Quarterly Report

 

 

 

 

(703) 480-7500

(Registrant’s telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

 

 

 

 

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

None

 

Indicate by check mark 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  o

 

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

 

 

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

 

The number of shares outstanding of Common Stock, par value $0.01, as of May 8, 2009 was 18,557,002 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 ^® , SPACE IMAGING ^® , GEOFUSE ^tm , GEOPROFESSIONAL ^tm , GEOSTEREO ^tm , SEASTAR ^tm , SEASTAR FISHERIES INFORMATION SERVICE ^sm , MARINE INFORMATION SERVICE ^sm , MASTERCAST ^tm , OCEAN MONITORING SERVICE ^sm , ORBBUOY ^tm , ORBMAP ^tm , ORBUOY ^tm and VESSEL TRACKING ^tm

Item 1.   Financial Statements.

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

GEOEYE, INC.

 

 

GEOEYE, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make judgments, estimates, and assumptions that affect the amount reported in our condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

New Accounting Pronouncements

 

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141R, Business Combinations (SFAS 141R). SFAS 141R will apply to business combinations for which the acquisition date is on or after January 1, 2009. The significant changes to SFAS 141R include the “acquirer” recording 100% of all assets and liabilities, including goodwill, of the acquired business, generally at their fair values, and acquisition-related transaction costs being expensed rather than capitalized as part of the cost of the acquisition. We adopted SFAS 141R in the first quarter of 2009. The impact of the adoption will depend on the nature and extent of business combinations occurring during 2009.

 

In April 2008, the FASB issued FASB staff position FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets . This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions after the effective date. We adopted FSP FAS 142-3 in the first quarter of 2009. The impact of the adoption will depend on the nature and extent of business combinations occurring during 2009.

 

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with U.S. GAAP. SFAS 162 became effective on November 12, 2008. SFAS 162 arranges these sources of GAAP in a hierarchy for users to apply accordingly. SFAS 162 did not result in a change in current practice and did not have an effect on our results of operations, financial condition or cash flows. In April 2009, the FASB proposed a replacement of SFAS 162 which modifies the hierarchy created by SFAS 162 by establishing only two levels of GAAP: authoritative and nonauthoritative. This would be accomplished by authorizing the FASB Accounting Standards Codification to become the single source of authoritative U.S. accounting and reporting standards, except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants. The effective date for the Statement is July 1, 2009. The changes to the GAAP hierarchy proposed in this Statement should not result in accounting changes that require specific transitional provisions.

 

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FAS 107-1 and APB 28-1), which requires public companies to disclose the fair value of financial instruments with the scope of FAS 107, Disclosures about Fair Value of Financial Instruments in interim financial statements. This position will be effective for interim periods ending after June 15, 2009. Since FSP FAS 107-1 and APB 28-1 requires only additional disclosures of fair values of financial instruments in interim financial statements, the adoption will not have an effect on our results of operations, financial condition or cash flows.

 

Fair Value Measurements

 

Our financial instruments include cash and cash equivalents, derivative instruments in the form of interest rate caps, short-term investments, accounts receivable, accounts payable, accrued liabilities, and debt. The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term nature. We record debt at cost, net of debt discount and issuance costs. The fair value of our publicly issued Senior Secured Floating Rate Notes due July 1, 2012 was

 

GEOEYE, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

approximately $238.9 million at March 31, 2009. The fair value was determined based on market trades of the Notes (Level 1 information).

 

On January 1, 2008, we prospectively adopted FASB SFAS No. 157, Fair Value Measurements (SFAS 157), which 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. SFAS No. 157 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. SFAS No. 157 establishes a three-level valuation hierarchy based upon the transparency of inputs utilized in the measurement and valuation of financial assets or liabilities as of the measurement date:

 

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

 

Financial assets carried at fair value on a recurring basis at March 31, 2009 are summarized below (in thousands) :

 

 

Short-term investments, which consist of certificates of deposit, are measured at fair value and are classified within Level 2 of the valuation hierarchy. These Level 2 fair values are routinely corroborated on a quarterly basis with observable market-based inputs.

 

In February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 , (FSP FAS 157-2) which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of SFAS 157 for nonfinancial assets and liabilities that are measured at fair value on a non-recurring basis did not impact our financial position or results of operations for the three months ended March 31, 2009, and we do not expect the adoption to have a material impact on the amounts reported in the financial statements in future periods.

 

 

The U.S. Government, through the National Geospatial-Intelligence Agency (NGA), announced in March 2003 that it intended to support, through the NextView program, the continued development of the commercial satellite imagery industry through contracts to support the engineering, construction and launch of the next generation of imagery satellites by two providers. Under the NextView program, we constructed a new satellite, GeoEye-1. GeoEye-1 was launched in September 2008 and started commercial operations on February 5, 2009. NGA certified the imagery as meeting NGA’s specifications on February 20, 2009 and GeoEye-1 commenced full operations. Total final capitalized costs (including financing and launch insurance costs) of the GeoEye-1 satellite and related ground systems incurred were $458.1 million. Approximately $28.2 million of this amount was payable to subcontractors at March 31, 2009.

 

Under the NextView contract, NGA agreed to support the project with a cost share totaling approximately $237.0 million spread out over the course of the project development and subject to various milestones. As of March 31, 2009, NGA had paid us the full cost share obligation. We had deferred recognition of the cost share

 

GEOEYE, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

amounts from NGA as revenue until GeoEye-1’s in-service date, which occurred on February 20, 2009. We recognize this revenue on a straight-line basis over the nine-year depreciable operational life of the satellite. As a result of the deployment of GeoEye-1 for less than the maximum contractual cost, a portion of NGA’s cost share payments, approximately $20.0 million, will be credited against future imagery purchase obligations during 2009.

 

In December 2008, a Service Level Agreement modification to the NextView contract was finalized with NGA. Under the Service Level Agreement, we began delivering imagery to NGA in the first quarter of 2009 and recognized $14.5 million of imagery revenue during the three months ended March 31, 2009.

 

 

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

 

 

The capitalized costs of our satellites and related ground systems include internal and external direct labor costs, internally developed software, material and depreciation costs related to assets which support the construction and development. The cost of our satellites also includes capitalized interest incurred during the construction, development and initial on-orbit testing period. The portion of the launch insurance premium allocable to the period from launch through on-orbit calibration and commissioning has been capitalized as part of the cost of the satellites and is amortized over the useful life of the satellites.

 

Final capitalized costs for the GeoEye-1 satellite and related ground systems was $458.1 million. Total capitalized costs related to our efforts to build GeoEye-2, our next earth imaging satellite, were $43.4 million and $29.9 million at March 31, 2009 and December 31, 2008, respectively.

 

We currently maintain three separate insurance policies for GeoEye-1, with combined coverage for on-orbit and total loss coverage in the amount of $320.0 million. The portion of the launch insurance capitalized as part of the cost of the satellite was $16.8 million. Also, as of March 31, 2009, $20.5 million was reported in prepaid expenses and $2.2 million was in other non-current assets on the condensed consolidated balance sheet.

 

Total satellite and related ground systems depreciation expense was $6.2 million and $1.4 million for the three months ended March 31, 2009 and 2008, respectively.

 

 

Our effective tax rate was 37.6% and 39.8% before discrete items for the three months ended March 31, 2009 and 2008, respectively. Income tax benefit was $2.1 million including discrete items for the three months ended March 31, 2009 and the income tax expense was $2.7 million including discrete items of $2.0 million related to interest and penalties for the three months ended March 31, 2008. Our effective tax rate exclusive of discrete items differs from the federal tax rate primarily due to state and local income taxes.

 

We record liabilities related to uncertain tax positions in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes , an interpretation of SFAS No. 109, Accounting for Income Taxes. The

 

GEOEYE, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

total liability for unrecognized tax benefits as of March 31, 2009 and December 31, 2008 was $0.7 million and $1.4 million, respectively. In the quarter ended March 31, 2009, we reversed $0.7 million related to the settlement of penalty and interest claims from our 2007 income tax filings. The majority of the remaining balance represents penalties and interest relating to federal and state income tax filings which would impact our effective tax rate if recognized.

 

We believe that it is reasonably possible that we will recognize a decrease in unrecognized tax benefits upon settlement with federal and state jurisdictions within the next 12 months. We believe there are no other jurisdictions in which the outcome of unresolved tax issues or claims is likely to be material to our results of operations, financial position, or cash flows for at least the next 12 months.

 

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The statutes of limitations for tax years 2005 through 2008 have not expired and thus these years remain subject to examination by the Internal Revenue Service (IRS). The statute of limitations for the 2005 tax year will remain open until February 2010 due to the late filing of the return. Significant state jurisdictions that remain subject to examination include Colorado, Virginia and Missouri for tax years 2005 through 2008.

 

 

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

 

 

 

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

 

 

Interest expense, net includes interest expense on our Senior Secured Floating Rate Notes (Notes), amortized prepaid financing costs, amortization of debt discount, market adjustments to fair value of the related derivative instruments and excludes capitalized interest expense and interest income.

 

The Notes were issued at a discount of 2.0% of total principal. The Notes bear interest at a rate per annum, reset semi-annually, equal to the greater of six-month LIBOR or 3.0% plus a margin of 9.5%. The rate as of March 31, 2009 was 12.50%. Interest expense related to the Notes was $8.7 million and $9.4 million for the three months ended March 31, 2009 and 2008, respectively.

 

In connection with the issuance of the Notes, we entered into an interest rate swap arrangement in June 2005 pursuant to which the effective interest rate under the Notes was fixed at 13.75% through July 1, 2008. In February

 

GEOEYE, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

2008, we entered into a $250.0 million interest rate cap agreement that is intended to protect us from increases in interest rates by limiting our interest rate exposure to the three-month LIBOR with a cap of 4.0%. The cap option cost was $0.5 million and is effective July 1, 2008 through January 1, 2010. As of March 31, 2009 the fair value of the interest rate cap was immaterial. We recorded an unrealized loss of $1.8 million for the three months ended March 31, 2008 on the derivative instruments and an immaterial amount for the three months ended March 31, 2009 on the interest rate cap. These amounts are included in interest expense.

 

 

Earnings per share

 

Basic earnings per share (EPS) is computed based on the weighted-average number of shares of our common stock outstanding. For the three months ended March 31, 2009 and 2008, non-vested stock, options and warrants to purchase or acquire shares of the Company’s common stock were not included in the calculation of the diluted loss per share amounts as their effect was anti-dilutive. Basic and diluted loss per share amounts are the same as the Company reported a loss for both periods presented.

 

 

Comprehensive Loss

 

For the first three months ended March 31, 2009 and 2008, there were no material differences between net loss as reported and comprehensive loss.

 

Warrants

 

As of March 31, 2009 there were outstanding warrants to purchase up to 3.1 million shares of new common stock at a weighted average exercise price of $10.00 per share. The warrants expire on March 25, 2010. During the three months ended March 31, 2009, 115,385 warrants granted January 1, 2006 at a weighted average exercise price of $15.00 were exercised.

 

 

The Company operates in a single industry segment, in which we provide imagery, imagery information products and image processing services to customers around the world.

 

The Company recognized revenue related to contracts with the U.S. Government, our largest customer, of $28.6 million and $15.0 million, for the first quarter of 2009 and 2008, representing 63% and 42% of total revenues, respectively. We had no other customers for whom revenues exceeded 10% of total revenues in the first three months of 2009 or 2008.

 

 

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

 

 

 

Operating Leases

 

The Company has commitments for operating leases primarily relating to equipment and office and operating facilities. 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 five to ten years. Total rental expense under operating leases million for the three months ended March 31, 2009 and 2008 was approximately $0.5 million and $0.4 million, respectively.

 

Contingencies

 

The Company, from time to time, may 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 the Company’s financial results, liquidity or operations.

 

 

The Senior Secured Floating Rate Notes (Notes) issued by the Company are guaranteed by ORBIMAGE Inc. The Company does not have any independent assets or operations other than its ownership in all of the capital stock of ORBIMAGE Inc., the subsidiary guarantor of the Notes, and the capital stock of its other non-guarantor subsidiaries. Since inception, all of the Company’s operations have been conducted through its wholly-owned subsidiaries. ORBIMAGE Inc.’s guarantee of the Notes is full and unconditional. There are no significant restrictions on the ability of the Company to obtain funds from ORBIMAGE Inc. by dividend or loan. There are also no significant restrictions on the ability of ORBIMAGE Inc. to obtain funds from the Company by dividend or loan.

 

The following consolidating financial information for the Company presents the financial information of the Company, the guarantor subsidiary and the non-guarantor subsidiaries based on the Company’s understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 under the Securities and Exchange Commission’s Regulation S-X. In this presentation, GeoEye, Inc. consists of the Parent company’s operations. Guarantor Subsidiary and Non-Guarantor Subsidiaries of the Company are reported on an equity basis.

 

GEOEYE, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The financial information may not necessarily be indicative of results of operations or financial position had the guarantor subsidiary or non-guarantor subsidiaries operated as independent entities.

 

 

 

 

 

 

 

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Annual Report). In preparing the discussion and analysis contained in this Item 2, we presume that readers have read or have access to the discussion and analysis contained in the 2008 Annual Report. In addition, the following discussion and analysis should be read in conjunction with GeoEye’s condensed consolidated financial statements, related notes and “Part I — Item 1A — Risk Factors”, which describe key risks associated with our operations and industry, and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2008 Annual Report.

 

FORWARD LOOKING STATEMENTS

 

All statements other than those of historical facts included in this Form 10-Q, including those related to our financial outlook, liquidity, goals, business strategy, projected plans and objectives of management for future operating results, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements as long as they are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements.

 

These forward-looking statements are subject to numerous assumptions, risks and uncertainties, based on our current expectations and projections about future events including but not limited to those factors set forth below and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) and “Part I-Item 1A-Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008. The forward-looking statements made in this quarterly report on Form 10-Q (Quarterly Report) reflect our intentions, plans, expectations, assumptions and beliefs about future events. Our actual results, performance or achievements could be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, there is a risk that these expectations will not be attained and that any deviations will be material. We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Form 10-Q to reflect any changes in our expectations or any change in events, conditions or circumstances on which any statement is based.

 

Overview

 

GeoEye is a premier provider of imagery, imagery information products and image processing services. Our products and services enable timely, accurate and accessible location intelligence. We provide our products and services to the U.S. Government, including the national security community, international customers and North American commercial customers. We have developed an advanced information technology infrastructure for capturing, receiving, processing and distributing high-resolution and low-resolution imagery, imagery information products and image processing services to customers around the world. With our existing satellite and aerial infrastructure, which includes GeoEye-1, currently the highest resolution commercial imaging satellite in the world, we are able to collect millions of square kilometers of imagery per year. Our collection systems and large-scale product generation capabilities serve market demand worldwide for advanced imagery information products to map, measure and monitor the Earth for a wide variety of applications including defense and intelligence, on-line and precision mapping, infrastructure planning and monitoring, and environmental monitoring.

 

Impact of Significant Transactions

 

GeoEye-1 Satellite

 

The GeoEye-1 satellite was launched in September 2008 and started commercial operations on February 5, 2009. The National Geospatial-Intelligence Agency (NGA) certified the imagery as meeting NGA’s specifications on February 20, 2009 and we commenced full operations. GeoEye-1 is currently the world’s highest-resolution

commercial remote-sensing satellite, which offers both black and white and color imagery. The GeoEye-1 satellite was constructed as part of our participation in the NextView program created by the U.S. Government through NGA.

 

Total final capitalized costs (including financing and launch insurance costs) of the GeoEye-1 satellite and related ground systems were $458.1 million. Approximately $28.2 million of this amount was payable to subcontractors at March 31, 2009. Under the NextView contract, NGA agreed to support the project with a cost share totaling approximately $237.0 million spread out over the course of the project development and subject to various milestones. As of March 31, 2009, NGA had paid us the full cost share obligation. We had deferred recognition of the cost share amounts from the NGA as revenue until GeoEye-1’s in-service date, which occurred on February 20, 2009. We recognize this revenue on a straight-line basis over the depreciable operational life of the satellite, which we believe will ultimately approximate the expected nine-year operational life of the satellite. As a result of the deployment of GeoEye-1 for less than the maximum contractual cost, a portion of NGA’s cost share payments, approximately $20.0 million, will be credited against its future imagery purchase obligations during 2009. For the first quarter of 2009, we have recognized $2.9 million of deferred revenue.

 

NextView Program and Service Level Agreement

 

Under the Service Level Agreement (SLA) modification to the NextView contract with NGA, signed December 10, 2008, we began delivering imagery to NGA in the first quarter of 2009 and recognized $14.5 million of imagery revenue.

 

 

 

Imagery revenues include imagery purchases, as well as affiliate access fees, operations and maintenance fees and the recognition of deferred revenue related to the cost share amounts from NGA. Imagery revenues increased $10.4 million to $35.3 million in the first quarter 2009 from $24.9 million in the same period in 2008 primarily due to increased imagery orders from the NGA relating to the SLA as imagery is now being produced from GeoEye-1 and the recognition of $2.9 million of deferred revenue related to the cost share amounts from NGA. Production and other services revenues decreased $1.1 million to $9.9 million in the first quarter 2009 from $11.0 million in the same period in 2008 primarily due to decreases as a result of two projects nearing completion.

 

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