The risks described below, among others, could cause our actual operating results to differ materially from those indicated or suggested by our past performance and current financial condition as reported in this Form 10-Q, as well as by forward-looking statements made in our Annual Report on Form 10-K for the year ended December 31, 2011 or in our quarterly reports on Form 10-Q, or presented elsewhere by management from time to time.
Risks Related To Our Contracts
Our business is substantially dependent on U.S. government contracts. The failure of the NGA to exercise the EnhancedView SLA option and any future modifications to the renewal options for the EnhancedView SLA will have an immediate and material adverse effect on our business, financial condition and results of operations.
Revenues from U.S. government contracts accounted for 64 percent of our total revenues for the year ended December 31, 2011, and 68 percent and 67 percent of our total revenues for the three and nine months ended September 30, 2012 respectively. Our contracts with U.S. government agencies are subject to risks of termination, with or without cause, or reduction in scope due to changes in U.S. government policies, priorities or funding level commitments to various 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. During the calendar year 2011 we recognized $147.0 million of revenue under the EnhancedView SLA, which accounted for approximately 41 percent of our revenue that year. During the three and nine months ended September 30, 2012, we recognized $37.5 million and $112.8 million of revenue, respectively, under the EnhancedView SLA, each representing 43 percent of our revenue for the respective periods. The EnhancedView SLA originally was 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.
On June 22, 2012 we were notified by letter that, due to funding shortfalls, the NGA would not exercise the full year EnhancedView SLA option for the contract year commencing September 1, 2012. The NGA has exercised a three month option renewal of the EnhancedView SLA that commenced September 1, 2012.
On October 31, 2012, we received notice from the NGA that, due to funding shortfalls, the NGA does not intend to exercise the nine-month EnhancedView SLA option with the Company for the current contract year performance period of December 1, 2012 through August 31, 2013. The NGA did indicate it might seek to renew the EnhancedView SLA by December 15, 2012, should funding become available. The nine-month option for the remainder of the contract year through August 31, 2013 would have provided for service revenue to the Company, based upon the availability of funding, of approximately $119.25 million.
The Company is materially dependent on its business with the U.S. government and anticipates such termination will have a material adverse effect on revenues and income. Loss of revenue from this customer will make us more dependent on revenue from commercial and international customers, which is difficult to forecast and subject to substantial uncertainty.
We have been notified that the NGA is reducing our cost share agreement for the development and launch of GeoEye-2.
As part of the EnhancedView award, we entered into a cost-share agreement with the NGA that contemplated approximately $337.0 million of funding for the development and launch of GeoEye-2; this amount represented approximately 42 percent of our expected GeoEye-2 development and launch expense. To date we have received $111.2 million toward such funding. The timing of any additional funding is uncertain and may depend on modifications to our cost-share agreement, further development of GeoEye-2, and any decision on our part not to accept additional cost share funding under the current agreement.
On June 22, 2012 we were notified by the NGA by letter that due to funding shortfalls for the EnhancedView program, it will not make further cost-share payments to us for the development of GeoEye-2 beyond the approximately $70.0 million remaining under the current agreement. This means that the NGA’s total cost-share contribution, should we accept the remaining $70.0 million and related modifications to our cost-share agreement, will not exceed $181.0 million, or approximately 23 percent of the total original estimated costs for GeoEye-2 development and launch expense, substantially less than we had forecasted. If we do not accept the remaining $70.0 million, the NGA’s total cost share contribution will have been $110.0 million or approximately 14 percent of the total original estimated costs for GeoEye-2. Although we intend to complete GeoEye-2 on schedule, the loss of forecasted cost-share revenue for GeoEye-2 will adversely affect our ability to fund and finance future satellite development after GeoEye-2 and additions to or replacements of our current satellites.
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.
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 2013 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 have a material adverse effect on our business, financial condition and results of 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, if any, 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 reduction 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.
We understand that 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 substantial dependence on U.S. government contracts requires us to meet critical performance requirements in our operations. Any failure on our part to meet those requirements could result in termination of one or more of our contracts.
Our contracts with the U.S. government set forth detailed performance requirements and specifications for the imagery and services that we provided under those contracts. Failure to meet those requirements and specifications may result in a delay in recognition of revenue from the U.S. government, and could result in the termination of one or more contract for material breach. Though we believe we maintain quality systems and controls to meet all contractual requirements, any breach on our part that results in termination of or delay in revenue under a significant contract, including our EnhancedView SLA, could have a material adverse effect on our business, financial condition or 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, which could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to our 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 our dedicated team of security professionals as well as 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.
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.
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 $111.2 million, the first installment of the federal government cost-share funds, as well as other 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.
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.
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 International Telecommunication Union, or ITU. Additionally, satellite operators must abide by the specific laws of the countries in which downlink services are provided from the satellite to ground station terminals within such countries. Our customers or distributors are responsible for obtaining local regulatory approval from the governments in the countries in which they receive imagery downlinked directly from our satellites to ground stations within such countries. If the necessary approvals are not obtained, we will not be able to distribute real-time imagery in those regions, and this inability to offer real-time service in a foreign country could negatively affect our business. In addition, regulatory provisions in countries where we wish to operate may impose unduly burdensome restrictions on our operations. Our business may also be adversely affected if the national authorities where we plan to operate adopt treaties, regulations or legislation unfavorable to foreign companies or limiting the provision of our products and services.
Risks Related to Competition and Markets
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.
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 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:
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Changes in domestic and foreign governmental regulations and licensing requirements;
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Deterioration of relations between the United States and a particular foreign country;
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Increases in tariffs and taxes and other trade barriers;
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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
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Difficulties in obtaining or enforcing judgments in foreign jurisdictions.
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These risks are beyond our control and could have a material adverse effect on our business, financial position and results of operations.
Risks Related to the Merger
Our Merger Agreement with DigitalGlobe, Inc. is subject to certain conditions beyond our control.
On July 22, 2012 we entered into an Agreement and Plan of Merger, or Agreement, with DigitalGlobe, Inc. under which our stockholders are to receive newly issued shares of DigitalGlobe common stock and cash (and, for our preferred holders, DigitalGlobe preferred stock and cash) in exchange for their shares in GeoEye. Consummation of the merger is subject to certain conditions beyond our control, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act, consent of the Federal Communications Commission, or FCC, no pending temporary restraining order or preliminary or final injunction, receipt of certain tax opinions and the approval of the stockholders of both GeoEye and DigitalGlobe. DigitalGlobe also has a right to terminate the Agreement based upon receipt by it of a superior proposal (as defined in the Agreement) or other intervening event beyond our control prior to approval of the merger by its stockholders. If the merger is not consummated there could be an adverse effect on the market price for our common stock.
GeoEye stockholders cannot be sure of the value of the DigitalGlobe common stock to be issued in the merger as the aggregate number of shares of DigitalGlobe common stock to be issued in the merger is fixed and the market price of shares of DigitalGlobe common stock will fluctuate.
To the extent any GeoEye stockholder elects to receive the mixed cash/stock consideration or fails to make any election with respect to any GeoEye common stock, such GeoEye stockholder will receive for each share of GeoEye common stock subject to the mixed cash/stock election the combination of (x) $4.10 in cash and (y) 1.137 shares of DigitalGlobe common stock; furthermore, to the extent any GeoEye stockholder elects to receive the all stock consideration, such GeoEye stockholder will receive for each share of GeoEye common stock subject to the all stock consideration, 1.425 shares of DigitalGlobe common stock (which may be prorated depending on the extent other GeoEye stockholders elect to receive mixed cash/stock consideration, cash consideration and/or stock consideration.).
In all cases, the aggregate number of shares of DigitalGlobe common stock to be issued pursuant to the Agreement is fixed and will not change to reflect changes in the market price of GeoEye or DigitalGlobe common stock. The market price of DigitalGlobe common stock at the time of completion of the merger may vary significantly from the market prices of DigitalGlobe common stock on the last trading date before the Agreement was executed, on the date of this joint proxy statement/prospectus, on the date a GeoEye stockholder makes an election with respect to the merger consideration, on the date of the respective special meetings of DigitalGlobe stockholders or GeoEye stockholders or on the date of the effective time of the merger.
In addition, the merger might not be completed until a significant period of time has passed after the special meetings of GeoEye stockholders and DigitalGlobe stockholders. Because the exchange ratio will not be adjusted to reflect any changes in the market value of GeoEye common stock or DigitalGlobe common stock, the market value of the DigitalGlobe common stock issued in connection with the merger and the GeoEye common stock surrendered in connection with the merger may be higher or lower than the values of those shares on earlier dates. Stock price changes may result from, among other things, changes in the business, operations or prospects of GeoEye or DigitalGlobe prior to or following the merger, litigation or regulatory considerations, general business, market, industry or economic conditions and other factors both within and beyond the control of GeoEye and DigitalGlobe. Neither GeoEye nor DigitalGlobe is permitted to terminate the Agreement solely because of changes in the market price of either company’s common stock.
GeoEye stockholders may receive a form or combination of consideration different from what they elect.
Only GeoEye stockholders who elect to receive the mixed cash/stock election amount and those that make no election can be assured of the exact amount of shares of DigitalGlobe common stock and cash they will receive in the merger. While each holder of GeoEye common stock may elect to receive all cash, all DigitalGlobe common stock or a combination of cash and DigitalGlobe common stock pursuant to the Agreement, the pools of cash and DigitalGlobe common stock available for all GeoEye stockholders is fixed. Depending on the elections made by other GeoEye stockholders, if a holder of GeoEye common stock elects to receive all cash pursuant to the merger, such holder may receive a portion of the merger consideration in DigitalGlobe common stock and if a holder of GeoEye common stock elects to receive all DigitalGlobe common stock pursuant to the merger, such holder may receive a portion of the merger consideration in cash. Accordingly, GeoEye stockholders who vote in favor of the merger proposal and elect to receive only cash cannot be assured that they will not receive a portion of their consideration in DigitalGlobe common stock, and GeoEye stockholders who vote in favor of the merger proposal and elect to receive only DigitalGlobe common stock cannot be assured that they will not receive a portion of their merger consideration in cash. If a holder of GeoEye common stock does not submit a properly completed and signed election form to the exchange agent by the election deadline, then such stockholder will have no control over the type of merger consideration such stockholder may receive, and, consequently, will receive the mixed cash/stock consideration amount.
If a GeoEye stockholder delivers shares of GeoEye common stock to make an election, such GeoEye stockholder will not be able to sell those shares unless the GeoEye stockholder revokes his or her election prior to the election deadline.
If you are a holder of GeoEye common stock and want to make an election, you must deliver to the exchange agent by the election deadline a properly completed and signed election form along with stock certificates (or a properly completed notice of guaranteed delivery) or, in the case of book-entry shares, any additional documents specified in the procedures set forth in the election form. You will not be able to sell any shares of GeoEye common stock that you have delivered to the exchange agent unless you revoke your election before the deadline by providing written notice to the exchange agent. If you do not revoke your election, you will not be able to liquidate your investment in GeoEye common stock for any reason until you receive cash and/or DigitalGlobe common stock pursuant to the merger. In the time between delivery of your shares to the exchange agent and the closing of the merger, the market price of GeoEye common stock or DigitalGlobe common stock may change, and you might otherwise want to sell your shares of GeoEye common stock to gain access to cash, make other investments, or reduce the potential for a decrease in the value of your investment.
Current GeoEye and DigitalGlobe stockholders will have a reduced ownership and voting interest after the merger.
DigitalGlobe will issue or reserve for issuance approximately 26.0 million shares of DigitalGlobe common stock to GeoEye common stockholders in the merger (including shares of DigitalGlobe common stock to be issued in connection with outstanding GeoEye equity awards). As a result of these issuances, current GeoEye and DigitalGlobe stockholders are expected to hold approximately 36 percent and 64 percent, respectively, of the combined company’s outstanding common stock immediately following completion of the merger.
GeoEye and DigitalGlobe stockholders currently have the right to vote for their respective directors and on other matters affecting their respective company. When the merger occurs, each GeoEye stockholder that receives shares of DigitalGlobe stock will become a stockholder of DigitalGlobe with a percentage ownership of the combined company that will be smaller than the stockholder’s percentage ownership of GeoEye. Correspondingly, each DigitalGlobe stockholder will remain a stockholder of DigitalGlobe with a percentage ownership of the combined company that will be smaller than the stockholder’s percentage of DigitalGlobe prior to the merger. As a result of these reduced ownership percentages, former GeoEye stockholders will have less voting power in the combined company than they now have with respect to GeoEye, and DigitalGlobe stockholders will have less voting power in the combined company than they now have with respect to DigitalGlobe. Accordingly, former GeoEye stockholders will have less influence over management of a combined company than they now have with respect to GeoEye, and DigitalGlobe stockholders will have less influence over management of a combined company than they now have with respect to DigitalGlobe.
Provisions of the Agreement may deter alternative business combinations.
Restrictions in the Agreement on solicitation generally prohibit GeoEye and DigitalGlobe from soliciting any acquisition proposal or offer for a merger or business combination with any other party, including a proposal that might be advantageous to the stockholders of GeoEye or DigitalGlobe when compared to the terms and conditions of the merger described in this joint proxy statement/prospectus. In addition, if the Agreement is terminated, under certain specified circumstances, GeoEye or DigitalGlobe could be required to pay the other a termination fee of $20.0 million. These provisions may deter third parties from proposing or pursuing alternative business combinations that might result in greater value to holders of GeoEye common stock or holders of DigitalGlobe stock than the transaction described in the joint proxy statement/prospectus filed by GeoEye and DigitalGlobe.
GeoEye and DigitalGlobe will be subject to various uncertainties and contractual restrictions while the merger is pending that could adversely affect their financial results.
Uncertainty about the effect of the merger on employees, suppliers, vendors and customers may have an adverse effect on GeoEye and/or DigitalGlobe. These uncertainties may impair GeoEye’s and/or DigitalGlobe’s ability to attract, retain and motivate key personnel until the merger is completed and for a period of time thereafter, and could cause customers, suppliers, vendors and others who deal with GeoEye or DigitalGlobe to seek to change existing business relationships with GeoEye or DigitalGlobe. Employee retention and recruitment may be particularly challenging prior to completion of the merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company.
The pursuit of the merger and the preparation for the integration may place a significant burden on management and internal resources of either or both companies. Any significant diversion of management’s attention away from ongoing business and any difficulties encountered in the transition and integration process could affect GeoEye’s and/or DigitalGlobe’s financial results prior to the merger and the combined company’s financial results post-merger.
In addition, the Agreement restricts each of GeoEye and DigitalGlobe, without the other party’s consent, from making certain acquisitions and dispositions and taking other specified actions while the merger is pending. These restrictions may prevent GeoEye and/or DigitalGlobe from pursuing attractive business opportunities and making other changes to their respective businesses prior to completion of the merger or termination of the Agreement.
If completed, the merger may not achieve its intended results, and GeoEye and DigitalGlobe may be unable to successfully integrate their operations.
GeoEye and DigitalGlobe entered into the Agreement with the expectation that the merger will result in various benefits for the combined company, including, among others, synergies resulting from cost savings and operating efficiencies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether the respective businesses and assets of GeoEye and DigitalGlobe can be integrated in an efficient and effective manner.
It is possible that the integration process could take longer than anticipated and could result in the loss of valuable employees, the disruption of each company’s ongoing businesses, processes and systems or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect the combined company’s ability to achieve the anticipated benefits of the merger. The combined company’s results of operations could also be adversely affected by any issues attributable to either company’s operations that arise or are based on events or actions that occur prior to the closing of the merger. The companies may have difficulty addressing possible differences in corporate cultures and management philosophies. The integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect the combined company’s future business, financial condition, operating results and prospects.
The merger could unfavorably impact negotiations or existing agreements with the NGA or other customers.
Both GeoEye and DigitalGlobe have historically derived a substantial portion of their revenues from contracts with the NGA. These contracts may be terminated in the future, or may not be renewed or extended, and the loss of any contract would materially reduce the revenue and could have a material adverse effect on the financial condition and results of operations of GeoEye, DigitalGlobe or the combined company. Whether or not the merger is consummated, the announcement and pendency of the merger could disrupt the respective companies’ business relationships with the NGA or other current customers, who may alter, delay or defer decisions regarding current and future arrangements with GeoEye or DigitalGlobe because of the pending merger. These disruptions could be exacerbated by a delay in the consummation of the merger or termination of the Agreement and could have an adverse effect on the respective businesses and financial results of GeoEye, DigitalGlobe or the combined company.
GeoEye may elect to launch or ship for launch its GeoEye-2 satellite, which could adversely affect the combined company’s ability to achieve the anticipated benefits of the merger.
Both companies believe that the merger could create significant benefits for the combined company, including by operating more effectively and integrating the GeoEye and DigitalGlobe satellites into one satellite operations infrastructure and optimizing the size of the satellite constellation. If GeoEye ships or launches GeoEye-2 prior to the closing of the merger, DigitalGlobe will have the right to terminate the Agreement. Even if DigitalGlobe elects to proceed with the merger, the shipment or launch of GeoEye-2 may impair the ability of the combined company to integrate the infrastructure of the combined company and the ability to achieve the anticipated benefits of the merger may be adversely affected. Although DigitalGlobe has the right to terminate the Agreement in the event GeoEye launches or ships for launch any satellite, DigitalGlobe may elect not to terminate and to instead proceed with the transaction despite the potential loss of certain anticipated synergies.
If the combined company elects to place a satellite in ground storage, the satellite will be subject to degradation, damage or obsolescence of certain capabilities, which could adversely affect the combined company’s ability to fully achieve the anticipated benefits of the merger.
GeoEye and DigitalGlobe each have a satellite under construction, GeoEye-2 and WorldView-3, respectively. To obtain the anticipated benefits of the merger, the combined company plans to optimize the size of the satellite constellation and anticipates placing in storage one of the two satellites currently being built until such time as incremental capacity or a replacement for an existing satellite is required. Each of the satellites includes advanced technologies and sensors, and extended periods of storage could result in degradation which may not be fully covered by applicable insurance or obsolescence of certain capabilities of the satellite. In addition, the satellite will be subject to damage or destruction while in storage which may not be fully covered by applicable insurance. If the satellite requires upgrades or is damaged while on the ground, DigitalGlobe may need additional time and may incur substantial expense. Any inability to upgrade, repair or replace the stored satellite in a timely manner could adversely affect the combined company’s ability to fully achieve the anticipated benefits of the merger.
GeoEye and DigitalGlobe may be unable to obtain in the anticipated timeframe, or at all, the regulatory approvals required to complete the merger or, in order to do so, GeoEye and DigitalGlobe may be required to comply with material restrictions or conditions that may negatively affect the combined company after the merger is completed or cause them to abandon the merger. Failure to complete the merger could negatively affect the future business and financial results of GeoEye and DigitalGlobe.
Completion of the merger is contingent upon, among other things, the expiration or termination of the applicable HSR Act waiting period and required regulatory approvals or consents from the FCC and NOAA or the Department of Commerce. Both we and DigitalGlobe have received a second request for information and documents from the Antitrust Division of the U.S. Department of Justice, and while we are cooperating in responding to the request, it may take several months to comply fully with the request. GeoEye and DigitalGlobe can provide no assurance that all required regulatory authorizations, approvals or consents will be obtained or that the authorizations, approvals or consents will not contain terms, conditions or restrictions that would be detrimental to the combined company after completion of the merger.
The respective special meetings of GeoEye and DigitalGlobe stockholders at which the merger-related proposals will be considered may take place before all of the required regulatory approvals have been obtained and before all conditions to such approvals, if any, are known.
Satisfying the conditions to, and completion of, the merger may take longer than, and could cost more than, GeoEye and DigitalGlobe expect. Any delay in completing, or any additional conditions imposed in order to complete, the merger may materially adversely affect the synergies and other benefits that GeoEye and DigitalGlobe expect to achieve from the merger and the integration of their respective businesses.
Neither GeoEye nor DigitalGlobe can make any assurances that it will be able to satisfy all the conditions to the merger or succeed in any litigation brought in connection with the merger. If the merger is not completed, the financial results of GeoEye and/or DigitalGlobe may be adversely affected and GeoEye and/or DigitalGlobe may be subject to several risks, including, but not limited to:
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payment to the other of a termination fee of approximately $20.0 million, as specified in the Agreement, depending on the nature of the termination;
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payment of costs relating to the merger, whether or not the merger is completed;
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loss of investor confidence as a result of failure to complete the merger; and/or
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being subject to litigation related to any failure to complete the merger.
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The pro forma financial statements and financial forecasts included in the joint proxy statement/prospectus filed by GeoEye and DigitalGlobe are presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the merger.
The pro forma financial statements and financial forecasts contained in the joint proxy statement/prospectus filed by GeoEye and DigitalGlobe are presented for illustrative purposes only, are based on various adjustments, assumptions and preliminary estimates and may not be an indication of the combined company’s financial condition or results of operations following the merger for several reasons. The prospective financial information was prepared during the period prior to the execution of the Agreement on July 22, 2012 and has not been updated. The actual financial condition and results of operations of the combined company following the merger may not be consistent with, or evident from, these pro forma financial statements or financial forecasts. In addition, the assumptions used in preparing the pro forma financial information and financial forecasts may not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the merger. Any potential decline in the combined company’s financial condition or results of operations may cause significant variations in the stock price of the combined company.
GeoEye and DigitalGlobe will incur substantial transaction fees and costs in connection with the merger.
GeoEye and DigitalGlobe expect to incur non-recurring expenses totaling approximately $60.1 million, which are primarily transaction costs. In addition to these expenses, we expect issuance costs of $28.9 million to be incurred and capitalized in connection with the refinancing of the indebtedness of both companies. Additional unanticipated costs may be incurred in the course of the integration of the respective businesses of GeoEye and DigitalGlobe. The companies cannot be certain that the elimination of duplicative costs or the realization of other efficiencies related to the integration of the two businesses will offset the transaction and integration costs in the near term, or at all.
Certain directors, executive officers and specific stockholders of GeoEye and DigitalGlobe have interests in the merger that are different from, or in addition to, those of other GeoEye and DigitalGlobe stockholders, which could have influenced their decisions to support or approve the merger.
Certain directors and executive officers of GeoEye and DigitalGlobe have interests in the merger that differ from, or that are in addition to, their interests as stockholders of GeoEye and DigitalGlobe. These interests include, among others, continued service as a director or an executive officer of the combined company, and the accelerated vesting of certain equity awards and/or certain severance benefits in connection with the merger.
In addition, GeoEye and DigitalGlobe have entered into voting agreements with certain directors, executive officers and specific stockholders of GeoEye and DigitalGlobe, in each case solely in the party’s capacity as a stockholder. These voting agreements require the stockholders to vote in favor of the proposals to be voted on at the GeoEye or DigitalGlobe special meeting of stockholders, as applicable, and to vote against certain actions. The voting agreements specifically do not limit or restrict the rights and obligations of a stockholder in their capacity as a director or officer of GeoEye or DigitalGlobe, as applicable, and in no way restricts any director or officer of GeoEye or DigitalGlobe, as applicable, in the exercise of their fiduciary duties as a director or officer of GeoEye or DigitalGlobe, as applicable. However, these voting agreements do limit the rights of these stockholders, solely in their capacity as stockholders, to vote against the proposals to be voted on at each company’s special meeting of stockholders, and for certain other actions.
These interests, among others, may influence the directors and executive officers of DigitalGlobe to support or approve the share issuance proposal and/or the directors and executive officers of GeoEye to support or approve the merger.
Risks Related to Our Capital Structure and Strategy
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 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.
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, which could have a material adverse effect on our business, financial condition and results of operations.
We have a substantial amount of indebtedness.
Our substantial indebtedness has important consequences. For example, it:
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limits our ability to borrow additional funds;
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limits our ability to pay dividends;
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limits our flexibility in planning for, or reacting to, changes in our business and our industry;
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increases our vulnerability to general adverse economic and industry conditions;
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limits our ability to make strategic acquisitions;
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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
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places us at a competitive disadvantage compared to competitors that have less debt.
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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 2015 Notes and 2016 Notes. Credit ratings are not recommendations to purchase, hold or sell the 2015 Notes and 2016 Notes. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure or marketing of the 2015 Notes and 2016 Notes. Any downgrade by a rating agency could decrease earnings and may result in higher borrowing costs in the future.
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 2015 Notes and 2016 Notes is subsequently lowered or withdrawn for any reason, you may not be able to resell the 2015 Notes and 2016 Notes without a substantial discount.
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.