UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 000-22839
GLOBECOMM SYSTEMS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3225567
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
45 OSER AVENUE, 11788
HAUPPAUGE, NY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 231-9800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 12, 2001, there were 12,717,846 shares outstanding of the
Registrant's common stock, par value $.001.
1
GLOBECOMM SYSTEMS INC.
Index to the September 30, 2001 Form 10-Q
Page
----
Part I -- Financial Information
Item 1. Consolidated Financial Statements ....................................................................3
Consolidated Balance Sheets -- As of September 30, 2001 (unaudited) and June 30, 2001.................3
Consolidated Statements of Operations (unaudited) -- For the three months ended
September 30, 2001 and 2000.........................................................................4
Consolidated Statement of Changes in Stockholders' Equity (unaudited) -- For the three months
ended September 30, 2001............................................................................5
Consolidated Statements of Cash Flows (unaudited) -- For the three months ended September 30, 2001
and 2000............................................................................................6
Notes to Consolidated Financial Statements (unaudited)................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................................22
Part II -- Other Information
Item 1. Legal Proceedings....................................................................................22
Item 2. Changes in Securities and Use of Proceeds............................................................22
Item 3. Defaults Upon Senior Securities......................................................................22
Item 4. Submission of Matters to a Vote of Security Holders..................................................22
Item 5. Other Information....................................................................................22
Item 6. Exhibits and Reports on Form 8-K.....................................................................22
Signatures...........................................................................................25
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, JUNE 30,
2001 2001
---- ----
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 45,844 $ 45,038
Restricted cash 588 588
Accounts receivable, net 20,780 25,337
Inventories 12,305 15,285
Prepaid expenses and other current assets 668 803
--------------------------------
Total current assets 80,185 87,051
Fixed assets, net 29,647 30,456
Goodwill and other assets, net 7,483 7,492
--------------------------------
Total assets $ 117,315 $ 124,999
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,802 $ 15,317
Deferred revenue 4,531 5,825
Accrued payroll and related fringe benefits 1,226 931
Other accrued expenses 3,417 3,609
Deferred liability 450 300
Capital lease obligations 440 430
--------------------------------
Total current liabilities 21,866 26,412
Deferred liability, less current portion 3,191 3,341
Capital lease obligations, less current portion 9,991 10,105
Commitments and contingencies
Stockholders' equity:
Series A Junior Participating, shares authorized, issued and outstanding:
none at September 30, 2001 and June 30, 2001 -- --
Common stock, $.001 par value, 22,000,000 shares authorized, shares issued:
12,865,591 at September 30, 2001 and June 30, 2001 13 13
Additional paid-in capital 123,276 123,276
Accumulated deficit (39,845) (36,997)
Accumulated other comprehensive loss (83) (57)
Treasury stock, at cost, 147,745 shares at September 30, 2001 and
June 30, 2001 (1,094) (1,094)
--------------------------------
Total stockholders' equity 82,267 85,141
--------------------------------
Total liabilities and stockholders' equity $ 117,315 $ 124,999
================================
See accompanying notes.
3
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
--------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
--------------------------------------
Revenues $ 24,220 $ 26,444
Costs of revenues 21,399 21,330
--------------------------------------
Gross profit 2,821 5,114
--------------------------------------
Operating expenses:
Network operations 1,349 756
Selling and marketing 1,606 2,096
Research and development 247 210
General and administrative 2,647 4,494
--------------------------------------
Total operating expenses 5,849 7,556
--------------------------------------
Loss from operations (3,028) (2,442)
Other income (expense):
Interest income 423 978
Interest expense (243) (1,951)
--------------------------------------
Loss before income taxes and minority interests in
operations of consolidated subsidiary (2,848) (3,415)
Provision for income taxes -- (415)
--------------------------------------
Loss before minority interests in operations of consolidated subsidiary (2,848) (3,830)
Minority interests in operations of consolidated subsidiary -- 37
--------------------------------------
Net loss $ (2,848) $ (3,793)
======================================
Basic and diluted net loss per common share $ (0.22) $ (0.32)
======================================
Weighted-average shares used in the calculation of basic and
diluted net loss per common share 12,718 11,879
======================================
See accompanying notes.
4
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK TOTAL
--------------- PAID-IN ACCUMULATED COMPREHENSIVE ------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) SHARES AMOUNT EQUITY
-----------------------------------------------------------------------------------------------
Balance at June 30, 2001 12,866 $ 13 $123,276 $ (36,997) $ (57) 148 $ (1,094) $ 85,141
Comprehensive loss:
Net loss (2,848) (2,848)
Gain from foreign currency
translation 63 63
Unrealized loss on
available-for-sale equity
securities (89) (89)
-----------
Total comprehensive loss (2,874)
-----------------------------------------------------------------------------------------------
Balance at September 30, 2001 12,866 $ 13 $123,276 $ (39,845) $ (83) 148 $ (1,094) $ 82,267
===============================================================================================
See accompanying notes.
5
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
---------------------------------------
OPERATING ACTIVITIES:
Net loss $ (2,848) $ (3,793)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,028 2,366
Provision for doubtful accounts 63 218
Deferred income taxes -- 415
Internet access services -- (49)
Minority interests in operations of consolidated subsidiary -- (37)
Stock compensation expense -- 19
Interest on capital lease obligations -- 17
Changes in operating assets and liabilities:
Accounts receivable 4,494 (4,992)
Inventories 2,980 (2,603)
Prepaid expenses and other current assets 46 264
Other assets 9 34
Accounts payable (3,515) 1,442
Deferred revenue (1,294) 163
Accrued payroll and related fringe benefits 295 450
Other accrued expenses (192) (519)
---------------------------------------
Net cash provided by (used in) operating activities 1,066 (6,605)
---------------------------------------
INVESTING ACTIVITIES:
Purchases of fixed assets, net of non-cash capital lease expenditures (219) (1,261)
Restricted cash -- (77)
---------------------------------------
Net cash used in investing activities (219) (1,338)
---------------------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- 27
Payments under capital leases (104) (481)
---------------------------------------
Net cash used in financing activities (104) (454)
---------------------------------------
Effect of foreign currency translation on cash 63 (16)
Net increase (decrease) in cash and cash equivalents 806 (8,413)
Cash and cash equivalents at beginning of period 45,038 65,289
---------------------------------------
Cash and cash equivalents at end of period $ 45,844 $ 56,876
=======================================
See accompanying notes.
6
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all material adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation of
the results for such periods have been included. The consolidated balance sheet
at June 30, 2001 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The results of operations for the
three months ended September 30, 2001 are not necessarily indicative of the
results that may be expected for the full fiscal year ending June 30, 2002, or
for any future period. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements, and to make estimates and assumptions that affect the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates and assumptions.
The accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the fiscal year ended June 30, 2001 and the accompanying notes thereto
contained in the Company's Annual Report on Form 10-K, filed with the Securities
and Exchange Commission on September 28, 2001.
Comprehensive loss
Comprehensive loss for the three months ended September 30, 2001 of
approximately $2,874,000 includes a foreign currency translation gain of
approximately $63,000 and an unrealized loss on available-for-sale equity
securities of approximately $89,000. The Company's comprehensive loss for the
three months ended September 30, 2000 of approximately $3,809,000 includes a
foreign currency translation loss of approximately $16,000.
Income Taxes
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income. For the three months
ended September 30, 2001 and the year ended June 30, 2001, the Company incurred
a net loss, and accordingly, management provided a full valuation allowance for
the net deferred tax assets. For the three months ended September 30 2000, the
Company realized approximately $415,000 of deferred tax assets based on the
amount of taxable income reported for such period.
2. GOODWILL AND OTHER ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("SFAS No. 141"),
and No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), effective
for fiscal years beginning after December 15, 2001. SFAS No. 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations completed on
or after July 1, 2001. SFAS No. 141 also requires that the Company recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain specified criteria. Under SFAS No. 142, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. SFAS No. 142 also requires that the Company
identify reporting units for the purpose of assessing potential future
impairments of goodwill, reassess the useful lives of other existing recognized
intangible assets and cease amortization of intangible assets with an indefinite
useful life.
7
On July 1, 2001, the Company adopted the new rules on business combinations
and accounting for goodwill and other intangible assets. The Company's previous
business combinations were accounted for using the purchase method of
accounting. Goodwill has a net carrying amount of approximately $7,441,000, net
of accumulated amortization of $458,000 at September 30, 2001 and June 30, 2001.
Application of the nonamortization provisions of SFAS No. 142 resulted in a
decrease in net loss of approximately $215,000 ($.02 per diluted share) for the
three months ended September 30, 2001 and is expected to result in a decrease in
net loss of approximately $860,000 ($.07 per diluted share) for fiscal 2002.
During the quarter ended September 30, 2001, the Company performed the first of
the required impairment tests of goodwill and determined that no impairment
losses have been deemed necessary.
Had the Company been accounting for its goodwill under SFAS No. 142 for all
periods presented, the Company's net loss and net loss per diluted share would
have been as follows:
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
-------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net loss $ (2,848) $ (3,793)
Add back goodwill amortization - 39
-------------------------------------------------------
Adjusted net loss $ (2,848) $ (3,754)
=======================================================
Basic and diluted net loss per common share:
As reported $ (0.22) $ (0.32)
Goodwill amortization - -
-------------------------------------------------------
Adjusted basic and diluted net loss per common share $ (0.22) $ (0.32)
=======================================================
3. RESTRUCTURING CHARGE
During April 2001, in connection with management's plan to reduce costs and
to improve NetSat's operating efficiencies, the Company recorded a restructuring
charge of approximately $1,950,000 during the fourth quarter of fiscal year
ended June 30, 2001. The restructuring charge is primarily associated with the
discontinuance of certain NetSat product lines to enhance the Company's
strategic redeployment of its consolidated operating activities, enabling the
Company to offer its customers end-to-end satellite communications solutions
while combining operations and reducing costs. At September 30, 2001 and June
30, 2001, approximately $250,000 and $500,000 of the restructuring charge is
accrued and included in other accrued expenses in the accompanying consolidated
balance sheets, respectively.
4. BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Basic and diluted net loss per common share is computed by dividing the net loss
for the period by the weighted-average number of common and dilutive equivalent
shares outstanding for the period. Common equivalent shares consist of the
incremental common shares issuable upon the conversion of preferred stock (using
an if-converted method) and incremental shares issuable upon the exercise of
stock options and warrants (using the treasury stock method). Incremental common
equivalent shares are excluded from the calculation of diluted net loss per
share if their effect is anti-dilutive. Diluted net loss per share for the three
months ended September 30, 2001 and 2000, excludes the effect of approximately
120,000 and 583,000 stock options and approximately 0 and 20,000 warrants,
respectively, as their effect would have been anti-dilutive.
5. INVENTORIES
Inventories, which consist primarily of work-in-progress from costs
incurred in connection with specific customer contracts, are stated at the lower
of cost (using the first-in, first-out method of accounting) or market value.
8
Inventories consist of the following:
SEPTEMBER 30, JUNE 30,
2001 2001
----------------------------------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
Raw materials and component parts $ 567 $ 608
Work-in-progress 11,738 14,677
----------------------------------------
$ 12,305 $ 15,285
========================================
6. SEGMENT INFORMATION
The Company operates through two business segments. Its Ground Segment
Systems, Networks and Enterprise Solutions Segment, through Globecomm Systems
Inc., is engaged in the design, assembly and installation of ground segment
systems, networks and enterprise solutions for the complex and changing
communications requirements of its customers. Its Data Communications Services
Segment, through its wholly-owned subsidiary NetSat Express Inc., is engaged in
providing high-speed, satellite-delivered data communications to developing
markets worldwide. NetSat Express is currently providing Internet access to
customers who have limited or no access to terrestrial network infrastructure
capable of supporting the economical delivery of such services.
The Company's reportable segments are business units that offer different
products and services. The reportable segments are each managed separately
because they provide distinct products and services.
The following is the Company's business segment information for the three
months ended September 30, 2001 and 2000 and as of September 30, 2001 and June
30, 2001:
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
----------------------------------------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Ground Segment Systems, Networks and
Enterprise Solutions $ 18,936 $ 20,657
Data Communications Services 6,264 6,801
Intercompany eliminations (980) (1,014)
-------------- --------------
Total revenues $ 24,220 $ 26,444
============== ==============
Loss from operations:
Ground Segment Systems, Networks and
Enterprise Solutions $ (1,164) $ (129)
Data Communications Services (1,867) (2,348)
Interest income 423 978
Interest expense (243) (1,951)
Provision for income taxes -- (415)
Minority interests in operations of consolidated subsidiary -- 37
Intercompany eliminations 3 35
-------------- --------------
Net loss $ (2,848) $ (3,793)
============== ==============
Depreciation and amortization:
Ground Segment Systems, Networks and
Enterprise Solutions $ 446 $ 426
Data Communications Services 585 1,940
Intercompany eliminations (3) --
-------------- --------------
Total depreciation and amortization $ 1,028 $ 2,366
============== ==============
9
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
-------------------------------------------
(UNAUDITED)
(IN THOUSANDS)
Expenditures for long-lived assets:
Ground Segment Systems, Networks and
Enterprise Solutions $ 139 $ 509
Data Communications Services 80 1,409
--------------- ----------------
Total expenditures for long-lived assets $ 219 $ 1,918
=============== ================
SEPTEMBER 30, JUNE 30,
2001 2001
(UNAUDITED) (AUDITED)
-------------------------------------------
(IN THOUSANDS)
Assets:
Ground Segment Systems, Networks and
Enterprise Solutions $ 130,040 $ 136,103
Data Communications Services 22,943 21,985
Intercompany eliminations (35,668) (33,089)
--------------- ----------------
Total assets $ 117,315 $ 124,999
================ ==============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-Q contains certain forward-looking
statements that involve risks and uncertainties. Our actual results could differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below as well as those discussed in our other filings with the
Securities and Exchange Commission, including our Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q.
OVERVIEW
Since our inception, a majority of our revenues have been generated by our
ground segment systems, networks and enterprise solutions business. Contracts
for these ground segment systems and networks and communications services have
been fixed-price contracts in virtually all cases. Profitability of such
contracts is subject to inherent uncertainties as to the cost of performance. In
addition to possible errors or omissions in making initial estimates, cost
overruns may be incurred as a result of unforeseen obstacles including both
physical conditions and unexpected problems encountered in engineering design
and testing. Since our business may at times be concentrated in a limited number
of large contracts, a significant cost overrun on any contract could have a
material adverse effect on our business, financial condition and results of
operations. The period from contract award through installation of ground
segment systems and networks and communications services supplied by us
generally is from three to twelve months.
We recognize revenue in accordance with Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, for our short-term (less than
twelve months in term) production-type contracts that are sold separately as
stand-alone ground segment systems. Such contracts typically require less
engineering, drafting and design efforts than other longer-term production-type
projects and usually require customer acceptance upon completion of installation
of the equipment at the customers' site. Accordingly, we typically recognize
80-90% of the contract value upon shipment with the balance recognized upon
receipt of the customers' final acceptance. Installation is not deemed to be
essential to the functionality of the equipment since installation is mechanical
in nature and does not require significant change to the features or capability
of the equipment, or require complex software integration and interfacing. In
addition, the customer or other vendors can install the equipment; and generally
the cost of installation is approximately 10-20% of the sales value of the
related equipment. Payments received in advance by customers are deferred until
shipment and are presented as deferred revenue.
10
We use the percentage-of-completion method of accounting to recognize
revenue for our long-term (in excess of twelve months in term), more complex
production-type contracts that are generally integrated into complete ground
segment networks, upon the achievement of certain contractual milestones, in
accordance with Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.
NetSat Express' revenues are derived primarily from Internet access service
fees and sales of hardware and equipment. Service revenues from Internet access
are recognized ratably over the period in which services are provided. Sales of
hardware and equipment are recognized upon shipment. Payments received in
advance of providing Internet access services are deferred until the period such
services are provided and are presented as deferred revenue.
Contract costs generally include purchased material, direct labor, overhead
and other indirect costs. Anticipated contracted losses are recognized as they
become known. Costs of revenues consist primarily of the costs of purchased
materials, direct labor and related overhead expenses, project-related travel,
living costs and subcontractor salaries. In addition, cost of revenues relating
to Internet access service fees consists primarily of satellite space segment
charges and Internet connectivity fees. Network operations expenses consist
primarily of costs associated with the operation of the network operations
center on a twenty-four hour a day, seven day a week basis including personnel
and related costs. Selling and marketing expenses consist primarily of salaries,
travel and living costs for sales and marketing personnel. Research and
development expenses consist primarily of salaries and related overhead expenses
paid to engineers. General and administrative expenses consist of expenses
associated with our management, finance, contract and administrative functions.
We anticipate that network operations expenses and research and development
expenses will continue to increase during the next several years due to expected
increases in personnel and related expenses to support our increasing service
base.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 and 2000
Revenues. Revenues decreased by $2.2 million, or 8.4%, to $24.2 million for
the three months ended September 30, 2001 compared to $26.4 million for the
three months ended September 30, 2000. The decrease reflects a continuing
difficult operating environment due to the global economic slowdown in the
telecommunications industry.
Gross Profit. Gross profit decreased by $2.3 million, or 44.8%, to $2.8
million for the three months ended September 30, 2001 from $5.1 million for the
three months ended September 30, 2000. The decrease reflects less revenues
generated due to the global economic slowdown. Gross profit as a percentage of
revenues for the three months ended September 30, 2001, decreased to 11.6 %,
compared to 19.3% for the same period in the preceding year. This decrease is
attributable to an increase in costs of sales from the renegotiation of one of
our capitalized lease arrangements to an operating lease arrangement in the
fourth quarter of fiscal 2001 as well as a decrease in the utilization of
network capacity. We expect our gross margins to decline in the future due to
the under-utilization of satellite transponder space and the global economic
slowdown in the telecommunications industry.
Network Operations. Network operations expenses increased by $0.6 million,
or 78.4%, to $1.3 million for the three months ended September 30, 2001 compared
to $0.8 million for the three months ended September 30, 2000. The increase is
due to the continuing expansion of our network operations center and related
expenses to support the increasing service base.
Selling and Marketing. Selling and marketing expenses decreased by $0.5
million, or 23.4%, to $1.6 million for the three months ended September 30, 2001
compared to $2.1 million for the three months ended September 30, 2000. This
decrease is attributable to a cost reduction program, which included a reduction
in work force partially offset by additional selling and marketing efforts
relating to an increase in bid and proposal activity.
Research and Development. Research and development expenses remained
relatively consistent for the three months ended September 30, 2001 compared to
the three months ended September 30, 2000.
General and Administrative. General and administrative expenses decreased
by $1.8 million, or 41.1%, to $2.6 million for the three months ended September
30, 2001 compared to $4.5 million for the three months ended September 30, 2000.
General and administrative expenses as a percentage of revenues decreased to
10.9% for the three months ended September 30, 2001 from 17.0% for the three
months ended September 30, 2000. The decrease
11
in general and administrative expenses is primarily due to reduced depreciation
expense related to the renegotiation of one of our capitalized lease
arrangements to an operating lease arrangement in the fourth quarter of fiscal
2001.
Interest Income. Interest income decreased by $0.6 million, or 56.7%, to
$0.4 million for the three months ended September 30, 2001 compared to $1.0
million for the three months ended September 30, 2000. The decrease is primarily
the result of reduced cash and cash equivalents due to cash used in operating
and investing activities during the fiscal year ended June 30, 2001 as well as a
decline in interest rates.
Interest Expense. Interest expense decreased by $1.7 million, or 87.5%, to
$0.2 million for the three months ended September 30, 2001 compared to $2.0
million for the three months ended September 30, 2000. The decrease relates to
the renegotiation of one of our capitalized lease arrangements to an operating
lease arrangement in the fourth quarter of fiscal 2001.
Provision for Income Taxes. Provision for income taxes decreased by $0.4
million, or 100.0%, for the three months ended September 30, 2001 compared to
the three months ended September 30, 2000. As the Company incurred a net loss
for the three months ended September 30, 2001 and since the Company provided a
full valuation allowance for the net deferred tax assets at June 30, 2001, no
provision for income taxes was recorded during the three months ended September
30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had working capital of $58.3 million, including
cash and cash equivalents of $45.8 million, restricted cash of $0.6 million, net
accounts receivable of $20.8 million, inventories of $12.3 million and prepaid
expenses and other current assets of $0.7 million, offset by $11.8 million in
accounts payable, $4.5 million in deferred revenue and $5.5 million in accrued
expenses and other current liabilities.
Net cash provided by operating activities during the three months ended
September 30, 2001 was $1.1 million, which primarily relates to a decrease in
accounts receivable of $4.4 million due to the timing of collections on certain
contract billings and a decrease in inventories of $3.0 million due to the
completion of certain jobs offset by a decrease in accounts payable of $3.5
million relating to the timing of vendor payments and the current period net
loss of $2.8 million.
The Company maintains a $5.0 million credit facility consisting of (1) a
$2.0 million secured domestic line of credit and (2) a $3.0 million secured
export-import guaranteed line of credit. Each line of credit bears interest at
the prime rate (6.0% at September 30, 2001) plus 0.50% per annum and is
collateralized by a first security interest on all our assets. The credit
facility contains certain financial covenants, which we were in compliance with
at September 30, 2001. As of September 30, 2001, no amounts were outstanding
under this credit facility.
We also lease satellite space segment services and other equipment under
various operating lease agreements, which expire in various years through 2014.
Future minimum lease payments due on these leases through September 30, 2002 are
approximately $20.1 million.
On November 7, 2001, the Board of Directors authorized a stock repurchase
program of up to $2.0 million of the Company's outstanding stock, representing
approximately 3.7% of the total shares outstanding on that date. Timing, price,
quantity and the manner of purchases will be at the discretion of management,
depending on market conditions and other factors, subject to compliance with the
applicable securities laws.
We expect that our cash and working capital requirements for our operating
activities will continue to increase as we expand our operations. Management
anticipates that we will experience negative cash flows due to continued
operating losses by NetSat Express, Inc.
Our future capital requirements will depend upon many factors, including
the success of our marketing efforts in the ground segment systems, networks,
and communications services business, the nature and timing of customer orders,
the extent to which we are able to locate additional strategic suppliers in
whose technology we wish to invest, the extent to which we must conduct research
and development efforts internally and potential acquisitions of complementary
businesses, products or technologies. Based on current plans, we believe that
our existing capital resources will be sufficient to meet working capital
requirements through September 30, 2002. However, we cannot assure you that
there will be no change that would consume available resources significantly
before that time. For example, recent terrorist attacks on the United States, as
well as future events occurring in response to or in connection
12
with them, including, without limitation, future terrorist attacks against the
United States or its allies or military or trade or travel disruptions impacting
our ability to sell and market our products and services in the United States
and internationally may impact our results of operations. Additional funds may
not be available when needed and even if available, additional funds may be
raised through financing arrangements and/or the issuance of preferred or common
stock or convertible securities on terms and prices significantly more favorable
than those of the currently outstanding common stock, which could have the
effect of diluting or adversely affecting the holdings or rights of our existing
stockholders. If adequate funds are unavailable, we may be required to delay,
scale back or eliminate some of our operating activities, including without
limitation, the timing and extent of our marketing programs, the extent and
timing of hiring additional personnel and our research and development
activities and operating activities of NetSat Express. We cannot assure you that
additional financing will be available to us on acceptable terms, or at all.
CERTAIN BUSINESS CONSIDERATIONS
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW AND EXPECT OUR
LOSSES TO CONTINUE.
We have incurred significant net losses since we began operating in August
1994. We incurred net losses of $2.8 million for the three months ended
September 30, 2001, $18.7 million during the fiscal year ended June 30, 2001 and
$3.6 million during the fiscal year ended June 30, 2000. As of September 30,
2001, our accumulated deficit was approximately $39.8 million. We anticipate
that we will continue to incur net losses. Our ability to achieve and maintain
profitability will depend upon our ability to generate significant revenues
through new customer contracts and the expansion of our existing products and
services, including our communications services. We cannot assure you that we
will be able to obtain new customer contracts or generate significant additional
revenues from those contracts or any new products or services that we introduce.
Even if we become profitable, we may not sustain or increase our profits on a
quarterly or annual basis in the future.
SINCE SALES OF SATELLITE COMMUNICATIONS EQUIPMENT ARE DEPENDENT ON THE GROWTH OF
COMMUNICATIONS NETWORKS, AS MARKET DEMAND FOR THESE NETWORKS DECLINES, OUR
REVENUE AND PROFITABILITY ARE LIKELY TO DECLINE.
We derive, and expect to continue to derive, a significant amount of
revenue from the sale of satellite ground segment systems and networks. If the
long-term growth in demand for communications networks does not occur as we
expect, the demand for our satellite ground segment systems and networks may
decline or grow more slowly than we expect. As a result, we may not be able to
grow our business, our revenue may decline from current levels and our results
of operations may be harmed. The demand for communications networks and the
products used in these networks is affected by various factors, many of which
are beyond our control. For example, general economic conditions have recently
deteriorated and affected the overall rate of capital spending by our customers.
Also, many companies are finding it increasingly difficult to raise capital to
finish building their communications networks and therefore are placing fewer
orders with our customers. We believe that the current economic slowdown may
result in a softening of demand from our customers. We believe that this
slowdown is generally the result of slower than forecasted growth in a number of
key segments, including communications infrastructure equipment, resulting from
a reduction in the capital spending of service providers. We cannot predict the
extent to which this softening of demand will continue. Further, increased
competition among satellite ground segment systems and networks manufacturers
may lead to overcapacity and falling prices.
RISKS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS COULD RESTRICT OUR
ABILITY TO EXPAND GLOBALLY AND HARM OUR BUSINESS AND PROSPECTS.
We market and sell our products and services in the United States and
internationally. We anticipate that international sales will continue to account
for a significant portion of our total revenues for the foreseeable future. We
presently conduct our international sales in the following geographic areas:
Africa, the Asia-Pacific Region, Australia, Central and South America, Eastern
and Central Europe and the Middle East. There are some risks inherent in
conducting our business internationally, including:
o political and economic instability in international markets, as well as a
result of the terrorist attacks in the United States on September 11, 2001
and the related outbreak of hostilities, could impede our ability to
deliver our products and services to customers and harm our results of
operations;
o changes in regulatory requirements could restrict our ability to deliver
services to our international customers;
13
o export restrictions, tariffs, licenses and other trade barriers could
prevent us from adequately equipping our network facilities;
o differing technology standards across countries may impede our ability to
integrate our products and services across international borders;
o protectionist laws and business practices favoring local competition may
give unequal bargaining leverage to key vendors in countries where
competition is scarce, significantly increasing our operating costs;
o increased expenses associated with marketing services in foreign countries;
o decreases in value of foreign currency relative to the U.S. dollar;
o relying on local subcontractors for installation of our products and
services;
o difficulties in staffing and managing foreign operations;
o potentially adverse taxes;
o complex foreign laws and treaties; and
o difficulties in collecting accounts receivable.
These and other risks could impede our ability to manage our international
operations effectively, limit the future growth of our business, increase our
costs and require significant management attention.
IF WE ARE NOT SUCCESSFUL IN SELLING OUR COMMUNICATIONS SERVICES TO OUR CUSTOMERS
FOR WHOM WE HAVE HISTORICALLY PROVIDED SATELLITE GROUND SEGMENT SYSTEMS AND
NETWORKS, OUR RESULTS OF OPERATIONS WILL BE HARMED.
We have historically provided our customers with satellite ground segment
systems and networks as a product on a project basis. We intend on marketing to
our customers our communications services. These services not only provide the
implementation of the satellite ground segment systems and networks but also
provides the ongoing operation and maintenance of these systems and networks. If
we are not successful in selling these communications services to our existing
customers it will harm our results of operations.
IF NETSAT EXPRESS DOES NOT EXECUTE ITS BUSINESS STRATEGY OR IF THE MARKET FOR
ITS SERVICES FAILS TO DEVELOP OR DEVELOPS MORE SLOWLY THAN IT EXPECTS, OUR STOCK
PRICE MAY BE ADVERSELY AFFECTED.
NetSat Express' future revenues and results of operations are dependent on
its execution of its business strategy and the development of the market for its
current and future services. In particular, the current level of utilization of
NetSat Express' transponder space continues to harm our results of operation,
and our gross profit margins in particular. If NetSat does not substantially
utilize its transponder space, our results of operations, and our gross profit
margins in particular, will be further harmed. We cannot assure you that the
transponder space will be substantially utilized.
CURRENCY DEVALUATIONS IN THE FOREIGN MARKETS IN WHICH WE OPERATE COULD DECREASE
DEMAND FOR OUR PRODUCTS AND SERVICES.
We denominate our foreign sales in U.S. dollars. Consequently, decreases in
the value of local currencies relative to the U.S. dollar in the markets in
which we operate, adversely affect the demand for our products and services by
increasing the price of our products and services in the currencies of the
countries in which they are sold. The difficult economic conditions in
international markets and the resulting foreign currency devaluations have led
to a decrease in demand for our products and services and the decrease in
bookings received by us from these and other foreign regions has adversely
effected our results of operations for the fiscal year ended June 30, 2001 and
the three months ended September 30, 2001. We expect that these negative trends
will continue to adversely impact our results of operations.
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YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, OUR STOCK
PRICE COULD DECLINE SIGNIFICANTLY.
Our future revenues and results of operations may significantly fluctuate
due to a combination of factors, including:
o general political and economic conditions in the United States and abroad
as a result of the terrorist attacks on September 11, 2001 and the related
outbreak of hostilities;
o the length of time needed to initiate and complete customer contracts;
o delays and/or a decrease in the booking of new contracts;
o the demand for and acceptance of our existing products and services;
o the cost of providing our products and services;
o the introduction of new and improved products and services by us or our
competitors;
o market acceptance of new products and services;
o the mix of revenue between our standard products, custom-built products and
our communications services;
o the timing of significant marketing programs;
o our ability to hire and retain additional personnel;
o the competition in our markets; and
o difficult global economic conditions and the currency devaluations in
international markets which have, and may continue to, adversely impact our
quarterly results.
Accordingly, you should not rely on quarter-to-quarter comparisons of our
results of operations as an indication of our future performance. It is possible
that in future periods our results of operations may be below the expectations
of public market analysts and investors, which could cause the trading price of
our common stock to decline.
OUR MARKETS ARE HIGHLY COMPETITIVE AND WE HAVE MANY ESTABLISHED COMPETITORS, AND
WE MAY LOSE MARKET SHARE AS A RESULT.
The markets in which we operate are highly competitive and this competition
could harm our ability to sell our products and services on prices and terms
favorable to us. Our primary competitors in the satellite ground segment and
networks market include vertically integrated satellite systems providers like
Nippon Electric Corporation, systems integrators like IDB Systems, a division of
MCI WorldCom Inc. and equipment manufacturers who also provide integrated
systems like Andrew Corporation and Vertex-RSI.
In the communications services and Internet access services markets, we
compete with other satellite communication companies who provide similar
services, like Loral CyberStar, Inc. and PanAmSat Corporation and Verestar, as
well as other Internet services providers. In addition, we may compete with
other communications service providers like Teleglobe, Inc. and MCI WorldCom
Inc. We anticipate that our competitors may develop or acquire services that
provide functionality that is similar to that provided by our services and that
those services may be offered at significantly lower prices or bundled with
other services. In addition, we anticipate that continuing deregulation
worldwide is expected to result in the formation of a significant number of new
competitive service providers over the next two to three years. These
competitors have the financial resources to withstand substantial price
competition and may be in a better position to endure difficult economic
conditions in international markets, and may be able to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. Moreover, many of our competitors have more extensive customer
bases, broader customer relationships and broader
15
industry alliances that they could use to their advantage in competitive
situations.
The markets in which we operate have limited barriers to entry and we
expect that we will face additional competition from existing competitors and
new market entrants in the future. Moreover, our current and potential
competitors have established or may establish strategic relationships among
themselves or with third parties to increase the ability of their products and
services to address the needs of our current and prospective customers. Existing
and new competitors with their potential strategic relationships may rapidly
acquire significant market share, which would harm our business and financial
condition.
IF THE SATELLITE COMMUNICATIONS INDUSTRY FAILS TO CONTINUE TO DEVELOP OR NEW
TECHNOLOGY MAKES IT OBSOLETE OUR BUSINESS AND FINANCIAL CONDITION WILL BE
HARMED.
Our business is dependent on the continued success and development of
satellite communications technology, which competes with terrestrial
communications transport technologies like terrestrial microwave, coaxial cable
and fiber optic communications systems. If the satellite communications industry
fails to continue to develop, or any technological development significantly
improves the cost or efficiency of competing terrestrial systems relative to
satellite systems, then our business and financial condition would be materially
harmed.
WE MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OUR CAPITAL REQUIREMENTS IN
THE FUTURE.
We have incurred negative cash flows from operations in each year since our
inception. We believe that our available cash resources will be sufficient to
meet our working capital and capital expenditure requirements through September
30, 2002. However, our future liquidity and capital requirements are difficult
to predict, as they depend on numerous factors, including the success of our
existing product and service offerings as well as competing technological and
market developments. We may need to raise additional funds in order to meet
additional working capital requirements and to support additional capital
expenditures. Should this need arise, additional funds may not be available when
needed and, even if additional funds are available, we may not find the terms
favorable or commercially reasonable. If adequate funds are unavailable, we may
be required to delay, reduce or eliminate some of our operating activities,
including marketing programs, hiring of additional personnel and research and
development programs. If we raise additional funds by issuing equity securities,
our existing stockholders will own a smaller percentage of our capital stock and
new investors may pay less on average for their securities than, and could have
rights superior to, existing stockholders.
WE RELY ON OUR RELATIONSHIPS WITH RESELLERS IN DEVELOPING COUNTRIES WITH
EMERGING MARKETS FOR SALES OF OUR PRODUCTS AND SERVICES AND THE LOSS OR FAILURE
OF ANY OF THESE RELATIONSHIPS MAY HARM OUR ABILITY TO MARKET AND SELL OUR
PRODUCTS AND SERVICES.
We intend to provide our products and services and NetSat Express' services
almost entirely in developing countries where we have little or no market
experience. We intend to rely on resellers in those markets to provide their
expertise and knowledge of the local regulatory environment in order to make
access to customers in emerging markets easier. If we are unable to maintain
these relationships, or develop new ones in other emerging markets, our ability
to enter into and compete successfully in developing countries would be
adversely affected.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUE, AND
THE LOSS OF A KEY CUSTOMER WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS,
BUSINESS AND FINANCIAL CONDITION.
We rely on a small number of customers for a large portion of our revenues
and expect that a significant portion of our revenues will continue to be
derived from a limited number of customers. We anticipate that our operating
results in any given period will continue to depend to a significant extent upon
revenues from large contracts with a small number of customers. As a result of
this concentration of our customer base, a loss of or decrease in business from
one or more of these customers would materially adversely affect our results of
operations and financial condition.
OUR INABILITY TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION COULD SERIOUSLY
HARM OUR ABILITY TO EFFECTIVELY RUN OUR BUSINESS.
Since our inception, we have continued to increase the scope of our
operations. This growth has placed, and our anticipated growth will continue to
place, a significant strain on our personnel, management, financial and other
resources. Any failure to manage our growth effectively could seriously harm our
ability to respond to customers,
16
monitor the quality of our products and services and maintain the overall
efficiency of our operations. In order to continue to pursue the opportunities
presented by our satellite-based communications services, we plan to continue to
hire key officers and other employees and to increase our operating expenses by
broadening our customer support capabilities, expanding our sales and marketing
operations and improving our operating and financial systems. If we fail to
manage any future growth in an efficient manner, and at a pace consistent with
our business, our results of operations, financial condition and business will
be harmed.
WE ANTICIPATE SIGNIFICANT REVENUES FROM FIVE CONTRACTS AND A MODIFICATION OR
TERMINATION OF ALL OR ANY OF THESE CONTRACTS WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We have agreements with five customers to provide equipment and services,
which we expect to generate substantial revenues. If any of these customers are
unable to implement their business plans, the market for their services
declines, or all or any of the customers modifies or terminates its agreement
with us, our results of operations and financial condition would be harmed.
WE ARE PAID A FIXED PRICE IN MOST OF OUR CUSTOMER CONTRACTS, AND ANY VARIATION
BETWEEN THE FIXED PRICE AND THE ACTUAL COST OF PERFORMANCE MAY HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
A majority of our customer contracts are on a fixed-price basis. The
profitability of these contracts is subject to inherent uncertainties in the
cost of performance, including costs related to unforeseen obstacles and
unexpected problems encountered in engineering, design and testing of our
products and services. Because a significant portion of our revenues is
dependent upon a small number of customers, if the fixed price is significantly
less than the actual cost of performance on any one contract, our results of
operations and financial condition could be adversely affected.
IF OUR PRODUCTS AND SERVICES ARE NOT ACCEPTED IN DEVELOPING COUNTRIES WITH
EMERGING MARKETS, OUR REVENUES WILL BE IMPAIRED.
We anticipate that a substantial portion of the growth in the demand for
our products and services will come from customers in developing countries due
to a lack of basic communications infrastructure in these countries. However, we
cannot guarantee an increase in the demand for our products and services in
developing countries or that customers in these countries will accept our
products and services at all. Our ability to penetrate emerging markets in
developing countries is dependent upon various factors including:
o the speed at which communications infrastructure, including terrestrial
microwave, coaxial cable and fiber optic communications systems, which
compete with satellite-based services, is built;
o the effectiveness of our local value-added resellers and sales
representatives in marketing and selling our products and services; and
o the acceptance of our products and services by customers.
If our products and services are not accepted, or the market potential we
anticipate does not develop, our revenues will be impaired.
WE DEPEND UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE
EMPLOYEES OR RECRUIT ADDITIONAL QUALIFIED PERSONNEL, WHICH WOULD HARM OUR
BUSINESS.
Our future performance depends on the continued service of our key
technical, managerial and marketing personnel; in particular, David Hershberg,
Kenneth Miller, Stephen Yablonski and Donald Woodring. The employment of any of
our key personnel could cease at any time subject to prior notice.
Our future success depends upon our ability to attract, retain and motivate
highly skilled employees. Because the competition for qualified employees among
companies in the satellite communications industry and the networking industry
is intense, we may not be successful in recruiting or retaining qualified
personnel, which would harm our business.
17
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BUSINESS.
We regard our trademarks, trade secrets and other intellectual property as
beneficial to our success. Unauthorized use of our intellectual property by
third parties may damage our business. We rely on trademark, trade secret and
patent protection and contracts including confidentiality and license agreements
with our employees, customers, strategic collaborators, consultants and others
to protect our intellectual property rights. Despite our precautions, it may be
possible for third parties to obtain and use our intellectual property without
our authorization.
We currently have been granted two patents in the United States, for remote
access to the Internet using satellites, and for satellite communication with
automatic frequency control, and have two patent applications pending in the
United States. We also intend to seek further patents on our technology, if
appropriate. We cannot assure you that patents will be issued for any of our
pending or future patents or that any claims allowed from such applications will
be of sufficient scope, or be issued in all countries where our products and
services can be sold, to provide meaningful protection or any commercial
advantage to us. Also, our competitors may be able to design around our patents.
The laws of some foreign countries in which our products and services are or may
be developed, manufactured or sold may not protect our products and services or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of our technology and products
and services more likely.
We have filed applications for trademark registration of Globecomm Systems
Inc., Globecomm, and GSI in the United States and various other countries, and
have been granted registrations for some of these terms in Europe and Russia. We
have received trademark registrations for NetSat Express in the United States,
the European Community, Russia, and Brazil. We have various other trademarks
registered or pending for registration in the United States and in other
countries and may intend to seek registration of other trademarks and service
marks in the future. We cannot assure you that registrations will be granted
from any of our pending or future applications, or that any registrations that
are granted will prevent others from using similar trademarks in connection with
related goods and services.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME
CONSUMING AND EXPENSIVE, AND IF WE ARE NOT SUCCESSFUL, COULD CAUSE SUBSTANTIAL
EXPENSES AND DISRUPT OUR BUSINESS.
We cannot be sure that our products, services, technologies, and
advertising we employ in our business do not or will not infringe valid patents,
trademarks, copyrights or other intellectual property rights held by third
parties. We may be subject to legal proceedings and claims from time to time
relating to the intellectual property of others in the ordinary course of our
business. Prosecuting infringers and defending against intellectual property
infringement claims could be time consuming and expensive, and regardless of
whether we are or are not successful, could cause substantial expenses and
disrupt our business. We may incur substantial expenses in defending against
these third party claims, regardless of their merit. Successful infringement
claims against us may result in substantial monetary liability and/or may
materially disrupt the conduct of, or necessitate the cessation of, our
business.
THROUGH THEIR OWNERSHIP, OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES MAY BE
ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER OUR MANAGEMENT.
As of November 12, 2001, our officers and directors, and their affiliates
beneficially own approximately 1.8 million shares, constituting approximately
13.5% of our outstanding common stock. These stockholders, acting together, may
be able to exert significant influence over the election of directors and other
corporate actions requiring stockholder approval.
WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGES, WHICH WOULD MAKE OUR
PRODUCTS AND SERVICES BECOME NON-COMPETITIVE AND OBSOLETE.
The telecommunications industry, including satellite-based communications
services, is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. If we are
unable, for technological or other reasons, to develop and introduce new
products and services or enhancements to existing products and services in a
timely manner or in response to changing market conditions or customer
requirements, our products and services would become non-competitive and
obsolete, which would harm our business, results of operations and financial
condition.
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WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE OUR SOLE OR A LIMITED SOURCE OF
SUPPLY, AND THE LOSS OF THESE SUPPLIERS WOULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We currently obtain most of our critical components and services from
single or limited sources and generally do not maintain significant inventories
or have long-term or exclusive supply contracts with our source vendors. We have
from time to time experienced delays in receiving products from vendors due to
lack of availability, quality control or manufacturing problems, shortages of
materials or components or product design difficulties. We may experience delays
in the future and replacement services or products may not be available when
needed, or at all, or at commercially reasonable rates or prices. If we were to
change some of our vendors, we would have to perform additional testing
procedures on the service or product supplied by the new vendors, which would
prevent or delay the availability of our products and services. Furthermore, our
costs could increase significantly if we need to change vendors. If we do not
get timely deliveries of quality products and services, or if there are
significant increases in the prices of these products or services, it could have
a material adverse effect on our business, results of operations and financial
condition.
WE MAY BE UNABLE TO LEASE TRANSPONDER SPACE ON SATELLITES, WHICH COULD LIMIT OUR
ABILITY TO PROVIDE OUR SERVICES TO OUR CUSTOMERS.
We and NetSat Express lease transponder space on satellites in order to
provide communications and Internet services to our customers and the customers
of NetSat Express. The supply of transponder space serving a geographic region
on earth is limited by the number of satellites that are in orbit above that
geographic region. If companies that own and deploy satellites in orbit
underestimate the demand for transponder space in a given geographic area or
they are simply unable to build and launch enough satellites to keep up with
increasing demand, the price for leasing transponder space could rise,
increasing our cost of operations or we simply may not be able to lease enough
transponder space where needed to meet the demands of our customers. We
currently anticipate that the rapid growth in the demand for satellite-based
communications worldwide could lead to a short-term shortage of transponder
space.
WE RELY ON NETSAT EXPRESS, OUR WHOLLY-OWNED SUBSIDIARY, FOR OUR MAIN SUPPLY OF
SPACE SEGMENT ON SATELLITES. IF ITS BUSINESS FAILS OR WE ARE OTHERWISE UNABLE TO
CONTINUE TO RELY ON NETSAT EXPRESS FOR THIS SUPPLY, OUR BUSINESS MAY BE HARMED.
We currently depend on NetSat Express for a majority of our transponder
space on satellites. We do not have a long-term agreement in place with NetSat
Express, as most of our needs are filled on a purchase order basis. If NetSat
Express is unable to develop its business or if we are unable to continue to
rely on their supply for space segment, then we will have to find alternative
suppliers. If we are unable to find another supplier of transponder space or if
we are unable to find one on terms favorable to us, then our business may be
harmed.
OUR NETWORK MAY EXPERIENCE SECURITY BREACHES, WHICH COULD DISRUPT OUR SERVICES.
Our network infrastructure may be vulnerable to computer viruses,
break-ins, denial of service attacks and similar disruptive problems caused by
our customers or other Internet users. Computer viruses, break-ins, denial of
service attacks or other problems caused by third parties could lead to
interruptions, delays or cessation in service to our customers. There currently
is no existing technology that provides absolute security, and the cost of
minimizing these security breaches could be prohibitively expensive. We may face
liability to customers for such security breaches. Furthermore, these incidents
could deter potential customers and adversely affect existing customer
relationships.
SATELLITES UPON WHICH WE RELY MAY BE DAMAGED OR LOST, OR MALFUNCTION.
The damage, loss or malfunction of any of the satellites used by us, or a
temporary or permanent malfunction of any of the satellites upon which we rely,
would likely result in the interruption of our satellite-based communications
services. This interruption would have a material adverse effect on our
business, results of operations and financial condition.
OUR STOCK PRICE IS HIGHLY VOLATILE.
Our stock price has fluctuated substantially since our initial public
offering, which was completed in August 1997. The market price for our common
stock, like that of the securities of many telecommunications and high
technology industry companies, is likely to remain volatile based on many
factors, including the following:
19
o quarterly variations in operating results;
o announcements of new technology, products or services by us or any of our
competitors;
o acceptance of satellite-based communication services and Internet access
services in developing countries with emerging markets;
o changes in financial estimates or recommendations by security analysts; or
o general market conditions, including, but not limited to, results of the
terrorist attacks on September 11, 2001 and the related outbreak of
hostilities.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. We may become involved in this type of
litigation in the future. Litigation of this type is often extremely expensive
and diverts management's attention and resources, which could significantly harm
our business.
A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING YOUR SHARES OF STOCK AT A
PREMIUM TO THE MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS.
Various provisions with respect to votes in the election of directors,
special meetings of stockholders, and advance notice requirements for
stockholder proposals and director nominations of our amended and restated
certificate of incorporation, bylaws and Section 203 of the General Corporation
Laws of the State of Delaware could make it more difficult for a third party to
acquire us, even if doing so might be beneficial to you and our other
stockholders. In addition, we have a poison pill in place that could make an
acquisition of us by a third party more difficult.
RISKS RELATED TO GOVERNMENT APPROVALS
WE ARE SUBJECT TO MANY GOVERNMENT REGULATIONS, AND FAILURE TO COMPLY WITH THEM
WILL HARM OUR BUSINESS.
OPERATIONS AND USE OF SATELLITES
We are subject to various federal laws and regulations, which may have
negative effects on our business. We operate Federal Communications Commission,
or FCC licensed earth stations in Hauppauge, New York, subject to the
Communications Act of 1934, as amended (the Act), and the rules and regulations
of FCC. Pursuant to the Act and rules, we have obtained and are required to
maintain radio transmission licenses from the FCC for both domestic and foreign
operations of our earth stations. These licenses should be renewed by the FCC in
the normal course as long as we remain in compliance with FCC rules and
regulations. However, we cannot guarantee that additional licenses will be
granted by the FCC when our existing licenses expire, nor are we assured that
the FCC will not adopt new or modified technical requirements that will require
us to incur expenditures to modify or upgrade our equipment as a condition of
retaining our licenses. We are also required to comply with FCC regulations
regarding the exposure of humans to radio frequency radiation from our earth
stations. These regulations, as well as local land use regulations, restrict our
freedom to choose where to locate our earth stations.
FOREIGN OWNERSHIP
We may, in the future, be required to seek FCC approval for foreign
ownership if we operate as a common carrier and ownership of our stock exceeds
the specified criteria. Failure to comply with these policies may result in an
order to divest the offending foreign ownership, fines, denial of license
renewal, and/or license revocation proceedings against the licensee by the FCC.
FOREIGN REGULATIONS
Regulatory schemes in countries in which we may seek to provide our
satellite-delivered data communications services may impose impediments on our
operations. Some countries in which we intend to operate have telecommunications
laws and regulations that do not currently contemplate technical advances in
telecommunications technology like Internet/intranet transmission by satellite.
We cannot assure you that the present regulatory
20
environment in any of those countries will not be changed in a manner, which may
have a material adverse impact on our business. Either we or our local partners
typically must obtain authorization for each country in which we provide our
satellite-delivered data communications services. The regulatory schemes in each
country are different, and thus there may be instances of noncompliance of which
we are not aware. We cannot assure you that our licenses and approvals are or
will remain sufficient in the view of foreign regulatory authorities, or that
necessary licenses and approvals will be granted on a timely basis in all
jurisdictions in which we wish to offer our products and services or that
restrictions applicable thereto will not be unduly burdensome.
REGULATION OF THE INTERNET
Due to the increasing popularity and use of the Internet it is possible
that a number of laws and regulations may be adopted at the local, national or
international levels with respect to the Internet, covering issues including
user privacy and expression, pricing of products and services, taxation,
advertising, intellectual property rights, information security or the
convergence of traditional communication services with Internet communications.
It is anticipated that a substantial portion of our Internet operations will be
carried out in countries which may impose greater regulation of the content of
information coming into the country than that which is generally applicable in
the United States; for example, privacy regulations in 35 countries in Europe
and content restrictions in countries including the Republic of China. To the
extent that we provide content as a part of our Internet services, it will be
subject to laws regulating content. Moreover, the adoption of laws or
regulations may decrease the growth of the Internet, which could in turn
decrease the demand for our Internet services or increase our cost of doing
business or in some other manner have a material adverse effect on our business,
operating results and financial condition. In addition, the applicability to the
Internet of existing laws governing issues including property ownership,
copyrights and other intellectual property issues, taxation, libel and personal
privacy is uncertain. The vast majority of these laws were adopted prior to the
advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. Changes to these laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the marketplace
which could reduce demand for our products and services, could increase our cost
of doing business as a result of costs of litigation or increased product
development costs, or could in some other manner have a material adverse effect
on our business, financial condition and results of operations.
TELECOMMUNICATIONS TAXATION, SUPPORT REQUIREMENTS, AND ACCESS CHARGES
All telecommunications carriers providing domestic services in the United
States are required to contribute a portion of their gross revenues for the
support of universal telecommunications services; and some telecommunications
services are subject to special taxation and to contribution requirements to
support services to special groups, like persons with disabilities. Our services
may be subject to new or increased taxes and contribution requirements that
could affect our profitability, particularly if we are not able to pass them
through to customers for either competitive or regulatory reasons.
Internet services are currently exempt from charges that long distance
telephone companies pay for access to the networks of local telephone companies
in the U.S. Efforts have been made from time to time, and may be made again in
the future, to eliminate this exemption. If these access charges are imposed on
telephone lines used to reach Internet service providers, and/or if flat rate
telephone services for Internet access are eliminated or curtailed, the cost to
customers who access our satellite facilities using telephone company-provided
facilities could increase to an extent that could discourage the demand for our
services. Likewise, the demand for our services in other countries may be
affected by the availability and cost of local telephone or other
telecommunications facilities to reach our facilities.
EXPORT OF TELECOMMUNICATIONS EQUIPMENT
The sale of our ground segment systems, networks, and communications
services outside the United States is subject to compliance with the regulations
of the United States Export Administration Regulations. The absence of
comparable restrictions on competitors in other countries may adversely affect
our competitive position. In addition, in order to ship our products into other
countries, the products must satisfy the technical requirements of that
particular country. If we were unable to comply with such requirements with
respect to a significant quantity of our products, our sales in those countries
could be restricted, which could have a material adverse effect on our business,
results of operations and financial condition.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to a variety of risks, including foreign currency exchange
rate fluctuations relating to certain purchases from foreign vendors. In the
normal course of business, we assess these risks and have established policies
and procedures to manage our exposure to fluctuations in foreign currency
values.
Our objective to managing our exposure to foreign currency exchange rate
fluctuations is to reduce the impact of adverse fluctuations in earnings and
cash flows associated with foreign currency exchange rates for certain purchases
from foreign vendors, if applicable. Accordingly, we utilize from time to time
foreign currency forward contracts to hedge our exposure on firm commitments
denominated in foreign currency. As of September 30, 2001, we had no such
foreign currency forward contracts.
Our results of operations and cash flows are subject to fluctuations due to
changes in interest rates primarily from our investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities, and secondly, our fixed long-term capital lease
agreement. Under our current positions, we do not use interest rate derivative
instruments to manage exposure to interest rate changes.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On November 7, 2001, the Board of Directors authorized a stock
repurchase program of up to $2.0 million of the Company's outstanding
stock, representing approximately 3.7% of the total shares outstanding
on that date. Timing, price, quantity and the manner of purchases will
be at the discretion of management, depending on market conditions and
other factors, subject to compliance with the applicable securities
laws.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Index to Exhibits:
Exhibit No.
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999).
22
3.2 Amended and Restated By-laws of the Company (incorporated by reference
to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws of the
Company defining rights of holders of Common Stock of the Company
(incorporated by reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-1, File No. 333-22425 (the "Registration
Statement")).
10.1 Form of Registration Rights Agreement, dated as of February 1997
(incorporated by reference to exhibit 10.1 of the Registration
Statement).
10.2 Form of Registration Rights Agreement, dated May 30, 1996 (incorporated
by reference to exhibit 10.2 of the Registration Statement).
10.3 Form of Registration Rights Agreement, dated December 31, 1996, as
amended (incorporated by reference to exhibit 10.3 of the Registration
Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common
Stock, dated November 9, 1995 between the Company and Thomson-CSF
(incorporated by reference to exhibit 10.4 of the Registration
Statement).
10.5 Investment Agreement, dated February 12, 1996 by and between Shiron
Satellite Communications (1996) Ltd. and the Company (incorporated by
reference to exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement, dated as of August 30, 1996 by and between
C-Grams Unlimited Inc. and the Company (incorporated by reference to
exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding, dated December 18, 1996 by and between
NetSat Express, Inc. and Applied Theory Communications, Inc.
(incorporated by reference to exhibit 10.7 of the Registration
Statement).
10.8 Stock Purchase Agreement, dated as of August 23, 1996 by and between
NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by
reference to exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement, dated as of October 9, 2001, by and between David
E. Hershberg and the Company (filed herewith).
10.10 Employment Agreement, dated as of October 9, 2001, by and between
Kenneth A. Miller and the Company (filed herewith).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated
December 12, 1996 by and between Eaton Corporation and the Company
(incorporated by reference to exhibit 10.13 of the Registration
Statement).
10.12 Amended and Restated 1997 Stock Incentive Plan (incorporated by
reference to exhibit 4 of the Company's Registration Statement on Form
S-8, File No. 333-54622, filed on January 30, 2001).
10.13 Investment Agreement, dated August 21, 1998 by and between McKibben
Communications LLC and the Company (incorporated by reference to
Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year
ended June 30, 1998).
10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit
99.8 of the Company's Registration Statement on Form S-8, File No.
333-70527, filed on January 13, 1999).
10.15 Rights Agreement, dated as of December 3, 1998, between American Stock
Transfer and Trust Company and the Company, which includes the form of
Certificate of Designation for the Series A Junior Participating
Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit
B and the Summary of Rights to Purchase Series A Preferred Shares as
Exhibit C (incorporated by reference to Exhibit 4 of Company's Current
Report on Form 8-K dated December 3, 1998).
10.16 Common Stock Purchase Agreement, dated August 11, 1999 between NetSat
Express, Inc. and Globix Corporation (incorporated by reference to
Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year
ended June 30, 1999).
23
10.17 Series A Preferred Stock Purchase Agreement, dated August 11, 1999
between NetSat Express, Inc. and George Soros (incorporated by
reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K
for the year ended June 30, 1999).
10.18 Common Stock Purchase Agreement, dated October 28, 1999 between NetSat
Express, Inc., Globecomm Systems, Inc. and Reuters Holdings Switzerland
SA (incorporated by reference to Exhibit 10.18 of the Company's
Quarterly Report on Form 10-Q, for the quarter ended September 30,
1999).
10.19 Negotiable Promissory Note, dated April 1, 2001, by and between Donald
G. Woodring and the Company (incorporated by reference to Exhibit 10.19
of the Company's Annual Report on Form 10-K for the year ended June 30,
2001).
10.20 Employment Agreement, dated as of October 9, 2001, by and between
Stephen C. Yablonski and the Company (filed herewith).
10.21 Employment Agreement, dated as of October 9, 2001, by and between
Andrew C. Melfi and the Company (filed herewith).
10.22 Employment Agreement, dated as of October 9, 2001, by and between
Donald G. Woodring and the Company (filed herewith).
10.23 Employment Agreement, dated as of October 9, 2001, by and between Paul
J. Johnson and the Company (filed herewith).
10.24 Employment Agreement, dated as of October 9, 2001, by and between Paul
Eterno and the Company (filed herewith).
10.25 Promissory Note Secured By Stock Pledge Agreement, dated September 4,
2001, by and between David E. Hershberg and the Company (filed
herewith).
10.26 Promissory Note Secured By Stock Pledge Agreement, dated September 4,
2001, by and between Kenneth A. Miller and the Company (filed
herewith).
* Confidential treatment granted for portions of this agreement.
(b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBECOMM SYSTEMS INC.
(Registrant)
Date: November 14, 2001 /s/ David E. Hershberg
----------------------
David E. Hershberg
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 14, 2001 /s/ Andrew C. Melfi
-------------------
Andrew C. Melfi
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
25
Index to Exhibits:
Exhibit No.
------------
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999).
3.2 Amended and Restated By-laws of the Company (incorporated by reference
to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws of the
Company defining rights of holders of Common Stock of the Company
(incorporated by reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-1, File No. 333-22425 (the "Registration
Statement")).
10.1 Form of Registration Rights Agreement, dated as of February 1997
(incorporated by reference to exhibit 10.1 of the Registration
Statement).
10.2 Form of Registration Rights Agreement, dated May 30, 1996 (incorporated
by reference to exhibit 10.2 of the Registration Statement).
10.3 Form of Registration Rights Agreement, dated December 31, 1996, as
amended (incorporated by reference to exhibit 10.3 of the Registration
Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common
Stock, dated November 9, 1995 between the Company and Thomson-CSF
(incorporated by reference to exhibit 10.4 of the Registration
Statement).
10.5 Investment Agreement, dated February 12, 1996 by and between Shiron
Satellite Communications (1996) Ltd. and the Company (incorporated by
reference to exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement, dated as of August 30, 1996 by and between
C-Grams Unlimited Inc. and the Company (incorporated by reference to
exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding, dated December 18, 1996 by and between
NetSat Express, Inc. and Applied Theory Communications, Inc.
(incorporated by reference to exhibit 10.7 of the Registration
Statement).
10.8 Stock Purchase Agreement, dated as of August 23, 1996 by and between
NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by
reference to exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement, dated as of October 9, 2001, by and between David
E. Hershberg and the Company (filed herewith).
10.10 Employment Agreement, dated as of October 9, 2001, by and between
Kenneth A. Miller and the Company (filed herewith).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated
December 12, 1996 by and between Eaton Corporation and the Company
(incorporated by reference to exhibit 10.13 of the Registration
Statement).
10.12 Amended and Restated 1997 Stock Incentive Plan (incorporated by
reference to exhibit 4 of the Company's Registration Statement on Form
S-8, File No. 333-54622, filed on January 30, 2001).
10.13 Investment Agreement, dated August 21, 1998 by and between McKibben
Communications LLC and the Company (incorporated by reference to
Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year
ended June 30, 1998).
10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit
99.8 of the Company's Registration Statement on Form S-8, File No.
333-70527, filed on January 13, 1999).
10.15 Rights Agreement, dated as of December 3, 1998, between American Stock
Transfer and Trust Company and the Company, which includes the form of
Certificate of Designation for the Series A Junior Participating
Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit
B and the Summary of Rights to Purchase Series A Preferred Shares as
Exhibit C (incorporated by reference to Exhibit 4 of Company's Current
Report on Form 8-K dated December 3, 1998).
10.16 Common Stock Purchase Agreement, dated August 11, 1999 between NetSat
Express, Inc. and Globix Corporation (incorporated by reference to
Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year
ended June 30, 1999).
26
10.17 Series A Preferred Stock Purchase Agreement, dated August 11, 1999
between NetSat Express, Inc. and George Soros (incorporated by
reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K
for the year ended June 30, 1999).
10.18 Common Stock Purchase Agreement, dated October 28, 1999 between NetSat
Express, Inc., Globecomm Systems, Inc. and Reuters Holdings Switzerland
SA (incorporated by reference to Exhibit 10.18 of the Company's
Quarterly Report on Form 10-Q, for the quarter ended September 30,
1999).
10.19 Negotiable Promissory Note, dated April 1, 2001, by and between Donald
G. Woodring and the Company (incorporated by reference to Exhibit 10.19
of the Company's Annual Report on Form 10-K for the year ended June 30,
2001).
10.20 Employment Agreement, dated as of October 9, 2001, by and between
Stephen C. Yablonski and the Company (filed herewith).
10.21 Employment Agreement, dated as of October 9, 2001, by and between
Andrew C. Melfi and the Company (filed herewith).
10.22 Employment Agreement, dated as of October 9, 2001, by and between
Donald G. Woodring and the Company (filed herewith).
10.23 Employment Agreement, dated as of October 9, 2001, by and between Paul
J. Johnson and the Company (filed herewith).
10.24 Employment Agreement, dated as of October 9, 2001, by and between Paul
Eterno and the Company (filed herewith).
10.25 Promissory Note Secured By Stock Pledge Agreement, dated September 4,
2001, by and between David E. Hershberg and the Company (filed
herewith).
10.26 Promissory Note Secured By Stock Pledge Agreement, dated September 4,
2001, by and between Kenneth A. Miller and the Company (filed
herewith).
* Confidential treatment granted for portions of this agreement.