10-K 1 form10k.htm GEOEYE INC 10-K 12-31-2011 form10k.htm


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

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to

Commission file number 001-33015

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock, Par Value $0.01
 
The NASDAQ Global Market

Securities registered pursuant to section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes 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 x     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 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.

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 Act).  Yes o     No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrants was approximately $526.6 million, based upon the closing price on the NASDAQ Global Market for such equity on June 30, 2011.
 
The number of shares outstanding of Common Stock, par value $0.01, as of March 7, 2012 was 22,244,065 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE

Portions of GeoEye, Inc.’s 2011 Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 31, 2012, to be filed within 120 days after the close of the Registrant’s fiscal year, are incorporated by reference in Part III of this Form 10-K.
 
 
2

 


PART I
 
 
 
Item 1.
 
5
Item 1A.
 
13
Item 1B.
 
21
Item 2.
 
21
Item 3.
 
22
Item 4.
 
22
PART II
 
 
 
Item 5.
 
22
Item 6.
 
23
Item 7.
 
25
Item 7A.
 
39
Item 8.
 
40
Item 9.
 
66
Item 9A.
 
66
Item 9B.
 
69
PART III
 
 
 
Item 10.
 
69
Item 11.
 
69
Item 12.
 
69
Item 13.
 
69
Item 14.
 
69
Item 15.
 
69
 
In this Annual Report, “GeoEye,” the “Company,” “we,” “our,” and “us” refer to GeoEye, Inc. and its subsidiaries.
 
 
FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K, and the documents incorporated by reference herein, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements as long as they are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements. Without limitation, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “will” and similar expressions are intended to identify forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to growth, expected levels of expenditures and statements about future operating results, are forward-looking statements. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements and those presented elsewhere by our management from time to time are subject to certain risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements. These risks and uncertainties include, but are not limited to, those described in “Risk Factors” included in this Annual Report.  The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:

 
·
changes or delays in Congressional appropriations or uncertainty as to the completion of the federal budget process;
 
·
risks associated with operating our in-orbit satellites;
 
satellite launch failures, satellite launch and construction delays and in-orbit failures or reduced performance;
 
the number of commercial satellite launch opportunities available in any given time period that could impact our ability to timely schedule future launches and the prices we have to pay for such launches;
 
possible future losses on satellites that are not adequately covered by insurance;
 
our ability to obtain new satellite insurance policies with financially viable insurance carriers on commercially reasonable terms or at all, as well as the ability of our insurance carriers to fulfill their obligations;
 
termination, suspension or other changes in purchase levels under our contracts with U.S. government agencies;
 
general U.S. and international economic, business and political conditions;
 
·
domestic and international government regulation;
 
market acceptance of our products and services;
 
our ability to maintain and protect our Earth imagery content and our image archives against damage;
 
changes in our revenue backlog or expected revenue backlog for future services;
 
pricing pressure and overcapacity in the markets in which we compete;
 
the competitive environment in which we operate, as some of our competitors may have greater financial, personnel and operating resources;
 
inadequate access to capital markets or other financing;
 
customer defaults on their obligations owed to us;
 
our international operations and other uncertainties associated with doing business internationally;

as well as other factors disclosed in Part I, Item 1A. “Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and elsewhere in this Annual Report on Form 10-K, and other factors beyond our control.  These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this report. We undertake no obligation to update or revise any forward-looking statements or cautionary factors, except as required by law.

Trademarks

We own or have rights to various copyrights, trademarks, and trade names used in our business, including the following: GEOEYE®; IKONOS®; MJ HARDEN®; ORBIMAGE®; ORBVIEW®; ROADTRACKER®; GEOEYE FOUNDATIONtm; GEOPROFESSIONALtm; GEOSTEREOtm; GEOFUSEtm; EYEQtm; EYEONtm; SEASTARtm; SEASTAR FISHERIES INFORMATION SERVICEsm; MARINE INFORMATION SERVICEsm; MASTERCASTtm; OCEAN MONITORING SERVICEsm; ORBBUOYtm; ORBMAPtm; TRUSTED IMAGERY EXPERTStm; VESSEL TRACKINGtm; ELEVATING INSIGHTtm; GEOEYE ANALYTICStm; EARTHWHEREtm; SIGNATURE ANALYSTtm; GEOEYE 3D AIRPORTtm; GEOEYE 3D HARBORtm; and GEOTRACKERtm
 
 
PART I

Item 1.

Overview
 
GeoEye is a leading provider 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 Earth imagery, geospatial expertise and enabling technology 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.

In 2011, we increased total revenues to $356.4 million from $330.3 million in 2010, a growth rate of 7.9 percent. Over the same period, we increased net income to $56.6 million from $24.6 million, a growth rate of 129.8 percent, and increased Adjusted EBITDA, a non-GAAP measure (see reconciliation on page 24), to $183.0 million from $176.9 million, a growth rate of 3.5 percent.

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. Our next satellite, GeoEye-2, will have even higher resolution. It is on track to launch and go into operations in 2013. We own one of the world’s largest libraries of commercial panchromatic and color digital satellite imagery; it contains more than 614 million square kilometers of color Earth imagery.
 
In addition to our high-resolution Earth imagery collection capacities, we are a global leader in the creation of enhanced satellite imagery information products and services. We operate state-of-the-art high-resolution image processing and production facilities in St. Louis, Missouri and Thornton, Colorado. Our St. Louis, Missouri facility processes imagery from numerous commercial and government sensors, including our own enhanced satellite imagery, to produce an expanded variety of value-added products. We believe we are the only major commercial imagery satellite operator who can produce imagery from multiple Earth imagery sources in addition to our own enhanced satellite imagery information products and services.

GeoEye’s Earth imagery, geospatial expertise and enabling technology allow its customers to collect, process and analyze vast amounts of geospatial data to quickly see, understand and respond to changes on the ground and anticipate where events may occur in the future. Our Web-based information services platform, EyeQ, provides on-demand access to GeoEye imagery, making this valuable information accessible to new audiences.

GeoEye Analytics builds on our heritage of providing multi-source value-added geospatial services by bringing advanced geospatial analytics expertise. Our analysts leverage proprietary tools and tradecraft to process and exploit multiple layers of geospatial data to better understand the characteristics of a location and anticipate where events may occur. Our teams support many important national security, law enforcement and risk management missions.

We believe the combination of our Earth imagery, geospatial expertise, and enabling technology differentiates us from our competitors. This combination enables us to provide “elevated insight” in the geospatial industry by delivering solutions that help our customers protect lives, manage risk and optimize resources.

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 U.S. 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-K 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 our earnings releases and supplemental financial information. 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.

Products and Services

Our principal sources of revenue are from the sale of Earth imagery directly to end users or value-added resellers, the provision of direct access to our satellites, associated ground processing technology upgrades and operations and maintenance services. We also derive significant revenue from value-added production and analytic services where we combine imagery GeoEye collects with other sources of data from our customers to create sophisticated value-added geospatial products. Additionally, we earn revenue from the dissemination and hosting of imagery.
 

Satellite Imagery

We offer a wide range of high-resolution satellite imagery that provides our customers archive data and new collection services in three key formats:

 
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 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 collection services are designed to support specific customer requests for high-resolution and highly accurate images. We offer two main types of aerial imagery collected by our dedicated fleet of three imaging aircraft: (1) digital aerial imaging; and (2) light detection and ranging, 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. We are currently evaluating strategic alternatives for our aerial imagery services, which comprised less than two percent of our total revenues in the year ended December 31, 2011.

Production Services

Value-added products and services 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 involve 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 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 match each other in location and color, so they can be stitched together to create a mosaic that 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 more.

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 satellite imagery with third-party data to create sophisticated and customized information for our customers. In 2010, we launched our information services business to provide our customers global on-demand access to imagery and related information over the Internet. This Web-based services platform, which we call EyeQ, provides the infrastructure for this service and our geospatial information services business. EyeQ commenced operations in April 2010 supporting the U.S. government’s National Geospatial-Intelligence Agency, or NGA, 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 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 completed the acquisition of 100 percent of the stock of SPADAC, Inc., or SPADAC, a geospatial predictive analytics company, which 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 enables 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 provides the insight they need so they can best manage risk, optimize deployment of resources and ensure efficient utilization of key assets.
 
Customers

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

We sell our imagery by means of image collection orders, both satellite and aerial, and from our satellite imagery library, which currently comprises over 614 million square kilometers of high-resolution imagery. Our imagery products and services are sold through direct and indirect sales channels, resellers, direct salespeople, strategic partners and through our customer service and production services personnel. Our imagery customers can buy imagery from us through various sales arrangements, including purchasing imagery by the square kilometer, or by buying monthly subscription-based access to one of our satellites and associated ground processing technology and support services. Certain international government customers pay for direct access to our satellites, giving them the right to task the satellites and to receive direct downlinks from the satellite. We can deliver imagery products by means of electronic delivery or by the use of physical media such as CDs, DVDs, hard drives or electronic distribution. The key factors in determining the appropriate delivery method depend on the customer’s needs and the file size of the imagery product ordered.
 
U.S. Government

Our products and services are provided to various U.S. government, defense, intelligence and law enforcement agencies and civil agency customers. Under the NextView program and the EnhancedView program, the NGA acquires imagery and imagery derived products on behalf of its clients in the U.S. defense, intelligence and law enforcement agencies. Other U.S. government agencies that purchase satellite imagery include the U.S. Air Force, U.S. Army, U.S. Department of Interior, U.S. Geological Survey, U.S. Fish and Wildlife Service, National Park Service, National Aeronautics and Space Administration and the U.S. Department of Agriculture. For the year ended December 31, 2011, we recognized aggregate revenues of $227.8 million from the U.S. government, which represented approximately 64 percent of our total revenues.
 
 
International

Our international customers, who represented 26 percent of our total revenues for the year ended December 31, 2011, are primarily comprised of foreign governments but also include commercial customers. Most foreign countries currently do not have satellite collection programs as technically sophisticated as the programs in the United States and must either rely on their own limited aerial imagery collection for their imagery applications or purchase imagery from reliable commercial satellite providers, such as GeoEye. Our international customers primarily use imagery for national defense, intelligence programs, agricultural planning and monitoring, resource monitoring, national border monitoring, environmental and infrastructure monitoring and construction planning.
 
North American Commercial and Other

Our North American commercial customers, who represented 10 percent of our revenues for the year ended December 31, 2011, purchased both aerial imagery and satellite imagery from us. Our North American commercial customers operate in a variety of different market segments, including online mapping, GIS, precision mapping, infrastructure, oil and gas, environmental monitoring, agriculture, mining, utilities and transportation. We sell imagery and products to our resellers and they in turn add additional value to the products for sale to the end user. Examples of our commercial relationships include arrangements with Esri and our multi-year agreement with Google, Inc. to provide satellite imagery for its online consumer and commercial applications.

Government Programs

EnhancedView Program

On August 6, 2010, the NGA awarded us contracts under its EnhancedView program. 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 EnhancedView program award provides for a new satellite imagery delivery Service Level Agreement, or 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 in the base year and 15 percent in the option years based on performance metrics. Under the EnhancedView SLA, to the extent that less than $12.5 million is paid by the NGA for any month, the shortfall can be applied to future products and services or used to fund an extension of the contract.  When GeoEye-2 becomes operational and meets NGA certification requirements, which we currently expect will occur in 2013, EnhancedView SLA payments are expected to increase by an additional $15.3 million per month ($183.6 million per year), also subject to a maximum reduction of 15 percent based on performance metrics. The initial term of the EnhancedView SLA was 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 42.1 percent of the cost, up to a maximum of $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 and meets NGA certification requirements. This award component will be initially recorded as deferred revenue and recognized as revenue over the expected operational life of the satellite. 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. During 2011, the Company successfully completed all critical design review milestones related to the GeoEye-2 satellite development under the EnhancedView contract.
 
The EnhancedView program 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.

If the NGA exercises all of its options and we perform as specified, the EnhancedView contracts are worth up to $3.8 billion over ten years.
 
On October 4, 2011, the Company entered into an amendment to the EnhancedView SLA with the NGA exercising the first renewal option under the contract to extend the EnhancedView SLA for the period of October 5, 2011, through August 31, 2012. Previously, on August 30, 2011, the Company signed an amendment to its SLA with the NGA to extend the performance period of the base year to October 4, 2011. The amendment also changed the date by which the NGA may exercise its first of nine one-year renewal options under the EnhancedView SLA from August 31, 2011, to October 31, 2011. The first of the one-year renewal options was shortened by the amount that the base year was extended by this amendment, so that the date by which NGA may exercise the second option year is August 31, 2012.
 
 
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 $147.0 million and $49.0 million of imagery and other revenue under the EnhancedView SLA during the years ended December 31, 2011 and 2010, respectively.

Satellites

GeoEye-1

GeoEye-1 has been designed to collect 0.41-meter (approximately equivalent to 16.1 inches) resolution black-and-white imagery (known in the industry as panchromatic) and 1.65-meter (approximately equivalent to 65.0 inches) resolution color imagery (known in the industry as multispectral) of the Earth’s surface, both individually and simultaneously. Although imagery can be collected at 0.41-meter resolution for the U.S. government, due to current U.S. licensing restrictions, products for non-government customers must be re-sampled to no better than 0.5-meter resolution before being made available for sale to non-U.S. government customers. For more details on this restriction, see “—Government Regulation — United States” below.

In addition to 0.5-meter resolution imagery, GeoEye-1 offers geo-location accuracy, which is currently better than five meters. This means that customers can map natural and man-made features to within five meters of their true location on the Earth’s surface without ground control points.

The Company maintains insurance policies for GeoEye-1 with both full coverage and total-loss-only coverage in compliance with our indentures. As of December 31, 2011, we carried $260.3 million in-orbit insurance for GeoEye-1, comprised in part by $195.8 million of full coverage to be paid if GeoEye-1’s capabilities become impaired as measured against a set of specifications, which expires on December 1, 2012. We also carry $64.5 million of insurance in the event of a total loss of the satellite, which expires December 1, 2012.

In 2009, we experienced an irregularity with GeoEye-1 that affected the transmission of imagery to certain ground stations and subsequently thereto, we experienced an unrelated aberration that affected the collection of some color imagery by GeoEye-1. We have successfully implemented modifications that we believe significantly reduce or eliminate the business impacts of these issues. Nonetheless, any failure of our cameras on any of our satellites or other loss of satellite capacity or functionality could require different satellite operational modifications that may have a material adverse effect on our imagery collection operations, and could materially affect our financial condition and results from operations.

IKONOS

GeoEye acquired this satellite through the acquisition of Space Imaging in 2006. IKONOS provides 0.82-meter resolution black-and-white and 3.2-meter resolution color imagery with a geo-location accuracy of approximately 7.8-meters. IKONOS can collect about 200,000 square kilometers of imagery per day. Like GeoEye-1, IKONOS is designed to downlink imagery to a customer and to accept imaging collection orders directly from customers. In addition, like GeoEye-1, IKONOS has the ability to take simultaneous black-and-white and color imagery, allowing us to deliver “pan sharpened multispectral” imagery. It can also capture stereo images on the same orbital pass. The Company maintains $4.3 million of in-orbit insurance for IKONOS, which expires December 1, 2012, to be paid if the satellite’s capabilities become impaired as measured against a set of specifications. The IKONOS satellite was launched in September 1999.

OrbView-2

We ceased operating OrbView-2 in early 2011, an event we had been anticipating for some time. OrbView-2 was the first commercial satellite to image the Earth’s entire surface on a daily basis in color. OrbView-2 was launched in August 1997, and far outlived its expected operational life; it was thirteen years old when we ceased operating it. OrbView-2 collected 1.0 kilometer, low-resolution color imagery, downlinking the imagery to both our primary and backup ground stations and to various regional receiving stations around the world. OrbView-2 revenues for 2011 and 2010 were immaterial. Since discontinuance of OrbView-2 operations, we have been using other available sources of low-resolution imagery.
 
GeoEye-2

As noted, on August 6, 2010, the NGA awarded us a contract under its EnhancedView program. One component of the award is a cost-share of up to $337.0 million for the development and launch of GeoEye-2. GeoEye-2 has been designed to collect 0.34-meter (approximately equivalent to 13.4 inches) resolution black-and-white imagery and 1.34-meter resolution color imagery (approximately equivalent to 53.5 inches).  The satellite also incorporates control moment gyros which makes it more agile for adhoc imagery collection.
 
 
GeoEye-2 is on track to launch and go into operations in 2013. On January 26, 2012, the NGA approved the System Critical Design Review for the EnhancedView program. This review was the final step to verify that GeoEye's space, ground and overall system level designs meet the stringent operational and security requirements of the NGA. Completion of these four critical design reviews also confirms the system will support all mission requirements for the EnhancedView Program.  As of December 31, 2011, we have incurred total capitalized costs of $578.7 million for EnhancedView, primarily consisting of costs for the development of and construction of GeoEye-2, including $63.0 million of capitalized interest.
 
Production Facilities

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

The following table summarizes the primary characteristics of production facilities and satellite control and communications services:
 
   
Satellite Control
 
Satellite
Communications and
Image Receiving
 
Image Order
Tasking
 
Imagery Processing
Center
Thornton, Colorado
 
ü
 
ü
 
ü
 
ü
Herndon, Virginia
 
ü
 
ü
 
ü
   
St. Louis, Missouri
 
 
 
 
 
 
 
ü
Point Barrow, Alaska
     
ü
       
Fairbanks, Alaska
 
ü
 
ü
 
 
 
 
Mission, Kansas
             
ü
Kiruna, Sweden
 
 
 
ü
 
 
 
 
Tromso, Norway
     
ü
       
Troll, Antarctica
 
 
 
ü
 
 
 
 

Company History

GeoEye was initially organized as ORBIMAGE Holdings, Inc., a Delaware corporation, on April 4, 2005, and is the successor registrant of ORBIMAGE Inc. On January 10, 2006, we adopted the brand name GeoEye. On September 28, 2006, the stockholders of the Company voted to formally change the legal name of the Company from ORBIMAGE Holdings, Inc. to GeoEye, Inc.

Strategic acquisitions have expanded our product and service offerings. On January 10, 2006, we completed the acquisition of Space Imaging, or SI, pursuant to the terms of an asset purchase agreement to acquire the operating assets of SI. The final cash purchase price, including acquisition costs, was approximately $51.5 million. On December 15, 2010, we acquired SPADAC, 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, Inc. GeoEye Analytics provides geospatial predictive analytics solutions to customers in key markets of defense, intelligence and homeland security, enabling customers to gain the insight they need to support mission-critical operations around the world.

Additionally, in December 2009, we established a new foreign subsidiary in Singapore to serve our expanding Asia customer base, GeoEye Asia Pte. Ltd.

In January 2010, we changed the names of the Company’s subsidiaries as follows:

Old Name
 
New Name
ORBIMAGE Inc.
 
GeoEye Imagery Collection Systems Inc.
ORBIMAGE SI Holdco Inc.
 
GeoEye Solutions Holdco Inc.
ORBIMAGE SI Opco Inc.
 
GeoEye Solutions Inc.
ORBIMAGE License Corp.
 
GeoEye License Corp.

Competition

We compete against various public and private companies, systems owned by the U.S. government and foreign state-sponsored entities that provide satellite and aerial imagery products and related information services to the commercial market.

Our major competitor for high-resolution satellite imagery is DigitalGlobe, Inc., or DigitalGlobe, a publicly listed commercial vendor of space imagery. International competitors for high-resolution satellite imagery and imagery products include Astrium, an EADS Company, the National Remote Sensing Centre, Department of Space (government of India), RADARSAT International (Canada) and ImageSat International N.V. (Israel).
 

Employees
 
As of December 31, 2011, we had 743 employees. Generally, our employees are retained on an at-will basis. We have entered into employment agreements with certain of our key employees. Certain of our employees have non-competition agreements that prohibit them from competing with us for various periods following termination of their employment.

Government Regulation

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

United States

Department of Commerce Regulation

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

We currently have DoC licenses for all of our existing satellite systems. We also hold a DoC license that we intend to use for the GeoEye-2 satellite system that is being developed. We intend to modify this DoC license, subject to DoC approval, to reflect the final technical specifications for the GeoEye-2 satellite under the NGA’s EnhancedView program. The DoC license for GeoEye-2 is a constellation license and authorizes us to operate an additional satellite subject to DoC approval. The DoC licenses for our satellites are valid through the operational lifetime of each satellite. We expect to satisfy the terms of each of the DoC licenses for our satellites and to maintain the regulatory licenses and approvals necessary for their ongoing operations.

Our DoC licenses generally include the following key operating conditions:

 
We are required to maintain positive operational control of our satellite systems from a location within the United States at all times;

 
We are restricted from disseminating to anyone other than the U.S. government panchromatic imagery with a resolution better than 0.5-meters or multispectral imagery with a resolution better than 2.0-meters within 24 hours of collection;

 
The U.S. government reserves the right to exercise “shutter control” — the interruption of service by limiting imagery collection and/or distribution as necessary to meet significant U.S. government national security or foreign policy interests or international obligations. Although the U.S. government has never exercised “shutter control” with respect to our satellite systems, the exercise of this authority would require us to make imagery data available exclusively to the U.S. government by means of approved re-keyable encryption on the downlink. We cannot anticipate whether or under what circumstances the U.S. government would exercise its “shutter control” authority, nor can we reasonably determine what costs and terms would be negotiated between us and the U.S. government in such an event;

 
We are required to obtain DoC approval before implementing “significant or substantial” agreements with foreign nations, entities or consortiums (foreign persons) to protect the national security, foreign policy interests and international obligations of the U.S. government. Transfers of “significant or substantial” agreements also require DoC approval. Examples of “significant or substantial” agreements include customer agreements for high-resolution imagery collection and distribution, operating agreements and agreements relating to equity investments in the Company of 20 percent or more of the total outstanding shares or that entitle a foreign person to a position on our Board of Directors. Foreign persons entering into “significant or substantial” agreements with us are required to comply with our DoC license imagery collection and distribution restrictions and are subject to the U.S. government’s exercise of “shutter control,” which could adversely affect our ability to collect imagery products for distribution to our foreign customers; and
 
 
 
We are restricted from disseminating imagery of the state of Israel with a resolution better than 2.0 meters.

Federal Communications Commission Regulation

The FCC is responsible for licensing commercial satellite and ground systems and the radio frequencies used by commercial satellite systems. In general, the FCC grants licenses to commercial satellite systems that conform to the technical, legal and financial requirements for these systems set forth in FCC regulations. The FCC also regulates the ownership and control of its licensees, and must consent to certain changes in such ownership or control.

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

   
GeoEye-1
 
IKONOS
FCC Satellite License Grant Date
 
2004
 
1999
Commercially Operational
 
Yes
 
Yes
FCC Satellite License Expiration Date
 
2018
 
2014
Grant Date of Associated FCC Ground Station Licenses
 
2004
 
1999
Expiration Date of Associated FCC
Ground Station License(s)
 
April 15, 2024, renewable for 15
years subject to FCC approval
 
October 3, 2022 and October 17,
2022, renewable for 15 years
subject to FCC approval
 
In March 2011, we completed the successful de-orbit of the OrbView-3 satellite and surrendered the OrbView-3 FCC and NOAA licenses. Additionally, we decommissioned the OrbView-2 satellite later in 2011. We recently filed an application to modify our GeoEye-1 satellite FCC license to add the GeoEye-2 satellite and associated ground stations and expect to obtain the FCC licenses and approvals necessary for GeoEye-2 operations before GeoEye-2 launch in 2013.

Export Controls and Security Clearance Regulation

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

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

In addition, we require certain facility and personnel security clearances to perform our classified U.S. government-related business. Security clearances are subject to regulations and requirements. This includes the National Industrial Security Program Operating Manual, or NISPOM, which provides baseline standards for the protection of classified information released or disclosed to industry in connection with classified U.S. government contracts. Among other things, the NISPOM restricts non-U.S. (“foreign”) ownership, control, or influence, or FOCI, over a U.S. citizen performing classified work for the U.S. government, such that investments in the Company by non-U.S. entities or individuals could require prior review by the U.S. Department of Defense, and could result in changes in the terms of our facility or personnel clearances. The suspension or cancellation of our facility clearances, or the inability to maintain personnel security clearances for our personnel to perform classified U.S. government contracts, could have a material adverse effect on our business and results of operations.

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

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

International

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

 
 
International Telecommunication Union, or ITU, Regulations — ITU regulations for a satellite system define the technical operating parameters, including a range of technical parameters that determine the potential interference to and from other services and users of the spectrum.  The FCC, on our behalf, has completed the ITU advance publication and notification processes for our IKONOS and GeoEye-1 satellite systems. After completion of the ITU notification process, ongoing coordination with other satellite systems could occur from time to time.

 
 
Foreign Downlink License — The regulations of some foreign countries require satellite operators to secure appropriate licenses and operational authority to use the required spectrum in each country. Within foreign countries, our foreign customers are responsible for securing appropriate licenses and operational authority to use the required spectrum for downlinking our high-resolution satellite imagery with assistance from us as required.

 
 
Foreign Imagery Acquisition or Distribution Regulations — The regulations or policies of foreign countries may restrict the acquisition or distribution of satellite imagery products and services. For example, in the Republic of India, we obtained permission from the government to promote satellite imagery product sales to customers in India, provided the actual product deliveries are made through a government-appointed reseller.

While we believe we will be able to obtain all U.S., ITU and foreign government licenses, authorizations and registrations necessary to provide services internationally, we cannot assure you that we will be successful in doing so. The failure to obtain some or all necessary licenses, approvals or registrations could have a material adverse effect on our business or results of operations.
 
Item 1A.

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

We depend heavily on U.S. government contracts. Termination of these contracts would materially reduce our revenue and have a material adverse effect on our business.

Revenues from U.S. government contracts accounted for 64 percent of our total revenues for the year ended December 31, 2011. Our contracts with U.S. government agencies are subject to risks of termination, with or without cause, or reduction in scope due to changes in U.S. government policies, priorities or funding level commitments to various government agencies. Our primary contract with the U.S. government, through the NGA, is the EnhancedView SLA, which was awarded and authorized on August 6, 2010. Any inability on our part to meet the performance requirements of the EnhancedView SLA could result in a breach of our contract with the NGA. The EnhancedView SLA is structured as a one-year agreement, with nine one-year renewal options, exercisable at the NGA’s option.  In October 2011, the NGA exercised its first renewal option under the contract. This contract amendment extended the EnhancedView SLA for an 11-month period beginning October 5, 2011 and ending August 31, 2012. Eight additional one-year renewal options remain under the EnhancedView SLA.  A breach of our contract with the NGA resulting in its termination, or a decision by the NGA not to exercise its remaining renewal options under the EnhancedView SLA, or any other U.S. government contract, would have a material adverse effect on our business, financial condition and results of operations.

As part of the EnhancedView award, we have entered into a cost-share agreement with the NGA that provides for approximately $337.0 million of funding for the development and launch of GeoEye-2; this amount represents approximately 42 percent of our expected GeoEye-2 development and launch expense. If the cost-share agreement is terminated or funding is significantly reduced, it will be difficult for us to obtain a similar level of financing on comparable or acceptable terms, if at all. If such termination is accompanied by a termination or non-renewal of the EnhancedView SLA, we will experience significant difficulty in obtaining financing for the construction and development of future satellites, which would have a material adverse effect on our business, financial condition and results of operations.
 

A substantial portion of our revenues are generated from contracts with U.S. government agencies, particularly the NGA, that are subject to annual renewal and Congressional appropriations. A failure or delay by Congress to make appropriations to the NGA or other U.S. government agencies could materially reduce our revenue and have a material adverse effect on our business.
 
Although our NGA contracts generally involve fixed annual minimum commitments, such commitments are subject to annual Congressional appropriations and, as a result, the NGA may not continue to fund these contracts at current or anticipated levels. If the NGA terminates, significantly reduces in scope or suspends any of its contracts with us, or changes its policies, priorities or funding levels, these actions would have a material and adverse effect on our business, financial condition and results of operations. We recognized $147.0 million of revenue under the EnhancedView SLA for the year ended December 31, 2011, which accounted for approximately 41 percent of our revenue during the year ended December 31, 2011.

Funding of U.S. government contracts are subject to congressional budget authorization and appropriation processes. We cannot predict the extent to which total funding and/or funding for our contracts will be included, increased or reduced as part of the 2012 budget and subsequent budgets ultimately approved by Congress or will be included in separate supplemental appropriations. The impact, severity and duration of the current U.S. economic situation, economic policies adopted or to be adopted by the U.S. government, and pressures on the federal budget could also adversely affect the total funding and/or funding for our contracts. In the event that appropriations for any of our contracts become unavailable, or are reduced or delayed, one or more of our contracts may be terminated or adjusted by the U.S. government, which could have a material adverse effect on our business, financial condition and results of operations.

When the U.S. government does not complete its budget process before the end of its fiscal year, government operations are typically funded pursuant to a continuing resolution that authorizes agencies of the U.S. government to continue to operate, but does not authorize new spending initiatives. When the U.S. government operates under a continuing resolution, government agencies may delay or cancel funding we expect to receive on work we are already performing. Additionally, when operating under a continuing resolution, U.S. government agencies may delay or cancel new initiatives and programs, which could materially adversely affect our business, financial condition and results from operations.

In addition, when the U.S. government approaches its existing statutory limit on the amount of permissible federal debt that may be incurred, this limit must be raised in order for the U.S. government to continue to pay its obligations on a timely basis. If the debt ceiling is not raised, it is unclear how the U.S. government would prioritize its payments and where our payments would fall in that priority list. A significant portion of our work is performed under U.S. government contracts that provide generally that we will continue to perform on the contract even if the U.S. government is unable to make timely payments. Failure to continue performance under the contract may place us at risk of termination for default. Such conditions are unprecedented in the history of U.S. government fiscal policy administration, and there is no assurance that should the U.S. government fail to pass legislation in time to avoid reaching the debt ceiling, such legislation would be forthcoming in the near term. Should conditions occur such that the U.S. government or others are unable to pay us timely for work performed, we would need to finance that work from our available cash resources, credit facilities and access to the capital markets, if available. It is unclear how long the U.S. government’s payment capacity might be constrained, and therefore, how long we may be required to finance; however, it is likely that there are practical limitations on how long we could finance our operations under these circumstances. An extended delay in the timely payments by the U.S. government would likely result in a material adverse effect on our business, financial condition and results of operations.

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

Current U.S. government policy encourages the use of commercial imagery products and services to support U.S. national security objectives. We are considered by the U.S. government to be a commercial imagery products and services provider. U.S. government policy is subject to change, and any change in policy away from supporting the use of commercial imagery products and service providers to meet U.S. government imagery needs could materially adversely affect our business, financial condition and results of operations.

Our information systems and security systems and networks may be subject to intrusion, resulting in possible interruption, delay or suspension of our ability to provide our products and services, which could result in loss of current and future business.

A breach or breaches of our information, security or network systems could materially adversely affect our business. Our business involves the transmission and storage of large quantities of electronic data, including the imagery comprising our global imagery library. In addition, our business is becoming increasingly Web-based, allowing our customers to access and take delivery of imagery from our digital imagery library over the Internet. From time to time, we have experienced computer viruses and other forms of third-party attacks on our systems that, to date, have not had a material adverse effect on our business.

Despite the implementation and continued upgrading of security measures, our network infrastructure may be vulnerable to computer viruses, unauthorized third-party access or other problems caused by third parties, which could lead to interruptions, delays or suspension of our operations, loss of imagery from our global imagery library and the loss or compromise of technical information or customer information. Inappropriate use of the Internet by third parties, including attempts to gain unauthorized access to information or systems—commonly known as “cracking” or “hacking”—could also potentially jeopardize the overall security of our systems and could deter certain customers from doing business with us. If a breach involves information subject to breach disclosure laws (such as certain personally identifiable information), we may be required to publicly disclose the breach, which may deter customers from dealing with us and/or expose us to material notification expenses. In addition, a security breach that involved classified or other sensitive government information, or certain controlled technical information, could subject us to civil or criminal penalties, and could result in loss of our government contracts, loss of access to classified information, loss of export privileges or debarment as a government contractor.
 
 
Because the techniques used to obtain unauthorized access, or to otherwise infect or sabotage information, security and network systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these new techniques or to implement adequate preventive measures. We may also need to expend significant people and financial resources to protect against security breaches or remedy any breaches that might occur. The risk that these types of events could seriously harm our business is likely to increase as we expand the number of Web-based products and services we offer and increase the number of countries within which we do business.

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

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

Our major U.S. competitor for high-resolution satellite imagery is DigitalGlobe.  DigitalGlobe currently operates three high-resolution satellites able to collect sub meter resolution imagery: Quickbird, launched in 2001; WorldView-1, launched in September 2007; and WorldView-2, launched in October 2009. DigitalGlobe’s three satellite constellation offers more collection capacity than GeoEye’s two satellite constellation of GeoEye-1 and IKONOS. While we believe GeoEye-1 offers the highest-resolution and positional accuracy of any commercial imagery satellite in the world, some customers may value collection capacity over image quality. In 2011, Astrium successfully launched their Pleiades satellite which collects sub meter imagery.  DigitalGlobe also announced intentions to expand their distribution option for international customers, known as the Direct Access Program. The emergence of Astrium as a commercial imagery vendor that offers radar, medium resolution, and high resolution imaging capabilities and DigitalGlobe’s increased investment in international growth could lead to increased pricing competition and put our market share at risk.

If competitors develop and launch satellites with comparable or more advanced technologies than ours, or offer services at lower prices than ours, then our business, financial position and results of operations could be adversely affected.

U.S. and foreign government agencies may build and operate their own systems, which could affect the current and potential market share of our products and services and could lead to pricing pressure.

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

The U.S. government and foreign governments also develop, construct, launch and operate their own imagery satellites, with comparable or higher resolution and accuracy, which could reduce their need to rely on commercial suppliers. In addition, such governments could sell Earth imagery from their satellites in the commercial market and thereby compete on price and technological capabilities with the sales of our imagery products and services. These governments could also subsidize the development, launch and operation of imagery satellites by our current or future competitors and subsidize the pricing of imagery from their satellites, which could lead to additional pricing pressure. Pricing pressure could lead to potential market share losses if we choose not to lower our prices to retain our existing customer base. Any reduction in purchases of our products and services by the U.S. government could have a material adverse effect on our business, operations and financial condition.

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

Our success depends on existing markets accepting our imagery products and information services and our ability to develop new business markets and new services. Our business plan is based on the assumption that we will generate significant future revenues from sales of high-resolution imagery produced by our satellite constellation and from sales of our information services to current and new customers in our existing and new markets. The commercial availability of high-resolution satellite imagery is still a fairly new market. Consequently, it is difficult to predict accurately the ultimate size of the market and the market acceptance of our products and services. Our strategy is to target certain existing and new markets for our satellite imagery and relies on a number of assumptions. The actual market for our products and services could vary from the potential end markets that we have identified causing us to develop smaller end markets and potentially miss other market opportunities.
 
 
We cannot accurately predict whether our products and services will achieve significant market acceptance or whether there will be a market for our products and services on terms we find acceptable. Market acceptance of our commercial high-resolution Earth imagery products and new information services depends on a number of factors, including the quality, scope, timeliness, sophistication and price of services and the availability of substitute products and services. Lack of significant market acceptance of our offerings, or other products and services that utilize our products and services, delays in acceptance, failure of certain markets to develop or our need to make significant investments to achieve acceptance by the market would negatively affect our business operations, financial condition and financial results.

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

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

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

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

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

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

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

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

The implementation of our business strategies, such as expanding our satellite constellation and our value-added products and services offerings, requires a substantial outlay of capital. As we pursue our business strategies and seek to respond to opportunities and trends in our industry, our actual capital expenditures may differ from our expected capital expenditures, and there can be no assurance that we will be able to satisfy our capital requirements in the future. We currently expect that our ongoing liquidity requirements for sustaining our operations will be satisfied by cash on hand, cash generated from our existing and future operations and proceeds from the U.S. government cost-share. However, we cannot provide assurances that our businesses will generate sufficient cash flow from operations in the future or that future borrowings will be available in amounts sufficient to enable us to execute our business strategies.
 
 
Lending institutions have suffered and may continue to suffer losses due to their lending policies and their other financial relationships, especially because of the continued challenges and uncertainties in the U.S. and global economies. As a result, changes in the capital markets may impact our ability to obtain new financing or refinance our existing debt on reasonable terms and in adequate amounts, if at all. If we determine we need to obtain additional funds through external financing and are unable to do so, we may be prevented from fully implementing our business strategies. We can provide no assurance that we will be able to raise sufficient capital to continue funding our satellite constellation and expand our other products and services.

The continuing economic challenges and uncertainty may affect our business operations, financial condition and financial results in ways that we currently cannot predict.

The continuing economic challenges in the financial markets, national debt concerns and uncertainty regarding the global economy may have an impact on our business, our business operations, financial condition and financial results. As the cost of capital has increased substantially and the availability of funds from the capital markets has diminished significantly, our ability to access the capital markets may be restricted or be available only on terms we do not consider favorable. Limited access to the capital markets could adversely affect our ability to take advantage of business opportunities or react to changing economic and business conditions and could adversely affect our strategy.

The current economic situation could affect our customers, causing them to fail to meet obligations to us, which could have a material adverse effect on our revenue, results of operations and cash flows. A continued economic downturn coupled with the uncertainty and volatility of the global financial crisis may have a further adverse effect on our business and our consolidated financial condition, results of operations and cash flows that we currently cannot predict or anticipate. The uncertainty about future economic conditions also makes it more challenging for us to forecast our operation results, make business decisions, and identify and prioritize the risks that may affect our business, our business operations, financial condition and financial results.

Our success depends upon our ability to recruit and motivate key personnel.

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

Our effective income tax rate may vary.

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

We may engage in various transactions, including purchases or sales of assets, acquisitions of businesses, or enter into investments or contractual arrangements, such as strategic alliances or joint ventures. These transactions may be intended to result in the realization of cost savings, the generation of cash, the generation of income or the reduction of risk. We cannot assure you that we will be able to identify suitable acquisition, investment, alliance or joint venture opportunities or that we will be able to consummate any such transactions or relationships on terms and conditions acceptable to us, or that such transactions or relationships will be successful.

In addition, upon consummation of an acquisition, investment, strategic alliance or joint venture, we may face challenges with integration efforts, including the combination and development of product and service offerings, sales and marketing approaches and establishment of combined operations. There can be no assurance that an acquired business will perform as expected; that we will not incur unforeseen obligations or liabilities; that the business will generate sufficient cash flow to support the indebtedness, if incurred, to acquire them or the expenditures needed to develop them; or that the rate of return from such businesses will justify the decision to invest the capital.

Any future acquisitions, investments, strategic alliances or joint ventures may require additional debt or equity financing, which, in the case of debt financing, would increase our leverage and potentially affect our creditworthiness. Any deterioration in our creditworthiness or our future credit ratings associated with an acquisition could adversely affect our ability to borrow by resulting in more restrictive borrowing terms.

Satellites have limited useful lives and are expensive to replace.

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

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

Our GeoEye-1 satellite was launched in September 2008 and has an expected operational life of nine years. IKONOS, another of our satellites, launched in September 1999, was fully depreciated in June 2008. An updated study on IKONOS was completed in 2011, and the results indicate that there are no impending sources of loss of mission through the end of 2012. However, there can be no assurance that IKONOS will continue to operate adequately to remain commercially viable.

Replacing a satellite is expensive. We are currently building GeoEye-2, which we expect to be operational in 2013. We expect to use $111.0 million, the first installment of the federal government cost-share funds, current cash balances and funds generated from operations to develop and launch GeoEye-2. If our cost-share agreement with the NGA is terminated by the NGA, or if Congress fails to make appropriations to fund payments by the NGA under this cost-share agreement, we will have to seek additional financing from outside sources, which we may be unable to obtain on terms we find acceptable. If we do not generate sufficient funds from operations and we cannot obtain financing from outside sources on favorable terms, we will not be able to deploy a new satellite to replace GeoEye-1 at the end of its expected operational life. We cannot assure investors that we will be able to generate sufficient funds from operations or be able to raise additional capital on acceptable terms or on a timely basis, if at all, to develop or deploy follow-on high-resolution satellites.

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

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

If we suffer a partial or total loss of a deployed satellite, we would need a significant amount of time and would incur substantial expense to repair or replace that satellite. We may experience other problems with our satellites that may reduce their performance. During any period in which a satellite is not fully operational, we may lose most or all of the revenue that otherwise would have been derived from that satellite. In addition, we may not have on hand, or be able to obtain in a timely manner, the necessary funds to cover the cost of any necessary satellite repair or replacement. Our inability to repair or replace a defective satellite, or correct any other technical problem in a timely manner, could result in a significant loss of revenue. Our business model depends on our ability to sell imagery from our high-resolution satellites. We do not presently have plans to construct and launch a replacement satellite for our high-resolution IKONOS satellite if it fails.

In 2009, we experienced an irregularity with GeoEye-1 that affected the transmission of imagery to certain ground stations and subsequently thereto, we experienced an unrelated aberration that affected the collection of some color imagery by GeoEye-1. We have successfully implemented modifications that we believe significantly reduce or eliminate the business impacts of these issues. Nonetheless, any failure of our cameras on any of our satellites or other loss of satellite capacity or functionality could require different satellite operational modifications that may have a material adverse effect on our imagery collection operations, and could materially affect our financial condition, liquidity and results from operations.

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

We have in the past experienced delays in satellite construction and launch, which have adversely affected our operations. Such interruptions can result from delays in the construction of satellites and the procurement of requisite components and launch vehicles; limited availability of appropriate launch windows; possible delays in obtaining regulatory approvals and launch failures. Failure to meet a satellite’s construction schedule, resulting in a significant delay in the future delivery of a satellite, could also adversely affect our marketing strategy for the satellite. Even after a satellite has been manufactured and is ready for launch, an appropriate launch date may not be available for several months. Further, any significant delay in the commencement of service of any of our satellites would allow customers who pre-purchased or agreed to utilize capacity on the satellite to terminate their contracts, which could affect our plans to replace an in-orbit satellite prior to the end of its service life.
 
 
Although we carry insurance on our satellites, there can be no assurance that insurance proceeds would be available to us in the event of operational degradation of any our satellites, or that proceeds that might be available will adequately cover our losses.

We procure insurance covering risks associated with our satellite operations through the commercial insurance markets. The cost and amount of coverage available to us, and the types of loss coverage we are able to obtain at reasonable costs, are affected by factors beyond our control. These include recent loss experience in insurance markets, risk assessments by insurance carriers and their advisors, the carriers’ cost of capital, general economic conditions, and failures of other satellites using components similar to ours or using similar launch vehicles. Insurance premiums for satellite risk of loss coverage have historically been quite volatile, as have the terms of coverage and exclusions for coverage, and there can be no assurance that future premiums we may be required to pay to obtain or maintain our insurance will not exceed our ability to pay those premiums.  Higher premiums on insurance policies will increase our costs. Should the future terms of launch and in-orbit insurance policies become less favorable than those currently available, this may result in limits on amounts of coverage that we can obtain or may prevent us from obtaining insurance at all.

Our insurance policies contain various exclusions from coverage based upon commercial realities and the types of coverage available in the market. For example, the anomalies we have experienced in the operation of GeoEye-1 are excluded from our present policies, and any costs we have experienced to mitigate such anomalies are not covered by insurance. If we experience other operational anomalies associated with our satellites that could degrade their performance or our ability to collect the amount and/or quality of imagery that we anticipate, we may not have access to proceeds to cover our added costs or loss of revenue.

Our 2015 Notes and 2016 Notes require us to obtain launch and in-orbit insurance for our satellites, which is costly and may be difficult or impossible to obtain.  A loss of a high-resolution satellite such as GeoEye-1 will require us to offer to repurchase our 2015 Notes and 2016 Notes, and we may lack sufficient insurance to cover that cost.

The terms of the 2015 Notes and 2016 Notes, or Indentures, require us to obtain launch and in-orbit insurance for any future satellites we construct and launch and require us to maintain specified levels of in-orbit operation insurance for GeoEye-1, to the extent that such coverage can be obtained at a premium that is not disproportionately high. With respect to GeoEye-1, we currently carry $260.3 million of in-orbit insurance, consisting of $195.8 million of in-orbit insurance, expiring December 1, 2012, and $64.5 million of in-orbit insurance in the event of the total loss of the satellite, expiring December 1, 2012.  We believe, that under current market conditions, the premiums for additional coverage would be disproportionately high. This insurance is not sufficient to cover the cost of a replacement high-resolution imagery satellite such as GeoEye-1 or to provide us with sufficient funds to repurchase all of the 2015 Notes and the 2016 Notes then outstanding in the event that, as a result of such a loss, we are required to make a mandatory offer to repurchase the 2015 Notes and the 2016 Notes. We will seek to obtain insurance coverage for GeoEye-2 and all future satellites as required under the 2015 Notes and the 2016 Notes. However, any failure to obtain required insurance could cause a default under the 2015 Notes and the 2016 Notes.

We have a substantial amount of indebtedness.
 
Our substantial indebtedness has important consequences. For example, it:

 
limits our ability to borrow additional funds;

 
limits our ability to pay dividends;

 
limits our flexibility in planning for, or reacting to, changes in our business and our industry;

 
increases our vulnerability to general adverse economic and industry conditions;

 
limits our ability to make strategic acquisitions;

 
requires us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, reducing the availability of cash flow to fund working capital, capital expenditures and other general corporate activities; and
 
 
places us at a competitive disadvantage compared to competitors that have less debt.
 
Interest costs related to our debt are substantial and, as a result, the demands on our cash resources are significant. Our ability to make payments on our debt and to fund operations and planned capital expenditures will depend on our future results of operations and ability to generate cash. Our future results of operations are, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
 
The terms of the Indentures will permit us and our subsidiaries to incur substantial additional indebtedness in the future, including secured indebtedness with first-priority liens or pari passu liens, which could further exacerbate the risks described above.
 
 
Servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may be unable to generate sufficient cash flow to service our debt obligations.
 
Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, political, financial, competitive, legislative, regulatory and other factors that are beyond our control.
 
For the year ended December 31, 2011, our interest expense totaled $53.1 million, before considering the impact of capitalized interest. We cannot assure you that our business will generate sufficient cash flow from operations to enable us to pay our indebtedness or to fund our other liquidity needs. If our cash flows are insufficient to allow us to make scheduled payments on our indebtedness, we may need to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, or that we will be able to refinance on commercially reasonable terms or that these measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient cash flow or refinance our debt on favorable terms, it could have a material adverse effect on our financial condition, the value of our outstanding debt and our ability to make any required cash payments under our indebtedness.
 
A lowering or withdrawal of the credit ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.

Our debt currently has a non-investment grade credit rating, and any credit rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes. Credit ratings are not recommendations to purchase, hold or sell the Notes. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure or marketing of the Notes. Any downgrade by a rating agency could decrease earnings and may result in higher borrowing costs.
 
Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing. If any credit rating initially assigned to the Notes is subsequently lowered or withdrawn for any reason, you may not be able to resell your Notes without a substantial discount.

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

U.S. Government Approvals.  Operation of our satellites requires licenses from, and is subject to regulation by, the DoC. The failure to obtain these licenses, or the revocation of one or more licenses (for example, as the result of our failure to comply with our licenses or applicable regulations), could adversely affect our ability to conduct our business. DoC regulations and license conditions provide that we must obtain prior DoC consent to certain changes in control over, or the holding of certain interests in, the Company. DoC regulations and license conditions also provide that the U.S. government may interrupt service or otherwise limit our ability to distribute satellite images to certain parties, including certain of our customers, to address national security or foreign policy concerns or because of the international obligations of the U.S. government. Actual or threatened interruptions or limitations on our service could adversely affect our ability to market our products. In addition, the DoC has the right to review and approve our agreements with foreign entities, including contracts with international customers for high-resolution imagery. We have received such approvals for the agreements in place with our existing international customers. However, such reviews could delay or prohibit us from executing new international agreements or renewals or extensions of our existing agreements, which could materially adversely affect our financial condition and results of operations. See “Government Regulation – United States – Department of Commerce Regulation.”

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

We require certain facility and personnel security clearances to perform our classified U.S. government related business. Security clearances are subject to regulations and requirements including the National Industrial Security Program Operating Manual, or NISPOM, which provides baseline standards for the protection of classified information released or disclosed to industry in connection with classified U.S. government contracts. Among other things, the NISPOM restricts the ability of non-U.S. (“foreign”) entities or individuals to hold foreign ownership, control, or influence, or FOCI, over a U.S. person performing classified work for the U.S. government, such that investments in the Company by a non-U.S. entity or individual could require prior review by the U.S. Department of Defense. The suspension or cancellation of our facility security clearances, or the inability to maintain personnel security clearances for our personnel to perform classified U.S. government contracts, could have a material adverse effect on our business and results of operations. See “Government Regulation – United States – Export Controls and Security Clearance Regulation.”
 
 
Our operation of satellites and ground stations also requires licenses from, and is subject to regulation by, the FCC. The FCC regulates the launch and operation of our satellites, the use of satellite spectrum and the licensing of our ground station terminals located within the United States. The FCC also regulates the ownership and control of its licensees, and must consent to certain changes in such ownership or control. We currently have all required FCC licenses necessary to operate our business as it is currently conducted and recently filed an application to modify the GeoEye-1 satellite FCC license to add the GeoEye-2 satellite and associated ground stations. However, these licenses have expiration dates, which are expected to occur while the satellites and ground systems are still in use. The FCC generally renews licenses in the ordinary course, but there can be no assurance that our licenses will be renewed at their expiration dates for full terms or without adverse conditions, or that our application to modify our GeoEye-1 satellite FCC license will be granted. Failure to renew or modify these licenses, obtain FCC authorization to launch and operate any new satellites or otherwise maintain our existing licenses (for example, as the result of our failure to comply with our licenses or applicable regulations) could have a material adverse effect on our ability to generate revenue and conduct our business as currently planned. See “Government Regulation – United States – Federal Communications Commission Regulation.”

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

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

For the year ended December 31, 2011, approximately 26 percent of our total revenues were derived from international sales. We intend to continue to pursue international contracts, and we expect to continue to derive substantial revenues from international sales of our products and services. International operations are subject to certain risks, such as:

 
Changes in domestic and foreign governmental regulations and licensing requirements;

 
Deterioration of relations between the United States and a particular foreign country;

 
Increases in tariffs and taxes and other trade barriers;

 
Changes in political and economic stability, including fluctuations in the value of foreign currencies, which may make payment in U.S. dollars, as provided for under our existing contracts, more expensive for foreign customers; and

 
Difficulties in obtaining or enforcing judgments in foreign jurisdictions.

These risks are beyond our control and could have a material adverse effect on our business, financial position and results of operations.

Government audits of our contracts could result in a decrease in our earnings and/or have a negative effect on our cash position following an audit adjustment.

Our government contracts are subject to cost audits, which may occur several years after the period to which the audit relates. If an audit identifies significant unallowable costs, we could incur a material charge to our earnings or reduction in our cash position.
 
 
None.

Item 2.
Properties

The properties used in our operations consist principally of satellite ground stations and terminals, production facilities and administrative and executive offices. The following table sets forth certain information about the location of each property used in our business:
 
 
Location
 
Sq. Ft.
 
Lease/Own
 
Purpose
Herndon, Virginia
    81,236  
Lease
 
Headquarters - satellite operations, information services and principal
executive offices
Thornton, Colorado
    42,106  
Own
 
Satellite operations and production services - back-up for GeoEye-1
St. Louis, Missouri
    21,060  
Lease
 
Production services
Mission, Kansas
    13,521  
Lease
 
MJ Harden aerial imagery and production services
Fairbanks, Alaska
    5,041  
Lease
 
Ground terminal station and IKONOS backup command and control
Point Barrow, Alaska
    620  
Lease
 
Ground terminal station
McLean, Virginia
    35,079  
Lease
 
GeoEye Analytics operations
Singapore, Asia
    436  
Lease
 
Sales, marketing and customer service activities
 
Item 3.
Legal Proceedings

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

Item 4.
Mine Safety Disclosures

Not applicable.

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities

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

As of December 31, 2011, we had approximately 530 holders of record of our common stock. All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at Depository Trust Company, and are therefore considered to be held of record by Cede & Co. as one stockholder.

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

   
2011
   
2010
 
   
High
   
Low
   
High
   
Low
 
4th Quarter
  $ 36.65     $ 18.25     $ 46.06     $ 39.86  
3rd Quarter
    41.65       27.22       40.48       30.80  
2nd Quarter
    41.57       33.17       32.98       26.10  
1st Quarter
    44.55       37.09       29.75       23.61  
 
We have 80,000 shares of 5 percent Series A Convertible Preferred Stock, or the Preferred Stock, authorized at $0.01 par value per share, of which 80,000 shares were issued and outstanding as of December 31, 2011, with a liquidation preference of $1,000 per share.

We have 50,000 shares of Series B Junior Participating Preferred Stock, authorized at no par value. There is no Series B Junior Participating Preferred Stock issued or outstanding as of December 31, 2011.

Dividends

We have never paid any cash dividends on our common stock, nor do we anticipate paying cash dividends on our common stock at any time in the foreseeable future. We are prohibited, with certain exceptions allowed under the indentures, from paying dividends under instruments governing our 2015 and 2016 Notes until the principal amount of all such notes has been repaid. These restrictions are more fully discussed in “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Cash Flows” below.

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, 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. The Company paid quarterly dividends of $1.0 million during each of the three month periods ended March 31, 2011; June 30, 2011; September 30, 2011; and December 31, 2011. As of December 31, 2011, we had $1.0 million of unpaid dividends. These dividends were paid on January 3, 2012.
 

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth, as of December 31, 2011, the number of securities outstanding under our equity compensation plans, the weighted average exercise price of such securities and the number of securities available for grant under these plans:

Plan Category
 
Securities to Be
 Issued Upon
Exercise of Outstanding
Options and Equity
Awards (1)
   
Weighted-Average
Exercise Price per
Share (2)
   
Securities Available
for Future Issuance
 
                   
Equity compensation plans approved by security holders
    1,852,564     $ 24.54       776,235  
Equity compensation plans not approved by security holders
    -       N/A       -  
Total
    1,852,564     $ 24.54       776,235  
 
 
(1)
Includes stock options, time-based nonvested stock, time-based director stock units, performance-based restricted stock units and performance-based nonvested stock awards.
 
 
(2)
Includes weighted-average exercise price of outstanding stock options only.
 
Item 6.
Selected Financial Data

The table below sets forth the selected historical consolidated financial and operating data for each of the five years ended December 31, 2011, which has been derived from the audited consolidated financial statements of GeoEye. The following consolidated financial information should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this Annual Report.

SELECTED CONSOLIDATED FINANCIAL DATA
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in thousands, except per share amounts)
 
Revenues
  $ 356,407     $ 330,345     $ 271,102     $ 146,659     $ 183,023  
                                         
Income before provision (benefit) for income taxes
  $ 89,925     $ 47,989     $ 14,488     $ 10,348     $ 68,005  
Net income
    56,612       24,637       32,061       26,615       28,470  
Net income available to common stockholders
    46,911       22,747       32,061       26,615       28,470  
                                         
Earnings per common share - basic
  $ 2.12     $ 1.05     $ 1.71     $ 1.48     $ 1.62  
Earnings per common share - diluted
    2.06       1.02       1.55       1.36       1.44  
                                         
Adjusted EBITDA
  $ 183,034     $ 176,928     $ 132,172     $ 39,707     $ 100,743  
Capital expenditures
    314,524       233,736       79,090       127,937       60,159  
                                         
Cash, cash equivalents and short-term investments
  $ 197,958     $ 333,357     $ 208,872     $ 110,546     $ 234,324  
Total assets
    1,334,585       1,269,085       947,207       794,605       853,090  
Long-term debt
    511,019       508,160       380,594       247,502       246,789  
Stockholders' equity
    507,287       443,243       279,955       230,404       193,209  
 
 
 
Non-GAAP Financial Measures
 
Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that represents net income before interest expense, net, provision for income taxes, depreciation and amortization expenses, 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 of 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 Year Ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in thousands)
 
Net income
  $ 56,612     $ 24,637     $ 32,061     $ 26,615     $ 28,470  
Adjustments:
                                       
Interest expense, net
    8,249       27,918       31,020       11,452       14,189  
Loss from early extinguishment of debt
    -       37       27,127       -       -  
Write-off of prepaid financing costs
    -       6,412       -       -       -  
Provision (benefit) for income taxes
    33,313       23,352       (17,573 )     (16,267 )     39,535  
Depreciation and amortization
    71,840       65,262       57,166       11,357       16,474  
Non-cash stock based compensation expense
    10,520       6,877       2,371       3,396       2,075  
Non-cash loss on inventory and investment impairments
    -       -       -       3,154       -  
Non-cash change in fair value of financial instrument
    -       24,466       -       -       -  
Gain from investments
    -       (3,200 )     -       -       -  
Goodwill impairment
    2,500       -       -       -       -  
Acquisition costs
    -       1,167       -       -       -  
Adjusted EBITDA
  $ 183,034     $ 176,928     $ 132,172     $ 39,707     $ 100,743  
 
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

This management discussion and analysis, or MD&A, is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. We organized our MD&A into the following sections:
 
 
·
Executive Summary — a brief description of our business.
 
·
Business and Industry Factors — a discussion of our plans to grow our business and industry trends that may impact our results.
 
·
Results of Operations — an analysis of our results of operations in our consolidated financial statements.
 
·
Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash, commitments and contingencies, and, the impact of inflation.
 
·
Critical Accounting Policies and Estimates — a discussion of key accounting policies requiring critical judgments and estimates.
 
·
Quantitative and Qualitative Disclosures about Market Risk — an analysis of the interest rate and foreign exchange exposure.
 
Executive Summary

GeoEye is a leading provider 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 our Earth imagery, geospatial expertise and enabling technology to support important missions around the globe. Widely recognized as a pioneer in high-resolution satellite imagery, we have evolved into a complete provider of geospatial intelligence solutions.

Business and Industry Factors

Business Strategy

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

 
Expand our satellite constellation.  With the NGA EnhancedView award, we will continue to develop and grow our constellation and add capacity to serve our customer base and expand our services. GeoEye-2 is on track to launch and go into operations in 2013. As of December 31, 2011, we have incurred total capitalized costs of $578.7 million for EnhancedView, primarily consisting of costs for the construction of GeoEye-2, including $63.0 million of capitalized interest. Our EnhancedView award from the NGA included a cost-share of up to $337.0 million to help fund the development of GeoEye-2.
 
 
Further expand our value-added products and service offerings.  We believe our industry-leading Earth imagery resolution and accuracy, high-scale image production capabilities, and expert personnel establish us as a leader in the field of imagery production and enhancement. We have classified facilities and cleared staff certified to process imagery from multiple Earth imagery providers to meet the needs of our government customers.  Our acquisition of SPADAC, Inc. expanded our expertise, tools, and tradecraft in the area of advanced geospatial analysis.  We believe these and continued investments will enable our customers to gain new insights that help them better support their missions.

 
Further commercialize our industry-leading high-resolution Earth imagery.  We plan to develop new platforms and distribution technologies to make our Earth imagery more accessible to our current and potential customers. For example, our EyeQ Web services platform provides access to imagery on a subscription basis, rather than selling imagery pixels on a square kilometer basis. By managing Earth imagery in the cloud, customers can save money and more easily share insights with a broader audience.

 
Expand our existing, geographically diverse customer base.  We will continue to build on our existing relationships with our customers and our international resellers. We have a strong global distribution network that includes regional affiliates that have invested in ground stations and a large number of global resellers. These partners offer a strong route to market for our Earth imagery and value-added products and services.

Industry Factors

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

 
We expect that due to geopolitical uncertainty, global terrorist activity, changing climate trends and large natural disasters, there will be continued demand from both U.S. and international government agencies for up-to-date and accurate digital imagery and digital mapping databases. Defense personnel may be called upon to deploy to support actions in hostile environments or to respond to natural disasters, and combat mission planners will require the latest geospatial information. Our customers in countries around the world will continue to need to monitor their borders and the other areas of political and economic interest.

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

 
·
GeoEye is often the first to deliver commercial satellite imagery to the U.S. government, foreign governments, commercial customers and humanitarian agencies. In 2011, GeoEye supplied imagery for humanitarian support and emergency relief support for the earthquake and tsunami in Japan and the devastation of the Fukushima nuclear facility; the massive floods in Queensland, Australia; the catastrophic landslides in Brazil; and tornadoes in Tuscaloosa, Alabama and Joplin, Missouri. Commercial satellite imagery was put to immediate use following the January 2010 earthquake in Haiti. In March 2010, the entire world saw the practical application of commercial satellite imagery for understanding the extent and scope of the volcanic eruption in Iceland and the effect of its ash cloud on Western Europe. Also, in April 2010, GeoEye began supplying the U.S. Coast Guard with millions of kilometers of imagery to understand the scope of the man-made oil spill disaster in the Gulf of Mexico. GeoEye continued to supply the NGA and the U.S. Coast Guard with current imagery throughout the summer so that federal agencies could make better response decisions as the crisis evolved.
 
 
Commercial demand for satellite imagery and geospatial expertise continues to grow. We expect the commercial market for imagery better than three-meter ground resolution from high-resolution imaging satellites to grow over the next few years. We believe that growth will be fueled in part by the broad awareness created by the online mapping search engines such as Google EarthTM and Microsoft Virtual Earth TM. Consumers are beginning to utilize location-based technologies for everything from navigation to social networking. The convergence of imagery with GPS and personal navigation devices, combined with inexpensive access to broadband communications networks, appears to have generated a development of new commercial applications incorporating Earth imagery.

 
Our technology is well suited for infrastructure project management. Both satellite and aerial imagery, along with other location-based enabling technologies, can help the U.S., other countries and large commercial enterprises achieve their infrastructure goals more efficiently and cost effectively, since every infrastructure project has a reference to a physical location on the surface of the globe. According to an industry trade group, a significant portion of the new stimulus programs proposed by the current U.S. administration will require geospatial data or services, particularly in the areas of design and planning for infrastructure projects, wildfire mapping, environmental infrastructure projects, surveying and charting and airport improvements.

 
Rapid advancements in IT infrastructure capabilities such as cloud computing, mobile communications and broadband may have dramatic effects on the industry. While digital information, including satellite imagery and products, is easily distributed to customers over the Internet, there is increasing customer interest in having others host imagery for them while adding value to it in a service-oriented environment. As a result, we anticipate growth in the increasing use of cloud computing where data and applications reside in the cloud rather than on company servers or hard drives. The NGA’s EnhancedView SLA is an example of how agencies may utilize geospatial technology rather than just buying imagery pixels by the square kilometer.

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

 
Due to the federal budgetary problems arising from the economic recession, the U.S. government is considering broad reductions in expenditures including possible reductions to expenditures on commercial satellite imagery.  The U.S. government drives a substantial portion of commercial imaging demand and our revenues, including EnhancedView.  This program is subject to annual funding appropriations.  At this time, the U.S. government’s ongoing budget process is underway and the amounts of any funding reductions to EnhancedView are unknown.  In addition, challenging economic conditions at the international, state and local level can negatively impact our ability to expand in these areas, particularly in commercial markets.
 
 
 
The U.S. government may build and launch its own classified satellite imaging program and produce imagery similar to or better than that currently provided by commercial data providers. While the current and last two government administrations in the U.S. developed commercial remote sensing policies that are favorable for the commercial satellite imagery industry, the intelligence community may make efforts to fund U.S. government-owned satellite systems that could compete with the commercial satellite imagery data providers. The current economic demands on the U.S. government resources and the inherent time it takes to design and deploy new satellite imagery systems may mitigate any near-term impact should the government decide to develop competing assets. We continue to monitor for any change in the U.S. government’s policy toward commercial imagery providers.

 
More countries are increasingly interested in developing and launching their own satellite imagery systems. According to a EuroConsult study released in January 2011, it is possible that over 30 high-resolution satellite imagery systems could be launched and in operation across all regions in the 2013 to 2018 timeframe. While none of these imaging systems can currently match the resolution and accuracy of U.S. commercial systems, several countries are planning to launch systems with capabilities similar to our imagery assets. The development and launch of such systems does involve significant risk and uncertainty, including technological, launch and financing risk. We are mindful of this trend as we consider how best to grow our business.

 
The U.S. government is increasingly using other sensors such as unmanned aerial vehicles for more persistent surveillance. While these systems are mainly used for tactical intelligence collection and tactical and targeted munitions delivery, they can provide commanders with visibility over a smaller area of interest on a more sustained basis. We believe that our imagery and products will remain an important element in fulfilling the U.S. government’s broad imagery needs in both tactical and non-mission critical situations.

 
While not new, the U.S. government continues to place onerous restrictions on the export of remote sensing satellites and associated ground station components to foreign persons. Many commentators believe that ITAR, has, in effect, hampered U.S. competitiveness overseas. Such strict government licensing restricts exchange of technical data and export of commercial remote sensing hardware, such as ground stations, thereby encouraging development of foreign manufacturing capability.


Results of Operations

Comparison of the Results of Operations for the Years Ended December 31, 2011 and 2010

   
For the Year Ended December 31,
       
   
2011
   
2010
   
Change Between 2011 and 2010
 
   
(in thousands, except percentages)
 
   
Amount
   
% of Revenue
   
Amount
   
% of Revenue
   
Amount
   
%
 
Revenues
  $ 356,407       100.0 %   $ 330,345       100.0 %   $ 26,062       7.9 %
                                                 
Operating expenses:
                                               
Direct costs of revenue (exclusive of depreciation and amortization)
    122,972       34.5       104,010       31.5       18,962       18.2  
Depreciation and amortization
    71,840       20.2       65,262       19.8       6,578       10.1  
Selling, general and administrative
    60,921       17.1       57,451       17.4       3,470       6.0  
Goodwill impairment
    2,500       0.7       -       0.0       2,500       100.0  
Total operating expenses
    258,233       72.5       226,723       68.6       31,510       13.9  
Income from operations
    98,174       27.5       103,622       31.4       (5,448 )     (5.3 )
Interest expense, net
    (8,249 )     (2.3 )     (27,918 )     (8.5 )     19,669       70.5  
Other non-operating expense
    -       0.0       (24,466 )     (7.4 )     24,466       100.0  
Gain from investments
    -       0.0       3,200       1.0       (3,200 )     (100.0 )
Loss from early extinguishment of debt
    -       0.0       (37 )     (0.0 )     37       100.0  
Write-off of prepaid financing costs
    -       0.0       (6,412 )     (1.9 )     6,412       100.0  
Income before provision for income taxes
    89,925       25.2       47,989       14.5       41,936       87.4  
Provision for income taxes
    (33,313 )     (9.3 )     (23,352 )     (7.1 )     (9,961 )     (42.7 )
Net income
    56,612       15.9       24,637       7.5       31,975       129.8  
Preferred stock dividends
    (4,000 )     (1.1 )     (1,107 )     (0.3 )     (2,893 )     (261.3 )
Net income less preferred stock dividends
    52,612       14.8       23,530       7.1       29,082       123.6  
Income allocated to participating securities
    (5,701 )     (1.6 )     (783 )     (0.2 )     (4,918 )     (628.1 )
Net income available to common stockholders
  $ 46,911       13.2     $ 22,747       6.9     $ 24,164       106.2  
 
Percentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments. The totals shown above may not appear to sum due to rounding.

Revenues
 
   
For the Year Ended December 31,
 
Change Between 2011
and 2010
 
 
 
2011
 
2010
   
(in thousands, except percentages)
 
Revenues
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Imagery
  $ 256,280       71.9 %   $ 249,698       75.6 %   $ 6,582       2.6 %
NextView cost-share
    24,153       6.8       24,153       7.3       -       -  
Production and other services
    75,974       21.3       56,494       17.1       19,480       34.5  
Total revenues
  $ 356,407       100.0     $ 330,345       100.0     $ 26,062       7.9  
 
Imagery revenues primarily include imagery sales, affiliate access fees and operations and maintenance fees. NextView cost-share revenues are 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, GeoEye Analytics and EyeQ, our Web-based dissemination services.

Imagery revenues increased primarily due to an increased level of deliveries to domestic commercial customers and international resellers.  Production and other services revenues increased in 2011, compared to 2010, primarily due to the inclusion of GeoEye Analytics, partially offset by a decline in our value-added production services over last year.

Total domestic and international revenues were as follows:

   
For the Year Ended December 31,
  Change Between 2011  
 
 
2011
 
2010
 
and 2010
 
   
(in thousands, except percentages)
 
Revenues
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Domestic
  $ 263,828       74.0 %   $ 244,826       74.1 %   $ 19,002       7.8 %
International
    92,579       26.0       85,519       25.9       7,060       8.3  
Total revenues
  $ 356,407       100.0     $ 330,345       100.0     $ 26,062       7.9  
 
 
Domestic revenues include those from the 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 and EyeQ, our 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, commercial imagery sales and sales of ground stations.

Domestic revenues increased in 2011, compared to 2010, primarily due to the inclusion of revenues from the sale of GeoEye Analytics products and services in 2011, and increased deliveries to commercial customers.

International revenues increased in 2011, compared to 2010, primarily due to an increase in imagery deliveries to international resellers.

Operating Expenses

Direct Costs of Revenue

   
For the Year Ended December 31,
  Change Between 2011  
 
 
2011
 
2010
 
and 2010
 
   
(in thousands, except percentages)
 
Direct Costs of Revenue
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Labor and overhead
  $ 77,102       21.6 %   $ 53,537       16.2 %   $ 23,565       44.0 %
Subcontractor
    25,080       7.0       29,541       8.9       (4,461 )     (15.1 )
Satellite insurance
    6,171       1.7       6,202       1.9       (31 )     (0.5 )
Other direct costs
    14,619       4.1       14,730       4.5       (111 )     (0.8 )
Total direct costs of revenue
  $ 122,972       34.5     $ 104,010       31.5     $ 18,962       18.2  
 
Direct costs of revenue include the costs of operating our satellites and related ground systems, labor and ongoing costs related to our operations, maintenance and production 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.

Labor and overhead costs increased in 2011, compared to 2010, primarily due to the inclusion of GeoEye Analytics. Subcontractor expenses decreased during 2011, compared to 2010, primarily due to a lower level of engineering and consulting costs incurred in 2011.

Depreciation and Amortization
 
   
For the Year Ended December 31,
  Change Between 2011  
 
 
2011
 
2010
 
and 2010
 
   
(in thousands, except percentages)
 
Depreciation and Amortization
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Depreciation
  $ 67,424       18.9 %   $ 62,620       19.0 %   $ 4,804       7.7 %
Amortization
    4,416       1.2       2,642       0.8       1,774       67.1  
Total depreciation and amortization
  $ 71,840       20.2     $ 65,262       19.8     $ 6,578       10.1  
 
During the Company’s annual evaluation of intangibles and long-lived assets, the implied fair value of certain identified assets related to our aerial imagery collection services, was lower than carrying value. This resulted in a $1.6 million adjustment, $0.7 million is included in depreciation and $0.9 million is included in amortization for the year ended December 31, 2011.

The increase in depreciation is primarily due to the deployment of several EyeQ system releases and related hardware, the inclusion of GeoEye Analytics, our move to the new Herndon headquarters in 2011 and the asset impairment noted above.

The increase in amortization expense is primarily associated with the inclusion of GeoEye Analytics intangibles and the asset impairment noted above, partially offset by Space Imaging intangible assets becoming fully amortized early in 2011.
 

Selling, General and Administrative Expenses

   
For the Year Ended December 31,
  Change Between 2011  
 
 
2011
 
2010
 
and 2010
 
   
(in thousands, except percentages)
 
Selling, General and Administrative Expenses
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Payroll, commissions, and related costs
  $ 25,593       7.2 %   $ 25,431       7.7 %   $ 162       0.6 %
Stock-based compensation
    7,075       2.0       5,276       1.6       1,799       34.1  
Professional fees
    10,056       2.8       12,528       3.8       (2,472 )     (19.7 )
Research and development
    2,690       0.8       1,647       0.5       1,043       63.3  
Other
    15,507       4.4       12,569       3.8       2,938       23.4  
Total selling, general and administrative expenses
  $ 60,921       17.1     $ 57,451       17.4     $ 3,470       6.0  
 
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, including commissions. 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 in 2011, compared to 2010, primarily as a result of increased stock-based compensation expense, as well as other selling, general and administrative expenses related to facilities, computer and telecommunication costs incurred in connection with the move to our new corporate headquarters during the second quarter of 2011.

Professional fees decreased in 2011, compared to 2010, primarily due to consulting fees incurred in 2010 associated with the EnhancedView bid that completed in March 2010 and other non-recurring 2010 accounting fees incurred with the acquisition of SPADAC in the fourth quarter of 2010 that were not incurred in 2011.
 
Goodwill Impairment

The loss from goodwill impairment for the year ended December 31, 2011 was $2.5 million for the excess of the carrying value of goodwill over the implied fair value of goodwill for GeoEye Analytics resulting from our annual impairment test. This non-cash charge reduces goodwill recorded in connection with the acquisition we made in 2010 and does not impact our overall business operations, including cash flows and debt covenants.

Interest Expense, net

   
For the Year Ended December 31,
  Change Between 2011  
 
 
2011
 
2010
 
and 2010
 
   
(in thousands, except percentages)
 
Interest Expense, Net
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Interest expense
  $ 53,138       14.9 %   $ 44,902       13.6 %   $ 8,236       18.3 %
Capitalized interest
    (44,600 )     (12.5 )     (16,580 )     (5.0 )     28,020       169.0  
Interest income
    (289 )     (0.1 )     (404 )     (0.1 )     (115 )     (28.5 )
Total interest expense, net
  $ 8,249       2.3     $ 27,918       8.5     $ (19,669 )     (70.5 )
 
Interest expense, net, includes interest expense on our 2015 and 2016 Notes, amortization of prepaid financing costs and amortization of debt discount offset by capitalized interest and interest income.

Interest expense increased during 2011, compared to 2010, primarily due to the issuance of $125 million senior notes in October 2010. The increase in capitalized interest during 2011, as compared to 2010, was due to the increased construction costs of the GeoEye-2 satellite during 2011, upon which interest is applied.

Other Non-Operating Expense

We recorded other non-operating expense of $24.5 million in 2010 related to the fair value measurement of the Preferred Stock Commitment associated with the Cerberus Stock Purchase Agreement. The Preferred Stock Commitment fair value was adjusted 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.

Gain from Investments

In connection with the acquisition of SPADAC in 2010, we recognized a gain of $2.5 million resulting from the increase in the estimated fair value of our non-controlling interest in SPADAC prior to the acquisition. During the third quarter of 2010, we liquidated our holdings in another cost-method investment and recorded a gain of $0.7 million.

Write-off of Prepaid Financing Costs

In 2010 we wrote-off unamortized prepaid financing costs of $6.4 million, including a $2.0 million non-refundable commitment fee, related to costs incurred on the debt financing under the Notes Purchase Agreement with Cerberus. In August 2010, the NGA awarded the Company the EnhancedView contract without a letter-of-credit requirement, and, as a result, the debt facility was cancelled, and these financing costs were expensed.
 
 
Provision for Income Taxes

We recorded income tax expense of $33.3 million and $23.4 million for 2011 and 2010, respectively. Tax provisions were calculated using our annual effective tax rate of approximately 37.0 percent and 48.7 percent for 2011 and 2010, respectively. The decrease in our annual effective tax rate is primarily due to the tax benefit of the research and development credit, offset by certain expenses that are not deductible for tax purposes, mainly the non-recurring, non-deductible book charges related to the goodwill impairment adjustment in 2011 and the fair value adjustment of the preferred stock commitment in 2010.

The total federal and state net operating loss carryforwards are approximately $276.2 million and $150.0 million as of 2011 and 2010, respectively. The net operating loss carryforwards will expire between tax years 2024 and 2031 and are expected to be fully realized.  We had tax credit carryforwards of approximately $10.1 million, of which $8.8 million expire on various dates through 2026.

The statutes of limitation for income tax returns in the U.S. federal jurisdiction and various state jurisdictions for tax years 2006 through 2010 have not expired; thus, these years remain subject to examination by the IRS and state jurisdictions.  Significant state jurisdictions that remain subject to examination include Colorado and Missouri for tax years 2006 through 2010 and Virginia for tax years 2007 through 2010.  For tax years for which we are no longer subject to federal, state and local tax examinations by tax authorities, the tax attribute carryforwards generated from these years may still be adjusted upon examination by tax authorities.

Comparison of the Results of Operations for the Years Ended December 31, 2010 and 2009
 
   
For the Year Ended December 31,
    Change Between 2010  
   
2010
   
2009
   
and 2009
 
   
(in thousands, except percentages)
 
   
Amount
   
% of Revenue
   
Amount
   
% of Revenue
   
Amount
   
%
 
Revenues
  $ 330,345       100.0 %   $ 271,102       100.0 %   $ 59,243       21.9 %
                                                 
Operating expenses:
                                               
Direct costs of revenue (exclusive of depreciation and amortization)
    104,010       31.5       94,693       34.9       9,317       9.8  
Depreciation and amortization
    65,262       19.8       57,166       21.1       8,096       14.2  
Selling, general and administrative
    57,451       17.4       46,608       17.2       10,843       23.3  
Total operating expenses
    226,723       68.6       198,467       73.2       28,256       14.2  
Income from operations
    103,622       31.4       72,635       26.8       30,987       42.7  
Interest expense, net
    (27,918 )     (8.5 )     (31,020 )     (11.4 )     3,102       10.0  
Other non-operating expense
    (24,466 )     (7.4 )     -       -       (24,466 )     (100.0 )
Gain from investments
    3,200       1.0       -       -       3,200       100.0  
Loss from early extinguishment of debt
    (37 )     (0.0 )     (27,127 )     (10.0 )     27,090       99.9  
Write-off of prepaid financing costs
    (6,412 )     (1.9 )     -       -       (6,412 )     (100.0 )
Income before (provision) benefit for income taxes
    47,989       14.5       14,488       5.3       33,501       231.2  
(Provision) benefit for income taxes
    (23,352 )     (7.1 )     17,573       6.5       (40,925 )     (232.9 )
Net income
    24,637       7.5       32,061       11.8       (7,424 )     (23.2 )
Preferred stock dividends
    (1,107 )     (0.3 )     -       -       (1,107 )     (100.0 )
Net income less preferred stock dividends
    23,530       7.1       32,061       11.8       (8,531 )     (26.6 )
Income allocated to participating securities
    (783 )     (0.2 )     -       -       (783 )     (100.0 )
Net income available to common stockholders
  $ 22,747       6.9     $ 32,061       11.8     $ (9,314 )     (29.1 )

Revenues

   
For the Year Ended December 31,
 
Change Between 2010
and 2009
 
 
 
2010
 
2009
   
(in thousands, except percentages)
 
Revenues
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Imagery
  $ 249,698       75.6 %   $ 206,417       76.1 %   $ 43,281       21.0 %
NextView cost-share
    24,153       7.3       21,062       7.8       3,091       14.7  
Production and other services
    56,494       17.1       43,623       16.1       12,871       29.5  
Total revenues
  $ 330,345       100.0     $ 271,102       100.0     $ 59,243       21.9  

Imagery revenues increased primarily due to the increased level of deliveries to the NGA and other regional affiliate and domestic commercial customers using GeoEye-1 for the full twelve months of 2010, as compared to ten-and-a-half months in 2009 as a result of commencement of GeoEye-1 operations in February 2009 and revenues related to the delivery of customer imagery system upgrades in 2010. NextView cost-share revenues increased in 2010, as compared to 2009, primarily due to revenue being recognized for the full twelve months of 2010, as compared to ten-and-one-half months in 2009 as a result of commencement of GeoEye-1 operations in February 2009.
 
 
Production and other services revenues increased in 2010, compared to 2009, primarily due to an increase in our value-added production services resulting from higher customer demand and system process improvements and enhancements and resulting from the commencement of our Web-based dissemination services in 2010.

Total domestic and international revenues were as follows:

   
For the Year Ended December 31,
  Change Between 2010  
 
 
2010
 
2009
 
and 2009
 
   
(in thousands, except percentages)
 
Revenues
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Domestic
  $ 244,826       74.1 %   $ 196,722       72.6 %   $ 48,104       24.5 %
International
    85,519       25.9       74,380       27.4       11,139       15.0  
Total revenues
  $ 330,345       100.0     $ 271,102       100.0     $ 59,243       21.9  

Domestic revenues increased in 2010, compared to 2009, primarily due to the increase in imagery provided by GeoEye-1 under the NextView and EnhancedView SLA agreements for a full twelve months of 2010 compared to ten-and-a-half months in 2009, and an increase in deliveries to commercial customers in 2010. Additionally, there was an increase in production services due to higher customer demand and system process improvements and enhancements.

International revenues increased in 2010, compared to 2009, primarily due to an increase from the recognition of revenues from ground system upgrades and an increase in deliveries to regional affiliate customers, including the delivery of a customer imagery system upgrade.

Operating Expenses

Direct Costs of Revenue

   
For the Year Ended December 31,
  Change Between 2010  
 
 
2010
 
2009
 
and 2009
 
   
(in thousands, except percentages)
 
Direct Costs of Revenue
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Labor and overhead
  $ 53,537       16.2 %   $ 48,924       18.0 %   $ 4,613       9.4 %
Subcontractor
    29,541       8.9       27,030       10.0       2,511       9.3  
Satellite insurance
    6,202       1.9       8,235       3.0       (2,033 )     (24.7 )
Other direct costs
    14,730       4.5       10,504       3.9       4,226       40.2  
Total direct costs of revenue
  $ 104,010       31.5     $ 94,693       34.9     $ 9,317       9.8  

Labor and overhead costs increased in 2010, compared to 2009, primarily due to the increase in our value-added production services resulting from higher customer demand.

Subcontractor expenses increased during 2010, compared to 2009, primarily due to 2010 costs incurred related to the GeoEye-1 satellite irregularity that occurred in the end of 2009, offset by a decrease related to one-time projects and contracts in 2009 not continued in 2010.

Satellite insurance decreased during 2010, compared to 2009, due to the reduction in insurance premiums.

Other direct costs of revenue increased during 2010, compared to 2009, primarily due to the costs related to the delivery of imagery system upgrades sold in the second and third quarters of 2010 and the recognition of costs of ground system upgrades that are being recognized over the combined delivery term of the service in 2010.
 

Depreciation and Amortization

   
For the Year Ended December 31,
  Change Between 2010  
 
 
2010
 
2009
 
and 2009
 
   
(in thousands, except percentages)
 
Depreciation and Amortization
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Depreciation
  $ 62,620       19.0 %   $ 54,516       20.1 %   $ 8,104       14.9 %
Amortization
    2,642       0.8       2,650       1.0       (8 )     (0.3 )
Total depreciation and amortization
  $ 65,262       19.8     $ 57,166       21.1     $ 8,096       14.2  
 
Depreciation increased during 2010, compared to 2009, primarily due to the full twelve months of depreciation of GeoEye-1 in 2010, compared to ten-and-a-half months of depreciation in 2009 as a result of commencement of operations of the GeoEye-1 satellite in February 2009.

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

Selling, General and Administrative Expenses
 
   
For the Year Ended December 31,
  Change Between 2010  
 
 
2010
 
2009
 
and 2009
 
   
(in thousands, except percentages)
 
Selling, General and Administrative Expenses
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Payroll, commissions, and related costs
  $ 25,431       7.7 %   $ 22,235       8.2 %   $ 3,196       14.4 %
Stock-based compensation
    5,276       1.6       2,072       0.8       3,204       154.6  
Professional fees
    12,528       3.8       13,450       5.0       (922 )     (6.9 )
Research and development
    1,647       0.5       1,399       0.5       248       17.7  
Other
    12,569       3.8       7,452       2.7       5,117       68.7  
Total selling, general and administrative expenses
  $ 57,451       17.4     $ 46,608       17.2     $ 10,843       23.3  
 
Total selling, general and administrative expenses increased in 2010, compared to 2009, primarily as a result of an increase in stock-based compensation and bonus expense, as well as headcount growth and business development costs related to our sales and marketing efforts to expand our product and service offerings to current and new customers. We also incurred transaction-related expenses in connection with the acquisition of SPADAC in the fourth quarter of 2010. Additionally, we have incurred rental-related costs in the fourth quarter for our new corporate headquarters in Herndon, Virginia to accommodate our growth and to consolidate our operations.

Interest Expense, net

   
For the Year Ended December 31,
  Change Between 2010  
 
 
2010
 
2009
 
and 2009
 
   
(in thousands, except percentages)
 
Interest Expense, Net
 
Amount
   
% of Revenue
 
Amount
   
% of Revenue
 
Amount
   
%
 
Interest expense
  $ 44,902       13.6 %   $ 36,183       13.3 %   $ 8,719       24.1 %
Capitalized interest
    (16,580 )     (5.0 )     (4,771 )     (1.8 )     11,809       247.5  
Interest income
    (404 )     (0.1 )     (392 )     (0.1 )     12       3.1  
Total interest expense, net
  $ 27,918       8.5     $ 31,020       11.4     $ (3,102 )     (10.0 )

Interest expense increased during 2010, compared to 2009, primarily due to an increase in our average outstanding long-term debt. Partially offsetting this increase was a reduction in our cost of capital from a floating rate of at least 12 percent related to the 2012 Notes compared to a fixed coupon rate of 9.625 percent and 8.625 percent related to the 2015 and 2016 Notes, respectively. The increase in capitalized interest during 2010 as compared to 2009 was due to the increased construction costs of the GeoEye-2 satellite during 2010, on which interest is applied.

Other Non-Operating Expense

We recorded other non-operating expense of $24.5 million in 2010 related to the fair value measurement of the Preferred Stock Commitment associated with the Cerberus Stock Purchase Agreement. The Preferred Stock Commitment fair value was marked to market and reflected as an adjustment to earnings and added to additional paid-in-capital when Cerberus purchased the Preferred Stock on September 22, 2010.

Gain from Investments

In connection with the acquisition of SPADAC in 2010, we recognized a gain of $2.5 million resulting from the increase in the estimated fair value of our non-controlling interest in SPADAC prior to the acquisition. During the third quarter of 2010, we liquidated our holdings in another cost-method investment and recorded a gain of $0.7 million.

 
Loss from Early Extinguishment of Debt

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

Write-off of Prepaid Financing Costs

In 2010, we wrote-off unamortized prepaid financing costs of $6.4 million, including a $2.0 million non-refundable commitment fee, related to costs incurred on the debt financing under the Notes Purchase Agreement with Cerberus. In August 2010, the NGA awarded the Company the EnhancedView contract without a letter-of-credit requirement, and as a result, the debt facility was cancelled, and these financing costs were expensed.

Provision for Income Taxes

We recorded income tax expense of $23.4 million and income tax benefit of $17.6 million for 2010 and 2009, respectively. Tax provisions were calculated using our annual effective tax rate of approximately 48.7 percent and 38.8 percent for 2010 and 2009, respectively. The increase in our annual effective tax rate is primarily due to the non-recurring, non-deductible book charges related to the fair value adjustment of the preferred stock commitment partially offset by the tax benefit of the research and development credit. Our 2009 income tax benefit is mainly related to restored net operating losses resulting from an IRS ruling approved in October 2009.

The total federal and state net operating loss carryforwards are approximately $150.0 million and $70.3 million as of 2010 and 2009, respectively. The net operating loss carryforwards will expire between tax years 2024 and 2030.  We had tax credit carryforwards of approximately $7.4 million, of which $6.5 million expires on various dates through 2026.

The statutes of limitation for income tax returns in the U.S. federal jurisdiction and various state jurisdictions for tax years 2006 through 2009 have not expired; thus, these years remain subject to examination by the IRS and state jurisdictions.  Significant state jurisdictions that remain subject to examination include Colorado and Missouri for tax years 2006 through 2009 and Virginia for tax years 2007 through 2009.  For tax years for which we are no longer subject to federal, state and local tax examinations by tax authorities, the tax attribute carryforwards generated from these years may still be adjusted upon examination by tax authorities.

Liquidity and Capital Resources
 
December 31,