations, which
expire in 2012 and 2013. Also, subsequent to September 30,
2010, the Company closed a debt offering of $125.0 million
in aggregate principal of 8.625% Senior Secured Notes due
October 1, 2016, or the 2016 Notes. Interest payments on
the new $125.0 million commitment will be made
semi-annually in arrears on April 1 and October 1 of each year
(see Note 15).
17
Operating
Leases
The Company has commitments for operating leases primarily
relating to equipment and office and operating facilities. We
lease various real properties under operating leases that
generally require us to pay taxes, insurance, maintenance and
minimum lease payments. These leases contain escalation
provisions for increases as a result of increases in real estate
taxes and operating expenses. Substantially all of these leases
have lease terms ranging from three to twelve years. Total
rental expense under operating leases for the three and nine
months ended September 30, 2010 was approximately $0.9 and
$2.0 million, respectively, and the total rental expense
under operating leases for the three and nine months ended
September 30, 2009, was approximately $0.5 and
$1.6 million, respectively. In August 2010, we entered into
a twelve-year lease agreement for a total commitment of
$26.6 million for office space to relocate our corporate
headquarters in Virginia.
Contingencies
GeoEye, from time to time, may be party to various lawsuits,
legal proceedings and claims arising in the normal course of
business. The Company cannot predict the outcome of these
lawsuits, legal proceedings and claims with certainty.
Nevertheless, the Company believes that the outcome of any
existing or known threatened proceedings, even if determined
adversely, should not have a material adverse impact on the
Companys financial results, liquidity or operations.
(15) | Subsequent Event |
On October 8, 2010, the Company closed a debt offering of
$125.0 million in aggregate principal of 8.625% Senior
Secured Notes due October 1, 2016, or the 2016 Notes.
Interest payments on the new $125.0 million commitment will
be made semi-annually in arrears on April 1 and October 1 of
each year. At any time on or after October 1, 2013, the
Company may on one or more occasions redeem all or part of the
2016 Notes at 104.313% of principal for the subsequent
12-month
period, at 102.156% of principal on October 1, 2014 for the
subsequent
12-month
period and at 100% of principal on October 1, 2015, and
thereafter.
The net proceeds of the 2016 Notes offering are being used for
general corporate purposes, which may include working capital,
future production and services expansion, contingent capital
expenditures and other strategic opportunities.
The 2016 Notes are unconditionally guaranteed, jointly and
severally, on a secured second-priority basis, by all existing
and future domestic restricted subsidiaries of the Company. The
2016 Notes and the guarantees are secured by a lien on
substantially all of the assets of the Company and the
guarantors.
18
FORWARD-LOOKING
STATEMENTS
All statements other than those of historical facts included in
this Quarterly Report on
Form 10-Q,
or Quarterly Report, including those related to our financial
outlook, liquidity, goals, business strategy, projected plans
and objectives of management for future operating results, are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, as
amended, or Exchange Act. These forward-looking statements
generally are identified by the words believe,
project, expect, anticipate,
estimate, intend, strategy,
plan, may, should,
will, would, will be,
will continue, will likely result and
similar expressions. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for certain
forward-looking statements as long as they are identified as
forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual
results to differ materially from the expectations expressed or
implied in the forward-looking statements.
These forward-looking statements are subject to numerous
assumptions, risks and uncertainties, based on our current
expectations and projections about future events, including, but
not limited to, the factors set forth below, and under the
captions Business, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and
Part 1-
Item 1A Risk Factors in our Annual Report
on
Form 10-K
for the year ended December 31, 2009, filed with the SEC on
March 12, 2010, or 2009 Annual Report, and in our other
Exchange Act filings. The forward-looking statements made in
this Quarterly Report on
Form 10-Q
reflect our intentions, plans, expectations, assumptions and
beliefs about future events. Our actual results, performance or
achievements could be materially different from any future
results, performance or achievements expressed or implied by
such forward-looking statements. Although we believe the
expectations reflected in these forward-looking statements are
based on reasonable assumptions, there is a risk that these
expectations will not be attained, and that any deviations will
be material. We disclaim any obligation or undertaking to
disseminate any updates or revisions to any forward-looking
statement contained in this Quarterly Report to reflect any
changes in our expectations or any change in events, conditions
or circumstances on which any statement is based.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The information included in this Quarterly Report should be read
in conjunction with the consolidated financial statements and
accompanying notes included in our 2009 Annual Report. In
preparing the discussion and analysis contained in this
Item 2, we assume that readers have read or have access to
the discussion and analysis contained in the 2009 Annual Report
and in our other Exchange Act filings. In addition, the
following discussion and analysis should be read in conjunction
with our condensed consolidated financial statements and related
notes, and Part I
Item 1A Risk Factors, which describes key
risks associated with our operations and industry, and
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations section of the 2009 Annual
Report.
Overview
GeoEye is a leading commercial provider of high-accuracy,
high-resolution Earth imagery, as well as a provider of image
processing services and imagery information services to
U.S. and foreign government defense and intelligence
organizations, domestic federal and foreign civil agencies and
commercial customers. We own and operate three Earth-imaging
satellites, GeoEye-1, IKONOS and Orbview-2, and three airplanes
with advanced high-resolution imagery collection capabilities.
GeoEye-1 is the worlds highest resolution and most
accurate commercial Earth-imaging satellite. In addition to our
imagery collection capacities, we are a global leader in the
creation of enhanced satellite imagery information products and
services. We operate four state of the art high-resolution image
processing and production facilities. Our St. Louis
facility processes imagery from numerous commercial and
government sensors, in addition to our own, to produce a variety
of value-added products. We believe we are the only major
commercial imagery satellite operator who can produce imagery
from multiple satellite sources in addition to our own. Our
satellite and aerial imagery products and services provide our
customers with timely and accurate location intelligence,
enabling them to analyze geospatial information and monitor and
map areas of interest to their needs and demands. We serve a
growing global market that requires high-resolution imagery and
precision mapping products for applications such as national
defense and intelligence, online mapping, environmental
monitoring and resource management, energy exploration, asset
monitoring, urban planning,
19
infrastructure planning and monitoring, disaster preparedness
and emergency response. We own one of the largest commercial
color digital satellite imagery libraries in the world, which
contains more than 483 million square kilometers of color
imagery of the Earth. We believe the combination of our highly
accurate satellite and aerial imaging assets, our
high-resolution image processing and production facilities,
especially our multi-source production capability, and our color
digital imagery library differentiate us from our competitors.
This enables us to deliver a comprehensive range of imaging
products and services to our diverse customer base.
Our principal sources of revenue are derived from imaging
services, the sale of satellite imagery directly to end users or
value-added resellers, the provision of direct access to our
satellites, and associated ground system and processing
technology upgrades and operations and maintenance services. We
also derive significant revenue from value-added production
services where we combine our images with data and imagery from
our own and other sources to create sophisticated information
products. We have recently initiated information services
pursuant to which we derive revenue from hosting information for
customers and delivering it through Web services.
Revenues are generally recognized upon delivery of products or
services. Revenues from the NGA cost share amounts received
under our NextView contract used for the construction of the
GeoEye-1 satellite are recognized on a straight-line basis over
the expected nine-year operational life of the satellite, which
started commercial operations in February 2009. Our operating
expenses principally include direct costs of revenue
(principally labor and overhead, subcontractor and other direct
costs, and satellite insurance); depreciation and amortization,
principally relating to our satellites; and selling, general and
administrative expenses, which include costs associated with
administrative and general management functions, and costs from
marketing, advertising, promotion and other selling expenses.
Our expenses also include interest expense on our 2015 Notes. We
capitalize interest incurred during satellite and ground system
construction and development and in-orbit commissioning and the
portion of the premiums associated with the insurance coverage
of the launch and in-orbit commissioning period of our
satellites. Accordingly, prior to the start of GeoEye-1s
commercial operations, we capitalized a portion of insurance
premiums in the cost of the satellite that will be amortized
over the estimated life of GeoEye-1. Following launch and
in-orbit commissioning, insurance premium amounts are charged to
expense ratably over the related policy periods. We are
currently in the process of construction of the GeoEye-2
satellite, which includes the receipt of cost share amounts from
the NGA under the EnhancedView contract upon expected completion
of certain milestones in 2012 and 2013.
Products
and Services
We offer a wide range of imagery products and services,
including the collection of satellite and aerial imagery,
imagery processing, production services, development of
satellite collection systems, operations and maintenance of
collection systems and information services. Our customers
receive products tailored to their needs, applications and
business and government operations.
Satellite
Imagery
We offer a wide range of high-resolution satellite imagery
products that provide our customers with time-critical visual
imagery, data and information, which we divide into three
general categories:
Geo. Our Geo product, which is the foundation
of the imagery product line, is a map-oriented image suitable
for a broad range of customer uses. Geo images are suitable for
customer visualization and monitoring applications and are
delivered to our customers in a data and information format
capable of being processed into other advanced imagery products
using standard commercially available software.
GeoProfessional. Our GeoProfessional products
consist of imagery that has been aligned and geographically
corrected by our experienced staff of production personnel to
provide the most accurate and precise imagery currently
available from a commercial satellite provider. Our production
personnel also have the ability to combine various satellite and
aerial images into a single, highly detailed and comprehensive
image. Available in various levels of accuracy, these
GeoProfessional products are suitable for feature extraction,
change detection, base mapping and other similar geo-location
applications.
20
GeoStereo. Our GeoStereo product uses at least
two images of the same location at different angles to provide
our customers with a three-dimensional image of a given
location. GeoStereo provides the base images that are used for
three-dimensional feature recognition and extraction. These
GeoStereo products support a wide range of imagery applications
such as digital elevation model creation, building height
extraction, spatial layers and three-dimensional feature
extraction.
Aerial
Imagery
Our aerial imagery products are designed to support specific
customer requests for high-resolution and highly accurate
images. We offer two main types of aerial imagery collected by
our dedicated fleet of three imaging aircraft: (1) digital
aerial imaging; and (2) light detection and ranging (LiDAR)
imaging (an optical remote sensing technology using laser pulses
to determine distances to an object or surface). The use of
digital aerial imaging provides our commercial and government
customers with complete digital images, which can be easily
stored in a data management system. The LiDAR technology is a
valuable tool for measuring and recording elevation data for use
in topographic mapping and three-dimensional terrain and surface
modeling, useful in the field of engineering.
Production
Services
Images and image products generated by our production service
operations are purchased by both U.S. government agencies
and commercial customers. Production services typically entail
the processing and production of specific data and imagery
information products that are built to stringent customer
specifications. We have developed advanced processing systems
that enable us to process raw data from a wide range of both
government and commercial sensors (imaging satellites) and then
merge the source images into very precise information and
imagery products to meet the needs of a broad range of
customers. Our production services range from the generation of
precision imagery products (for example, digital elevation maps)
to the extraction of site-specific features (for example,
airports, highways and buildings) for our customers
database development.
Our production services, which are designed to increase the
accuracy and precision of satellite and aerial imagery, include
the following production processes:
| Georectification. This is a computer-processing operation that corrects the pixel locations of a digital image to remove image distortions caused by the non-vertical pointing and movement of the sensor during the imaging event. | |
| Tonal Correction. This is the scientific correction of the color variations between various component images of an image mosaic so that the image or picture reflects a coherent color structure. | |
| Image Mosaicking. This is the process of merging or stitching multiple satellite images together. Since images are taken at different look angles, elevations, weather, times and season, etc., they do not match each other tonally or in exact location to the ground. Prior to mosaicking, images are tonally corrected as much as possible. They are also block adjusted the images are shifted in relation to each other and to ground truth to improve accuracy. The result is a group of images that will match each other in location and color, so they can be stitched together to create a mosaic. The result is one composite image, which is as seamless as possible. | |
| Orthorectification. This is the process of accurately registering imagery to ground coordinates and geometrically correcting it for Earth elevation differences at the image location. For example, orthorectification is used to make buildings and objects in an image appear to be standing straight instead of leaning. After processing, the image can be used for a variety of mapping applications, including land use and land-cover classification, terrain analysis, natural resource mapping, backdrops for maps, temporal-change analysis, multi-image fusion, and others. |
Our production services include LiDAR elevation data, maps,
topographic maps, digital orthophoto imagery, remote sensing
services, survey and inventory services and Geospatial
Information System (GIS) consulting and implementation. We also
offer geospatial products and services to help develop and
manage geospatial data to support customer documentation needs,
inventory of resources and engineering and development
applications.
21
Information
Services
We also provide imagery information services, which combine our
imagery with real-time, third-party data to create a
sophisticated and customized information product for our
customers. During the second quarter, we launched our
information services business in an effort to give our customers
global on-demand access to imagery and related information
products over the Web. This new Web services platform, which we
call EyeQ, provides the core infrastructure for this new
service and our new geospatial information services business.
EyeQ commenced operations in April 2010.
EyeQ delivers imagery and other location-based information
through annual subscriptions and user licenses. EyeQ offers a
Web interface with tools that function as our customers
data center. EyeQ serves up imagery and other standards-based
content throughout the customers data network and out to
their customers and partners.
With EyeQ, our customers have access to secure, timely and
accurate location information delivered into their business
environment. EyeQ is user friendly and is available twenty-four
hours a day and seven days a week. EyeQ serves our goal of
simplifying access to and delivery of imagery and location
information.
Impact of
Significant Transactions
GeoEye-2
Satellite and EnhancedView Program
On August 6, 2010, the NGA awarded us a contract under its
EnhancedView program that is worth up to $3.8 billion,
assuming the NGA exercises all of its options and we perform as
specified. The award provides for a new satellite imagery
delivery SLA; the engineering, construction and launch of
GeoEye-2; the design and procurement of associated ground
station equipment; and the design and procurement of additional
infrastructure to support government operations, value-added
products and other services, including web-based delivery of
information. This competitively awarded contract supports the
EnhancedView program by providing products and services that
will help meet the increasing geospatial intelligence needs of
the intelligence community and the Department of Defense.
The award includes the following components:
| $2.8 billion for commercial satellite imagery purchases under the EnhancedView SLA over the next ten years, with an initial one-year term and nine one-year options to renew, as follows: |
| An extension of the NGAs current ability to purchase commercial imagery from the Companys existing satellite constellation under a Service Level Agreement for $12.5 million per month ($150.0 million per year). | |
| An additional award to purchase commercial imagery, when GeoEye-2 becomes operational in 2013, for approximately $15.3 million per month ($183.6 million per year) for seven years. |
| Up to $337.0 million cost share for the development and launch of GeoEye-2. The cost share is anticipated to be funded at approximately $111.0 million in 2012 and approximately $226.0 million in 2013, when the GeoEye-2 satellite becomes fully operational. | |
| Up to $702.0 million for value-added products and services and our EyeQ Web Mapping Services to be delivered over the life of the EnhancedView SLA. This award component includes funding for the design and procurement of additional infrastructure to support government operations. |
This program replaced the NextView program, which the NGA
extended through August 2010. GeoEye will continue to fulfill
existing NextView value-added product and services orders until
such orders are complete. New value-added product and services
orders are expected to be placed under the EnhancedView
contract. The NextView SLA portion of the NextView program was
replaced by the EnhancedView SLA as of September 1, 2010.
In preparation for meeting the U.S. governments need
and given the long lead time associated with providing
additional capacity, we entered into a contract with ITT
Corporation during the third quarter of 2007, pursuant to
22
which ITT Corporation commenced work on the advanced camera for
our GeoEye-2 satellite. ITT Corporations work has been
used to accelerate the deployment of GeoEye-2 so that it could
become operational in 2013. On March 11, 2010, the Company
announced the selection of Lockheed Martin Space Systems Company
to build the GeoEye-2 satellite and has subsequently signed a
launch agreement with Lockheed Martin Commercial Launch
Services. As of September 30, 2010, we have incurred total
capitalized costs of $204.0 million for EnhancedView,
primarily consisting of costs for the construction of GeoEye-2.
Preferred
Stock
On March 4, 2010, the Company entered into a binding
commitment with Cerberus Capital Management, L.P. to purchase
preferred stock and provide debt financing, the proceeds of
which were to be used for development and launch of GeoEye-2.
Subsequently, on March 22, 2010, the Company entered into a
Stock Purchase Agreement and a Note Purchase Agreement with
Cerberus Satellite LLC, or Cerberus. This additional financing
related to the development and launch of GeoEye-2 was necessary,
because the original proposal for EnhancedView required that,
upon a successful contract award, the Company would need to
provide a letter of credit for the full amount of any potential
cost share award for the development of GeoEye-2 that would be
received from the NGA for a period of up to three years after
the NGAs certification of the satellites imagery.
Under the Stock Purchase Agreement, Cerberus agreed to purchase
from the Company and the Company agreed to sell to Cerberus,
subject to certain conditions including a successful contract
award requiring a letter of credit, up to 115,000 shares of
a newly issued series of convertible preferred stock of the
Company, having an initial liquidation preference of $1,000 per
share. If the Company received a contract award without the
letter of credit requirement, the Company would no longer be
obligated to issue 115,000 shares of Preferred Stock to
Cerberus, but Cerberus would have the option to purchase
80,000 shares of Series A Convertible Preferred Stock,
or the Preferred Stock. Under the terms of the Note Purchase
Agreement, at the Companys option, and assuming a letter
of credit requirement, Cerberus also agreed to provide the
Company with debt financing of $100.0 million, contingent
upon the Company receiving an award from the NGA with a letter
of credit requirement. This letter of credit requirement was
subsequently eliminated.
On September 22, 2010, we consummated a preferred stock
issuance pursuant to the Stock Purchase Agreement with Cerberus.
Pursuant to the terms of the Stock Purchase Agreement and as a
result of the EnhancedView award by the NGA being made without
the letter of credit requirement, Cerberus purchased
80,000 shares of Preferred Stock having a liquidation
preference of $1,000 per share, resulting in net proceeds to the
Company of $78.0 million, after discounts and before
issuance costs.
The issuance of 80,000 shares of Preferred Stock to
Cerberus represents an ownership interest, assuming conversion
of such Preferred Stock to the Companys common stock, of
approximately 11% as of September 30, 2010.
The Preferred Stock will be entitled to receive a dividend at an
annual rate of 5%, payable in kind, in cash or securities, at
the Companys option. The Preferred Stock will have a
conversion price of $29.76 per share, subject to adjustment and
customary anti-dilution adjustments. Holders of the Preferred
Stock will vote with the Companys common stock on an
as-converted basis. However, Cerberus is not permitted to vote
with Preferred Stock to the extent it would result in Cerberus
voting more than an equivalent of 19.99% of the Companys
outstanding voting securities.
GeoEye-1
Satellite, NextView Program and Service
Level Agreement
The NGA announced in March 2003 that it intended to support,
through the NextView program, the continued development of the
commercial satellite imagery industry. The NGA also announced
that it intended to award two imagery providers with contracts
to support the engineering, construction and launch of the next
generation of imagery satellites. On September 30, 2004,
the NGA awarded us a contract as the second provider under the
NextView program and, as a result, we contracted for the
construction of a new satellite, GeoEye-1. Under the NextView
program, we began delivering imagery to the NGA from our IKONOS
satellite in February 2007 and from our GeoEye-1 satellite in
the first quarter of 2009.
23
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 worlds highest-resolution and
highest-accuracy commercial imagery satellite and offers both
black-and-white
and color imagery. The GeoEye-1 satellite was constructed as
part of our participation in the NextView program. We achieved
deployment of GeoEye-1 for less than the maximum cost specified
in our NextView contract with the NGA.
Total capitalized costs (including financing and launch
insurance costs) of the GeoEye-1 satellite and ground systems
were $478.3 million. Under the NextView contract, the NGA
agreed to support the project with a cost share totaling
approximately $237.0 million spread over the course of the
project development and subject to various milestones. In March
2009, the NGA paid us the final installment of its cost share
obligation. We recognize this as revenue on a straight-line
basis over the expected nine-year operational life of the
satellite. During the three and nine months ended
September 30, 2010, we recognized $6.0 million and
$18.1 million of cost share revenue under the NextView
contract.
On December 9, 2008, we entered into the NextView SLA with
the NGA, under which the NGA agreed to purchase GeoEye-1 imagery
from us through November 30, 2009. On September 1, 2009,
the NGA extended the SLA through March 31, 2010. In addition,
the NGA, on March 1, 2010, modified the SLA, giving it the
option to extend the term of the SLA beyond March 31, 2010. The
SLA was extended through August 31, 2010. The NextView SLA
provided for monthly payments of $12.5 million, subject to
a maximum reduction of 10% based on performance metrics. Under
the NextView SLA, to the extent that less than
$12.5 million was paid by the NGA in any month, the
shortfall was used to fund an extension of the contract. On
August 6, 2010, the NGA awarded us a new contract under the
EnhancedView program, which includes monthly payments under the
EnhancedView SLA on terms similar to the NextView SLA. The
EnhancedView SLA replaced the NextView SLA portion of the
NextView program as of September 1, 2010. During the three
and nine months ended September 30, 2010, we recognized
$25.0 million and $99.6 million of revenue under the
NextView SLA. During the three and nine months ended
September 30, 2010, we recognized $12.3 million of
revenue under the EnhancedView SLA.
In addition to the SLA contract for NextView and EnhancedView,
we received new U.S. government awards during the nine
months ended September 30, 2010, totaling more than
$32.5 million to supply geospatial products and services.
Under these awards, which are expected to be completed during
2011, we will provide the NGA with a significant amount of
value-added, imagery-based geospatial-intelligence products. We
began delivering imagery to the NGA under the new awards in the
third quarter of 2010 and recognized $5.1 million of
imagery revenue during the three and nine months ended
September 30, 2010.
In December 2009, we announced that our engineers detected an
irregularity in the equipment that GeoEye-1 uses to point the
antenna that transmits imagery to receiving stations on the
ground. The irregularity limits the range of movement of
GeoEye-1s downlink antenna, which affects GeoEye-1s
ability to image and downlink simultaneously. GeoEye-1 is able
to downlink imagery to GeoEyes and customer ground
stations when not collecting images.
In May 2009, we announced that our engineers detected an anomaly
with GeoEye-1 affecting the collection of color imagery by a
narrow band of pixels within an image. As a result, we modified
our operations and currently collect, produce and deliver color
imagery to customers that is unaffected by the anomaly.
Subsequently, an adjacent band of pixels experienced the same
anomaly. GeoEye-1 imagery collection, production and delivery to
customers is unaffected by this second occurrence because of the
previous operational modifications implemented by the Company,
and the pixel bands affected by the anomaly continue to collect
panchromatic
(black-and-white)
images normally. While we have designed modifications that we
believe would significantly reduce or eliminate the effects to
the Company of these types of failures, any failure of our
cameras on any of our satellites or other loss of satellite
capacity or functionality could require different satellite
operational modifications that may have a material adverse
effect on our imagery collection operations, and also could
materially affect our financial condition and results from
operations.
24
Results
of Operations
Comparison
of the Results of Operations for the Three and Nine Months Ended
September 30, 2010 and 2009
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||||||||||||||||||||||||||||||||||
September 30, |
Change |
September 30, |
Change Between |
|||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 |
Between 2010 |
2010 | 2009 |
2010 |
|||||||||||||||||||||||||||||||||||||||||||
% of |
% of |
and 2009 |
% of |
% of |
and 2009 | |||||||||||||||||||||||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||||||||||||||||||||
(In thousands, except percentages) | (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Revenues
|
$ | 86,452 | 100.0 | % | $ | 79,941 | 100.0 | % | $ | 6,511 | 8.1 | % | $ | 247,802 | 100.0 | % | $ | 197,853 | 100.0 | % | $ | 49,949 | 25.2 | % | ||||||||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||||||||||||||||||
Direct costs of revenue (exclusive of depreciation and
amortization)
|
26,722 | 30.9 | 23,836 | 29.8 | 2,886 | 12.1 | 77,905 | 31.4 | 70,235 | 35.5 | 7,670 | 10.9 | ||||||||||||||||||||||||||||||||||||
Depreciation and amortization
|
16,363 | 18.9 | 16,347 | 20.4 | 16 | 0.1 | 48,585 | 19.6 | 40,743 | 20.6 | 7,842 | 19.2 | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative
|
14,219 | 16.4 | 12,042 | 15.1 | 2,177 | 18.1 | 41,384 | 16.7 | 33,594 | 17.0 | 7,790 | 23.2 | ||||||||||||||||||||||||||||||||||||
Total operating expenses
|
57,304 | 66.3 | 52,225 | 65.3 | 5,079 | 9.7 | 167,874 | 67.7 | 144,572 | 73.1 | 23,302 | 16.1 | ||||||||||||||||||||||||||||||||||||
Income from operations
|
29,148 | 33.7 | 27,716 | 34.7 | 1,432 | 5.2 | 79,928 | 32.3 | 53,281 | 26.9 | 26,647 | 50.0 | ||||||||||||||||||||||||||||||||||||
Interest expense, net
|
(5,719 | ) | (6.6 | ) | (8,659 | ) | (10.8 | ) | 2,940 | 34.0 | (21,714 | ) | (8.8 | ) | (22,839 | ) | (11.5 | ) | 1,125 | 4.9 | ||||||||||||||||||||||||||||
Other non-operating expense
|
(16,047 | ) | (18.6 | ) | | | (16,047 | ) | (100.0 | ) | (24,466 | ) | (9.9 | ) | | | (24,466 | ) | (100.0 | ) | ||||||||||||||||||||||||||||
Gain from sale of investment
|
700 | 0.8 | | | 700 | 100.0 | 700 | 0.3 | | | 700 | 100.0 | ||||||||||||||||||||||||||||||||||||
Loss from early extinguishment of debt
|
| | | | | | (37 | ) | (0.0 | ) | | | (37 | ) | (100.0 | ) | ||||||||||||||||||||||||||||||||
Write-off of prepaid financing costs
|
(6,412 | ) | (7.4 | ) | | | (6,412 | ) | (100.0 | ) | (6,412 | ) | (2.6 | ) | | | (6,412 | ) | (100.0 | ) | ||||||||||||||||||||||||||||
Income before provision for income taxes
|
1,670 | 1.9 | 19,057 | 23.8 | (17,387 | ) | (91.2 | ) | 27,999 | 11.3 | 30,442 | 15.4 | (2,443 | ) | (8.0 | ) | ||||||||||||||||||||||||||||||||
Provision for income taxes
|
(8,046 | ) | (9.3 | ) | (6,530 | ) | (8.2 | ) | (1,516 | ) | (23.2 | ) | (21,452 | ) | (8.7 | ) | (10,100 | ) | (5.1 | ) | (11,352 | ) | (112.4 | ) | ||||||||||||||||||||||||
Net (loss) income
|
(6,376 | ) | (7.4 | ) | 12,527 | 15.7 | (18,903 | ) | (150.9 | ) | 6,547 | 2.6 | 20,342 | 10.3 | (13,795 | ) | (67.8 | ) | ||||||||||||||||||||||||||||||
Preferred stock dividends
|
(99 | ) | (0.1 | ) | | | (99 | ) | (100.0 | ) | (99 | ) | (0.0 | ) | | | (99 | ) | (100.0 | ) | ||||||||||||||||||||||||||||
(6,475 | ) | (7.5 | ) | 12,527 | 15.7 | (19,002 | ) | (151.7 | ) | 6,448 | 2.6 | 20,342 | 10.3 | (13,894 | ) | (68.3 | ) | |||||||||||||||||||||||||||||||
Income allocated to participating securities
|
| | | | | | (27 | ) | (0.0 | ) | | | (27 | ) | (100.0 | ) | ||||||||||||||||||||||||||||||||
Net (loss) income available to common stockholders
|
$ | (6,475 | ) | (7.5 | ) | $ | 12,527 | 15.7 | $ | (19,002 | ) | (151.7 | ) | $ | 6,421 | 2.6 | $ | 20,342 | 10.3 | $ | (13,921 | ) | (68.4 | ) | ||||||||||||||||||||||||
Revenues
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||||||||||||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 |
Change Between 2010 |
2010 | 2009 |
Change Between 2010 |
|||||||||||||||||||||||||||||||||||||||||||
% of |
% of |
and 2009 |
% of |
% of |
and 2009 | |||||||||||||||||||||||||||||||||||||||||||
Revenues
|
Amount | Revenue | Amount | Revenue | Amount | % | Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||
(In thousands, except percentages) | (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Imagery
|
$ | 66,696 | 77.1 | % | $ | 62,092 | 77.7 | % | $ | 4,604 | 7.4 | % | $ | 187,426 | 75.6 | % | $ | 150,776 | 76.2 | % | $ | 36,650 | 24.3 | % | ||||||||||||||||||||||||
NextView cost share
|
6,038 | 7.0 | 6,038 | 7.6 | | | 18,114 | 7.3 | 15,023 | 7.6 | 3,091 | 20.6 | ||||||||||||||||||||||||||||||||||||
Production and other services
|
13,718 | 15.9 | 11,811 | 14.8 | 1,907 | 16.1 | 42,262 | 17.1 | 32,054 | 16.2 | 10,208 | 31.8 | ||||||||||||||||||||||||||||||||||||
Total revenues
|
$ | 86,452 | 100.0 | $ | 79,941 | 100.0 | $ | 6,511 | 8.1 | $ | 247,802 | 100.0 | $ | 197,853 | 100.0 | $ | 49,949 | 25.2 | ||||||||||||||||||||||||||||||
Imagery revenues primarily include imagery sales, affiliate
access fees and operations and maintenance fees. NextView cost
share revenues include the recognition of deferred revenue
related to the cost share amounts from the NGA. Production and
other services revenues primarily include revenue from
production orders for the NGA and commercial customers, as well
as our digital aerial imagery service and the SeaStar Fisheries
information service.
25
Imagery revenues increased during the three months ended
September 30, 2010, compared to the same period in 2009,
primarily due to an increase in deliveries to domestic
commercial customers as well as revenue related to the delivery
of a customer imagery system upgrade in the third quarter of
2010. Imagery revenues increased during the nine months ended
September 30, 2010, compared to the same period in 2009,
primarily due to the increased level of deliveries to the NGA
and other regional affiliate and domestic commercial customers
using GeoEye-1 for the full nine months of 2010, as compared to
seven-and-a-half
months in 2009 as a result of commencement of
GeoEye-1
operations in February 2009.
Production and other services revenues increased for the three
and nine months ended September 30, 2010, compared to the
same periods in 2009, primarily due to an increase in our
value-added production services resulting from higher customer
demand and system process improvements and enhancements.
Total domestic and international revenues were as follows:
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||||||||||||||||||||||||||||||||||
September 30, | September 30, |
Change |
||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 |
Change Between 2010 |
2010 | 2009 |
Between 2010 |
|||||||||||||||||||||||||||||||||||||||||||
% of |
% of |
and 2009 |
% of |
% of |
and 2009 | |||||||||||||||||||||||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||||||||||||||||||||
(In thousands, except percentages) | (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Domestic
|
$ | 62,523 | 72.3 | % | $ | 57,919 | 72.5 | % | $ | 4,604 | 7.9 | % | $ | 184,409 | 74.4 | % | $ | 139,276 | 70.4 | % | $ | 45,133 | 32.4 | % | ||||||||||||||||||||||||
International
|
23,929 | 27.7 | 22,022 | 27.5 | 1,907 | 8.7 | 63,393 | 25.6 | 58,577 | 29.6 | 4,816 | 8.2 | ||||||||||||||||||||||||||||||||||||
Total revenues
|
$ | 86,452 | 100.0 | $ | 79,941 | 100.0 | $ | 6,511 | 8.1 | $ | 247,802 | 100.0 | $ | 197,853 | 100.0 | $ | 49,949 | 25.2 | ||||||||||||||||||||||||||||||
Domestic revenues include those from the SLA, recognition of
deferred revenue related to the NextView cost share payments
from the NGA, commercial imagery sales and sales of value-added
products and services. Domestic revenues increased during the
three and nine months ended September 30, 2010, compared to
the same periods in 2009, primarily due to the substantial
increase in imagery provided by GeoEye-1 under the NextView and
EnhancedView SLA agreements and an increase in deliveries to
commercial customers in 2010. Additionally, there was an
increase in production services due to higher customer demand
and system process improvements and enhancements.
International revenues include those from access fee agreements
and ground station operation and maintenance contracts with our
international regional affiliate customers and commercial
imagery sales. International revenues increased during the three
and nine months ended September 30, 2010, compared to the
same periods in 2009, primarily due to revenue related to the
delivery of a customer imagery system upgrade in the third
quarter of 2010 and an increase in deliveries to regional
affiliate customers and other international resellers offset by
a decrease related to one-time projects and contracts in 2009
not continued in 2010.
Operating
Expenses
Direct
Costs of Revenue
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||||||||||||||||||||||||||||||||||
September 30, | September 30, |
Change |
||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 |
Change Between 2010 |
2010 | 2009 |
Between 2010 |
|||||||||||||||||||||||||||||||||||||||||||
% of |
% of |
and 2009 |
% of |
% of |
and 2009 | |||||||||||||||||||||||||||||||||||||||||||
Direct Costs of Revenue
|
Amount | Revenue | Amount | Revenue | Amount | % | Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||
(In thousands, except percentages) | (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Labor and overhead
|
$ | 14,022 | 16.2 | % | $ | 14,190 | 17.8 | % | $ | (168 | ) | (1.2 | )% | $ | 39,397 | 15.9 | % | $ | 36,582 | 18.5 | % | $ | 2,815 | 7.7 | % | |||||||||||||||||||||||
Subcontractor
|
6,717 | 7.8 | 6,491 | 8.1 | 226 | 3.5 | 22,375 | 9.0 | 19,764 | 10.0 | 2,611 | 13.2 | ||||||||||||||||||||||||||||||||||||
Other direct costs
|
4,443 | 5.1 | 2,364 | 3.0 | 2,079 | 87.9 | 11,494 | 4.6 | 7,244 | 3.7 | 4,250 | 58.7 | ||||||||||||||||||||||||||||||||||||
Satellite insurance
|
1,540 | 1.8 | 791 | 1.0 | 749 | 94.7 | 4,639 | 1.9 | 6,645 | 3.4 | (2,006 | ) | (30.2 | ) | ||||||||||||||||||||||||||||||||||
Total direct costs of revenue
|
$ | 26,722 | 30.9 | $ | 23,836 | 29.8 | $ | 2,886 | 12.1 | $ | 77,905 | 31.4 | $ | 70,235 | 35.5 | $ | 7,670 | 10.9 | ||||||||||||||||||||||||||||||
Direct costs of revenue include the costs of operating our
satellites and related ground systems, construction and on-going
costs related to our operations and maintenance contracts.
Subcontractor costs primarily include payments to third parties
for support to operate the IKONOS and GeoEye-1 satellites and
their related ground
26
systems. Other direct costs include third-party costs and fees
to support our satellite program and the costs associated with
monitoring our ground station equipment.
Labor and overhead costs increased during the nine months ended
September 30, 2010, compared to the same period in 2009,
primarily due to the increased production costs associated with
the increase in our value-added production services resulting
from higher customer demand and system process improvements and
enhancements.
Subcontractor expenses increased during the nine months ended
September 30, 2010, compared to the same period in 2009,
primarily due to 2010 costs incurred related to the GeoEye-1
satellite irregularity that occurred in the end of 2009.
Satellite insurance decreased during the nine months ended
September 30, 2010, compared to the same period in 2009,
primarily due to the reduction in insurance premiums in 2010. We
are currently in the process of renewing the coverage on our
satellite insurance policies.
Other direct costs of revenue increased during the three months
and nine months ended September 30, 2010, compared to the
same periods in 2009. This was primarily due to costs related to
the delivery of imagery system upgrades sold in the second and
third quarters of 2010 and the recognition of the costs of
ground system upgrades that are being recognized over the
combined delivery term of the service in 2010.
Depreciation
and Amortization
For the Three Months Ended September 30, |
Change Between |
For the Nine Months Ended September 30, |
Change |
|||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 |
2010 and |
2010 | 2009 |
Between 2010 |
|||||||||||||||||||||||||||||||||||||||||||
Depreciation and |
% of |
% of |
2009 |
% of |
% of |
and 2009 | ||||||||||||||||||||||||||||||||||||||||||
Amortization
|
Amount | Revenue | Amount | Revenue | Amount | % | Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||
(In thousands, except percentages) | (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Depreciation
|
$ | 15,702 | 18.2 | % | $ | 15,687 | 19.6 | % | $ | 15 | 0.1 | % | $ | 46,603 | 18.8 | % | $ | 38,754 | 19.6 | % | $ | 7,849 | 20.3 | % | ||||||||||||||||||||||||
Amortization
|
661 | 0.8 | 660 | 0.8 | 1 | 0.2 | 1,982 | 0.8 | 1,989 | 1.0 | (7 | ) | (0.4 | ) | ||||||||||||||||||||||||||||||||||
Total depreciation and amortization
|
$ | 16,363 | 18.9 | $ | 16,347 | 20.4 | $ | 16 | 0.1 | $ | 48,585 | 19.6 | $ | 40,743 | 20.6 | $ | 7,842 | 19.2 | ||||||||||||||||||||||||||||||
Depreciation increased during the nine months ended
September 30, 2010, compared to the same period in 2009,
primarily due to a full nine months of depreciation of GeoEye-1
in 2010, compared to
seven-and-a-half
months of depreciation in 2009 as a result of commencement of
operations of the GeoEye-1 satellite in February 2009.
Amortization expense is primarily associated with acquired
contracts and customer relationship intangibles from our
acquisitions of MJ Harden Associates Inc., or MJ Harden, and
Space Imaging LLC in prior years.
Selling,
General and Administrative Expenses
For the Three Months Ended September 30, | For the Nine Months Ended September 30, |
Change |
||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 |
Change Between 2010 |
2010 | 2009 |
Between 2010 |
|||||||||||||||||||||||||||||||||||||||||||
Selling, General and Administrative |
% of |
% of |
and 2009 |
% of |
% of |
and 2009 | ||||||||||||||||||||||||||||||||||||||||||
Expenses
|
Amount | Revenue | Amount | Revenue | Amount | % | Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||
(In thousands, except percentages) | (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Payroll, commissions, and related costs
|
$ | 6,220 | 7.2 | % | $ | 6,160 | 7.7 | % | $ | 60 | 1.0 | % | $ | 18,898 | 7.6 | % | $ | 16,032 | 8.1 | % | $ | 2,866 | 17.9 | % | ||||||||||||||||||||||||
Stock-based compensation
|
1,416 | 1.6 | 420 | 0.5 | 996 | 237.1 | 3,650 | 1.5 | 1,305 | 0.7 | 2,345 | 179.7 | ||||||||||||||||||||||||||||||||||||
Professional fees
|
2,736 | 3.2 | 3,028 | 3.8 | (292 | ) | (9.6 | ) | 7,940 | 3.2 | 10,074 | 5.1 | (2,134 | ) | (21.2 | ) | ||||||||||||||||||||||||||||||||
Research and development
|
496 | 0.6 | 623 | 0.8 | (127 | ) | (20.4 | ) | 1,279 | 0.5 | 655 | 0.3 | 624 | 95.3 | ||||||||||||||||||||||||||||||||||
Other
|
3,351 | 3.9 | 1,811 | 2.3 | 1,540 | 85.0 | 9,617 | 3.9 | 5,528 | 2.8 | 4,089 | 74.0 | ||||||||||||||||||||||||||||||||||||
Total selling, general and administrative expenses
|
$ | 14,219 | 16.4 | $ | 12,042 | 15.1 | $ | 2,177 | 18.1 | $ | 41,384 | 16.7 | $ | 33,594 | 17.0 | $ | 7,790 | 23.2 | ||||||||||||||||||||||||||||||
Selling, general and administrative expenses include the costs
of the finance, administrative and general management functions
and the costs of marketing, advertising, promotion and other
selling expenses.
Total selling, general and administrative expenses increased in
the three and nine months ended September 30, 2010,
compared to the same periods in 2009, primarily as a result of
an increase in stock-based compensation and bonus expense as
well as headcount growth and an increase from our bid and
proposal efforts in 2010 related to new business development,
mainly for the EnhancedView Program.
27
Interest
Expense, Net
The composition of interest expense, net, was as follows:
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||||||||||||||||||||||||||||||||||
September 30, | September 30, |
Change Between |
||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 |
Change Between 2010 |
2010 | 2009 |
2010 |
|||||||||||||||||||||||||||||||||||||||||||
% of |
% of |
and 2009 |
% of |
% of |
and 2009 | |||||||||||||||||||||||||||||||||||||||||||
Interest Expense, Net
|
Amount | Revenue | Amount | Revenue | Amount | % | Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||
(In thousands, except percentages) | (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Interest expense
|
$ | 10,647 | 12.3 | % | $ | 8,695 | 10.9 | % | $ | 1,952 | 22.4 | % | $ | 31,906 | 12.9 | % | $ | 26,098 | 13.2 | % | $ | 5,808 | 22.3 | % | ||||||||||||||||||||||||
Capitalized interest
|
(4,806 | ) | (5.6 | ) | | | (4,806 | ) | (100.0 | ) | (9,980 | ) | (4.0 | ) | (2,919 | ) | (1.5 | ) | (7,061 | ) | (241.9 | ) | ||||||||||||||||||||||||||
Interest income
|
(122 | ) | (0.1 | ) | (36 | ) | (0.0 | ) | (86 | ) | (238.9 | ) | (212 | ) | (0.1 | ) | (340 | ) | (0.2 | ) | 128 | 37.6 | ||||||||||||||||||||||||||
Total interest expense, net
|
$ | 5,719 | 6.6 | $ | 8,659 | 10.8 | $ | (2,940 | ) | (34.0 | ) | $ | 21,714 | 8.8 | $ | 22,839 | 11.5 | $ | (1,125 | ) | (4.9 | ) | ||||||||||||||||||||||||||
Interest expense, net, primarily includes interest expense on
our 2015 Notes as well as the interest on our previously
redeemed 2012 Notes for the three and nine months ended
September 30, 2010 and 2009, respectively. Interest
expense, net, also includes amortized prepaid financing costs
and amortization of debt discount.
Interest expense increased during the three months and nine
months ended September 30, 2010, compared to the comparable
periods in 2009, primarily due to the increase in our long-term
debt balance in 2010 as a result of the issuance of the
$400.0 million of 2015 Notes as compared to the previous
$250.0 million of 2012 Notes, offset by the reduction of
our cost of capital from a floating rate of at least 12% related
to the 2012 Notes compared to a fixed coupon rate of 9.625%
related to the 2015 Notes. The increase in capitalized interest
during the three months and nine months ended September 30,
2010, compared to the comparable periods in 2009, was due to
increased capitalized interest associated with the increased
construction costs of the GeoEye-2 satellite during 2010.
Other
Non-Operating Expense
We recorded other non-operating expense of $16.0 million
and $24.5 million during the three and nine months ended
September 30, 2010, related to the fair value measurement
of the Preferred Stock Commitment associated with the Cerberus
Stock Purchase Agreement. The Preferred Stock Commitment fair
value was marked to market and reflected as an adjustment to
earnings until Cerberus purchased the Preferred Stock on
September 22, 2010.
Write-Off
of Prepaid Financing Costs
During the third quarter of 2010, we wrote-off unamortized
prepaid financing costs of $6.4 million, including a
$2.0 million non-refundable commitment fee, related to
costs incurred on the debt financing under the Notes Purchase
Agreement with Cerberus. In August 2010, the NGA awarded the
Company the EnhancedView contract without a letter of credit
requirement, and as a result, the debt facility was cancelled
and these financing costs were expensed.
Provision
for Income Taxes
The effective income tax rate was 39.5% and 37.0% before
discrete items for the nine months ended September 30, 2010
and 2009, respectively. Income tax expense was $8.0 million
and $6.5 million including discrete items for the three
months ended September 30, 2010 and 2009, respectively.
Income tax expense was $21.5 million and $10.1 million
including discrete items for the nine months ended
September 30, 2010 and 2009, respectively. The increase in
income tax expense for the three and nine months ended
September 30, 2010 compared to the same periods in 2009, is
primarily a result of higher pretax income before recognition of
the fair value adjustment of the Preferred Stock Commitment (see
Note 9) deducted for financial reporting purposes but not
deductible for income tax purposes representing a permanent tax
difference. The impact of the fair value adjustment of
approximately $26.6 million contributes to an overall effective
tax rate of 76.6% for the nine months ended September 30,
2010.
28
Our effective tax rate exclusive of discrete items differs from
the federal tax rate due to state and local income taxes, the
recording of unrecognized tax benefits, adjustments to our
recorded valuation allowance and permanent book/tax difference
items.
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, income tax expense (benefit),
non-cash stock-based compensation expense and other items. 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 be 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:
| It does not reflect our cash expenditures, or future requirements, for all contractual commitments; | |
| It does not reflect our significant interest expense, or the cash requirements necessary to service our indebtedness; | |
| It does not reflect cash requirements for the payment of income taxes when due; | |
| Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and | |
| It does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, but may nonetheless have a material impact on our results of operations. |
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 net earnings, to measure our
performance. Our calculation of adjusted EBITDA may not be
comparable to the calculation of similarly titled measures
reported by other companies.
29
A reconciliation of net income to adjusted EBITDA is as follows
(in thousands):
Change |
||||||||||||||||||||||||
For the Three Months |
Change |
For the Nine Months Ended |
Between |
|||||||||||||||||||||
Ended September 30, |
Between 2010 |
September 30, |
2010 and |
|||||||||||||||||||||
2010 | 2009 | and 2009 | 2010 | 2009 | 2009 | |||||||||||||||||||
Net (loss) income
|
$ | (6,376 | ) | $ | 12,527 | $ | (18,903 | ) | $ | 6,547 | $ | 20,342 | $ | (13,795 | ) | |||||||||
Adjustments:
|
||||||||||||||||||||||||
Interest expense, net
|
5,719 | 8,659 | (2,940 | ) | 21,714 | 22,839 | (1,125 | ) | ||||||||||||||||
Loss from early extinguishment of debt
|
| | | 37 | | 37 | ||||||||||||||||||
Write-off of prepaid financing costs
|
6,412 | | 6,412 | 6,412 | | 6,412 | ||||||||||||||||||
Provision for income taxes
|
8,046 | 6,530 | 1,516 | 21,452 | 10,100 | 11,352 | ||||||||||||||||||
Depreciation and amortization
|
16,363 | 16,347 | 16 | 48,585 | 40,743 | 7,842 | ||||||||||||||||||
Non-cash stock-based compensation expense
|
1,844 | 466 | 1,378 | 4,685 | 1,495 | 3,190 | ||||||||||||||||||
Non-cash change in fair value of financial instrument
|
16,047 | | 16,047 | 24,466 | | 24,466 | ||||||||||||||||||
Gain from sale of investment
|
(700 | ) | | (700 | ) | (700 | ) | | (700 | ) | ||||||||||||||
Adjusted EBITDA
|
$ | 47,355 | $ | 44,529 | $ | 2,826 | $ | 133,198 | $ | 95,519 | $ | 37,679 | ||||||||||||
Liquidity
and Capital Resources
Our principal sources of liquidity are unrestricted cash, cash
equivalents, short-term investments and accounts receivable. Our
primary cash needs are for working capital, capital expenditures
and debt service.
We believe that we currently have sufficient resources to meet
our operating requirements through the next twelve months.
However, our ability to continue to be profitable and generate
positive cash flow from our operations beyond that period is
dependent on the continued expansion of commercial and
government services and adequate customer acceptance of our
products and services.
Cash
Flow Items
As of September 30, 2010, we had cash and cash equivalents
of $246.7 million.
Net Cash
Provided by Operating Activities
Net cash provided by operating activities was $95.0 million
and $69.3 million for the nine months ended
September 30, 2010 and 2009, respectively. The increase of
$25.7 million in the nine months ended September 30,
2010, from the same period in 2009, was primarily due to the
increase in net income in 2010 excluding the effects of a
non-cash charge for a financial instrument and an increase in
cash collections on accounts receivable balances year over year.
Net Cash
Used in Investing Activities
Net cash used in investing activities was $149.9 million
and $57.9 million for the nine months ended
September 30, 2010 and 2009, respectively, and was
primarily related to capital expenditures and purchases of
short-term investments. Capital expenditures increased
$87.4 million in the nine months ended September 30,
2010, compared to the same period in 2009. The increase in
capital expenditures was primarily attributable to expenditures
related to the construction of GeoEye-2 that were incurred in
2010. We estimate that we will spend an additional
$100.0 million in building our next Earth-imaging
satellite, GeoEye-2, through the end of 2010. We have incurred
total capitalized costs of $204.0 million for EnhancedView
as of September 30, 2010, primarily consisting of costs for
the construction of GeoEye-2.
30
Net Cash
Provided by Financing Activities
Net cash provided by financing activities was $92.7 million
and $5.5 million for the nine months ended
September 30, 2010 and 2009, respectively, and was
primarily related to the issuance of the convertible preferred
stock to Cerberus as well as issuances of common stock primarily
due to exercise of warrants.
Long-Term
Debt
In October 2009, we closed on a private placement offering of
$400.0 million of our 2015 Notes due October 1, 2015,
or the 2015 Notes. The net proceeds of the 2015 Notes offering
were used to fund the repurchase of the Companys total
outstanding $250.0 million 2012 Notes due July 1,
2012. On July 15, 2010, the Company commenced an exchange
offer to fulfill its obligations regarding the registration of
the outstanding 2015 Notes. Pursuant to a registration rights
agreement entered into by GeoEye in connection with the sale of
the 2015 Notes, the Company agreed to file a registration
statement with the SEC relating to the exchange offer. On
August 17, 2010, GeoEye completed its exchange offer of
$400.0 million aggregate principal amount of its 2015 Notes
for substantially identical notes, which have been registered
under the Securities Act of 1933, as amended.
As of September 30, 2010, our total long-term debt
consisted of $400.0 million of 2015 Notes, net of original
issue discount of $20.0 million. Under the indenture
governing the 2015 Notes, we are prohibited from paying
dividends until the principal amount of all such notes has been
repaid. At any time on or after October 1, 2013, GeoEye
may, on one or more occasions redeem all or part of the 2015
Notes at 104.813% of principal for the subsequent
12-month
period and at 100% of principal on October 1, 2014, and
thereafter.
The indenture governing our 2015 Notes contains a covenant that
restricts our ability to incur additional indebtedness unless,
among other things, we can comply with a specified leverage
ratio. We may incur additional indebtedness only if, after
giving pro forma effect to that incurrence, our ratio of total
consolidated debt to adjusted cash EBITDA for the four fiscal
quarters ending as of the most recent date for which internal
financial statements are available and meet certain levels, or
we have availability to incur such indebtedness under certain
baskets in the indenture. Adjusted cash EBITDA is defined as
adjusted EBITDA less amortization of deferred revenue related to
the NextView agreement with the NGA. The 2015 Notes bear
interest at the rate of 9.625% per annum. Interest is payable
semi-annually in arrears on April 1 and October 1 of each year.
On October 8, 2010, the Company closed a debt offering of
$125.0 million in aggregate principal of 8.625% Senior
Secured Notes due October 1, 2016, or the 2016 Notes.
Interest payments on the 2016 Notes will be made semi-annually
in arrears on April 1 and October 1 of each year. At any time on
or after October 1, 2013, the Company may, on one or more
occasions redeem all or part of the 2016 Notes at 104.313% of
principal for the subsequent
12-month
period, at 102.156% of principal on October 1, 2014, for
the subsequent
12-month
period and at 100% of principal on October 1, 2015 and
thereafter.
The net proceeds of the 2016 Notes offering are being used for
general corporate purposes, which may include working capital,
future production and services expansion, contingent capital
expenditures and other strategic opportunities.
The 2016 Notes are unconditionally guaranteed, jointly and
severally, on a secured second-priority basis, by all existing
and future domestic restricted subsidiaries of the Company. The
2016 Notes and the guarantees are secured by a lien on
substantially all of the assets of the Company and the
guarantors.
Funding
Sources and Uses
The Preferred Stock Commitment entered into in March 2010 was
subject to the Company winning a competitively bid
U.S. government EnhancedView program contract award to
build a new Earth-imaging satellite and supply imagery to the
U.S. government. This commitment was entered into to
fulfill a federal government requirement of the original
EnhancedView
request-for-proposal
contract procurement to provide a letter of credit in an amount
equal to the U.S. governments cost share payments to
support the development of a new Earth-imaging satellite. This
letter of credit requirement was subsequently eliminated.
31
On September 22, 2010, we consummated the preferred stock
issuance pursuant to the Stock Purchase Agreement with Cerberus.
Pursuant to the terms of the Stock Purchase Agreement and as a
result of the EnhancedView award by the NGA being made without
the letter of credit requirement, Cerberus purchased
80,000 shares of Preferred Stock having a liquidation
preference of $1,000 per share, resulting in net proceeds to the
Company of $78.0 million, after discounts.
We expect to spend approximately $15.0 million on
relocating our corporate headquarters in the fourth quarter of
2010, including approximately $10.0 million on preparing
the new office space for the relocation and $5.0 million on
the information technology infrastructure for the new facility.
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 committed backlog for the next twelve months was
approximately $345.7 million as of September 30, 2010,
and approximately $271.4 million as of December 31,
2009. Backlog includes our EnhancedView SLA with the NGA, access
fee agreements, regional affiliate ground station operations and
maintenance contracts with our international regional affiliate
customers, commercial imagery contracts and value-added products
and services.
Our backlog as of September 30, 2010, included
approximately $179.4 million of contracts with the
U.S. government, including approximately
$137.5 million related specifically to the EnhancedView SLA
through August 31, 2011. On August 6, 2010, the
Company received the EnhancedView award from the NGA. Most of
our government contracts are funded incrementally on a
year-to-year
basis; however, certain foreign 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 and 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 $178.2 million of remaining
unamortized revenue from the NGA NextView cost share payments
made prior to the GeoEye-1 satellite becoming fully operational,
of which $24.2 million is expected to be recognized within
one year. 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.
Commitments
and Contingencies
Contractual
Obligations
The following table summarizes our contractual obligations at
September 30, 2010:
Payments Due by Year | ||||||||||||||||||||||||||||
Less than 1 |
1 to 2 |
2 to 3 |
3 to 4 |
4 to 5 |
||||||||||||||||||||||||
Contractual Obligations
|
Year | Years | Years | Years | Years | Thereafter | Total | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Long-term debt obligations
|
$ | | $ | | $ | | $ | | $ | | $ | 400,000 | $ | 400,000 | ||||||||||||||
Operating lease obligations
|
2,107 | 2,582 | 2,430 | 2,559 | 2,406 | 18,376 | 30,460 | |||||||||||||||||||||
Interest expense on long-term debt(1)
|
38,500 | 38,500 | 38,500 | 38,500 | 38,500 | 19,250 | 211,750 | |||||||||||||||||||||
Purchased obligations(2)
|
42,066 | 83,874 | 27,920 | | | | 153,860 | |||||||||||||||||||||
Total contractual obligations
|
$ | 82,673 | $ | 124,956 | $ | 68,850 | $ | 41,059 | $ | 40,906 | $ | 437,626 | $ | 796,070 | ||||||||||||||
(1) | Represents contractual interest payment obligations on the $400.0 million outstanding principal balance of our 2015 Notes, which bear interest at a rate per annum of 9.625%. |
32
(2) | Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that are enforceable and legally binding. As of September 30, 2010, purchase obligations include ground systems, communication services and EnhancedView-related commitments. |
In addition to the above, the Company has entered into
commitments subsequent to September 30, 2010, totaling up
to approximately $278.2 million, primarily purchase
obligations, which expire in 2012 and 2013. Also, subsequent to
September 30, 2010, the Company closed a debt offering of
$125.0 million in aggregate principal of 8.625% Senior
Secured Notes due October 1, 2016, or the 2016 Notes.
Interest payments on the new $125.0 million commitment will
be made semi-annually in arrears on April 1 and October 1 of
each year.
Operating
Leases
We have commitments for operating leases primarily relating to
equipment and office and operating facilities. We lease various
real properties under operating leases that generally require us
to pay taxes, insurance, maintenance and minimum lease payments.
These leases contain escalation provisions for increases as a
result of increases in real estate taxes and operating expenses.
Substantially all of these leases have lease terms ranging from
three to twelve years. Some of our leases have options to renew.
Total rental expense under operating leases for the three and
nine months ended September 30, 2010, was approximately
$0.9 and $2.0 million, respectively, and the total rental
expense under operating leases for the three and nine months
ended September 30, 2009, was approximately $0.5 and
$1.6 million, respectively.
In August 2010, we entered into a twelve-year lease agreement
for a total commitment of $26.6 million for office space to
relocate our corporate headquarters in Virginia.
Contingencies
We may, from time to time, be party to various lawsuits, legal
proceedings and claims arising in the normal course of 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 impact on our financial results or operations.
Critical
Accounting Policies
The foregoing discussion of our financial condition and results
of operations is based on the consolidated financial statements
included in this
Form 10-Q,
which has been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of
these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, sales and expenses and the related disclosures of
contingencies. We base these estimates on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
During the nine months ended September 30, 2010, there were
no significant changes to the critical accounting policies we
disclosed in Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual
Report on
Form 10-K
for the year ended December 31, 2009, except for the
addition of our short-term investments policy, as discussed
below.
We record our investments in debt securities at amortized cost
or fair value, and classify these securities as short-term
investments on the consolidated balance sheet when the original
maturities at purchase are greater than ninety days but less
than one year.
The Companys short-term investments consist of debt
securities which include commercial paper, corporate bonds,
agency notes, variable rate demand notes and certificates of
deposit. Investments in debt securities that the Company has the
positive intent and ability to hold to maturity are recorded at
amortized cost and classified as
held-to-maturity.
Investments in debt securities that are not classified as
held-to-maturity
are carried at fair value and classified as
available-for-sale.
33
We evaluate our investments for
other-than-temporary
impairment on a quarterly basis.
Other-than-temporary
impairment occurs when the fair value of an investment is below
our carrying value, and we determine that difference is not
recoverable in the near future. Factors we consider to make such
determination include the duration and severity of the
impairment, the reason for the decline in value and the
potential recovery period, and our intent to sell, or whether it
is more likely than not that we will be required to sell the
investment before recovery of the amortized cost basis.
As of September 30, 2010, we categorized our investments as
either
available-for-sale
or
held-to-maturity,
and all of these outstanding short-term investments mature
within one year. As of December 31, 2009, we had no
investments.
New
Accounting Pronouncements
In October 2009, the FASB issued revised guidance on revenue
from multiple deliverable arrangements including principles and
application guidance on whether multiple deliverables exist, how
the arrangement should be separated and the allocation of the
consideration. Additionally, this revised guidance requires an
entity to allocate revenue in multiple-element arrangements
using estimated selling prices of deliverables if
vendor-specific or other third-party evidence of value is not
available. The new guidance is to be applied on a prospective
basis for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010, with earlier adoption permitted. We are currently
evaluating the impact of this accounting guidance and do not
expect any significant impact on our consolidated financial
statements.
In October 2009, the FASB revised its guidance on accounting for
revenue that contains tangible products and software. The new
guidance revised the scope of software revenue guidance such
that software included together with tangible products would not
be included within its scope. The revised guidance is to be
applied on a prospective basis for revenue arrangements entered
into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. We
are currently evaluating the impact of this accounting guidance
and do not expect any significant impact on our consolidated
financial statements.
In January 2010, the FASB issued new guidance that requires new
disclosures for fair value measurements and provides
clarification for existing disclosures requirements. More
specifically, it requires reporting entities to 1) disclose
separately the amount of significant transfers into and out of
Level 1 and Level 2 fair-value measurements and to
describe the reasons for the transfers and 2) provide
information on purchases, sales, issuances and settlements on a
gross basis rather than net in the reconciliation of
Level 3 fair- value measurements. This guidance is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the Level 3
fair-value measurements disclosures that are effective for
fiscal years beginning after December 15, 2010. The
adoption of the updated guidance did not have an effect on the
Companys consolidated results of operations, financial
condition or cash flow during the first nine months of 2010.
In March 2010, the Patient Protection and Affordable Care Act,
or PPACA, and the Health Care and Education Reconciliation Act
were both signed into law. While the new law may affect our
healthcare plan, we currently believe this impact will not be
material. We will continue to review the impact of the new
healthcare legislation.
Item 3. | Quantitative and Qualitative Disclosure About Market Risk. |
We are not currently exposed to the market risk associated with
unfavorable movements in interest rates. All of our debt and
held-to-maturity
short-term investments as of September 30, 2010 are
fixed-rate. While changes in interest rates impact the fair
value of our debt and
held-to-maturity
short-term investments, there is no impact to earnings and cash
flows, because we intend to hold these investments and carry the
debt to maturity unless market and other conditions are
favorable. Our
available-for-sale
investments generally renew every seven days and therefore, are
classified as short-term investments due to our ability to
quickly liquidate or put back these securities. These financial
instruments may be subject to interest rate risk through lost
income should interest rates increase during their limited term
to maturity or resetting of interest rates and thus may limit
our ability to invest in higher income investments.
34
Effective July 1, 2008, we had entered into an interest
rate cap agreement associated with the 2012 Notes that was
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 2012 Notes were subject to interest rate
fluctuation because the interest rate reset semi-annually for
the term of the 2012 Notes. The interest rate cap agreement was
outstanding until January 2010, when we paid off the remaining
balance of the 2012 Notes.
We do not currently have any material foreign currency exposure.
Our subsidiary in Asia commenced operations during January 2010,
our revenue contracts are denominated in U.S. dollars, and
the majority of our purchase contracts are denominated in
U.S. dollars.
Item 4. | Controls and Procedures. |
a) | Evaluation of Disclosure Controls and Procedures |
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures (as defined in
Rule 13a-15(e)
or
Rule 15d-15(e)
under the Exchange Act) as of the end of the period covered by
the report as required by
Rule 13a-15(b),
as adopted by the Securities and Exchange Commission (SEC) under
the Securities Exchange Act of 1934, as amended (Exchange Act).
Disclosure controls and procedures are the controls and other
procedures that are designed to ensure that information required
to be disclosed in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports that we file
or submit under the Exchange Act is accumulated and communicated
to management, including the chief executive officer and chief
financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
As of December 31, 2009, we had reported a material
weakness in our financial reporting related to our internal
controls over the accuracy and valuation of the provision for
income taxes. Please refer to Item 9A, Managements
Report on Internal Control over Financial Reporting, in our
2009 Annual Report.
The material weakness was as follows:
The Company did not maintain effective controls over the
accuracy and valuation of the provision for income taxes. We
did not maintain effective controls over reviewing and
monitoring the accuracy of the income tax provision calculation.
This material weakness resulted in material errors in income tax
benefit and the related deferred tax asset and current income
tax payable that were corrected prior to the issuance of the
Companys consolidated financial statements.
b) | Changes in Internal Control over Financial Reporting in our Last Fiscal Quarter |
To remediate the material weakness described above and enhance
our internal control over financial reporting, we are currently
enhancing our control environment and control activities
intended to address the material weakness in our internal
control over financial reporting and to remedy the
ineffectiveness of our disclosure controls and procedures.
During the nine months ended September 30, 2010, we
continued remediation initiatives, which are intended to address
our material weakness in internal control over financial
reporting.
| Our Director of Tax, a position we created and filled in September 2009, continues to prepare and facilitate all tax related information as required to calculate the tax provision including monitoring the tax depreciation for all fixed assets, capitalized costs and associated valuation, and proper treatment of satellite and research and development expenses. In addition, the Director of Tax ensures that all information is accurately reflected and the permanent and temporary differences and uncertain tax positions are reasonable and supported. | |
| As previously disclosed during the first quarter of 2010 we retained a third-party accounting firm to assist the Director of Tax. This firm continues to provide the review and approval of the income tax accounting for compliance with generally accepted accounting principles and to ensure corporate compliance with tax regulations. |
35
| We continue to improve the tax provision process by conducting training for key management personnel to provide insight on current tax law changes and tax regulations as well as to improve communication around significant transactions. |
Management believes the measures we have implemented during the
nine months ended September 30, 2010, through the date of
this filing to remediate the material weakness discussed above,
had a positive effect on our internal control over financial
reporting since December 31, 2009, and anticipates that
these measures and other ongoing enhancements as discussed will
continue to have a positive impact on our internal control over
financial reporting in future periods.
Notwithstanding such efforts, the material weakness related to
the accuracy and valuation of the provision for income taxes
described above will not be fully remediated until the new
controls operate for a sufficient period of time. Because the
Company has not yet completed comprehensive testing of the
operating effectiveness of its controls, the Company cannot
conclude on the effectiveness of its internal controls over
financial reporting in its entirety.
36
PART II
OTHER INFORMATION
Item 1. | Legal Proceedings. |
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 or
results of operations.
Item 1A. | Risk Factors. |
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-Q
or presented elsewhere by management from time to time. We are
exposed to certain risk factors that may affect future
consolidated operating and financial results. The risks and
uncertainties described below are not the only risks and
uncertainties that we face. Additional risks and uncertainties
not presently known to us or that are currently deemed
immaterial may also impair our future business operations. You
are encouraged to review our most recently filed annual report
on
Form 10-K
to learn more about the various risks and uncertainties facing
our business and their potential impact on our revenue, earnings
and stock price.
Certain risk factors included in our annual report on
Form 10-K
for the year ended December 31, 2009, in Part I,
Item 1A, Risk Factors, have been enhanced or
otherwise updated to reflect changes as a result of an offering
of $125.0 million in Senior Notes the Company executed on
October 8, 2010, as well as managements judgment
regarding risk and uncertainties in the business based on
currently available information.
A
substantial portion of our revenues are generated from contracts
with U.S. government agencies that are subject to annual renewal
and congressional appropriations. Termination of these contracts
or a failure by Congress to make appropriations to the NGA could
materially reduce our revenue and have a material adverse effect
on our business.
Revenues from U.S. government contracts accounted for 64%
and 67% of our total revenues for the three and nine months
ended September 30, 2010, respectively. Our contracts with
U.S. government agencies are subject to risks of
termination, with or without cause, or reduction in scope due to
changes in U.S. government policies, priorities or funding
level commitments to various agencies. Our primary contract with
the U.S. government, through the NGA, is the EnhancedView
SLA. The loss of this or any other U.S. government contract
would materially reduce our revenue. Any inability on our part
to meet the performance requirements of the EnhancedView SLA
could result in a breach of our contract with the NGA. The
EnhancedView SLA is structured as a one-year agreement, with
nine one-year renewal options, exercisable at the NGAs
option. A breach of our contract with the NGA resulting in its
termination, or a decision by the NGA not to exercise it renewal
options under the EnhancedView SLA, would have a material
adverse effect on our business, financial condition and results
of operations.
Although our NGA contracts generally involve fixed annual
minimum commitments, such commitments are subject to annual
Congressional appropriations and, as a result, the NGA may not
continue to fund these contracts at current or anticipated
levels. If the NGA terminates, significantly reduces in scope or
suspends any of its contracts with us, or changes its policies,
priorities or funding levels, these actions would have a
material and adverse effect on our business, financial condition
and results of operations. We recognized $25.0 million and
$99.6 million of revenue under the NextView SLA with the
NGA and $12.3 million of revenue under the EnhancedView SLA
for both the three and nine months ended September 30,
2010, respectively, which accounted for approximately 43% and
45% of our revenue during the three and nine months ended
September 30, 2010, respectively.
As part of the EnhancedView award, we have entered into a cost
share agreement with the NGA that provides for approximately
$337.0 million of funding for the development and launch of
GeoEye-2, which amount represents over 40% of our expected
GeoEye-2 development and launch expense. If the cost share
agreement is terminated, it will be difficult for us to obtain a
similar level of financing on comparable or acceptable terms, if
at all. If such termination is accompanied by a termination or
non-renewal of the EnhancedView SLA, we will experience
37
significant difficulty in obtaining financing for the
construction and development of GeoEye-2, which would have a
material adverse effect on our business, financial condition and
results of operations.
Changes
in U.S. government policy regarding the use of commercial
imagery products and service providers, or material delay or
cancellation of the 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 a commercial imagery products and
services 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 adversely
affect our business, financial condition and results of
operations.
Satellites
have limited useful lives and are expensive to
replace.
Satellites have limited useful lives. We determine a
satellites useful life, or its expected operational life,
using a complex calculation involving the probabilities of
failure of the satellites 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
satellites 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
September 2011 based on a study that was completed in August
2008 and updated in September 2009 by the IKONOS manufacturer,
which resulted in an extended life expectancy for IKONOS.
However, there can be no assurance that IKONOS will continue to
operate adequately to remain commercially viable. Our OrbView-2
satellite, a medium resolution satellite launched in 1997 and
providing nominal revenues, has in the past year 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
medium resolution imagery. OrbView-2 last switched into
safe-hold mode on September 11, 2010, and it recently
returned to normal operations and we continue to monitor the
situation. Management is currently conducting a cost-benefit
analysis of continuing OrbView-2s operations, since we can
obtain most information it provides from other external sources,
and the impact to our revenues of discontinuing the satellite
would be nominal.
Replacing a satellite can be expensive. We are currently
building GeoEye-2, which we expect to be operational in 2013. We
expect to use up to $337.0 million in federal government
cost share funds, current cash balances, proceeds from the
Preferred Stock sold to Cerberus and funds generated from
operations to develop and launch GeoEye-2. If our cost share
agreement with the NGA is terminated by the NGA, or if Congress
fails to make appropriations to fund payments by the NGA under
this cost share agreement, we will have to seek additional
financing from outside sources, which we may be unable to
obtain. If we do not generate sufficient funds from operations
and we cannot obtain financing from outside sources, we will not
be able to deploy a new satellite to replace GeoEye-1 at the end
of its expected operational life. We cannot assure investors
that we will be able to
38
generate sufficient funds from operations or be able to raise
additional capital on acceptable 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 satellites 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 of commands that can negatively affect a
satellites 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 satellites sensors could
significantly degrade their performance, which could materially
affect our ability to collect imagery and market our products
successfully.
If we suffer a partial or total loss of a deployed satellite, we
would need a significant amount of time and would incur
substantial expense to replace that satellite. We may experience
other problems with our satellites that may reduce their
performance. During any period of time in which a satellite is
not fully operational, we may lose most or all of the revenue
that otherwise would have been derived from that satellite. In
addition, we may not have on hand, or be able to obtain in a
timely manner, the necessary funds to cover the cost of any
necessary satellite replacement. Our inability to repair or
replace a defective satellite, or correct any other technical
problem in a timely manner, could result in a significant loss
of revenue. 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, which is not a high-resolution
satellite and which does not have a material effect on our
business plan, has experienced operational anomalies related to
various components. When these have occurred, OrbView-2 has
switched into safe-hold mode to protect itself while
we work on restoring its functionality. When in safe-hold mode,
OrbView-2 is unable to provide imagery. The last safe-hold mode
incident occurred September 11, 2010, but the satellite has
returned to normal operations. While we have historically had
success in returning OrbView-2 to operational status from this
mode, we cannot assure you that OrbView-2 will continue to
operate normally or will return to operational status should it
re-enter safe-hold mode. Management is currently conducting a
cost-benefit analysis of continuing OrbView-2s operations,
since we can obtain most information it provides from other
external sources, and the impact to our revenues of
discontinuing the satellite would be nominal.
In December 2009, we announced that our engineers detected an
irregularity in the equipment that GeoEye-1 uses to point the
antenna that transmits imagery to receiving stations on the
ground. The irregularity limits the range of movement of
GeoEye-1s downlink antenna, which affects GeoEye-1s
ability to image and downlink simultaneously. GeoEye-1 is able
to downlink imagery to GeoEyes and customer ground
stations when not collecting images.
In May 2009, we announced that our engineers detected an anomaly
with GeoEye-1 affecting the collection of color imagery by a
narrow band of pixels within an image. As a result, we modified
our operations and currently collect, produce and deliver color
imagery to customers that is unaffected by the anomaly.
Subsequently, an adjacent band of pixels experienced the same
anomaly. GeoEye-1 imagery collection, production and delivery to
customers is unaffected by this second occurrence because of the
previous operational modifications implemented by the Company,
and the pixel bands affected by the anomaly continue to collect
panchromatic
(black-and-white)
images normally. We have designed modifications that we believe
would significantly reduce or eliminate the effects to the
Company of these types of failures. However, any failure of our
cameras on any of our satellites or other loss of satellite
capacity or functionality could require different satellite
operational modifications that may have a material adverse
effect on our imagery collection operations and could materially
affect our financial condition and results from operations.
39
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 satellites 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.
Our
information systems and security systems and networks may be
subject to intrusion, resulting in possible interruption, delay
or suspension of our ability to provide our products and
services and could result in loss of current and future
business.
A breach or breaches of our system security could materially
adversely affect our business. Our business involves the
transmission and storage of large quantities of electronic data,
including the imagery comprising our global imagery library. In
addition, our business is becoming increasingly Web-based,
allowing our customers to access and take delivery of imagery
from our digital imagery library over the Internet. From time to
time, we have experienced computer viruses and other forms of
third-party attacks on our systems that, to date, have not had a
material adverse affect on our business. We cannot assure you,
however, that future attacks will not materially adversely
affect our business.
Despite the implementation and continued upgrading of security
measures, our network infrastructure may be vulnerable to
computer viruses, unauthorized third-party access, or other
problems caused by third parties. Any of these could lead to
interruptions, delays or suspension of our operations, loss of
imagery from our global imagery library, as well as the loss or
compromise of technical information or customer information.
Inappropriate use of the Internet by third parties, including
attempts to gain unauthorized access to information or
systems commonly known as cracking or
hacking could also potentially
jeopardize the overall security of our systems and could deter
certain customers from doing business with us. If a breach
involves information subject to breach disclosure laws (such as
certain personally identifiable information), we may be required
to publicly disclose the breach, which may deter customers from
dealing with us
and/or
expose us to material notification expenses. In addition, a
security breach that involved classified or other sensitive
government information, or certain controlled technical
information, could subject us to civil or criminal penalties,
and could result in loss of our government contracts, loss of
access to classified information, loss of export privileges or
debarment as a government contractor.
Because the techniques used to obtain unauthorized access, or to
otherwise infect or sabotage information systems, change
frequently and often are not recognized until launched against a
target, we may be unable to anticipate these new techniques or
to implement adequate preventative measures. We may also need to
expend significant people and financial resources to protect
against security breaches or remedy any breaches that might
occur. The risk that these types of events could seriously harm
our business is likely to increase as we expand the number of
Web-based products and services we offer and increase the number
of countries within which we do business.
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 other satellite and
aircraft-based imagery sources and related imagery products and
services offered by a wide range and scale of commercial and
government providers. Some competitors may have greater
financial, personnel and other operating 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;
40
and WorldView-2, 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
DigitalGlobes position in the industry. Our satellites
have different capabilities from those of DigitalGlobe.
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
affected.
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 and also subsidize their satellites on the pricing
of imagery leading to pricing pressure. Future pricing pressure
could lead to market share losses if we choose not to compete on
price to retain our existing customer base. 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 and EyeQ
Web-based information services 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.
41
We may not continue to grow in line with our historical growth
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 results of operations
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 and
EyeQ customers. 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 expanding 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 difficult and costly to obtain or
maintain.
The terms of the 2016 Notes and 2015 Notes require us to obtain
launch and in-orbit insurance for any future satellites we
construct and launch and also require 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. We also carry $187.0 million of
in-orbit coverage to be paid if the satellites
capabilities become impaired as measured against a set of
specifications, of which $137.0 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
42
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 2016 Notes and
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 2016 Notes and the 2015 Notes. With respect to
IKONOS, we currently carry $20.0 million of in-orbit
coverage to be paid if the satellites 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, as OrbView-2 provides nominal
revenues to the Company. We will seek to obtain insurance
coverage for GeoEye-2 and all future satellites as required
under the 2016 Notes and the 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 2016 Notes and 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 affect 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 affect 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, the
operations of our subsidiary, M.J. Harden Associates, Inc. have
and could continue to face greater exposure to this risk. 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 counterparts. 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 affect 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 ongoing liquidity
requirements for sustaining our operations will be satisfied by
cash on hand and cash generated from our existing and future
operations. However, we cannot provide assurances that our
businesses will generate sufficient cash flow from operations in
the future or that future borrowings will be available in
amounts sufficient to enable us to execute our business
strategies.
43
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
affect 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. We
can provide no assurance that we will be able to raise
sufficient capital to continue funding our satellite
constellation and expand our business.
We received significant funding support from the
U.S. government, through the NGA, in connection with the
construction and launch of GeoEye-1 and have entered into a cost
share agreement with the NGA providing for up to
$337.0 million of funds in connection with the construction
and launch of GeoEye-2. Changes in U.S. government policy
regarding this kind of support would require us to seek
alternative sources of funding for the construction and
development of our satellites, and there can be no assurance
that such funding would be available on terms acceptable to us,
if at all.
Failure
to obtain, or the revocation 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, and is
subject to regulation by, the United States Department of
Commerce, or DoC. The failure to obtain these licenses, or the
revocation of one or more licenses (for example, as the result
of our failure to comply with our licenses or applicable
regulations), could adversely affect our ability to conduct our
business. DoC regulations and license conditions provide that we
must obtain prior DoC consent to certain changes in control
over, or the holding of certain interests in, the Company. DoC
regulations and license conditions also 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. government. 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. See Regulation United
States DoC regulation.
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, then our business, financial condition and results of
operations could be materially adversely affected. See
Regulation United States Export
controls and security clearance regulation.
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 (NISPOM), which provides baseline standards for the
protection of classified information released or disclosed to
industry in connection with classified U.S. government
contracts. Among other things, the NISPOM restricts the ability
of
non-U.S. (foreign)
entities or individuals to hold foreign ownership, control, or
influence (FOCI) over a U.S. person performing classified
work for the U.S. government, such that investments in the
Company by a
non-U.S. entity
or individual could require prior review by the
U.S. Department of Defense. The suspension or cancellation
of our facility security clearances, or the inability to
maintain personnel security clearances for our personnel to
perform classified U.S. government contracts, could have a
material adverse effect on our business and results of
operations. See Regulation United
States Export controls and security clearance
regulation.
44
Our operation of satellites and ground stations also requires
licenses from, and is subject to regulation by, the Federal
Communications Commission, or FCC. The FCC regulates the launch
and operation of our satellites, the use of satellite spectrum
and the licensing of our ground stations terminals located
within the United States. The FCC also regulates the ownership
and control of its licensees, and must consent to certain
changes in such ownership or control. 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. In light of the EnhancedView
contract award, which includes up to $337.0 million in cost
share funds from the NGA for the development and launch of the
GeoEye-2 satellite, we are preparing an application to modify
our GeoEye-1 satellite FCC license to add the GeoEye-2 satellite
and associated ground stations and expect to file this
application in the near future. 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, or that our application to
modify our GeoEye-1 satellite FCC license will be granted.
Failure to renew or modify these licenses, obtain FCC
authorization to launch and operate any new satellites or
otherwise maintain our existing licenses (for example, as the
result of our failure to comply with our licenses or applicable
regulations) could have a material adverse affect on our ability
to generate revenue and conduct our business as currently
planned. See Regulation United
States FCC regulation.
International
registration and approvals
The use of satellite spectrum is subject to the requirements of
the International Telecommunication Union, or 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.
Our
international business exposes us to risks relating to increased
regulation and political or economic instability in foreign
markets.
For the three and nine months ended September 30, 2010,
approximately 28% and 26%, respectively 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:
| Changes in domestic and foreign governmental regulations and licensing requirements; | |
| Deterioration of relations between the United States and a particular foreign country; | |
| Increases in tariffs and taxes and other trade barriers; | |
| Changes in political and economic stability, including fluctuations in the value of foreign currencies, which may make payment in U.S. dollars, as provided for under our existing contracts, more expensive for foreign customers; and | |
| Difficulties in obtaining or enforcing judgments in foreign jurisdictions. |
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 engineering and information technology
professionals. A number of our employees are highly skilled
engineers and other information technology professionals. In
addition, our success depends to a significant extent upon the
abilities and efforts
45
of the members of our senior executive management team.
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.
Government
audits of our contracts could result in a decrease in 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.
We may
pursue acquisitions, investments, strategic alliances and joint
ventures, which could affect our results of
operations.
We may engage in various transactions, including purchases or
sales of assets, acquisitions of businesses, or entering into
investments or contractual arrangements, such as strategic
alliances or joint ventures. These transactions may be intended
to result in the realization of cost savings, the generation of
cash or income or the reduction of risk. We cannot assure you
that we will be able to identify suitable acquisition,
investment, alliance, or joint venture opportunities or that we
will be able to consummate any such transactions or
relationships on terms and conditions acceptable to us, or that
such transactions or relationships will be successful.
Any future acquisitions, investments, strategic alliances or
joint ventures may require additional debt or equity financing,
which, in the case of debt financing, would increase our
leverage and potentially affect our creditworthiness. Any
deterioration in our creditworthiness or our future credit
ratings associated with an acquisition could adversely affect
our ability to borrow by resulting in more restrictive borrowing
terms.
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.
Managements 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 of our Annual Report on
Form 10-K
for the year ended December 31, 2009, filed with the SEC on
March 12, 2010, and Item 4. Controls and
Procedures of this quarterly report on
Form 10-Q.
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.
During the nine months ended September 30, 2010, we have
undertaken initiatives to remediate the material weakness
described in Item 4.
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
46
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.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
On September 22, 2010, the Company completed an offering of
80,000 shares of Preferred Stock for net proceeds of
$78.0 million. The terms of the Preferred Stock provide for
a liquidation preference of $1,000 per share and cumulative
dividends at an annual rate of 5%, payable in cash or
securities, at the Companys option. For further
information, please see Note 7 Convertible Preferred
Stock to the consolidated condensed financial statement in
this
Form 10-Q,
and the Companys Current Report on
Form 8-K
filed with the SEC on September 24, 2010.
Item 6. | Exhibits. |
(a) Exhibits:
Exhibit 10 | .1* | Contract No. HM0210-10-C-003 with U.S. National Geospatial-Intelligence Agency. | ||
Exhibit 10 | .2* | Contract No. HM0210-10-9-0001 with U.S. National Geospatial-Intelligence Agency. | ||
Exhibit 31 | .1 | Rule 13a-14(a) Certification of Matthew M. OConnell | ||
Exhibit 31 | .2 | Rule 13a-14(a) Certification of Joseph F. Greeves | ||
Exhibit 32 | .1 | Certification Pursuant to 18 U.S.C. Section 1350 of Matthew M. OConnell | ||
Exhibit 32 | .2 | Certification Pursuant to 18 U.S.C. Section 1350 of Joseph F. Greeves |
* | Portions of this exhibit have been omitted pursuant to a request for confidential treatment, and this exhibit has been filed separately with the SEC. |
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
GeoEye, Inc.
(Registrant)
/s/ MATTHEW
M. OCONNELL
Matthew M. OConnell
President and Chief Executive Officer
/s/ JOSEPH
F. GREEVES
Joseph F. Greeves
Executive Vice President and Chief Financial Officer
Date: November 9, 2010
48