NOTE 4. Business Acquisitions

GeoEye

On January 31, 2013, DigitalGlobe completed its acquisition of 100% of the outstanding stock of GeoEye, Inc. DigitalGlobe is considered the acquirer and has accounted for the transaction under the acquisition method in accordance with U.S. GAAP. The acquisition of GeoEye broadened the Company’s service offerings, enabled the Company to optimize its satellite orbits and collection of imagery, strengthened its production and analytics capabilities, increased the scale of its existing operations and diversified its customer and product mix.

GeoEye common stockholders received, in the aggregate, approximately 25.9 million shares of DigitalGlobe’s common stock and $92.8 million in cash in exchange for their shares of GeoEye common stock. In addition, each share of GeoEye’s Series A Convertible Preferred Stock was converted into one newly-designated share of Series A Convertible Preferred Stock of DigitalGlobe and $4.10 in cash for each share of GeoEye common stock into which such share of GeoEye Series A Convertible Preferred Stock was convertible. As a result, DigitalGlobe issued 80,000 shares of Series A Convertible Preferred Stock and paid approximately $11.0 million in cash to GeoEye’s Series A Convertible Preferred stockholder. The Company also assumed the awards outstanding under GeoEye’s equity incentive plans. Immediately following the acquisition, the former GeoEye stockholders owned approximately 35% of DigitalGlobe’s common stock. The Company incurred total acquisition costs of $33.5 million related to the acquisition of GeoEye of which $20.6 million was incurred during the nine months ended September 30, 2013.

In accordance with the terms of the GeoEye Senior Secured Notes agreements, the Company redeemed the outstanding balances of GeoEye’s $400.0 million 9.625% Senior Secured Notes due 2015 and $125.0 million 8.625% Senior Secured Notes due 2016 and paid fees and expenses associated with the redemption totaling approximately $55.3 million and accrued interest of $16.4 million.

The total purchase price for the acquisition of GeoEye was as follows:

(in millions)	Amount
Net cash received	$	(76.2	)
Cash due to equity holders	0.8
DigitalGlobe common stock	723.8
DigitalGlobe Series A convertible preferred stock	114.0
DigitalGlobe equity awards issued to replace GeoEye equity awards	21.6
Long-term debt issued to redeem GeoEye’s long-term debt including early termination penalties and accrued interest	596.7
Aggregate purchase price	$	1,380.7

Pursuant to the acquisition method of accounting, the fair value of each DigitalGlobe common share issued was $27.97, which was the Company’s closing share price on January 31, 2013.

The following represents the classifications of the cash flows received, which are included within the Unaudited Condensed Consolidated Statements of Cash Flows:

(in millions)	Amount
Investing activities:
Acquisition of business (1)	$	76.2
Redemption of GeoEye debt (2)	(596.7		)
Total cash used in acquisition of business	$	(520.5	)

(1) Includes $103.8 million of cash paid to GeoEye common and convertible preferred stockholders, offset by cash acquired of $180.0 million.

(2) Includes cash paid to settle GeoEye’s outstanding long-term debt at the acquisition date, including principal of $525.0 million and accrued interest of $16.4 million that was replaced by new debt (See Note 8). As a result of the discharge and redemption of GeoEye’s debt, DigitalGlobe incurred early termination penalties of approximately $55.3 million.

The Company has recognized the assets and liabilities of GeoEye based on its preliminary estimates of their acquisition date fair values. The preliminary fair value of GeoEye’s property and equipment was estimated using a market approach. A market approach uses prices and other relevant information generated by market transactions involving comparable assets. The preliminary fair value of GeoEye’s satellites was estimated using a replacement cost approach and was based on the amount that would be required to replace the service capacity of the assets. Under the replacement cost approach, the Company estimated the cost of a similar satellite having the nearest equivalent utility to the satellite being valued. The Company then adjusted this value, as necessary, for physical depreciation, functional obsolescence or economic obsolescence. As of the acquisition date, identifiable intangible assets, excluding technology, were measured at fair value primarily using various “income approaches,” which required a forecast of expected future cash flows, either for the use of a relief-from royalty method or a multi-period excess earnings method. Technology was valued using a cost approach.

The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. DigitalGlobe expects to complete its final determinations no later than January 31, 2014. The final determinations may be significantly different than those reflected in the Company’s Unaudited Condensed Consolidated Financial Statements as of September 30, 2013. Based on the Company’s preliminary estimates, the aggregate purchase price exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities by $441.1 million, which amount has been recognized as goodwill. None of the goodwill associated with this acquisition is deductible for income tax purposes.

The following is DigitalGlobe’s preliminary assignment of the aggregate consideration based on currently available information.

(in millions)	September 30, 2013
Current assets, net of cash acquired	$	90.1
Property, plant and equipment, including satellite constellation	988.8
Identifiable intangible assets:
Technology	26.0
Customer relationships	10.0
Trademarks	5.0
FCC licenses and other	2.5
Other noncurrent assets	4.0
Current liabilities	(50.2		)
Deferred revenue	(12.1		)
Long-term deferred tax liability, net	(124.5		)
Fair value of acquired assets and assumed liabilities	939.6
Goodwill	441.1
Aggregate purchase price	$	1,380.7

During the three-month period ended September 30, 2013, the Company increased goodwill related to the acquisition of GeoEye by $2.3 million primarily relating to a reduction in the preliminary value of acquired property, plant and equipment and an increase in the value of the Convertible Preferred Series A shares issued in conjunction with the acquisition. In addition, during the three-month period ended June 30, 2013 the Company also recognized an increase in goodwill of $1.2 million primarily relating to a reduction in the preliminary value of an acquired investment and buildings. which was partially offset by an increase in the value assigned to the acquired customer relationship intangible asset.

The results of GeoEye’s operations have been included in the Company’s Unaudited Condensed Consolidated Results of Operations beginning as of the acquisition date of January 31, 2013. During the period February 1, 2013 to September 30, 2013, the Company recognized an incremental $83.6 million of revenue and $118.5 million of net loss from continuing operations attributable to GeoEye’s operations since the date of the acquisition, which includes restructuring and integration costs. The following unaudited pro forma financial information presents the combined results of DigitalGlobe and GeoEye for the nine months ended September 30, 2013 and 2012 as though the acquisition had been consummated as of January 1, 2012.

	Nine months ended September 30,
(in millions, except per share data)	2013			2012
Operating revenue	$	452.8		$	560.8
Net (loss) income	(78.7		)	20.8
Net (loss) income available to common stockholders	(81.7		)	17.1
Basic (loss) income per common share	$	(1.11	)	$	0.24
Diluted (loss) income per common share	$	(1.11	)	$	0.23

This pro forma information reflects certain adjustments to DigitalGlobe’s previously reported operating results, primarily:

· transaction costs are reflected as if they occurred on January 1, 2012;

· increased amortization of stock-based compensation;

· increased amortization expense related to identifiable intangible assets recorded as part of the acquisition;

· changes to depreciation expense as a result of the fair value adjustment to property and equipment;

· decreased interest expense due to lower interest rates on long-term debt; and

· related income tax effects.

The pro forma information for the nine months ended September 30, 2012 includes approximately $130.9 million of revenue from GeoEye’s major contracts, principally the EnhancedView SLA with NGA, which ended in the fourth quarter of 2012. The pro forma information does not reflect the actual results of operations had the acquisition been consummated at January 1, 2012, nor is it necessarily indicative of present or future operating results. The pro forma information does not give effect to any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition (other than those realized subsequent to the January 31, 2013 acquisition date).

Tomnod Acquisition

During the nine-month period ended September 30, 2013, the Company acquired Tomnod, Inc. for $4.0 million, consisting of $3.5 million of cash and $0.5 million of accrued liabilities. The Company has recognized the assets and liabilities of Tomnod based on its preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. DigitalGlobe expects to complete its final determinations no later than the first quarter of 2014. The final determinations may be significantly different than those reflected in its Unaudited Condensed Consolidated Financial Statements as of September 30, 2013.

Based on the Company’s preliminary estimates, the aggregate purchase price exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities by $3.3 million, which amount has been recognized as goodwill. None of the goodwill associated with this acquisition is deductible for income tax purposes. In addition, the Company recorded $1.1 million of technology and other intangible assets and $0.4 million of deferred tax liability as part of its purchase price allocation.