Quarterly Report

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

FORM 10-Q

R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended March 31, 2011
   
OR
 
£
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)

Delaware
 
20-2759725
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
2325 Dulles Corner Boulevard
 
20171
Herndon, VA
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:
(703) 480-7500
 

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o      No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x      No 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller reporting company)

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

The number of shares outstanding of Common Stock, par value $0.01, as of May 6, 2011 was 22,171,924 shares.
 
 
 
 
 
TABLE OF CONTENTS

PART I —
3
 
Item 1.
3
 
 
3
 
 
4
 
 
5
 
 
6
 
Item 2.
18
 
Item 3.
29
 
Item 4.
29
 
PART II —
30
 
Item 1.
30
 
Item 1A.
30
 
Item 6.
30
 
Signatures   30  

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

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

PART I — FINANCIAL INFORMATION

Item 1.   Financial Statem ents.

GEOEYE, INC.
 
   
March 31, 2011
   
December 31, 2010
 
   
(Unaudited)
       
   
(In thousands)
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 245,040     $ 283,233  
Short-term investments
    35,088       50,124  
Accounts receivable - trade and unbilled receivables (net of allowances: 2011 - $874; 2010 - $957)
    33,736       42,868  
Income tax receivable
    33,347       34,385  
Restricted cash
    4,207       3,952  
Prepaid expenses and other current assets
    17,705       16,183  
Total current assets
    369,123       430,745  
Property, plant and equipment, net
    49,936       35,924  
Satellites and related ground systems, net
    763,469       697,126  
Goodwill
    71,228       71,568  
Intangible assets, net of accumulated amortization: 2011 - $16,348; 2010 - $15,417
    14,012       14,943  
Non-current restricted cash
    9,835       10,822  
Other non-current assets
    7,571       7,957  
Total assets
  $ 1,285,174     $ 1,269,085  
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 72,834     $ 70,936  
Current portion of deferred revenue
    49,684       50,533  
Current deferred tax liabilities
    6,656       6,656  
Total current liabilities
    129,174       128,125  
Long-term debt
    508,846       508,160  
Long-term deferred revenue, net of current portion
    154,266       161,673  
Non-current income tax reserve
    626       626  
Deferred tax liabilities
    28,760       21,336  
Other non-current liabilities
    6,291       5,922  
Total liabilities
    827,963       825,842  
Commitments and contingencies
    -       -  
Stockholders’ equity:
               
Series A convertible preferred stock
    1       1  
Common stock
    222       221  
Additional paid-in capital
    370,429       367,723  
Retained earnings
    86,559       75,298  
Total stockholders’ equity
    457,211       443,243  
Total liabilities and stockholders’ equity
  $ 1,285,174     $ 1,269,085  

See Notes to Unaudited Condensed Consolidated Financial Statements

   
For the Three Months Ended March 31,
 
   
2011
   
2010
 
   
(In thousands, except per share amounts)
 
Revenues
  $ 86,626     $ 80,389  
                 
Operating expenses:
               
Direct costs of revenue (exclusive of depreciation and amortization)
    31,312       24,481  
Depreciation and amortization
    16,726       16,022  
Selling, general and administrative
    14,394       13,382  
Total operating expenses
    62,432       53,885  
Income from operations
    24,194       26,504  
Interest expense, net
    (4,523 )     (8,243 )
Other non-operating expense
    -       (10,474 )
Loss from early extinguishment of debt
    -       (37 )
Income before provision for income taxes
    19,671       7,750  
Provision for income taxes
    (7,424 )     (6,976 )
Net income
    12,247       774  
Preferred stock dividends
    (986 )     -  
      11,261       774  
Income allocated to participating securities
    (1,224 )     -  
Net income available to common stockholders
  $ 10,037     $ 774  
                 
Earnings per share
               
Basic
  $ 0.46     $ 0.04  
Diluted
  $ 0.44     $ 0.04  
Shares used to compute basic earnings per share
    22,043       21,068  
Shares used to compute diluted earnings per share
    22,757       21,687  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.


GEOEYE, INC.

 
 
For the Three Months Ended March 31,
 
 
 
2011
   
2010
 
   
(In thousands)
 
Cash flows from operating activities:
           
     Net income
  $ 12,247     $ 774  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    16,726       16,022  
Non-cash recognition of deferred revenue
    (7,926 )     (7,884 )
Non-cash amortization of deferred costs
    1,119       1,056  
Amortization of debt discount and issuance costs
    925       715  
Amortization of premium/discount on investments
    36       -  
Loss from early extinguishment of debt
    -       37  
Bad debt expense and other
    6       325  
Change in fair value of financial instrument
    -       10,474  
Stock-based compensation
    2,845       993  
     Changes in assets and liabilities:
               
Accounts receivable and other current assets
    6,696       (4,565 )
Net transfer from restricted cash
    732       1,005  
Other assets
    27       (267 )
Accounts payable, accrued expenses and current liabilities
    (4,607 )     (837 )
Income taxes receivable / payable and reserves
    8,462       6,798  
Deferred revenue and other long-term liabilities
    34       4,794  
      Net cash provided by operating activities
    37,322       29,440  
Cash flows from investing activities:
               
Capital expenditures
    (90,600 )     (26,743 )
Redemptions of short-term investments
    15,000       -  
Adjustment for SPADAC acquisition
    340       -  
Net cash used in investing activities
    (75,260 )     (26,743 )
Cash flows from financing activities:
               
Prepaid financing costs
    (83 )     (2,888 )
Preferred stock dividend payments
    (1,007 )     -  
Proceeds from exercise of stock options and warrants, and other
    835       18,828  
  Net cash (used in) provided by financing activities
    (255 )     15,940  
Net (decrease) increase in cash and cash equivalents
    (38,193 )     18,637  
Cash and cash equivalents, beginning of period
    283,233       208,872  
Cash and cash equivalents, end of period
  $ 245,040     $ 227,509  
Supplemental disclosures of cash flow information:
               
Interest paid, net of capitalized interest
  $ -     $ 35  
Income taxes paid
    27       3,105  
Non-cash surrender of common stock to cover employees' minimum tax liability
    (1,171 )     (12 )
Non-cash issuance of common stock for services provided
    -       250  
Non-cash preferred stock dividend accrual
    986       -  

See Notes to Unaudited Condensed Consolidated Financial Statements.


GEOEYE, INC.

(1) General Information

Business

GeoEye is a leading source of geospatial information and insight for decision makers and analysts who need a clear understanding of our changing world to protect lives, manage risk and optimize resources. Each day, organizations in defense and intelligence, public safety, critical infrastructure, energy and online media rely on GeoEye’s imagery, tools and expertise to support important missions around the globe. Widely recognized as a pioneer in high-resolution satellite imagery, GeoEye has evolved into a complete provider of geospatial intelligence solutions.

We own and operate two Earth-imaging satellites, GeoEye-1 and IKONOS, and three airplanes with advanced high-resolution imagery collection capabilities. GeoEye-1 is the world’s highest resolution and most accurate commercial Earth-imaging satellite.

In addition to our imagery collection capacities, we are a global leader in the creation of enhanced satellite imagery information products and services. We operate four state-of-the-art high-resolution image processing and production facilities. Our St. Louis, Missouri 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.

GeoEye’s information services allow its customers to collect, process and analyze vast amounts of geospatial data to quickly see precise changes on the ground and anticipate where events may occur in the future. Our Web-based information services platform, EyeQ, can serve up imagery and other layers of geospatial information on demand. EyeQ combines imagery products with on-demand tools for managing geospatial information and project-based collaboration. GeoEye Analytics has industry-leading expertise in analyzing multiple layers of intelligence, including human geography, to discover patterns to gain insights that protect lives and mitigate risk.

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—our color digital imagery library and our information services differentiate us from our competitors. This combination enables us to elevate insight by delivering a comprehensive range of imagery, imaging products and information services to our diverse customer base.

We serve both domestic and international customers with imagery, products and information services. Our principal customers are U.S. government agencies. For the first quarter of 2011, U.S. government agencies represented approximately 70 percent of our total revenues.

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, 2010, has been prepared without audit. The condensed consolidated balance sheet as of December 31, 2010, has been derived from, but does not include, all the disclosures contained in the audited consolidated financial statements for the year ended December 31, 2010. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods presented herein and are of a normal recurring nature.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in GeoEye’s Annual Report on Form 10-K for the year ended December 31, 2010. 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, 2011.

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

 
Principles of Consolidation

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

Use of Estimates

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

Restricted Cash

The Company is party to irrevocable standby letters of credit, in connection with contracts between GeoEye and third parties, in the ordinary course of business to serve as performance obligation guarantees. As of March 31, 2011, the Company had $14.0 million classified as restricted cash as a result of the irrevocable standby letters of credit. Approximately $4.2 million is available within one year and is classified as current, and the remaining $9.8 million is available through 2022.

Investments

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

The Company’s short-term investments consist of debt securities that 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 March 31, 2011 and December 31, 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.

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 percent per annum of the $1,000 liquidation preference per share. At the Company’s option, dividends may be declared and paid in cash out of funds legally available therefore, when, as and if declared by the Board of Directors of the Company. If not paid in cash, an amount equal to the cash dividends due is added to the liquidation preference. Dividends payable in cash are recorded in current liabilities. All dividends payable, whether in cash or as an addition to the liquidation preference, are recorded as a reduction to our retained earnings.

Earnings per Share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Net income available to common shareholders is equal to net income less preferred stock dividends and income allocated to participating securities. The Company’s preferred shares are participating securities and require the two-class method of computing earnings per share. Diluted earnings per share is calculated by dividing net income available to common shareholders as adjusted for the effect of dilutive common equivalent shares by the weighted average number of common and dilutive common equivalent shares outstanding during the year. Common equivalent shares consist of the common shares issuable upon the conversion of the convertible preferred shares and those issuable related to stock options, deferred stock units, employee stock purchase plan shares and nonvested stock (using the treasury stock method). For purposes of computing diluted earnings per share, the if-converted method will be used to the extent that the result is more dilutive than the application of the two-class method.
 
 
Revenue Recognition

Our principal sources of revenue are 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 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. Additionally, effective in 2010, new sources of revenue include the dissemination and hosting of imagery and  the provision of consultation, integration, data analysis and other professional services related to geospatial information systems.

We record revenues from the sale of satellite imagery directly to end users or value-added resellers based on the delivery of the imagery.  This revenue is recognized when the products are delivered to the customer and generally these arrangements are contracted for separately on a stand-alone basis.

Sales of direct access to our satellites ordinarily require us to provide access over the term of multi-year sales contracts under subscription-based arrangements. Accordingly, we recognize revenues on such imagery contracts on a straight-line basis over the delivery term of the contract. However, certain multi-year sales contracts are based on minimum levels of access time with adjustments based on usage. In addition to the sale of direct satellite access, we may separately sell ground processing technology upgrades and operations and maintenance services to a customer in a bundled arrangement. Previously, to determine revenue recognition for multiple element arrangements, we considered whether individual customer arrangement elements had value to the customer on a standalone basis, whether there was objective and reliable evidence of fair value of undelivered item(s) and, whether the arrangement included a general right of return relative to the delivered item(s), and delivery performance of the undelivered item(s) was considered probable and substantially in the Company’s control. If the satellite access service is combined with the sale of ground processing technology upgrades and operations and maintenance services, and the requirements for separate revenue recognition are not met, we recognize revenues on a straight-line basis over the combined delivery term of the services.  In other arrangements when the separation criteria are met, total arrangement consideration is allocated to each separate unit of accounting using relative fair value.  Revenues are recognized over the appropriate service period:  access and operations and maintenance are recognized over the contract term; ground processing technology upgrades are recognized when delivery and acceptance is complete.  We consider a deliverable to have standalone value if the product or service provides value to the customer independent from other elements in the arrangement or if the product or service is sold separately by us or if it could be resold by the customer.  Our revenue arrangements generally do not include a general right of return relative to the delivered products.

Beginning on January 1, 2011, we adopted on a prospective basis the guidance on revenue from multiple deliverable arrangements from the Financial Accounting Standards Board, or FASB.  With its adoption the inability to determine the fair value of undelivered item(s) will no longer preclude our ability to separate deliverables in multiple element arrangements. Instead, management’s estimated selling price will be used to allocate the contract value among the deliverables, assuming all other separation criteria are met.   We determine estimated selling price by considering several external and internal factors including, but not limited to, pricing practices, margin objectives, estimated costs to deliver the offering(s), competition, and customer type.  As these factors evolve, we may modify our estimated selling prices in the future for purposes of allocating arrangement consideration to agreements with multiple elements.   Estimated selling prices are analyzed on an annual basis or more frequently if we experience significant changes in our estimated selling prices and the factors that affect or determine them.   The introduction of this accounting guidance has not materially impacted our consolidated financial statements.

We record revenues generated from the information services base offering, including dissemination and hosting of imagery, on a straight-line basis over the subscription period.

Revenue is recognized on contracts to provide value-added production services using the percentage-of-completion method. Revenue is recognized under different acceptable alternatives of the percentage-of-completion method depending on the terms of the underlying contract, which include input measures based on costs and efforts expended or output measures based on units of delivery or completion of contractual milestones. Generally these arrangements are sold on a standalone basis and are not bundled with other product offerings.  To the extent that estimated costs of completion are adjusted, revenue and profit recognized from a particular contract will be affected in the period of the adjustment. Anticipated contract losses are recognized as they become known.
 
 
Revenues for consultation and professional services are recognized into revenues as the services are performed.  Revenues from time and materials contracts are recognized based on man-hours utilized, plus other reimbursable contract costs incurred during the period.  Revenues from firm-fixed price contracts are recognized on a percentage of completion basis, utilizing the relationship of contract costs incurred and management’s estimate of total contract costs.

Deferred revenue represents receipts in advance of the delivery of imagery or services. Revenue for other services is recognized as services are performed. In addition, cost-share amounts received from the U.S. government are recorded as deferred revenue when received and recognized on a straight-line basis over the useful life of the satellite.
 
(2) NextView Program

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

Under the NextView contract, the NGA agreed to support the project with a cost-share totaling approximately $237.0 million spread over the course of the project development and subject to various milestones. On March 19, 2009, the NGA had paid the Company its cost-share obligation in full. GeoEye had deferred recognition of the cost-share amounts from the NGA as revenue until GeoEye-1’s in-service date in February 2009. We recognize this revenue on a straight-line basis over the expected nine-year depreciable operational life of the satellite. During each of the three months ended March 31, 2011 and 2010, we recognized $6.0 million of deferred revenue under the NextView contract.

The NextView SLA provided for monthly payments of $12.5 million, subject to a maximum reduction of 10 percent 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. The EnhancedView SLA replaced the NextView SLA portion of the NextView program as of September 1, 2010. We recognized $37.1 million of imagery revenue under the SLA during the three months ended March 31, 2010.

(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 over ten years, 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 ($150.0 million per year), subject to a maximum reduction of 10 percent based on performance metrics. Under the EnhancedView SLA, when GeoEye-2 becomes operational, which we currently expect will occur in 2013, payments under the award will increase by an additional $15.3 million per month ($183.6 million per year). The term of the EnhancedView SLA is one year, with nine one-year renewal options exercisable by the NGA. Imagery deliveries under the EnhancedView SLA began on September 1, 2010, and the imagery is collected by the Company’s existing satellite constellation, with GeoEye-2 to collect additional imagery when it becomes operational.
 
 
As part of the EnhancedView contract, 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 ready for integration and testing; and the second payment, and balance of the cost-share, when the GeoEye-2 satellite becomes operational. At the time the final cost-share payment is made, it is expected that any credits due to the government will be determined and will be factored into the final payment amount.
 
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, which will be initially recorded as deferred revenue and recognized as revenue over the contractual term of the EnhancedView contract.

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 $36.4 million of imagery revenue under the EnhancedView SLA during the three months ended March 31, 2011.

(4) Investments

Short-term investments consisted of the following at March 31, 2011, and December 31, 2010 (in thousands) :

         
Gross unrecognized
       
March 31, 2011
 
Amortized  cost
   
Gains
   
Losses
   
Estimated fair  value
 
Available-for-sale securities:
                       
Variable-rate demand notes
  $ 10,000     $ -     $ -     $ 10,000  
                                 
Held-to-maturity securities:
                               
Commercial paper
    19,997       2       -       19,999  
Corporate bonds
    5,091       4       -       5,095  
                                 
Total short-term investments
  $ 35,088     $ 6     $ -     $ 35,094  
 
         
Gross unrecognized
       
December 31, 2010
 
Amortized cost
   
Gains
   
Losses
   
Estimated fair value
 
Available-for-sale securities:
                       
Variable-rate demand notes
  $ 10,000     $ -     $ -     $ 10,000  
                                 
Held-to-maturity securities:
                               
Commercial paper
    19,969       4       -       19,973  
Corporate bonds
    5,155       5       -       5,160  
Agency notes
    5,000       -       -       5,000  
Certificates of deposit
    10,000       -       -       10,000  
                                 
Total short-term investments
  $ 50,124     $ 9     $ -     $ 50,133  
 
As of March 31, 2011, there were no other-than-temporary impairments of the Company’s investments.
 
(5) Property, Plant and Equipment

Property, plant and equipment consisted of the following at March 31, 2011, and December 31, 2010 ( in thousands ):

 
   
March 31,   2011
   
December 31,
  2010
 
Land and buildings
  $ 7,297     $ 7,297  
Furniture, computers, equipment and software
    43,686       42,724  
Leasehold improvements
    3,460       3,460  
Vehicles and airplanes
    2,228       2,228  
Accumulated depreciation
    (31,930 )     (29,467 )
Subtotal
    24,741       26,242  
Property, plant and equipment in process
    25,195       9,682  
Property, plant and equipment, net
  $ 49,936     $ 35,924  
 
We record property, plant and equipment at cost. We also capitalize certain internal and external software development 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. Property, plant and equipment in process includes costs incurred in connection with the move to our new corporate headquarters and computer hardware and software costs related to the EyeQ platform. Depreciation expense related to property, plant and equipment was $2.5 million and $2.2 million for the three months ended March 31, 2011 and 2010, respectively.
 
(6)  Satellites and Related Ground Systems

Satellites and related ground systems consisted of the following at March 31, 2011, and December 31, 2010 ( in thousands ):

   
March 31,
 2011
   
December 31,
 2010
 
Satellites
  $ 414,158     $ 414,158  
Ground systems
    89,285       89,268  
Accumulated depreciation
    (131,530 )     (118,198 )
Subtotal
    371,913       385,228  
Satellites and ground systems in process
    391,556       311,898  
Satelllites and related ground systems, net
  $ 763,469     $ 697,126  

The capitalized costs of the Company’s satellites and related ground systems include internal direct labor and project management costs, internally developed software and material costs related to assets that support the satellites’ construction and development. The cost of the Company’s satellites and related ground systems also includes capitalized interest incurred during the construction, development and initial in-orbit testing period.

As of March 31, 2011, and December 31, 2010, we have incurred total capitalized costs of $389.3 million and $309.9 million, respectively, related to the Company’s development efforts for EnhancedView, primarily consisting of costs for the development of and construction of GeoEye-2.

We maintain in-orbit insurance policies covering our GeoEye-1 and IKONOS satellites. We capitalize the portion of the premiums associated with the insurance coverage of the launch and in-orbit commissioning period of our commercial satellites. Accordingly, prior to the start of GeoEye-1’s commercial operations, we capitalized a portion of insurance premiums in the cost of the satellite that will be amortized over the estimated life of GeoEye-1, which is nine years. Following launch and in-orbit commissioning, insurance premium amounts related to in-orbit operations are charged to expense ratably over the related policy periods.

The Company maintains insurance policies for GeoEye-1 with both full coverage and total-loss-only coverage in compliance with our indenture. As of March 31, 2011, we carried $255.8 million of in-orbit insurance for GeoEye-1, comprised in part by $135.5 million of full coverage to be paid if GeoEye-1’s capabilities become impaired as measured against a set of specifications; of such coverage, $50.0 million expires on September 6, 2011, and $85.5 million expires on December 1, 2011. We also carry $120.3 million of insurance in the event of a total loss of the satellite, which expires December 1, 2011.

Our IKONOS satellite was fully depreciated in June 2008. The IKONOS satellite is insured for $9.0 million of in-orbit coverage which expires on December 1, 2011.

 
Total satellite and related ground systems depreciation expense was $13.3 million and $13.2 million for the three months ended March 31, 2011 and 2010, respectively.

(7)  Income Taxes

The Company’s effective tax rate was 37.7% for the three months ended March 31, 2011 and 38.3% before discrete items for the three months ended March 31, 2010. Income tax expense was $7.4 million for the three months ended March 31, 2011 and $7.0 million including discrete items for the three months ended March 31, 2010. The Company’s effective tax rate differs from the federal tax rate primarily due to a benefit from research tax credits partially offset by a related reserve, a benefit from a foreign tax rate differential, state and local income taxes, and certain expenses that are not deductible for tax purposes.

In May 2011, the Company finalized its method of tax accounting for the NextView cost-share payments with the Internal Revenue Service, or IRS.  Under the new tax accounting method, the NextView cost-share payments will effectively be treated for tax the same as they are treated for book purposes whereby amounts received from the U.S. government are recorded as deferred revenue when received and recognized on a straight-line basis over the useful life of the satellite.  Prior to this IRS ruling, the Company was recognizing the NextView cost-share payments for tax purposes when the Company was entitled to receive these payments from the U.S. government. The change in tax accounting method will result in a reclassification of deferred tax items and will have no material impact on cash flow or earnings.

(8)  Long-Term Debt

On October 8, 2010, the Company issued $125.0 million aggregate principal of 8.625 percent Senior Secured Notes due 2016, or the 2016 Notes, in a publicly registered offering. Interest payments on the 2016 Notes are due 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 percent of principal for the subsequent 12-month period, at 102.156 percent of principal on October 1, 2014, for the subsequent 12-month period and at 100 percent of principal on October 1, 2015, and thereafter.

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. Except for a minor investment in a foreign subsidiary, the Company does not have any independent assets or operations other than its ownership in all of the capital stock of its Guarantor Subsidiaries. Since inception, all of the Company’s operations have been conducted through its wholly owned subsidiaries.

 On October 9, 2009, the Company issued $400.0 million aggregate principal, net of original issue discount of $20.0 million, of 9.625 percent Senior Secured Notes due 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 on one or more occasions redeem all or part of the 2015 Notes at 104.813 percent of principal for the subsequent 12-month period and at 100 percent 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.

The 2015 Notes are unconditionally guaranteed, jointly and severally, on a senior secured basis, by all existing and future domestic restricted subsidiaries of the Company. The 2015 Notes and the guarantees are secured by a lien on substantially all of the assets of the Company and the guarantors.

Interest Expense, Net

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

   
For the Three Months Ended March 31,
 
   
2011
   
2010
 
Interest expense
  $ 13,249     $ 10,322  
Capitalized interest
    (8,592 )     (2,030 )
Interest income
    (134 )     (49 )
Total interest expense, net
  $ 4,523     $ 8,243  
 

Interest expense, net, for the three months ended March 31, 2011, primarily includes interest expense on our 2016 Notes and 2015 Notes. Interest expense, net, for the three months ended March 31, 2010, primarily includes interest expense on our 2015 Notes. Interest expense, net, also includes amortized prepaid financing costs and amortization of debt discount.

(9)  Convertible Preferred Stock

In March 2010, the Company entered into a Stock Purchase Agreement and a Note Purchase Agreement with Cerberus Satellite LLC, or Cerberus for the sale of its Series A Convertible Preferred Stock, or Preferred Stock.  In September 2010, 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, at a conversion rate of $29.76 per common share, which is equivalent to a conversion rate of 2.7 million shares of common stock of the Company.

The March 2010 Stock Purchase Agreement represented a financial instrument, not in the form of a share, which 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.  During the three months ended March 31, 2010, the change in the value of the financial instrument resulted in $10.5 million of other non-operating expenses.

The Preferred Stock represents an ownership interest assuming conversion of such Preferred Stock to the Company’s common stock, of approximately 11 percent as of March 31, 2011. Dividends on the Preferred Stock are payable quarterly in arrears at a rate of 5 percent per annum of the liquidation preference of $1,000 per share, subject to declaration by the Board of Directors.  The Company declared dividends on the Preferred Stock of $1.0 million during the three months ended March 31, 2011. The dividend payable of $1.0 million was included in accounts payable and accrued expenses as of March 31, 2011.

(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

GeoEye’s financial instruments include cash and cash equivalents, available-for-sale 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 following table provides information about the financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011, and December 31, 2010 (in thousands) :
 
   
March 31, 2011
   
December 31, 2010
 
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
 
Available-for-sale securites
  $ 10,000     $ 10,000     $ 10,000     $ 10,000  
Senior Secured Notes (due 2016)
    125,000       132,500       125,000       131,250  
Senior Secured Notes (due 2015)
    383,846       453,000       383,160       452,000  
 
We classified the above instruments as Level 2 instruments due to the usage of quoted market prices and observable market data.

(11) Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following as of March 31, 2011, and December 31, 2010 (in thousands):

   
March 31,
 2011
   
December 31,
 2010
 
Accounts payable and accrued expenses
  $ 16,325     $ 17,246  
Accrued payroll
    8,876       14,660  
Accrued expenses - subcontractors
    22,216       25,912  
Accrued interest payable
    24,431       12,111  
Dividends payable
    986       1,007  
Total accounts payable and accrued expenses
  $ 72,834     $ 70,936  
 
(12) Stockholders’ Equity

Earnings per Share

Basic earnings per share, or EPS, is computed based on the weighted-average number of shares of the Company’s Common Stock outstanding. Diluted EPS is computed based on the weighted-average number of shares of the Company’s Common Stock outstanding and other dilutive securities. Securities that 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. The Company’s preferred shares are participating securities.
 
 
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations (in thousands):
 
   
For the Three Months Ended
 March 31,
 
   
2011
   
2010
 
Numerator for basic and diluted earnings per share:
           
Net income
  $ 12,247     $ 774  
Preferred stock dividends
    (986 )     -  
      11,261       774  
Income allocated to participating securities
    (1,224 )     -  
Net income available to common stockholders
  $ 10,037     $ 774  
                 
Denominator:
               
Weighted average shares outstanding used to compute basic earnings per share
    22,043       21,068  
Dilutive effect of:
               
Warrants
    -       418  
Stock options, deferred stock units, restricted stock units, employee stock purchase plan shares and nonvested stock
     714        201  
Weighted average shares outstanding and dilutive securities used to compute diluted earnings per share
     22,757        21,687  
 
For the three months ended March 31, 2011, 2.7 million potential common shares from the conversion of preferred stock and 0.1 million stock options and nonvested stock awards were excluded from the calculation of diluted EPS, as their inclusion would have been anti-dilutive.

For the three months ended March 31, 2010, 0.3 million stock options and nonvested stock awards were excluded from the calculation of diluted EPS, as their inclusion would have been anti-dilutive.

Changes in Stockholders’ Equity

Changes in stockholders’ equity for the three months ended March 31, 2011, consisted of the following (in thousands):

Balance at January 1, 2011
  $ 443,243  
Net income for the three months ended March 31, 2011
    12,247  
Issuance of common stock
    854  
Surrender of common stock to cover employees' minimum tax liability
    (1,171 )
Stock-based compensation
    3,071  
Other adjustments
    (47 )
Preferred stock dividends
    (986 )
Balance at March 31, 2011
  $ 457,211  

During 2011, we granted a total of 129,241 shares of nonvested stock, which vest over three- to four-year periods and 135,552 stock options, which vest over a four-year period. In addition, we granted 51,945 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.

Comprehensive Income

For the three months ended March 31, 2011 and 2010, there were no material differences between net income as reported and comprehensive income.

 
(13)  Significant Customer and Geographic Information

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

GeoEye recognized revenue related to contracts with the U.S. government, the Company’s largest customer, of $60.2 million and $54.2 million for the three months ended March 31, 2011 and 2010, representing 70 percent and 67 percent of total revenues, respectively. We had no other customers for whom revenues exceeded 10 percent of total revenues during the three months ended March 31, 2011 or 2010.

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

Total revenues by these lines were as follows ( in thousands ):

   
For the Three Months Ended
 March 31,
 
   
2011
   
2010
 
Imagery
  $ 58,975     $ 59,637  
NextView cost-share
    6,038       6,038  
Production and other services
    21,613       14,714  
Total revenues
  $ 86,626     $ 80,389  

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

   
For the Three Months Ended
 March 31,
 
   
2011
   
2010
 
Domestic
  $ 67,066     $ 59,779  
International
    19,560       20,610  
Total revenues
  $ 86,626     $ 80,389  
 
Our property, plant and equipment and ground systems are held domestically.

(14)  Commitments and Contingencies

Contractual Obligations

The following table summarizes our contractual cash obligations at March 31, 2011 (in thousands) :

 
   
Payments due by year
 
   
Less than 1 Year
   
1 to 2
years
   
2 to 3
years
   
3 to 4
years
   
4 to 5
years
   
Thereafter
   
Total
 
Long-term debt obligations
  $ -     $ -     $ -     $ -     $ 400,000     $ 125,000     $ 525,000  
Interest expense on long-term debt (1)
    49,281       49,281       49,281       49,281       49,281       10,781       257,186  
Operating lease obligations
    2,073       3,434       3,499       2,448       2,439       17,150       31,043  
Purchase obligations (2)
    142,145       127,236       17,844       840       350       -       288,415  
Total contractual obligations
  $ 193,499     $ 179,951     $ 70,624     $ 52,569     $ 452,070     $ 152,931     $ 1,101,644  

(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 percent and contractual interest payment obligations on the $125.0 million outstanding principal balance of our 2016 Notes, which bear interest at a rate per annum of 8.625 percent.
                               
(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 March 31, 2011, purchase obligations include EnhancedView-related commitments, ground systems and communication services.
 
Operating Leases

We have commitments for operating leases primarily relating to office and operating facilities and equipment. 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. We recognize rent expense under such leases on a straight-line basis over the term of the lease. 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 months ended March 31, 2011 and 2010 was approximately $1.5 million and $0.5 million, respectively.
 
Contingencies

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


FORWARD-LOOKING STATEMENTS

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

These forward-looking statements are subject to numerous assumptions, risks and uncertainties, based on our current expectations and projections about future events, including, but not limited to, the factors set forth below, and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part 1- Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 15, 2011, or 2010 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.   Management’s Discussion and Analysis of Financial Conditio n 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 2010 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 2010 Annual Report and in our other Exchange Act filings. In addition, the following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes, and “Part I — Item 1A — Risk Factors,” which describes key risks associated with our operations and industry, and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2010 Annual Report.

Overview

GeoEye is a leading source of geospatial information and insight for decision makers and analysts who need a clear understanding of our changing world to protect lives, manage risk and optimize resources. Each day, organizations in defense and intelligence, public safety, critical infrastructure, energy and online media rely on GeoEye’s imagery, tools and expertise to support important missions around the globe. Widely recognized as a pioneer in high-resolution satellite imagery, GeoEye has evolved into a complete provider of geospatial intelligence solutions.

We own and operate two Earth-imaging satellites, GeoEye-1 and IKONOS, and three airplanes with advanced high-resolution imagery collection capabilities. GeoEye-1 is the world’s highest resolution and most accurate commercial Earth-imaging satellite. We own one of the world’s largest libraries of commercial color digital satellite imagery; it contains more than 535 million square kilometers of color imagery of the Earth.

In addition to our imagery collection capacities, we are a global leader in the creation of enhanced satellite imagery information products and services. We believe we are the only major commercial imagery satellite operator that can produce imagery from multiple satellite sources in addition to our own.

GeoEye’s information services allow its customers to collect, process and analyze vast amounts of geospatial data to quickly see precise changes on the ground and anticipate where events may occur in the future. Our Web-based information services platform, EyeQ, can serve up imagery and other layers of geospatial information on demand. EyeQ combines imagery products with on-demand tools for managing geospatial information and project-based collaboration. GeoEye Analytics has industry-leading expertise in analyzing multiple layers of intelligence, including human geography, to discover patterns to gain insights that protect lives and mitigate risk.
 
 
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—our color digital imagery library and our information services differentiate us from our competitors. This combination enables us to elevate insight by delivering a comprehensive range of imagery, imaging products and information services to our diverse customer base.

Our principal sources of revenue are 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 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. Additionally, effective in 2010, new sources of revenue include the dissemination and hosting of imagery and  the provision of consultation, integration, data analysis and other professional services related to geospatial information systems.

Our Web site is www.geoeye.com. We make available free of charge on or through our Web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. This reference to our Web site is for the convenience of shareholders as required by the SEC and shall not be deemed to incorporate any information on the Web site into this Form 10-Q or our other filings with the SEC.

Our Web site is also a key source of important information about us. We routinely post to the About Us/Investor Relations section of our Web site important information about our business, our operating results and our financial condition and prospects, including, for example, information about important acquisitions and dispositions, our earnings releases and certain supplemental financial information related or complementary thereto. We also have a Corporate Governance page in the Investor Relations section of our Web site that includes, among other things, copies of our Code of Business Conduct & Ethics and the charters for each standing committee of our Board of Directors, which currently are: the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, the Strategy Committee and the Risk Committee. Copies of our Bylaws and these charters and policies are also available in print to stockholders upon request.

Products and Services

Satellite Imagery

We offer a wide range of high-resolution satellite imagery that provides 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 can also combine various satellite and aerial images into a single, highly detailed and comprehensive image. Available in various levels of accuracy, these GeoProfessional products are suitable for feature extraction, change detection, base mapping and other similar geo-location applications.

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

Aerial Imagery

Our aerial imagery is 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, or 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 U.S. government agencies and domestic and international commercial customers, including international governments and state and local governments. 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, or GIS, consulting and implementation. We also offer geospatial products and services to help develop and manage geospatial data to support customer documentation needs, inventory of resources and engineering and development applications.

Information Services

We provide imagery information services, which combine our imagery with third-party data to create sophisticated and customized information for our customers. During the second quarter of 2010, we launched our information services business to give our customers global on-demand access to imagery and related information over the Internet. This new Web-based 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 with support to the U.S. government’s National Geospatial-Intelligence Agency, or NGA, customers. In September 2010, EyeQ became available to our commercial customers.
 
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.

On December 15, 2010 GeoEye, Inc. completed the acquisition of 100 percent of the stock of SPADAC, Inc., or SPADAC, a geospatial predictive analytics company, for a net purchase price of $44.3 million in cash and stock, which includes an adjustment for changes to the tangible net worth of SPADAC, as defined in the merger agreement. With the completion of the acquisition, SPADAC became a wholly owned subsidiary named GeoEye Analytics.

GeoEye Analytics provides geospatial predictive analytic solutions to over 40 customers in key markets of defense, intelligence and homeland security. Our highly trained geospatial and multi-source analysts utilize proprietary software and algorithms to combine location-based information, geographic data, human geography, historic events, and a wide range of other information sources to generate unique location based analysis that enable customers to gain the insight they need to support mission critical operations around the world. Our teams and technology are used daily in mission areas such as counter terrorism, law enforcement, oil and gas exploration, fraud detection and risk management.  Predictive geospatial analysis enables our customers to analyze where events are likely to occur and in that way to provide the insight they need so they can best manage risk, optimize deployment of resources and ensure efficient utilization of key assets.

Results of Operations

Comparison of the Results of Operations for the Three Months Ended March 31, 2011 and 2010

   
For the Three Months Ended March 31,
     
Change Between
 
   
2011
   
2010
   
2011 and 2010
 
   
Amount
   
% of
Revenue
   
Amount
   
% of
Revenue
   
Amount
   
%
 
   
(in thousands, except percentages)
 
Revenues
  $ 86,626       100.0 %   $ 80,389       100.0 %   $ 6,237       7.8 %
                                                 
Operating expenses:
                                               
Direct costs of revenue (exclusive of depreciation and amortization)
    31,312       36.1       24,481       30.5       6,831       27.9  
Depreciation and amortization
    16,726       19.3       16,022       19.9       704       4.4  
Selling, general and administrative
    14,394       16.6       13,382       16.6       1,012       7.6  
Total operating expenses
    62,432       72.1       53,885       67.0       8,547       15.9  
Income from operations
    24,194       27.9       26,504       33.0       (2,310 )     (8.7 )
Interest expense, net
    (4,523 )     (5.2 )     (8,243 )     (10.3 )     3,720       45.1  
Other non-operating expense
    -       -       (10,474 )     (13.0 )     10,474       100.0  
Loss from early extinguishment of debt
    -       -       (37 )     (0.0 )     37       100.0  
Income before provision for income taxes
    19,671       22.7       7,750       9.6       11,921       153.8  
Provision for income taxes
    (7,424 )     (8.6 )     (6,976 )     (8.7 )     (448 )     (6.4 )
Net income
    12,247       14.1       774       1.0       11,473       1,482.3  
Preferred stock dividends
    (986 )     (1.1 )     -       -       (986 )     (100.0 )
      11,261       13.0       774       1.0       10,487       1,354.9  
Income allocated to participating securities
    (1,224 )     (1.4 )     -       -       (1,224 )     (100.0 )
Net income available to common stockholders
  $ 10,037       11.6     $ 774       1.0     $ 9,263       1,196.8  
 
Revenues

   
For the Three Months Ended March 31,
   
Change Between
   
2011
 
2010
 
2011 and 2010
   
Amount
   
% of
Revenue
 
Amount
   
% of
Revenue
 
Amount
   
%
   
(in thousands, except percentages)
 
Imagery
  $ 58,975       68.1 %   $ 59,637       74.2 %   $ (662 )     (1.1 )  %
NextView cost-share
    6,038       7.0       6,038       7.5       -       -  
Production and other services
    21,613       24.9       14,714       18.3       6,899       46.9  
Total revenues
  $ 86,626       100.0     $ 80,389       100.0     $ 6,237       7.8  
 
Imagery revenues primarily include imagery sales, affiliate access fees and operations and maintenance fees. NextView cost-share revenues is based on 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, our digital aerial imagery services, Marine Services, GeoEye Analytics, EyeQ and Web-based dissemination services.

Imagery revenues decreased primarily due to lower level of deliveries to international customers and a lower level of achievement under the NGA EnhancedView SLA metrics during the first quarter of 2011 compared to the same period in 2010. These decreases were offset by an increase in the level of deliveries to commercial customers in the first quarter of 2011 compared to the same period in 2010. Production and other services revenues increased for the first quarter of 2011 compared to the same period in 2010 due to the inclusion of GeoEye Analytics for a full quarter and Web-based dissemination services revenues, which commenced in April 2010, offset by a decline in our digital aerial services.
 
Total domestic and international revenues were as follows:

   
For the Three Months Ended March 31,
  Change Between
   
2011
 
2010
 
  2011 and 2010
   
Amount
   
% of
Revenue
 
Amount
   
% of
Revenue
 
Amount
   
%
   
(in thousands, except percentages)
 
Domestic
  $ 67,066       77.4 %   $ 59,779       74.4 %   $ 7,287       12.2 %
International
    19,560       22.6       20,610       25.6       (1,050 )     (5.1 )
Total revenues
  $ 86,626       100.0     $ 80,389       100.0     $ 6,237       7.8  
 
Domestic revenues include those from the Service Level Agreements, or SLAs, recognition of deferred revenue related to the NextView cost-share payments from the NGA, commercial imagery sales, sales of value-added products and services, EyeQ and Web-based dissemination services. International revenues are derived from access fee agreements and ground station operation and maintenance contracts with our international regional affiliate customers and commercial imagery sales.

Domestic revenues increased during the first quarter of 2011 compared to the same period in 2010, primarily due to the inclusion of GeoEye Analytics and an increase in the level of deliveries to domestic commercial customers in 2011, offset by a decline in our digital aerial services. Additionally, there was a decrease in domestic revenues due to a lower level of achievement under the NGA EnhancedView SLA metrics in the first quarter of 2011 compared to the same period in 2010. International revenues decreased primarily due to the lower level of deliveries to international customers during the first quarter of 2011 compared to the same period in 2010.
 
 
Operating Expenses

Direct Costs of Revenue
 
   
For the Three Months Ended March 31,
   
Change Between
 
   
2011
 
2010
 
  2011 and 2010
 
   
Amount
   
% of
Revenue
 
Amount
   
% of
Revenue
 
Amount
   
%
 
   
(in thousands, except percentages)
 
Labor and overhead
  $ 20,616       23.8 %   $ 11,652       14.5 %   $ 8,964       76.9 %
Subcontractor
    6,075       7.0       8,211       10.2       (2,136 )     (26.0 )
Satellite insurance
    1,579       1.8       1,550       1.9       29       1.9  
Other direct costs
    3,042       3.5       3,068       3.8       (26 )     (0.8 )
Total direct costs of revenue
  $ 31,312       36.1     $ 24,481       30.5     $ 6,831       27.9  
 
Direct costs of revenue include the costs of operating our satellites and related ground systems, labor and ongoing costs related to our operations and maintenance contracts and provision of services by GeoEye Analytics. Subcontractor expenses primarily include payments to third parties for support to operate the IKONOS and GeoEye-1 satellites and their related ground 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.

Total direct costs of revenue increased during the first quarter of 2011 compared to the same period in 2010, primarily due to the increase in labor and overhead costs related to the inclusion of GeoEye Analytics and an increase in headcount growth. These increases were offset by a decrease in subcontractor expenses for 2011 compared with the same period in 2010 due to higher engineering and consulting costs incurred in early 2010.

Depreciation and Amortization

   
For the Three Months Ended March 31,
   
Change Between
 
 
2011
 
2010
 
2011 and 2010
   
Amount
   
% of
Revenue
 
Amount
   
% of
Revenue
 
Amount
   
%
   
(in thousands, except percentages)
 
Depreciation
  $ 15,795       18.2 %   $ 15,361       19.1 %   $ 434       2.8 %
Amortization
    931       1.1       661       0.8       270       40.8  
Total depreciation and amortization
  $ 16,726       19.3     $ 16,022       19.9     $ 704       4.4  
 
Depreciation increased during the first quarter of 2011 compared to the same period in 2010, primarily due to the increase in operating assets related to computer hardware, software and server equipment in connection with the EyeQ platform as well as the GeoEye-1 ground station backup upgrade at our Thornton facility.

Amortization expense is primarily associated with acquired contracts and customer relationship intangibles from our acquisition in prior years of MJ Harden, Space Imaging LLC and GeoEye Analytics.

Amortization increased during the first quarter of 2011 compared to the same period in 2010, primarily due to the intangibles recognized in connection with the acquisition of GeoEye Analytics in December 2010.
 
 
Selling, General and Administrative Expenses
 
   
For the Three Months Ended March 31,
   
Change Between
 
 
 
2011
 
2010
 
2011 and 2010
 
   
Amount
   
% of
Revenue
 
Amount
   
% of
Revenue
 
Amount
   
%
 
   
(in thousands, except percentages)
 
Payroll, commissions, and related costs
  $ 5,899       6.8 %   $ 5,950       7.4 %   $ (51 )     (0.9 )  %
Stock-based compensation
    1,840       2.1       825       1.0       1,015       123.0  
Professional fees
    2,445       2.8       2,865       3.6       (420 )     (14.7 )
Research and development
    563       0.6       410       0.5       153       37.3  
Other
    3,647       4.2       3,332       4.1       315       9.5  
Total selling, general and administrative expenses
  $ 14,394       16.6     $ 13,382       16.6     $ 1,012       7.6  
 
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. Other selling, general and administrative expenses include facilities, computer and telecommunication services, travel and related costs for our sales, marketing and back office support activities.

Total selling, general and administrative expenses increased during the first quarter of 2011 compared to the same period in 2010, primarily as a result of an increase in investment in our sales and marketing programs, stock-based compensation and additional costs incurred in the first quarter in connection with the move to our new corporate headquarters in Herndon, Virginia to accommodate our growth and to consolidate our operations.

Interest Expense, Net

The composition of interest expense, net, was as follows:
 
   
For the Three Months Ended March 31,
   
Change Between
 
 
2011
 
2010
 
2011 and 2010
   
Amount
   
% of
Revenue
 
Amount
   
% of
Revenue
 
Amount
   
%
   
(in thousands, except percentages)
 
Interest expense
  $ 13,249       15.3 %   $ 10,322       12.8 %   $ 2,927       28.4 %
Capitalized interest
    (8,592 )     (9.9 )     (2,030 )     (2.5 )     (6,562 )     (323.3 )
Interest income
    (134 )     (0.2 )     (49 )     (0.1 )     (85 )     (173.5 )
Total interest expense, net
  $ 4,523       5.2     $ 8,243       10.3     $ (3,720 )     (45.1 )
 
Interest expense, net, includes interest expense on our 2015 and 2016 Notes, amortization of prepaid financing costs and amortization of debt discount.

Interest expense increased during 2011 compared to 2010, primarily due to the increase in our average outstanding long-term debt as a result of the issuance of the $125.0 million of 2016 Notes in October 2010. The increase in capitalized interest during the three months ended March 31, 2011, compared to the same period in 2010 was due to increased capitalized interest associated with the increased construction costs of the GeoEye-2 satellite during 2011, on which interest is applied.

Other Non-Operating Expense

  We recorded a loss of $10.5 million in the first quarter of 2010 related to the fair value measurement of the Preferred Stock Commitment associated with the Cerberus Preferred Stock Purchase Agreement. The Preferred Stock Commitment fair value was marked to market and reflected as an adjustment to earnings and added to additional paid-in capital when Cerberus purchased the Preferred Stock on September 22, 2010.

 
Provision for Income Taxes

The effective income tax rate was 37.7% for the three months ended March 31, 2011, and 38.3% before discrete items for the three months ended March 31, 2010. Income tax expense was $7.4 million for the three months ended March 31, 2011, and $7.0 million including discrete items for the three months ended March 31, 2010. The increase in income tax expense for the three months ended March 31, 2011, compared to the same period in 2010, is primarily a result of higher pretax income in the current period.

Our effective tax rate differs from the federal tax rate primarily due to a benefit from research tax credits partially offset by a related reserve, a benefit from a foreign tax rate differential, state and local income taxes, and certain expenses that are not deductible for tax purposes.

In May 2011, the Company finalized its method of tax accounting for the NextView cost-share payments with the IRS.  Under the new tax accounting method, the NextView cost-share payments will effectively be treated for tax the same as they are treated for book purposes whereby amounts received from the U.S. government are recorded as deferred revenue when received and recognized on a straight-line basis over the useful life of the satellite.  Prior to this IRS ruling, the Company was recognizing the NextView cost-share payments for tax purposes when the Company was entitled to receive these payments from the U.S. government. The change in tax accounting method will result in a reclassification of deferred tax items and will have no material impact on cash flow or earnings.

Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that represents net income before depreciation and amortization expenses, interest expense, net, provision for income taxes, 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 cash flow provided by operating activities and capital expenditures, to measure our liquidity. Our calculation of adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.
 
 
A reconciliation of net income to adjusted EBITDA is as follows:
 
   
For the Three Months Ended March 31,
    ChangeBetween  
   
2011
   
2010
   
  2011 and 2010
 
   
(in thousands)
 
Net income
  $ 12,247     $ 774     $ 11,473  
Adjustments:
                       
Interest expense, net
    4,523       8,243       (3,720 )
Loss from early extinguishment of debt
    -       37       (37 )
Provision for income taxes
    7,424       6,976       448  
Depreciation and amortization
    16,726       16,022       704  
Non-cash stock-based compensation expense
    2,845       993       1,852  
Non-cash change in fair value of financial instrument
    -       10,474       (10,474 )
Adjusted EBITDA
  $ 43,765     $ 43,519     $ 246  
 
Liquidity and Capital Resources

The Company’s principal sources of liquidity are its cash from operating activities, 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 and fund the GeoEye-2 program. However, our ability to continue to be profitable, generate positive cash flow from our operations beyond that period and fund the GeoEye-2 program 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 March 31, 2011, we had $245.0 million of cash and cash equivalents and $35.1 million of short-term investments.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $37.3 million and $29.4 million for the three months ended March 31, 2011 and 2010, respectively. The increase of $7.9 million in the first quarter of 2011 compared to the same period in 2010 was primarily related to an increase in cash collections on accounts receivable balances year over year partially offset by a decrease in accounts payable and accrued expenses due to the timing of vendor payments.

Net Cash Used in Investing Activities

Net cash used in investing activities was $75.3 million and $26.7 million for the three months ended March 31, 2011 and 2010, respectively and was primarily related to capital expenditures partially offset by the redemption of short-term investments. The increase in capital expenditures of $63.9 million compared to the same period in 2010 was primarily due to expenditures related to the construction of GeoEye-2 that were incurred in the first quarter of 2011. As of March 31, 2011, we have incurred total capitalized costs of $389.3 million for EnhancedView, primarily consisting of costs for the construction of GeoEye-2.

Net Cash (Used in) Provided by Financing Activities

Net cash (used in) provided by financing activities was ($0.3) million and $15.9 million for the three months ended March 31, 2011 and 2010, respectively. The decrease of $16.2 million in the first quarter of 2011 compared to the same period in 2010 was primarily related to the issuance of common stock due to the exercise of warrants that occurred in 2010, which did not recur in 2011.

Long-Term Debt

In October 2010, we closed on a publicly registered debt offering of $125.0 million of our 2016 Notes due October 1, 2016. The 2016 Notes bear interest at 8.625 percent per annum. 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 percent of principal for the subsequent 12-month period, at 102.156 percent of principal on October 1, 2014, for the subsequent 12-month period and at 100 percent 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, capital expenditures and other strategic opportunities. The 2016 Notes are unconditionally guaranteed, jointly and severally, on a secured second-priority basis.

 
In October 2009, we closed on a private placement offering of $400.0 million of our 2015 Notes due October 1, 2015. The net proceeds of the 2015 Notes offering were used to fund the repurchase of the Company’s outstanding $250.0 million 2012 Notes due July 1, 2012. The 2015 Notes bear interest at the rate of 9.625 percent per annum. Interest is payable semi-annually in arrears on April 1 and October 1 of each year. At any time on or after October 1, 2013, GeoEye, Inc. may on one or more occasions redeem all or part of the 2015 Notes at 104.813 percent of principal for the subsequent 12-month period and at 100 percent of principal on October 1, 2014, and thereafter. The 2015 Notes are unconditionally guaranteed, jointly and severally, on a senior secured basis.

As of March 31, 2011, our total long-term debt consisted of $125.0 million of 2016 Notes and $400.0 million of 2015 Notes, net of original issue discount of $16.2 million. Under the indentures governing the 2016 and 2015 Notes, we are prohibited from paying dividends on our common stock until the principal amount of all such notes has been repaid.

The indentures governing our 2016 Notes and 2015 Notes contain covenants that restrict our ability to incur additional indebtedness unless, among other things, we can comply with fixed charge coverage ratios. We may incur additional indebtedness only if, after giving pro forma effect to that incurrence, our ratio of adjusted cash EBITDA to total consolidated debt for the four fiscal quarters ending as of the most recent date for which internal financial statements are available meet certain levels or we have availability to incur such indebtedness under certain baskets in the indentures. Adjusted cash EBITDA is defined as Adjusted EBITDA less amortization of deferred revenue related to the NextView agreement with the NGA in the indenture governing the 2015 Notes, and as Adjusted EBITDA less amortization of deferred revenue related to the NextView, EnhancedView or any successor agreement with the NGA in the indenture governing the 2016 Notes. As of March 31, 2011, we were in compliance with all covenants associated with our borrowings.

Equity Sources and Uses

In March 2010, the Company entered into a Stock Purchase Agreement and a Note Purchase Agreement with Cerberus Satellite LLC, or Cerberus for the sale of its Series A Convertible Preferred Stock, or Preferred Stock.  In September 2010, 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, at a conversion rate of $29.76 per common share, which is equivalent to a conversion rate of 2.7 million shares of common stock of the Company.

The March 2010 Stock Purchase Agreement represented a financial instrument, not in the form of a share, which 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.  During the three months ended March 31, 2010, the change in the value of the financial instrument resulted in $10.5 million of other non-operating expenses.

The Preferred Stock represents an ownership interest assuming conversion of such Preferred Stock to the Company’s common stock, of approximately 11 percent as of March 31, 2011. Dividends on the Preferred Stock are payable quarterly in arrears at a rate of 5 percent per annum of the liquidation preference of $1,000 per share, subject to declaration by the Board of Directors. The Company declared dividends on the Preferred Stock of $1.0 million during the three months ended March 31, 2011. The dividend payable of $1.0 million was included in accounts payable and accrued expenses as of March 31, 2011.

Contracted Backlog

We have historically had and currently have a substantial contracted backlog. Backlog reduces the volatility of our net cash provided by operating activities more than would be typical for a company outside our industry.

 
   
Backlog expected to be recognized:
 
(in millions)
 
Less than 1 year
   
Thereafter
   
Total Contracted Backlog
 
EnhancedView SLA
  $ 150.0     $ 2,649.8     $ 2,799.8  
EnhancedView cost-share amortization
    -       384.0       384.0  
NextView cost-share amortization
    24.2       142.0       166.2  
International
    52.4       39.5       91.9  
North American commercial
    19.4       38.8       58.2  
U.S. government
    35.8       7.7       43.5  
Total Backlog
  $ 281.8     $ 3,261.8     $ 3,543.6  
 
Total backlog includes all contractual commitments. These include the remaining portion of our ten-year term of the EnhancedView SLA with the NGA, infrastructure design and procurement services under the EnhancedView contract 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, and remaining unamortized revenue from the NGA NextView cost-share payments made prior to the GeoEye-1 satellite becoming fully operational. In addition, as part of the EnhancedView agreement, the NGA has agreed to contribute to the overall construction and launch costs of the GeoEye-2 satellite and associated ground station equipment, as well as the design and procurement of additional infrastructure to support government operations. This award component will be initially recorded as deferred revenue and recognized as revenue over the contractual term of the EnhancedView contract
 
The EnhancedView SLA contract is structured as a one-year contract, with nine one-year renewal options exercisable by the NGA. Most of our government contracts, including the EnhancedView program, 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, liquidity 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 our backlog.

Capital Expenditures

For the first quarter of 2011, our capital expenditures included $74.6 million for satellites and ground systems and $16.0 million for property, plant and equipment.

We currently expect that total capital expenditures for 2011 will be approximately $300.0 million, of which $260.0 million will be related to our continued construction of GeoEye-2 under the EnhancedView program. The remaining $40.0 million in capital expenditures relates to $22.0 million associated with our new corporate headquarters and other ongoing capital expenditures. Our new lease agreement provides for a $4.9 million tenant improvement reimbursement allowance. Reimbursements under this provision will be recorded as a deferred lease incentive and will reduce rent expense over the remaining lease term. We intend to fund our capital expenditure requirements through cash on hand and cash provided by operating activities.

Off-Balance Sheet Arrangements

We lease various real properties under operating leases that generally require us to pay taxes, insurance, maintenance and minimum lease payments. Some of our leases have options to renew.

We do not have any other significant off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Commitments and Contingencies

Operating Leases

We have commitments for operating leases primarily relating to office and operating facilities and equipment. 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. We recognize rent expense under such leases on a straight-line basis over the term of the lease. 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 months ended March 31, 2011 and 2010 was approximately $1.5 million and $0.5 million, respectively.

Contingencies

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

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 three months ended March 31, 2011, there were no significant changes to the critical accounting policies we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010. Refer to Note 1 – “General Information” in the Notes to Unaudited Condensed Consolidated Financial Statements for a summary of the new revenue recognition guidance we recently adopted.

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 March 31, 2011, are fixed-rate. At March 31, 2011, the estimated fair value of our long-term debt instruments was approximately $585.5 million, compared with a carrying value of $508.8 million, excluding the $16.2 million unamortized discount. 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.

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 Proced ures.

a)     Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a - 15(e) and 15d - 15(e)) as of March 31, 2011. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective.

b)     Changes in Internal Control over Financial Reporting
 
There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

PART II — OTHER INFORMATION

Item 1.   Legal Proce edings.

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.

We do not believe that there have been any material changes to the risk factors previously disclosed in our 2010 Annual Report on Form 10-K.

Item 6.   Exhib its.
 
 
(a)
Exhibits:

Rule 13a-14(a) Certification of Matthew M. O’Connell
   
Rule 13a-14(a) Certification of Joseph F. Greeves
   
Certification Pursuant to 18 U.S.C. Section 1350 of Matthew M. O’Connell
   
Certification Pursuant to 18 U.S.C. Section 1350 of Joseph F. Greeves
____________

SIGNATU RES

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.  
       
    /s/  Matthew M. O’Connell  
    Matthew M. O’Connell  
    Chief Executive Officer  
       
    /s/  Joseph F. Greeves  
    Joseph F. Greeves  
    Executive Vice President and Chief Financial Officer  
       
    /s/  Jeanine J. Montgomery  
    Jeanine J. Montgomery  
    Vice President, Accounting and Corporate Controller  
       
       
Date: May 10, 2011      
 
30
Exhibit 31.1

Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Amended

I, Matthew M. O’Connell, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of GeoEye, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2011
 
/s/ MATTHEW M. O’CONNELL
MATTHEW M. O’CONNELL
President and Chief Executive Officer
 
Exhibit 31.2

Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Amended

I, Joseph F. Greeves, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of GeoEye, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2011

/s/ JOSEPH F. GREEVES
JOSEPH F. GREEVES
Executive Vice President and Chief Financial Officer
 
 


Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350

In connection with the Quarterly Report of GeoEye, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew M. O’Connell, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
       
/s/ Matthew M. O’Connell
Matthew M. O’Connell
President and Chief Executive Officer

May 10, 2011

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350

In connection with the Quarterly Report of GeoEye, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph F. Greeves, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
/s/ Joseph F. Greeves
Joseph F. Greeves
Executive Vice President and Chief Financial Officer

May 10, 2011

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.