DGI Digitalglobe, (delisted)

Filed Pursuant to Rule 424(b)(1)

Registration No. 333-150235

 

14,700,000 Shares

 

 

COMMON STOCK

 

 

 

 

This prospectus may be used by Morgan Stanley & Co. Incorporated in connection with offers and sales in agency transactions. Such sales may be made at prevailing market prices at the time of sale, at prices related thereto or at negotiated prices.

 

 

 

 

We will not receive any of the proceeds of the sale of the common stock pursuant to this prospectus.

 

 

 

 

An affiliate of Morgan Stanley & Co. Incorporated currently owns 36.8% of our common stock and, upon completion of our initial public offering, such affiliate will own 32.0% of our common stock (30.5% if the underwriters’ over-allotment option is exercised in full).

 

 

 

 

The common stock has been approved for listing on the New York Stock Exchange under the symbol “DGI.”

 

 

 

 

Investing in the common stock involves risks. See “Risk Factors” beginning on page 9.

 

 

 

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

MORGAN STANLEY

 

May 13, 2009

 

TABLE OF CONTENTS

 

 

You should rely only on the information contained in this prospectus and any free-writing prospectus that we authorize to be distributed to you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with information different from or in addition to that contained in this prospectus or any related free-writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We and the selling stockholders are offering to sell and are seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus and any free writing prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Our business, financial conditions, results of operations and prospects may have changed since that date.

 

Through and including June 7, 2009 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States: Neither we, the selling stockholders nor any of the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to our initial public offering and the distribution of this prospectus.

 

PROSPECTUS SUMMARY

	•	Increasing Reliance on Commercial Products and Services by the U.S. and Foreign Governments.   The U.S. and, we believe, foreign governments are increasingly relying on commercial remote sensing space capabilities to provide unclassified earth imagery for defense, intelligence, foreign policy, homeland security and civil needs.
	•	Expanding Use of Location-Based Information by Commercial Enterprises and Civil Agencies.   Commercial enterprises are using imagery and other location-based information to help plan and manage business infrastructures and supply chains to capture efficiencies across functions. Business software providers, such as Autodesk, Oracle, SAP and SAS, are enhancing their products and services by incorporating imagery products and services. U.S. and foreign civil agencies are using satellite imagery for many purposes, including establishing effective police and fire emergency routes, and classifying land use for growth planning and tax assessments.
	•	Growing Use of Imagery to Monitor Economic Development.   Developing countries in Asia, Eastern Europe, and Latin and South America are experiencing significant changes as a result of their economic growth and development. These countries are increasingly relying on earth imagery for many purposes, such as building and maintaining current maps that catalogue this development and change.
	•	Increasing Use of Imagery in Consumer Applications.   The introduction of earth imagery overlays to digital maps by major internet portals, such as Google and Microsoft, has increased consumer awareness of, and demand for, location-based applications that utilize earth imagery. Large-scale mapping capabilities are being combined with up-to-date images and information to create new and more powerful consumer applications and products for use in real-estate applications, GPS-based mobile devices and next generation video games.

	•	Leading Imagery Collection Capabilities.   We currently operate two imagery satellites capable of capturing images at a resolution of 61 centimeters or better. With the launch of our WorldView-2 satellite, we expect to nearly double our collection capabilities to nearly two million square kilometers per day and achieve intra-day revisit capability. WorldView-2 will also make us the only commercial earth imagery provider with 8-band multi-spectral capability, which has a more robust color palette and enables enhanced analysis of non-visible characteristics of the earth’s surface and underwater.
	•	Large and Rapidly Expanding ImageLibrary.   We believe that our ImageLibrary is the largest, most up-to-date and comprehensive archive of high resolution earth imagery commercially available. Our ImageLibrary contains more than 660 million square kilometers of high resolution earth imagery and is currently growing at an average rate of 745,000 square kilometers per day. Our comprehensive ImageLibrary enables our customers to use up-to-date images for real-time planning purposes and to perform comparison analyses with our historical images. We continue to create innovative solutions to monetize this valuable content.
	•	Strong, Strategic Customer Relationships.   Our largest customer, the U.S. government, has been highly supportive of the development of the commercial earth imagery industry and has purchased imagery from us since 2002. The strength of our relationship with the U.S. government has facilitated the growth of our international defense and intelligence and commercial businesses, and positions us well for future opportunities with these customers. Our relationships with providers of location-based information, such as

		Google, Microsoft, Nokia, NAVTEQ and Garmin, provide increased awareness of our products and services, represent a variety of types of commercial uses for our products and services and, we believe, are significant to the growth of our commercial business.

	•	Significant Barriers to Entry.   We have made significant capital investments in our satellites, ground infrastructure and imagery archive. The development and launch of a high resolution satellite typically takes four years or longer. Our industry is highly regulated due to the sensitive nature of satellite technology and new entrants would need considerable technical expertise and face substantial up-front capital outlays and long lead times due to the time required to secure necessary licenses. Finally, new entrants into the market would be unable to replicate the historical context provided by our extensive ImageLibrary without significant expense.

	•	Experienced Management Team.   Our management team combines deep knowledge, experience and technical expertise within the satellite imagery industry with a track record of innovation and growth in the commercial sector. Our team has demonstrated significant capabilities in launching and operating satellites, as well as managing the large volume of imagery information we collect.

	•	Drive Adoption of Imagery Products and Services in Mass Market Applications.   We will continue to work closely with our customers to develop new applications that facilitate ease of use of our imagery. For example, we are collaborating with personal navigation and wireless communication device manufacturers and internet portals to develop consumer products and applications that utilize high resolution earth imagery to enhance the navigational and mapping features in their products and services.
	•	Monetize Content From Our Growing ImageLibrary.   We strategically operate our satellites to expand our ImageLibrary by capturing imagery of areas of greatest interest to our customers. We will seek to monetize this content by offering our products and services to an increasing variety of customers. Additionally, we are committed to investing in software tools that will enable our customers to derive greater value from our products and services.
	•	Leverage Our Existing Customer Base.   Our relationship with the National Geospatial-Intelligence Agency, or NGA, provides a substantial foundation upon which to expand our relationships with defense and intelligence agencies, and enables us to enhance our commercial offerings. Earth imagery collected and licensed to our existing customers is maintained in our ImageLibrary and provides a content archive that can be incorporated into products and services for both new and existing customers.
	•	Offer Flexible Distribution to Enhance Accessibility.   We intend to continue to develop our processing and delivery capabilities to provide our customers with user-friendly access to our imagery content. In addition, under our Direct Access Program, or DAP, certain customers, with prior approval from the U.S. government, will be able to task our WorldView-1 and WorldView-2 satellites from their own secure access facilities and receive data directly into their facilities for processing and use.
	•	Extend Our Industry Leading Earth Imaging Capabilities.   Upon the successful launch and deployment of WorldView-2 in September or early October 2009, we will expand our capabilities and product offerings by increased collection rates, intra-day site revisits and enhanced multi-spectral imagery. We believe these innovations will extend our market leadership.

	•	Approximately 73.9% and 77.4% of our revenue in 2008 and for the three months ended March 31, 2009, respectively, was derived from NGA, most of which was from our service level agreement, or SLA, that can be terminated at any time. The loss or significant reduction of the SLA would materially reduce our revenue.
	•	Global economic conditions may reduce demand for our products.
	•	We face competition that may cause us to have to reduce our prices or to lose market share.
	•	We are highly dependent upon our ImageLibrary and our failure or inability to protect and maintain the earth imagery content stored in our ImageLibrary could have a material adverse effect on our business, financial condition and results of operations.
	•	The market may not accept our imagery products and services. You should not rely upon our historic growth rates as an indicator of future growth.
	•	Failure to obtain or maintain regulatory approvals could result in service interruptions or could impede us from executing our business plan.
	•	Any program delays encountered in connection with the construction, launch and operational commissioning of our WorldView-2 satellite will increase reliance on existing satellites, possibly allowing competitors to provide superior multi-spectral imagery services.
	•	We may experience a launch failure or other satellite damage during the launch of our WorldView-2 satellite, which could significantly delay, and potentially permanently reduce, our expected revenue.

Shares offered by us		1,366,256 common stock
Shares offered by the selling stockholders		13,333,744 common stock
Shares to be outstanding immediately after our initial public offering		44,871,007 common stock
Use of proceeds		We intend to use the net proceeds from our initial public offering for general corporate purposes. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. See “Use of Proceeds” and “Principal and Selling Stockholders.”
NYSE symbol		DGI
Risk factors		Please read the section entitled “Risk Factors” beginning on page 9 for a discussion of some of the factors you should carefully consider before deciding to invest in our common stock.

	•	3,175,340 shares of common stock issuable upon the exercise of options outstanding as of April 15, 2009 at a weighted average exercise price of approximately $19.59 per share;
	•	30,000 shares of restricted stock at a grant date fair value of $22.10 per share; and
	•	3,067,249 shares of common stock available for grant under our option plans.

	•	no exercise by the underwriters of their right to purchase up to an additional 2,205,000 shares of common stock;
	•	a 1-for-5 reverse stock split effected on April 28, 2009; and
	•	the adoption of our amended and restated certificate of incorporation and amended and restated bylaws upon the completion of our initial public offering.

														Three Months
		Year Ended December 31,												Ended March 31,
		2006				2007 (1)				2008				2008				2009
														(unaudited)
Revenue		$	106.8			$	151.7			$	275.2			$	68.8			$	67.2
Cost and expenses:
Cost of revenue, excluding depreciation and amortization			16.5				22.1				28.5				6.7				6.4
Selling, general and administrative			37.4				49.0				76.1				18.4				22.6
Depreciation and amortization			46.0				46.8				75.7				18.8				18.7
Loss on disposal of assets			0.1				—				—				—				—
Income from operations			6.8				33.8				94.9				24.9				19.5
Interest income (expense), net			3.1				4.1				(3.0	)			(1.4	)			—
Mark-to-market on derivative instrument			—				—				—				—				(1.8	)
Income before income taxes			9.9				37.9				91.9				23.5				17.7
Income tax (expense) benefit			(0.7	)			57.9	(2)			(38.1	) (3)			(9.4	)			(7.1	)
Net income		$	9.2			$	95.8			$	53.8			$	14.1			$	10.6
Earnings per share: (4)
Basic		$	0.24			$	2.21			$	1.24			$	0.32			$	0.24
Diluted		$	0.24			$	2.18			$	1.22			$	0.32			$	0.24
Weighted average common shares outstanding:
Basic			38,433,419				43,269,243				43,513,506				43,420,261				43,499,757
Diluted			38,832,556				43,993,589				44,100,898				44,162,965				43,989,202

		As of March 31, 2009
		(unaudited)
										Pro Forma
		Actual				Pro Forma (5)				As Adjusted (6)
Cash and cash equivalents		$	67.9			$	115.5			$	134.6
Working capital			79.9				133.3				149.3
Total assets			1,012.0				1,064.8				1,080.8
Current portion of deferred revenue (7)			31.6				31.6				31.6
Long-term deferred revenue (7)			208.5				208.5				208.5
Total long-term debt			276.5				341.8				341.8
Total stockholders’ equity			415.5				408.8				424.8

														Three Months
		Year Ended December 31,												Ended March 31
		2006				2007				2008				2008				2009
														(unaudited)
Adjusted EBITDA (8)		$	55.1			$	83.2			$	174.8			$	44.8			$	40.5
Capital expenditures			82.9				238.1				142.0				56.2				17.7

(1)		The 2007 results include the operations for GlobeXplorer LLC, or GlobeXplorer, subsequent to the acquisition that occurred in January 2007.
(2)		During 2007, we released our deferred tax valuation allowance based on a determination that it was more likely than not that we will be able to utilize the deferred tax assets, which primarily consist of net operating losses accumulated in prior years.
(3)		In connection with the preparation of our 2007 federal income tax return, we determined that certain adjustments should have been made prior to the release of the valuation allowance that was recorded in the fourth quarter of 2007 of $59.1 million. We noted that the net operating loss carryforward recorded as a deferred tax asset as of December 31, 2007 and related income tax benefit for the year ended December 31, 2007 should have been reduced by $1.4 million. We determined the adjustment is not material as of or for the years ended December 31, 2007 and 2008. Accordingly, the error was corrected in the second quarter of 2008.
(4)		See Note 2 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net income per share.
(5)		Pro forma to give effect to the issuance by us of $341.8 million accreted value of our senior secured notes and the use of proceeds therefrom, including the repayment in full of our senior credit facility and senior subordinated notes on April 28, 2009.
(6)		On a pro forma as adjusted basis to give effect to the sale of 1,366,256 shares of our common stock by us in our initial public offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the use of proceeds therefrom.
(7)		Deferred revenue primarily consists of deferred revenue derived from prepayments from NGA that are being recognized ratably over the current estimated customer relationship period of 10.5 years.
(8)		Adjusted EBITDA is defined as net income or loss adjusted for depreciation and amortization, net interest income or expense, income tax expense (benefit), loss on disposal of assets, restructuring, loss on early extinguishment of debt and non-cash stock compensation expense.
		Adjusted EBITDA is not a recognized term under generally accepted accounting principles, or GAAP, in the United States and may not be defined similarly by other companies. Adjusted EBITDA should not be

		considered an alternative to net income, as an indication of financial performance, or as an alternative to cash flow from operations as a measure of liquidity. There are limitations to using non-GAAP financial measures, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from ours.
		Adjusted EBITDA is a key measure used in internal operating reports by management and the board of directors to evaluate the performance of our operations and is also used by analysts, investment banks and lenders for the same purpose. Adjusted EBITDA is a measure of our current period operating performance, excluding charges for capital, depreciation related to prior period capital expenditures and items which are generally non-core or non-recurring in nature.
		We believe that the elimination of certain non-cash, non-operating or non-recurring items enables a more consistent measurement of period to period performance of our operations, as well as a comparison of our operating performance to companies in our industry. We believe this measure is particularly important in a capital intensive industry such as ours, in which our current period depreciation is not a good indication of our current or future period capital expenditures. The cost to construct and launch a satellite and build the related ground infrastructure may vary greatly from one satellite to another, depending on the satellite’s size, type and capabilities. For example, our QuickBird satellite, which we are currently depreciating, cost significantly less than our WorldView-1 or WorldView-2 satellites. Current depreciation expense is not indicative of the revenue generating potential of the satellite.
		Adjusted EBITDA excludes interest income, interest expense, income taxes and loss on early extinguishment of debt because these items are associated with our capitalization and tax structures. Adjusted EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the impact of prior capital expenditure decisions which are not indicative of future capital expenditure requirements. Adjusted EBITDA excludes other income (expense), net, and mark-to-market on derivative instrument because these items are not related to our primary operations.
		We use Adjusted EBITDA in conjunction with traditional GAAP operating performance measures as part of our overall assessment of our performance and we do not place undue reliance on this measure as our only measure of operating performance. Adjusted EBITDA should not be considered a substitute for other measures of financial performance reported in accordance with GAAP.
		Reconciliation of net income to Adjusted EBITDA is presented below:

														Three Months
		Year Ended December 31,												Ended March 31,
		2006				2007				2008				2008				2009
		(in millions)
Net income		$	9.2			$	95.8			$	53.8			$	14.1			$	10.6
Depreciation and amortization			46.0				46.8				75.7				18.8				18.7
Interest (income) expense, net			(3.1	)			(4.1	)			3.0				1.4				—
Mark-to-market on derivative instrument			—				—				—				—				1.8
Income tax expense (benefit)			0.7				(57.9	)			38.1				9.4				7.1
Loss on disposal of assets			0.1				—				—				—				—
Non-cash stock compensation expense			2.2				2.6				4.2				1.1				2.3
Adjusted EBITDA		$	55.1			$	83.2			$	174.8			$	44.8			$	40.5

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as all of the other information contained in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could materially and adversely affect our business, financial condition, prospects, results of operations and cash flows. In such case, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition, results of operations and cash flow.

 

Risks Related To Our Business

 

The loss or reduction in scope of any one of our primary contracts will materially reduce our revenue. The majority of our revenue is derived from contracts with U.S. government agencies that can be terminated at any time.

 

Approximately 82.8% and 86.1% of our revenue for the years ended December 31, 2008 and the three months ended March 31, 2009, respectively, was derived from our top five customers, including NGA, which accounted for approximately 73.9% and 77.4% of our revenue for the years ended December 31, 2008 and the three months ended March 31, 2009, respectively. These contracts may be terminated in the future, or may not be renewed or extended, and the loss of any one of these customers would materially reduce our revenue.

 

Our contracts with U.S. government agencies are subject to risks of termination or reduction in scope due to changes in U.S. government policies, priorities or funding level commitments to various agencies. U.S. government agencies can terminate or suspend our contracts at any time with or without cause. Although our U.S. government contracts generally involve fixed annual minimum commitments, such commitments are subject to annual Congressional appropriations and, as a result, U.S. government agencies may not continue to fund these contracts at current or anticipated levels. In addition, although we anticipate that the U.S. government agencies will continue to purchase earth imagery from us after the scheduled expiration of our contract under the NextView program in July 2009, we cannot assure you that those purchases will continue at current levels or at all, or that there will not be gaps between the expiration of this agreement and entry into any new agreement. If U.S. government agencies terminate, significantly reduce in scope or suspend any of their contracts with us, or change their policies, priorities, or funding levels, these actions would have a material and adverse effect on our business, financial condition and results of operations.

 

The effects of the global economic crisis may adversely impact our business, operating results or financial condition.

 

The global economic crisis has caused disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy, and impacted consumer spending levels. These macroeconomic developments could adversely affect our business, operating results, or financial condition. Current or potential customers, including foreign governments, may delay or decrease spending on our products and services as their business and/or budgets are impacted by economic conditions. These conditions have also led to concerns about the stability of financial markets generally and the strength of counterparties. For example, if one or more of our insurance carriers fails, we may not receive the full amount of proceeds due to us in the event of loss or damage to one of our satellites. The inability of current and potential customers to pay us for our products and services may adversely affect our earnings and cash flows. In addition, if we attempt to obtain future insurance in addition to, or replacement of, our existing coverage, the credit market turmoil could negatively impact our ability to obtain such insurance.

 

We face competition that may cause us to have to reduce our prices or to lose market share.

 

Our products and services compete with satellite and aerial imagery and related products and services offered by a range of private and government providers. Our current or future competitors may have greater financial, personnel and other resources than we have. Our major existing competitors include GeoEye, SPOT Image, ImageSat International N.V. and the National Remote Sensing Agency, Department of Space (Government of India), plus numerous aggregators of imagery and imagery-related products and services, including Google and

Microsoft. In addition, we compete against aerial providers of high resolution imagery, whose offerings provide certain benefits over satellite-based imagery, including better resolution. The value of our imagery may also be diluted by earth imagery that is available free of charge.

 

The U.S. government and foreign governments also may develop, construct, launch and operate their own imagery satellites, 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 with our imagery products and services. These governments could also subsidize the development, launch and operation of imagery satellites by our current or future competitors.

 

GeoEye recently commissioned a multi-spectral satellite with a resolution of 41 centimeters into commercial operation, which has strengthened its competitive position in the industry. SPOT Image has announced plans to launch two high resolution satellites, one in 2010 and the other in 2011. Our competitors, including GeoEye and SPOT Image, or potential competitors with greater resources than ours could in the future offer satellite-based imagery or other products and services with more attractive features than our products and services. The emergence of new remote imaging technologies could negatively affect our marketing efforts. More importantly, if competitors develop and launch satellites or other imagery content sources with more advanced capabilities and technologies than ours, or offer services at lower prices than ours, our business and results of operations could be harmed. From time to time, we have experienced decreases in the average sales prices of some of our products and services. Due to competitive pricing pressures, new product introductions by us or our competitors, or other factors, the average selling price of our products and services may further decrease. If we are unable to offset decreases in our average selling prices by increasing our sales volumes or by adjusting our product mix, our revenue and gross margins will decline. In addition, to maintain our gross margins, we must continue to develop and introduce new products and services and enhancements with higher margins. If we cannot maintain our gross margins, our financial position may be harmed and our stock price may decline.

 

We are highly dependent upon our ImageLibrary and our failure or inability to protect and maintain the earth imagery content stored in our ImageLibrary could have a material adverse effect on our business, financial condition and results of operations.

 

Our operations depend upon our ability to maintain and protect our earth imagery content and our ImageLibrary against damage that may be caused by fire and other natural disasters, power failures, telecommunications failures, terrorist attacks, unauthorized intrusion, computer viruses, equipment malfunction or inadequacy, firewall breach or other events. The satellite imagery content we collect is downloaded directly to our Longmont, Colorado facility and then stored in our ImageLibrary for sale to customers. Our aerial imagery is collected and processed by our aerial suppliers and then delivered to us to be uploaded to our ImageLibrary. We back up our imagery and permanently store it with a third party data storage provider. Notwithstanding precautions we have taken to protect our ImageLibrary, there can be no assurance that a natural disaster or other event would not result in a prolonged interruption in our ability to provide access to or deliver imagery from our ImageLibrary to our clients. The temporary or permanent loss or disruption of access to our ImageLibrary could impair our ability to supply current and future customers with imagery content, have a negative impact on our revenue and cause harm to our reputation. Any impairment in our ability to supply our customers with imagery content could affect our ability to retain or attract customers, which would have a material adverse effect on our business, financial condition and results of operations.

 

Interruption or failure of our infrastructure could hurt our ability to effectively perform our daily operations and provide our products and services, which could damage our reputation and harm our operating results.

 

The availability of our products and services depends on the continuing operation of our infrastructure, information technology and communications systems. Any 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 have the ability to be powered by

backup generators. However, if our primary source of power and the backup generators fail, our daily operations and operating results would be materially and adversely affected.

 

In addition, our ground station centers 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. The occurrence of any of the foregoing could result in lengthy interruptions in our services and/or damage our reputation, which could have a material adverse effect on our financial condition and results of operations.

 

The market may not accept our imagery products and services. You should not rely upon our historic growth rates as an indicator of future growth.

 

Our success depends on existing markets accepting our imagery products and services and our ability to develop new markets. Our business plan is based on the assumption that we will generate significant future revenue from sales of imagery products and services produced from our QuickBird, WorldView-1 and WorldView-2 satellites and other content sources. The commercial sale of high resolution earth imagery is a relatively new industry. Consequently, it is difficult to predict the ultimate size of the market and the acceptance, by the market, of our products and services. Our business strategy and projections rely on a number of assumptions, some or all of which may be incorrect. Actual markets could vary materially from the potential markets that we have identified.

 

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 services depends on a number of factors, including the quality, scope, timeliness, sophistication and price and 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, financial condition and results of operations.

 

We may not continue to grow in line with historical rates, or at all. If we are unable to achieve sustained growth, we may be unable to execute our business strategy, expand our business or fund other liquidity needs and our prospects, financial condition and results of operations could be materially and adversely affected.

 

Failure to obtain or maintain regulatory approvals could result in service interruptions or could impede us from executing our business plan.

 

DoC Approvals.   Our business requires licenses from the U.S. Department of Commerce, or the DoC, through the National Oceanic and Atmospheric Administration, or NOAA. Under our DoC licenses, the U.S. government reserves the right to interrupt service or limit our ability to distribute satellite images when foreign policy or U.S. national security interests are affected. In addition, the DoC has the right to review and approve the terms of certain of our agreements with international customers, including our DAP customers. We currently have the necessary approvals for our existing international customers. However, such reviews in the future could delay or prohibit us from executing new international agreements. The inability to get approvals for DAP customers could materially affect our ability to establish and grow our DAP business. In addition, should we not get approvals in a timely manner our products and services may not be competitive.

 

DoS Approvals.   The ground station equipment and related technology that is purchased by certain of our DAP customers is controlled under the International Traffic in Arms Regulations, or ITAR. We, or our suppliers, must obtain export licenses from the U.S. Department of State, or the DoS, in order to export ground station equipment and related technology to our DAP customers. Export licenses can take up to six months or longer to be processed and the DoS is not obligated to approve any license application. Our inability or the inability of our suppliers to get required export approvals for equipment and technology supporting DAP could materially affect our ability to establish and grow our DAP business.

 

FCC Approvals.   Our operation of satellites and ground station centers also requires licenses from the U.S. Federal Communications Commission, or the FCC. The FCC regulates the construction, launch and operation

of our satellites, the use of satellite frequency spectrum and the licensing of our ground station centers located within the United States. We are also subject to the FCC’s rules and regulations and the terms of our licenses, which require us to comply with various operating conditions and requirements. The current licenses of our satellites expire in 2012 and those of our ground station centers expire in 2010, 2019 and 2021. While the FCC generally renews licenses routinely, there can be no assurance that our licenses will be renewed at their expiration dates on favorable terms or without adverse conditions. Failure to renew these licenses could have a material and adverse affect on our ability to generate revenue and conduct our business as currently expected.

 

International Registration and Approvals.   The use of satellite frequency spectrum internationally is subject to the rules and requirements of the International Telecommunication Union, or 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 centers within such countries. The FCC has coordinated the operations for each of our QuickBird and WorldView-1 satellites pursuant to the ITU requirements, and we expect the FCC to do so for our WorldView-2 satellite.

 

Coordination of our satellites with other satellite systems is required by the ITU to help prevent harmful frequency interference from or into existing or planned satellite operations. We do not expect significant issues relating to the coordination of our satellites due to the nature of satellite imaging operations. However, if the FCC fails to conclude the necessary coordination for WorldView-2, it could have a material and adverse effect on our business, financial condition and results of operations.

 

Our foreign DAP customers are responsible for securing necessary licenses and operational authority to use the required spectrum in each country into which we will downlink high resolution commercial earth imagery. If such customers are not successful in obtaining the necessary approvals, we will not be able to distribute real-time imagery to those customers. Our inability to offer real-time access service in a significant number of foreign countries 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.

 

Changes in U.S. or foreign laws and regulations could have a material adverse effect on our operations and financial condition.

 

Our industry is highly regulated due to the sensitive nature of satellite technology. We cannot assure you that the laws and regulations governing our business and operations, including the distribution of satellite imagery, will not change in the future. Our business and operating results may be materially and adversely affected if we are required to alter our business operations to comply with such changes or if our ability to sell our products and services on a global basis is reduced or restricted due to increased U.S. or foreign government regulation.

 

Any program delays encountered in connection with the final testing, launch and operational commissioning of our WorldView-2 satellite may affect our ability to provide the anticipated volume of imagery products and services and increase our reliance on our existing satellites, which could have a materially adverse affect on our business, financial condition and results of operations.

 

The manufacturing, testing and launch of satellites involves complex processes and technology and we rely on third party contractors for the manufacturing, testing and launch of our satellites. The final testing of our WorldView-2 satellite and related ground systems requires a large amount of advanced technical and engineering work to be done in a relatively short period of time. Launch dates, once scheduled, are subject to change. After launch, the satellite must be calibrated and tested to confirm operational capability, a commissioning process that typically takes several months. The satellite may not pass the operational commissioning tests or may not otherwise operate as required. For example, satellites may experience technical difficulties communicating with the ground station center or collecting imagery in the same quality or volume that was intended. The failure to launch WorldView-2 on time or to achieve operational commissioning on time or at all could affect our ability to provide the anticipated volume of imagery products and services to our customers, which could have a material adverse effect on our business, financial condition and results of operations.

On May 12, 2009, GeoEye reported that it had identified an issue with some of the color imagery collected by the camera on its GeoEye-1 satellite. GeoEye reported that it is still analyzing the issue to determine the impact on its collection capability but that black and white collection was unaffected. The cameras on the WorldView-1 and WorldView-2 satellites were manufactured by ITT, the same manufacturer as the camera on GeoEye-1. We do not believe our cameras have a similar issue. The WorldView-1 satellite captures black and white imagery as opposed to color and has been in operation for over a year without any similar issues. The WorldView-2 satellite uses a newer version of color imaging hardware than that used on GeoEye-1 and has undergone extensive testing on the ground with no evidence this issue exists. Nonetheless, we cannot assure you that our cameras will not experience a similar issue.

 

We expect to launch our WorldView-2 satellite in September or early October 2009. We entered into an agreement with our launch provider, Boeing Launch Services, to launch WorldView-2 in September 2009. Boeing Launch Services subsequently informed us that a launch date in September 2009 is unavailable at this time due to a request from the U.S. government, which has priority access to the launch site. As a result, Boeing Launch Services assigned us an early October 2009 launch date, which may be accelerated if an earlier launch date becomes available. Our assigned launch date may be delayed further based on access requested by the U.S. government, weather conditions and other events outside of our control, and any unanticipated delays in completing the final testing of WorldView-2. The failure to launch or commission WorldView-2 as scheduled will increase the period of time during which we will have to rely solely on our QuickBird and WorldView-1 satellites, which approach the end of their expected operational life in 2010 and 2018, respectively. If QuickBird or WorldView-1 suffers any satellite failure or anomaly or other damage prior to the launch of WorldView-2, our revenue, customer relationships, business, prospects, financial condition and results of operations could be materially and adversely affected. Furthermore, if WorldView-2 is not successfully launched or commissioned as scheduled, certain of our competitors may be able to offer superior multi-spectral imagery during the period of any delay. If QuickBird goes out of service before WorldView-2 is launched and commissioned, we will not be able to offer multi-spectral imagery capabilities, which could cause us to lose customers or business opportunities to our competitors.

 

We may experience a launch failure or other satellite damage during the launch of our WorldView-2 satellite, which could lead to significant delays in expected revenue.

 

We may experience a launch failure with respect to our WorldView-2 satellite that could result in the partial or total loss of that satellite. Even if launched into orbit, WorldView-2 may fail to enter into its designated orbital location. Since our incorporation in 1994, we have launched four satellites, the first of which suffered a power system failure, causing a loss of communications four days after its launch in 1997. The second of these satellites failed to achieve orbit on launch in November 2000. The loss of, or damage to, a satellite due to a launch failure could result in significant delays in anticipated revenue to be generated by that satellite. Any significant delay in the commencement of service of a satellite due to a launch failure would delay and potentially permanently reduce the revenue anticipated to be generated by that satellite. In addition, we may not be able to accommodate affected customers with our other satellites until a replacement satellite is available, and 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 replacement.

 

If our satellites fail to operate as intended, our ability to collect imagery and market our products and services successfully could be materially and adversely affected.

 

Our satellites employ advanced technologies and sensors that are exposed to severe environmental stresses in space that could affect our satellites’ performance. Hardware component problems in space could lead to deterioration in performance or loss of functionality of a satellite, with attendant costs and revenue losses. In addition, human operators may execute improper implementation commands that may negatively impact a satellite’s performance. Exposure of our satellites to an unanticipated catastrophic event, such as a meteor shower or a collision with space debris, could reduce the performance of, or completely destroy, the affected satellite.

 

We cannot assure you that our QuickBird and WorldView-1 satellites will continue to operate successfully in space throughout their expected operational lives. In addition, we cannot assure you that, if it is successfully launched, WorldView-2 will operate successfully. Even if a satellite is operated properly, technical flaws in that

satellite’s sensors could significantly hinder its performance, which could materially affect our ability to collect imagery and market our products and services successfully.

 

If we suffer a partial or total loss of a deployed satellite, we would likely need a significant amount of time and incur substantial expense to replace that satellite. We may experience other problems with our satellites that may reduce their performance. During any period of time in which a satellite is not fully operational, we likely would 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 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.

 

We are dependent on foreign resellers for our international revenue. If these resellers fail to market or sell our products and services successfully, our business would be harmed.

 

We rely on foreign regional resellers to market and sell a significant portion of our products and services in the international market. We have intensified our efforts to further develop our operations in overseas markets. Our foreign resellers may not have the skill or experience to develop regional commercial markets for our imagery products and services. If we fail to enter into reseller agreements on a timely basis or if our foreign regional resellers fail to market and sell our imagery products and services successfully, these failures would negatively impact 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 which could adversely affect our revenue.

 

In 2008 and for the first three months of 2009, approximately 17.1% and 15.4%, respectively, of our revenue was derived from international sales, and we intend to continue to pursue international contracts. We expect to derive substantial revenue from international sales of our products and services. International operations are subject to certain risks, such as:

 

 

These risks are beyond our control and could have a material and adverse effect on our business.

 

We depend upon our ability to attract, train and retain employees. Our inability to do so, or the loss of key personnel, would seriously harm our business.

 

Because of the specialized nature of our business, we rely heavily on our ability to attract and retain qualified scientific, technical, managerial and sales and marketing personnel. The loss of one or more of our senior executive officers could result in the loss of knowledge, experience and technical expertise within the satellite imagery sector which would be detrimental to us, if we cannot recruit suitable replacements in a timely manner. The competition for qualified personnel in the commercial high resolution earth imagery industry is intense. Due to this intense competition, we may be unable to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel.

 

Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees. The loss of the services of any member of our senior management or the inability to hire or retain experienced management personnel could adversely affect our ability to execute our business plan and harm our operating results.

Satellites have limited operational lives and are expensive to replace. Loss of, or damage to, a satellite may require us to seek additional financing from outside sources, which we may be unable to obtain on favorable terms, if at all.

 

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. The expected ends of the operational lives of our currently in-orbit satellites are as follows:

 

 

The expected operational lives of these satellites are affected by a number of factors, 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. The failure of satellite components could cause damage to or loss of the use of a satellite before the end of its expected operational life. Electrostatic storms or collisions with other objects could also damage our satellites. We cannot assure you that each satellite will remain in operation until the end of its expected operational life. Furthermore, we expect the performance of each satellite to decline gradually near the end of its expected operational life. We can offer no assurance that QuickBird, WorldView-1, or WorldView-2, when launched, will maintain their prescribed orbits or remain operational.

 

We anticipate using funds generated from operations to fund the completion and launch of WorldView-2 and any follow-on satellites. If we do not generate sufficient funds from operations, we may need to obtain additional financing from outside sources to deploy WorldView-2 and any follow-on satellites. If we do not generate sufficient funds from operations and cannot obtain financing, we will not be able to deploy WorldView-2 or other follow-on satellites or be able to replace any of our operating satellites at the end of their operational lives. We cannot assure you that we will be able to generate sufficient funds from operations or raise additional capital on favorable terms or on a timely basis, if at all, to develop or deploy additional high resolution satellites.

 

Limited insurance coverage and availability may prevent us from obtaining insurance to cover all risks of loss.

 

We currently maintain $50.0 million and $242.5 million of one year in-orbit operations insurance coverage for QuickBird and WorldView-1, respectively, and $50.0 million of two year in-orbit insurance coverage for WorldView-1. We intend to continue this coverage to the extent it remains available at acceptable premiums. This insurance is not sufficient to cover the cost of an equivalent high resolution satellite. Any insurance proceeds received in connection with a partial or total loss of QuickBird or WorldView-1 may not be sufficient to cover the replacement cost, if we choose to do so, for such a high resolution satellite. In addition, this insurance will not protect us against all losses to QuickBird or WorldView-1 due to specified exclusions, deductibles and material change limitations, and it may be difficult to insure against certain risks, including a partial deterioration in satellite performance.

 

In addition, we currently maintain $230.0 million of launch plus initial year of operations insurance coverage and $60.0 million of launch plus first three years of operations insurance coverage for our WorldView-2 satellite. This insurance is not sufficient to cover the cost of an equivalent high resolution satellite. There can be no assurance that such coverage will cover all risks associated with the launch of our satellite or sufficiently cover all damages incurred in the event of a launch failure. Furthermore, our launch insurance will not cover any loss of revenue incurred as a result of a delayed or failed launch.

 

The price and availability of insurance have fluctuated significantly since we began offering commercial services in 2001. Although we intend to maintain insurance for all of our operating satellites, any determination we make as to whether to obtain insurance coverage will depend on a variety of factors, including the availability of insurance in the market and the cost of available insurance. Insurance market conditions or factors outside our control at the time we are in the market for the required insurance, such as failure of a satellite using similar components or a similar launch vehicle, could cause premiums to be significantly higher than current estimates and

could reduce amounts of available coverage. Higher premiums on insurance policies will increase our costs and consequently reduce our operating income by the amount of such increased premiums. If the terms of launch and in-orbit insurance policies become less favorable than those currently available, there may be limits on the amount of coverage that we can obtain or we may not be able to obtain insurance at all. Even if obtained, our launch and in-orbit operations insurance will not cover any loss in revenue incurred as a result of a delayed satellite launch or a partial or total satellite loss.

 

We depend on third parties to provide us with aerial imagery. If we are unable to obtain aerial imagery at sufficient resolution or on commercially reasonable terms, our ability to supplement our content library may be harmed, which could have a material adverse effect on our business, financial condition and results of operations.

 

We do not own planes or other similar aircraft and therefore depend on a network of aerial imagery suppliers to provide us with aerial imagery to include in our ImageLibrary. Aerial imagery is collected and processed by our aerial suppliers and then delivered to us to be uploaded into our ImageLibrary. Without this service, the comprehensiveness of our ImageLibrary could be diminished or our ImageLibrary could become outdated. An inability to successfully provide our customers with access to a comprehensive, up-to-date and diverse content library that meets their needs on commercial terms that make our services cost-effective to them could limit the scope and variety of our products and services and potentially affect the quality of our services. An inability to reach mutually acceptable commercial arrangements with our current aerial suppliers, or find new aerial providers to supply us with aerial imagery on commercially reasonable terms, could result in our inability to maintain or expand our customer base, which could have a material adverse effect on our business, financial condition and results of operations.

 

Future material weaknesses in our internal controls, if not properly corrected, could result in material misstatements in our financial statements.

 

In connection with the audit of our consolidated financial statements for the year ended December 31, 2007 and the review of the first quarter of 2008, our auditors identified two material weaknesses in our system of internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies in internal controls over financial reporting that results in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In years prior to 2007, our auditors identified additional material weaknesses and significant deficiencies. All material weaknesses and significant deficiencies identified in 2008 and earlier have since been remediated although it is possible that we may have additional material weaknesses in the future.

 

The first material weakness related to our not maintaining a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of GAAP commensurate with the financial reporting requirements and the complexity of our operations and transactions. In addition, we did not have the appropriate complement of personnel in accounting for income taxes. To remedy this material weakness, we hired an experienced tax professional to perform these duties, engaged an outside accounting consultant on a full time basis, and hired additional financial reporting resources with the appropriate level of accounting knowledge, experience and training in the application of GAAP to complement our existing personnel.

 

The second material weakness related to a lack of effective internal controls over the completeness and accuracy of stock-based compensation grants, forfeitures and modifications, and their related impact on stock-based compensation expense. To remedy this material weakness, we established a new internal policy that requires communication and approval of any non-standard stock option grants or modifications, fully transitioned to a stock option compensation software program and implemented multiple levels of review to ensure the completeness and accuracy of stock-based compensation calculations.

 

If we have any material weaknesses in the future and are not able to remedy these material weaknesses in a timely manner, we may be unable to provide our stockholders with the required financial information in a timely and reliable manner and we may misreport financial information, either of which could subject us to stockholder

litigation and regulatory enforcement actions. This could materially and adversely impact our financial condition as well as the market value of our securities.

 

We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, including our ability to incur additional indebtedness.

 

As of March 31, 2009, on a pro forma basis to reflect the consummation of the issuance of our senior secured notes, our total indebtedness was $341.8 million, which represented 45.5% of our total capitalization. Our substantial amount of indebtedness increases the possibility that we may be unable to generate sufficient cash to pay, when due, the principal of, interest on or other amounts due with respect to our indebtedness.

 

Our substantial indebtedness could have important consequences for you, including:

 

 

The indenture governing the senior secured notes contains a number of restrictions and covenants that, among other things, limit our ability to incur additional indebtedness, make investments, pay dividends or make distributions to our stockholders, grant liens on our assets, sell assets, enter into a new or different line of business, enter into transactions with our affiliates, merge or consolidate with other entities or transfer all or substantially all of our assets, and enter into sale and leaseback transactions. The credit market turmoil could negatively impact our ability to obtain future financing or to refinance our outstanding indebtedness.

 

Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. Our failure to comply with any of the restrictions and covenants under the indenture governing our senior secured notes could result in a default under the indenture, which could cause all of our existing indebtedness to be immediately due and payable. If our indebtedness is accelerated, we may not be able to repay our indebtedness or borrow sufficient funds to refinance it. In addition, in the event of an acceleration holders of our senior secured notes could proceed against the collateral securing the notes which includes nearly all of our assets, including the shares of capital stock of our subsidiaries, the QuickBird and WorldView-1 satellites in operation, and our WorldView-2 satellite, which is in final testing. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our indebtedness is in default for any reason, our business, financial condition and results of operations could be materially and adversely affected. In addition, complying with these restrictions and covenants may also cause us to take actions that are not favorable to our stockholders and may make it more difficult for us to successfully execute our business plan and compete against companies that are not subject to such restrictions and covenants.

 

We have a history of losses. If revenue grows more slowly than anticipated and operational costs increase, we may be unable to sustain profitability.

 

Our company was incorporated in 1994. We successfully launched and commissioned our QuickBird satellite in October 2001 and February 2002, respectively, and successfully launched and commissioned our WorldView-1 satellite in September and November 2007, respectively. While we have experienced increasing annual revenue since 2004 and achieved positive net income for the fiscal years 2006, 2007 and 2008, we experienced significant operating losses from 1994 through 2005. We had stockholders’ equity of $344.6 million as of December 31, 2007,

$402.3 million as of December 31, 2008 and $415.5 million as of March 31, 2009, which included an accumulated deficit of $52.8 million as of March 31, 2009. We may be unable to sustain profitability in the future if our revenue grows more slowly than anticipated or if operating expenses exceed our expectations or cannot be adjusted accordingly.

 

Risks Related to Our Initial Public Offering and Ownership of Our Common Stock

 

An active trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the initial public offering price.

 

Prior to our initial public offering, there has been no public market for our common stock. An active trading market for shares of our common stock may never develop or be sustained following our initial public offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The initial public offering price for our common stock was determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following our initial public offering. Consequently, you may not be able to sell your common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to acquire other companies, products or technologies by using our common stock as consideration.

 

We expect that the price of our common stock will fluctuate substantially.

 

You should consider an investment in our common stock risky and invest only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause the market price of our common stock to fluctuate are:

 

 

In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

 

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

 

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. The price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

 

If one or more of the analysts who elect to cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our common stock price to decline.

 

The obligations associated with being a public company will require significant resources and management attention, which may divert from our business operations.

 

As a result of our initial public offering, we will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. As a result, we will incur significant legal, accounting and other expenses that we did not previously incur. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements. We anticipate that these costs will materially increase our selling, general and administrative expenses.

 

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission in March 2011, and will likely require in the same report, a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. Although not currently subject to the requirements of Section 404, we have identified material weaknesses in the past that we have remediated. In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify additional deficiencies. We may not be able to remediate any future deficiencies in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price.

 

You may incur immediate and substantial dilution as a result of our initial public offering.

 

If you purchase common stock in our initial public offering, you may pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate dilution equal to the difference between the price you pay and our net tangible book value per share. As of March 31, 2009, our pro forma net tangible book value per share after giving effect to our initial public offering was $9.21.

Morgan Stanley & Co. Incorporated will be able to exert significant influence over us and our significant corporate decisions and may act in a manner that advances its best interest and not necessarily those of other stockholders.

 

Upon completion of our initial public offering, an affiliate of Morgan Stanley & Co. Incorporated will own approximately 32.0% of our outstanding common stock, or approximately 30.5% if the underwriters’ over-allotment option is exercised in full. In addition, upon completion of our initial public offering we will enter into an Investor Agreement with the affiliate of Morgan Stanley & Co. Incorporated pursuant to which it will have the right to designate for nomination five of the nine nominees for our board of directors, at least three of whom must be independent under the NYSE rules, proportionately adjusted for the actual size of our board of directors. As a result, the affiliate of Morgan Stanley & Co. Incorporated will have the ability to exert significant influence over us and our significant corporate decisions, including the outcome of all matters requiring stockholder approval, such as the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets and it may act in a manner that advances its best interests and not necessarily those of other stockholders, including investors in our initial public offering, by, among other things:

 

 

Our management team may allocate the proceeds of our initial public offering in ways in which you may not agree.

 

We have broad discretion in applying the net proceeds we will receive in our initial public offering. As part of your investment decision, you will not be able to assess or direct how we apply these net proceeds. If we do not apply these funds effectively, we may lose significant business opportunities. Furthermore, our stock price could decline if the market does not view our use of the net proceeds from our initial public offering favorably. A significant portion of the offering is by selling stockholders, and we will not receive proceeds from the sale of the shares offered by them.

 

Future sales of our common stock, or the perception that such sales may occur, could depress our common stock price.

 

Upon completion of our initial public offering, our current stockholders will hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. Sales by our current stockholders of a substantial number of shares after our initial public offering could significantly reduce the market price of our common stock.

 

We, our directors and executive officers, the selling stockholders and certain of our other stockholders have agreed with the underwriters that, without the prior written consent of Morgan Stanley & Co. Incorporated and J.P. Morgan Securities Inc., we and they will not, subject to certain exceptions and extensions, during the period ending 180 days after the date of this prospectus offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of directly or indirectly, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of common stock or any securities convertible into or exercisable or exchangeable for common stock. Our amended and restated certificate of incorporation authorizes us to issue up to 250.0 million shares of common stock, of which approximately 44.9 million shares will be outstanding and approximately 3.2 million shares will be issuable upon the exercise of outstanding stock options. All of our shares of common stock will be freely tradable after the expiration date of the lock-up agreements, excluding any shares acquired by persons who may be deemed to be our affiliates.

Approximately 22.6 million shares of our common stock held by our affiliates will continue to be subject to the volume and other restrictions of Rule 144 under the U.S. Securities Act of 1933, as amended, or the Securities Act. Morgan Stanley & Co. Incorporated and J.P. Morgan Securities Inc. may, in their sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up.

 

In addition, immediately following our initial public offering, we intend to file a registration statement registering under the Securities Act the shares of common stock reserved for issuance in respect of incentive awards to our officers and certain of our employees. If any of these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. See the information under the heading “Shares Eligible for Future Sale” for a more detailed description of the shares that will be available for future sales upon completion of our initial public offering.

 

Provisions in our amended and restated certificate of incorporation and by-laws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Provisions of our amended and restated certificate of incorporation and by-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include: the existence of a classified board of directors; limitations on the removal of directors; advance notice requirements for stockholder proposals and director nominations; the inability of stockholders to act by written consent or to call special meetings; the ability of our board of directors to make, alter or repeal our by-laws; and the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.

 

Generally, the amendment of our amended and restated certificate of incorporation requires approval by our board of directors and a majority vote of stockholders in some circumstances, or at least 80% of the voting power of the shares entitled to vote at an election of directors, in other circumstances. Any amendment to our by-laws requires the approval of either a majority of our board of directors or holders of at least 80% of the voting power of the shares entitled to vote at an election of directors.

 

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

 

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. This provision of the Delaware General Corporation Law could delay or prevent a change of control of our company, which could adversely affect the price of our common stock.

 

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

 

We have never declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends on our common stock in the future will be at the discretion of our board of directors.

Our amended and restated certificate of incorporation contains provisions that permit the redemption of our stock to avoid the loss of licenses and registrations.

 

Our amended and restated certificate of incorporation contains provisions that permit the redemption of stock from stockholders where necessary, in the judgment of our board of directors, to protect our licenses and registrations. The purpose of these provisions is to ensure our compliance with our licenses or registration from any governmental agency that are conditioned upon some or all of our stockholders possessing prescribed qualifications. Failure to comply with these requirements may result in fines or a denial of renewal, or revocation of these licenses or registrations. See “Description of Capital Stock — Anti-Takeover Provisions — Redemption.”

 

These provisions could prevent or discourage a merger, tender offer or proxy contest involving us and a non-U.S. entity, and could impede an attempt by a non-U.S. entity to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders and might provide our stockholders with the opportunity to sell their shares of our common stock at a premium over prevailing market prices.

 

 

This prospectus contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words, although not all forward-looking statements contain these words. These statements are only predictions.

 

Any forward-looking statements contained in this prospectus are based upon our historical performance and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements.

 

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

This prospectus is to be used by Morgan Stanley & Co. Incorporated in connection with agency transactions involving shares of our common stock. We will not receive any of the proceeds from such transactions.

 

We have never declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on then-existing conditions, including our financial condition and results of operations, contractual restrictions, including restrictive covenants contained in our credit facilities, capital requirements and other factors.

 

The following table sets forth our cash and cash equivalents and our unaudited capitalization, as of March 31, 2009:

 

 

This table should be read in conjunction with “Selected Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto appearing elsewhere in this prospectus.

 

 

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the as adjusted net tangible book value per share of our common stock immediately after our initial public offering. Our historical net tangible book value as of March 31, 2009 was $403.7 million, or $9.28 per share of common stock. Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding.

 

After giving effect to our sale of 1,366,256 shares of common stock, after deducting estimated underwriting discounts and commissions and offering expenses, our as adjusted net tangible book value as of March 31, 2009 would have been $413.0 million, or $9.21 per share. This amount represents an immediate decrease in net tangible book value to our existing stockholders of $0.07 per share and an immediate dilution to new investors of $9.79 per share. The following table illustrates this per share dilution:

 

 

If the underwriters exercise their over-allotment option to purchase additional shares in our initial public offering, our as adjusted net tangible book value at March 31, 2009 would be $452.0 million, or $9.61 per share, representing an immediate increase in as adjusted net tangible book value to our existing stockholders of $0.33 per share and an immediate dilution to investors participating in our initial public offering of $9.39 per share.

 

The following table summarizes as of March 31, 2009, on an as adjusted basis, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by our existing stockholders and by investors participating in our initial public offering, before deducting estimated underwriting discounts and commissions and offering expenses payable by us.

 

 

Sales of shares of common stock by the selling stockholders in our initial public offering will reduce the number of shares of common stock held by existing stockholders to 30,146,618, or approximately 67.2% of the total shares of common stock outstanding after our initial public offering, and will increase the number of shares held by new investors to 14,700,000, or approximately 32.8% of the total shares of common stock outstanding after our initial public offering.

 

The above discussion and tables also assume no exercise of any outstanding stock options or warrants except as set forth above and does not include 3,262,206 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2009 at a weighted average exercise price of $19.46 per share because the weighted average exercise price exceeds the initial public offering price of $19.00 per share.

 

Effective upon the completion of our initial public offering, an aggregate of 2,982,805 shares of our common stock will be reserved for future issuance under our option plans. To the extent that any of these options are exercised, new options are issued under our option plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in our initial public offering.

 

The selected consolidated statements of operations data for the years ended December 31, 2006, 2007 and 2008 and the selected consolidated balance sheet data as of December 31, 2007 and 2008 have been derived from our audited financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the years ended December 31, 2004 and 2005 and the selected consolidated balance sheet data as of December 31, 2004, 2005 and 2006 have been derived from our audited financial statements that are not included in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2008 and 2009 and the selected consolidated balance sheet data as of March 31, 2009 has been derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth herein. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or for any future period. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

Consolidated Statements of Operations

(in millions, except share and per share data)

 

Consolidated Balance Sheet

(in millions)

 

 

 

 

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and the other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We are a leading global provider of commercial high resolution earth imagery products and services. We own and operate two imagery satellites that we believe offer among the highest collection rates and resolution, and among the most sophisticated technical capabilities in the commercial market today. Together, our satellites are capable of collecting nearly one million square kilometers of imagery per day, an area greater than the combined land mass of France and Germany. This proprietary imagery is added daily to our ImageLibrary, which currently houses more than 660 million square kilometers of high resolution earth imagery, an area greater than four times the earth’s land mass. We believe that our ImageLibrary is the largest, most up-to-date and comprehensive archive of high resolution earth imagery commercially available. The planned launch of our WorldView-2 satellite in September or early October 2009 is expected to nearly double our collection capabilities to nearly two million square kilometers per day.

 

Our products and services support a wide variety of uses such as defense and intelligence initiatives, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management. We offer a range of on- and off-line distribution options designed to enable customers to easily access and integrate our imagery into their business operations and applications. Our principal customers include U.S. and foreign defense and intelligence agencies and a wide variety of commercial customers, such as internet portals, companies in the energy, telecommunications, utility and agricultural industries, and U.S. and foreign civil agencies.

 

We successfully commissioned our QuickBird satellite into full operational capability, or FOC, in February 2002. In January 2003, we entered into the ClearView agreement with NGA, under which we agreed to provide a minimum of $72.0 million of QuickBird imagery products and services to the U.S. government over a three year period, with two one-year extensions at NGA’s option. In January 2006, NGA exercised the first option to extend the ClearView agreement for one year with an additional $36.0 million purchase commitment.

 

In September 2003, we entered into the NextView agreement with NGA, under which we agreed to provide a minimum of $531.0 million of imagery products and services from our WorldView-1 satellite. Of this amount, $266.0 million was paid between September 2003 and November 2007, the date WorldView-1 became operational, and was used to offset the construction costs of the satellite. The remaining $265.0 million commitment was to be paid upon the delivery of imagery once WorldView-1 achieved FOC. The commitment was subsequently raised by $46.0 million to $311.0 million. While NGA has committed to spend these funds to purchase our products and services, actual spending of the funds is ultimately dependent on government appropriations of available funds. We do not recognize revenue prior to performing a service and funds being appropriated. We recognize revenue as described in Note 2 to the consolidated financial statements included elsewhere in this prospectus. The pre-FOC payments were accounted for as deferred revenue until WorldView-1 became operational in November 2007. The deferred revenue is being recognized ratably over the current estimated life of the customer relationship, or 10.5 years.

 

In February 2007, the ClearView agreement was merged with the NextView agreement to include delivery of imagery from the QuickBird satellite, which, together with sales of images from WorldView-1 after its commissioning in November 2007, generated $73.2 million of revenue in 2007, $157.9 million of revenue in 2008 and $39.3 million in the first three months of 2009. In January 2008, we amended the NextView agreement from image-based ordering to a service level agreement, or SLA, and increased the amount we are to receive under the NextView agreement from $265.0 million to $311.0 million. Under the SLA, we are obligated to make substantially all of the image tasking capacity of our WorldView-1 satellite available to NGA, as well as to meet certain service requirements related to the operational performance of our WorldView-1 satellite and related ground systems. In

the event that we do not meet the service level requirements, NGA is granted an allowance of up to $0.8 million of the total $12.5 million monthly fee, which NGA can use to extend the SLA period or apply to any new agreement between the parties. Any revenue deferred related to this allowance will be recognized when earned in future periods. For the three months ended March 31, 2009, we deferred $0.1 million of SLA revenue as a result of underperformance against the SLA performance requirements. However our performance against these requirements has not had a significant adverse impact on our revenue from NGA. Our commitment to provide a substantial portion of the WorldView-1 satellite imaging capacity to NGA under the NextView agreement limits our ability to provide tasking services from WorldView-1 to other customers, but does not materially limit our ability to sell collected imagery to other customers from our ImageLibrary. Our revenue from NGA under the NextView agreement is derived from sales of WorldView-1 imagery products under the SLA, as well as from non-SLA orders for imagery products and services. Historically, NGA has purchased more than the contracted amounts stipulated in the ClearView and NextView agreements.

 

We receive a significant majority of our revenue under the NextView agreement, which is scheduled to expire in July 2009. We are currently engaged in negotiations with NGA to extend or replace the NextView agreement and NGA has issued a presolicitation notice stating its intention to extend the NextView agreement through June 2010. We cannot assure you that the negotiations will be successful or that such purchases will continue at current levels or at all, or that there will not be gaps between the expiration of the NextView agreement and entry into any amendment or new agreement. If NGA does not continue the SLA at current levels and on similar terms beyond July 2009, our revenue, net income, liquidity and backlog would be materially and negatively impacted.

 

In January 2007, we acquired GlobeXplorer for $21.3 million, net of cash acquired. This acquisition broadened our customer portfolio, expanded our product offerings to include aerial and other satellite imagery content and added web-based distribution capabilities.

 

We conduct our business through two segments: (i) defense and intelligence and (ii) commercial. We have organized our business into these two segments because we believe that customers in these two groups are functionally similar in terms of their areas of focus and purchasing habits. Our imagery products and services are comprised of imagery that we process to varying levels according to the customer’s specifications. We deliver our products and services using the distribution method that best suits our customers’ needs. Customers acquire our imagery either by placing a tasking order for our satellites to collect data to their specifications or purchasing images that are archived in our ImageLibrary.

 

Revenue

 

Our principal source of revenue is the licensing of our earth imagery products and services to end users and resellers.

 

Revenue from defense and intelligence customers accounted for 66.1%, 68.2%, 80.2%, 83.0% and 85.3% of our total revenue in 2006, 2007, 2008 and the three months ended March 31, 2008 and 2009, respectively. Revenue from commercial customers accounted for 33.9%, 31.8%, 19.8%, 17.0% and 14.7% of our total revenue in 2006, 2007, 2008 and three months ended March 31, 2008 and 2009, respectively. Growth in defense and intelligence revenue as a percentage of total revenue was due to increases in NGA purchases under the ClearView and NextView agreements, including the start of deliveries of imagery products and services from our WorldView-1 satellite to NGA in late 2007. We expect this trend to continue in 2009 as a result of continued purchases by NGA. The launch of WorldView-2 in September or early October 2009 and its subsequent operational commissioning may contribute to a continuation of this trend, depending upon, in part, the date on which WorldView-2 is commissioned and we begin receiving revenue from the sales of WorldView-2 imagery, continued funding by the U.S. government of purchases of our imagery products and services and the success of DAP. Funding for U.S. government purchases of our imagery products and services is subject to appropriation of funds by Congress. Should appropriated funds fall below current levels, we could experience a decrease in our defense and intelligence revenue trend. We generated approximately 71.2%, 76.4%, 83.8%, 84.6% and 85.1% of our revenue in the United States and Canada and 28.8%, 23.6%, 16.2%, 15.4% and 14.9% of our revenue outside of the United States and Canada in 2006, 2007, 2008 and three months ended March 31, 2008 and 2009, respectively. We generated approximately 72.6% of our revenue from paid tasking and 27.4% from our ImageLibrary for the trailing twelve month period ended March 31, 2009

(treating all of the revenue from the SLA under the NextView agreement as paid tasking and excluding amortized revenue).

 

We will not recognize revenue from DAP until we commission into operation the ground terminal and can provide contractually specified access to our operational satellites. The success of DAP will depend on our ability to secure contracts with potential customers and on our ability to obtain U.S. government approval for contracts with these customers. As described in “Risk Factors — Failure to obtain or maintain regulatory approvals could result in service interruptions or could impede us from executing our business plan,” our failure to obtain approval from the U.S. government for future DAP customers could limit our sales and negatively affect our defense and intelligence revenue trend.

 

Defense and Intelligence Revenue

 

Our defense and intelligence segment consists of customers who are principally defense and intelligence agencies of U.S. or foreign governments. The U.S. government, through NGA, purchases our imagery products and services under the NextView agreement on behalf of various agencies within the U.S. government. Other U.S. defense and intelligence customers include defense and intelligence contractors, such as Harris Corporation and Lockheed Martin Corporation. Defense and intelligence contractors provide an additional outlet for our imagery by adding value to our imagery by combining it with other information to deliver a final product to a customer.

 

Our defense and intelligence customers focus on image quality, including resolution, frequency of area revisit and coverage, as well as ensuring availability of a certain amount of our capacity as they integrate our products and services into their operational planning. Our customers in this segment prefer to operate under contracts with purchase commitments, through which we receive quarterly or semi-annual pre-payments in exchange for delivering specific orders to the customer. Our revenue from our defense and intelligence customers has historically been largely from tasking orders, with a smaller portion from sales of imagery from our ImageLibrary. We believe this trend will continue. For the trailing twelve month period ended March 31, 2009, we generated approximately 87.1% of our defense and intelligence revenue from paid tasking and 12.9% from our ImageLibrary (treating all of the revenue from the SLA under the NextView agreement as paid tasking and excluding amortized revenue).

 

In 2008 and for the first three months of 2009, we sold to our defense and intelligence customers both directly and through resellers, with 96.8% and 95.2% respectively, of our defense and intelligence revenue coming from direct sales and 3.2% and 4.8% respectively, from resellers.

 

In 2008 and for the first three months of 2009, $205.5 million, or 93.1%, and $52.4 million, or 91.5%, respectively, of our defense and intelligence revenue was generated within the United States and Canada, and $15.3 million, or 6.9%, and $4.9 million, or 8.5%, respectively, was generated from international defense and intelligence customers. In 2008 and first three months of 2009, our top five defense and intelligence customers accounted for 97.6% and 97.7% respectively, of our defense and intelligence revenue. NGA was our only customer that accounted for more than 10% of our revenue in 2008 and for the first three months of 2009. NGA accounted for approximately 73.9% and 77.4% of our revenue for the year ended December 31, 2008 and the three months ended March 31, 2009, respectively.

 

Commercial Revenue

 

Our commercial business consists of both traditional customers, primarily civil governments, and energy, telecommunications, utility and agricultural companies that use our content for mapping, monitoring, analysis and planning activities, and customers that add our content to enhance and expand the information products and services that they develop and sell to the commercial market. We call this second type of customer an integrated information customer.

 

Most of our traditional commercial customers purchase our imagery products and services on an as-needed basis, either from the ImageLibrary or by placing tasking orders. By contrast, some of our integrated information customers prefer contracts to maintain access to our imagery archive, or provide subscriptions to access our ImageLibrary. The majority of revenue from the commercial segment has historically been generated from sales of

imagery from our ImageLibrary, with a smaller proportion from tasking orders. We believe this trend will continue in 2009. For the trailing twelve month period ended March 31, 2009, we generated approximately 20.8% of our commercial revenue from paid tasking and 79.2% from our ImageLibrary.

 

Our commercial customers are located throughout the world. We sell to these customers both directly and through resellers, with 58.6% and 58.5%, respectively, of our commercial revenue coming from resellers and 41.4% and 41.5%, respectively, coming from direct sales in 2008 and for the three month period ended March 31, 2009.

 

In 2008 and first three months of 2009, $25.1 million, or 46.1%, and $4.8 million, or 48.1%, respectively, of our commercial revenue was generated in the United States and Canada and $29.3 million or 53.9% and $5.1 million or 51.9%, respectively, was generated outside of the United States and Canada. In 2008 and first three months of 2009, our top five commercial customers accounted for 39.7% and 48.8% respectively, of our commercial revenue. None of these customers accounted for more than 10% of our revenue in 2008 and first three months of 2009. We believe that we will have additional opportunities in some of the countries with developing economies, such as Brazil, China, India and Russia, and, as a result, we expect that sales long-term growth in our commercial segment will be higher outside of the United States and Canada.

 

Expenses

 

Most of our revenue has come from the sale of products and services comprised of imagery from QuickBird and, since November 2007, WorldView-1. Given that most of the operating costs of a satellite are related to the pre-operation capital expenditures required to build and launch a satellite, there is no significant direct relationship between our cost of revenue and changes in our revenue. Our cost of revenue consists primarily of the cost of personnel, as well as the cost of operations directly associated with operating our satellites, retrieving information from the satellites, and processing the data retrieved. In 2007, we acquired an aerial imagery library when we purchased GlobeXplorer. Costs of acquiring the aerial imagery are amortized on an accelerated basis as a cost of revenue.

 

Our selling, general and administrative expenses consist primarily of labor, benefits, travel, rent and related overhead costs, third-party consultant payments, sales commissions and marketing expenses. Our selling, general and administrative expenses have been increasing in total, but decreasing as a percentage of revenue. We expect the increase in costs to continue, as we expand our sales and administrative resources to accommodate our revenue growth, increase capacity for product sales and distribution, and incur costs related to being a public company. As a result, we expect that our selling, general and administrative expenses will materially increase. As we expand our worldwide presence, we also expect an increase in travel, selling and administrative expenses. As a result, the trend of selling, general and administrative expenses decreasing as a percentage of revenue may not continue. The acquisition of GlobeXplorer resulted in an increase in staff, as well as additional lease, sales and operating expenses in 2007.

 

Depreciation and amortization consist primarily of depreciation of our satellites and other operating assets. In 2007, we began recording amortization of intangible assets as a result of the GlobeXplorer acquisition. Those costs were partially offset by lower depreciation associated with an extension of the estimated operational life of QuickBird and certain assets that continue to be used by us becoming fully depreciated. When WorldView-2 becomes operational, our earnings may be impacted as we will begin depreciating the satellite, which will increase our depreciation expense.

 

Our interest charges consist primarily of interest payments on borrowings used to finance satellite construction and are capitalized as a cost of our satellite construction. During 2008, substantially all interest incurred was capitalized to our satellite that was under construction. With the successful completion of WorldView-1, construction and related interest capitalization will be allocated to the WorldView-2 satellite currently under construction. The completion of our satellite construction will potentially impact our earnings by increasing our interest expense when WorldView-2 is operational, because we may no longer capitalize the interest on our debt.

 

We had net operating losses through 2005 and accumulated a deferred tax asset related to those losses. The accumulated deferred tax assets had a full valuation allowance recorded against it. In 2007, we removed the valuation allowance previously recorded against certain of our net deferred tax assets, based on a determination that

it is more likely than not that we will be able to fully use the related deferred tax assets in future years. In 2006, 2007 and 2008, taxable income was substantially offset by the utilization of our net operating loss carryforwards.

 

With the release of our valuation allowance in 2007, our 2008 income tax expense increased. However, we will not make federal tax payments, other than alternative minimum tax payments, until we fully utilize our net operating loss carryforwards, which is expected to occur during 2009.

 

Results of Operations

 

For the Three-Month Period Ended March 31, 2009 Compared to Three-Month Period Ended March 31, 2008

 

The following table summarizes our historical results of operations for the three-month period ended March 31, 2009 compared to the three-month period ended March 31, 2008 and our expenses as a percentage of revenue for the periods indicated:

 

		Three Months Ended
		March 31,								Change
		2008				2009				$				Percent
		(unaudited)
		(in millions)
Historical results of operations:
Defense and intelligence revenue		$	57.1			$	57.3			$	0.2				0.4	%
Commercial revenue			11.7				9.9				(1.8	)			(15.4	)
Total revenue			68.8				67.2				(1.6	)			(2.3	)
Cost of revenue excluding depreciation and amortization			6.7				6.4				(0.3	)			(4.5	)
Selling, general and administrative			18.4				22.6				4.2				22.8
Depreciation and amortization			18.8				18.7				(0.1	)			(0.5	)
Income from operations			24.9				19.5				(5.4	)			(21.7	)
Mark-to-market on derivative instrument			—				(1.8	)			(1.8	)			*
Interest income (expense), net			(1.4	)			—				1.4				*
Net income before income taxes			23.5				17.7				(5.8	)			(24.7	)
Income tax expense (benefit)			9.4				7.1				(2.3	)			(24.5	)
Net income		$	14.1			$	10.6			$	(3.5	)			(24.8	)%

 

 

 

		Three Months Ended
		March 31,
		2008				2009
Expenses as a percentage of revenue:
Total revenue			100.0	%			100.0	%
Cost of revenue, excluding depreciation and amortization			9.7				9.5
Selling, general and administrative			26.7				33.6
Depreciation and amortization			27.3				27.8
Income from operations			36.2				29.1
Interest income, net of interest expense			(2.0	)			—
Other non-operating expense			—				(2.7	)
Income before income taxes			34.2				26.4
Income tax (expense) benefit			13.7				10.6
Net income			20.5	%			15.8	%

 

Revenue for the three months ended March 31, 2009 decreased by $1.6 million, or 2.3%, to $67.2 million from $68.8 million for the three-month period ended March 31, 2008.

 

Revenue from our defense and intelligence segment increased by $0.2 million, or 0.4%, for the three months ended March 31, 2009. Our domestic defense and intelligence revenue decreased by $0.7 million, primarily due to stronger sales of imagery projects to NGA during the three months ended March 31, 2008. International defense and intelligence revenue increased by $0.9 million, due to stronger sales volumes in Japan and Taiwan.

 

Commercial revenue decreased by $1.8 million, or 15.4%, for the three months ended March 31, 2009. The decrease in commercial revenue was due to a decline of approximately $1.0 million in North America and $0.8 million in international sales. In North America, the lower sales were a result of lower sales volumes in both subscriptions and sales of archive imagery. International sales were lower primarily due to a significant one-time sale that occurred in the prior year as well as lower sales of archive imagery.

 

Cost of revenue for the three-month period ended March 31, 2009 decreased by $0.3 million, or 4.5%, to $6.4 million from $6.7 million for the three-month period ended March 31, 2008, due to (i) a $0.3 million increase in labor costs resulting from increase in salaries and fringe benefit costs, (ii) a $0.2 million increase in the amortization of aerial imagery library, (iii) a decrease in consulting costs of $0.3 million and (iv) a decrease of $0.4 million from third-party costs related to certain project sales completed in the prior year that did not occur at the same level in the current year.

 

Selling, general and administrative expenses for the three-month period ended March 31, 2009 increased by $4.2 million, or 22.8%, to $22.6 million from $18.4 million for the three-month period ended March 31, 2008. The increase is due to (i) a $1.9 million increase in expenses from payroll, bonus, travel and related costs due to increased headcount, (ii) increased stock compensation expense of $1.1 million resulting from stock option grants made in the first quarter of 2009, (iii) a $0.5 million increase in third party commission and fees due primarily to a commission earned as a result of the execution of a DAP contract, (iv) $0.6 million increase for bad debt expense and (v) a $0.1 million decrease in marketing expense due to the timing of trade shows.

 

Depreciation and amortization for the three-month period ended March 31, 2009 decreased by $0.1 million, or 0.5%, to $18.7 million from $18.8 million for the three-month period ended March 31, 2008.

 

The changes in mark-to-market on derivative instrument for the three months ended March 31, 2009 was a loss of $1.8 million. There was no change in mark-to-market on derivative instrument for the three months ended March 31, 2008. In January 2009, we entered into a swap transaction in which we traded the floating 3-month LIBOR rate on $130.0 million of our senior credit facility to a fixed rate of 2.00% until maturity of the loan on October 20, 2011. In February 2009, we amended our debt agreement for certain items and, as a result, our interest

rate on the loan increased and we were then subject to a minimum 3-month LIBOR rate of 3.0%. Given that the minimum 3-month LIBOR rate was higher than the swap rate, the swap was ineffective during the quarter ended March 31, 2009; therefore, the mark-to-market changes are being recorded in other non-operating costs. On February 9, 2009, when we amended our senior credit facility, the swap, as well as another swap that we entered into in February 2006, became ineffective and no longer qualified as cash flow hedges.

 

Interest income, net, for the three-month period ended March 31, 2009 decreased by $1.4 million to zero, from $1.4 million at March 31, 2008. Interest income, net, decreased due to lower average interest rate returns on our cash balances in the first three months of 2009, as compared to the first three months of 2008. During the first three months of 2008, only a portion of the interest expense was capitalized to the WorldView-2 satellite because our spending on the WorldView-2 satellite was not in excess of our outstanding debt. During the first three months of 2009, all of our interest was capitalized to the WorldView-2 satellite, as our spending on WorldView-2 then exceeded our outstanding debt.

 

Income tax expense for the three-month period ended March 31, 2009 decreased by $2.3 million, to $7.1 million from $9.4 million. The decrease in income tax expense is primarily due to a decrease in pre-tax income. We perform an analysis of our projected 2009 operating results to determine an effective overall tax rate to be applied for each quarter of 2009.

 

For the Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

 

The following tables summarize our historical results of operations for the year ended December 31, 2008 compared to the year ended December 31, 2007 and our expenses as a percentage of revenue for the periods indicated:

 

		Year
		Ended
		December 31,								Change
		2007				2008				$				Percent
		(in millions)
Historical results of operations:
Defense and intelligence revenue		$	103.4			$	220.8			$	117.4				113.5	%
Commercial revenue			48.3				54.4				6.1				12.6
Total revenue			151.7				275.2				123.5				81.4
Cost of revenue excluding depreciation and amortization			22.1				28.5				6.4				29.0
Selling, general and administrative			49.0				76.1				27.1				55.3
Depreciation and amortization			46.8				75.7				28.9				61.8
Income from operations			33.8				94.9				61.1				180.8
Interest income (expense), net			4.1				(3.0	)			(7.1	)			*
Income before income taxes			37.9				91.9				54.0				142.5
Income tax (expense) benefit			57.9				(38.1	)			(96.0	)			*
Net income		$	95.8			$	53.8			$	(42.0	)			(43.8	)%

 

 

 

		Year Ended
		December 31,
		2007				2008
Expenses as a percentage of revenue:
Total revenue			100.0	%			100.0	%
Cost of revenue, excluding depreciation and amortization			14.6				10.4
Selling, general and administrative			32.3				27.7
Depreciation and amortization			30.8				27.4
Income from operations			22.3				34.5
Interest income (expense), net			2.7				(1.1	)
Income before income taxes			25.0				33.4
Income tax (expense) benefit			38.2				(13.8	)
Net income			63.2	%			19.6	%

 

Revenue for the year ended December 31, 2008 increased by $123.5 million, or 81.4%, to $275.2 million from $151.7 million from the year ended December 31, 2007, primarily due to growth in domestic, which includes the U.S. and Canada, defense and intelligence revenue. The $117.4 million growth in defense and intelligence revenue for the year ended December 31, 2008 is primarily due to an increase in sales to NGA under the SLA. Domestic defense and intelligence, including NGA, increased by $114.6 million to $205.5 million from $90.9 million for the year ended December 31, 2007. The increase in NextView revenue of approximately $84.7 million is due to the first full year of operation of WorldView-1. The increase is also attributable to an increase of $8.2 million in revenue from special imagery projects in addition to revenue under the SLA. This increase includes $22.3 million of non-cash pre-FOC deferred revenue related to pre-WorldView-1 launch payments made by NGA pursuant to the NextView contract that was recognized during 2008.

 

International defense and intelligence revenue increased $2.8 million, or 22.4%, to $15.3 million from $12.5 million from the year ended December 31, 2007, primarily due to increased revenue from Asia.

 

Commercial revenue increased by $6.1 million, or 12.6%, to $54.4 million, primarily due to increased international revenue. Domestic commercial revenue increased $0.1 million, or 0.4%, to $25.1 million from $25.0 million from the year ended December 31, 2007. International commercial revenue increased $6.0 million, or 25.8%, to $29.3 million from $23.3 million from the year ended December 31, 2007, primarily due to growth in revenue from Central and South America, China, India and Europe.

 

Cost of revenue for the year ended December 31, 2008 increased by $6.4 million, or 29.0%, to $28.5 million from $22.1 million for the year ended December 31, 2007. The increase in expenses is due to the fact that we are no longer deferring certain contract costs and increased operation costs due to a full year of WorldView-1 operation. The increase in expenses is attributable to (i) a $2.6 million increase in the amortization of the aerial imagery library, (ii) $2.1 million related to subcontracted project costs, (iii) an increase in labor costs, stock compensation and bonus expense of $1.5 million, and (iv) an increase in consulting costs of $0.2 million.

 

Selling, general and administrative expenses for the year ended December 31, 2008 increased by $27.1 million, or 55.3%, to $76.1 million from $49.0 million from the year ended December 31, 2007. The increase is driven by (i) $11.8 million of increased expenses from compensation, travel and related costs resulting from increased headcount, (ii) an increase of $6.0 million in satellite insurance expense related to the first full year of WorldView-1 coverage, (iii) an increase in consulting expenses of $3.8 million, (iv) an increase of $3.5 million in bonus and stock compensation expense, and (v) an increase in marketing expenditures of $0.7 million. Although these expenses grew slower than our revenue in 2008, we believe that these investments are necessary to support the growth of the business.

 

Depreciation and amortization for the year ended December 31, 2008 increased by $28.9 million, or 61.8%, to $75.7 million from $46.8 million from the year ended December 31, 2007. Depreciation expense increased by $28.9 million for the year ended December 31, 2008 due to a full year of depreciation expense related to the

operation of WorldView-1. The increase in WorldView-1 depreciation of $39.5 million was offset by a decrease of $11.1 million related to the extension of the depreciable operational life of QuickBird from March 2009 to November 2010 and $0.5 million of depreciation of other fixed assets acquired during the year. The semi-annual assessment, performed in January 2008, of the estimated useful life of the QuickBird satellite led to an extension of the useful depreciable operational life of QuickBird, primarily attributable to the reduced consumption of fuel compared to previous estimates. The assessment performed in the third quarter of 2008 did not result in a change to the estimated life of QuickBird.

 

Interest income (expense), net, for the year ended December 31, 2008 decreased by $7.1 million to $3.0 million of net interest expense from $4.1 million of net interest income for the year ended December 31, 2007. We had interest expense in 2008 of $3.9 million and interest income of $0.9 million. The change from interest income to interest expense is primarily due to lower average cash balances and lower average interest rate returns on cash balances during 2008 as compared to 2007. Prior to the fourth quarter of 2007, when the WorldView-1 satellite became operational, all interest on our debt was being capitalized to the WorldView-1 satellite, in accordance with SFAS No. 34, Capitalization of Interest Cost, or SFAS No. 34. Prior to the fourth quarter of 2008, $16.2 million of our interest expense was capitalized. During the fourth quarter of 2008, the amount of capitalized costs for the WorldView-2 satellite exceeded the total value of our outstanding debt and thereafter all interest on our debt was capitalized to the WorldView-2 satellite. We expect to capitalize all interest associated with our debt until the WorldView-2 satellite is launched and operational.

 

Income tax expense for the year ended December 31, 2008 increased by $96.0 million to $38.1 million from a tax credit of $57.9 million for the year ended December 31, 2007. The increase is primarily due to the tax benefit in 2007 of $57.9 million reflecting the release of our valuation allowance as we determined that it was more likely than not, that we would utilize a certain portion of our net operating loss carry-forwards. Further, an increase in pre-tax income for the year ended December 31, 2008 compared to year ended December 31, 2007 resulted in higher income tax expense. During 2008, we utilized some of our deferred tax assets in accordance with SFAS No. 109, Accounting for Income Taxes, or SFAS No. 109. When our deferred tax assets are fully utilized we will pay cash taxes on our net income. We applied the estimated tax rate for the 2008 year to the quarterly results of operations. A portion of the increase is also due to an out-of-period adjustment that was made during the second quarter of 2008, which resulted in an increase in income tax expense of $1.4 million during the second quarter of 2008. In connection with the preparation of the second quarter income tax provision and the 2007 federal income tax return, we became aware of certain adjustments that should have been made to prior to the release the valuation allowance that was recorded in the fourth quarter of 2007. The net operating loss carryforward recorded as a deferred tax asset as of December 31, 2007 and related income tax benefit for the year ended December 31, 2007 should have been reduced by $1.4 million, due to tax basis and related tax depreciation differences. Prior to the fourth quarter of 2007, we held a full valuation allowance against our deferred tax related to net operating losses and only recognized alternative minimum tax expense.

For the Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

 

The following tables summarize our historical results of operations for the year ended December 31, 2007 compared to the year ended December 31, 2006 and our expenses as a percentage of revenue for the periods indicated:

 

 

 

 

Revenue for the year ended December 31, 2007 increased by $44.9 million, or 42.0%, to $151.7 million from $106.8 million for the year ended December 31, 2006, due to growth in defense and intelligence revenue and growth in commercial revenue attributable to our acquisition of GlobeXplorer. Revenue from our defense and intelligence segment increased by $32.8 million, or 46.5%, for the year ended December 31, 2007, primarily due to increased sales of $31.0 million to NGA and increased sales of $1.4 million to customers in Asia and Europe. Defense and intelligence revenue included $3.2 million of deferred revenue, recognized as a result of amortizing $266.0 million of pre-launch payments made by NGA to partially offset the cost of the construction of WorldView-1. Commercial revenue increased by $12.1 million, or 33.4%, of which $11.9 million was due to the GlobeXplorer acquisition.

Cost of revenue for the year ended December 31, 2007 increased by $5.6 million, or 33.9%, to $22.1 million from $16.5 million for the year ended December 31, 2006, primarily due to costs attributable to the GlobeXplorer acquisition. As a result of the GlobeXplorer acquisition, we purchase aerial imagery content from third-party suppliers that is recorded as aerial image library and expensed over a two-year period. This aerial image library expense was $3.7 million, or 66.1%, of the total increase in cost of revenue in 2007. Upon commissioning of WorldView-1 in November 2007, certain project costs that were once capitalized, either as satellite or deferred contract costs, began to be expensed due to the reduced requirements to support WorldView-1 as it achieved FOC and the lower relative level of effort required to construct and develop WorldView-2. These increases were offset by a decrease in costs related to a defense and intelligence project of $1.6 million due to a multi-year NGA project that was completed in 2006.

 

Selling, general and administrative expenses for the year ended December 31, 2007 increased by $11.6 million, or 31.0%, to $49.0 million from $37.4 million for the year ended December 31, 2006. Approximately $6.2 million, or 53.4%, of the total increase was attributable to the GlobeXplorer acquisition, higher marketing expenditures accounted for $1.3 million of the increase, an increase in compensation, travel and related costs accounted for $1.2 million of the increase and higher consulting expenses accounted for $0.9 million of the increase. Upon commissioning of WorldView-1 in November 2007, certain project costs that were once capitalized, either as costs of the satellite or deferred contract costs, began to be expensed due to the reduced requirements to support WorldView-1 as it became operational and a lower level of effort required to construct and develop WorldView-2. These increases were offset by a decrease in defense and intelligence internal sales commissions of $1.2 million in 2007.

 

Depreciation and amortization for the year ended December 31, 2007 increased by $0.8 million, or 1.7%, to $46.8 million from $46.0 million for the year ended December 31, 2006. Depreciation expense increased by $5.7 million due to WorldView-1 commencing operations on November 16, 2007. This increase was partially offset by decreases in depreciation due to $17.0 million of assets becoming fully depreciated in the first quarter of 2007 and a $2.8 million reduction related to the extension of the depreciable operational life of QuickBird from March 2009 to July 2009.

 

Interest income, net, for the year ended December 31, 2007 increased by $1.0 million, or 32.3%, to $4.1 million from $3.1 million for the year ended December 31, 2006, due to higher average cash balances through the first half of 2007 and a higher average interest rate realized in 2007.

 

Income tax benefit for the year ended December 31, 2007 was $57.9 million due to the release of our deferred tax asset valuation allowance. In 2007 and 2006, we had taxable income and were able to carry forward net operating losses from prior fiscal years to decrease the total amount of taxes paid. In 2007, we determined that it was more likely than not that we will be able to utilize approximately $59.1 million of our net deferred tax assets against taxable earnings generated in future periods.

 

Liquidity and Capital Resources

 

We believe that the combination of funds currently available to us and funds expected to be generated from operations will be adequate to finance our operations and development activities for the next twelve months, provided that NGA continues to purchase imagery from us at current levels and on similar terms after the scheduled expiration of the NextView agreement in July 2009. If the U.S. government does not continue to purchase imagery from us at current levels and on similar terms beyond July 2009 our liquidity would be negatively impacted and we may be unable to fund our operations and development activities without additional capital. Our cash and cash equivalents balance was $67.9 million at March 31, 2009.

 

In April 2009, we issued $341.8 million accreted value of our senior secured notes and used $280.3 million of the net proceeds to repay in full our senior credit facility and senior subordinated notes and will use the remaining balance for transaction costs and general corporate purposes. The note transaction resulted in net proceeds to us after giving effect to the debt repayment, increased cash interest expense and an extension of debt maturities. The net result is that our liquidity improved as of March 31, 2009, pro forma for the note transaction. As of the issuance date of the senior secured notes, we estimate that our cumulative spending on the WorldView-2 satellite exceeds the accreted value of our debt. Therefore, we expect to capitalize all of the interest expense, including the accretion of the debt discount and amortization of debt issue costs on the notes to the WorldView-2 satellite under construction until we reach commissioning of the satellite. We expect to launch our WorldView-2 satellite in September or early

October 2009. After launch, the satellite must be calibrated and tested to confirm operational capability, a commissioning process that typically takes several months.

 

We estimate the costs to test, insure and launch WorldView-2 will be $106.9 million for the remainder of 2009, including estimated fixed price contracted costs of $35.0 million for satellite hardware components and the launch service vehicle and estimated additional costs of $71.9 million. Additional costs to complete the final testing and launch of WorldView-2 consist predominantly of internal labor, capitalized interest and third party software. A delay in the launch would delay the requirement to make payments under some of our insurance and launch contracts that are tied to the launch date.

 

Upon commissioning of our WorldView-2 satellite, we believe that our cash flow from operations will exceed our capital expenditures and will be sufficient to meet our current long-term liquidity needs. If we begin a new satellite construction project, we may need to raise additional capital in order to fund a portion of the construction and launch costs.

 

We expect to fully utilize our deferred tax assets and tax credits by the fourth quarter of 2009 and expect to begin paying cash taxes in 2009.

 

The recent global economic crisis has caused disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy, and has impacted consumer spending levels. These macroeconomic developments could adversely affect our business, operating results or financial condition. Current or potential customers, including foreign governments, may delay or decrease spending on our products and services as their business and/or budgets are impacted by economic conditions. The inability of current and/or potential customers to pay us for our products and services may adversely affect our earnings and cash flows.

 

In summary, our cash flows were:

 

 

In the first three months of 2009, our operating cash flow reflected net income generated during the period of $10.6 million, adjusted for non-cash items such as depreciation and amortization expense of $18.7 million, stock-based compensation of $2.3 million and a non-cash deferred income tax expense of $6.0 million. Operating cash flows decreased to $26.1 million due to a decrease in accrued liabilities of $6.2 million and a decrease of $6.6 million primarily due to recognition of pre-FOC payments made to us by NGA under the NextView agreement.

 

In the first three months of 2008, our operating cash flow reflected net income generated during the period of $14.1 million, adjusted for non-cash items such as depreciation and amortization expense of $18.8 million, stock-based compensation of $1.1 million and a decrease in deferred income tax assets of $8.8 million. Cash flows decreased due to the recognition of pre-FOC payments made to us by NGA under the NextView agreement of $6.4 million.

 

In 2008, our operating cash flow reflected net income of $53.8 million, adjusted for non-cash items such as depreciation and amortization expense of $75.7 million, stock-based compensation of $4.2 million and non-cash deferred income tax expense of $34.7 million. Operating cash flows were increased to $144.4 million due to a $6.5 million increase in deferred revenue from related parties, an increase in accrued liabilities of $8.1 million, a decrease of $25.5 million primarily due to recognition of pre-FOC payments made to us by NGA under the NextView agreement and an increase in deferred contract costs from related parties of $10.3 million.

 

In 2007, our operating cash flow reflected net income of $95.8 million, adjusted for non-cash items such as depreciation and amortization expense of $46.8 million, stock-based compensation of $2.6 million and an increase in deferred income tax assets of $59.1 million. Additionally, short- and long-term deferred revenue, including those

from related parties, provided cash of $35.8 million primarily from receipt of payments under the NextView agreement. Cash flows decreased due to an increase in accounts receivable, including those from a related party, of $30.7 million primarily due to increased revenue in the fourth quarter from NGA.

 

In 2006, our operating cash flow reflected net income of $9.2 million, adjusted for non-cash items such as depreciation and amortization expense of $46.0 million and stock-based compensation of $2.2 million. Deferred revenue, including those from related parties, generated cash flow of $24.4 million primarily due to payments received from NGA under the NextView agreement.

 

Cash paid for satellite and related ground facilities construction was $80.5 million, $233.4 million, $131.8 million, $55.4 million and $15.6 million, in 2006, 2007, 2008 and the three months ended March 31, 2008 and 2009, respectively. The decrease in satellite construction spending is primarily due to the construction of both the WorldView-1 and WorldView-2 satellites during 2007 and construction of only the WorldView-2 satellite during 2008 and 2009. We purchased marketable securities of $90.7 million and $163.5 million in 2006 and 2007, respectively. The sale of those securities generated cash of $8.0 million and $249.2 million in 2006 and 2007, respectively. We did not have purchases or sales of securities in 2008 or for the first three months of 2009. We paid $9.4 million in the twelve month period ended December 31, 2007 for the acquisition of GlobeXplorer.

 

Cash provided by (used in) financing activities was $127.9 million, $(2.4) million, $37.0 million, $39.3 million and $(1.2) million in 2006, 2007 and 2008 and the three months ended March 31, 2008 and 2009, respectively. During 2006, we amended our senior credit facility, to increase its size by $30.0 million, and we received proceeds from the issuance of common stock, net of transaction costs, of $99.7 million, which were primarily used for construction of WorldView-2. In 2007, we paid $2.0 million in fees associated with the 2006 sale of common stock. In February 2008, we issued senior subordinated notes net of fees and other issuance costs, which primarily were legal fees, of $38.5 million to be used for the construction and launch of WorldView-2.

 

Senior Credit Facility and Senior Subordinated Notes

 

In April 2009, we repaid in full our $230.0 million senior credit facility and our senior subordinated notes with the proceeds from the issuance of our senior secured notes.

 

Senior Secured Notes

 

On April 28, 2009, we issued $355.0 million principal amount of our senior secured notes. Gross proceeds of $341.8 million were used to repay our senior credit facility and senior subordinated notes in full and pay fees and expenses associated with the transaction. The remaining proceeds will be used for general corporate purposes. The senior secured notes mature on May 1, 2014. The senior secured notes are guaranteed by our subsidiaries and secured by nearly all of our assets, including the shares of capital stock of our subsidiaries, the QuickBird and WorldView-1 satellites in operation, and our WorldView-2 satellite, which is in final testing. The senior secured notes bear interest at the rate of 10.5% per annum. Interest is payable semi-annually on May 1 and November 1 of each year.

 

We may redeem some or all of the senior secured notes after May 1, 2012, at a redemption price equal to 105.25% of their principal amount through May 1, 2013 and 100% thereafter plus, in each case, accrued and unpaid interest. In addition, at any time on or prior to May 1, 2012, we may redeem up to 35% of the aggregate principal amount of the senior secured notes with the net cash proceeds of certain equity offerings at 110.5% of the principal amount plus accrued and unpaid interest. In the event of certain change of control events, we must give holders of the senior secured notes an opportunity to sell us their notes at a purchase price of 101% of the accreted value of such notes, plus accrued and unpaid interest.

 

The indenture governing the senior secured notes contains a number of significant restrictions and covenants that, among other things, limit our ability to incur additional indebtedness, make investments, pay dividends or make distributions to our stockholders, grant liens on our assets, sell assets, enter into a new or different line of business, enter into transactions with our affiliates, merge or consolidate with other entities or transfer all or substantially all of our assets, and enter into sale and leaseback transactions. The credit market turmoil could negatively impact our ability to obtain future financing or to refinance our outstanding indebtedness.

Off-Balance Sheet Arrangements, Contractual Obligations, Guaranty and Indemnification Obligations

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements as of December 31, 2008 and March 31, 2009.

 

Contractual Obligations

 

We have various contractual obligations impacting our liquidity. The following represents our contractual obligations as of December 31, 2008:

 

 

 

 

Payments due on our senior credit facility are based on borrowings under such facility as of December 31, 2008. Our senior credit facility and senior subordinated notes were repaid in full in April 2009. For purposes of projecting future cash commitments in the table above, we have used an estimated interest rate under our senior credit facility of 9.5%. Payments due on our senior secured notes as of the date of their issuance totaled $341.8 million, due in more than 5 years (excluding interest). Our operating leases are primarily for office space in the United States. We generally believe leasing office space is more cost-effective than purchasing real estate. The distribution fee from Hitachi Software Engineering Company, Ltd., or Hitachi Software, is refundable if WorldView-2 is not commissioned. Construction contracts are commitments for the remaining estimated costs to test, launch and insure WorldView-2. The failure to launch WorldView-2 as scheduled may delay the period in which the construction contract payments detailed above are paid.

 

Guaranty and Indemnification Obligations

 

We enter into agreements in the ordinary course of business with resellers and others. Most of these agreements require us to indemnify the other party against third-party claims alleging that one of our products infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements require us to indemnify the other party against claims relating to property damage, personal injury or acts or omissions by us, our employees, agents or representatives. In addition, from time to time we have made guarantees regarding the performance of our systems to our customers.

 

Critical Accounting Policies

 

Our consolidated financial statements are based on the selection and application of GAAP that require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the

accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. Our significant accounting policies are presented within Note 2 to our consolidated financial statements included elsewhere in this prospectus.

 

Revenue Recognition

 

Our principal source of revenue is the licensing of earth imagery products and services for end users and resellers. Revenue is recognized when an arrangement exists, the solution has been delivered to our customers, the fee is fixed or determinable and the collection of funds is reasonably assured. We have a limited number of agreements with multiple deliverables that we review to determine whether any or all of the deliverables can be separated from one another. If separable, revenue is allocated to the various deliverables based on their relative fair value and recognized for each deliverable when the revenue recognition criteria for that specific deliverable are achieved.

 

All direct costs are expensed as a cost of revenue. An allowance for doubtful accounts receivable is provided for at the end of each period, based upon management’s assessment of the collectability of outstanding accounts receivable.

 

Our revenue is generated from: (i) licenses of imagery; (ii) subscription services; and (iii) the recognition of deferred revenue. We recognize revenue from each of our revenue sources as follows:

 

 

The following additional recognition policies have been applied for significant contracts.

 

NGA paid us $266.0 million to partially offset the cost of the construction and launch of WorldView-1. These payments were recorded as deferred revenue when received. When WorldView-1 reached FOC in November 2007, we began recognizing the deferred revenue on a straight line basis over the estimated customer relationship period of 10.5 years. We will be evaluating the estimated customer relationship period when events suggest the period may

have changed or at least on an annual basis, and may make adjustments to the amortization period if a change to the estimated life of the relationship is made.

 

Occasionally, we enter into contracts with customers that are required to be deferred over a period of time. If the contract does not have a specified contractual life, we make an assessment as to the likely term of the remaining period of the contractual relationship with the customer. A review of the contractual relationship is performed by management quarterly, and, as such, the potential amortization of the deferred revenue may be adjusted as appropriate.

 

Accounting for Stock Options

 

We apply SFAS No. 123R, which requires the fair value recognition provisions of stock-based compensation expense and measures stock compensation at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. We adopted SFAS No. 123R prospectively and therefore applied the valuation provisions of SFAS No. 123R to all new options and to options that were outstanding prior to the effective date that were subsequently modified.

 

In order to determine the fair value of our common stock on the date of grant for purposes of calculating the fair value of our stock option grants under SFAS No. 123R, we utilized the most recent valuation performed prior to the grant date, in each case within 90 days of the grant.

 

Since our common stock has not been publicly traded, we established a peer group of comparable publicly traded companies and utilized their reported cash operating earnings and revenue multiples as of each valuation date. At each valuation date we reviewed the companies that comprise the peer group and, from time to time have changed the composition of the peer group, based on changes to our business or the business of the comparable companies and other factors outside of our control, such as mergers and consolidations.

 

At each stock option grant date, we utilized the peer group data to calculate our expected volatility. Expected volatility was based on comparable companies’ four-year history. Expected term and forfeiture rate were based on the timing of our initial public offering, existing employee exercise patterns and our historical pre-vested forfeiture experience. The risk-free rate was based on an average of the yields of the treasury note with a maturity corresponding to the expected option life assumed at the grant date.

 

Changes to the underlying assumptions, including increased forfeiture rates, may have a significant impact on the underlying value of the stock options, which could have a material impact on our financial statements. As of March 31, 2009, there was a total of $12.2 million of unrecognized expense which will be recognized over a weighted average period of 3.0 years.

The following table sets forth all stock option grants, including the fair value of our common stock as determined by the board of directors from June 14, 2007 through the date of this prospectus and the variations between the fair value and the initial public offering price of $19.00 per share: