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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 000-22839
GLOBECOMM SYSTEMS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3225567
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
45 OSER AVENUE, 11788
HAUPPAUGE, NY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 231-9800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 11, 2002, there were 12,569,217 shares of the registrant's common
stock, $0.001 par value, outstanding.
1
GLOBECOMM SYSTEMS INC.
Index to the September 30, 2002 Form 10-Q
Page
Part I -- Financial Information ----
Item 1. Consolidated Financial Statements ....................................................................3
Consolidated Balance Sheets--As of September 30, 2002 (unaudited) and June 30, 2002...................3
Consolidated Statements of Operations (unaudited)--For the three months ended
September 30, 2002 and 2001.........................................................................4
Consolidated Statement of Changes in Stockholders' Equity (unaudited)--For the three months
ended September 30, 2002............................................................................5
Consolidated Statements of Cash Flows (unaudited)--For the three months ended
September 30, 2002 and 2001.........................................................................6
Notes to Consolidated Financial Statements (unaudited)................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........................................24
Item 4. Controls and Procedures..............................................................................25
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...........................................................................................29
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,
2002 2002
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 36,827 $ 38,708
Restricted cash 588 588
Accounts receivable, net 9,319 14,999
Inventories 9,245 8,594
Prepaid expenses and other current assets 1,070 1,239
Deferred income taxes 138 138
----------------------------------
Total current assets 57,187 64,266
Fixed assets, net 27,488 28,484
Goodwill 7,204 7,204
Other assets 340 343
----------------------------------
Total assets $ 92,219 $ 100,297
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,065 $ 12,918
Deferred revenues 2,773 3,541
Accrued payroll and related fringe benefits 1,268 957
Other accrued expenses 2,347 2,076
Deferred liabilities 600 600
Capital lease obligation 482 472
----------------------------------
Total current liabilities 17,535 20,564
Deferred liabilities, less current portion 3,682 3,060
Capital lease obligation, less current portion 9,509 9,633
Commitments and contingencies
Stockholders' equity:
Series A Junior Participating, shares authorized, issued and outstanding:
none at September 30, 2002 and June 30, 2002 - -
Common stock, $.001 par value, 22,000,000 shares authorized, shares issued:
12,933,062 at September 30, 2002 and June 30, 2002 13 13
Additional paid-in capital 123,598 123,598
Accumulated deficit (59,723) (54,260)
Accumulated other comprehensive loss (128) (44)
Treasury stock, at cost, 349,745 shares at September 30, 2002 and June 30,
2002 (2,267) (2,267)
----------------------------------
Total stockholders' equity 61,493 67,040
----------------------------------
Total liabilities and stockholders' equity $ 92,219 $ 100,297
==================================
See accompanying notes.
3
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
---------------------------------
Revenues from ground segment systems, networks and
enterprise solutions $ 8,164 $ 18,034
Revenues from data communications services 4,270 6,186
---------------------------------
Total revenues 12,434 24,220
---------------------------------
Costs and operating expenses:
Costs from ground segment systems, networks and
enterprise solutions 7,692 16,177
Costs from data communications services 6,289 7,111
Selling and marketing 1,632 1,606
Research and development 265 247
General and administrative 1,956 2,107
---------------------------------
Total costs and operating expenses 17,834 27,248
---------------------------------
Loss from operations (5,400) (3,028)
Other income (expense):
Interest income 170 423
Interest expense (233) (243)
---------------------------------
Net loss $ (5,463) $ (2,848)
=================================
Basic and diluted net loss per common share $ (0.43) $ (0.22)
=================================
Weighted-average shares used in the calculation of basic
and diluted net loss per common share 12,583 12,718
=================================
See accompanying notes.
4
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK TOTAL
-------------- PAID-IN ACCUMULATED COMPREHENSIVE ------------------ STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT LOSS SHARES AMOUNT EQUITY
-----------------------------------------------------------------------------------------------
Balance at June 30, 2002 12,933 $ 13 $ 123,598 $ (54,260) $ (44) 350 $ (2,267) $ 67,040
Comprehensive loss:
Net loss (5,463) (5,463)
Gain from foreign currency
translation 8 8
Unrealized loss on
available-for-sale equity
securities (92) (92)
-----------
Total comprehensive loss (5,547)
-----------------------------------------------------------------------------------------------
Balance at September 30, 2002 12,933 $ 13 $ 123,598 $ (59,723) $ (128) 350 $ (2,267) $ 61,493
===============================================================================================
See accompanying notes.
5
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
---------------------------------
OPERATING ACTIVITIES:
Net loss $ (5,463) $ (2,848)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,092 1,028
Provision for doubtful accounts 42 63
Change in deferred liabilities 622 -
Changes in operating assets and liabilities:
Accounts receivable 5,659 4,494
Inventories (648) 2,980
Prepaid expenses and other current assets 78 46
Other assets 3 9
Accounts payable (2,873) (3,515)
Deferred revenue (770) (1,294)
Accrued payroll and related fringe benefits 310 295
Other accrued expenses 268 (192)
---------------------------------
Net cash (used in) provided by operating activities (1,680) 1,066
---------------------------------
INVESTING ACTIVITIES:
Purchases of fixed assets (96) (219)
---------------------------------
Net cash used in investing activities (96) (219)
---------------------------------
FINANCING ACTIVITIES:
Payments under capital leases (114) (104)
---------------------------------
Net cash used in financing activities (114) (104)
---------------------------------
Effect of foreign currency translation on cash 9 63
---------------------------------
Net (decrease) increase in cash and cash equivalents (1,881) 806
Cash and cash equivalents at beginning of period 38,708 45,038
---------------------------------
Cash and cash equivalents at end of period $ 36,827 $ 45,844
=================================
See accompanying notes.
6
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(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 consolidated balance sheet
at June 30, 2002 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. The results of operations for the
three months ended September 30, 2002, are not necessarily indicative of the
results that may be expected for the full fiscal year ending June 30, 2003, or
for any future period.
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, 2002 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 30, 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, NetSat Express, Inc., or NetSat, and
Globecomm Systems Europe Limited (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
Sale of Stock by Subsidiary
The Company recognizes changes in the ownership percentage of its
subsidiaries caused by issuances of the subsidiary's stock as an adjustment to
additional paid-in capital in the consolidated statements of changes in
stockholders' equity.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, for
its production-type contracts that are sold separately as standard satellite
ground segment systems when persuasive evidence of an arrangement exists, the
selling price is fixed or determinable, collectibility is reasonably assured,
delivery has occurred and the contractual performance specifications have been
met. The Company's standard satellite ground segment systems produced in
connection with these contracts are typically short-term (less than twelve
months in term) and manufactured using a standard modular production process.
Such systems require less engineering, drafting and design efforts than the
Company's long-term complex production-type projects. Revenue is recognized on
the Company's standard satellite ground segment systems upon shipment and
acceptance of factory performance testing which is when title transfers to the
customer. The amount of revenues recorded on each standard production-type
contract is reduced by the customers' contractual holdback amount, which
typically requires 10% to 30% of the contract value to be retained by the
7
customer until installation and final acceptance is complete. The customer
generally becomes obligated to pay 70% to 90% of the contract value upon
shipment and acceptance of factory performance testing. Installation is not
deemed to be essential to the functionality of the system since installation
does not require significant changes to the features or capabilities of the
system, does not require complex software integration and interfacing and the
Company has not experienced any difficulties installing such equipment. In
addition, the customer or other third party vendors can install the system. The
estimated relative fair value of the installation services is determined by
management, which is typically less than the customer's contractual holdback
percentage. If the holdback is less than the fair value of installation, the
Company will defer recognition of revenues, determined on a contract-by-contract
basis equal to the fair value of the installation services. Payments received in
advance by customers are deferred until shipment and are presented as deferred
revenues in the accompanying consolidated balance sheets.
The Company recognizes revenue using the percentage-of-completion method
of accounting upon the achievement of certain contractual milestones in
accordance with Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, for its non-standard,
complex production-type contracts for the production of satellite ground segment
systems and equipment that are generally integrated into the customers'
satellite ground segment network. The equipment and systems produced in
connection with these contracts are typically long-term (in excess of twelve
months in term) and require significant customer-specific engineering, drafting
and design effort in order to effectively integrate all of the customizable
earth station equipment into the customers' ground segment network. These
contracts generally have larger contract values, greater economic risks and
substantive specific contractual performance requirements due to the engineering
and design complexity of such systems and related equipment. Progress payments
received in advance by customers are netted against the inventory balances in
the accompanying consolidated balance sheets.
Contract costs generally include purchased material, direct labor,
overhead and other indirect costs. Anticipated contracted losses are recognized,
as they become known.
Revenues from data communications services are derived primarily from
Internet access service fees. Service revenues from Internet access are
recognized ratably over the period in which services are provided. Payments
received in advance of providing Internet access services are deferred until the
period such services are provided and are presented as deferred revenues in the
accompanying consolidated balance sheets.
Costs from Ground Segment Systems, Networks and Enterprise Solutions
Costs from ground segment systems, networks and enterprise solutions
consist primarily of the costs of purchased materials, direct labor and related
overhead expenses, project-related travel, living costs and subcontractor costs.
Costs associated with hardware and equipment sales consist primarily of the
purchase of the related products.
Costs from Data Communications Services
Costs from data communications services relating to Internet access
service fees consist primarily of satellite space segment charges and Internet
connectivity fees. Satellite space segment charges consist of the costs
associated with obtaining satellite bandwidth (the measure of capacity) used in
the transmission of services to and from leased satellites, depreciation
relating to a capitalized satellite transponder lease and network operations
expenses which consist primarily of costs associated with the operation of the
Network Operation Center (the "NOC"), including teleport services and
maintaining a twenty-four hour a day, seven-day a week staff to monitor the
operations of the NOC.
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired primarily from the buyback of the minority interests
of NetSat. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill and other indefinite life intangible assets are no longer
amortized, but instead tested for impairment at least annually.
The net carrying value of goodwill is approximately $7,204,000, at
September 30, 2002 and June 30, 2002,
8
which relates to the data communications solutions reporting unit.
Comprehensive loss
Comprehensive loss for the three months ended September 30, 2002 of
approximately $5,547,000 includes a foreign currency translation gain of
approximately $8,000 and an unrealized loss on available-for-sale equity
securities of approximately $92,000. The Company's comprehensive loss for the
three months ended September 30, 2001 of approximately $2,874,000 includes a
foreign currency translation gain of approximately $63,000 and an unrealized
loss on available-for-sale equity securities of approximately $89,000.
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
three months ended September 30, 2002 and the year ended June 30, 2002, due to
the uncertainty regarding the Company's ability to utilize its net operating
losses in the future, the Company provided a valuation allowance against its
operating losses and temporary differences except for approximately $138,000
representing state investment tax credit carryforwards that will be utilized
during fiscal 2003 to offset state capital taxes on the Company's consolidated
state tax return.
2. BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Basic and diluted net loss per common share is computed by dividing the net loss
for the period by the weighted-average number of common and dilutive equivalent
shares outstanding for the period. Common equivalent shares consist of the
incremental common shares issuable upon the conversion of preferred stock (using
an if-converted method) and incremental shares issuable upon the exercise of
stock options and warrants (using the treasury stock method). Incremental common
equivalent shares are excluded from the calculation of diluted net loss per
share if their effect is anti-dilutive. Diluted net loss per share for the three
months ended September 30, 2002 and 2001, excludes the effect of approximately
5,000 and 120,000 stock options respectively, as their effect would have been
anti-dilutive.
3. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, JUNE 30,
2002 2002
-----------------------------------
(UNAUDITED)
(IN THOUSANDS)
Raw materials and component parts $ 887 $ 876
Work-in-progress 8,358 7,718
-----------------------------------
$ 9,245 $ 8,594
===================================
At September 30, 2002 and June 30, 2002, there were no progress payments
to net against inventories under long-term contracts.
4. SEGMENT INFORMATION
The Company operates through two business segments. Its ground segment
systems, networks and enterprise solutions segment, through Globecomm Systems
Inc. and Globecomm Systems Europe Limited, is engaged in the design, assembly
and installation of ground segment systems, networks and enterprise solutions.
Its data communications services segment, through NetSat, is engaged in
providing high-speed, satellite-delivered data
9
communications to developing markets worldwide. NetSat also provides 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
months ended September 30, 2002 and 2001 and as of September 30, 2002 and June
30, 2002:
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
-------------------------------------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Ground segment systems, networks and enterprise solutions $ 8,164 $ 18,034
Data communications services 4,270 6,186
------------ ------------
Total revenues $ 12,434 $ 24,220
============ ============
Loss from operations:
Ground segment systems, networks and enterprise solutions $ (2,643) $ (1,163)
Data communications services (2,760) (1,867)
Interest income 170 423
Interest expense (233) (243)
Intercompany eliminations 3 2
------------ ------------
Net loss $ (5,463) $ (2,848)
============ ============
Depreciation and amortization:
Ground segment systems, networks and enterprise solutions $ 511 $ 446
Data communications services 584 585
Intercompany eliminations (3) (3)
------------ ------------
Total depreciation and amortization $ 1,092 $ 1,028
============ ============
Expenditures for long-lived assets:
Ground segment systems, networks and enterprise solutions $ 46 $ 139
Data communications services 50 80
------------ ------------
Total expenditures for long-lived assets $ 96 $ 219
============ ============
SEPTEMBER 30, JUNE 30,
2002 2002
(UNAUDITED)
-------------------------------------
(IN THOUSANDS)
Assets:
Ground segment systems, networks and enterprise solutions $ 118,159 $ 123,484
Data communications services 20,322 20,106
Intercompany eliminations (46,262) (43,293)
-------------------------------------
Total assets $ 92,219 $ 100,297
=====================================
10
5. COMMITMENTS AND CONTINGENCIES
In October 2002, the Company reached an agreement with one of its
vendors, which modified and reduced the Company's satellite bandwidth
obligations. Under the terms of this agreement, the Company paid $7.6 million,
which included a one-time termination fee of $3.6 million and $4.0 million,
which primarily related to outstanding invoices and an additional security
deposit, assigned $31.6 million of future contract revenues to the vendor and
reduced the Company's future space segment obligations by $52.2 million.
Accordingly, the Company recorded a charge to costs from data communications
services of $0.8 million in the second quarter of fiscal 2003, representing the
difference between the $3.6 million termination fee and the corresponding
reduction in a deferred liability of $2.8 million, which was to be amortized
into income over the remaining term of the lease.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read the following discussion of our financial condition and
results of operations with the consolidated financial statements and related
notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion
contains, in addition to historical information, forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995,
based on our current expectations, assumptions, estimates and projections. These
forward-looking statements involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, such as, among others, the decline in
demand for our services and products due to economic and industry-specific
conditions, the risks associated with operating in international markets and our
dependence on a limited number of contracts for a high percentage of our
revenue. These risks and others are more fully described in the "Risk Factors"
section of this Quarterly Report and 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. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
OVERVIEW
Since our inception, a majority of our revenues have been generated by
ground segment systems, networks and enterprise solutions business. Contracts
for these ground segment systems and networks and communications services have
been fixed-price contracts in a majority of 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 is frequently 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.
Contract costs generally include purchased material, direct labor,
overhead and other indirect costs. Anticipated contract losses are recognized in
the period identified. Costs from ground segment systems, networks and
enterprise solutions consist primarily of the costs of purchased materials,
direct labor and related overhead expenses, project-related travel, living costs
and subcontractor salaries. Costs from data communications services consist
primarily of satellite space segment charges, Internet connectivity fees,
network operations expenses and depreciation. Satellite space segment charges
consist of the costs associated with obtaining satellite bandwidth (the measure
of capacity) used in the transmission of services to and from the satellite
leased from operators. Network operations expenses consist primarily of costs
associated with the operation of the network operations center on a twenty-four
hour a day, seven day a week basis, including personnel and related costs.
Depreciation relates to a capitalized transponder lease and the network
operations center. 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
for engineers. General and administrative expenses consist of expenses
associated with our management, finance, contract and administrative functions.
Our business has been adversely affected by the current global economic
slowdown and, in particular, the significant challenges facing the
telecommunications industry worldwide. These challenges include excess bandwidth
resulting from weak consumer and business demand, which has fallen far short of
expectations, and the attendant financial distress facing both traditional
telecommunication carriers and the new generation of competitive local exchange
carriers. Moreover, as a result of the uncertainties facing the economy,
corporations have seriously
11
restricted their capital expenditures to those that are absolutely necessary.
The reduction in demand has been accompanied by significant pricing pressures
and intensifying competition, while the financial difficulties of industry
participants and customers have created risks associated with collectibility of
accounts receivable. We have experienced a decline in bookings of contract
orders as customers and prospects delay projects. These negative trends are
expected to continue to impact our business and prospects for the foreseeable
future.
CRITICAL ACCOUNTING POLICIES
Certain of our accounting policies require judgment by management in
selecting the appropriate assumptions for calculating financial estimates. By
their nature, these judgments are subject to an inherent degree of uncertainty.
These judgments are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by our
customers, and information available from other outside sources, as appropriate.
Actual results may differ from these judgments under different assumptions or
conditions. Our accounting policies that require management to apply significant
judgment include:
REVENUE RECOGNITION
We recognize revenue in accordance with Staff Accounting Bulletin No. 101
("SAB 101"), Revenue Recognition in Financial Statements, for our
production-type contracts that are sold separately as standard satellite ground
segment systems when persuasive evidence of an arrangement exists, the selling
price is fixed or determinable, collectibility is reasonably assured, delivery
has occurred and the contractual performance specifications have been met. Our
standard satellite ground segment systems produced in connection with these
contracts is typically short-term (less than twelve months in term) and
manufactured using a standard modular production process. Such systems require
less engineering, drafting and design efforts than our long-term complex
production-type projects. Revenue is recognized on our standard satellite ground
segment systems upon shipment and acceptance of factory performance testing
which is when title transfers to the customer. The amount of revenues recorded
on each standard production-type contract is reduced by the customer's
contractual holdback amount, which typically requires 10% to 30% of the contract
value to be retained by the customer until installation and final acceptance is
complete. The customer generally becomes obligated to pay 70% to 90% of the
contract value upon shipment and acceptance of factory performance testing.
Installation is not deemed to be essential to the functionality of the system
since installation does not require significant changes to the features or
capabilities of the equipment, does not require complex software integration and
interfacing and we have not experienced any difficulties installing such
equipment. In addition, the customer or other third party vendors can install
the equipment. The estimated relative fair value of the installation services is
determined by management, which is typically less than the customer's
contractual holdback percentage. If the holdback is less than the fair value of
installation, we will defer recognition of revenues, determined on a
contract-by-contract basis equal to the fair value of the installation services.
Payments received in advance by customers are deferred until shipment and are
presented as deferred revenues.
We recognize revenue using the percentage-of-completion method of
accounting upon the achievement of certain contractual milestones in accordance
with Statement of Position 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts, for our non-standard, complex
production-type contracts for the production of satellite ground segment systems
and equipment that are generally integrated into the customers' satellite ground
segment network. The equipment and systems produced in connection with these
contracts are typically long-term (in excess of twelve months in term) and
require significant customer-specific engineering, drafting and design effort in
order to effectively integrate all of the customizable earth station equipment
into the customers' ground segment network. These contracts generally have
larger contract values, greater economic risks and substantive specific
contractual performance requirements due to the engineering and design
complexity of such systems and related equipment. Progress payments received in
advance by customers are netted against the inventory balances.
Revenues from data communications services are derived primarily from
Internet access service fees. Service revenues from Internet access are
recognized ratably over the period in which services are provided. Payments
received in advance of providing Internet access services are deferred until the
period such services are provided and are presented as deferred revenues.
12
COSTS FROM GROUND SEGMENT SYSTEMS, NETWORKS AND ENTERPRISE SOLUTIONS
Costs related to our production-type contracts and our non-standard,
complex production-type contracts rely on estimates based on total expected
contract costs. We use reasonable, dependable estimates of the costs applicable
to various elements. Since these contract costs depend on estimates, which are
assessed continually during the term of these contracts, costs are subject to
revisions as the contract progresses to completion. Revision in cost estimates
are reflected in the period in which they become known. In the event an estimate
indicates that a loss will be incurred at completion, we record the costs in the
period identified.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired primarily from the buyback of the minority interests
of NetSat. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill and other indefinite life intangible assets are no longer
amortized, but instead tested for impairment at least annually.
In assessing goodwill, we must make assumptions regarding the estimated
future cash flows and other factors to determine the fair value of goodwill.
Future events could cause us to conclude that impairment indicators exist and
that the goodwill associated with NetSat is impaired. Any resulting impairment
could have a material adverse effect on our financial condition and results of
operations.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
assess the customer's ability to pay based on a number of factors, including our
past transaction history with the customer and the credit worthiness of the
customer. Management specifically analyzes accounts receivable, historical bad
debts, customer concentrations, customer credit-worthiness and current economic
trends. If the financial condition of our customers were to deteriorate in the
future, resulting in an impairment of their ability to make payments, additional
allowances may be required.
INVENTORIES
Inventories consist primarily of work-in-progress from costs incurred in
connection with specific customer contracts, which are stated at the lower of
cost or market value. In assessing the realizability of inventories, we are
required to make estimates of the total contract costs based on the various
elements of the work-in-progress. It is possible that changes to these estimates
could cause a reduction in the net realizable value of our inventories.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 and 2001
Revenues from Ground Segment Systems, Networks and Enterprise Solutions.
Revenues decreased by $9.9 million, or 54.7%, to $8.2 million for the three
months ended September 30, 2002 compared to $18.0 million for the three months
ended September 30, 2001. The decrease relates to a decrease in shipment and/or
completion of contracts as a result of a decline in bookings of contract orders
due to the continued uncertainty surrounding the global economic slowdown in the
telecommunications industry, resulting in customers and prospects continuing to
delay projects. We expect the trend in revenues that adversely affected our
results of operations for the three months ended September 30, 2002 to continue
to adversely impact us.
Revenues from Data Communication Services. Revenues decreased by $1.9
million, or 31.0%, to $4.3 million for the three months ended September 30, 2002
compared to $6.2 million for the three months ended September 30, 2001. The
decrease reflects changes in market conditions, including the global economic
slowdown in the telecommunications industry, pricing pressures in the
marketplace and penetration of fiber into areas we have traditionally provided
services, coupled with the termination of services from our largest Middle East
customer in August 2002. During October 2002, pursuant to an agreement reached
with one of our vendors, we assigned $31.6 million of contracts which will
reduce our future monthly recurring revenues by approximately $0.4 million. We
13
expect the trend in revenues that adversely affected our results of operations
for the three months ended September 30, 2002 to continue to adversely impact
us.
Costs from Ground Segment Systems, Networks and Enterprise Solutions.
Costs from ground segment systems, networks and enterprise solutions decreased
by $8.5 million, or 52.5%, to $7.7 million for the three months ended September
30, 2002 from $16.2 million for the three months ended September 30, 2001. The
decrease is attributable to a lower revenue base. Costs as a percentage of
related revenues increased to 94.2% for the three months ended September 30,
2002 from 89.7% for the three months ended September 30, 2001. The decrease was
mainly attributable to competitive margin pressure and a change in contract mix.
Costs from Data Communications Services. Costs from data communications
services decreased by $0.8 million, or 11.6%, to $6.3 million for the three
months ended September 30, 2002 from $7.1 million for the three months ended
September 30, 2001. The decrease is primarily due to the continued global
economic slowdown in the telecommunications industry. Costs as a percentage of
related revenues increased to 147.3% for the three months ended September 30,
2002 from 115.0% for the three months ended September 30, 2001. This increase is
due to the inability of our lower revenue base to absorb the fixed costs of its
unutilized transponder capacity. During October 2002, we reached an agreement
with one of our vendors, which reduced our future space segment transponder
obligations by $52.2 million, or 72%, with this vendor. This agreement will
reduce our future monthly space segment costs by approximately $0.8 million.
Selling and Marketing. Selling and marketing expenses remained relatively
consistent for the three months ended September 30, 2002 compared to the three
months ended September 30, 2001.
Research and Development. Research and development expenses remained
relatively consistent for the three months ended September 30, 2002 compared to
the three months ended September 30, 2001.
General and Administrative. General and administrative expenses decreased
by $0.2 million, or 7.2%, to $2.0 million for the three months ended September
30, 2002 compared to $2.1 million for the three months ended September 30, 2001.
The decrease in general and administrative expenses is primarily due to a
reduction in salary and salary related expenses. General and administrative
expenses as a percentage of revenues increased to 15.7% for the three months
ended September 30, 2002 from 8.7% for the three months ended September 30, 2001
principally due to the decrease in our revenues.
Interest Income. Interest income decreased by $0.3 million, or 59.8%, to
$0.2 million for the three months ended September 30, 2002 compared to $0.4
million for the three months ended September 30, 2001. The decrease is primarily
the result of a decrease in cash and cash equivalents due to cash used in our
operations during the past twelve months ended September 30, 2002, coupled with
a decline in interest rates.
Interest Expense. Interest expense remained relatively consistent for the
three months ended September 30, 2002 compared to the three months ended
September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had working capital of $39.7 million, including
cash and cash equivalents of $36.8 million, restricted cash of $0.6 million, net
accounts receivable of $9.3 million, inventories of $9.3 million, prepaid
expenses and other current assets of $1.1 million and deferred income taxes of
$0.1 million, offset by $10.1 million in accounts payable, $2.8 million in
deferred revenues and $4.7 million in accrued expenses and other current
liabilities.
Net cash used in operating activities during the three months ended
September 30, 2002 was $1.7 million, which primarily related to the net loss of
$5.5 million and a decrease in accounts payable of $2.9 million relating to the
reduction in business levels, offset by a decrease in accounts receivable of
$5.7 million due to collections on certain contract billings and the reduction
in revenues, depreciation and amortization expense of $1.1 million related
primarily to the network operation center and one satellite space segment
transponder.
Effective April 11, 2002, we amended our bank agreement and established a
$5.0 million working capital line of credit. The modified credit facility bears
interest at the prime rate (4.75% at September 30, 2002) and is
14
collateralized by a first security interest on most of our assets. The credit
facility, which expires on April 10, 2003, contains certain financial covenants,
with which we were in compliance at September 30, 2002. As of September 30,
2002, no amounts were outstanding under this credit facility, however, there are
outstanding standby letters of credit, bid proposals and performance guarantees
of approximately $2.0 million, which are applied against and reduce the amounts
available under the working capital line of credit.
We lease satellite space segment services and other equipment under
various operating lease agreements, which expire in various years through 2008.
Future minimum lease payments due on these leases through September 30, 2003 are
approximately $14.9 million. In October 2002, we reached an agreement with one
of our vendors, which modified and reduced our satellite bandwidth obligations.
Under the terms of this agreement, we paid $7.6 million, which included a
one-time termination fee of $3.6 million, and $4.0 million, which primarily
related to outstanding invoices and an additional security deposit, assigned
$31.6 million of future contract revenues to the vendor and reduced our future
space segment obligations by $52.2 million.
At September 30, 2002 we had contractual obligations and commercial
commitments as follows (in thousands):
PAYMENTS DUE BY PERIOD
LESS THAN 1 AFTER 5
TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS
------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
- -----------------------
Capital lease obligation $ 16,524 $ 1,387 $ 2,774 $ 2,774 $ 9,589
Operating leases (1) 82,988 14,910 32,627 28,349 7,102
------------------------------------------------------------------------
Total contractual cash obligations $ 99,512 $ 16,297 $ 35,401 $ 31,123 $ 16,691
OTHER COMMERCIAL COMMITMENTS
- ----------------------------
Standby letters of credit $ 1,359 $ 711 $ 8 $ - $ 640
Performance guarantees 607 607 - - -
------------------------------------------------------------------------
Total commercial commitments $ 1,966 $ 1,318 $ 8 $ - $ 640
(1) In October 2002, we reached an agreement with one of our vendors, which
modified and reduced our satellite bandwidth obligations. Under the terms
of this agreement, we reduced our future space segment obligations by
$52.2 million.
On November 7, 2001, the Board of Directors authorized a stock repurchase
program whereby we can repurchase up to $2.0 million of our outstanding stock,
representing approximately 3.7% of the total shares outstanding on that date.
Since November 2001, we repurchased, in aggregate, a total of 216,100 shares for
$1.2 million. The timing, price, quantity and manner of future purchases will be
at the discretion of management, depending on market conditions and other
factors, subject to compliance with the applicable securities laws.
We expect that our cash and working capital requirements for operating
activities will increase as we continue to implement our business strategy.
Management anticipates that we will experience negative cash flows due to
continued operating losses as a result of a decrease in orders due to the
continued global economic slowdown in the telecommunications industry.
NetSat has had, and we expect it will continue to have, significant
working capital requirements, which have, and will, put increased pressure on
our capital resources. In October 2002, we reached an agreement with one of our
vendors, which modified and reduced our satellite bandwidth obligations by
$52.2 million, or 72% with this vendor. We are currently exploring additional
alternative strategies to continue to reduce the drain on our resources caused
by NetSat's losses. These include strategies to better utilize, or further
reduce the cost of underutilized, transponder capacity, as well as strategies to
deal with NetSat's funding needs. We cannot assure you that we will successfully
achieve our goal of improving NetSat's working capital.
Our future capital requirements will depend upon many factors, including
the success of our marketing efforts in the ground segment systems, networks,
and communications services business, the nature and timing of customer
15
orders, 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 working capital requirements through
September 30, 2003. However, we cannot assure you that there will be no change
that would consume available resources significantly before that time. For
example, the terrorist attacks on the United States in 2001, as well as future
events occurring in response to, or in connection with them, including, without
limitation, future terrorist attacks against the United States or its allies or
military or trade or travel disruptions impacting our ability to sell and market
our products and services in the United States and internationally may impact
our results of operations. 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 unavailable, we may 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. We cannot
assure you that additional financing will be available to us on acceptable
terms, or at all.
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW AND EXPECT OUR
LOSSES TO CONTINUE.
We have incurred significant net losses since we began operating in
August 1994. We incurred net losses of $5.5 million during the three months
ended September 30, 2002, $17.3 million during the fiscal year ended June 30,
2002 and $18.7 million during the fiscal year ended June 30, 2001. As of
September 30, 2002, our accumulated deficit was approximately $59.7 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.
SINCE SALES OF SATELLITE COMMUNICATIONS EQUIPMENT ARE DEPENDENT ON THE GROWTH OF
COMMUNICATIONS NETWORKS, AS MARKET DEMAND FOR THESE NETWORKS DECLINES, OUR
REVENUE AND PROFITABILITY ARE LIKELY TO DECLINE.
We derive, and expect to continue to derive, a significant amount of
revenue from the sale of satellite ground segment systems and networks. If the
long-term growth in demand for communications networks does not occur as we
expect, the demand for our satellite ground segment systems and networks may
decline or grow more slowly than we expect. As a result, we may not be able to
grow our business, our revenue may decline from current levels and our results
of operations may be harmed. The demand for communications networks and the
products used in these networks is affected by various factors, many of which
are beyond our control. For example, general economic conditions have
deteriorated and affected the overall rate of capital spending by our customers.
Also, many companies are finding it increasingly difficult to raise capital to
finish building their communications networks and, therefore, are placing fewer
orders with our customers. The current economic slowdown has resulted in a
softening of demand from our customers. We believe that this slowdown is
generally the result of slower than forecasted growth in a number of key
segments, including communications infrastructure equipment, resulting from a
reduction in the capital spending of service providers. We cannot predict the
extent to which this softening of demand will continue. Further, increased
competition among satellite ground segment systems and networks manufacturers
has increased pricing pressures.
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 with
a significant portion of the international revenue coming from developing
countries. We presently conduct our international sales in the following
geographic areas: Africa, the Asia-Pacific Region, Australia, Central and South
America, Eastern and Central Europe and the Middle East. There are some risks
inherent in conducting our business
16
internationally, including:
o general political and economic instability in international markets,
as well as a result of the terrorist attacks in the United States on
September 11, 2001 and the related outbreak of hostilities, could
impede our ability to deliver our products and services to customers
and harm our results of operations;
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 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 could effect our ability to compete;
o relying on local subcontractors for installation of our products and
services could adversely impact the quality of our products and
services;
o difficulties in staffing and managing foreign operations could effect
our ability to compete;
o potentially adverse taxes could adversely affect our results of
operations;
o complex foreign laws and treaties could affect our ability to compete;
and
o difficulties in collecting accounts receivable could adversely affect
our results of operations.
These and other risks could impede our ability to manage our
international operations 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-by-project basis. We intend on marketing to
our customers our communications services. These services not only provide the
implementation of the satellite ground segment systems and networks but also
provide for the ongoing operation and maintenance of these systems and networks.
If we are not successful in selling these communications services to our
existing customers, it will harm our results of operations.
IF NETSAT DOES NOT EXECUTE ITS BUSINESS STRATEGY OR IF THE MARKET FOR ITS
SERVICES FAILS TO DEVELOP OR DEVELOPS MORE SLOWLY THAN IT EXPECTS, OUR RESULTS
OF OPERATIONS WILL BE HARMED AND OUR STOCK PRICE MAY BE ADVERSELY AFFECTED.
NetSat's revenues from data communications services have decreased during
the three months ended September 30, 2002. Its future revenues will be reduced
by $31.6 million of customer contracts assigned to a vendor pursuant to a
settlement agreement reached in October 2002. NetSat's future revenues and
results of operations are dependent on its execution of its business strategy
and development of the market for its current and future services. In
particular, the current level and manner of utilization of NetSat's transponder
space, as well as a decrease in orders currently being experienced, continues to
harm our results of operation. Despite the agreement reached with one of the
Company's vendors on October 25, 2002, which modified and reduced the Company's
satellite
17
bandwidth obligations, we cannot assure you that the transponder space will be
efficiently and substantially utilized or that an increase in orders will be
realized. NetSat has had, and we expect will continue to have, significant cash
requirements, which have and will decrease our cash resources. If NetSat does
not efficiently and substantially utilize its transponder space capacity or
increase its level of orders, its cash requirements may increase and our results
of operations will be harmed.
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 could 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
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 foreign regions has adversely affected our
results of operations for the three months ended September 30, 2002 and the
fiscal year ended June 30, 2002. We expect that these negative trends will
continue to adversely impact our results of operations.
YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, OUR STOCK
PRICE COULD DECLINE SIGNIFICANTLY.
Our future revenues and results of operations may significantly fluctuate
due to a combination of factors, including:
o delays and/or a decrease in the booking of new contracts;
o general political and economic conditions in the United States and
abroad as a result of the terrorist attacks on September 11, 2001 and
the related outbreak of hostilities;
o the length of time needed to initiate and complete customer 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 timing of significant marketing programs;
o our ability to hire and retain additional personnel;
o the competition in our markets; and
o difficult global economic conditions and the currency devaluations in
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
18
decline.
OUR MARKETS ARE HIGHLY COMPETITIVE AND WE HAVE MANY ESTABLISHED COMPETITORS, AND
WE MAY LOSE MARKET SHARE AS A RESULT.
The markets in which we operate are highly competitive and this
competition could harm our ability to sell our products and services on prices
and terms favorable to us. Our primary competitors in the satellite ground
segment and networks market include vertically integrated satellite systems
providers like Nippon Electric Corporation, systems integrators like IDB
Systems, a division of MCI WorldCom Inc. and equipment manufacturers who also
provide integrated systems like Andrew Corporation and Vertex-RSI.
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 and Verestar, as
well as other ISPs. In addition, we may compete with other communications
service providers, MCI WorldCom Inc., and satellite owners like New Skies
Satellites N.V. and Intelsat. We anticipate that our competitors may develop or
acquire services that provide functionality that is similar to that provided by
our services and that those services may be offered at significantly lower
prices or bundled with other services. These competitors may have the financial
resources to withstand substantial price competition and may be in a better
position to endure difficult economic conditions in 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 than we do 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. Fiber optic communications systems have
penetrated areas in which we have traditionally provided services. If the
satellite communications industry fails to continue to develop, or any
technological development significantly improves the cost or efficiency of
competing terrestrial systems relative to satellite systems, then our business
and financial condition would be materially harmed.
WE MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OUR CAPITAL REQUIREMENTS IN
THE FUTURE.
We have incurred negative cash flows from operations in each year since
our inception. We believe that our available cash resources will be sufficient
to meet our working capital and capital expenditure requirements through
September 30, 2003. 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, as well as competing
technological and market developments. In particular, NetSat has had significant
cost requirements, which are expected to continue in the future. We may need to
raise additional funds in order to meet additional working capital requirements
and to support additional capital expenditures. Should this need arise,
additional funds may not be available when needed and, even if additional funds
are available, we may not find the terms favorable or commercially reasonable.
If adequate funds are unavailable, we may be required to delay, reduce or
eliminate some of our operating activities, including marketing programs, hiring
of additional personnel and research and development programs. If we raise
additional funds by issuing equity securities, our existing stockholders will
own a smaller percentage of our capital stock and new investors may pay less on
average for their securities than, and could have rights superior to, existing
stockholders.
19
A LIMITED NUMBER OF CUSTOMER CONTRACTS ACCOUNT FOR A HIGH PERCENTAGE OF OUR
REVENUES, AND THE INABILITY TO REPLACE A KEY CUSTOMER CONTRACT WOULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION.
We rely on a small number of customer contracts 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 customer contracts. 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, an inability
to replace one or more of these large customer contracts would materially
adversely affect our results of operations and financial condition.
WE ANTICIPATE SIGNIFICANT REVENUES FROM FIVE CONTRACTS AND A MODIFICATION OR
TERMINATION OF ALL OR ANY OF THESE CONTRACTS WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We have agreements with five customers to provide equipment and services,
which we expect to generate a substantial potion of our revenues. 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 results of operations and financial condition 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 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 results of
operations and financial condition could be adversely affected.
IF OUR PRODUCTS AND SERVICES ARE NOT ACCEPTED IN DEVELOPING COUNTRIES WITH
EMERGING MARKETS, OUR REVENUES WILL BE IMPAIRED.
We anticipate that a substantial portion of the growth in the demand for
our products and services will come from customers in developing countries due
to a lack of basic communications infrastructure in these countries. However, we
cannot guarantee an increase in the demand for our products and services in
developing countries or that customers in these countries will accept our
products and services at all. Our ability to penetrate emerging markets in
developing countries is dependent upon various factors including:
o the speed at which communications infrastructure, including
terrestrial microwave, coaxial cable and fiber optic communications
systems, which compete with satellite-based services, is built;
o the effectiveness of our local resellers and sales representatives in
marketing and selling our products and services; and
o the acceptance of our products and services by customers.
If our products and services are not accepted, or the market potential we
anticipate does not develop, our revenues will be impaired.
WE DEPEND UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE
EMPLOYEES.
Our future performance depends on the continued service of our key
technical, managerial and marketing personnel; in particular, David Hershberg,
Kenneth Miller, Patrick Flemming, Stephen Yablonski and Donald Woodring. The
employment of any of our key personnel could cease at any time.
20
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BUSINESS.
We regard our trademarks, trade secrets and other intellectual property
as beneficial 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.
We currently have been granted two patents in the United States, one for
remote access to the Internet using satellites, and the other for satellite
communication with automatic frequency control, and have two patent applications
pending in the United States and one Patent Cooperation Treaty ("PCT") patent
application pending for implementing fax and data communications using internet
protocols. 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 future patents 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., Globecomm, and GSI in the United States and various other
countries, and have been granted registrations for some of these terms in Europe
and Russia. We have received trademark registrations for NetSat in the United
States, the European Community, Russia, and Brazil. We have various other
trademarks registered or pending for registration in the United States and in
other countries and may seek registration of other trademarks and service marks
in the future. We cannot assure you that registrations will be granted from any
of our pending or future applications, or that any registrations that are
granted will prevent others from using similar trademarks in connection with
related goods and services.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME
CONSUMING AND EXPENSIVE, AND IF WE ARE NOT SUCCESSFUL, COULD CAUSE SUBSTANTIAL
EXPENSES AND DISRUPT OUR BUSINESS.
We cannot be sure that our 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. Prosecuting infringers and defending against intellectual property
infringement claims could be time consuming and expensive, and regardless of
whether we are or are not successful, could cause substantial expenses and
disrupt our business. We may incur substantial expenses in defending against
these third party claims, regardless of their merit. Successful infringement
claims against us may result in substantial monetary liability and/or may
materially disrupt the conduct of, or necessitate the cessation of, our
business.
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, 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
21
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 RELY ON NETSAT, OUR WHOLLY-OWNED SUBSIDIARY, FOR SPACE SEGMENT ON SATELLITES.
IF ITS BUSINESS FAILS OR WE ARE OTHERWISE UNABLE TO CONTINUE TO RELY ON NETSAT
FOR THIS SUPPLY, OUR BUSINESS MAY BE HARMED.
We currently depend on NetSat for a portion of our transponder space on
satellites. We do not have a long-term agreement in place with NetSat, as most
of our needs are filled on a purchase order basis. If NetSat is unable to
develop its business or if we are unable to continue to rely on their supply for
space segment, 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, including, but not limited to, results of
the terrorist attacks on September 11, 2001.
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,
22
which could significantly harm our business.
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 Communication Commission,
or FCC, licensed earth stations in Hauppauge, New York, subject to the
Communications Act of 1934, as amended, or the FCC Act, and the rules and
regulations of FCC. Pursuant to the FCC 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 the FCC will grant
additional licenses 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 data communications 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 restrictions applicable thereto
will not be unduly burdensome.
REGULATION OF THE INTERNET
Due to the increasing popularity and use of the Internet it is possible
that a number of laws and regulations may be adopted at the local, national or
international levels with respect to the Internet, covering issues including
user privacy and expression, pricing of products and services, taxation,
advertising, intellectual property rights, information
23
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 that 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
35 countries in Europe and content restrictions in countries including 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 such 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,
results of operations and financial condition.
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. During the three months ended September 30,
2002 and the fiscal year ended June 30, 2002, we had no such foreign currency
forward contracts.
24
Our results of operations and cash flows are subject to fluctuations due
to changes in interest rates primarily from our investment of available cash
balances in money market funds with portfolios of investment grade corporate and
government securities, and secondly, our fixed long-term capital lease
agreement. Under our current positions, we do not use interest rate derivative
instruments to manage exposure to interest rate changes.
ITEM 4. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND INTERNAL CONTROLS.
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO") of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities and Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their evaluation,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect the disclosure controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On August 6, 2002, we issued a notice of termination to a major
customer in the Middle East for failure to pay for services
rendered, and included a demand for full payment of the past due
balance and specified liquidated damages for early termination.
The customer responded by issuing its own notice of termination
claiming certain breaches of the contract by NetSat, which
claims we have denied. The contract requires settlement of
disputes by arbitration to be held in New York. We intend to
fully pursue all available remedies to recover monies owed for
services rendered and for liquidated damages, including
arbitration if required and have retained outside counsel to
assist in this matter.
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
25
Index to Exhibits:
Exhibit No.
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999).
3.2 Amended and Restated By-laws of the Registrant (incorporated by reference
to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws of the
Registrant defining rights of holders of Common Stock of the Registrant
(incorporated by reference to Exhibit 4.2 of the Registrant's
Registration Statement on Form S-1, File No. 333-22425 (the "Registration
Statement")).
10.1 Form of Registration Rights Agreement dated as of February 1997
(incorporated by reference to Exhibit 10.1 of the Registration
Statement).
10.2 Form of Registration Rights Agreement dated May 30, 1996 (incorporated by
reference to Exhibit 10.2 of the Registration Statement).
10.3 Form of Registration Rights Agreement dated December 31, 1996, as amended
(incorporated by reference to Exhibit 10.3 of the Registration
Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock
dated November 9, 1995 between the Registrant and Thomson-CSF
(incorporated by reference to Exhibit 10.4 of the Registration
Statement).
10.5 Investment Agreement dated February 12, 1996 by and between Shiron
Satellite Communications (1996) Ltd. and the Registrant (incorporated by
reference to Exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between
C-Grams Unlimited Inc. and the Registrant (incorporated by reference to
Exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding dated December 18, 1996 by and between NetSat
Express, Inc. and Applied Theory Communications, Inc. (incorporated by
reference to Exhibit 10.7 of the Registration Statement).
10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between
NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by
reference to Exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement dated as of January 27, 1997 between the Registrant
and David E. Hershberg (incorporated by reference to Exhibit 10.9 of the
Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the Registrant
and Kenneth A. Miller (incorporated by reference to Exhibit 10.10 of the
Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated
December 12, 1996 by and between Eaton Corporation and the Registrant
(incorporated by reference to Exhibit 10.13 of the Registration
Statement).
10.12 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 of
the Registration Statement).
10.13 Investment Agreement dated August 21, 1998 by and between McKibben
Communications LLC and the Registrant (incorporated by reference to
Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year
ended June 30, 1998).
26
10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit
99.8 of the S-8 Registration Statement).
10.15 Rights Agreement, dated as of December 3, 1998, between the Company and
American Stock Transfer and Trust Company, which includes the form of
Certificate of Designation for the Series A Junior Participating
Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B
and the Summary of Rights to Purchase Series A Preferred Shares as
Exhibit C (incorporated by reference to Exhibit 4 of Company's Current
Report on Form 8-K dated December 3, 1998).
10.16 Common Stock Purchase Agreement dated August 11, 1999 between NetSat
Express, Inc. and Globix Corporation (incorporated by reference to
Exhibit 10.16 of the Company's Annual Report on Form 10-K for the 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).
10.19 Negotiable Promissory Note, dated April 1, 2001, between the Registrant
and Donald Woodring (incorporated by reference to Exhibit 10.19 of the
Company's Annual Report on Form 10-K for the year ended June 30, 2001).
10.20 Employment Agreement, dated as of October 9, 2001, by and between Stephen
C. Yablonski and the Company (incorporated by reference to Exhibit 10.20
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.21 Employment Agreement, dated as of October 9, 2001, by and between Andrew
C. Melfi and the Company (incorporated by reference to Exhibit 10.21 of
the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.22 Employment Agreement, dated as of October 9, 2001, by and between Donald
G. Woodring and the Company (incorporated by reference to Exhibit 10.22
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.23 Employment Agreement, dated as of October 9, 2001, by and between Paul J.
Johnson and the Company (incorporated by reference to Exhibit 10.23 of
the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.24 Employment Agreement, dated as of October 9, 2001, by and between Paul
Eterno and the Company (incorporated by reference to Exhibit 10.24 of the
Company's Quarterly Report on Form 10-Q, for the quarter ended September
30, 2001).
10.25 Promissory Note Secured By Stock Pledge Agreement, dated September 4,
2001, by and between David E. Hershberg and the Company (incorporated by
reference to Exhibit 10.25 of the Company's Quarterly Report on Form
10-Q, for the quarter ended September 30, 2001).
10.26 Promissory Note Secured By Stock Pledge Agreement, dated September 4,
2001, by and between Kenneth A. Miller and the Company (incorporated by
reference to Exhibit 10.26 of the Company's Quarterly Report on Form
10-Q, for the quarter ended September 30, 2001).
27
10.27 Employment Agreement, dated as of January 25, 2002, by and between G.
Patrick Flemming and the Company (incorporated by reference to Exhibit
10.27 of the Company's Quarterly Report on Form 10-Q, for the quarter
ended December 31, 2001).
10.28** Settlement Agreement, dated as of October 1, 2002, by and between Loral
Skynet(R), a division of Loral SpaceCom Corporation and the Company
(filed herewith).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
* Confidential treatment granted for portions of this agreement.
** Application has been made to the Securities and Exchange Commission to seek
confidential treatment of certain provisions. Omitted material for which
confidential treatment has been requested has been filed with the Securities
and Exchange Commission.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on August 27, 2002 with respect to a notification of
termination of services from one of its major customers in the Middle
East.
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on October 29, 2002 with respect to an agreement
with one of its vendors to reduce its future satellite bandwidth
obligations.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBECOMM SYSTEMS INC.
----------------------
(Registrant)
Date: November 14, 2002 /s/ DAVID E. HERSHBERG
----------------------
David E. Hershberg
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2002 /s/ ANDREW C. MELFI
-------------------
Andrew C. Melfi
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
29
CERTIFICATION FOR FORM 10-Q
---------------------------
FOR PERIOD ENDED SEPTEMBER 30, 2002
-----------------------------------
I, David E. Hershberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Globecomm Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ DAVID E. HERSHBERG
----------------------
David E. Hershberg
Chairman of the Board and
Chief Executive Officer
30
CERTIFICATION FOR FORM 10-Q
---------------------------
FOR PERIOD ENDED SEPTEMBER 30, 2002
-----------------------------------
I, Andrew C. Melfi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Globecomm Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ ANDREW C. MELFI
-------------------
Andrew C. Melfi
Vice President, Chief Financial
Officer and Treasurer
31
Index to Exhibits:
Exhibit No.
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999).
3.2 Amended and Restated By-laws of the Registrant (incorporated by reference
to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws of the
Registrant defining rights of holders of Common Stock of the Registrant
(incorporated by reference to Exhibit 4.2 of the Registrant's
Registration Statement on Form S-1, File No. 333-22425 (the "Registration
Statement")).
10.1 Form of Registration Rights Agreement dated as of February 1997
(incorporated by reference to Exhibit 10.1 of the Registration
Statement).
10.2 Form of Registration Rights Agreement dated May 30, 1996 (incorporated by
reference to Exhibit 10.2 of the Registration Statement).
10.3 Form of Registration Rights Agreement dated December 31, 1996, as amended
(incorporated by reference to Exhibit 10.3 of the Registration
Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock
dated November 9, 1995 between the Registrant and Thomson-CSF
(incorporated by reference to Exhibit 10.4 of the Registration
Statement).
10.5 Investment Agreement dated February 12, 1996 by and between Shiron
Satellite Communications (1996) Ltd. and the Registrant (incorporated by
reference to Exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between
C-Grams Unlimited Inc. and the Registrant (incorporated by reference to
Exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding dated December 18, 1996 by and between NetSat
Express, Inc. and Applied Theory Communications, Inc. (incorporated by
reference to Exhibit 10.7 of the Registration Statement).
10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between
NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by
reference to Exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement dated as of January 27, 1997 between the Registrant
and David E. Hershberg (incorporated by reference to Exhibit 10.9 of the
Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the Registrant
and Kenneth A. Miller (incorporated by reference to Exhibit 10.10 of the
Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated
December 12, 1996 by and between Eaton Corporation and the Registrant
(incorporated by reference to Exhibit 10.13 of the Registration
Statement).
10.12 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 of
the Registration Statement).
10.13 Investment Agreement dated August 21, 1998 by and between McKibben
Communications LLC and the Registrant (incorporated by reference to
Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year
ended June 30, 1998).
10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit
99.8 of the S-8 Registration Statement).
32
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).
10.19 Negotiable Promissory Note, dated April 1, 2001, between the Registrant
and Donald Woodring (incorporated by reference to Exhibit 10.19 of the
Company's Annual Report on Form 10-K for the year ended June 30, 2001).
10.20 Employment Agreement, dated as of October 9, 2001, by and between
Stephen C. Yablonski and the Company (incorporated by reference to
Exhibit 10.20 of the Company's Quarterly Report on Form 10-Q, for the
quarter ended September 30, 2001).
10.21 Employment Agreement, dated as of October 9, 2001, by and between Andrew
C. Melfi and the Company (incorporated by reference to Exhibit 10.21 of
the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.22 Employment Agreement, dated as of October 9, 2001, by and between Donald
G. Woodring and the Company (incorporated by reference to Exhibit 10.22
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.23 Employment Agreement, dated as of October 9, 2001, by and between Paul
J. Johnson and the Company (incorporated by reference to Exhibit 10.23
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.24 Employment Agreement, dated as of October 9, 2001, by and between Paul
Eterno and the Company (incorporated by reference to Exhibit 10.24 of
the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.25 Promissory Note Secured By Stock Pledge Agreement, dated September 4,
2001, by and between David E. Hershberg and the Company (incorporated by
reference to Exhibit 10.25 of the Company's Quarterly Report on Form
10-Q, for the quarter ended September 30, 2001).
10.26 Promissory Note Secured By Stock Pledge Agreement, dated September 4,
2001, by and between Kenneth A. Miller and the Company (incorporated by
reference to Exhibit 10.26 of the Company's Quarterly Report on Form
10-Q, for the quarter ended September 30, 2001).
10.27 Employment Agreement, dated as of January 25, 2002, by and between G.
Patrick Flemming and the Company (incorporated by reference to Exhibit
10.27 of the Company's Quarterly Report on Form 10-Q, for the quarter
ended December 31, 2001).
10.28** Settlement Agreement, dated as of October 1, 2002, by and between Loral
Skynet(R), a division of Loral SpaceCom Corporation and the Company
(filed herewith).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
* Confidential treatment granted for portions of this agreement.
** Application has been made to the Securities and Exchange Commission to seek
confidential treatment of certain provisions. Omitted material for which
confidential treatment has been requested has been filed with the Securities
and Exchange Commission.
33