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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number # 000-22839
----------------------------------
GLOBECOMM SYSTEMS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3225567
------------------------------- -------------------
(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: (516) 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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of November 5,
1999, there were 9,323,538 shares outstanding of the registrant's Common Stock,
par value $.001.
1
GLOBECOMM SYSTEMS INC.
Index to the September 30, 1999 Form 10-Q
Page
----
Part I -- Financial Information
Item 1. Consolidated Financial Statements (unaudited).........................................................3
Consolidated Balance Sheets -- As of September 30, 1999 and June 30, 1999.............................3
Consolidated Statements of Operations -- For the three months ended
September 30, 1999 and 1998.........................................................................5
Consolidated Statement of Changes in Stockholders' Equity -- For the three months
ended September 30, 1999............................................................................6
Consolidated Statements of Cash Flows -- For the three months ended September 30, 1999
and 1998............................................................................................7
Notes to Consolidated Financial Statements............................................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................22
Part II -- Other Information
Item 1. Legal Proceedings....................................................................................23
Item 2. Changes in Securities and Use of Proceeds............................................................23
Item 3. Defaults Upon Senior Securities......................................................................23
Item 4. Submission of Matters to a Vote of Security Holders..................................................23
Item 5. Other Information....................................................................................23
Item 6. Exhibits and Reports on Form 8-K.....................................................................23
Signatures...........................................................................................25
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, JUNE 30,
------------- --------
1999 1999
---- ----
(UNAUDITED) (1)
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 15,088 $ 11,944
Restricted cash......................................................................... 337 3,486
Accounts receivable, net................................................................ 24,546 18,147
Inventories, net........................................................................ 5,237 6,419
Prepaid expenses and other current assets............................................... 1,434 1,207
-----------------------------------
Total current assets...................................................................... 46,642 41,203
Fixed assets, net......................................................................... 23,687 12,684
Investments............................................................................... 2,961 2,961
Other assets, net of accumulated amortization............................................. 1,207 1,162
-----------------------------------
Total assets.............................................................................. $ 74,497 $ 58,010
===================================
See accompanying notes.
3
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, JUNE 30,
------------- --------
1999 1999
---- ----
(UNAUDITED) (1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 15,041 $ 18,749
Deferred revenue........................................................................ 382 299
Accrued payroll and related fringe benefits............................................. 725 859
Accrued commissions..................................................................... 63 72
Other accrued expenses.................................................................. 2,239 1,774
Capital lease obligations............................................................... 366 -
-------------------------------
Total current liabilities................................................................. 18,816 21,753
Capital lease obligations, less current................................................... 10,833 -
Minority interests in consolidated subsidiary............................................. 1,547 -
Series A Participating Preferred stock of consolidated subsidiary, at redemption
value..................................................................................... 5,000 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 3,000,000 shares authorized:
Class A Convertible, shares authorized, issued and outstanding: none at September 30,
1999 and June 30, 1999............................................................. - -
Class B Convertible, shares authorized, issued and outstanding: none at
September 30, 1999 and June 30, 1999............................................... - -
Series A Junior Participating, shares authorized, issue and outstanding: none at
September 30, 1999 and June 30, 1999............................................... - -
Common stock, $.001 par value, 22,000,000 shares authorized, shares issued 9,416,731 at
September 30, 1999 and 9,365,489 at June 30, 1999.................................. 9 9
Additional paid-in capital.............................................................. 54,825 52,061
Accumulated deficit..................................................................... (15,456) (14,717)
Deferred compensation................................................................... (274) (293)
Treasury stock, at cost, 139,638 shares at September 30, 1999 and June 30, 1999 (803) (803)
-------------------------------
Total stockholders' equity................................................................ 38,301 36,257
-------------------------------
Total liabilities and stockholders' equity................................................ $ 74,497 $ 58,010
===============================
See accompanying notes.
(1) The consolidated balance sheet at June 30, 1999 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
4
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------------------------------
(UNAUDITED)
Revenues.................................................................... $ 19,425 $ 13,293
Costs of revenues........................................................... 16,917 11,673
------------------------------------
Gross profit................................................................ 2,508 1,620
------------------------------------
Operating expenses:
Network operations........................................................ 276 98
Selling and marketing..................................................... 1,045 1,031
Research and development.................................................. 130 291
General and administrative................................................ 1,984 1,290
Terminated acquisition costs.............................................. - 972
------------------------------------
Total operating expenses.................................................... 3,435 3,682
------------------------------------
Loss from operations........................................................ (927) (2,062)
Interest income, net........................................................ 112 338
------------------------------------
Loss before minority interests in operations of consolidated
subsidiary............................................................... (815) (1,724)
Minority interests in operations of consolidated subsidiary................. 76 -
------------------------------------
Net loss.................................................................... $ (739) $ (1,724)
====================================
Basic and diluted net loss per common share................................. $ (0.08) $ (0.19)
Shares used in the calculation of basic and diluted net loss per common
share.................................................................... 9,229 9,161
====================================
See accompanying notes.
5
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED: IN THOUSANDS)
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------- PAID-IN ACCUMULATED DEFERRED ------------------ STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION SHARES AMOUNT EQUITY
----------------------------------------------------------------------------------------
Balance at June 30, 1999.... 9,365 $ 9 $ 52,061 $ (14,717) $ (293) 140 $ (803) $ 36,257
Net proceeds from issuance of
consolidated subsidiary
common stock.............. 3,978 3,978
Minority interests resulting
from issuance of
consolidated subsidiary
common stock.............. (1,623) (1,623)
Proceeds from exercise of
stock options ............ 52 - 391 391
Options granted to employees
and directors............. 18 18
Amortization of deferred
compensation.............. 19 19
Net loss.................... (739) (739)
----------------------------------------------------------------------------------------
Balance at September 30, 1999 9,417 $ 9 $ 54,825 $ (15,456) $ (274) 140 $ (803) $ 38,301
========================================================================================
See accompanying notes.
6
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
-------------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss............................................................... $ (739) $ (1,724)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................ 554 410
Stock compensation expense........................................... 37 19
Provision (credit) for doubtful accounts............................. 52 (33)
Minority interests in operations of consolidated subsidiary.......... (76) -
Changes in operating assets and liabilities:
Accounts receivable.............................................. (6,451) (2,288)
Inventories, net................................................. 1,182 48
Prepaid expenses and other current assets........................ (227) (358)
Other assets..................................................... (92) (68)
Accounts payable................................................. (3,708) 3,449
Deferred revenue................................................. 83 1
Accrued payroll and related fringe benefits...................... (134) (116)
Accrued commissions and other accrued expenses................... 456 412
-------------------------------------------
Net cash used in operating activities.................................. (9,063) (248)
-------------------------------------------
INVESTING ACTIVITIES
Purchases of investments............................................... - (1,534)
Purchases of fixed assets.............................................. (311) (121)
Restricted cash........................................................ 3,149 (133)
-------------------------------------------
Net cash provided by (used in) investing activities.................... 2,838 (1,788)
-------------------------------------------
FINANCING ACTIVITIES
Proceeds from sale of consolidated subsidiary common stock, net of
issuance costs of $1,022............................................. 3,978 -
Proceeds from sale of consolidated subsidiary preferred stock.......... 5,000 -
Proceeds from exercise of stock options................................ 391 -
Purchases of treasury stock............................................ - (209)
Payments under capital leases.......................................... - (11)
-------------------------------------------
Net cash provided by (used in) financing activities.................... 9,369 (220)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents.................. 3,144 (2,256)
Cash and cash equivalents at beginning of year......................... 11,944 21,342
-------------------------------------------
Cash and cash equivalents at end of year............................... $ 15,088 $ 19,086
===========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................. $ 58 $ 1
===========================================
See accompanying notes.
7
Globecomm Systems Inc.
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation of
the results for the periods have been included. The results of operations for
such periods are not necessarily indicative of the results that may be expected
for the full fiscal year or for any future period. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates and assumptions.
The accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the fiscal year ended June 30, 1999 and the notes thereto contained in the
Company's Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on September 28, 1999.
Reclassifications
Certain balances in the prior fiscal quarter have been reclassified to
conform to the current fiscal quarter and fiscal year end presentation.
In addition, a certain portion of the carrying value of the common
stock of NetSat Express, Inc. ("NetSat Express") a majority-owned subsidiary of
the Company, will be reclassified to reflect the estimated value of the
Technology Agreement entered into in connection with NetSat Express' common
stock offering (see Note 4. Subsidiary Stock Transactions). Such adjustment will
be made during the second quarter of fiscal 2000 and will not have a material
impact on the Company's financial position or results of operations for such
periods.
Comprehensive Income
The Company's comprehensive losses of approximately $739,000 and
$1,724,000 for the three months ended September 30, 1999 and 1998, respectively,
were equal to the respective net losses for each of the respective periods
presented.
2. Basic and Diluted Loss Per Share
Basic loss per share for the three months ended September 30, 1999 and
1998 is based on the weighted-average number of common shares outstanding during
the period. Diluted loss per share for the three months ended September 30, 1999
and 1998 excluded the effect of stock options and warrants, as the effect of
inclusion would have been anti-dilutive as the Company reported net losses for
the periods then ended.
8
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.
Inventory consists of the following:
SEPTEMBER 30, JUNE 30,
1999 1999
--------------------------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
Raw materials and component parts.............. $ 93 $ 87
Work-in-progress............................... 9,590 9,975
--------------------------------
9,683 10,062
Less progress payments......................... 4,446 3,643
--------------------------------
$ 5,237 $ 6,419
================================
4. Subsidiary Equity Transactions
On August 11, 1999, the Company contributed $3,500,000 of the amount it
was owed at June 30, 1999 from NetSat Express as additional paid-in capital and
entered into a promissory note agreement with NetSat Express for the repayment
of the balance of $3,582,000. The promissory note is due and payable in
seven-years and accrues interest (payable monthly) at a variable rate equal to
the Company's cost of funds, which is currently at the prime rate plus 1%.
Amounts owed by NetSat Express to the Company pursuant to the Master Operating
Agreement and for any advances made subsequent to June 30, 1999 are payable
currently.
On August 11, 1999, NetSat Express issued and sold 1,000,000 shares of
it's Series A Participating Preferred Stock ("Preferred Stock") and 1,000,000
shares of it's common stock, for $5 per share in a private offering yielding
proceeds of approximately $8,978,000, net of offering costs of approximately
$1,022,000. In conjunction with the common stock offering NetSat Express entered
into a Technology Agreement to purchase $5,000,000 in services. The Company's
common stock ownership percentage of NetSat Express was reduced from 95% to 81%
following the issuance and sales of the common stock. The Company recorded a
credit to stockholders' equity of approximately $3,400,000 reflecting the
increase in its share of the net assets of NetSat Express as a result of the
common stock offering and $3,500,000 contributed capital by the Company.
The preferred stock has preference in liquidation and each share of
preferred stock is convertible into one share of common stock at the option of
the holder at any time, or automatically following the third anniversary of the
date of issuance, or following the period of 180 days after an initial public
offering plus sixty consecutive days on which the price per share of the common
stock is equal to or greater than $7.50 per share.
The holders of Preferred Stock shall be entitled to receive an annual
dividend on the anniversary date of issuance equal to 0.166667 shares of common
stock for each share of Preferred Stock until the third anniversary date of the
Preferred Stock issuance provided that if the fair market value of the common
stock issued as dividends is less than $2,500,000, the holders of the Preferred
Stock will be entitled to receive a special dividend equal to the shortfall.
Additionally, the holder of the Preferred Stock may purchase up to $5,000,000 in
services from NetSat Express at cost, as defined in the agreement, and payment
for such services, at the option of the holder, may be either in dollars or
shares of the NetSat Express' common stock valued at fair market value. In
connection with the sale of preferred stock and common stock, NetSat Express
paid an investment advisor a fee of $500,000 and issued a warrant to purchase
100,000 shares of common stock at $6.00 per share which expires in five years.
9
5. Commitments and Contingencies
On September 14, 1999, NetSat Express signed a 15-year lease for
satellite space segment on the SatMex 5 satellite. This satellite will provide
NetSat Express the capability of providing its services to the Caribbean Islands
and the North, South and Central America regions covered by the SatMex 5
satellite. In connection with this lease, NetSat Express recorded a capital
lease for approximately $11,199,000 and the related current and long-tem portion
of the capital lease obligation in accompanying consolidated balance sheets. The
annual lease payments for this space segment is approximately $1,386,000 for a
total commitment of approximately $20.8 million over the 15-year lease term.
6. Segment Information
The Company operates through two business segments. Its Ground Segment
Systems and Networks Segment, through Globecomm Systems Inc., is engaged in the
design, assembly and installation of ground segment systems and network
solutions for the complex and changing communications requirements of its
customers. The Company's ground segment systems typically consist of an earth
station and ancillary subsystems such as microwave links for back-haul of
traffic to a central office or generators for emergency power restoral. An earth
station is an integrated system consisting of antennas, transmitting and
receiving equipment, modulation/demodulation equipment, monitor and control
systems and voice, data and video network interface equipment. Its Data
Communications Services Segment, through the 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.
10
The following is the Company's business segment information as of and for the
three months ended September 30, 1999 and 1998:
THREE MONTHS ENDED
-----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
-----------------------------------
(UNAUDITED; IN THOUSANDS)
Revenues:
Ground Segment Systems and Networks......................... $ 18,518 $ 12,951
Data Communications Services................................ 1,789 342
Intercompany eliminations.................................. (882) -
-----------------------------------
Total revenues................................................ $ 19,425 $ 13,293
===================================
Loss from operations:
Ground Segment Systems and Networks......................... $ (92) $ (1,607)
Data Communications Services................................ (741) (455)
Interest income, net.......................................... 112 338
Minority interests in operations of consolidated
subsidiary................................................. 76 -
Intercompany eliminations..................................... (94) -
-----------------------------------
Net Loss...................................................... $ (739) $ (1,724)
===================================
Depreciation and amortization:
Ground Segment Systems and Networks......................... $ 378 $ 324
Data Communications Services................................ 177 86
Intercompany eliminations................................... (1) -
-----------------------------------
Total depreciation and amortization........................... $ 554 $ 410
===================================
Expenditures for long-lived assets:
Ground Segment Systems and Networks......................... $ 117 $ 117
Data Communications Services................................ 231 4
Intercompany eliminations................................... (37) -
-----------------------------------
Total expenditures for long-lived assets...................... $ 311 $ 121
===================================
SEPTEMBER 30, JUNE 30,
1999 1999
(UNAUDITED) (AUDITED)
-----------------------------------
(IN THOUSANDS)
Assets:
Ground Segment Systems and Networks......................... $ 62,698 $ 62,664
Data Communications Services................................ 23,973 3,200
Intercompany eliminations................................... (12,174) (7,854)
-----------------------------------
Total assets.................................................. $ 74,497 $ 58,010
===================================
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-Q contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below as well as those discussed in other
filings made by the Company with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K and Quarterly Reports on Form
10-Q.
OVERVIEW
Globecomm Systems Inc. (the "Company" or "GSI"), incorporated in Delaware
on August 17, 1994, designs, assembles and installs satellite ground segment
systems and networks which support a wide range of satellite communications
applications, including fixed, mobile and direct broadcast services as well as
certain military applications. The Company's customers include prime
communications infrastructure contractors, government-owned postal, telephone
and telegraph providers ("PTTs"), Internet Service Providers ("ISPs"),
government entities, other telecommunications carriers, producers and
distributors of news and entertainment content and other corporations. The
Company's ground segment systems typically consist of an earth station, which is
an integrated system designed to transmit and receive signals to and from
satellites, together with ancillary subsystems. The Company's ground segment
networks are typically comprised of two or more ground segment systems
communicating with a satellite and interconnected with a terrestrial network.
During fiscal 1997, the Company established a subsidiary, NetSat Express, Inc.
("NetSat Express"), to develop service revenues by providing high-speed,
satellite-delivered data communications to developing markets worldwide. More
recently, the Company, in concert with NetSat Express, has begun supplying
end-to-end service solutions bundled with the facilities at both ends of the
service provided. These end-to-end services are provided as part of our strategy
to offer enterprise service solutions. The Company's enterprise service
solutions typically are comprised of ground segment systems and networks in
combination with terrestrial and space segment services to provide end-to-end
service solutions.
The combination of GSI as a ground segment systems and network provider,
and NetSat Express as a satellite-delivered data communications services
provider, allows us to provide end-to-end solutions and services to enterprises
globally. Solutions include engineering and implementation of satellite
communications and terrestrial communications technology. Services include
provision of Internet connectivity, Intranet extension, media distribution and
other network services on a global basis. 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.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998
Revenues. Revenues increased by $6.1 million, or 46.1%, to $19.4
million for the three months ended September 30, 1999 compared to $13.3 million
for the comparable three months ended September 30, 1998. The increase reflects
increased shipments for both international and domestic projects and an increase
in revenues generated by NetSat Express. Although the Company experienced
increased revenues for the three months ended September 30, 1999, the Company
expects the trend in revenues that adversely affected its results of operations
for the fiscal year ended June 30, 1999 to continue to adversely impact the
Company. These trends include the difficult economic conditions in the Pacific
Rim region, Russia and other international markets and the decrease in bookings
received by the Company from these regions.
Gross Profit. Gross profit increased by $0.9 million or 54.8%, to $2.5
million, for the three months ended September 30, 1999 from $1.6 million for the
comparable period in the preceding year. The increase reflects increased
shipments for both international and domestic projects and an increase in
revenues generated by NetSat Express. Gross profit as a percentage of revenues
for the three months ended September 30, 1999 increased to 12.9% in comparison
to 12.2% for the same period in the preceding year. This increase is mainly
attributable to an increase in the NetSat Express gross profit percentage to
21.1% for the three months ended September 30, 1999 compared to 2.0% for the
comparable period in the prior year.
12
Network Operations. Network operations expenses increased by $0.2
million or 181.6%, to $0.3 million for the three months ended September 30, 1999
from $0.1 million, for the comparable period in the prior year. The increase is
due to the continuing expansion of NetSat Express' Network Operations Center and
related expenses to support increasing service base.
Selling and Marketing. Selling and marketing expenses remained
relatively constant at $1.0 million for the three months ended September 30,
1999 and 1998.
Research and Development. Research and development expenses decreased
by $0.2 million, or 55.3%, to $0.1 million for the three months ended
September 30, 1999 from $0.3 million for the comparable period in the preceding
year. This decrease is due to the Company reducing research and development
efforts from the same period in the prior year.
General and Administrative. General and administrative expenses
increased by $0.7 million, or 53.8%, to $2.0 million for the three month period
ended September 30, 1999 from $1.3 million for the comparable period in the
preceding year and increased as a percentage of revenues to 10.2% from 9.7% for
the same period in the prior year. The increase in general and administrative
expenses for the three month period resulted from an increase in NetSat Express
personnel and related expenses.
Terminated Acquisition. Terminated acquisition costs of approximately
$1.0 million for the three months ended September 30, 1998 relate to certain
legal, accounting and other expenses associated with the termination of a
proposed acquisition of a mobile satellite communications business due to the
determination that such acquisition was not in the best interest of the
Company's stockholders.
Interest Income Net of Interest Expense. Interest income, net of
interest expense decreased by $0.2 million to $0.1 million for the three months
ended September 30, 1999 from $0.3 million for three months ended September 30,
1998. This decrease was primarily due to the reduction of cash and cash
equivalents during the three months ended September 30, 1999 compared to same
period in the prior year. Interest expense for the three months ended September
30, 1999 was $0.06 million and minimal for the comparable period in the prior
year.
NetSat Express. The Company's consolidated subsidiary, NetSat Express,
experienced an increase in revenues of $1.4 million, or 392.7%, to $1.7 million
for the three months ended September 30, 1999 from $0.3 million for the three
months ended September 30, 1998. The increase resulted from additional service
and hardware revenues derived from new and existing Access Plus customers. The
loss from operations associated with NetSat Express increased by $0.3 million,
or 77.4%, to $0.8 million for the three months ended September 30, 1999 from
$0.5 million for the three months ended September 30, 1998. The increase was
primarily associated with an increase in general and administrative expenses
relating to an increase in NetSat Express personnel and related expenses.
YEAR 2000. The Company is in the process of assessing the anticipated
costs, problems and uncertainties associated with Year 2000 issues. The Company
has initiated a Year 2000 Compliance Plan which includes information technology
("IT") and non-IT systems requiring or which may require modification or
conversion, and supplier, facilities and other operations (such as financial and
banking systems) readiness. The Company has substantially completed reviews of
each of the above areas including identification and assessment of potential
Year 2000 issues, identification and contact with key suppliers or institutions
based on their relative risks associated with product integrity and continued
product deliveries and service. Until such reviews are complete, the Company
will not be able to completely evaluate whether its IT and non-IT systems will
need to be modified or replaced. The Company has incurred only nominal costs to
date and estimates at this time that the total Year 2000 costs will not be
material. The Company is continuing its assessment which may necessitate
refinement of its estimate over time. There can be no assurance, however, that
costs associated with the Company's Year 2000 Compliance Plan will not be higher
than anticipated which could have a material adverse effect on the Company's
business, results of operations and financial condition.
In association with the Company's Year 2000 Compliance Plan, the Company
has developed contingency plans for certain critical applications. These
contingency plans may include, among other actions, manual workarounds,
increasing inventories and adjusting staffing strategies. There can be no
assurance such contingency plans, once developed, will be adequate.
13
Since the Company's Year 2000 Compliance Plan is ongoing, all potential
Year 2000 issues have not yet been identified. Therefore the potential impact of
these issues on the Company's financial condition and results of operations can
not be determined at this time. If IT and non-IT systems used by the Company or
its suppliers, the product integrity of products provided to the Company by its
suppliers, or the software applications or hardware used in systems integrated
and sold by the Company, fail or experience significant difficulties related to
the Year 2000, the Company's results of operations and financial condition could
be materially affected. In addition, there can be no assurance that equipment
operated by third parties that interface with or contain the Company's products
will timely achieve Year 2000 compliance. Furthermore, if the Company's ground
segment systems, and networks, and enterprise service solutions and
satellite-delivered data communication services were unable to be used by the
Company's customers because of Year 2000 compliance problems, there can be no
assurance that the Company's customers will not commence litigation against the
Company for such systems and networks failure. Any of the foregoing could result
in a material adverse effect on the Company's business, financial condition and
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of $27.8 million,
including cash and cash equivalents of $15.1 million, restricted cash of $0.3
million, accounts receivable of $24.6 million, inventories of $5.2 million and
prepaid and other current assets of $1.4 million, offset by $15.0 million in
accounts payable and $3.8 million in accrued expenses and other current
liabilities.
Several factors had an effect on the Company's liquidity during the three
months ended September 30, 1999. First, the Company used approximately $9.1
million for operating activities, which primarily relates to the increase in
accounts receivable of $6.5 million due to the related increase in revenues, a
decrease in accounts payable of $3.7 million reflecting the timing of a large
payment to a major vendor, offset by a decrease in inventory of $1.2 million due
to an increase in shipments. The second factor affecting liquidity during the
three months ended September 30, 1999 was the Company's financing activities. In
August 1999, NetSat Express completed a private placement of common and
preferred stock yielding proceeds of approximately $9.0 million, net of issuance
costs. These proceeds will be used to fund NetSat Express' operations, expand
marketing initiatives, engineering efforts and fund capital expansion.
Management anticipates that NetSat Express will experience negative cash flow
due to the capital investment required for continued development of its
operations and continued loss from operating activities for an extended period
of time. The third factor affecting liquidity during the three months ended
September 30, 1999 was the Company's investment activities. The Company's
restricted cash decreased $3.1 million due to the expiration of a letter of
credit and the redemption of a certificate of deposit held as collateral during
the three months ended September 30, 1999.
The Company has a $9.0 million credit facility consisting of a $5.0 million
secured domestic line of credit and a $4.0 million secured export-import
guaranteed line of credit. Each line of credit bears interest at the prime rate
(7.75% as of September 30, 1999) plus 1.0% per annum and is collateralized by a
first security interest on all the Company's assets. No amounts are outstanding
under this credit facility as of November 5, 1999.
During October 1999, the Company and NetSat Express entered into a common
stock purchase agreement with an investor to purchase one million shares of
NetSat Express common stock of which 700,000 shares was purchased directly from
the Company for $3.5 million and 300,000 shares were issued and sold directly by
NetSat Express for $1.5 million. The net proceeds received by the Company are
intended to be used for general corporate purposes and the net proceeds received
by NetSat Express are intended to be used to fund operations, expand marketing
initiatives, engineering efforts and fund capital expansion.
The Company expects that its cash and working capital requirements for its
operating activities will continue to increase as the Company expands its
operations.
The Company's future capital requirements will depend upon many factors,
including the success of the Company's marketing efforts in the ground segment
systems, networks, and enterprise service solutions business, and the
satellite-delivered data communications services business, the nature and timing
of customer orders, the extent to which
14
it is able to locate additional strategic suppliers in whose technology it
wishes to invest, the extent to which it must conduct research and development
efforts internally and potential acquisitions of complementary businesses,
products or technologies. Based on current plans, the Company believes that its
existing capital resources will be sufficient to meet its capital requirements
through September 30, 2000. However, no assurance can be given that there will
be no change that would consume available resources significantly before such
time. Additional funds may not be available when needed and even if available,
additional funds may be raised through financing arrangements and/or the
issuance of preferred or common stock or convertible securities on terms and
prices significantly more favorable than those of the currently outstanding
common stock, which could have the effect of diluting or adversely affecting the
holdings or rights of existing stockholders of the Company. If adequate funds
are not available, the Company will be required to delay, scale back or
eliminate certain of its operating activities, including without limitation, the
timing and extent of its marketing programs, the extent and timing of hiring
additional personnel and its research and development activities. No assurance
can be given that additional financing will be available to the Company on
acceptable terms, or at all.
CERTAIN BUSINESS CONSIDERATIONS
RISK FACTORS
HISTORY OF NET LOSSES AND ACCUMULATED DEFICIT
The Company has incurred significant net losses since its inception.
The Company has financed its operations to date primarily from the sale of
equity securities and, to a lesser degree, from stockholder loans. The Company
generated its first revenue from its ground segment systems, and networks
business in June 1995 and has generated only minimal revenues from its
satellite-delivered data communications services business, which commenced
operations in July 1996. The Company has incurred net losses since inception and
has incurred net losses of $8.2 million, $0.5 million and $2.7 million during
the fiscal years ended June 30, 1999, 1998 and 1997, respectively (which amounts
for fiscal years ended June 30, 1999, 1998 and 1997 include net losses of $2.3
million, $1.7 million and $1.5 million, respectively for NetSat Express'
satellite-delivered data communication services business) and will incur further
losses as it attempts to expand its businesses. The Company's ability to expand
its ground segment systems, and networks, and enterprise service solutions
business and satellite-delivered data communication services business and
generate additional revenues and positive operating and net income is dependent,
in large part, on its ability to obtain new contracts and the profitability of
such contracts, and there can be no assurance that the Company will generate
significant additional revenues or report quarterly or annual positive operating
or net income. As of September 30, 1999, the Company had an accumulated deficit
of $15.5 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources.
INHERENT RISK OF INTERNATIONAL OPERATIONS
The Company anticipates that foreign sales will continue to account for a
significant portion of total revenues in the foreseeable future. The Company's
foreign sales are generally denominated in U.S. dollars. Consequently, the
decrease in the value of foreign currencies relative to the U.S. dollar, such as
the currency devaluations in the Pacific Rim region, Russia and other
international currencies, has adversely affected and may continue to adversely
affect the demand for the Company's ground segment systems, and networks, and
enterprise network service solutions business and satellite-delivered data
communication services business by increasing the price of the Company's
products and services in the currency of the countries in which they are sold.
The economic and monetary crisis in the Pacific Rim countries, including Korea,
Malaysia, Thailand, Philippines, Indonesia and other countries in the region, as
well as the economic and monetary declines in Russia, has resulted in a
decreased demand in such countries and other foreign regions for capital
equipment such as the ground segment systems, and networks, and enterprise
network service solutions supplied by the Company and NetSat Express'
satellite-delivered data communications services. The difficult economic
conditions in the Pacific Rim region, Russia and other international markets and
the decrease in bookings received by the Company from these and other foreign
regions have adversely effected the Company's results of operations for the
fiscal year ended June 30, 1999 and the three months ended September 30, 1999
and the Company expects that these negative trends will continue to adversely
impact it. Additional risks inherent to the Company's international business
activities include various and changing regulatory requirements, costs and risks
of relying upon local subcontractors for the installation of its ground segment
systems, and networks, and enterprise network service solutions, increased sales
and marketing expenses,
15
availability of export licenses, tariffs and other trade barriers, political and
economic instability, difficulties in staffing and managing foreign operations,
potentially adverse taxes, complex foreign laws and treaties and the possibility
of difficulty in accounts receivable collections. In addition, the Company is
subject to the Foreign Corrupt Practices Act (the "FCPA") which may place the
Company at a competitive disadvantage to foreign companies, which are not
subject to the FCPA. There can be no assurance that any of these factors will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
QUARTERLY FLUCTUATIONS
The Company may continue to experience significant quarter to quarter
fluctuations in its results of operations, which may result in volatility in the
price of the Company's Common Stock. Quarterly results of operations may
fluctuate as a result of a variety of factors, including the timing of the
initiation and completion of contracts, delays in the booking of new contracts,
the demand for the Company's ground segment systems, and networks, and
enterprise network service solutions and NetSat Express' satellite-delivered
data communications, the introduction of new or enhanced products and services
by the Company or NetSat Express or their competitors, market acceptance of new
products and services, the mix of revenues between custom-built satellite
communications systems and networks designed for its customers and standard
installations provided to its customers, the growth of demand for Internet
infrastructure-based products and services in developing countries, the timing
of significant marketing programs, the extent and timing of the hiring of
additional personnel, competitive conditions in the industry and general
economic conditions in the U.S. and abroad, such as the difficult economic
conditions and currency devaluations in the Pacific Rim region, Russia and other
international markets which have adversely impacted, and may continue to,
adversely impact the Company's quarterly results. See "Inherent Risk of
International Operations". Due to the foregoing factors, it is likely that in
one or more future quarters the Company's operating results will be below the
expectations of public market analysts and investors. Such an event could have a
material adverse effect on the price of the Company's Common Stock.
INTENSE COMPETITION; LIMITED BARRIERS TO ENTRY
The markets for ground segment systems, networks, enterprise network
service solutions and satellite-delivered data communication services businesses
are highly competitive. Many of the Company's competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than those available to the Company. As a result, such
competitors may be able to develop and expand their products and services more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products and services than can the Company. In addition, there are limited
barriers to entry in the Company's markets and certain of the Company's
strategic suppliers and customers have technologies and capabilities in the
Company's product areas and could choose to compete with the Company or to
replace the Company's products or services with their own. The entry of new
competitors, the decision by a strategic ally to compete with the Company or the
decision by a customer to develop and employ in-house capability to satisfy its
satellite communications needs could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company anticipates that its competitors may develop or acquire
competing products or products that provide functionality that is similar to
that provided by the Company's products and may be offered at significantly
lower prices or bundled with other products. In addition, current and potential
competitors in both markets in which the Company competes have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products and services to address the needs of
the Company's current and prospective customers. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. Increased competition is likely to result in
price reductions, reduced gross profit margins and loss of market share, any of
which would have a material adverse effect on the Company's business, results of
operations and financial condition. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also is dependent on the continued success and development of
the satellite communications industry, which itself competes with other
technologies such as terrestrial microwave, copper wire and fiber optic
communications systems. Any failure of the satellite communications industry to
continue to develop, or any
16
technological development which significantly improves the capacity, cost or
efficiency of such competing systems relative to satellite systems, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Rapid Industry Change; Technological Obsolescence."
ADDITIONAL FINANCING REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has incurred negative cash flows from operations in each year
since its inception. The Company expects that its cash and working capital
requirements for its operating activities will continue to increase as the
Company expands its operations. The Company anticipates that its capital
resources are adequate to satisfy its capital requirements through September 30,
2000 at its current level of operations. However, no assurance can be given that
there will be no change that would consume available resources significantly
before such time. Additional funds may not be available when needed and even if
available, additional funds may be raised through financing arrangements and/or
the issuance of preferred or common stock or convertible securities on terms and
prices significantly more favorable than those of the currently outstanding
common stock, which could have the effect of diluting or adversely affecting the
holdings or rights of existing stockholders of the Company. If adequate funds
are not available, the Company will be required to delay, scale back or
eliminate certain of its operating activities, including without limitation, the
timing and extent of its marketing programs, the extent and timing of hiring
additional personnel and its research and development activities. No assurance
can be given that additional financing will be available to the Company on
acceptable terms, or at all.
RELIANCE ON STRATEGIC RELATIONSHIPS
The Company is dependent on certain customers and suppliers for the
development and expansion of its ground segment systems, networks, enterprise
network service solutions business and satellite-delivered data communication
services business. However, such relationships are not governed by any contract
and, accordingly, neither the Company nor such customers or suppliers are
obligated to maintain such strategic relationships. There can be no assurance
that the Company will be able to maintain such strategic relationships, that its
strategic customers and suppliers will continue to assist the Company by
developing and expanding its business and by providing research and development
expertise, or that such strategic customers and suppliers will not actually
compete with the Company in the future. See "Intense Competition; Limited
Barriers to Entry."
Because the Company intends to provide its satellite-delivered data
communications services almost entirely in developing markets where the Company
has little or no market experience, the Company will also be dependent on local
partners in such markets to provide marketing expertise and knowledge of the
local regulatory environment in order to facilitate the acquisition of necessary
licenses and access to existing customers. The Company has not yet formally
established an alliance with a local partner. The Company's failure to form and
maintain such alliances with local partners, or the preemption or disruption of
such alliances by the actions of the Company's competitors or otherwise, would
adversely affect the Company's ability to penetrate and compete successfully in
such emerging markets. There can be no assurance that the Company will be able
to compete successfully in the future in such markets or that competition will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
RISK OF CUSTOMER CONCENTRATION
The Company typically relies upon a small number of customers for a large
portion of its revenues. The Company expects that in the near term a significant
portion of its revenues will continue to be derived from a limited number of
customers (the identity of whom may vary from period to period) as the Company
seeks to expand its business and its customer base. The reduction, delay, or
cancellation of orders from one or more of such significant customers would have
a material adverse effect on the Company's business, financial condition and
results of operations.
RISK OF MANAGEMENT OF RAPID GROWTH
The Company has been significantly and rapidly expanding its operations
since its inception. In order to pursue successfully the opportunities presented
by the ground segment systems, and networks, and enterprise network service
solutions business and satellite-delivered data communication services business,
the Company will be required to continue to expand its operations. Such
expansion has placed, and is expected to continue to place, a significant strain
17
on the Company's personnel, management, and financial and other resources. In
order to manage any future growth effectively, the Company will, among other
things, be required to attract, train, motivate and manage a significantly
larger number of employees successfully to conduct product engineering and
management, product implementation, sales activity and customer support
activities; manage higher working capital requirements; and improve its
operating and financial systems. Any failure to manage any future growth in an
efficient manner and at a pace consistent with the Company's business could have
a material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH THE CD RADIO CONTRACT
The Company has been awarded a contract by CD Radio Inc, ("CD Radio") to
provide equipment for the terrestrial repeater segment of CD Radio's digital
satellite radio transmission system. Operations for the system are scheduled to
commence at the end of the fourth quarter of 2000. The inability of CD Radio and
its other suppliers to effectuate CD Radio's plan to build a nationwide digital
radio broadcast system, the health of the overall economy and the specific
market for digital radio, and CD Radio's ability to terminate or modify the
contract in certain circumstances would have a material adverse effect on the
Company's future business, financial condition and results of operations.
RISK OF FIXED-PRICE CONTRACTS
Virtually all of the Company's contracts for installation of ground segment
systems, networks, and enterprise network service solutions are on a fixed-price
basis. Profitability of such contracts is subject to inherent uncertainties as
to the cost of performance. In addition to possible errors or omissions in
making initial estimates, cost overruns may be incurred as a result of
unforeseen obstacles, including both physical conditions and unexpected problems
encountered in engineering, design and testing. Since the Company's business may
at certain times be concentrated in a limited number of large contracts, a
significant cost overrun on any one contract could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk of Customer Concentration."
EMPHASIS ON DEVELOPING MARKETS; UNCERTAIN MARKET POTENTIAL
The Company believes a substantial portion of the growth in demand for its
ground segment systems, networks, enterprise network service solutions business
and satellite-delivered data communication services business will come from
customers in developing countries. There can be no assurance that such increases
in demand will occur or that prospective customers will accept such products and
services in sufficient quantities or at all. The degree to which the Company is
able to penetrate potential markets in developing countries will be affected in
major part by the speed with which other competing elements of the
communications infrastructure, such as telephone lines, other
satellite-delivered solutions and fiber optic cable and television cable, are
installed in the developing countries and with respect to the Company's
satellite-delivered data communication services business, also on the
effectiveness of the Company's local partners in such markets. The failure to
have its products and services accepted in developing countries would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Intense Competition; Limited Barriers to Entry" and
"Reliance on Strategic Relationships."
RAPID INDUSTRY CHANGE; TECHNOLOGICAL OBSOLESCENCE
The telecommunications industry, including the ground segment systems,
networks, enterprise network service solutions business and satellite-delivered
data communication services business, is characterized by rapid and continuous
technological change. Future technological advances in the telecommunications
industry may result in the availability of new products or services that could
compete with the satellite ground segment products and services and
satellite-delivered data communications services provided by the Company or
render the Company's products and services obsolete. There can be no assurance
that the Company will be successful in developing and introducing new products
and services that meet changing customer needs or in responding to technological
changes or evolving industry standards in a timely manner, if at all, or that
services or technologies developed by others will not render the Company's
products or services noncompetitive. Any failure by the Company to respond to
changing market conditions, technological developments, evolving industry
standards or changing customer requirements, or the development of competing
technology or products that render the Company's products and services
noncompetitive or obsolete would have a material adverse effect on the Company's
business, financial condition and results of operations.
18
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the data code field. These data code fields
will need to accept four digit entries to distinguish 21st century dates. As a
result, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance.
The Company is in the process of assessing the anticipated costs, problems
and uncertainties associated with Year 2000 issues. The Company has initiated a
Year 2000 Compliance Plan which includes information technology ("IT") and
non-IT systems requiring or which may require modification or conversion, and
supplier, facilities and other operations (such as financial and banking
systems) readiness. The Company has substantially completed reviews of each of
the above areas including identification and assessment of potential Year 2000
issues, identification and contact with key suppliers or institutions based on
their relative risks associated with product integrity and continued product
deliveries and service. Until such reviews are complete, the Company will not be
able to completely evaluate whether its IT and non-IT systems will need to be
modified or replaced. The Company has incurred only nominal costs to date and
estimates at this time that the total Year 2000 costs will not be material. The
Company is continuing its assessment, which may necessitate refinement of its
estimate over time. There can be no assurance, however, that costs associated
with the Company's Year 2000 Compliance Plan will not be higher than anticipated
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
In association with the Company's Year 2000 Compliance Plan, the Company is
currently developing contingency plans for certain critical applications. These
contingency plans may include, among other actions, manual workarounds,
increasing inventories and adjusting staffing strategies. There can be no
assurance such contingency plans, once developed, will be adequate.
Since the Company's Year 2000 Compliance Plan is ongoing; all potential
Year 2000 issues have not yet been identified. Therefore the potential impact of
these issues on the Company's financial condition and results of operations can
not be determined at this time. If IT and non-IT systems used by the Company or
its suppliers, the product integrity of products provided to the Company by its
suppliers, or the software applications or hardware used in systems integrated
and sold by the Company, fail or experience significant difficulties related to
the Year 2000, the Company's results of operations and financial condition could
be materially affected. In addition, there can be no assurance that equipment
operated by third parties that interface with or contain the Company's products
will timely achieve Year 2000 compliance. Furthermore, if the Company's ground
segment systems, and networks, and enterprise network service solutions and
satellite-delivered data communication services were unable to be used by the
Company's customers because of Year 2000 compliance problems, there can be no
assurance that the Company's customers will not commence litigation against the
Company for such systems and networks failure. Any of the foregoing could result
in a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company currently procures most of the critical components and
services for its products from single or limited sources in connection with
specific contracts and does not otherwise carry significant inventories or have
long-term or exclusive supply contracts with its source vendors. The Company has
from time to time experienced delays in receiving products from certain of its
vendors due to quality control or manufacturing problems, shortages of materials
or components or product design difficulties. There can be no assurance that
similar problems will not recur or that replacement products will be available
when needed at commercially reasonable rates, or at all. If the Company were to
change certain of its vendors, the Company would be required to perform
additional testing procedures upon the components supplied by such new vendors,
which could prevent or delay product shipments. Additionally, prices could
increase significantly in connection with changes of vendors. Any inability of
the Company to obtain timely deliveries of materials of acceptable quality or
timely services, or any significant increase in the prices of materials or
services, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk of Fixed-Price
Contracts" and "Quarterly Fluctuations".
RISK OF FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS
19
The Company is subject to various federal laws and regulations, which may
have negative effects on the Company. The Company operates earth stations in
Hauppauge, New York, subject to FCC Rules and Regulations. The Company has
obtained certain licenses from the FCC for both domestic and international
operation of its earth stations and must operate it in compliance with FCC Rules
and Regulations for the terms of the licenses. These licenses generally should
be renewed by the FCC so long as the Company is in compliance with the FCC Rules
and Regulations. The Company cannot offer assurances that any necessary
additional licenses will be granted by the FCC.
Generally, non-U.S. citizens or their representatives, foreign governments,
or corporations otherwise subject to control by non-U.S. citizens may not
directly own more than 20% of a licensee or may not indirectly own more than 25%
of a licensee, through a parent corporation or other controlling entity, under
the FCC Rules and Regulations. The FCC may grant waivers of its foreign
ownership policy to allow for increased indirect investment in a licensee by an
entity based in a World Trade Organization ("WTO") member country. For an entity
based in a non-WTO member country, the FCC will allow increased indirect
investment only if a licensee can show that the non-WTO member country allows
"effective competitive opportunities" for U.S. based entities. Failure to comply
with these policies may result in an order to divest the offending alien
ownership, fines, denial of license renewal, and or license revocation
proceedings against the licensee by the FCC. The Company has no knowledge of any
present foreign ownership, which would result in a violation of the FCC Rules
and Regulations. The Company may, in the future, be required to seek a waiver of
the FCC Rules and Regulations regarding foreign ownership, if such ownership
exceeds the aforementioned benchmarks.
Regulatory schemes in countries in which the Company may seek to provide
its satellite-delivered data communications services may impose impediments on
the Company's operations. Certain countries in which the Company intends to
operate have telecommunications laws and regulations that do not currently
contemplate technical advances in broadcast technology such as Internet/Intranet
transmission by satellite. There can be no assurance that the present regulatory
environment in any such country will not be changed in a manner, which may have
a material adverse impact on the Company's business. The Company or its local
partners typically must obtain authorization for each country in which the
Company provides its satellite-delivered data communications services. Although
the Company believes that it or its local partners will be able to obtain the
requisite licenses and approvals from the countries in which the Company intends
to provide service, the regulatory schemes in each country are different and
thus there may be instances of noncompliance of which the Company is not aware.
Although the Company believes these regulatory schemes will not prevent the
Company from pursuing its business plan, there can be no assurance such licenses
and approvals are or will remain sufficient in the view of foreign regulatory
authorities, or that necessary licenses and approvals will be granted on a
timely basis in all jurisdictions in which the Company wishes to offer its
services or that restrictions applicable thereto will not be unduly burdensome.
The Company's Internet operations (other than the operation of a teleport)
are not currently subject to direct government regulation in most countries, and
there are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is likely that a number of laws and regulations may be adopted
at the local, national or international levels with respect to the Internet,
covering issues such as user privacy and expression, pricing of products and
services, taxation, advertising, intellectual property rights, information
security or the convergence of traditional communication services with Internet
communications. For example, the Child Online Protection Act, enacted in the
United States in 1998, imposes civil and criminal penalties on Internet content
providers who fail to restrict minor's access to material that is deemed
"harmful" to them. However, this act is currently enjoined and its
constitutionality is being adjudicated. It is anticipated that a substantial
portion of the Company's Internet operations will be carried out in countries
which may impose greater regulation of the content of information coming into
the country than that which is generally applicable in the United States. To the
extent that the Company provides content as a part of its Internet services, it
will be subject to any such laws regulating content. Moreover, the adoption of
any such laws or regulations may decrease the growth of the Internet, which
could in turn decrease the demand for the Company's Internet services or
increase the Company's cost of doing business or in some other manner have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel and personal privacy is uncertain.
The vast majority of such laws were adopted prior to the advent of the Internet
and related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies. Changes to such laws
intended to address these issues, including some recently proposed changes,
could create uncertainty in the marketplace which
20
could reduce demand for the Company's services, could increase the Company's
cost of doing business as a result of costs of litigation or increased product
development costs, or could in some other manner have a material adverse effect
on the Company's business, financial condition and results of operations.
The sale of the Company's ground segment systems, and networks, and
enterprise network service solutions outside the United States is subject to
compliance with the regulations of the United States Export Administration
Regulations. The absence of comparable restrictions on competitors in other
countries may adversely affect the Company's competitive position. In addition,
in order to ship the Company's products into certain other countries, the
products must satisfy the technical requirements of that particular country. If
the Company were unable to comply with such requirements with respect to a
significant quantity of the Company's products, the Company's sales in Europe
could be restricted, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on its executive
officers and certain technical, managerial and marketing personnel. The loss of
the services of any of these individuals or group of individuals could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company maintains term life insurance in the amount
of $1.0 million on David E. Hershberg, the Chairman and Chief Executive Officer
of the Company and term life insurance in the amount of $0.5 million for each of
Messrs. Miller, Woodring, Yablonski and Melfi, all of whom are officers of the
Company. The Company believes that its future success also will depend
significantly upon its ability to attract, motivate and retain additional highly
skilled technical, managerial and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting, assimilating and retaining the personnel it requires
to grow and operate profitably.
PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
The Company relies heavily on the technological and creative skills of its
personnel, new product developments, computer programs and designs, frequent
product enhancements, reliable product support and proprietary technological
expertise in maintaining its competitive position, and lacks patent protection
for its products and services. There can be no assurance that others will not
independently develop or acquire substantially equivalent techniques or
otherwise gain access to the Company's proprietary and confidential
technological expertise or disclose such technologies or that the Company can
ultimately protect its rights to such proprietary technological expertise.
The Company generally relies on confidentiality agreements with its
consultants, key employees and sales representatives to protect its proprietary
technological expertise, and generally controls access to and distribution of
its technology, software and other proprietary information. Despite these
precautions, there can be no assurance that such agreements will not be
breached, that the Company will have adequate remedies for any such breach or
that a third party will not copy or otherwise obtain and use the Company's
products or technology without authorization or develop similar products or
technology independently. Failure by the Company to maintain protection of its
proprietary technological expertise for any reason could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is subject to the risk of alleged infringement of intellectual
property rights of others. Most of the Company's officers and employees were
formerly officers or employees of other companies in the industry. The Company
believes that neither it nor its officers or employees have violated any
agreements with, or obligations to, prior employers. Although the Company is not
aware of any pending or threatened infringement claims with respect to the
Company's current or future products, there can be no assurance that third
parties, including previous employers, will not assert such claims or that any
such claims will not require the Company to enter into license arrangements or
result in protracted and costly litigation, regardless of the merits of such
claims. No assurance can be given that any necessary licenses will be available
or that, if available, such licenses can be obtained on commercially reasonable
terms. Furthermore, litigation may be necessary to enforce or protect the
Company's intellectual property rights, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.
21
The Company currently has two patents in the United States, a patent
pending in the United States and a PCT application, corresponding to one of the
United States patents, is pending in a number of foreign jurisdictions. The
Company also intends to seek further patents on its technology, if appropriate.
There can be no assurance that patents will issue from any of the Company's
pending or any future applications or that any claims allowed from such
applications will be of sufficient scope or strength, or be issued in all
countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. Also, competitors of the
Company may be able to design around the Company's patents. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and thus
make the possibility of piracy of the Company's technology and products more
likely.
The Company has filed applications for trademark registration of Globecomm
Systems Inc. in the United States and various other countries, has received a
trademark for NetSat Express in the United States and Brazil, and has filed
applications for trademark registration of NetSat Express in various other
countries. The Company intends to seek registration of other trademarks in the
future. There can be no assurance that registrations will be granted from any of
the Company's pending or future applications, or that any registrations that are
granted to the Company will prevent others from using similar trademarks in
connection with related goods and services.
RISK OF CONCENTRATED OWNERSHIP
As of November 5, 1999, the Company's officers and directors, and their
affiliates beneficially own approximately 2.0 million shares, constituting
approximately 20% of the Company's outstanding Common Stock. These stockholders,
if acting together, may be able to exert significant influence over the election
of directors and other corporate actions requiring stockholder approval.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, acceptance of satellite communication services in developing
countries, and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations, which have affected the
market price of securities of many companies in the telecommunications and high
technology industries. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. See "Quarterly Fluctuations".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to a variety of risks, including foreign currency
exchange rate fluctuations relating to certain purchases from foreign vendors.
In the normal course of business, the Company assesses these risks and has
established policies and procedures to manage its exposure to fluctuations in
foreign currency values.
The Company's objective to managing its exposure to foreign currency
exchange rate fluctuations is to reduce the impact of adverse fluctuations in
earnings and cash flows associated with foreign currency exchange rates for
certain purchases from foreign vendors, if applicable. Accordingly, the Company
utilizes foreign currency forward contracts to hedge its exposure on firm
commitments denominated in foreign currency. As of September 30, 1999, the
Company had no such foreign currency forward contracts.
The Company's interest income is sensitive to changes in the general
level of U.S. interest rates. Due to the nature of our cash equivalents and
short-term investments, which are primarily money market funds and commercial
paper, we have concluded that there is no material market risk exposure.
22
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Index to Exhibits:
Exhibit No.
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1999).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.3 of the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1999).
4.2 See Exhibits 3.1 and 3.3 for provisions of the Amended and
Restated Certificate of Incorporation and Amended and Restated
By-Laws of the Registrant defining rights of holders of Common
Stock of the Registrant. (incorporated by reference to Exhibit 4.2
of the Registrant's Registration Statement on Form S-1, File No.
333-22425 (the "Registration Statement")).
10.1 Form of Registration Rights Agreement dated as of February 1997
(incorporated by reference to exhibit 10.1 of the Registration
Statement).
10.2 Form of Registration Rights Agreement dated May 30, 1996
(incorporated by reference to exhibit 10.2 of the Registration
Statement).
10.3 Form of Registration Rights Agreement dated December 31, 1996, as
amended (incorporated by reference to exhibit 10.3 of the
Registration Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common
Stock dated November 9, 1995 between the Registrant and
Thomson-CSF (incorporated by reference to exhibit 10.4 of the
Registration Statement).
10.5 Investment Agreement dated February 12, 1996 by and between Shiron
Satellite Communications (1996) Ltd. and the Registrant
(incorporated by reference to exhibit 10.5 of the Registration
Statement).
10.6* Stock Purchase Agreement dated as of August 30, 1996 by and
between C-Grams Unlimited Inc. and the Registrant (incorporated by
reference to exhibit 10.6 of the Registration Statement).
23
10.7 Memorandum of Understanding dated December 18, 1996 by and between
NetSat Express, Inc. and Applied Theory Communications, Inc.
(incorporated by reference to exhibit 10.7 of the Registration
Statement).
10.8 Stock Purchase Agreement dated as of August 23, 1996 by and
between NetSat Express, Inc. and Hughes Network Systems, Inc.
(incorporated by reference to exhibit 10.8 of the Registration
Statement).
10.9 Employment Agreement dated as of January 27, 1997 between the
Registrant and David E. Hershberg (incorporated by reference to
exhibit 10.9 of the Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the
Registrant and Kenneth A. Miller (incorporated by reference to
exhibit 10.10 of the Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York,
dated December 12, 1996 by and between Eaton Corporation and the
Registrant (incorporated by reference to exhibit 10.13 of the
Registration Statement).
10.12 1997 Stock Incentive Plan (incorporated by reference to exhibit
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 fiscal 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 fiscal year ended June 30, 1999).
10.17 Series A Preferred Stock Purchase Agreement dated August 11, 1999
between NetSat Express, Inc. and George Soros (incorporated by
reference to Exhibit 10.17 of the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1999).
10.18 Common Stock Purchase Agreement dated October 28, 1999 between
NetSat Express, Inc., Globecomm Systems, Inc. and Reuters Holdings
Switzerland SA (filed herewith).
27 Financial Data Schedule (filed herewith).
* Confidential treatment granted for portions of this agreement.
(b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBECOMM SYSTEMS INC.
(Registrant)
Date: November 15, 1999 /s/ David E. Hershberg
----------------------
David E. Hershberg
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 15, 1999 /s/ Andrew C. Melfi
-------------------
Andrew C. Melfi
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
25