<PAGE>
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 March 31, 1999
------------------------------------------------
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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
45 Oser Avenue, Hauppauge, New York 11788
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 231-9800
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Registrant's telephone number, including area code
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check [X] 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 No [X]
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 9,088,196 shares of
the Company's Common Stock, $.001 par value, were outstanding as of May 6, 1999.
<PAGE>
GLOBECOMM SYSTEMS INC.
Index to March 31, 1999 Form 10-Q
<TABLE>
<CAPTION>
Page
Part I -- Financial Information
<S> <C> <C>
Item 1. Financial Statements..................................................................................3
Consolidated Balance Sheets-- March 31, 1999 and June 30, 1998.......................................3
Consolidated Statements of Operations -- Three and Nine Month Periods Ended
March 31, 1999 and 1998.............................................................................5
Consolidated Statement of Changes in Stockholders' Equity -- Nine Month Period
Ended March 31, 1999................................................................................6
Consolidated Statements of Cash Flows -- Nine Month Periods Ended March 31, 1999
and 1998............................................................................................7
Notes to Consolidated Financial Statements............................................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................21
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 Report on Form 8-K......................................................................22
Signatures...........................................................................................27
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
-------------------
(UNAUDITED) (1)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $12,699 $21,342
Restricted cash 3,640 4,416
Accounts receivable 17,356 18,017
Inventories, net 2,775 1,583
Prepaid expenses and other current assets 980 635
------------------
TOTAL CURRENT ASSETS
37,450 45,993
Fixed assets, net
10,526 9,963
Investments
3,652 2,093
Other assets
354 295
------------------
TOTAL ASSETS $51,982 $58,344
==================
</TABLE>
See accompanying notes.
3
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
---------------------
(UNAUDITED) (1)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 11,689 $ 13,042
Accrued payroll and related fringe benefits 644 632
Accrued commissions 108 216
Other accrued expenses and current liabilities 1,081 422
Capital lease obligations 1 18
--------------------
TOTAL CURRENT LIABILITIES 13,523 14,330
--------------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 3,000,000 shares authorized,
shares issued none at March 31, 1999 and June 30, 1998 -- --
Common stock, $.001 par value; 22,000,000 shares
authorized and issued: 9,080,208 at March 31, 1999
and 9,165,908 June 30, 1998 9 9
Treasury stock, 114,200 shares at March 31, 1999 and none at
June 30, 1998 (545) --
Additional paid-in capital 50,686 50,530
Accumulated deficit (11,691) (6,525)
--------------------
TOTAL STOCKHOLDERS' EQUITY 38,459 44,014
--------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 51,982 $ 58,344
====================
</TABLE>
See accompanying notes.
(1) The balance sheet at June 30, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
4
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues $ 6,498 $ 16,261 $ 31,673 $ 47,121
Costs of revenues 5,827 13,294 27,950 40,115
-------------------------- --------------------------
Gross profit 671 2,967 3,723 7,006
-------------------------- --------------------------
Operating expenses:
Selling and marketing 1,315 1,167 3,639 2,964
Research and development 412 287 962 871
General and administrative 1,474 1,235 4,130 3,476
Terminated acquisition -- -- 972 --
-------------------------- --------------------------
Total operating expenses 3,201 2,689 9,703 7,311
-------------------------- --------------------------
(Loss) income from operations (2,530) 278 (5,980) (305)
Interest income, net 204 291 814 934
-------------------------- --------------------------
Net (loss) income $ (2,326) $ 569 $ (5,166) $ 629
========================== ==========================
Basic (loss) earnings per share $ (0.26) $ 0.06 $ (0.57) $ 0.08
========================== ==========================
Diluted (loss) earnings per share $ (0.26) $ 0.06 $ (0.57) $ 0.07
========================== ==========================
Weighted Average Shares:
Basic 9,065,958 9,095,003 9,102,406 8,331,025
========================== ==========================
Diluted 9,065,958 9,950,154 9,102,406 9,309,639
========================== ==========================
</TABLE>
See accompanying notes.
5
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK TREASURY STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 9,166 $ 9 - $ - $ 50,530 $ (6,525) $ 44,014
Options granted to employees
and directors 56 56
Purchase of treasury stock (114) 114 (545) (545)
Proceeds from exercise of
stock options 28 100 100
Net loss (5,166) (5,166)
-------------------------------------------------------------------------------------
Balance at March 31, 1999 9,080 $ 9 114 $(545) $ 50,686 $(11,691) $ 38,459
=====================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1999 1998
--------------------
(UNAUDITED)
<S> <C> <C>
NET (LOSS) INCOME $ (5,166) $ 629
OPERATING ACTIVITIES:
Adjustments to reconcile net (loss) income to cash used in operating
activities:
Depreciation and amortization 943 510
Amortization of organization costs 39 40
Stock compensation expense 56 56
Changes in operating assets and liabilities:
Accounts receivable 661 (4,954)
Inventories, net (1,192) 790
Prepaid expenses and other current assets (345) (480)
Other assets (98) 110
Accounts payable (1,353) (3,717)
Accrued payroll and related fringe benefits 12 25
Accrued commissions and other accrued expenses 551 (43)
--------------------
NET CASH USED IN OPERATING ACTIVITIES (5,892) (7,034)
--------------------
INVESTING ACTIVITIES:
Purchases of investments (1,559) (821)
Purchases of fixed assets (1,506) (2,752)
Restricted cash 776 (2,887)
--------------------
NET CASH USED IN INVESTING ACTIVITIES (2,289) (6,460)
--------------------
FINANCING ACTIVITIES:
Proceeds from initial public offering of common stock, net - 28,664
Proceeds from exercise of warrants - 55
Proceeds from exercise of stock options 100 329
Purchases of treasury stock (545) -
Payments under capital leases (17) (42)
--------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (462) 29,006
--------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,643) 15,512
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,342 5,164
--------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,699 $ 20,676
====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1 $ 5
====================
</TABLE>
See accompanying notes
7
<PAGE>
Globecomm Systems Inc.
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles and reflect all
adjustments consisting of normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the periods
shown. The results of operations for such periods are not necessarily indicative
of the results expected for the full fiscal year or for any future period. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates and assumptions.
The accompanying financial statements should be read in conjunction
with the audited financial statements of the Company for the fiscal year ended
June 30, 1998 and the notes thereto contained in the Company's Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on September 28,
1998.
2. Summary of Significant Accounting Policies
Basic and Diluted (Loss) Earnings Per Share
During the year ended June 30, 1998, Financial Accounting Standards
Board's Statement of Financial Accounting Standard No. 128 ("Statement 128"),
"Earnings Per Share" became effective. Statement 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share.
Basic loss per share for the three and nine-month periods ended March
31, 1999 are based on the weighted average number of common shares outstanding
during the period. Diluted loss per share for the three and nine-month periods
ended March 31, 1999 excluded the effect of stock options and warrants as the
effect of inclusion would have been anti-dilutive as the Company reported a net
loss for the periods then ended.
Basic earnings per share for the three and nine-month periods ended
March 31, 1998 are based on the weighted average number of common shares
outstanding during the period.
3. Treasury Stock
On September 1, 1998, the Company's Board of Directors authorized the
repurchase of up to $2.0 million of the Company's outstanding common stock. The
repurchase program allows for purchases to be made intermittently, through open
market and privately negotiated transactions. Timing, price, quantity and the
manner of purchase are at the discretion of the Company's management subject to
compliance with the applicable securities laws. Any repurchased shares under the
repurchase program will be used for general corporate purposes. As of March 31,
1999 the Company had repurchased approximately 114,200 shares of the Company's
common stock under the repurchase program for an aggregate purchase price of
approximately $545,000.
8
<PAGE>
4. Segment Information
The Company operates through two business segments. Its Ground Segment
Systems and Networks Segment, through Globecomm Systems Inc., is engaged in the
design, assembly and installation of satellite ground segment systems and
networks which support a wide range of satellite communications applications,
including fixed, mobile and direct broadcast services as well as certain
military applications. The Company's ground segment systems typically consist of
an earth station and ancillary subsystems such as microwave links for back-haul
of traffic to a central office or generators for emergency power restoral. An
earth station is an integrated system consisting of antennas, transmitting and
receiving equipment, modulation/demodulation equipment, monitor and control
systems and voice, data and video network interface equipment. The Company's
ground segment networks typically are comprised of two or more ground segment
systems communicating with a satellite and interconnected with a terrestrial
network. Its Data Communications Services Segment, through the NetSat Express,
Inc. ("NetSat Express") subsidiary, is engaged in providing satellite based
Internet access services, digital media distribution services, and integrated
data, voice and video communications services. 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 basis for
the segment allocation set forth below is the same basis management uses for
internal reporting purposes.
The following is the business segment information as of and for the
nine-month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998
-------------------- --------------------
(UNAUDITED; IN THOUSANDS)(UNAUDITED; IN THOUSANDS)
Revenues:
<S> <C> <C> <C> <C>
Ground Segment Systems and Networks .... $ 5,642 $ 16,049 $ 30,125 $ 46,701
Data Communications Services ........... 856 212 1,548 420
--------------------------------------------
Total revenues ........................... $ 6,498 $ 16,261 $ 31,673 $ 47,121
============================================
(Loss) income from operations:
Ground Segment Systems and Networks .... $ (2,033) $ 623 $ (4,501) $ 818
Data Communications Services ........... (497) (346) (1,478) (1,123)
Interest income, net ..................... 204 292 813 934
--------------------------------------------
Net (loss) income ........................ $ (2,326) $ 569 $ (5,166) $ 47,121
============================================
Depreciation and amortization:
Ground Segment Systems and Networks .... $ 164 $ 165 $ 793 $ 483
Data Communications Services ........... 0 16 150 27
--------------------------------------------
Total depreciation and amortization ...... $ 164 $ 181 $ 943 $ 510
============================================
Expenditures for long-lived assets:
Ground Segment Systems and Networks .... $ 187 $ 444 $ 1,063 $ 2,319
Data Communications Services ........... 370 303 443 433
--------------------------------------------
Total expenditures for long-lived assets $ 557 $ 747 $ 1,506 $ 2,752
============================================
</TABLE>
9
<PAGE>
4. Segment Information (continued)
MARCH 31, JUNE 30,
1999 1998
(UNAUDITED)
----------------------
(IN THOUSANDS)
Assets:
Ground Segment Systems and Networks $ 56,430 $ 60,894
Data Communications Services ...... 2,305 1,169
Intercompany eliminations ......... (6,753) (3,719)
----------------------
Total assets ........................ $ 51,982 $ 58,344
======================
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the actual
events or results may differ materially 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 other
filings made by the Company with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K and Quarterly Reports on Form
10-Q.
OVERVIEW
The Company designs, assembles and installs satellite ground segment
systems and networks which support a wide range of satellite communications
applications, including fixed, mobile and direct broadcast services as well as
certain military applications. The Company's customers include prime
communications infrastructure contractors, government-owned PTTs, other
telecommunications carriers, producers and distributors of news and
entertainment content and other corporations. The Company's ground segment
systems typically consist of an earth station and ancillary subsystems such as
microwave links for back-haul of traffic to a central office or generators for
emergency power restoral. An earth station is an integrated system consisting of
antennas, transmitting and receiving equipment, modulation/demodulation
equipment, monitor and control systems and voice, data and video network
interface equipment. The Company's ground segment networks are typically
comprised of two or more ground segment systems communicating with a satellite
and interconnected with a terrestrial network. NetSat Express, Inc. ("NetSat
Express"), the Company's subsidiary, is engaged in providing satellite based
Internet access services, digital media distribution services, and integrated
data, voice and video communications services. NetSat Express is currently
providing Internet access to customers who have limited or no access to
terrestrial network infrastructures capable of supporting the economical
delivery of such services.
RESULTS OF OPERATIONS
Three and Nine Month Periods Ended March 31, 1999 and 1998
Revenues. Revenues, which were primarily derived from sales of ground
segment systems and networks, decreased by $9.8 million, or 60.0%, to $6.5
million for the three month period ended March 31, 1999 and decreased by $15.4
million, or 32.8%, to $31.7 million for the nine-month period ended March 31,
1999 compared to $16.3 million and $47.1 million for the comparable three and
nine-month periods ended March 31, 1998, respectively. The decrease relates
primarily to the decrease in the shipment and /or completion of ground segment
systems and networks contracts as a result of a decline in the bookings of
several larger contract orders due to the continuing difficult economic
conditions in the Pacific Rim, Russia and other international markets.
Gross Profit. Gross profit decreased by $2.3 million, or 77.4%, to
$671,000 for the three month period ended March 31, 1999 and decreased by $3.3
million, or 46.9%, to $3.7 million for the nine-month period ended March 31,
1999 compared to $3.0 million and $7.0 million for the comparable three and
nine-month periods ended March 31, 1998, respectively. The decrease was
primarily due to the decrease in the shipment and/or completion of ground
segment systems and networks contracts. Gross profit as a percentage of revenues
decreased from 18.2% to 10.3% and decreased from 14.9% to 11.8% for the three
and nine-month periods ended March 31, 1999, respectively, as compared to the
three and nine-month periods ended March 31, 1998, respectively. The decrease
was due primarily to a significant negotiated contract in the second and third
quarters of fiscal 1998, which resulted in a higher gross profit margin.
Selling and Marketing. Selling and marketing expenses increased by $0.1
million, or 12.7%, to $1.3 for the three month period ended March 31, 1999 and
increased by $0.7 million, or 22.8%, to $3.7 million for the nine-month period
ended March 31, 1999 compared to $1.2 million and $3.0 million for the
comparable three and nine-
11
<PAGE>
month periods ended March 31, 1998, respectively. The increase was primarily due
to the increase in marketing and bid and proposal efforts in the Americas and
Africa, as well as the related increase in sales and marketing personnel.
Research and Development. Research and development expenses increased
by $0.1 million, or 43.6%, to $0.4 million for the three month period ended
March 31, 1999 and increased by $0.1 million, or 10.5%, to $1.0 million for the
nine-month period ended March 31, 1999 compared to $0.3 million and $0.9 million
for the comparable three and nine-month periods ended March 31, 1998,
respectively. The increase was primarily due to the development of the
Explorer-Ku Multimedia Portable Satellite Earth Station.
General and Administrative. General and administrative expenses
increased by $0.2 million, or 19.3%, to $1.5 million for the three-month period
ended March 31, 1999 from $1.2 million for the same period in the prior year and
increased as a percentage of revenues to 22.7% from 7.6% for the same period in
the prior year. For the nine-month period ended March 31, 1999, general and
administrative expenses increased by $0.7 million, or 18.8%, to $4.1 million in
comparison to $3.5 million for the same period in the prior year and increased
as a percentage of revenues to 13.0% from 7.4% for the same period in the prior
year. The increase in general and administrative expenses for the three and
nine-month period resulted mainly from an increase in personnel and related
expenses relating to the Company's subsidiary NetSat Express.
Terminated Acquisition. Terminated acquisition costs of approximately
$1.0 million for the nine-month period ended March 31, 1999 relate to certain
legal, accounting and other expenses associated with the termination of a
proposed acquisition of a mobile satellite communications business during the
first quarter ended September 30, 1998 due to the determination that such
acquisition was not in the best interest of the Company's stockholders.
NetSat Express. The Company's consolidated subsidiary NetSat Express
experienced an increase in revenues by $644,000, or 304.3%, to $856,000 for the
three-month period ended March 31, 1999 and increased by $1.1 million, or 269.0%
to $1.5 million for the nine-month period compared to $212,000 and $420,000 for
the comparable three and nine-month periods ended March 31, 1998, respectively.
The increase resulted from the implementation of Access Plus services in January
1998, as well as an increase in the number of PC Vector equipment sales and
related activations. The loss from operations associated with NetSat Express
increased by $0.2 million, or 43.5%, to $0.5 for the three month period ended
March 31, 1999 and increased by $0.4 million, or 31.6%, to $1.5 million for the
nine-month period ended March 31, 1999 compared to $0.3 million and $1.1 million
for the comparable three and nine-month periods ended March 31, 1998,
respectively. The increase was primarily associated with the implementation of
operating NetSat's Network Operations Center on a 24 by 7 basis, an increase in
general and administrative expenses and an increase in selling and marketing
efforts for NetSat's Access Plus services.
Year 2000. The Company is in the process of assessing the anticipated
costs, problems and uncertainties associated with Year 2000 issues. The Company
has initiated a Year 2000 Compliance Plan which includes information technology
("IT") and non-IT systems requiring or which may require modification or
conversion, and supplier, facilities and other operations (such as financial and
banking systems) readiness. The Company is in the process of or has completed
reviews of each of the above areas including identification and assessment of
potential Year 2000 issues, identification and contact with key suppliers or
institutions based on their relative risks associated with product integrity and
continued product deliveries and service. Until such reviews are complete, the
Company will not be able to completely evaluate whether its IT and non-IT
systems will need to be modified or replaced. The Company has incurred only
nominal costs to date and estimates at this time that the total Year 2000 costs
will not be material. The Company is continuing its assessment which may
necessitate refinement of its estimate over time. There can be no assurance,
however, that costs associated with the Company's Year 2000 Compliance Plan will
not be higher than anticipated which could have a material adverse effect on the
Company's business, results of operations and financial condition.
In association with the Company's Year 2000 Compliance Plan, the
Company is currently developing contingency plans for certain critical
applications. These contingency plans may include, among other actions,
12
<PAGE>
manual workarounds, increasing inventories and adjusting staffing strategies.
There can be no assurance such contingency plans, once developed, will be
adequate.
Since the Company's Year 2000 Compliance Plan is ongoing, all potential
Year 2000 issues have not yet been identified. Therefore the potential impact of
these issues on the Company's financial condition and results of operations can
not be determined at this time. If IT and non-IT systems used by the Company or
its suppliers, the product integrity of products provided to the Company by its
suppliers, or the software applications or hardware used in systems integrated
and sold by the Company, fail or experience significant difficulties related to
the Year 2000, the Company's results of operations and financial condition could
be materially affected. In addition, there can be no assurance that equipment
operated by third parties that interface with or contain the Company's products
will timely achieve Year 2000 compliance. Furthermore, if the Company's ground
segment systems and networks were unable to be used by the Company's customers
because of Year 2000 compliance problems, there can be no assurance that the
Company's customers will not commence litigation against the Company for such
systems and networks failure. Any of the foregoing could result in a material
adverse effect on the Company's business, financial condition and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $23.9 million,
including cash and cash equivalents of $12.7 million, restricted cash of $3.6
million, accounts receivable of $17.3 million, inventories of $2.8 million and
prepaid and other current assets of $1.0 million, offset by $11.7 million in
accounts payable and $1.8 million in accrued expenses and other current
liabilities
Several factors had a major effect on the Company's liquidity during
the nine-month period ended March 31, 1999. First, inventories increased by $1.2
million reflecting the timing of purchases to support future shipments and/or
completion of ground segment systems and networks, offset by a decrease in
accounts payable and accrued expenses of $0.7 million. The second factor
affecting liquidity during the three and nine-month period ended March 31, 1999
was the Company's investment activities. During the nine-month period ended
March 31, 1999, the Company purchased $1.5 million in fixed assets and through
its Stock Repurchase Program, repurchased $545,000 or 144,200 shares of the
Company's common stock. In addition, during the first quarter ended September
30, 1998, the Company purchased a $1.5 million equity interest in McKibben
Communications, LLC. McKibben Communications provides conditional access and
uplink services to the television industry in Los Angeles. McKibben
Communications also originates sports broadcasts from Los Angeles to Japan for
the distribution in Japan by a local satellite provider. The Company and
McKibben Communications complement each other and intend to offer a turnkey
solution to broadcasters including design, installation, and operation of uplink
facilities.
The Company's future capital requirements will depend upon many
factors, including the success of the Company's marketing efforts in both the
Ground Segment Systems and Networks Segment and the Data Communications Services
Segment, the nature and timing of customer orders, the extent to which it is
able to locate additional strategic suppliers in whose technology it wishes to
invest, the extent to which it must conduct research and development efforts
internally and potential acquisitions of complementary businesses, products or
technologies. Based on current plans, the Company believes that its existing
capital resources will be sufficient to meet its capital requirements for at
least the next 12 months.
13
<PAGE>
CERTAIN BUSINESS CONSIDERATIONS
RISK FACTORS
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company, which was formed in August 1994, has a limited operating
history upon which an evaluation of the Company can be based and has incurred
significant operating losses since its inception. The Company has financed its
operations to date primarily from the sale of equity securities and, to a lesser
degree, from stockholder loans. The Company generated its first revenue from its
ground segment systems and networks business in June 1995 and has generated only
minimal revenues from its satellite-delivered data communications services
business, which commenced operations in July 1996. The Company incurred
operating losses of $1.1 million, $2.3 million, $2.7 million and $0.5 million
during the fiscal years ended June 30, 1995, 1996, 1997 and 1998, respectively
(which amounts for fiscal years ended June 30, 1997 and 1998 include operating
losses of $1.5 million and $1.7million, respectively, for NetSat Express' data
communications services business) and may incur further operating losses as it
attempts to expand its businesses. The Company's ability to expand its ground
segment systems and networks business and data communications services business
and generate additional revenues and positive operating and net income is
dependent, in large part, on its ability to obtain new contracts and the
profitability of such contracts, and there can be no assurance that the Company
will generate significant additional revenues or report quarterly or annual
positive operating or net income. As of March 31, 1999, the Company had an
accumulated deficit of $11.7 million. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
INHERENT RISK OF INTERNATIONAL OPERATIONS
Most of the Company's revenues are derived from sales to customers
outside the United States. The Company anticipates that foreign sales will
continue to account for a significant portion of total revenues in the
foreseeable future. The Company's foreign sales are generally denominated in
U.S. dollars. Consequently, the decrease in the value of foreign currencies
relative to the U.S. dollar, such as the currency devaluations in the Pacific
Rim region, Russia and other international currencies, has adversely affected
and may continue to adversely affect the demand for the Company's ground segment
systems and networks and data communications services by increasing the price of
the Company's products and services in the currency of the countries in which
they are sold. The economic and monetary crisis in the Pacific Rim countries,
including Korea, Malaysia, Thailand, Philippines, Indonesia and other countries
in the region, as well as the recent economic and monetary declines in Russia,
has resulted in a decreased demand in such countries and other foreign regions
for capital equipment such as the ground segment systems and networks supplied
by the Company and NetSat Express' data communications services. The difficult
economic conditions in the Pacific Rim region, Russia and other international
markets and the decrease in bookings received by the Company from these and
other foreign regions adversely effected the Company's results of operations for
the fourth quarter of fiscal year 1998 and the first nine months of fiscal year
1999, and the Company expects that these negative trends will continue to
adversely impact it. Additional risks inherent to the Company's international
business activities include various and changing regulatory requirements, costs
and risks of relying upon local subcontractors for the installation of its
ground segment systems and networks, increased sales and marketing expenses,
availability of export licenses, tariffs and other trade barriers, political and
economic instability, difficulties in staffing and managing foreign operations,
potentially adverse taxes, complex foreign laws and treaties and the possibility
of difficulty in accounts receivable collections. In addition, the Company is
subject to the Foreign Corrupt Practices Act (the "FCPA") which may place the
Company at a competitive disadvantage to foreign companies, which are not
subject to the FCPA. There can be no assurance that any of these factors will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
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QUARTERLY FLUCTUATIONS
The Company may continue to experience significant quarter to quarter
fluctuations in its results of operations, which may result in volatility in the
price of the Company's Common Stock. Quarterly results of operations may
fluctuate as a result of a variety of factors, including the timing of the
initiation and completion of contracts, delays in the booking of new contracts,
the demand for the Company's ground segment systems and networks and NetSat
Express' data communications services, the introduction of new or enhanced
products and services by the Company or NetSat Express or their competitors,
market acceptance of new products and services, the mix of revenues between
custom-built satellite communications systems and networks designed for its
customers and standard installations provided to its customers, the growth of
demand for Internet infrastructure-based products and services in developing
countries, the timing of significant marketing programs, the extent and timing
of the hiring of additional personnel, competitive conditions in the industry
and general economic conditions in the U.S. and abroad, such as the difficult
economic conditions and currency devaluations in the Pacific Rim region, Russia
and other international markets which have adversely impacted, and may continue
to, adversely impact the Company's quarterly results. See "Inherent Risk of
International Operations". Due to the foregoing factors, it is likely that in
one or more future quarters the Company's operating results will be below the
expectations of public market analysts and investors. Such an event could have a
material adverse effect on the price of the Company's Common Stock.
INTENSE COMPETITION; LIMITED BARRIERS TO ENTRY
The markets for both ground segment systems and networks and
satellite-delivered data communications services are highly competitive. Many of
the Company's competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to the Company. As a result, such competitors may be able
to develop and expand their products and services more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products and services than
can the Company. In addition, there are limited barriers to entry in the
Company's markets and certain of the Company's strategic suppliers and customers
have technologies and capabilities in the Company's product areas and could
choose to compete with the Company or to replace the Company's products or
services with their own. The entry of new competitors, the decision by a
strategic ally to compete with the Company or the decision by a customer to
develop and employ in-house capability to satisfy its satellite communications
needs could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company anticipates that its competitors may develop or acquire
competing products or products that provide functionality that is similar to
that provided by the Company's products and may be offered at significantly
lower prices or bundled with other products. In addition, current and potential
competitors in both markets in which the Company competes have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products and services to address the needs of
the Company's current and prospective customers. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. Increased competition is likely to result in
price reductions, reduced gross profit margins and loss of market share, any of
which would have a material adverse effect on the Company's business, results of
operations and financial condition. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also is dependent on the continued success and development
of the satellite communications industry, which itself competes with other
technologies such as terrestrial microwave, copper wire and fiber optic
communications systems. Any failure of the satellite communications industry to
continue to develop, or any technological development which significantly
improves the capacity, cost or efficiency of such competing systems
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relative to satellite systems, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Rapid
Industry Change; Technological Obsolescence."
RELIANCE ON STRATEGIC RELATIONSHIPS
The Company is dependent on certain customers and suppliers for the
development and expansion of its ground segment system and network business.
However, such relationships are not governed by any contract and accordingly
neither the Company nor such customers or suppliers are obligated to maintain
such strategic relationships. There can be no assurance that the Company will be
able to maintain such strategic relationships, that its strategic customers and
suppliers will continue to assist the Company by developing and expanding its
business and by providing research and development expertise, or that such
strategic customers and suppliers will not actually compete with the Company in
the future. See "Intense Competition; Limited Barriers to Entry."
In addition, the Company relies on the Personal Earth Station and
DirecPC technologies provided by Hughes Network Systems, Inc. ("HNS"), a
subsidiary of Hughes Electronics Corp. in connection with the operation of
NetSat Express's Data Communications Services Segment. Each project for which
NetSat Express uses HNS' DirecPC technology will require the grant of a license
from HNS to NetSat Express. HNS is under no obligation to grant such licenses
and there can be no assurance that NetSat Express will be able to negotiate such
licensing arrangements with HNS on acceptable terms, or at all. In addition,
failure to maintain a business relationship with HNS would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Because the Company intends to provide its satellite-delivered data
communications services almost entirely in developing markets where the Company
has little or no market experience, the Company will also be dependent on local
partners in such markets to provide marketing expertise and knowledge of the
local regulatory environment in order to facilitate the acquisition of necessary
licenses and access to existing customers. The Company has not yet formally
established an alliance with a local partner. The Company's failure to form and
maintain such alliances with local partners, or the preemption or disruption of
such alliances by the actions of the Company's competitors or otherwise, would
adversely affect the Company's ability to penetrate and compete successfully in
such emerging markets. There can be no assurance that the Company will be able
to compete successfully in the future in such markets or that competition will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
RISK OF CUSTOMER CONCENTRATION
The Company typically relies upon a small number of customers for a
large portion of its revenues. The Company expects that in the near term a
significant portion of its revenues will continue to be derived from one or a
limited number of customers (the identity of whom may vary from period to
period) as the Company seeks to expand its business and its customer base. The
reduction, delay, or cancellation of orders from one or more of such significant
customers would have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF MANAGEMENT OF RAPID GROWTH
The Company has been significantly and rapidly expanding its operations
since its inception. In order to pursue successfully the opportunities presented
by the ground segment and emerging satellite-delivered communications and
Internet/intranet-infrastructure markets, the Company will be required to
continue to expand its operations. Such expansion has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management,
financial and other resources. In order to manage any future growth effectively,
the Company will, among other things, be required to attract, train, motivate
and manage a significantly larger number of employees successfully to conduct
product engineering and management, product implementation, sales activity and
customer support activities; manage higher working capital requirements; and
improve its operating and financial systems. Any failure to manage any future
growth in an efficient manner and at a pace consistent with the Company's
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business could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF FIXED-PRICE CONTRACTS
Virtually all of the Company's contracts for installation of ground
segment systems and networks are on a fixed-price basis. 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 the Company's business may at certain times be concentrated
in a limited number of large contracts, a significant cost overrun on any one
contract could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk of Customer
Concentration."
EMPHASIS ON DEVELOPING MARKETS; UNCERTAIN MARKET POTENTIAL
The Company believes a substantial portion of the growth in demand for
its ground segment systems and networks and its recently launched
satellite-delivered data communications services will come from customers in
developing countries. There can be no assurance that such increases in demand
will occur or that prospective customers will accept such products and services
in sufficient quantities or at all. The degree to which the Company is able to
penetrate potential markets in developing countries will be affected in major
part by the speed with which other competing elements of the communications
infrastructure, such as telephone lines, other satellite-delivered solutions and
fiber optic cable and television cable, are installed in the developing
countries and with respect to the Company's data communications services, on the
effectiveness of the Company's local partners in such markets. The failure to
have its products and services accepted in developing countries would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Intense Competition; Limited Barriers to Entry" and
"Reliance on Strategic Relationships."
RAPID INDUSTRY CHANGE; TECHNOLOGICAL OBSOLESCENCE
The telecommunications industry, including the satellite communications
ground segment systems and networks and data communication services businesses,
is characterized by rapid and continuous technological change. Future
technological advances in the telecommunications industry may result in the
availability of new products or services that could compete with the satellite
ground segment products and services provided by the Company or render the
Company's products and services obsolete. There can be no assurance that the
Company will be successful in developing and introducing new products and
services that meet changing customer needs or in responding to technological
changes or evolving industry standards in a timely manner, if at all, or that
services or technologies developed by others will not render the Company's
products or services noncompetitive. Any failure by the Company to respond to
changing market conditions, technological developments, evolving industry
standards or changing customer requirements, or the development of competing
technology or products that render the Company's products and services
noncompetitive or obsolete would have a material adverse effect on the Company's
business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the data code field. These data code
fields will need to accept four digit entries to distinguish 21st century dates.
As a result, computer systems and/or software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance.
The Company is in the process of assessing the anticipated costs,
problems and uncertainties associated with Year 2000 issues. The Company has
initiated a Year 2000 Compliance Plan which includes information
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technology ("IT") and non-IT systems requiring or which may require modification
or conversion, and supplier, facilities and other operations (such as financial
and banking systems) readiness. The Company is in the process of or has
completed reviews of each of the above areas including identification and
assessment of potential Year 2000 issues, identification and contact with key
suppliers or institutions based on their relative risks associated with product
integrity and continued product deliveries and service. Until such reviews are
complete, the Company will not be able to completely evaluate whether its IT and
non-IT systems will need to be modified or replaced. The Company has incurred
only nominal costs to date and estimates at this time that the total Year 2000
costs will not be material. The Company is continuing its assessment which may
necessitate refinement of its estimate over time. There can be no assurance,
however, that costs associated with the Company's Year 2000 Compliance Plan will
not be higher than anticipated which could have a material adverse effect on the
Company's business, results of operations and financial condition.
In association with the Company's Year 2000 Compliance Plan, the
Company is currently developing contingency plans for certain critical
applications. These contingency plans may include, among other actions, manual
workarounds, increasing inventories and adjusting staffing strategies. There can
be no assurance such contingency plans, once developed, will be adequate.
Since the Company's Year 2000 Compliance Plan is ongoing, all potential
Year 2000 issues have not yet been identified. Therefore the potential impact of
these issues on the Company's financial condition and results of operations can
not be determined at this time. If IT and non-IT systems used by the Company or
its suppliers, the product integrity of products provided to the Company by its
suppliers, or the software applications or hardware used in systems integrated
and sold by the Company, fail or experience significant difficulties related to
the Year 2000, the Company's results of operations and financial condition could
be materially affected. In addition, there can be no assurance that equipment
operated by third parties that interface with or contain the Company's products
will timely achieve Year 2000 compliance. Furthermore, if the Company's ground
segment systems and networks were unable to be used by the Company's customers
because of Year 2000 compliance problems, there can be no assurance that the
Company's customers will not commence litigation against the Company for such
systems and networks failure. Any of the foregoing could result in a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company currently procures most of the critical components and
services for its products from single or limited sources in connection with
specific contracts and does not otherwise carry significant inventories or have
long-term or exclusive supply contracts with its source vendors. The Company has
from time to time experienced delays in receiving products from certain of its
vendors due to quality control or manufacturing problems, shortages of materials
or components or product design difficulties. There can be no assurance that
similar problems will not recur or that replacement products will be available
when needed at commercially reasonable rates, or at all. If the Company were to
change certain of its vendors, the Company would be required to perform
additional testing procedures upon the components supplied by such new vendors,
which could prevent or delay product shipments. Additionally, prices could
increase significantly in connection with changes of vendors. Any inability of
the Company to obtain timely deliveries of materials of acceptable quality or
timely services, or any significant increase in the prices of materials or
services, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk of Fixed-Price
Contracts" and "Quarterly Fluctuations".
RISK OF FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS
The Company is subject to various federal laws and regulations which
may have negative effects on the Company. The Company operates a teleport in
Hauppauge, New York, which is subject to FCC Rules and Regulations. The Company
has obtained certain licenses from the FCC for both domestic and international
operation of the teleport and must operate it in compliance with FCC Rules and
Regulations for the term of the license. There
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can be no assurance that the Company will be able to obtain additional licenses
that may be required or maintain the necessary licenses.
Under the FCC Rules and Regulations, non-U.S. citizens or their
representatives, foreign governments, or corporations otherwise subject to
control by non-U.S. citizens, may not own more than 20% of a licensee directly,
or, if the FCC finds it consistent with the public interest, may not own more
than 25% of the parent of a licensee. Non-U.S. citizens may not serve as
officers of a licensee or as members of a licensee's board of directors,
although the FCC may waive this requirement in whole or in part. Failure to
comply with these requirements may result in the FCC issuing an order to the
entity requiring divestiture of alien ownership to bring the entity into
compliance with the FCC Rules and Regulations. In addition, fines, a denial of
renewal or revocation of the license are possible. The Company has no knowledge
of any present foreign ownership which would result in a violation of the FCC
Rules and Regulations, but there can be no assurance that foreign holders will
not in the future hold more than 20% or 25% of the Common Stock of the Company.
Regulatory schemes in countries in which the Company may seek to
provide its satellite-delivered data communications services may impose
impediments on the Company's operations. Certain countries in which the Company
intends to operate have telecommunications laws and regulations that do not
currently contemplate technical advances in broadcast technology such as
Internet/intranet transmission by satellite. There can be no assurance that the
present regulatory environment in any such country will not be changed in a
manner which may have a material adverse impact on the Company's business. The
Company or its local partners typically must obtain authorization for each
country in which the Company provides its satellite-delivered data
communications services. Although the Company believes that it or its local
partners will be able to obtain the requisite licenses and approvals from the
countries in which the Company intends to provide service, the regulatory
schemes in each country are different and thus there may be instances of
noncompliance of which the Company is not aware. Although the Company believes
these regulatory schemes will not prevent the Company from pursuing its business
plan, there can be no assurance such 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 the Company wishes to offer its services or that restrictions applicable
thereto will not be unduly burdensome.
The Company's Internet operations (other than the operation of a
teleport) are not currently subject to direct government regulation in most
countries, and there are currently few laws or regulations directly applicable
to access to or commerce on the Internet. However, due to the increasing
popularity and use of the Internet, it is likely that a number of laws and
regulations may be adopted at the local, national or international levels with
respect to the Internet, covering issues such as 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. For example, the Telecommunications Act
of 1996 (the constitutionality of certain portions of which is currently under
challenge) was recently enacted in the United States, and imposes criminal
penalties via the Communications Decency Act on anyone who distributes obscene,
lascivious or indecent communications over the Internet. It is anticipated that
a substantial portion of the Company's 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. To the extent that the Company provides content as a part of its
Internet services, it will be subject to any such laws regulating content.
Moreover, the adoption of any such laws or regulations may decrease the growth
of the Internet, which could in turn decrease the demand for the Company's
Internet services or increase the Company's cost of doing business or in some
other manner have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the applicability to the Internet
of existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel and personal privacy is
uncertain. The vast majority of such 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
such laws intended to address these issues, including some recently proposed
changes, could create uncertainty in the marketplace which could reduce demand
for the Company's services, could increase the Company's cost of doing business
as a result of costs of litigation or increased product
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development costs, or could in some other manner have a material adverse effect
on the Company's business, financial condition and results of operations.
The sale of the Company's ground segment systems and networks 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 the Company's competitive
position. In addition, in order to ship its products into European Union
countries, the Company must satisfy certain technical requirements. If the
Company were unable to comply with such requirements with respect to a
significant quantity of the Company's products, the Company's sales in Europe
could be restricted, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on its
executive officers and certain technical, managerial and marketing personnel.
The loss of the services of any of these individuals or group of individuals
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company maintains term life insurance
in the amount of $1.0 million on David E. Hershberg, the Chairman and Chief
Executive Officer of the Company and term life insurance in the amount of $0.5
million for each of Messrs. Miller, DiCicco, Woodring, Yablonski and Melfi, all
of whom are officers of the Company. The Company believes that its future
success also will depend significantly upon its ability to attract, motivate and
retain additional highly skilled technical, managerial and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, assimilating and retaining the
personnel it requires to grow and operate profitably.
PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
The Company relies heavily on the technological and creative skills of
its personnel, new product developments, computer programs and designs, frequent
product enhancements, reliable product support and proprietary technological
expertise in maintaining its competitive position, and lacks patent protection
for its products and services. There can be no assurance that others will not
independently develop or acquire substantially equivalent techniques or
otherwise gain access to the Company's proprietary and confidential
technological expertise or disclose such technologies or that the Company can
ultimately protect its rights to such proprietary technological expertise.
The Company generally relies on confidentiality agreements with its
consultants, key employees and sales representatives to protect its proprietary
technological expertise, and generally controls access to and distribution of
its technology, software and other proprietary information. Despite these
precautions, there can be no assurance that such agreements will not be
breached, that the Company will have adequate remedies for any such breach or
that a third party will not copy or otherwise obtain and use the Company's
products or technology without authorization or develop similar products or
technology independently. Failure by the Company to maintain protection of its
proprietary technological expertise for any reason could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is subject to the risk of alleged infringement of
intellectual property rights of others. Most of the Company's officers and
employees were formerly officers or employees of other companies in the
industry. The Company believes that neither it nor its officers or employees
have violated any agreements with, or obligations to, prior employers. Although
the Company is not aware of any pending or threatened infringement claims with
respect to the Company's current or future products, there can be no assurance
that third parties, including previous employers, will not assert such claims or
that any such claims will not require the Company to enter into license
arrangements or result in protracted and costly litigation, regardless of the
merits of such claims. No assurance can be given that any necessary licenses
will be available or that, if available, such licenses can be obtained on
commercially reasonable terms. Furthermore, litigation may be necessary to
enforce or protect the Company's
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intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has been granted one patent in the United States and
currently has two patent applications pending in the United States and a PCT
application, corresponding to one of the United States applications, is pending
in a number of foreign jurisdictions. The Company also intends to seek further
patents on its technology, if appropriate. There can be no assurance that
patents will be issue from any of the Company's pending or any future
applications or that any claims allowed from such applications will be of
sufficient scope or strength, or be issued in all countries where the Company's
products can be sold, to provide meaningful protection or any commercial
advantage to the Company. Also, competitors of the Company may be able to design
around the Company's patents. The laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold may not protect
the Company's products or intellectual property rights to the same extent as do
the laws of the United States and thus make the possibility of piracy of the
Company's technology and products more likely.
The Company has filed applications for trademark registration of
Globecomm Systems Inc. in the United States, China, the European Union and the
Russian Federation and of NetSat Express in the United States, Singapore, the
European Union, the Russian Federation and Brazil, and intends to seek
registration of other trademarks in the future. There can be no assurance that
registrations will be granted from any of the Company's pending or future
applications, or that any registrations that are granted to the Company will
prevent others from using similar trademarks in connection with related goods
and services.
RISK OF CONCENTRATED OWNERSHIP
As of May 6, 1999, the Company's officers and directors, and their
affiliates beneficially own approximately 2,369,349 shares, constituting
approximately 24.5% of the Company's outstanding Common Stock. These
stockholders, if acting together, may be able to exert significant influence
over the election of directors and other corporate actions requiring stockholder
approval.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, acceptance of satellite communication services in developing
countries, and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations, which have affected the
market price of securities of many companies in the telecommunications and high
technology industries. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.
See "Quarterly Fluctuations."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is 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, the Company assesses these risks and
has established policies and procedures to manage its exposure to fluctuations
in foreign currency values.
The Company's objective to managing its 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, the Company
utilizes foreign currency forward contracts to hedge its exposure on firm
commitments denominated in foreign currency. As of March 31, 1999, the Company
had no such foreign currency forward contracts.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
The effective date of the Company's first registration statement (the
"Registration Statement") filed on Form S-1 (Registration No.
333-22425) under the Securities Act of 1933, as amended, was August 7,
1997. The class of securities registered was Common Stock. The Company
incurred total expenses in the offering of $3,721,000 of which
$2,214,000 represented underwriting discounts and commissions and
$1,507,000 represented other expenses. All of such expenses were
direct or indirect payments to others. The net offering proceeds to
the Company after deducting the total expenses were $27,904,000.
From the effective date of the Registration Statement to March 31,
1999, the approximate amount of net offering proceeds used were $7.4
million to fund capital expenditures, and investments in strategic
suppliers, and $19.9 million for working capital purposes, increased
selling and marketing efforts, and increased internal research and
development expenses. All of such payments were direct or indirect
payments to others.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
for the period ended December 31, 1998).
3.1(a) Certificate of Designation of Series A Junior Participating Preferred
Stock (incorporated by reference to Exhibit 3.1(a) of the Company's
Quarterly Report on Form 10-Q for the period ended December 31, 1998).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.3 of the Company's Annual Report on Form 10K for
the year ended June 30, 1998).
4.2 See Exhibits 3.1 and 3.3 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated By-Laws of the
Registrant defining rights of holders of Common Stock of the
Registrant. (incorporated by reference to Exhibit 4.2 of the
Registrant'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).
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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 Registrant 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 Registrant (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 Registrant (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 January 27, 1997 between the
Registrant and David E. Hershberg (incorporated by reference to exhibit
10.9 of the Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the
Registrant and Kenneth A. Miller (incorporated by reference to exhibit
10.10 of the Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated
December 12, 1996 by and between Eaton Corporation and the Registrant
(incorporated by reference to exhibit 10.13 of the Registration
Statement).
10.12 1997 Stock Incentive Plan (incorporated by reference to exhibit 99.1 of
the Registrant's Registration Statement on Form S-8, File No. 333-7527
(the "S-8 Registration Statement")).
10.13 Investment Agreement dated August 21, 1998 by and between McKibben
Communications LLC and the Registrant (incorporated by reference to
Exhibit 10.13 of the Company's Annual Report on Form 10K for the year
ended June 30, 1998).
10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit
99.8 of the S-8 Registration Statement).
10.15 Rights Agreement, dated as of December 3, 1998, between the Company and
American Stock Transfer and Trust 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).
27 Financial Data Schedule (filed herewith).
* Confidential treatment granted for portions of this agreement.
(b) Reports on Form 8-K
None
23
<PAGE>
INDEX TO EXHIBITS:
Exhibit No.
3.1.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
for the period ended December 31, 1998).
3.1(a) Certificate of Designation Designation of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the period ended December
31, 1998).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.3 of the Company's Annual Report on Form 10K for
the year ended June 30, 1998).
4.2 See Exhibits 3.1 and 3.3 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated By-Laws of the
Registrant defining rights of holders of Common Stock of the
Registrant. (incorporated by reference to Exhibit 4.2 of the
Registrant'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 Registrant 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 Registrant (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 Registrant (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 January 27, 1997 between the
Registrant and David E. Hershberg (incorporated by reference to exhibit
10.9 of the Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the
Registrant and Kenneth A. Miller (incorporated by reference to exhibit
10.10 of the Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated
December 12, 1996 by and between Eaton Corporation and the Registrant
(incorporated by reference to exhibit 10.13 of the Registration
Statement).
10.12 1997 Stock Incentive Plan (incorporated by reference to exhibit 99.1 of
the Registrant's Registration Statement on Form S-8, File No. 333-7527
(the "S-8 Registration Statement")).
3.1 Investment Agreement dated August 21, 1998 by and between McKibben
Communications LLC and the Registrant (incorporated by reference to
Exhibit 10.13 of the Company's Annual Report on Form 10K for the year
ended June 30, 1998).
24
<PAGE>
3.2 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit
99.8 of the S-8 Registration Statement).
3.3 Rights Agreement, dated as of December 3, 1998, between the Company and
American Stock Transfer and Trust 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).
27 Financial Data Schedule (filed herewith).
* Confidential treatment granted for portions of this agreement.
25
<PAGE>
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: May 14, 1999 /s/ David E. Hershberg
---------------------------
David E. Hershberg
Chief Executive Officer and
Chairman of the Board of
Directors
Date: May 14, 1999 /s/ Andrew C. Melfi
---------------------------
Andrew C. Melfi
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Globecomm Systems Inc. Financial Statements, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-END> MAR-31-1999 MAR-31-1999
<CASH> 12,699 12,699
<SECURITIES> 0 0
<RECEIVABLES> 17,356 17,356
<ALLOWANCES> 0 0
<INVENTORY> 2,775 2,775
<CURRENT-ASSETS> 37,450 37,450
<PP&E> 12,575 12,575
<DEPRECIATION> 2,049 2,049
<TOTAL-ASSETS> 51,982 51,982
<CURRENT-LIABILITIES> 13,523 13,523
<BONDS> 0 0
0 0
0 0
<COMMON> 9 9
<OTHER-SE> 38,995 38,955
<TOTAL-LIABILITY-AND-EQUITY> 51,982 51,982
<SALES> 6,498 31,673
<TOTAL-REVENUES> 6,498 31,673
<CGS> 5,827 27,950
<TOTAL-COSTS> 5,827 27,950
<OTHER-EXPENSES> 3,201 9,703
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,326) (5,166)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,326) (5,166)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,326) (5,166)
<EPS-PRIMARY> (0.26) (0.57)
<EPS-DILUTED> (0.26) (0.57)
</TABLE>
