<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 September 30, 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 November 10, 2000, there were 11,882,111 shares outstanding of the
registrant's Common Stock, par value $.001.
1
<PAGE>
GLOBECOMM SYSTEMS INC.
Index to the September 30, 2000 Form 10-Q
<TABLE>
<CAPTION>
Page
Part I -- Financial Information
<S> <C>
Item 1. Consolidated Financial Statements .................................................................3
Consolidated Balance Sheets -- As of September 30, 2000 (unaudited) and June 30, 2000..............3
Consolidated Statements of Operations (unaudited) -- For the three months ended
September 30, 2000 and 1999 ....................................................................5
Consolidated Statement of Changes in Stockholders' Equity -- For the three months
ended September 30, 2000 (unaudited)............................................................6
Consolidated Statements of Cash Flows (unaudited) -- For the three months ended September 30, 2000
and 1999 .......................................................................................7
Notes to Consolidated Financial Statements (unaudited).............................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................23
Part II -- Other Information
Item 1. Legal Proceedings.................................................................................24
Item 2. Changes in Securities and Use of Proceeds.........................................................24
Item 3. Defaults Upon Senior Securities...................................................................24
Item 4. Submission of Matters to a Vote of Security Holders...............................................24
Item 5. Other Information.................................................................................24
Item 6. Exhibits and Reports on Form 8-K..................................................................24
Signatures........................................................................................26
</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>
SEPTEMBER 30, JUNE 30,
------------- --------
2000 2000
---- ----
(UNAUDITED) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 56,876 $ 65,289
Restricted cash........................................ 498 421
Accounts receivable, net............................... 27,496 22,722
Inventories, net....................................... 12,600 9,748
Prepaid expenses and other current assets.............. 1,307 1,571
Deferred income taxes.................................. 1,527 1,942
----------------------------------------------
Total current assets..................................... 100,304 101,693
Fixed assets, net........................................ 112,375 112,784
Investments.............................................. 2,961 2,961
Other assets, net........................................ 1,656 1,729
----------------------------------------------
Total assets............................................. $ 217,296 $ 219,167
==============================================
</TABLE>
See accompanying notes.
3
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------- --------
2000 2000
---- ----
(UNAUDITED) (1)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 17,936 $ 16,494
Deferred revenue........................................................................ 3,112 2,700
Accrued payroll and related fringe benefits............................................. 1,130 680
Accrued interest........................................................................ 505 1,566
Other accrued expenses.................................................................. 4,371 3,812
Deferred liability...................................................................... 237 194
Capital lease obligations............................................................... 2,780 1,716
---------------------------------------
Total current liabilities................................................................. 30,071 27,162
Deferred liability, less current portion.................................................. 1,761 1,853
Capital lease obligations, less current portion........................................... 93,615 94,502
Minority interests in consolidated subsidiary............................................. 219 126
Series A Participating Preferred stock of consolidated
subsidiary, at redemption value......................................................... 5,000 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
September 30, 2000 and June 30, 2000.............................................. - -
Class B Convertible, shares authorized, issued and outstanding: none at
September 30, 2000 and June 30, 2000............................................... - -
Series A Junior Participating, shares authorized, issued and outstanding: none at
September 30, 2000 and June 30, 2000.............................................. - -
Common stock, $.001 par value, 22,000,000 shares authorized, shares issued:
12,029,856 at September 30, 2000 and 12,024,256 at June 30, 2000.................. 12 12
Additional paid-in capital.............................................................. 110,001 110,105
Accumulated deficit..................................................................... (22,091) (18,298)
Accumulated other comprehensive income.................................................. 1 17
Deferred compensation................................................................... (199) (218)
Treasury stock, at cost, 147,745 shares at September 30, 2000 and
June 30, 2000..................................................................... (1,094) (1,094)
---------------------------------------
Total stockholders' equity................................................................ 86,630 90,524
---------------------------------------
Total liabilities and stockholders' equity................................................ $ 217,296 $ 219,167
=======================================
</TABLE>
See accompanying notes.
4
(1) The consolidated balance sheet at June 30, 2000 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-----------------------------------------
<S> <C> <C>
Revenues........................................................................... $ 26,444 $ 19,425
Costs of revenues.................................................................. 21,330 16,917
-----------------------------------------
Gross profit....................................................................... 5,114 2,508
-----------------------------------------
Operating expenses:
Network operations........................................................... 756 276
Selling and marketing........................................................ 2,096 1,045
Research and development..................................................... 210 130
General and administrative................................................... 4,494 1,984
-----------------------------------------
Total operating expenses........................................................... 7,556 3,435
-----------------------------------------
Loss from operations............................................................... (2,442) (927)
Other income (expense):
Interest income.............................................................. 978 170
Interest expense............................................................. (1,951) (58)
-----------------------------------------
Loss before income taxes and minority interests.................................... (3,415) (815)
Provision for income taxes......................................................... (415) -
-----------------------------------------
Loss before minority interests..................................................... (3,830) (815)
Minority interests in operations of consolidated subsidiary 37 76
-----------------------------------------
Net loss........................................................................... $ (3,793) $ (739)
=========================================
Basic and diluted net loss per common share........................................ $ (0.32) $ (0.08)
=========================================
Weighted-average shares used in the calculation of basic and diluted net loss per
common share.................................................................... 11,879 9,229
=========================================
</TABLE>
See accompanying notes.
5
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 2000 ...... 12,024 $ 12 $ 110,105 $(18,298) $ 17
Minority interests resulting
from issuance of consolidated
subsidiary's common stock ... (131)
Proceeds from exercise of
stock options ............... 6 -- 27
Amortization of deferred
compensation ................
Comprehensive loss:
Net loss .................... ( 3,793)
Loss from foreign currency
translation ................ (16)
Total comprehensive loss ......
------------------------------------------------------------------------------------------------
Balance at September 30, 2000 . 12,030 $ 12 $ 110,001 $(22,091) $ 1
================================================================================================
<CAPTION>
TREASURY STOCK TOTAL
DEFERRED ---------------- STOCKHOLDERS'
COMPENSATION SHARES AMOUNT EQUITY
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 2000 ...... $ (218) 148 $ (1,094) $ 90,524
Minority interests resulting
from issuance of consolidated
subsidiary's common stock ... (131)
Proceeds from exercise of
stock options ............... 27
Amortization of deferred
compensation ................ 19 19
Comprehensive loss:
Net loss .................... (3,793)
Loss from foreign currency
translation ................ (16)
--------
Total comprehensive loss ...... (3,809)
---------------------------------------------------------------------------------------------
Balance at September 30, 2000 . $ (199) 148 $ (1,094) $ 86,630
=============================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss............................................................... $ (3,793) $ (739)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 2,366 554
Stock compensation expense......................................... 19 37
Provision for doubtful accounts.................................... 218 52
Minority interests in operations of consolidated subsidiary........ (37) (76)
Deferred income taxes.............................................. 415 -
Interest on capital lease obligations.............................. 17 -
Internet access services........................................... (49) -
Changes in operating assets and liabilities:
Accounts receivable............................................. (4,992) (6,451)
Inventories..................................................... (2,852) 1,182
Prepaid expenses and other current assets....................... 264 (227)
Other assets.................................................... 34 (92)
Accounts payable................................................ 1,442 (3,708)
Deferred revenue................................................ 412 83
Accrued payroll and related fringe benefits..................... 450 (134)
Accrued interest and other accrued expenses..................... (519) 456
-------------------------------------------
Net cash used in operating activities.................................. (6,605) (9,063)
-------------------------------------------
INVESTING ACTIVITIES:
Purchases of fixed assets, net of non-cash capital lease expenditures.. (1,261) (311)
Restricted cash........................................................ (77) 3,149
-------------------------------------------
Net cash (used in) provided by investing activities.................... (1,338) 2,838
-------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sale of consolidated subsidiary's common stock, net ..... - 3,978
Proceeds from sale of consolidated subsidiary's preferred stock........ - 5,000
Proceeds from exercise of stock options................................ 27 391
Payments under capital leases.......................................... (481) -
-------------------------------------------
Net cash (used in) provided by financing activities.................... (454) 9,369
-------------------------------------------
Loss from foreign currency translation ................................ (16) -
Net (decrease) increase in cash and cash equivalents................... (8,413) 3,144
Cash and cash equivalents at beginning of period....................... 65,289 11,944
-------------------------------------------
Cash and cash equivalents at end of period............................. $ 56,876 $ 15,088
===========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................. $ 2,908 $ 58
===========================================
</TABLE>
See accompanying notes.
7
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 such periods have been included. The results of operations for
the three months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the full fiscal year ending June 30, 2001, or
for any future period. The preparation of the 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, 2000 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, 2000.
Comprehensive Loss
For the three months ended September 30, 2000, comprehensive loss of
approximately $3,809,000 includes a foreign currency translation loss of
approximately $16,000. The Company's comprehensive loss for the three months
ended September 30, 1999, was equal to the Company's net loss for such period.
Income Taxes
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income. For the year ended June
30, 2000, management reversed approximately $1,942,000 of the deferred tax asset
valuation allowance representing an amount that will be realized based on
projected fiscal 2001 taxable income. For the three months ended September 30,
2000, the Company realized approximately $415,000 of the deferred tax assets
based on the amount of taxable income recorded for the three months ended
September 30, 2000.
2. BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". Basic and diluted net loss per common share is computed by dividing the
net loss for the period by the weighted-average number of common and dilutive
equivalent shares outstanding for the period. Common equivalent shares consist
of the incremental common shares issuable upon the conversion of preferred
stock (using an if-converted method) and shares issuable upon the exercise of
stock options and warrants (using the treasury stock method). Common equivalent
shares are excluded from the calculation of diluted net loss per share if their
effect is anti-dilutive. Diluted net loss per share for the three months ended
September 30, 2000 and 1999, excludes the effect of approximately 583,000 and
324,000 stock options and approximately 20,000 and 10,000 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, which consist primarily of work-in-progress from costs
incurred in connection with specific customer contracts, are stated at the lower
of cost (using the first-in, first-out method of accounting) or market value,
less customer progress payments.
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
-----------------------------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
<S> <C> <C>
Raw materials and component parts................................................. $ 580 $ 450
Work-in-progress.................................................................. 15,358 12,885
-----------------------------------
15,938 13,335
Less progress payments............................................................. 3,338 3,587
-----------------------------------
$ 12,600 $ 9,748
===================================
</TABLE>
4. RECENTLY ISSUED ACCOUNTING STANDARDS
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 timing for recognizing revenues 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 revenues 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.
Management is currently evaluating the effect of SAB No. 101, if any, on its
consolidated financial position, results of operations, liquidity and cash
flows.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended,
which is required to be adopted in years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, the adoption of this new Statement
did not have a significant effect on earnings or the consolidated financial
position of the Company.
5. SEGMENT INFORMATION
The Company operates through two business segments. Its Ground Segment
Systems, Networks and Enterprise Solutions Segment, through Globecomm Systems
Inc., is engaged in the design, assembly and installation of ground segment
systems, networks and enterprise solutions for the complex and changing
communications requirements of its customers. Its Data Communications Services
Segment, through its 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.
9
<PAGE>
The following is business segment information for the three months ended
September 30, 2000 and 1999 and as of September 30, 2000 and June 30, 2000 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Revenues:
Ground Segment Systems, Networks and
Enterprise Solutions.................................. $ 20,657 $ 18,518
Data Communications Services............................. 6,801 1,789
Intercompany eliminations................................ (1,014) (882)
----------------------- -----------------------
Total revenues.............................................. $ 26,444 $ 19,425
======================= =======================
Loss from operations:
Ground Segment Systems, Networks and
Enterprise Solutions................................... $ (129) $ (92)
Data Communications Services............................. (2,348) (741)
Interest income............................................. 978 170
Interest expense............................................ (1,951) (58)
Provision for income taxes.................................. (415) -
Minority interests in operations of consolidated
subsidiary............................................. 37 76
Intercompany eliminations................................... 35 (94)
----------------------- -----------------------
Net loss.................................................... $ (3,793) $ (739)
==== ================== === ===================
Depreciation and amortization:
Ground Segment Systems, Networks and
Enterprise Solutions................................... $ 426 $ 378
Data Communications Services............................. 1,940 177
Intercompany eliminations................................ - (1)
----------------------- -----------------------
Total depreciation and amortization......................... $ 2,366 $ 554
======================= =======================
Expenditures for long-lived assets:
Ground Segment Systems, Networks and
Enterprise Solutions................................... $ 509 $ 117
Data Communications Services............................. 1,409 231
Intercompany eliminations................................ - (37)
----------------------- -----------------------
Total expenditures for long-lived assets.................... $ 1,918 $ 311
======================= =======================
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
----------------------- -----------------------
(UNAUDITED) (AUDITED)
Assets:
Ground Segment Systems, Networks and
Enterprise Solutions................................... $ 124,823 $ 121,519
Data Communications Services............................. 107,308 109,624
Intercompany eliminations................................ (14,835) (11,976)
----------------------- -----------------------
Total assets................................................ $ 217,296 $ 219,167
======================= =======================
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-Q contains certain forward-looking
statements that involve risks and uncertainties. Our actual results could differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below as well as those discussed in our other filings with the
Securities and Exchange Commission, including our Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q.
OVERVIEW
Since our inception, a majority of our revenues have been generated by our
ground segment systems, networks and enterprise solutions business. Contracts
for these ground segment systems, networks and enterprise solutions 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
revenues 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 services are 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 materials,
direct labor and related overhead expenses, project-related travel, living costs
and subcontractor salaries. In addition, cost of revenues relating to Internet
access service fees consists primarily of satellite space segment charges and
Internet connectivity fees. Network operations expenses consist primarily of
costs associated with the operation of 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 general and administrative expenses, network
operations, selling and marketing, and research and development, will continue
to increase during the next several years due to expected increases in personnel
and related expenses to support our increasing service base.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999
Revenues. Revenues increased by approximately $7.0 million, or 36.1%, to
approximately $26.4 million for the three months ended September 30, 2000
compared to approximately $19.4 million for the three months ended September 30,
1999. The increase reflects an increase in revenues generated by NetSat Express
from additional service and hardware revenues derived from new and existing
Internet access service customers and increased shipments in the domestic
satellite infrastructure business.
Gross Profit. Gross profit increased by approximately $2.6 million, or
103.9%, to approximately $5.1 million for the three months ended September 30,
2000 from approximately $2.5 million for the three months ended September 30,
1999. The increase reflects an increase in revenues generated by NetSat Express
and increased shipments in the domestic satellite infrastructure business. Gross
profit as a percentage of revenues for the three months ended September 30,
2000, increased to 19.3% compared to 12.9% for the same period in the preceding
year. This increase is attributable to an increase in the gross profit for
NetSat Express as a result of an increase in utilization of network capacity.
11
<PAGE>
Network Operations. Network operations expenses increased by approximately
$0.5 million, or 173.9%, to approximately $0.8 million for the three months
ended September 30, 2000 compared to approximately $0.3 million for the three
months ended September 30, 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 $1.1 million, or 100.6%, to approximately $2.1 million for the
three months ended September 30, 2000 compared to approximately $1.0 million for
the three months ended September 30, 1999. This increase is attributable to an
increase in NetSat Express sales and marketing efforts to penetrate into new
regions.
Research and Development. Research and development expenses increased by
approximately $0.1 million, or 61.5%, to approximately $0.2 million for the
three months ended September 30, 2000 compared to approximately $0.1 million for
the three months ended September 30, 1999. This increase is due to NetSat
Express' research and development efforts for potential new products.
General and Administrative. General and administrative expenses increased
by approximately $2.5 million, or 126.5%, to approximately $4.5 million for the
three months ended September 30, 2000 compared to approximately $2.0 million for
the three months ended September 30, 1999. General and administrative expenses
as a percentage of revenues increased to 17.0% from 10.2% for the three months
ended September 30, 2000 and 1999, respectively. The increase in general and
administrative expenses is mainly due to an increase in NetSat Express
depreciation expense related to capital leases entered into during fiscal year
2000 for satellite space segment transponders and an increase in personnel,
including expenses related to developing its management team.
Interest Income. Interest income increased by approximately $0.8 million,
or 475.3%, to approximately $1.0 million for the three months ended September
30, 2000 compared to approximately $0.2 million for the three months ended
September 30, 1999. The increase was primarily due to the increase of cash and
cash equivalents during the first quarter ended September 30, 2000 compared to
the same period in the prior year due to the investment of the net proceeds from
our secondary common stock offering completed in April 2000.
Interest Expense. Interest expense was approximately $2.0 million for the
three months ended September 30, 2000 compared to approximately $0.1 million for
the three months ended September 30, 1999. The increase relates to the NetSat
Express capital leases entered into during fiscal year 2000 for satellite space
segment transponders.
Provision for Income Taxes. For the three months ended September 30, 2000,
the Company recorded a provision for income taxes of approximately $0.4 million
and also realized $0.4 million of the deferred tax assets based on the amount of
taxable income recorded for the period.
NetSat Express. Our majority-owned consolidated subsidiary, NetSat Express,
experienced an increase in revenues of approximately $4.2 million, or 250.1%, to
approximately $5.9 million for the three months ended September 30, 2000
compared to approximately $1.7 million for the three months ended September 30,
1999. The increase resulted from additional service and hardware revenues
derived from new and existing Internet access service customers. The loss from
operations associated with NetSat Express increased by approximately $1.6
million, or 216.9%, to approximately $2.3 million for the three months ended
September 30, 2000 compared to approximately $0.7 million for the three months
ended September 30, 1999. The increase was primarily associated with an increase
in general and administrative expenses due to an increase in depreciation
expense related to capital leases entered into during fiscal 2000 for satellite
space segment transponders and an increase in personnel, including expenses
related to developing its management team, an increase in selling and marketing
efforts to penetrate into new regions and an increase in network operation
expenses due to continuing expansion of NetSat Express' network operations
center and related expenses to support the increasing service base.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had working capital of approximately $70.2
million, including cash and cash equivalents of approximately $56.9 million,
restricted cash of approximately $0.5 million, net accounts receivable of
approximately $27.5 million, net inventories of approximately $12.6 million,
prepaid and other current assets of
12
<PAGE>
approximately $1.3 million and deferred income taxes of approximately $1.5
million, offset by approximately $17.9 million in accounts payable and
approximately $12.2 million in accrued expenses and other current liabilities.
Several factors had an effect on our liquidity during the three months
ended September 30, 2000. First, we used approximately $6.6 million for
operating activities, which primarily relates to an increase in net accounts
receivable of approximately $5.0 million due to the timing of collections on a
few large contract billings, an increase in net inventories of approximately
$2.9 million reflecting the timing of purchases to support future shipments and
completion of ground segment systems and networks, offset by a increase in
accounts payable of approximately $1.4 million related to the timing of vendor
payments.
The second factor affecting liquidity during the three months ended
September 30, 2000, was our investing activities. During the three months ended
September 30, 2000, we purchased approximately $1.3 million in fixed assets
primarily related to the NetSat Express Network Operations Center.
We have a $9.0 million credit facility consisting of (1) a $5.0 million
secured domestic line of credit and (2) a $4.0 million secured export-import
guaranteed line of credit at September 30, 2000. This credit facility expired in
December 1999 at which time the Company entered into a new credit facility with
substantially the same terms, which expires in December 2000. Each line of
credit bears interest at the prime rate (9.50% at September 30, 2000) plus a
variable margin rate ranging from 0.75% to 1.75% per annum (1% at September 30,
2000) based on the Company's tangible net worth calculation, as defined in the
credit facility, and is collateralized by a first security interest on all the
Company's assets. The credit facilities contains certain financial covenants,
which the Company is in compliance with at September 30, 2000. As of September
30, 2000, no amounts were outstanding under such credit facility.
We also lease satellite space segment services and other equipment under
various capital and operating lease agreements which expire in various years
through 2014. The present value of future minimum lease payments due on these
leases through September 30, 2001 is approximately $6,680,000.
We expect that our cash and working capital requirements for our operating
activities will continue to increase as we expand our operations. Management
anticipates that NetSat Express will experience negative cash flows due to the
capital investment required for continued development of its operations and
continued losses from its operating activities for an extended period of time.
Our future capital requirements will depend upon many factors, including
the success of our marketing efforts in the ground segment systems, networks and
enterprise solutions, 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
September 2001. However, we cannot assure you that there will be no change that
would consume available resources significantly before that 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 some of our operating activities, including
without limitation, the timing and extent of our marketing programs, the extent
and timing of hiring additional personnel and our research and development
activities and operating activities of NetSat Express. We cannot assure you that
additional financing will be available to us on acceptable terms, or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
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 timing for recognizing revenues 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 revenues 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
13
<PAGE>
recorded based on the relationship of total costs incurred to date to total
projected final costs. Management is currently evaluating the effect of SAB No.
101, if any, on its consolidated financial position, results of operations,
liquidity and cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended,
which is required to be adopted in years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, the adoption of this new Statement
did not have a significant effect on earnings or the consolidated financial
position of the Company.
CERTAIN BUSINESS CONSIDERATIONS
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOWS AND EXPECT OUR
LOSSES TO CONTINUE.
We have incurred significant net losses since we began operating in
August 1994. We incurred net losses of $0.5 million during the fiscal year ended
June 30, 1998, $8.2 million during the fiscal year ended June 30, 1999 and $3.6
million during the fiscal year ended June 30, 2000. Our net losses include net
losses of $1.7 million during the fiscal year ended June 30, 1998, $2.1 million
during the fiscal year ended June 30, 1999 and $7.1 million during the fiscal
year ended June 30, 2000 for NetSat Express. As of September 30, 2000, our
accumulated deficit was $22.1 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.
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;
14
<PAGE>
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 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 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, 2000 and
the three months ended September 30, 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 booking of new contracts;
15
<PAGE>
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 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 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
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. In addition, we anticipate that continuing deregulation worldwide is
expected to result in the formation of a significant number of new competitive
service providers over the next two or three years.
These competitors have the financial resources to withstand substantial
price competition and may be in a better position to endure difficult economic
conditions in 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
16
<PAGE>
the ability of their products and services to address the needs of our current
and prospective customers. Existing and new competitors with their potential
strategic relationships may rapidly acquire significant market share, which
would harm our business and financial condition.
IF THE SATELLITE COMMUNICATIONS INDUSTRY FAILS TO CONTINUE TO DEVELOP OR NEW
TECHNOLOGY MAKES IT OBSOLETE, OUR BUSINESS AND FINANCIAL CONDITION WILL BE
HARMED.
Our business is dependent on the continued success and development of
satellite communications technology, which competes with terrestrial
communications transport technologies like terrestrial microwave, coaxial cable
and fiber optic communications systems. If the satellite communications industry
fails to continue to develop, or any technological development significantly
improves the cost or efficiency of competing terrestrial systems relative to
satellite systems, then our business and financial condition would be materially
harmed.
WE MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OUR CAPITAL REQUIREMENTS IN
THE FUTURE.
We have incurred negative cash flows from operations in each year since our
inception. We believe that our available cash resources will be sufficient to
meet our working capital and capital expenditure requirements through September
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.
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
17
<PAGE>
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 THREE CONTRACTS AND A MODIFICATION OR
TERMINATION OF ALL OR ANY OF THESE CONTRACTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR REVENUES AND FINANCIAL CONDITION.
We have agreements with three customers to provide equipment and services,
which we expect to generate substantial revenues from. If any of these customers
are unable to implement their business plans, the market for their services
declines, or all or any of the customers modifies or terminates its agreement
with us, our 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.
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.
18
<PAGE>
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 all 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. We also 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.
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 that part of, our business.
THROUGH THEIR OWNERSHIP, OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES MAY BE
ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER OUR MANAGEMENT.
As of November 10, 2000, our officers and directors, and their affiliates
beneficially own approximately 1.7 million shares, constituting approximately
14.1% 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.
19
<PAGE>
WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE OUR SOLE OR A LIMITED SOURCE OF
SUPPLY, AND THE LOSS OF THESE SUPPLIERS WOULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We currently obtain most of our critical components and services from
single or limited sources and generally do not maintain significant inventories
or have long-term or exclusive supply contracts with our source vendors. We have
from time to time experienced delays in receiving products from vendors due to
lack of availability, quality control or manufacturing problems, shortages of
materials or components or product design difficulties. We may experience delays
in the future and replacement services or products may not be available when
needed, or at all, or at commercially reasonable rates or prices. If we were to
change some of our vendors, we would have to perform additional testing
procedures on the service or product supplied by the new vendors, which would
prevent or delay the availability of our products and services. Furthermore, our
costs could increase significantly if we need to change vendors. If we do not
get timely deliveries of quality products and services, or if there are
significant increases in the prices of these products or services, it could have
a material adverse effect on our business, results of operations and financial
condition.
WE MAY BE UNABLE TO LEASE TRANSPONDER SPACE ON SATELLITES WHICH COULD LIMIT OUR
ABILITY TO PROVIDE OUR SERVICES TO OUR CUSTOMERS.
We and NetSat Express lease transponder space on satellites in order to
provide communications and Internet services to our customers and the customers
of NetSat Express. The supply of transponder space serving a geographic region
on earth is limited by the number of satellites that are in orbit above that
geographic region. If companies that own and deploy satellites in orbit
underestimate the demand for transponder space in a given geographic area or
they are simply unable to build and launch enough satellites to keep up with
increasing demand, the price for leasing transponder space could rise,
increasing our cost of operations or we simply may not be able to lease enough
transponder space to meet the demands of our customers. We currently anticipate
that the rapid growth in the demand for satellite-based communications worldwide
could lead to a short-term shortage of transponder space.
WE RELY ON NETSAT EXPRESS, OUR 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.
20
<PAGE>
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
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 Federal Communications Commission,
or FCC licensed earth stations in Hauppauge, New York, subject to the
Communications Act of 1934, as amended (the Act), and the rules and regulations
of the 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
21
<PAGE>
foreign operations of our earth stations. These licenses should be renewed by
the FCC in the normal course as long as we remain in compliance with FCC rules
and regulations. However, we cannot guarantee that additional licenses will be
granted by the FCC when our existing licenses expire, nor are we assured that
the FCC will not adopt new or modified technical requirements that will require
us to incur expenditures to modify or upgrade our equipment as a condition of
retaining our licenses.
We are also required to comply with FCC regulations regarding the exposure
of humans to radio frequency radiation from our earth stations. These
regulations, as well as local land use regulations, restrict our freedom to
choose where to locate our earth stations.
FOREIGN OWNERSHIP
We may, in the future, be required to seek FCC approval for foreign
ownership if we operate as a common carrier and ownership of our stock exceeds
the specified criteria. Failure to comply with these policies may result in an
order to divest the offending foreign ownership, fines, denial of license
renewal, and/or license revocation proceedings against the licensee by the FCC.
FOREIGN REGULATIONS
Regulatory schemes in countries in which we may seek to provide our
satellite-delivered communication 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.
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
22
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to a variety of risks, including foreign currency exchange
rate fluctuations relating to certain purchases from foreign vendors. In the
normal course of business, we assess these risks and have established policies
and procedures to manage our exposure to fluctuations in foreign currency
values.
Our objective to managing our exposure to foreign currency exchange rate
fluctuations is to reduce the impact of adverse fluctuations in earnings and
cash flows associated with foreign currency exchange rates for certain purchases
from foreign vendors, if applicable. Accordingly, we utilize from time to time
foreign currency forward contracts to hedge our exposure on firm commitments
denominated in foreign currency. As of September 30, 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 our 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.
23
<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 3.2 of the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws of the
Registrant defining rights of holders of Common Stock of the Registrant
(incorporated by reference to Exhibit 4.2 of the Registrant's
Registration Statement on Form S-1, File No. 333-22425 (the
"Registration Statement")).
10.1 Form of Registration Rights Agreement dated as of February 1997
(incorporated by reference to exhibit 10.1 of the Registration
Statement).
10.2 Form of Registration Rights Agreement dated May 30, 1996 (incorporated
by reference to exhibit 10.2 of the Registration Statement).
10.3 Form of Registration Rights Agreement dated December 31, 1996, as
amended (incorporated by reference to exhibit 10.3 of the Registration
Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock
dated November 9, 1995 between the Registrant and Thomson-CSF
(incorporated by reference to exhibit 10.4 of the Registration
Statement).
10.5 Investment Agreement dated February 12, 1996 by and between Shiron
Satellite Communications (1996) Ltd. and the Registrant (incorporated by
reference to exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between
C-Grams Unlimited Inc. and the Registrant (incorporated by reference to
exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding dated December 18, 1996 by and between
NetSat Express, Inc. and Applied Theory Communications, Inc.
(incorporated by reference to exhibit 10.7 of the Registration
Statement).
10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between
NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by
reference to exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement dated as of January 27, 1997 between the Registrant
and David E. Hershberg (incorporated by reference to exhibit 10.9 of the
Registration Statement).
24
<PAGE>
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 10.14 of
the 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 year
ended June 30, 1998).
10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit
99.8 of the S-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 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
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
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBECOMM SYSTEMS INC.
----------------------
(Registrant)
Date: November 14, 2000 /s/ David E. Hershberg
----------------------
David E. Hershberg
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 14, 2000 /s/ Andrew C. Melfi
-------------------
Andrew C. Melfi
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
26
