<PAGE>
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 March 31, 2000
---------------------------------------------
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 May 12, 2000, there were 11,861,856 shares outstanding of the registrant's
Common Stock, par value $.001.
<PAGE>
GLOBECOMM SYSTEMS INC.
Index to the March 31, 2000 Form 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I -- Financial Information
Item 1. Consolidated Financial Statements ....................................................................3
Consolidated Balance Sheets -- As of March 31, 2000 and June 30, 1999.................................3
Consolidated Statements of Operations -- For the three and nine months ended
March 31, 2000 and 1999.............................................................................5
Consolidated Statement of Changes in Stockholders' Equity -- For the nine months
ended March 31, 2000................................................................................6
Consolidated Statements of Cash Flows -- For the nine months ended March 31, 2000
and 1999............................................................................................7
Notes to Consolidated Financial Statements............................................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................26
Part II -- Other Information
Item 1. Legal Proceedings....................................................................................27
Item 2. Changes in Securities and Use of Proceeds............................................................27
Item 3. Defaults Upon Senior Securities......................................................................27
Item 4. Submission of Matters to a Vote of Security Holders..................................................27
Item 5. Other Information....................................................................................27
Item 6. Exhibits and Reports on Form 8-K.....................................................................27
Signatures...........................................................................................29
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
--------- --------
2000 1999
---- ----
(UNAUDITED) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 19,777 $11,944
Restricted cash...................................... 317 3,486
Accounts receivable, net............................. 19,141 18,147
Inventories, net..................................... 8,426 6,419
Prepaid expenses and other current assets............ 1,602 1,207
-------- -------
Total current assets................................... 49,263 41,203
Fixed assets, net...................................... 93,482 12,684
Investments............................................ 2,961 2,961
Other assets, net...................................... 1,786 1,162
-------- -------
Total assets........................................... $147,492 $58,010
======== =======
</TABLE>
See accompanying notes.
3
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
--------- --------
2000 1999
---- ----
(UNAUDITED) (1)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 15,925 $ 18,749
Deferred revenue........................................................................ 34 299
Accrued payroll and related fringe benefits............................................. 957 859
Accrued commissions..................................................................... 36 72
Other accrued expenses.................................................................. 3,304 1,774
Deferred liability...................................................................... 121 -
Capital lease obligations............................................................... 953 -
--------- --------
Total current liabilities................................................................. 21,330 21,753
Capital lease obligations, less current portion........................................... 78,172 -
Deferred liability, less current portion.................................................. 1,974 -
Minority interests in consolidated subsidiary............................................. 1,001 -
Series A Participating Preferred stock of consolidated
subsidiary, at redemption value......................................................... 5,000 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 3,000,000 shares authorized:
Class A Convertible, shares authorized, issued and outstanding: none at
March 31, 2000 and June 30, 1999..................................................... - -
Class B Convertible, shares authorized, issued and outstanding: none at
March 31, 2000 and June 30, 1999..................................................... - -
Series A Junior Participating, shares authorized, issued and outstanding: none at
March 31, 2000 and June 30, 1999..................................................... - -
Common stock, $.001 par value, 22,000,000 shares authorized, shares issued:
10,008,476 at March 31, 2000 and 9,365,489 at June 30, 1999.......................... 10 9
Additional paid-in capital.............................................................. 57,739 52,061
Accumulated deficit..................................................................... (16,403) (14,717)
Deferred compensation................................................................... (237) (293)
Treasury stock, at cost, 147,745 shares at March 31, 2000 and 139,638 at
June 30, 1999........................................................................ (1,094) (803)
--------- --------
Total stockholders' equity................................................................ 40,015 36,257
--------- --------
Total liabilities and stockholders' equity................................................ $ 147,492 $ 58,010
========= ========
</TABLE>
See accompanying notes.
(1) The consolidated balance sheet at June 30, 1999 has been derived from the
audited consolidated 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
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................. $ 18,570 $ 6,498 $ 55,368 $ 31,673
Costs of revenues..................... 16,104 5,714 47,989 27,633
-------- ------- -------- --------
Gross profit.......................... 2,466 784 7,379 4,040
Operating expenses:
Network operations................ 550 113 1,268 317
Selling and marketing............. 1,587 1,315 4,013 3,639
Research and development.......... 193 412 548 962
General and administrative........ 2,808 1,474 6,922 4,130
Terminated acquisition costs...... - - - 972
-------- ------- -------- --------
Total operating expenses................ 5,138 3,314 12,751 10,020
-------- ------- -------- --------
Loss from operations.................... (2,672) (2,530) (5,372) (5,980)
Other income (expense):
Interest income................... 282 204 729 814
Interest expense.................. (769) - (1,085) -
Gain on sale of consolidated
subsidiary's common stock......... - - 2,353 -
-------- ------- -------- --------
Loss before minority interests
in operations of consolidated
subsidiary........................... (3,159) (2,326) (3,375) (5,166)
Minority interests in operations of
consolidated subsidiary.............. 1,075 - 1,689 -
-------- ------- -------- --------
Net loss................................ $ (2,084) $(2,326) $ (1,686) $ (5,166)
======== ======= ======== ========
Basic and diluted net loss per
common share......................... $ (0.22) $ (0.26) $ (0.18) $ (0.57)
======== ======= ======== ========
Weighted-average shares used in the
calculation of basic and diluted net
loss per common share................ 9,674 9,066 9,430 9,102
======== ======= ======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Total
----------------- Paid-in Accumulated Deferred ----------------- Stockholders'
Shares Amount Capital Deficit Compensation Shares Amount Equity
------ ------ ------- ------- ------------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999....... 9,365 $ 9 $52,061 $(14,717) $(293) 140 $ (803) $ 36,257
Net proceeds from issuance of
consolidated subsidiary's
common stock................. 3,398 3,398
Minority interests resulting
from issuance of consolidated
subsidiary's common stock.... (2,016) (2,016)
Proceeds from exercise of
stock options................ 573 1 3,541 3,542
Proceeds from exercise of
consolidated subsidiary's
stock options................ 239 239
Proceeds from exercise of
warrants..................... 2 12 12
Exercise of stock options in
exchange for shares of
common stock................. 54 291 8 (291) -
Issuance of common stock in
connection with employee
stock purchase plan.......... 14 119 119
Options granted to employees
and directors................ 56 56
Options of consolidated
subsidiary's common stock
granted to consultants....... 38 38
Amortization of deferred
compensation................. 56 56
Net loss....................... (1,686) (1,686)
------ ---- ------- -------- ----- --- ------- --------
Balance at March 31, 2000..... 10,008 $ 10 $57,739 $(16,403) $(237) 148 $(1,094) $ 40,015
====== ==== ======= ======== ===== === ======= ========
</TABLE>
See accompanying notes.
6
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................... $ (1,686) $ (5,166)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 1,823 990
Stock compensation expense......................................... 150 56
Provision for doubtful accounts.................................... 260 67
Minority interests in operations of consolidated subsidiary........ (1,689) -
Gain on sale of consolidated subsidiary's common stock............. (2,353) -
Interest on capital lease obligations.............................. 569 -
Changes in operating assets and liabilities:
Accounts receivable, net........................................ (1,254) 594
Inventories, net................................................ (2,355) (851)
Prepaid expenses and other current assets....................... (395) (345)
Other assets.................................................... (744) (98)
Accounts payable................................................ (2,824) (1,353)
Deferred revenue................................................ (265) 41
Accrued payroll and related fringe benefits..................... 98 12
Accrued commissions and other accrued expenses.................. 1,370 441
Deferred liability.............................................. 2,095 -
-------- --------
Net cash used in operating activities.................................. (7,200) (5,612)
-------- --------
INVESTING ACTIVITIES:
Purchases of investments............................................... - (1,559)
Purchases of fixed assets, net of non-cash expenditures of $78,792..... (3,709) (1,786)
Restricted cash........................................................ 3,169 776
Proceeds from sale of consolidated subsidiary's common stock........... 3,500 -
-------- --------
Net cash provided by (used in) investing activities.................... 2,960 (2,569)
-------- --------
FINANCING ACTIVITIES:
Proceeds from sale of consolidated subsidiary's common stock, net ..... 3,398 -
Proceeds from sale of consolidated subsidiary's preferred stock........ 5,000 -
Proceeds from exercise of stock options................................ 3,542 100
Proceeds from exercise of consolidated subsidiary's stock options...... 239 -
Proceeds from exercise of warrants..................................... 12 -
Proceeds from sale of common stock in connection with employee stock
purchase plan........................................................ 119 -
Purchases of treasury stock............................................ - (545)
Payments under capital leases.......................................... (237) (17)
-------- --------
Net cash provided by (used in) financing activities.................... 12,073 (462)
-------- --------
Net increase (decrease) in cash and cash equivalents.................. 7,833 (8,643)
Cash and cash equivalents at beginning of period....................... 11,944 21,342
-------- --------
Cash and cash equivalents at end of period............................. $ 19,777 $ 12,699
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................. $ 515 $ 1
======== ========
</TABLE>
See accompanying notes.
7
<PAGE>
Globecomm Systems Inc.
Notes to Consolidated Financial Statements
March 31, 2000
(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 the periods have been included. The results of operations for
the three and nine months ended March 31, 2000 are not necessarily indicative of
the results that may be expected for the full fiscal year ending June 30, 2000,
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 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 consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the fiscal year ended June 30, 1999 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, 1999.
Reclassifications
Certain balances in the third quarter of fiscal 1999 have been
reclassified to conform to the third quarter of fiscal 2000 presentation.
Comprehensive Income
The Company's comprehensive loss for the three and nine months ended
March 31, 2000 and 1999, were equal to the respective net loss for each of the
respective periods presented.
Income Taxes
A valuation allowance has been established to offset deferred tax
assets primarily related to net operating loss carryforwards, as there is no
assurance of future taxable income. Due to the gain on sale of the Company's
consolidated subsidiary's common stock during the fiscal 2000 second quarter
ended December 31, 1999, it is anticipated that the Company will realize taxable
income for the fiscal 2000 year ending June 30, 2000. As such, the valuation
allowance on the deferred tax assets related to net operating loss carryforwards
have been reduced accordingly.
2. Basic and Diluted Loss Per Share
Basic loss per share for the three and nine months ended March 31, 2000
and 1999 is based on the weighted-average number of common shares outstanding
during the period. Diluted loss per share for the three months ended March 31,
2000 and 1999 and for the nine months ended March 31, 2000 and 1999 excluded the
effect of approximately 1,135,000, 267,000, 1,045,000 and 245,000 stock options,
respectively, and for the three and nine months ended March 31, 2000
approximately 41,000 and 32,000 common stock warrants, respectively since the
effect of inclusion would have been anti-dilutive as the Company reported a net
loss for the periods then ended.
8
<PAGE>
3. Inventories
Inventories 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, less
customer progress payments.
Inventories consist of the following:
MARCH 31, JUNE 30,
2000 1999
----------- ----------
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
Raw materials and component parts.......... $ 321 $ 138
Work-in-progress........................... 12,376 9,924
------- --------
12,697 10,062
Less progress payments..................... 4,271 3,643
------- --------
$ 8,426 $ 6,419
======= ========
4. Consolidated Subsidiary's Equity Transactions
On August 11, 1999, the Company contributed $3,500,000 of the amount it
was owed at June 30, 1999 from NetSat Express as additional paid-in capital and
entered into a promissory note agreement with NetSat Express for the repayment
of the balance of $3,582,000. The promissory note is due and payable in
seven-years and accrues interest (payable monthly) at a variable rate equal to
the Company's cost of funds, which is currently at the prime rate (9.0% at
March 31, 2000) plus 1%. Amounts owed by NetSat Express to the Company pursuant
to the Master Operating Agreement and for any advances made subsequent to June
30, 1999 are payable currently.
On August 11, 1999, NetSat Express issued and sold 2,000,000 shares of
its Series A Participating Preferred Stock ("Preferred Stock") for $2.50 per
share and 2,000,000 shares of its common stock for $2.50 per share in a private
offering yielding net proceeds of approximately $6,963,000, net of offering
costs of approximately $937,000. In connection with the common stock offering,
NetSat Express entered into a Technology Agreement to purchase $5,000,000 of
services from a company participating in the private common stock offering. As a
result, the Company allocated $2.1 million from the proceeds of the common stock
offering to the value of the Technology Agreement based on an independent
valuation and classified such between current and non-current deferred liability
at March 31, 2000. The Company's common stock ownership percentage in NetSat
Express was reduced from approximately 95% to approximately 81% following the
issuance and sale of the common stock. Accordingly, the Company recorded a
credit to stockholders' equity of approximately $1,700,000 reflecting the
increase in its share of the net equity of NetSat Express as a result of the
common stock offering and the $3,500,000 of additional capital contributed by
the Company.
The preferred stock has preference in liquidation and each share of
preferred stock is convertible into one share of common stock at the option of
the holder at any time, or automatically following the third anniversary of the
date of issuance, or following the period of 180 days after an initial public
offering ("IPO") plus sixty consecutive days on which the price per share of the
common stock is equal to or greater than $3.75 per share.
Prior to an IPO, the holders of Preferred Stock shall be entitled to
receive an annual dividend on the anniversary date of issuance equal to 0.166667
shares of common stock for each share of Preferred Stock until the third
anniversary date of the Preferred Stock issuance provided that if the fair
market value of the common stock issued as dividends is less than $2,500,000,
the holders of the Preferred Stock will be entitled to receive a special
dividend equal to the shortfall. Additionally, the holder of the Preferred Stock
may purchase up to $5,000,000 in services from NetSat Express at cost, as
defined in the agreement, and payment for such services, at the option of the
9
<PAGE>
holder, may be either in dollars or shares of the NetSat Express' common stock
valued at fair market value. In connection with the sale of preferred stock and
common stock, NetSat Express paid an investment advisor a fee of $500,000 and
issued a warrant to purchase 200,000 shares of common stock at $3.00 per share,
which expires in five years.
During October 1999, the Company and NetSat Express entered into a
common stock purchase agreement with an investor to purchase 2,000,000 shares of
NetSat Express common stock for $2.50 per share, of which 1,400,000 shares were
purchased directly from the Company and 600,000 shares were issued and sold
directly by NetSat Express, yielding net proceeds of approximately $4,935,000,
net of offering costs of $65,000. As a result, the Company recorded a gain of
approximately $2,353,000 from the sale of its 1,400,000 shares of NetSat Express
common stock during the second quarter of fiscal 2000 ended December 31, 1999.
The Company's common stock ownership percentage in NetSat Express was reduced
from approximately 81% to approximately 68.5% following the issuance and sale of
the NetSat Express common stock. Accordingly, the Company recorded a credit to
stockholders' equity of approximately $830,000 reflecting the increase in its
share of the net equity of NetSat Express as a result of this common stock
offering.
On November 11, 1999, the Board of Directors of NetSat Express
approved, effective on November 11, 1999, a two-for-one common stock split in
the form of a common stock dividend of NetSat Express common stock. Accordingly,
the accompanying consolidated financial statements have been retroactively
restated to reflect the common stock dividend.
In order to comply with NetSat Express' Amended and Restated
Certificate of Incorporation to allow for the effectuation of a preferred stock
dividend, NetSat Express amended the Amended and Restated Certificate of
Incorporation, effective on February 17, 2000, to provide for a two-for-one
stock split of its preferred stock in the form of a dividend of one share of
preferred stock for each share of preferred stock outstanding. Accordingly, the
accompanying consolidated financial statements have been retroactively restated
to reflect the preferred stock dividend.
During March 2000, stock options for 95,700 shares of NetSat Express
common stock were exercised. As a result, the Company's common stock ownership
percentage in NetSat Express was reduced to approximately 68.0%. Accordingly,
the Company recorded a credit to stockholders' equity of approximately $127,000
reflecting the increase in its share of the net equity of NetSat Express as a
result of the common stock options exercised.
5. Commitments and Contingencies
During September 1999, NetSat Express signed a 15-year capital lease
for a satellite space segment transponder. This satellite will provide NetSat
Express the capability of providing its services to the Caribbean Islands and
the North, South and Central America regions. In connection with this lease,
NetSat Express recorded equipment under a capital lease of approximately
$11,257,000 and the related current and long-tem portion of the capital lease
obligation in the accompanying consolidated balance sheet. For the three and
nine months ended March 31, 2000, NetSat Express recorded amortization expense
of approximately $154,000 and total accumulated amortization of approximately
$154,000 as of March 31, 2000. Future fiscal year minimum lease payments under
this non-cancelable capital lease agreement are as follows: 2000 -- $347,000;
2001 -- $1,387,000; 2002 -- $1,387,000; 2003 -- $1,387,000; 2004 -- $1,387,000;
thereafter -- $14,096,000. Of the $19,991,000 in remaining minimum lease
payments, approximately $8,971,000 represents interest.
During March 2000, NetSat Express signed a 14-year capital lease
agreement for satellite space segment transponders. This satellite will provide
NetSat Express the capability of providing its services to Europe, Middle East
and South America. In connection with this lease, NetSat Express recorded
equipment under a capital lease of approximately $67,535,000 and the related
current and long-tem portion of the capital lease obligation in the accompanying
consolidated balance sheet. For the three and nine months ended March 31, 2000,
NetSat Express recorded amortization expense of approximately $227,000 and total
accumulated amortization of approximately $227,000 as of March 31, 2000. Future
fiscal year minimum lease payments under this non-cancelable capital lease
agreement are as follows: 2000 -- $1,467,000 2001 -- $7,942,000; 2002 --
$9,727,000; 2003 -- $9,727,000; 2004 -- $9,727,000;
10
<PAGE>
thereafter -- $92,408,000. Of the $130,998,000 in remaining minimum lease
payments, approximately $63,684,000 represents interest.
In April 2000, NetSat Express signed an additional 14-year capital
lease agreement for a satellite space segment transponder. Future fiscal year
minimum lease payments under this non-cancellable capital lease agreement are
as follows: 2000 -- $0, 2001 -- $1,231,000, 2002 -- $2,462,000, 2003 --
$2,462,000, 2004 -- $2,462,000; thereafter -- $23,394,000. Of the $32,011,000 in
remaining lease payments, approximately $14,649,000 represents interest.
6. Secondary Common Stock Offering
On April 4, 2000, the Company completed its secondary public offering
of 2,000,000 shares of its common stock for a price of $27.00 per share. The
Company raised net proceeds of approximately $50.1 million net of underwriting
discounts, commissions and other related expenses. The net proceeds will be used
for a revolving credit facility for up to $15.0 million to NetSat Express, for
their working capital and general corporate purposes and for the Company's
working capital and general corporate purposes.
7. Recently Issued Accounting Standard
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements. The SEC staff addressed several issues in SAB No. 101,
including the timing for recognizing revenue derived from selling arrangements
that involve contractual customer acceptance provisions and when installation
and title transfer occurs after shipment. The Company's existing revenue
recognition policy is to recognize revenue based on the percentage of completion
method of accounting for contract revenue upon the achievement of certain
milestones. Accordingly, revenue from fixed price contracts are generally
recorded based on the relationship of total costs incurred to date to total
projected final costs. Applying the requirements of SAB No. 101 to the current
contract revenue recognition method may result in a change in the Company's
accounting policy for revenue recognition. The effect of the change will be
recognized as a cumulative effect of a change in accounting no later than the
Company's first quarter of fiscal year 2001 ending on September 30, 2000.
Management is currently evaluating the effect of this change on its financial
position, results of operations, liquidity and cash flows.
8. 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 ground segment systems and network
solutions for the complex and changing communications requirements of its
customers. 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. Its Data
Communications Services Segment, through its majority-owned NetSat Express
subsidiary, 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.
11
<PAGE>
The following is the Company's business segment information as of and for the
three and nine months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Ground Segment Systems and
Networks.......................... $ 17,581 $ 5,642 $ 53,944 $ 30,125
Data Communications Services...... 2,725 856 6,814 1,548
Intercompany eliminations......... (1,736) - (5,390) -
-------- -------- -------- --------
Total revenues....................... $ 18,570 $ 6,498 $ 55,368 $ 31,673
======== ======== ======== ========
Income (loss) from operations:
Ground Segment Systems and
Networks.......................... $ 31 $ (2,033) $ (48) $ (4,502)
Data Communications Services...... (2,573) (497) (4,951) (1,478)
Interest income...................... 282 204 729 814
Interest expense..................... (769) - (1,085) -
Gain on sale of consolidated
subsidiary's common stock............ - - 2,353 -
Minority interests in operations of
consolidated subsidiary............. 1,075 - 1,689 -
Intercompany eliminations............ (130) - (373) -
-------- -------- -------- --------
Net loss............................. $ (2,084) $ (2,326) $ (1,686) $ (5,166)
======== ======== ======== ========
Depreciation and amortization:
Ground Segment Systems and
Networks.......................... $ 296 $ 173 $ 1,048 $ 820
Data Communications Services...... 419 5 775 197
-------- -------- -------- --------
Total depreciation and amortization.. $ 715 $ 178 $ 1,823 990
======== ======== ======== ========
Expenditures for long-lived assets:
Ground Segment Systems and
Networks.......................... $ 78 $ 187 $ 768 $ 1,063
Data Communications Services...... 1,434 650 3,170 723
Intercompany eliminations......... (196) - (229) -
-------- -------- -------- --------
Total expenditures for long-lived
assets.............................. $ 1,316 $ 837 $ 3,709 $ 1,786
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
(UNAUDITED) (AUDITED)
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Ground Segment Systems and Networks......................... $ 68,166 $ 62,664
Data Communications Services................................ 92,491 3,200
Intercompany eliminations................................... (13,165) (7,854)
--------- --------
Total assets.................................................. $ 147,492 $ 58,010
========= ========
</TABLE>
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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 our future financial
performance. 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 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, substantially all of our revenue has been
generated by our ground segment systems and networks and communications services
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 requires from three to 12 months. We use the percentage
of completion method of accounting for contract revenues, upon the achievement
of various milestones. Accordingly, most of the revenue from sales of products
is typically recognized when the product is shipped, with the balance recognized
at the time of acceptance by the customer. Revenues from providing
satellite-based communications services are recognized at the time the service
is performed. Costs of revenues are generally recorded based on the relationship
of the amount of projected final costs to the percentage of revenue recorded for
the specific contract.
Costs of revenues consist primarily of the costs of purchased material,
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 consist primarily of satellite space segment charges and
Internet connectivity fees. Network operations expenses consist primarily of
costs associated with the operation of NetSat Express' 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, accounting, contract and administrative
functions. We anticipate that research and development will increase and network
operations, selling and marketing and general and administrative 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 and Nine Months Ended March 31, 2000 and 1999
Revenues. Revenues increased by approximately $12.1 million, or 185.8%,
to approximately $18.6 million for the three months ended March 31, 2000 and
increased by approximately $23.7 million, or 74.8%, to approximately $55.4
million for the nine months ended March 31, 2000 compared to approximately $6.5
million and approximately $31.7 million for the comparable three and nine months
ended March 31, 1999, respectively. The increase reflects increased shipments
for both international and domestic projects and an increase in revenues
generated by NetSat Express. Although we experienced increased revenues for the
three and nine months ended March 31, 2000, we expect the trend in revenues that
adversely affected our results of operations for the fiscal year ended June 30,
1999 to continue to adversely impact us. These trends include the difficult
economic conditions in the Pacific Rim region, Russia and other international
markets and the decrease in bookings we received from these regions.
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Gross Profit. Gross profit increased by approximately $1.7 million, or
214.5%, to approximately $2.5 million, for the three months ended March 31, 2000
and increased by approximately $3.3 million, or 82.6%, to approximately $7.4
million, for the nine months ended March 31, 2000 from approximately $0.8
million and approximately $4.0 million for the comparable three and nine months
in the preceding year. The increase reflects increased shipments for both
international and domestic projects and an increase in revenues generated by
NetSat Express. Gross profit as a percentage of revenues for the three months
ended March 31, 2000 increased to 13.3 % compared to 12.1% for the same three
months ended in the preceding year and increased to 13.3% for the nine months
ended March 31, 2000 in comparison to 12.8% for the same nine months ended in
the preceding year. This increase is mainly attributable to an increase in the
Globecomm Systems gross profit for the nine months ended March 31, 2000 compared
to the comparable period in the prior year.
Network Operations. Network operations expenses increased by
approximately $0.4 million or 386.7%, to approximately $0.5 million for the
three months ended March 31, 2000 and increased by approximately $1.0 million,
or 300.0%, to approximately $1.3 million, for the nine months ended March 31,
2000 compared to approximately $0.1 million and approximately $0.3 million for
the comparable three and nine months ended March 31, 1999. The increase is due
to the continuing expansion of NetSat Express' network operations center and
related expenses to support the increasing service base.
Selling and Marketing. Selling and marketing expenses increased by
approximately $0.3 million or 20.7%, to approximately $1.6 million for the three
months ended March 31, 2000 and increased by approximately $0.4 million, or
10.3%, to approximately $4.0 million, for the nine months ended March 31, 2000
compared to approximately $1.3 million and approximately $3.6 million for the
comparable three and nine months ended March 31, 1999. This increase is
attributable to an increase in NetSat Express sales and marketing efforts,
offset in part by a decrease in Globecomm Systems' sales and marketing efforts.
Research and Development. Research and development expenses decreased
by approximately $0.2 million, or 53.2%, to approximately $0.2 million for the
three months ended March 31, 2000 and decreased by approximately $0.4 million,
or 43.0%, to approximately $0.6 million for the nine months ended March 31, 2000
compared to approximately $0.4 million and approximately $1.0 million for the
three and nine months ended March 31, 1999. This decrease is due to us reducing
research and development efforts.
General and Administrative. General and administrative expenses
increased by approximately $1.3 million or 90.5%, to approximately $2.8 million
for the three months ended March 31, 2000 and increased by approximately $2.8
million, or 67.6%, to approximately $6.9 million, for the nine months ended
March 31, 2000 compared to approximately $1.5 million and approximately $4.1
million for the comparable three and nine months ended March 31, 1999. General
and administrative expenses as a percentage of revenues decreased to 15.1% from
22.7% for the three months ended March 31, 2000 and 1999, respectively, and
decreased to 12.5% from 13.0% for nine months ended March 31, 2000 and 1999,
respectively. The increase in general and administrative expenses for the three
months and nine months ended is mainly due to an increase in NetSat Express
personnel and related expenses and depreciation expense related to capital
leases entered into during fiscal 2000 for satellite space segment transponders.
Terminated Acquisition. Terminated acquisition costs of approximately
$1.0 million for the nine months 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 our stockholders.
Interest Income. Interest income increased by approximately $0.1
million or 38.2%, to approximately $0.3 million for the three months ended March
31, 2000 and decreased by approximately $0.1 million, or 10.4%, to approximately
$0.7 million for the nine months ended March 31, 2000 compared to approximately
$0.2 million and approximately $0.8 million for the three and nine months ended
March 31, 1999. The increase for the three months ended March 31, 2000 relates
primarily to NetSat Express investment of the net proceeds from its private
common and preferred stock offerings and the decrease for the nine months ended
March 31, 2000 was primarily due to the reduction of cash and cash equivalents
during the first quarter ended September 30, 1999 compared to the same period in
the prior year.
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Interest Expense. Interest expense was approximately $0.8 million and
approximately $1.1 million for the three and nine months ended March 31, 2000
and minimal for the comparable periods in the prior year. This increase relates
to the NetSat Express capital leases entered into during fiscal 2000 for
satellite space segment transponders.
Gain on Sale of Consolidated Subsidiary's Common Stock. The gain on
sale of consolidated subsidiary's common stock of approximately $2.4 million for
the nine months ended March 31, 2000 relates to our sale of 1,400,000 shares of
common stock of NetSat Express at $2.50 per share during the second quarter
ended December 31, 1999.
NetSat Express. Our consolidated subsidiary, NetSat Express,
experienced an increase in revenues of approximately $1.0 million or 119.9%, to
approximately $1.9 million for the three months ended March 31, 2000 and
increased by approximately $3.9 million, or 254.5%, to approximately $5.5
million, for the nine months ended March 31, 2000 compared to approximately $0.9
million and approximately $1.5 million for the comparable three and nine months
ended March 31, 1999. The increase resulted from additional service and hardware
revenues derived from new and existing Access Plus customers. The loss from
operations associated with NetSat Express increased by approximately $2.1
million or 430.1%, to approximately $2.6 million for the three months ended
March 31, 2000 and increased by approximately $3.5 million, or 239.6%, to
approximately $5.0 million, for the nine months ended March 31, 2000 compared to
approximately $0.5 million and approximately $1.5 million for the comparable
three and nine months ended March 31, 1999. The increase was primarily
associated with an increase in general and administrative expenses, network
operation expenses and selling and marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had working capital of approximately $27.9
million, including cash and cash equivalents of approximately $19.8 million,
restricted cash of approximately $0.3 million, net accounts receivable of
approximately $19.1 million, net inventories of approximately $8.4 million and
prepaid and other current assets of approximately $1.6 million, offset by
approximately $15.9 million in accounts payable and approximately $5.4 million
in accrued expenses and other current liabilities.
Several factors had an effect on our liquidity during the nine months
ended March 31, 2000. First, we used approximately $7.2 million for operating
activities, which primarily relates to a decrease in accounts payable of
approximately $2.8 million reflecting the timing of a large payment to a major
vendor, a gain on sale of our consolidated subsidiary's common stock of
approximately $2.4 million, an increase in net inventory of approximately $2.4
million reflecting the timing of purchases to support future shipments and/or
completion of ground segment systems and networks, minority interests in
operations of our consolidated subsidiary of approximately $1.7 million and an
increase in net accounts receivable of approximately $1.0 million due to the
timing of billings and payments to and from customers, offset by the deferred
liability of $2.1 due to the Technology Agreement entered into in connection
with the NetSat Express private offering of common stock and an increase of
accrued expenses of approximately $1.4 million.
The second factor affecting liquidity during the nine months ended
March 31, 2000 was our financing activities. In August 1999, NetSat Express
completed a private placement of common and preferred stock yielding net
proceeds of approximately $7.0 million, net of issuance costs. These proceeds
are being used to fund NetSat Express' operations, expand marketing initiatives,
engineering efforts and fund capital expansion. In October 1999, we, together
with NetSat Express, entered into a common stock purchase agreement with an
investor to purchase 2,000,000 shares of NetSat Express common stock of which
1,400,000 shares were purchased directly from us (see investing activities
below) and 600,000 shares were issued and sold directly by NetSat Express for
approximately $1.5 million. The net proceeds of approximately $1.4 million
received by NetSat Express, net of issuance costs, are being used to fund
operations, expand marketing initiatives, engineering efforts and fund capital
expansion. Management anticipates that NetSat Express will experience negative
cash flow due to the capital investment required for continued development of
its operations and continued loss from operating activities for an extended
period of time. In addition, during the nine months ended March 31, 2000, we
received approximately $3.8 million in proceeds from the exercise of certain
employee and director stock options.
The third factor affecting liquidity during the nine months ended
March 31, 2000, was our investing activities. During the nine months ended
March 31, 2000, we purchased approximately $3.7 million in fixed assets,
restricted cash decreased by approximately $3.2 million due to the expiration of
letter of credits and the redemption of certificates of deposits held as
collateral, and we received approximately $3.5 million in net proceeds from the
sale of 1,400,000 shares of NetSat Express' common stock, which are intended to
be used for general corporate purposes.
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On April 4, 2000, we completed a secondary public offering of 2,000,000
shares of our common stock for a price of $27.00 per share. We raised net
proceeds of approximately $50.1 million net of underwriting discounts,
commissions and other related expenses. The net proceeds will be used for a
revolving credit facility for up to $15.0 million to NetSat Express, for their
working capital and general corporate purposes and for our working capital and
general corporate purposes.
We have a $9.0 million credit facility consisting of a $5.0 million
secured domestic line of credit and a $4.0 million secured export-import
guaranteed line of credit. Each line of credit bears interest at the prime rate
(9.0% as of March 31, 2000) plus a variable margin rate ranging from 0.75% to
1.75% (1.0% per annum at March 31, 2000) and is collateralized by a first
security interest on all of our assets. No amounts are outstanding under this
credit facility as of May 5, 2000. We also lease satellite space segment
transponders under various capital lease agreements, which expire in various
years through 2014. Future minimum lease payments due on these capital leases
through March 31, 2001 are approximately $9,184,000.
We expect that our cash and working capital requirements for our
operating activities will continue to increase as we expand our operations.
Our future capital requirements will depend upon many factors,
including the success of our marketing efforts in the ground segment systems and
networks and communications services businesses, 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 our
capital requirements through March 31, 2001. However, we cannot assure you that
there will be no change that would consume available resources significantly
before such time. 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 not
available, we will be required to delay, scale back or eliminate certain of our
operating activities, including without limitation, the timing and extent of its
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.
RECENTLY ISSUED ACCOUNTING STANDARD
In December 1999, the Security and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements. The SEC staff addressed several issues in SAB No. 101,
including the timing for recognizing revenue derived from selling arrangements
that involve contractual customer acceptance provisions and when installation
and title transfer occurs after shipment. The Company's existing revenue
recognition policy is to recognize revenue based on the percentage of completion
method of accounting for contract revenue upon the achievement of certain
milestones. Accordingly, revenue from fixed price contracts are generally
recorded based on the relationship of total cost incurred to date to total
projected final costs. Applying the requirements of SAB No. 101 to the current
contract revenue recognition method may result in a change in the Company's
accounting policy for revenue recognition. The effect of the change will be
recognized as a cumulative effect of a change in accounting no later than the
Company's first quarter of fiscal year 2001 ending on September 30, 2000.
Management is currently evaluating the effect of this change on its financial
position, results of operations, liquidity and cash flows.
CERTAIN BUSINESS CONSIDERATIONS
RISKS RELATED TO OUR BUSINESS
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 $2.7 million during the fiscal year ended
June 30, 1997, $0.5 million during the fiscal year ended June 30, 1998, and $8.2
million during the fiscal year ended June 30, 1999. Our net losses include net
losses of $1.5 million during the fiscal year ended June 30, 1997, $1.7 million
during the fiscal year ended June 30, 1998, and $2.1 million during the fiscal
year ended June 30, 1999 for NetSat Express. As of March 31, 2000, our
accumulated deficit was approximately $16.4 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.
RISKS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS COULD RESTRICT OUR
ABILITY TO EXPAND GLOBALLY AND HARM OUR BUSINESS AND PROSPECTS.
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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 regions: Africa, the
Pacific Rim 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 changes in regulatory requirements could restrict our ability to
deliver services to our international customers;
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 political and economic instability in international markets could
impede our ability to deliver our services to customers and harm
our financial results;
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 complying with complex foreign laws and treaties; and
o difficulties in collecting accounts receivable.
These and other risks could impede our ability to manage our
international business 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 on a project basis. We currently market our
communications services to our existing customers. These services not only
provide the implementation of the satellite ground segment systems and networks
but also provide the ongoing operation and maintenance of these services. 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. If NetSat Express does not execute its
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business strategy or execute it to the expectation level of public market
analysts, these public market analysts may reduce the value they assign to
NetSat Express. If the market for its current or future services fails to
develop, or develops more slowly than it expects, then public market analysts
may reduce the value they assign to NetSat Express. In the event these analysts,
in either case, reduce the value they assign NetSat Express, it would have a
material adverse affect on the market price of our stock.
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
the Pacific Rim region, Russia and other 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, 1999 and the nine months ended March 31, 2000. We expect
that these negative trends will continue to adversely impact our results of
operations.
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 the length of time needed to initiate and complete customer
contracts;
o delays in the bookings 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 level of demand for our existing products and services in
developing countries with emerging markets for our 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 general economic conditions in the United States and abroad,
including the difficult economic conditions and currency
devaluations in the Pacific Rim region, Russia and other
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
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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 services include vertically integrated satellite systems
providers like Nippon Electric Corporation, and systems integrators like IDB
Systems, a division of MCI WorldCom, Inc.
In the communications services and Internet access services markets, we
do compete with other satellite communication companies who provide similar
services, like Loral CyberStar, Inc. and PanAmSat Corporation, as well as other
Internet services providers. In addition, we may compete with other
communications services providers like Teleglobe, Inc. and MCI WorldCom. 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.
These competitors have the financial resources to withstand substantial
price competition and may be in a better position to endure difficult economic
conditions in the Pacific Rim region, Russia and other 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 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 March
2001. 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 services 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. Please see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for a more complete description of our historical financial
condition, results of operations and liquidity.
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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
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 REVENUES, 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 revenues
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, 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 a significant number of 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 revenues, financial condition and business will be harmed.
WE ANTICIPATE SIGNIFICANT REVENUES FROM OUR SIRIUS SATELLITE RADIO CONTRACT AND
A MODIFICATION OR TERMINATION OF THIS CONTRACT COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR REVENUES AND FINANCIAL CONDITION.
We have an agreement with Sirius Satellite Radio, Inc. to provide
equipment for their satellite radio transmission system, which we expect to
generate substantial revenues. Sirius Satellite Radio anticipates beginning
operations of its system at the end of the fourth quarter of 2000. If it is
unable to implement its plan to build a nationwide radio broadcast system, the
market for digital radio declines, or Sirius Satellite Radio modifies or
terminates its agreement with us, our financial condition and results of
operations 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, implementation 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
financial condition and results of operations could be adversely affected.
IF OUR PRODUCTS AND SERVICES ARE NOT ACCEPTED IN DEVELOPING COUNTRIES WITH
EMERGING MARKETS, OUR REVENUES WILL BE IMPAIRED.
20
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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 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, we are highly
dependent on our management team, including David Hershberg, Kenneth Miller,
Marni Ehrlich, Burt Liebowitz, Steven Yablonski and Don Woodring. The employment
of any of our key personnel could cease at any time.
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.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BUSINESS.
We regard our trademarks, trade secrets and other intellectual property
as critical 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. Failure to maintain protection of our intellectual property
for any reason could have a materially adverse effect on our business.
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 a patent 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 any future applications 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. in the United States and various other countries and have received
trademark registrations for NetSat Express in the United States, the European
Community, Russia, and Brazil. We 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.
21
<PAGE>
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 the 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. 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 May 12, 2000, our officers and directors, and their affiliates
beneficially own approximately 1.7 million shares, constituting approximately
14% 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 and Internet access 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.
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 telecommunications 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 to meet the demands of our customers. We currently anticipate
that the rapid growth in the demand for satellite-based communications in the
Pacific Rim region could lead to a short-term shortage of transponder space in
that region.
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<PAGE>
WE RELY ON NETSAT EXPRESS, OUR MAJORITY-OWNED SUBSIDIARY, FOR OUR MAIN SUPPLY OF
TRANSPONDER SPACE ON SATELLITES. IF THEIR BUSINESS FAILS OR WE ARE OTHERWISE
UNABLE TO CONTINUE TO RELY ON THEM 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 transponder space, 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:
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.
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.
NetSat Express has announced its intentions to make an initial public
offering of shares of its common stock. Because we own a large percentage of the
shares of NetSat Express, an adverse change in the market price of NetSat
Express' common stock, whether or not it accurately reflects the financial
performance or prospects of NetSat Express, may affect the market price of our
common stock. In addition, any perceived delay or actual postponement of an
initial public offering of NetSat Express' common stock may adversely affect the
market price of our common stock. We currently report in our consolidated
financial statements the operations of NetSat Express. The timing and size of
NetSat Express' anticipated offering is dependent on market conditions and other
factors. If NetSat Express completes its anticipated initial public offering,
our equity ownership may decrease to a percentage that would cause us to no
23
<PAGE>
longer consolidate the financial position and results of operations of NetSat
Express. Therefore, we may in the future report our financial statements without
consolidating the financial statements of NetSat Express. If public market
analysts view this change in our financial statement reports negatively, it
could have a material adverse affect on the market price of our stock.
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 earth stations in Hauppauge, New
York, subject to the Communications Act of 1934, as amended, and the rules and
regulations of the Federal Communications Commission, or 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 are in compliance with the 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 NetSat
Express' 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 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 applicable restrictions will not be unduly burdensome.
24
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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 Europe and content
restrictions in countries like 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 United States. 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 these 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,
financial condition and results of operations.
25
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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 March 31, 2000 we had no such
foreign currency forward contracts.
Our earnings and cash flows are subject to fluctuations due to changes in
interest rates primarily from its investment of available cash balances in money
market funds with portfolios of investment grade corporate and government
securities, and secondly, certain of its fixed long term capital lease
agreements. Under our current positions, we do not use interest rate derivative
instruments to manage exposure to interest rate changes.
26
<PAGE>
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
None
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).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.3 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 3.3 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).
27
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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 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 10-K for the
fiscal 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).
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
fiscal year ended June 30, 1999).
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 fiscal 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). 27 Financial Data Schedule (filed herewith).
* Confidential treatment granted for portions of this agreement.
(b) Reports on Form 8-K
None
28
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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 15, 2000 /s/ David E. Hershberg
----------------------
David E. Hershberg
Chief Executive Officer and
Chairman of the Board of Directors
Date: May 15, 2000 /s/ Andrew C. Melfi
-------------------
Andrew C. Melfi
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Globecomm Systems Inc. Consolidated Financial Statements, and is qualified in
its entirety by reference to such consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 19,777
<SECURITIES> 0
<RECEIVABLES> 19,455
<ALLOWANCES> 314
<INVENTORY> 8,426
<CURRENT-ASSETS> 49,263
<PP&E> 97,474
<DEPRECIATION> 3,992
<TOTAL-ASSETS> 147,492
<CURRENT-LIABILITIES> 21,330
<BONDS> 0
5,000
0
<COMMON> 10
<OTHER-SE> 40,005
<TOTAL-LIABILITY-AND-EQUITY> 147,492
<SALES> 55,368
<TOTAL-REVENUES> 55,368
<CGS> 47,989
<TOTAL-COSTS> 12,751
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 260
<INTEREST-EXPENSE> 1,085
<INCOME-PRETAX> (1,686)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,686)
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
</TABLE>
