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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 March 31, 2003
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of May 12, 2003, there were 12,554,457 shares of the Registrant's
common stock, $0.001 par value, outstanding.
GLOBECOMM SYSTEMS INC.
Index to the March 31, 2003 Form 10-Q
Page
----
Part I -- Financial Information
Item 1. Consolidated Financial Statements ....................................................................3
Consolidated Balance Sheets -- As of March 31, 2003 (unaudited) and June 30, 2002.....................3
Consolidated Statements of Operations (unaudited) -- For the three and nine months ended
March 31, 2003 and 2002.............................................................................4
Consolidated Statement of Changes in Stockholders' Equity (unaudited) -- For the nine
months ended March 31, 2003.........................................................................5
Consolidated Statements of Cash Flows (unaudited) -- For the nine months ended
March 31, 2003 and 2002.............................................................................6
Notes to Consolidated Financial Statements (unaudited)................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........................................25
Item 4. Controls and Procedures..............................................................................26
Part II -- Other Information
Item 1. Legal Proceedings....................................................................................26
Item 2. Changes in Securities and Use of Proceeds............................................................26
Item 3. Defaults Upon Senior Securities......................................................................26
Item 4. Submission of Matters to a Vote of Security Holders..................................................26
Item 5. Other Information....................................................................................26
Item 6. Exhibits and Reports on Form 8-K.....................................................................26
Signatures...........................................................................................30
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30,
2003 2002
--------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $23,902 $38,708
Restricted cash 588 588
Accounts receivable, net 10,562 14,999
Inventories 11,658 8,594
Prepaid expenses and other current assets 848 1,239
Deferred income taxes 138 138
-------- ---------
Total current assets 47,696 64,266
Fixed assets, net 17,227 28,484
Goodwill 7,204 7,204
Other assets 1,446 343
-------- ---------
Total assets $73,573 $100,297
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,630 $12,918
Deferred revenues 5,862 3,541
Accrued payroll and related fringe benefits 1,296 957
Other accrued expenses 1,935 2,076
Deferred liabilities 636 600
Capital lease obligation -- 472
-------- ---------
Total current liabilities 19,359 20,564
Deferred liabilities, less current portion 1,383 3,060
Capital lease obligation, less current portion -- 9,633
Commitments and contingencies
Stockholders' equity:
Series A Junior Participating, shares authorized, issued and outstanding:
none at March 31, 2003 and June 30, 2002 -- --
Common stock, $.001 par value, 22,000,000 shares authorized, shares issued:
12,958,302 at March 31, 2003 and 12,933,062 at June 30, 2002 13 13
Additional paid-in capital 123,679 123,598
Accumulated deficit (68,338) (54,260)
Accumulated other comprehensive loss (75) (44)
Treasury stock, at cost, 403,845 shares at March 31, 2003 and 349,745 shares
at June 30, 2002 (2,448) (2,267)
-------- ---------
Total stockholders' equity 52,831 67,040
-------- ---------
Total liabilities and stockholders' equity $73,573 $100,297
======== =========
See accompanying notes.
3
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues from ground segment systems,
networks and enterprise solutions $ 9,231 $ 15,120 $ 29,249 $ 50,093
Revenues from data communications
services 3,261 5,172 10,733 17,066
-------- -------- -------- --------
Total revenues 12,492 20,292 39,982 67,159
-------- -------- -------- --------
Costs and operating expenses:
Costs from ground segment systems,
networks and enterprise solutions 8,967 13,166 27,446 44,640
Costs from data communications
services 3,697 6,698 14,470 20,219
Selling and marketing 1,513 1,581 4,760 4,802
Research and development 131 366 553 786
General and administrative 2,277 2,179 6,651 6,502
-------- -------- -------- --------
Total costs and operating expenses 16,585 23,990 53,880 76,949
-------- -------- -------- --------
Loss from operations (4,093) (3,698) (13,898) (9,790)
Other income (expense):
Interest income 73 190 359 867
Interest expense (76) (237) (539) (721)
-------- -------- -------- --------
Net loss $ (4,096) $ (3,745) $(14,078) $ (9,644)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.33) $ (0.29) $ (1.12) $ (0.76)
======== ======== ======== ========
Weighted-average shares used in the
calculation of basic and diluted net
loss per common share 12,557 12,753 12,569 12,730
======== ======== ======== ========
See accompanying notes
4
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2003
(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
Issuance of common stock in
connection with employee
stock purchase plan 25 81 81
Purchases of treasury stock 54 (181) (181)
Comprehensive loss:
Net loss (14,078) (14,078)
Gain from foreign currency
translation 25 25
Unrealized loss on
available-for-sale equity
securities (56) (56)
-------------
Total comprehensive loss (14,109)
----------------------------------------------------------------------------------------
Balance at March 31, 2003 12,958 $13 $123,679 $(68,338) $(75) 404 $(2,448) $52,831
========================================================================================
See accompanying notes.
5
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
2003 2002
-------- --------
OPERATING ACTIVITIES:
Net loss $(14,078) $(9,644)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,883 2,764
Provision for doubtful accounts 108 170
Gain on termination of capital lease (959) --
Stock compensation expense -- 55
Change in deferred liabilities (1,641) (150)
Changes in operating assets and liabilities:
Accounts receivable 4,377 3,510
Inventories (3,060) 5,595
Prepaid expenses and other current assets 335 (352)
Other assets (1,103) 47
Accounts payable (3,315) (4,468)
Deferred revenue 2,321 (293)
Accrued payroll and related fringe benefits 339 355
Other accrued expenses 130 (982)
-------- --------
Net cash used in operating activities (13,663) (3,393)
-------- --------
INVESTING ACTIVITIES:
Purchases of fixed assets (776) (650)
-------- --------
Net cash used in investing activities (776) (650)
-------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- 26
Proceeds from sale of common stock in connection with employee
stock purchase plan 81 154
Payments under capital lease (270) (318)
Purchases of treasury stock (181) (8)
-------- --------
Net cash used in financing activities (370) (146)
-------- --------
Effect of foreign currency translation on cash 3 (3)
-------- --------
Net decrease in cash and cash equivalents (14,806) (4,192)
Cash and cash equivalents at beginning of period 38,708 45,038
-------- --------
Cash and cash equivalents at end of period $23,902 $40,846
======== ========
See accompanying notes.
6
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(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 and nine months ended March 31, 2003, 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 statement 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
customer until installation and final acceptance is complete. The customer
generally becomes obligated to pay 70%
7
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 contract 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 (terminated in February
2003) and network operations expenses which consist primarily of costs
associated with the operation of the Network Operation Center (the "NOC"),
including depreciation, 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 from the buyback of the minority interests of
NetSat. In accordance with Statement of Financial Accounting Standards ("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 Company will perform this test in the fourth
quarter of fiscal 2003.
The net carrying value of goodwill is approximately $7,204,000, at
March 31, 2003 and June 30, 2002, which relates to the buyback of the minority
interests of NetSat.
8
Comprehensive loss
Comprehensive loss for the three and nine months ended March 31, 2003
of approximately $4,126,000 and $14,109,000, respectively, includes a foreign
currency translation (loss) gain of approximately ($17,000) and $25,000 and an
unrealized loss on available-for-sale equity securities of approximately $13,000
and $56,000 for the three and nine months ended March 31, 2003, respectively.
Comprehensive loss for the three and nine months ended March 31, 2002 of
approximately $3,788,000 and $9,627,000, respectively, includes a foreign
currency translation (loss) gain of approximately ($13,000) and $47,000, and an
unrealized loss on available-for-sale equity securities of approximately $30,000
for the three and nine months ended March 31, 2002, respectively.
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
nine months ended March 31, 2003 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 common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." Basic and diluted net loss per
common share is computed by dividing the net loss for the period by the
weighted-average number of common and dilutive equivalent shares outstanding for
the period. Common equivalent shares consist of the incremental common shares
issuable upon the conversion of preferred stock (using an if-converted method)
and 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 common share if their
effect is anti-dilutive. Diluted net loss per common share for the three and
nine months ended March 31, 2003 excludes the effect of approximately 100 and
1,600 stock options, respectively, as their effect would have been
anti-dilutive. Diluted net loss per common share for the three and nine months
ended March 31, 2002 excludes the effect of approximately 302,000 and 163,000
stock options, respectively, as their effect would have been anti-dilutive.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, JUNE 30,
2003 2002
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
Raw materials and component parts $957 $876
Work-in-progress 11,264 7,718
------- -------
12,221 8,594
Less progress payments under long-term contracts 563 --
------- -------
$11,658 $8,594
======= =======
4. FAIR VALUE DISCLOSURE OF STOCK OPTIONS
Interim pro-forma information regarding net loss and net loss per
common share is required by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, if the Company accounts for its stock
options granted under the intrinsic value method. The fair value of options
granted under the Company's 1997 Stock Incentive Plan was estimated at date of
grant using a Black-Scholes option pricing model.
9
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options under the Black-Scholes
option valuation model.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro-forma information is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ --------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2003 2002 2003 2002
---------- ----------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net loss $(4,096) $(3,745) $ (14,078) $ (9,644)
Pro-forma stock compensation expense (594) (763) (2,057) (2,181)
------- ------- --------- ----------
Pro-forma net loss $(4,690) $(4,508) $ (16,135) $ (11,825)
======= ======= ========= ==========
Reported basic and diluted net loss
per common share $ (0.33) $ (0.29) $ (1.12) $ (0.76)
======= ======= ========= ==========
Pro-forma basic and diluted net
loss per common share $ (0.37) $ (0.35) $ (1.28) $ (0.93)
======= ======= ========= ==========
5. 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 communications to developing
markets worldwide. NetSat also provides Internet access to customers who have
limited or no access to a terrestrial network infrastructure capable of
supporting the economical delivery of such services.
The Company's reportable segments are business units that offer
different products and services. The reportable segments are each managed
separately because they provide distinct products and services.
10
The following is the Company's business segment information for the
three and nine months ended March 31, 2003 and 2002 and as of March 31, 2003 and
June 30, 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Ground segment systems, networks and
enterprise solutions $ 9,231 $ 15,120 $ 29,249 $ 50,093
Data communications services 3,261 5,172 10,733 17,066
---------- ---------- ---------- ----------
Total revenues $ 12,492 $ 20,292 $ 39,982 $ 67,159
========== ========== ========== ==========
Loss from operations:
Ground segment systems, networks and
enterprise solutions $ (2,735) $ (1,477) $ (7,412) $ (4,103)
Data communications services (1,362) (2,224) (6,496) (5,696)
Interest income 73 190 359 867
Interest expense (76) (237) (539) (721)
Intercompany eliminations 4 3 10 9
---------- ---------- ---------- ----------
Net loss $ (4,096) $ (3,745) $ (14,078) $ (9,644)
========== ========== ========== ==========
Depreciation and amortization:
Ground segment systems, networks and
enterprise solutions $ 299 $ 351 $ 1,321 $ 1,243
Data communications services 404 461 1,572 1,530
Intercompany eliminations (4) (3) (10) (9)
---------- ---------- ---------- ----------
Total depreciation and amortization $ 699 $ 809 $ 2,883 $ 2,764
========== ========== ========== ==========
Expenditures for long-lived assets:
Ground segment systems, networks and
enterprise solutions $ 17 $ 51 $ 88 $ 349
Data communications services 224 186 728 301
Intercompany eliminations (1) - (40) --
---------- ---------- ---------- ----------
Total expenditures for long-lived assets $ 240 $ 237 $ 776 $ 650
========== ========== ========== ==========
MARCH 31, JUNE 30,
2003 2002
(UNAUDITED)
---------- ----------
(IN THOUSANDS)
Assets:
Ground segment systems, networks and
enterprise solutions $ 119,804 $ 123,484
Data communications services 9,870 20,106
Intercompany eliminations (56,101) (43,293)
---------- ----------
Total assets $ 73,573 $ 100,297
========== ==========
11
6. COMMITMENTS AND CONTINGENCIES
In February 2003, the Company reached an agreement with one of its
vendors, which reduced the Company's satellite bandwidth obligations. Under the
terms of this agreement, the Company paid a one-time termination fee of $0.6
million, assigned $4.6 million of future contract revenues to the vendor and
reduced the Company's future space segment obligations by $16.6 million. The
difference between the reduction of capital lease obligation of $9.8 million
and the reduction of net fixed assets of $8.9 million or $0.9 million less the
one-time termination fee of $0.6M was recorded as a deferred gain of $0.3
million. The gain is being deferred as the Company has guaranteed six months of
revenues totaling $0.3 million, assigned to the vendor. If the assigned
revenues are not paid to the vendor, the Company will be responsible to satisfy
the obligation. The deferred liability will be amortized into income monthly
when the guaranteed payments are satisfied.
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.
7. RELATED PARTY TRANSACTION
During January 2003, pursuant to a Letter Agreement (the "Agreement")
the Company consolidated the then outstanding loan and advances from a former
officer of the Company into a $321,000 promissory note (the "Note"). Under the
terms of the agreement the Company will forgive the outstanding principal and
interest amounts due on the Note in five annual installments beginning in
January 2004, subject to the terms of the Agreement.
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.
12
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 costs. 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 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
reduction of business levels, which is expected to continue to impact our
business and prospects for the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 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.
13
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.
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. Revisions 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 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 Company will perform
this test in the fourth quarter of fiscal 2003.
In assessing goodwill, which we will undertake in the fourth quarter of
fiscal 2003, we will 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.
14
RESULTS OF OPERATIONS
Three and Nine Months Ended March 31, 2003 and 2002
Revenues from Ground Segment Systems, Networks and Enterprise
Solutions. Revenues decreased by $5.9 million, or 38.9%, to $9.2 million for the
three months ended March 31, 2003 and decreased by $20.8 million, or 41.6%, to
$29.2 million for the nine months ended March 31, 2003, compared to $15.1
million and $50.1 million for the three and nine months ended March 31, 2002,
respectively. 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 nine months ended March 31, 2003 to continue to
adversely impact us.
Revenues from Data Communications Services. Revenues decreased by $1.9
million, or 36.9%, to $3.3 million for the three months ended March 31, 2003 and
decreased by $6.3 million, or 37.1%, to $10.7 million for the nine months ended
March 31, 2003, compared to $5.2 million and $17.1 million for the three and
nine months ended March 31, 2002, respectively. 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 where we have traditionally provided services,
coupled with the termination of services from our largest Middle East customer
in August 2002. During February 2003 and October 2002, pursuant to agreements
reached with two of our vendors, we assigned contracts with future revenues of
$36.2 million, which reduced our monthly recurring revenues by approximately
$0.4 million. We expect the trend in revenues that adversely affected our
results of operations for the nine months ended March 31, 2003 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 $4.2 million, or 31.9%, to $9.0 million for the three months ended March 31,
2003 and decreased by $17.2 million, or 38.5%, to $27.4 million for the nine
months ended March 31, 2003, compared to $13.2 million and $44.6 million for the
three and nine months ended March 31, 2002, respectively. The decrease is
attributable to the lower revenue base. Costs as a percentage of related
revenues increased to 97.1% and 93.8% for the three and nine months ended March
31, 2003, respectively, compared to 87.1% and 89.1% for the three and nine
months ended March 31, 2002, respectively. The increase was mainly attributable
to competitive margin pressure and cost overruns on a major project.
Costs from Data Communications Services. Costs from data communications
services decreased by $3.0 million, or 44.8%, to $3.7 million for the three
months ended March 31, 2003 and decreased by $5.7 million, or 28.4%, to $14.5
million for the nine months ended March 31, 2003 compared to $6.7 million and
$20.2 million for the three and nine months ended March 31, 2002, respectively.
Costs as a percentage of related revenues decreased to 113.4% for the three
months ended March 31, 2003 and increased to 134.8% for the nine months ended
March 31, 2003, compared to 129.5% and 118.5% for the three and nine months
ended March 31, 2002, respectively. The decrease for the three-month period is
primarily due to agreements reached with two of our vendors during February 2003
and October 2002, in which we significantly reduced our space segment
transponder costs and obligations. These agreements will continue to reduce our
future monthly space segment costs. The increase in the nine month period is
primarily due to a lower revenue base resulting from the assignment of $36.2
million in contract revenues, the termination of services from our largest
Middle East customer in August 2002 and the global economic slowdown in the
telecommunications industry.
Selling and Marketing. Selling and marketing expenses decreased by $0.1
million, or 4.3%, to $1.5 million for the three months ended March 31, 2003 and
decreased by less than $0.1 million, or 0.9%, to $4.8 million for the nine
months ended March 31, 2003, compared to $1.6 million and $4.8 million for the
three and nine months ended March 31, 2002, respectively. The decrease is
primarily due to reduced salary and salary related expenses, offset by one-time
severance costs associated with reductions in sales and marketing personnel. We
expect to experience some reduction in salary expenses, as the fourth quarter
will not be burdened with severance costs.
Research and Development. Research and development expenses decreased
by $0.2 million, or 64.2%, to $0.1 million for the three months ended March 31,
2003 and decreased by $0.2 million, or 29.6%, to $0.6 million for
15
the nine months ended March 31, 2003, compared to $0.4 million and $0.8
million for the three and nine months ended March 31, 2002, respectively. The
decrease is attributable to reduced internal development of monitoring and
control technologies. Additionally, for the nine months ended March 31, 2002 we
incurred one-time costs associated with the development of various initial
subsystems for solutions to be provided to a new customer.
General and Administrative. General and administrative expenses
increased by $0.1 million, or 4.5%, to $2.3 million for the three months ended
March 31, 2003 and increased by $0.1 million, or 2.3%, to $6.7 million, for the
nine months ended March 31, 2003, compared to $2.2 million and $6.5 million for
the comparable three and nine months ended March 31, 2002, respectively. The
increase is primarily due to an increase in legal expenses, mainly related to
pursuing available remedies to recover monies owed for services rendered and
liquidating damages associated with the termination of services from our largest
Middle East customer in August 2002 and an increase in insurance premiums based
on the current operating environment. General and administrative expenses as a
percentage of revenues for the three months ended March 31, 2003 increased to
18.2% compared to 10.7% for the three months ended March 31, 2002 and increased
for the nine months ended March 31, 2003 to 16.6% compared to 9.7% for the nine
months ended March 31, 2002, principally due to the decrease in our revenues.
Interest Income. Interest income decreased by $0.1 million, or 61.6%,
to $0.1 million for the three months ended March 31, 2003, compared to $0.2
million for the three months ended March 31, 2002, and decreased by $0.5
million, or 58.6%, to $0.4 million for the nine months ended March 31, 2003,
compared to $0.9 million for the nine months ended March 31, 2002. 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 March 31, 2003,
coupled with a decline in interest rates.
Interest Expense. Interest expense decreased by $0.2 million, or 67.9%,
to $0.1 million for the three months ended March 31, 2003, compared to $0.2
million for the three months ended March 31, 2002, and decreased by $0.2
million, or 25.2%, to $0.5 million for the nine months ended March 31, 2003,
compared to $0.7 million for the nine months ended March 31, 2002. The decreases
are the result of less interest paid on our capital lease obligation, which was
terminated in February 2003.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had working capital of $28.3 million, including
cash and cash equivalents of $23.9 million, restricted cash of $0.6 million, net
accounts receivable of $10.6 million, inventories of $11.7 million, prepaid
expenses and other current assets of $0.8 million and deferred income taxes of
$0.1 million, offset by $9.6 million in accounts payable, $5.9 million in
deferred revenues and $3.9 million in accrued expenses and other current
liabilities.
Net cash used in operating activities during the nine months ended
March 31, 2003 was $13.7 million, which primarily related to the net loss of
$14.1 million, a decrease in accounts payable of $3.3 million relating to the
reduction in business levels, an increase in inventory of $3.1 million from
materials purchased for anticipated fourth quarter shipments, and a decrease in
deferred liabilities of $1.6 million associated with agreements reached in
February 2003 and October 2002 with two of our vendors, offset by a decrease in
accounts receivable of $4.4 million due to collections on certain contract
billings and the reduction in revenues, depreciation and amortization expense of
$2.9 million related primarily to the network operation center and one satellite
space segment transponder (terminated in February 2003) and a $2.3 million
increase in deferred revenues due to timing differences between project billings
and revenue recognition milestones resulting from specific customer contracts.
We currently have a $5.0 million working capital line of credit, which
bears interest at the prime rate (4.25% at March 31, 2003) and is collateralized
by a first security interest on most of our assets. On April 11, 2003 the credit
facility was renewed for an additional three months while the Company works to
establish a new bank agreement. The credit facility, which expires on July 10,
2003, contains certain financial covenants, with which we were in compliance at
March 31, 2003. As of March 31, 2003, no amounts were outstanding under this
credit facility, however, there were outstanding standby letters of credit, bid
proposals and performance guarantees of approximately $2.0 million, which were
applied against and reduced the amounts available under the working capital line
of credit. We cannot assure you that we will be able to further renew the credit
facility or as to the amount or terms of any future facility.
16
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 March 31, 2004 are
approximately $6.7 million.
At March 31, 2003 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
Operating leases $27,662 $ 6,650 $12,183 $ 7,861 $ 968
------- ------- ------- ------- -------
Total contractual obligations $27,662 $ 6,650 $12,183 $ 7,861 $ 968
OTHER COMMERCIAL COMMITMENTS
Standby letters of credit $ 1,059 $ 922 $ 12 $ 125 --
Performance guarantees 974 974 -- -- --
------- ------- ------- ------- -------
Total commercial commitments $ 2,033 $ 1,896 $ 12 $ 125 --
======= ======= ======= ======= =======
The above operating lease obligations include two contracts we entered
into with a vendor in fiscal 2001 for satellite space segment services on
satellites which were scheduled to be launched in late 2002 and operational by
March 2003, for a total value of approximately $6.0 million. The vendor has
experienced significant delays in the planned launch and operational dates for
the satellites. As of result of these delays, we maintain that we have a right
to terminate the contracts without cost and have provided notification of such
termination. The vendor has denied our assertion that we have a right to
terminate the contracts without cost. If our position is sustained, the above
operating lease commitment would be reduced by approximately $6.0 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 256,100 shares for $1.4 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 and additional working capital requirements for work
in progress for new orders as obtained. Our expectation is that working capital
requirements will ease as shipments are made on new orders, although we cannot
assure you as to the timing and amount of new orders.
NetSat has had, and we expect it will continue to have, working capital
requirements, which have, and will, put increased pressure on our capital
resources. We have implemented strategies to reduce the drain on our resources
caused by NetSat's losses. While we will continue to seek additional means to
reduce NetSat's cost structure, we can only achieve our goal of improving
NetSat's working capital by generating additional revenues. We cannot assure you
that we will successfully increase NetSat's revenue base.
Our future capital requirements will depend upon many factors,
including the success of our marketing efforts in the ground segment systems,
networks, and data communications services business, the nature and timing of
customer orders and the extent to which we must conduct research and development
efforts internally. Based on current plans, we believe that our existing capital
resources will be sufficient to meet working capital requirements through March
31, 2004. However, we cannot assure you that there will be no unforeseen events
or circumstances that would consume available resources significantly before
that time. For example, future events occurring in response to the war with
Iraq, or in connection with a war, 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. Unexpected events negatively impacting international commerce, like
the current SARS epidemic, could defer our ability to close contracts with
international customers. 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
17
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 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 $14.1 million during the nine months
ended March 31, 2003, $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 March 31,
2003, our accumulated deficit was approximately $68.3 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 data 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 return from its
depressed level, 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 and an oversupply of
communications capacity. 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 a number of
risks inherent in conducting our business internationally, including:
o general political and economic instability in international
markets, including the war in Iraq, 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;
18
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 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 nine months ended March 31, 2003. As of March 31, 2003, its future
revenues will be reduced by $33.5 million based on customer contracts assigned
to vendors pursuant to settlement agreements reached in February 2003 and
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 agreements reached with two of the Company's vendors in February 2003 and
October 2002, which modified and reduced the Company's satellite 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.
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, including the war in Iraq;
o the length of time needed to initiate and complete customer
contracts;
o the demand for and acceptance of our existing products and
services;
19
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 adversely impacted and may
continue to adversely impact our quarterly results.
Accordingly, you should not rely on quarter-to-quarter comparisons of
our results of operations as an indication of our future performance. It is
possible that in future periods our results of operations may be below the
expectations of public market analysts and investors, which could cause the
trading price of our common stock to decline.
OUR MARKETS ARE HIGHLY COMPETITIVE AND WE HAVE MANY ESTABLISHED COMPETITORS, AND
WE MAY LOSE MARKET SHARE AS A RESULT.
The markets in which we operate are highly competitive and this
competition could harm our ability to sell our products and services on prices
and terms favorable to us. Our primary competitors in the satellite ground
segment and networks 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.
20
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 March
31, 2004. 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 continues to have cash requirements,
which may continue in the future. We cannot assure you that we will be able to
further renew our credit facility or as to the amount or terms of any future
facility. 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 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.
A LIMITED NUMBER OF CUSTOMER CONTRACTS ACCOUNT FOR A SIGNIFICANT PORTION 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
revenue. Specifically, we have agreements with six customers to provide
equipment and services, from which we expect to generate a significant portion
of our revenues. If any of these customers is unable to implement its business
plan, the market for its services declines, or if all or any of the customers
modifies or terminates its agreement with us, and we are unable to replace these
contracts, our results of operations, business and financial condition would be
materially 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.
21
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, Stephen Yablonski and Donald Woodring. The employment of any of
our key personnel could cease at any time.
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 three patents in the United States, one
for remote access to the Internet using satellites, another for satellite
communication with automatic frequency control, and, most recently, we have been
granted a patent concerning a monitor and control system for satellite
communications networks and the like. We currently have one Patent Cooperation
Treaty ("PCT") patent application pending for implementing facsimile (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
22
customer requirements, our products and services would become non-competitive
and obsolete, which would harm our business, results of operations and financial
condition.
WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE OUR SOLE OR A LIMITED SOURCE OF
SUPPLY, AND THE LOSS OF THESE SUPPLIERS WOULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We currently obtain most of our critical components and services from
single or limited sources and generally do not maintain significant inventories
or have long-term or exclusive supply contracts with our source vendors. We have
from time to time experienced delays in receiving products from vendors due to
lack of availability, quality control or manufacturing problems, shortages of
materials or components or product design difficulties. We may experience delays
in the future and replacement services or products may not be available when
needed, or at all, or at commercially reasonable rates or prices. If we were to
change some of our vendors, we would have to perform additional testing
procedures on the service or product supplied by the new vendors, which would
prevent or delay the availability of our products and services. Furthermore, our
costs could increase significantly if we need to change vendors. If we do not
get timely deliveries of quality products and services, or if there are
significant increases in the prices of these products or services, it could have
a material adverse effect on our business, results of operations and financial
condition.
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.
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
23
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. In addition, prior to a third party acquisition of us, we would
need to seek approval from the FCC to transfer the radio transmission licenses
we have obtained to the third party upon the consummation of the acquisition.
However, we cannot assure you that the FCC will permit the transfer of these
licenses. These approvals may make it more difficult for a third party to
acquire us.
FOREIGN OWNERSHIP
We may, in the future, be required to seek FCC approval for foreign
ownership if we operate as a common carrier and foreign 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 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 such as 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 of
existing laws governing issues including property ownership, copyrights and
other intellectual property issues, taxation, libel, court jurisdiction and
personal privacy to the Internet 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.
24
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 in 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 nine months ended March
31, 2003 and the fiscal year ended June 30, 2002, we had no such foreign
currency forward contracts.
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. Under our current positions, we do not use interest rate
derivative instruments to manage exposure to interest rate changes.
25
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 of 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, as amended, 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. To that end, NetSat initiated the
arbitration process in December 2002 when its outside counsel
prepared and served NetSat's Notice of Arbitration and Statement
of Claim on the terminated Middle East customer. NetSat and its
customer were unable to agree on an arbitrator and, as per the
rules of arbitration stated in the contract, an arbitrator will
be selected by an independent organization. On April 25, 2003,
the International Chamber of Commerce nominated three (3)
candidates and a decision on the final arbitrator is expected by
the end of May 2003.
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
26
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 October 9, 2001 by and between David
E. Hershberg and the Company (incorporated by reference to Exhibit 10.9
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.10 Employment Agreement dated as of October 9, 2001 by and between Kenneth
A. Miller and the Company (incorporated by reference to Exhibit 10.10
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
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).
27
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).
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).
28
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
(incorporated by reference to Exhibit 10.28 of the Company's Quarterly
Report on Form 10-Q, for the quarter ended September 30, 2002).
10.29 Separation Agreement and General Release, dated as of January 22, 2003,
by and between G. Patrick Flemming and the Company (incorporated by
reference to Exhibit 10.29 of the Company's Quarterly Report on Form
10-Q, for the quarter ended December 31, 2002).
10.30 Letter Agreement, dated as of January 31, 2003, by and between Donald
G. Woodring and the Company (incorporated by reference to Exhibit 10.30
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
December 31, 2002).
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.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities
and Exchange Commission on May 14, 2003 with respect to its fiscal
2003 third quarter and nine-month financial results.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBECOMM SYSTEMS INC.
----------------------
(Registrant)
Date: May 15, 2003 /s/ DAVID E. HERSHBERG
----------------------
David E. Hershberg
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2003 /s/ ANDREW C. MELFI
-------------------
Andrew C. Melfi
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
30
CERTIFICATION FOR FORM 10-Q
FOR PERIOD ENDED MARCH 31, 2003
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: May 15, 2003 /s/ DAVID E. HERSHBERG
----------------------
David E. Hershberg
Chairman of the Board and
Chief Executive Officer
31
CERTIFICATION FOR FORM 10-Q
FOR PERIOD ENDED MARCH 31, 2003
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: May 15, 2003 /s/ ANDREW C. MELFI
-------------------
Andrew C. Melfi
Vice President, Chief Financial
Officer and Treasurer
32
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 October 9, 2001 by and between David
E. Hershberg and the Company (incorporated by reference to Exhibit 10.9
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
10.10 Employment Agreement dated as of October 9, 2001 by and between Kenneth
A. Miller and the Company (incorporated by reference to Exhibit 10.10
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 2001).
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).
33
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
(incorporated by reference to Exhibit 10.28 of the Company's Quarterly
Report on Form 10-Q, for the quarter ended September 30, 2002).
10.29 Separation Agreement and General Release, dated as of January 22, 2003,
by and between G. Patrick Flemming and the Company (incorporated by
reference to Exhibit 10.29 of the Company's Quarterly Report on Form
10-Q, for the quarter ended December 31, 2002).
10.30 Letter Agreement, dated as of January 31, 2003, by and between Donald
G. Woodring and the Company (incorporated by reference to Exhibit 10.30
of the Company's Quarterly Report on Form 10-Q, for the quarter ended
December 31, 2002).
34
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.
35