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 December 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 February 12, 2001, there were 11,955,423 shares outstanding of the
registrant's common stock, par value $.001.
1
GLOBECOMM SYSTEMS INC.
Index to the December 31, 2000 Form 10-Q
Page
----
Part I -- Financial Information
Item 1. Consolidated Financial Statements ...................................................................3
Consolidated Balance Sheets -- As of December 31, 2000 (unaudited) and June 30, 2000.................3
Consolidated Statements of Operations (unaudited) -- For the three and six months ended
December 31, 2000 and 1999.........................................................................5
Consolidated Statement of Changes in Stockholders' Equity (unaudited) -- For the six months
ended December 31, 2000............................................................................6
Consolidated Statements of Cash Flows (unaudited) -- For the six months ended December 31, 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...................................................................................25
Item 2. Changes in Securities and Use of Proceeds...........................................................25
Item 3. Defaults Upon Senior Securities.....................................................................25
Item 4. Submission of Matters to a Vote of Security Holders.................................................25
Item 5. Other Information...................................................................................25
Item 6. Exhibits and Reports on Form 8-K....................................................................25
Signatures..........................................................................................27
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS .
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 JUNE 30,
----------- --------
2000 2000
---- ----
(UNAUDITED) (1)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 52,955 $ 65,289
Restricted cash.............................................................. 757 421
Available for sale equity securities......................................... 271 -
Accounts receivable, net..................................................... 29,001 22,722
Inventories, net............................................................. 7,681 9,748
Prepaid expenses and other current assets.................................... 2,383 1,571
Deferred income taxes........................................................ 947 1,942
----------------------------------------------
Total current assets........................................................... 93,995 101,693
Fixed assets, net.............................................................. 113,399 112,784
Investments.................................................................... 2,761 2,961
Other assets, net.............................................................. 1,146 1,729
----------------------------------------------
Total assets................................................................... $ 211,301 $ 219,167
==============================================
See accompanying notes.
3
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
------------ --------
2000 2000
---- ----
(UNAUDITED) (1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 14,374 $ 16,494
Deferred revenue........................................................................ 2,687 2,700
Accrued payroll and related fringe benefits............................................. 773 680
Accrued interest........................................................................ 486 1,566
Other accrued expenses.................................................................. 6,508 3,812
Deferred liability...................................................................... 189 194
Capital lease obligations............................................................... 3,353 1,716
---------------------------------------
Total current liabilities................................................................. 28,370 27,162
Deferred liability, less current portion.................................................. 1,761 1,853
Capital lease obligations, less current portion........................................... 92,324 94,502
Minority interests in consolidated subsidiary............................................. 774 126
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
December 31, 2000 and June 30, 2000............................................... - -
Class B Convertible, shares authorized, issued and outstanding: none at
December 31, 2000 and June 30, 2000................................................ - -
Series A Junior Participating, shares authorized, issued and outstanding: none at
December 31, 2000 and June 30, 2000............................................... - -
Common stock, $.001 par value, 22,000,000 shares authorized, shares issued:
12,098,205 at December 31, 2000 and 12,024,256 at June 30, 2000................... 12 12
Additional paid-in capital.............................................................. 110,364 110,105
Accumulated deficit..................................................................... (25,990) (18,298)
Accumulated other comprehensive (loss) income........................................... (39) 17
Deferred compensation................................................................... (181) (218)
Treasury stock, at cost, 147,745 shares at December 31 and
June 30, 2000..................................................................... (1,094) (1,094)
---------------------------------------
Total stockholders' equity................................................................ 83,072 90,524
---------------------------------------
Total liabilities and stockholders' equity................................................ $ 211,301 $ 219,167
=======================================
See accompanying notes.
(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.
4
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
-----------------------------------------------------------------
Revenues ............................................... $ 26,824 $ 17,373 $ 53,268 $ 36,798
Costs of revenues ...................................... 20,664 14,968 41,994 31,885
-----------------------------------------------------------------
Gross profit ........................................... 6,160 2,405 11,274 4,913
-----------------------------------------------------------------
Operating expenses:
Network operations ............................... 1,381 442 2,137 718
Selling and marketing ............................ 1,944 1,381 4,040 2,426
Research and development ......................... 157 225 367 355
General and administrative ....................... 4,537 2,130 9,031 4,114
-----------------------------------------------------------------
Total operating expenses ............................... 8,019 4,178 15,575 7,613
-----------------------------------------------------------------
Loss from operations ................................... (1,859) (1,773) (4,301) (2,700)
Other income (expense):
Interest income .................................. 868 277 1,846 448
Interest expense ................................. (2,077) (258) (4,028) (317)
Gain on sale of investment ....................... 304 -- 304 --
Gain on sale of consolidated subsidiary's common
stock ......................................... -- 2,353 -- 2,353
-----------------------------------------------------------------
(Loss) income before income taxes and minority
interests ........................................... (2,764) 599 (6,179) (216)
Provision for income taxes ............................. (580) -- (995) --
-----------------------------------------------------------------
(Loss) income before minority interests ............... (3,344) 599 (7,174) (216)
Minority interests in operations of consolidated
subsidiary .......................................... (555) 538 (518) 614
-----------------------------------------------------------------
Net (loss) income ...................................... $ (3,899) $ 1,137 $ (7,692) $ 398
=================================================================
Basic net (loss) income per common share ............... $ (.33) $ 0.12 $ (.65) $ .04
=================================================================
Diluted net (loss) income per common share ............. $ (.33) $ 0.11 $ (.65) $ .04
=================================================================
Weighted-average shares used in the calculation of
net (loss) income per common share:
Basic ............................................ 11,890 9,266 11,885 9,268
=================================================================
Diluted .......................................... 11,890 10,298 11,885 10,157
=================================================================
See accompanying notes.
5
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
-------------------------------------------------------
Balance at June 30, 2000....... 12,024 $ 12 $ 110,105 $ (18,298) $ 17
Minority interests resulting
from issuance of consolidated
subsidiary's common stock as
a preferred stock dividend... (131)
Proceeds from exercise of
stock options ............... 47 196
Issuance of common stock in
connection with employee
stock purchase plan.......... 27 194
Amortization of deferred
compensation ...............
Comprehensive loss:
Net loss..................... (7,692)
Loss from foreign currency
translation ................ (27)
Unrealized loss on available
for sale equity securities.. (29)
Total comprehensive loss.......
-------------------------------------------------------
Balance at December 31, 2000... 12,098 $ 12 $ 110,364 $ (25,990) $ (39)
=======================================================
TREASURY STOCK TOTAL
DEFERRED ---------------- STOCKHOLDERS'
COMPENSATION SHARES AMOUNT EQUITY
-------------------------------------------------
Balance at June 30, 2000....... $ (218) 148 $(1,094) $ 90,524
Minority interests resulting
from issuance of consolidated
subsidiary's common stock as
a preferred stock dividend... (131)
Proceeds from exercise of
stock options ............... 196
Issuance of common stock in
connection with employee
stock purchase plan.......... 194
Amortization of deferred
compensation ............... 37 37
Comprehensive loss:
Net loss..................... (7,692)
Loss from foreign currency
translation ................ (27)
Unrealized loss on available
for sale equity securities.. (29)
-------------
Total comprehensive loss....... (7,748)
-------------------------------------------------
Balance at December 31, 2000... $ (181) 148 $(1,094) $ 83,072
=================================================
See accompanying notes.
6
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------- -------------
OPERATING ACTIVITIES
Net (loss) income ........................................................... $ (7,692) $ 398
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization ........................................... 4,840 1,108
Stock compensation expense .............................................. 37 75
Provision for doubtful accounts ......................................... 341 153
Minority interests in operations of consolidated subsidiary ............. 518 (614)
Gain on sale of investment .............................................. (304) --
Gain on sale of consolidated subsidiary's common stock .................. -- (2,353)
Deferred income taxes ................................................... 995 --
Interest on capital lease obligations ................................... 486 --
Internet access services ................................................ (97) 2,100
Changes in operating assets and liabilities:
Accounts receivable .................................................. (6,620) 2,575
Inventories .......................................................... 2,067 1,238
Prepaid expenses and other current assets ............................ (812) (478)
Other assets ......................................................... 505 (760)
Accounts payable ..................................................... (2,120) (7,077)
Deferred revenue ..................................................... (13) 292
Accrued payroll and related fringe benefits .......................... 93 (183)
Accrued interest and other accrued expenses .......................... 123 393
-------------------------------
Net cash used in operating activities ....................................... (7,653) (3,133)
-------------------------------
INVESTING ACTIVITIES
Purchases of fixed assets ................................................... (4,720) (2,393)
Restricted cash ............................................................. (336) 2,654
Proceeds from sale of investment ............................................ 204 --
Proceeds from sale of consolidated subsidiary's common stock ................ -- 3,500
-------------------------------
Net cash (used in) provided by investing activities ......................... (4,852) 3,761
-------------------------------
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 ..................................... 196 2,070
Proceeds from sale of common stock in connection with employee stock purchase
plan ...................................................................... 194 119
Payments under capital leases ............................................... (192) (88)
-------------------------------
Net cash provided by (used in) financing activities ......................... 198 10,499
-------------------------------
Loss from foreign currency translation ...................................... (27) --
Net (decrease) increase in cash and cash equivalents ........................ (12,334) 11,127
Cash and cash equivalents at beginning of period ............................ 65,289 11,944
-------------------------------
Cash and cash equivalents at end of period ................................. $ 52,955 $ 23,071
==============================
See accompanying notes.
7
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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 such periods have been included. The results of operations for
the three and six months ended December 31, 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) income
Comprehensive loss for the three and six months ended December 31, 2000 of
approximately $3,939,000 and $7,748,000 includes a foreign currency translation
loss of approximately $11,000 and $27,000 and an unrealized loss on available
for sale equity securities of approximately $29,000 and $0 for the three and six
months ended December 31, 2000, respectively. The Company's comprehensive income
for the three and six months ended December 31, 1999, was equal to the Company's
net income for such periods.
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 and six months ended
December 31, 2000, the Company utilized approximately $580,000 and $995,000,
respectively, of the deferred tax assets based on the amount of taxable income
recorded for the three and six months ended December 31, 2000.
2. BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE
The Company computes net (loss) income per share in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". Basic and diluted net (loss) income per common share is
computed by dividing the net (loss) income 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 and six months ended December 31, 2000,
excludes the effect of approximately 286,000 and 433,000 stock options and
approximately 3,000 and 13,000 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
Diluted net income per share for the three and six months ended December 31,
1999, includes the effect of approximately 1,002,000 and 866,000 stock options
and approximately 30,000 and 23,000 warrants, respectively.
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:
DECEMBER 31, JUNE 30,
2000 2000
--------------------------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
Raw materials and component parts................................... $ 559 450
Work-in-progress.................................................... 12,391 12,885
--------------------------------
12,950 13,335
Less progress payments.............................................. 5,269 3,587
--------------------------------
$ 7,681 $ 9,748
================================
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 in accordance with Statement of Position 81-1, Accounting for Performance
of Construction-Type and Certain Production-Type Contracts, 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 on its consolidated financial position,
results of operations, liquidity and cash flows. The effect, if any, will become
effective in the fourth quarter of fiscal 2001.
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.
The following is the Company's business segment information for the three
and six months ended December 31, 2000 and 1999 and as of December 31, 2000 and
June 30, 2000 (in thousands):
9
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
-------------------------------- -----------------------------
(UNAUDITED) (UNAUDITED)
Revenues:
Ground Segment Systems, Networks and
Enterprise Solutions .................... $ 22,878 $ 17,845 $ 43,535 $ 36,363
Data Communications Services .............. 7,056 2,300 13,857 4,089
Intercompany eliminations ................. (3,110) (2,772) (4,124) (3,654)
------------ ------------ ------------ ------------
Total revenues ............................... $ 26,824 $ 17,373 53,268 36,798
============ ============ ============ ============
Loss from operations:
Ground Segment Systems, Networks and
Enterprise Solutions .................... $ (62) $ 13 (191) (79)
Data Communications Services .............. (1,743) (1,637) (4,091) (2,378)
Interest income .............................. 868 277 1,846 448
Interest expense ............................. (2,077) (258) (4,028) (317)
Gain on sale of investment ................... 304 -- 304 --
Gain on sale of consolidated subsidiary's
common stock ............................... -- 2,353 -- 2,353
Provision for income taxes ................... (580) -- (995) --
Minority interests in operations of
consolidated subsidiary..................... (555) 538 (518) 614
Intercompany eliminations .................... (54) (149) (19) (243)
------------ ------------ ------------ ------------
Net (loss) income ............................ $ (3,899) $ 1,137 (7,692) 398
============ ============ ============ ============
Depreciation and amortization:
Ground Segment Systems, Networks and
Enterprise Solutions .................... $ 426 $ 374 852 752
Data Communications Services .............. 2,051 179 3,991 356
Intercompany eliminations ................. (3) 1 (3) --
------------ ------------ ------------ ------------
Total depreciation and amortization .......... $ 2,474 $ 554 4,840 1,108
============ ============ ============ ============
Expenditures for long-lived assets:
Ground Segment Systems, Networks and
Enterprise Solutions .................... $ 916 $ 572 1,425 689
Data Communications Services .............. 2,670 1,506 4,079 12,936
Intercompany eliminations ................. (126) 4 (126) (33)
------------ ------------ ------------ ------------
Total expenditures for long-lived assets ..... $ 3,460 $ 2,082 5,378 13,592
============ ============ ============ ============
DECEMBER 31, JUNE 30,
2000 2000
(UNAUDITED) (AUDITED)
---------------------------------------------
Assets:
Ground Segment Systems, Networks and
Enterprise Solutions............................................... $ 121,618 $ 121,519
Data Communications Services......................................... 107,120 109,624
Intercompany eliminations............................................ (17,437) (11,976)
---------------------------------------------
Total assets............................................................ $ 211,301 219,167
=============================================
10
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 twelve
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 amortization on long-term satellite transponder capital leases,
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 and Six Months Ended December 31, 2000 and 1999
Revenues. Revenues increased by $9.5 million, or 54.4% to $26.8 million for
the three months ended December 31, 2000 and increased by $16.5 million, or
44.8% to $53.3 million for the six months ended December 31, 2000 compared to
$17.4 million and $36.8 million for the comparable three and six months ended
December 31, 1999. The increase reflects an increase in shipments in the
domestic satellite infrastructure business and increased revenues generated by
NetSat Express from additional service and hardware revenues derived from new
and existing Internet access service customers.
Gross Profit. Gross profit increased by approximately $3.8 million, or
156.1% to $6.2 million for the three months ended December 31, 2000, and
increased by $6.4 million, or 129.5% to $11.3 million, for the six months ended
December 31, 2000 from $2.4 million and $4.9 million for the comparable three
and six months ended December 31, 1999, respectively. The increase reflects an
increase in shipments in the domestic satellite
11
infrastructure business and increased revenues generated by NetSat Express from
additional service and hardware revenues derived from new and existing Internet
access service . Gross profit as a percentage of revenues for the three months
ended December 31, 2000 increased to 23.0% compared to 13.8% for the three
months ended December 31, 1999 and for the six months ended December 31, 2000
increased to 21.2% compared to 13.4% for the six months ended December 31, 1999.
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.
Network Operations. Network operations expenses increased by $0.9 million,
or 212.4%, to $1.4 million for the three months ended December 31, 2000 and
increased by $1.4 million, or 197.6% to $2.1 million, for the six months ended
December 31, 2000 compared to $0.4 million and $0.7 million for the comparable
three and six months ended December 31,1999. The increase is due to the
expansion of NetSat Express' network operations center and related expenses to
support the increase in service base.
Selling and Marketing. Selling and marketing expenses increased by $0.6
million, or 40.8%, to $1.9 million for the three months ended December 31, 2000
and increased by $1.6 million, or 66.5% to $4.0 million, for the six months
ended December 31, 2000 compared to $1.4 million and $2.4 million for the
comparable three and six months ended December 31, 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 remained
consistent at approximately $0.2 for the three months ended December 31, 2000
and 1999 and $0.4 million for the six months ended December 31, 2000 and 1999.
General and Administrative. General and administrative expenses increased
by $2.4 million, or 113.0% to $4.5 million for the three months ended December
31, 2000 and increased by $4.9 million or 119.5%, to $9.0 million, for the six
months ended December 31, 2000 compared to $2.1 million and $4.1 million for the
comparable three and six months ended December 31, 1999. General and
administrative expenses as a percentage of revenues for the three months ended
December 31, 2000 increased to 16.9% compared to 12.3% for the three months
ended December 31, 1999 and for the six months ended December 31, 2000 increased
to 17.0% compared to 11.2% for the six months ended December 31, 1999. The
increase in general and administrative expenses is mainly due to an increase in
NetSat Express amortization 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 $0.6 million, or 213.4% to
$0.9 million for the three months ended December 31, 2000 compared to $0.3
million for the three months ended December 31, 1999, and increased by $1.4
million, or 312.1% to $1.8 million for the six months ended December 31, 2000
compared to $0.4 million for the six months ended December 31, 1999. The
increase was primarily due to the increase of cash and cash equivalents during
the six months ended December 31, 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 $2.1 million for the three months
ended December 31, 2000 compared to $0.3 million for the three months ended
December 31, 1999, and $4.0 million for the six months ended December 31, 2000
compared to $0.3 million for the six months ended December 31, 1999. The
increase relates to the NetSat Express capital leases entered into during fiscal
year 2000 for satellite space segment transponders.
Gain on Sale of Investment. The gain on sale of investment of $0.3 million
relates to the sale of our 17% interest in Armer Communications Engineering
Services, Inc. during the second quarter ended December 31, 2000.
Gain on Sale of Consolidated Subsidiary's Common Stock. The gain on sale of
consolidated subsidiary's common stock of $2.4 million 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.
12
Provision for Income Taxes. For the three and six months ended December 31,
2000, the Company recorded a provision for income taxes of $0.6 million and $1.0
million. The Company utilized deferred tax assets in connection with its
provision based on the amount of projected taxable income for such periods.
NetSat Express. Our majority-owned consolidated subsidiary, NetSat Express,
experienced an increase in revenues of $4.2 million, or 217.5% to $6.1 million
for the three months ended December 31, 2000, and revenues increased by $8.4
million, or 232.7% to $12.0 million, for the six months ended December 31, 2000
compared to $1.9 million and $3.6 million for the comparable three and six
months ended December 31, 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
$0.1 million, or 3.9%, to $1.7 million for the three months ended December 31,
2000 and increased by $1.7 million, or 69.4% to $4.0 million, for the six months
ended December 31, 2000 compared to $1.6 million and $2.4 million for the
comparable three and six months ended December 31, 1999. The increase was
primarily due to an increase in general and administrative expenses associated
with an increase in amortization 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 expansion of NetSat Express'
network operations center and related expenses to support the increase in
service base.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had working capital of $65.6 million, including
cash and cash equivalents of $53.0 million, restricted cash of $0.8 million, net
accounts receivable of $29.0 million, net inventories of $7.7 million, prepaid
and other current assets of $2.4 million and deferred income taxes of $0.9
million, offset by $14.4 million in accounts payable and $14.0 million in
accrued expenses and other current liabilities.
Net cash used in operating activities during the six months ended December
31, 2000 was $7.7 million, which primarily relates to the net loss of $7.7
million, an increase in net accounts receivable of $6.6 million due to the
timing of collections on certain contract billings, a decrease in accounts
payable of $2.1 million relating to the timing of vendor payments, offset by
depreciation and amortization expense of $4.9 million primarily related to
capital leases for satellite space segment transponders and a decrease in net
inventories of $2.1 million due to the timing of project billings.
Net cash used in investing activities during the six months ended December
31, 2000 was $4.9 million. During the six months ended December 31, 2000, we
used cash of $4.7 million to purchase fixed assets primarily related to the
NetSat Express Network Operations Center and to purchase satellite earth station
equipment.
We have a $5.0 million credit facility consisting of (1) a $2.0 million
secured domestic line of credit and (2) a $3.0 million secured export-import
guaranteed line of credit at December 31, 2000. This credit facility expired in
December 2000 at which time the Company entered into a new credit facility with
substantially the same terms, which expires in December 2001. Each line of
credit bears interest at the prime rate (9.50% at December 31, 2000) plus 0.50%
and is collateralized by a first security interest on all the Company's assets.
The credit facility contains certain financial covenants, which the Company is
in compliance with at December 31, 2000. As of December 31, 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 future minimum lease payments due on these leases through
December 31, 2001 is approximately $21,282,000.
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.
13
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 extent additional funding of NetSat Express is
required and is not obtained from third parties, 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 December 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 in accordance with Statement of Position 81-1, Accounting for Performance
of Construction-Type and Certain Production-Type Contracts, 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 on its consolidated financial position,
results of operations, liquidity and cash flows. The effect, if any, will become
effective in the fourth quarter of fiscal 2001.
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 December 31, 2000, our
accumulated deficit was $26.0 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
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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 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.
15
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.
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 ability of NetSat Express to obtain additional funding from third
parties
o the length of time needed to initiate and complete customer contracts;
o delays in the booking of new contracts;
o the demand for and acceptance of our existing products and services;
o the cost of providing our products and services;
o the introduction of new and improved products and services by us or our
competitors;
o market acceptance of new products and services;
o the mix of revenue between our standard products, custom-built products and
our communications services;
o the 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.
16
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 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 December
31, 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 service offerings, the extent additional funding of NetSat
Express is required and not obtained from third parties, 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, our research and development activities and operating activities of
NetSat Express. 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.
17
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 FIVE 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 five 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
18
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 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.
19
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 February 12, 2001, our officers and directors, and their affiliates
beneficially own approximately 1.7 million shares, constituting approximately
14.0% 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 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.
20
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 previously announced its intention to make an initial
public offering of shares of its common stock. However, based on market
conditions and other factors NetSat Express is now pursuing strategic and
financing alternatives. Because we own a large percentage of NetSat Express, the
nature of the financing alternative, or any failure to obtain any financing by
NetSat Express, may adversely affect the market price of our common stock. We
currently report in our consolidated financial statements the operations of
NetSat Express. Depending on the nature of the financing alternative, if any,
NetSat Express completes, 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 statements
negatively, it could have a material adverse affect on the market price of our
stock.
21
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 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
22
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.
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 December 31, 2000, we had no such foreign
currency forward contracts.
23
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 U.S. government
securities, and secondly, certain of its fixed rate long term capital lease
agreements. Under our current positions, we do not use interest rate derivative
instruments to manage exposure to interest rate changes.
24
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
(a) The Company's Annual Meeting of Stockholders was held on
November 16, 2000 (the "Annual Meeting").
(b) The matters voted upon at the Annual Meeting and the results of the
voting were as follows:
(i) The following individuals were elected by the Stockholders to
serve as Directors:
Board Member In Favor Against
------------ -------- -------
Richard E. Caruso 10,883,674 291,708
Benjamin Duhov 10,883,674 291,708
Herman Fialkov 10,883,674 291,708
David E. Hershberg 10,883,674 291,708
Kenneth A. Miller 10,883,674 291,708
A. Robert Towbin 10,883,674 291,708
C.J. Waylan 10,883,674 291,708
Donald G. Woodring 10,883,674 291,708
Stephen C. Yablonski 10,883,674 291,708
(ii) The amendment to the Company's 1997 Stock Incentive Plan to
increase the number of shares of common stock authorized to be
issued thereunder from 2,556,958 to 3,356,958 was voted upon
as follows: 4,678,104 shares in favor; 1,633,252 shares
against; and 346,215 shares abstaining.
(iii) The appointment of Ernst & Young LLP as independent auditors
of the Company to serve for the year ending June 30, 2001 was
voted upon as follows: 11,133,012 shares in favor; 36,955
shares against; and 5,415 shares abstaining.
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")).
25
10.1 Form of Registration Rights Agreement dated as of February 1997
(incorporated by reference to exhibit 10.1 of the Registration
Statement).
10.2 Form of Registration Rights Agreement dated May 30, 1996 (incorporated
by reference to exhibit 10.2 of the Registration Statement).
10.3 Form of Registration Rights Agreement dated December 31, 1996, as
amended (incorporated by reference to exhibit 10.3 of the Registration
Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common
Stock dated November 9, 1995 between the Registrant and Thomson-CSF
(incorporated by reference to exhibit 10.4 of the Registration
Statement).
10.5 Investment Agreement dated February 12, 1996 by and between Shiron
Satellite Communications (1996) Ltd. and the Registrant (incorporated
by reference to exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between
C-Grams Unlimited Inc. and the Registrant (incorporated by reference to
exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding dated December 18, 1996 by and between
NetSat Express, Inc. and Applied Theory Communications, Inc.
(incorporated by reference to exhibit 10.7 of the Registration
Statement).
10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between
NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by
reference to exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement dated as of January 27, 1997 between the
Registrant and David E. Hershberg (incorporated by reference to exhibit
10.9 of the Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the
Registrant and Kenneth A. Miller (incorporated by reference to exhibit
10.10 of the Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated
December 12, 1996 by and between Eaton Corporation and the Registrant
(incorporated by reference to exhibit 10.13 of the Registration
Statement).
10.12 Amended and Restated 1997 Stock Incentive Plan (incorporated by
reference to exhibit 4 of the Registrant's Registration Statement
on Form S-8, File No. 333-54622, filed on January 30, 2001).
10.13 Investment Agreement dated August 21, 1998 by and between McKibben
Communications LLC and the 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 Registrant's Registration Statement on Form S-8, File
No. 333-70527, filed on January 13, 1999).
10.15 Rights Agreement, dated as of December 3, 1998, between 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).
* Confidential treatment granted for portions of this agreement.
b) Reports on Form 8-K
None
26
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: February 14, 2001 /s/ David E. Hershberg
----------------------
David E. Hershberg
Chief Executive Officer and
Chairman of the Board of Directors
Date: February 14, 2001 /s/ Andrew C. Melfi
-------------------
Andrew C. Melfi
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
27