Item 1.
Business
Overview
Globecomm Systems Inc., or Globecomm, is a leading global provider of satellite-based managed network solutions. Employing our expertise in emerging communication technologies we are able to offer a comprehensive suite of system integration, system products, and network services enabling a complete end-to-end solution for our customers. We believe our integrated approach of in-house design and engineering expertise combined with a world-class global network and our 24 by 7 network operating centers provides us a unique competitive advantage. We are now taking this value proposition to selective vertical markets, including government, wireless, media, enterprise and maritime.
As a network solution provider we leverage our global network to provide customers managed access services to the United States Internet backbone, video content, the public switched telephone network or their corporate headquarters or government offices. We currently have customers for which we are providing such services in the United States, Europe, South America, Africa, the Middle East and Asia.
Globally, communications networks are moving rapidly toward Internet protocol-based networks and services based on the lower cost of implementation and the flexibility these networks offer. Satellite-based communications complement this trend as many of the regions in the world lack the “next generation” terrestrial networks required to accommodate the rapid and reliable transmission of the vast amounts of information underlying the growth in traffic. Even in a well connected area of the globe, satellite communications offer a diverse network path in support of disaster recovery and network augmentation.
We were incorporated in Delaware in August 1994. Our Globecomm Systems division provides our infrastructure solutions. Our services are principally provided by our wholly-owned subsidiaries, Globecomm Network Services Corp. (“GNSC”), a Delaware corporation, and Globecomm Services Maryland LLC (“GSM”), a Delaware limited liability company. In July 2008, we formed Cachendo LLC, (“Cachendo”) a wholly-owned Delaware limited liability company, to operate our professional engineering services business. In fiscal 2009, we added two companies to our services business through the acquisition of B.V. Mach 6 (“Mach 6”), a Netherlands company headquartered near Amsterdam, and Telaurus Communications LLC (“Telaurus”), a Delaware limited liability company, based in New Jersey. In fiscal 2010, we added two companies to our services business through the acquisition of Carrier to Carrier Telecom B.V. (“C2C”) and Evocomm Communications Limited (“Evocomm”).
Growth Strategy
Our growth strategy continues to focus on the development of recurring revenue streams by leveraging our engineering expertise and our global network to provide IP networking solutions for mission critical applications. Our strong service platform foundation allows us to continue to develop additional value-added solutions for our core customers. We will continue to mature this global platform as we integrate our new acquisitions and expand the reach of our managed network solution offerings.
We have supplemented our organic growth through acquisitions. With the recent completion of the C2C and Evocomm acquisitions we have broadened our solutions offerings, enhanced our position within the markets that we currently service and positioned ourselves to penetrate new markets. We believe that the satellite services market is fragmented and that there are, and will be, additional acquisition opportunities that may meet our acquisition criteria. We plan to continue to employ a selective and disciplined approach when evaluating acquisition opportunities.
We have focused our efforts toward increasing market share through vertical markets with the creation of value-added service solutions in emerging market niches. This has been supplemented by an ongoing effort to identify and develop select research and development projects and network components into marketable shared-service “hosted” platforms. With the natural cycle of technology advancement and the
continued convergence of communications applications to Internet protocol, we remain excited about the new addressable market opportunities.
Solution Offerings
We provide our managed network solutions business through two business segments. Our services segment, through GNSC, GSM, Cachendo, Melat, Mach 6, Telaurus, C2C and Evocomm, provides satellite communication services capabilities, which include our Access, Hosted and Lifecycle Support service lines. Our infrastructure segment, through Globecomm Systems Inc., is engaged in the design, assembly and installation of ground segment systems and networks, which includes both our pre-engineered products and our custom systems design and integration product lines.
Services Solution Overview
We work to continually evolve our service platforms to meet the communication needs of our customers. Our customer base has grown as our service and customer support have proven the value of outsourced services. Our strategy includes offering flexible service-based solutions with fixed monthly pricing in order to make it easy for our customers to support an outsourcing decision.
Our global network is comprised of three teleport or data center facilities, our Kenneth A. Miller International Teleport, located in Hauppauge, New York, our GSM facility located in Laurel, Maryland and our new facility the C2C teleport in the Netherlands, added through the recent C2C acquisition. These facilities are interconnected via terrestrial capacity and are used to transport signals to serve customers in Latin America, the United States, Canada, Europe, the Middle East, Africa and Asia. Our facilities are designed to meet stringent requirements for high-speed data communications and leverage redundant critical systems and uninterruptible power supplies with back-up power generation to ensure high reliability and availability.
We also lease facility services in Los Angeles, Hong Kong, the United Kingdom, the Netherlands and Poland to transport signals to other areas of the world. We lease satellite and terrestrial capacity to meet the bandwidth needs of our customers. We continue to expand our high-capacity fiber connections between facilities and public Point of Presence (POP) locations to provide higher throughput and easier accessibility to our customer networks.
We have built and staff a centralized global network operation center, or NOC, at our Hauppauge, New York facility to provide our centralized global services. We also have regional NOCs in Maryland and the Netherlands. The NOCs operate twenty-four hours per day, seven days per week, or 24/7, to monitor customer networks, provide help desk services, respond to customer inquiries and initiate new services. The NOCs provide on a 24/7 basis technology specific engineers to assist our customers with troubleshooting and problem resolution. We utilize our internally developed AxxSys Orion network management systems to monitor and control satellite communication equipment and satellite terminal networks at our NOCs. At our GSM facility in Laurel, Maryland and our Mach 6 and C2C facilities in the Netherlands, we have regional data centers that provide 24/7 localized technical support to our customers. We also leverage these facilities to dispatch technical personnel to support our lifecycle services offering.
Our service-based offerings are continuously being fine-tuned partly through customer-funded programs and partly through internally funded programs. Our goal is to create high value customized solutions for our customers that are based on standardized building blocks, or service lines. The following service lines are the focal point of our evolving strategy.
Access Service Line
Our core service line, Access, supports transport and connectivity for video, voice and data services globally. The Access service line consists of specific products to address this diverse marketplace. The Access business is currently the largest component of the services revenue mix. The recent acquisitions, along with the integration of GSM, have expanded the Access business. Access services are driven by leveraging our core service communication infrastructure to create the standard product sets within our
Access service line. As part of our expansion, we look to maximize utilization and drive growth with the Access product sets described below.
Access Plus utilizes a combination of terrestrial connectivity, satellite bandwidth and our teleports, along with a variety of remote very small aperture terminal, or VSATs, or a network of VSATs, to provide end-to-end connectivity. Our VSAT hubs, at our teleports coupled with the extension and expansion of our terrestrial backbone network to these locations provide us with global VSAT coverage. This coverage and flexibility provide a wide range of services encompassing fundamental satellite technologies, including:
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Single Channel per Carrier (SCPC)
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Multiple Channel per Carrier (MCPC)
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Time Division Multiple Access (iDirect)
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Deterministic SCPC (Vipersat)
Access Video Backhaul based upon Access Plus, is specifically developed for video-centric delivery. The primary technology enabling this service is the Digital Video Broadcast standard (DVB/DVB-S2). Our Access Video Backhaul product leverages the core service elements with a greater concentration on maximizing video throughput while ensuring the highest service availability into potentially residential-grade reception systems or to cable head ends. The current evolution of IP-centric video delivery will continue to shape new technologies in this arena. The current adoption of H.264 and MPEG-4 technologies has been slow, though they continue to gain ground. As the industry evolves, we will continue to position the Access Video Backhaul product within the market to offer the greatest amount of value to the end user. Specifically, we look to retain the current platform in place and continue to offer services with only gradual adaptation of new technology to ensure a broad market access until end-users have widely adopted the new technology.
Access Voice Termination is also based upon the Access Plus product and is specifically designed for voice trunking services. We are licensed by the FCC to deliver high quality, toll-based termination of voice calls while leveraging high compression and highly reliable connectivity between the Globecomm network and the voice origination network. This differentiates us from many low cost providers. In addition, we often take advantage of utilizing pre-existing links, which allows us to position the Access Voice Termination product as extremely competitive alongside high value voice over IP providers while delivering a superior service in terms of features (caller ID, signaling pass through, etc.) and overall quality.
Access Bandwidth is one of the largest elements of our cost of doing business, but it is also an asset which we utilize as a source of revenue. After combining resources with our recent acquisitions, we lease close to two GHz of total satellite bandwidth across the globe for different frequencies, coverage areas and polarizations. Given our increased demand, we are able to leverage our increased buying power in the satellite provider market, and are often capable of procuring bandwidth at very competitive rates. Accordingly, we leverage our current inventory of capacity or resell our provider’s capacity. We continually attempt to optimize and consolidate bandwidth to ensure attractive margins while being cost-competitive compared to our competitors and competing mediums. This service is a derivative of our base Access line and affords us the ability to provide long-term satellite bandwidth resale opportunities with minimal overall risk.
Access Maritime is technically similar to our Access Plus line but is customized for the maritime industry by supporting traditional narrowband services as provided by Telaurus and Evosat. This product provides vessel operators with traditional IP services, including; e-mail, Internet, video streaming, virtual private network and voice over IP applications. Access Maritime incorporates Inmarsat and Iridium services to provide a full feature set of solutions to the maritime market. We will look to capitalize on the convergence of Geo-stationary satellite, Inmarsat, and Iridium technologies to provide a single ubiquitous service to the maritime market that will help drive higher IP throughput at a lower cost to the vessel operator.
Access Hardware products range from VSAT terminals to IP-centric routing hardware and co-location hardware. Frequently, our Access Hardware products are shipped, installed and maintained globally. The ability to offer a complete solution through the Access Hardware product line thus enables the delivery of our services on a global level. Our Access Hardware product line provides us with the opportunity to offer lifecycle support services for this equipment.
AccessX®,
our new X-Band based service, again is technically similar to our Access Plus line, though customized for the military market, operates on commercial X-Band frequencies. Only recently have commercial X-Band frequencies been made available for use. We can offer X-Band services through our partnership with our Poland teleport operator. We have successfully tested and operated on XTAR and Paradigm X-Band fleets into our TomCat®
product. We are one of the only providers that manufacture microsat terminals and can provide the service into the terminals it supplies via our Access X®
service offering.
Overall, our Access service line continues to offer us the ability to grow our business. In addition to the growth that is offered through this line, the Access products, when considered with our customers drive to outsource their entire networks, is one of the prime mechanisms that has driven our Lifecycle Support service line as a separate yet integral suite of services.
Hosted Service Line
Our Hosted service line is based on creating scalable service offerings around complex and typically capital intensive technologies to allow service operators to expand their offerings while sharing the high cost of complex networks across multiple customers. This approach has allowed us to invest, develop, and capitalize in new communication technologies through our customers service needs. Our hosted products are currently positioned to address the needs of the enterprise, media and wireless vertical markets.
Hosted Cellular allows our customers the ability to outsource their switching services through a full-featured hosted mobile switching center for GSM/UMTS and CDMA/EVDO technologies. The target customer base includes hundreds of small to mid-sized cellular operators in North America, emerging cellular operators globally and large international operators extending their coverage and/or meeting Universal Services Obligations. This particular product is driven by leveraging our core service elements, including:
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Our GSM-UMTS/HSPA Switching/Core Platform
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Our CDMA-EVDO Switching/Core Platform
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Domestic and international connectivity for voice, data and internet
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Our network of Tier 1 IP terrestrial providers at our teleport locations and the interconnectivity between our teleport facilities
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Our large pool of diverse satellite bandwidth coverage, frequencies and providers
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Our centralized global NOC
The hosted value proposition is focused on creating alternative, cost-effective solutions to establish and/or grow cellular networks while delivering a compelling return on investment with lower capital requirements and operating expenses. In some cases, the hosted model represents the only viable financial model. The solution provides a cost-effective solution to introduce new services and technologies to an existing network (2G to 3G migration, SMS, MMS, etc.) and an affordable solution to deliver cellular services to unserved areas while meeting government-imposed Universal Services Obligations. Lastly, the solution provides an accepted and “trusted” source where large, established cellular operators are comfortable that its roaming customers will interoperate with our hosted customers and are paid under their respective roaming agreements.
We house our mobile switching center in our Kenneth A. Miller International Teleport. The switching systems are part of a complete central office facility that provides all the systems and services required
to support a cellular operator. Our satellite solution incorporates mobile signaling but keeps voice traffic off the satellite, which minimizes operational cost and optimizes quality of service for local calling, and allows remote geographic areas to join the GSM network with a small investment in base stations and VSATs.
Our Ericsson GSM/UMTS Switching Core (“Core”) positions us to expand this business. The Core will provide a full featured hosted GSM/UMTS (2G/3G) platform to scale the hosted business in North America and internationally with the ability to migrate to LTE (4G) in the future.
Hosted Video minimizes customer capital and operating expenditures and is positioned to address the needs of the enterprise and media market verticals. A key differentiator for us in providing high quality networked service is the ability to leverage our facility in Hauppauge, New York, allowing for outstanding satellite and terrestrial connectivity. This product includes both the hardware for hosting the services and the software platforms for customers to securely publish, process and distribute their content. This solution also allows viewers to interact with the content and provides stakeholders with valuable viewership reporting. The capabilities for our Hosted Video product include:
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Publishing platform for hosting of Video On Demand content
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Media processing infrastructure for the transcoding of live and on-demand content for viewing across hybrid networks and for viewing on televisions, computers and mobile devices
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Security platforms to ensure secure content delivery and digital rights management across diverse networks
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Streaming media platform for delivery across hybrid network topologies
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Interactive platform allowing viewers to interact with live presenters and on-demand content
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Administrative platform providing customers with back office control and reporting
Lifecycle Support Service Line
Our Lifecycle support service line is an all encompassing service that supports Access and Hosted products across the globe. These services typically include installation, network monitoring, help desk, maintenance and professional engineering services. We are able to offer these lifecycle support products by leveraging our facilities infrastructure, including our teleports, our NOCs and our data centers, as well as our personnel and network of skilled technicians. We have government cleared personnel as well as commercial personnel across the globe supporting our Lifecycle support services today. In addition, we have global maintenance partners that provide us access to skilled technicians worldwide that allow us to quickly expand and contract our workforce globally. We provide the following products on either a stand-alone basis, or bundled with other service lines or infrastructure solutions.
Network Monitoring and Help Desk solutions provide 24/7 monitoring of satellite and terrestrial network systems and networks. Status and alarm monitoring coupled with our help desk services provide our customers with the ability to outsource monitoring of their networks. We provide customers with network troubleshooting and problem resolution support with escalation to technical resources personnel to address problems requiring detailed technical knowledge of equipment, systems and/or networking. We utilize a remedy-based trouble ticket system to track problems through conclusion. Customized reports are issued by our help desk to meet our customers’ requirements.
Installation and Maintenance solutions provide installation and maintenance services of satellite and terrestrial infrastructure at customer locations anywhere in the world. We have an established worldwide network of field technicians, consisting of both employees and contractors, to provide on-site services for customer networks. These technicians enable us to provide cost-effective, quick-response services for installation and required maintenance.
Professional Engineering solutions provide engineering expertise and hands-on support for co-located equipment and engineering and design support for proposal creation and network architecture design. We also provide professional engineering services for customers who need our engineering specialists and program managers to complement their internal staff. Our professional engineering services are primarily provided by Cachendo. Cachendo acts as a trusted advisor to our government and commercial clients by providing end-to-end technology consulting.
Our Lifecycle Support products are composed of four distinct phases: design, installation, maintenance, and customer service. This approach orchestrates the alignment of business and technical requirements at every phase.
Design - During this phase, we work with our customers to develop a comprehensive detailed design that meets their current business and technical requirements and incorporates specifications to support availability, reliability, security, scalability and performance. Custom solutions are created to meet the customers’ unique requirements to enable integration with their existing network infrastructure. A variety of plans are developed during the design phase to guide activities such as configuring and testing connectivity, deploying and commissioning the proposed system, migrating network services, demonstrating network functionality and validating network operation.
Installation - Our global network of field technicians provides on-site, cost-effective, quick-response services for installation and required maintenance. Technicians are certified based on their skills. We have amassed a database of technicians that support network operations ranging from a simple VSAT to a complex hybrid network with IP networking responsibility across the globe.
Maintenance - Our full-service maintenance package provides customers with complete coverage in an economical, convenient and timely manner, all for a fixed monthly fee per location. With the full-service maintenance approach, we assume all responsibility for the network, including stocking a spares pool and restoring downlink systems to working order. Our maintenance service process involves remote troubleshooting at our NOC, followed up by an overnight shipment of a replacement item to the site in question. The field installation crew would also be dispatched and arrive on location at the time when the spare item has been received.
Customer Service - Lifecycle support services would not be complete without customer care and improvement. Customer service is an integral part of our general business model, though it is most visible in our Lifecycle support service. From the point of view of the engineering effort in the overall sales process, customer service plays an important role in our ability to generate future business.
Infrastructure Solutions Overview
Our infrastructure solutions consist of the design, engineering and installation of ground segment systems and networks, which are deployed in communications and media delivery networks for the government, media, wireless and enterprise verticals. We combine our expert engineering and design capabilities with state-of-the-art technologies and products to provide solutions for building and maintaining satellite earth stations, uplink centers, and media broadcast centers and Internet protocol-based, or IP, communication networks. In the case of complex IP-based networks, our infrastructure solutions support a wide range of network applications and facilitate “quadruple play” services, comprised of video, data, voice and wireless communications.
We offer complete turn-key solutions providing system architecture and design, equipment rack and cable design and integration, site layout and design, all required civil works, power systems and installation and commissioning. Our experienced team offers all levels of training, staff augmentation and comprehensive lifecycle support.
Pre-Engineered Products
A key component of our infrastructure solutions is our product line of pre-engineered fixed and mobile/transportable satellite terminals and software-based network management systems, which are
marketed under the Summittm,
Explorertm
and AxxSys®
Orion brands. These product solutions are designed to address the government and commercial marketplace. Summit fixed satellite terminals have antenna apertures ranging from sub-meter to 21 meters in diameter using pre-engineered building blocks that assure high reliability and rapid response. Explorer mobile/transportable satellite terminals have antenna apertures ranging from sub-meter to 4 meters in diameter using highly integrated electronics and mechanical packaging techniques in order to provide ease of transport, light weight, small in size at a low cost. The AxxSys network management systems provides the capability to efficiently and securely manage, monitor and control small to large scale networks. A brief description of each product line is provided below:
Summit Product Line - Fixed Satellite Terminals
Summit fixed earth station antennas come in configurations ranging from sub-meter up to Standard A, customized for each installation from a field-proven set of blocks that provides high reliability satcom and fast turn-up at a very competitive price. Summit earth station antennas include all satcom electronics (L through Ka-band and all intermediate frequencies) needed to meet the customer’s requirements for transmit, receive and interface to terrestrial networks, either integrated into the antenna or within a separate shelter or building. With all products we include complete system documentation along with our commitment to provision into service.
Explorer Product Line - Transportable Satellite Terminals
Explorer satellite terminals are custom-configured for each customer’s requirements based on pre-engineered building block components with proven mission critical service in the field. The result is a perfect mix of high performance at an affordable cost. The product has integrated electronics for L, C, X, Ku and Ka bands which are suited for a wide range of military, institutional, news gathering, enterprise, disaster recovery and other applications. This product is available in sizes ranging from sub-meter up to 4 meters. Depending on the requirements, they can be configured as vehicle-mounted, trailer-mounted, transportable or fly-away terminals.
These products provide cost-effective, two-way communications in locations where traditional communication infrastructure is inadequate or nonexistent.
With the launch of the new WGS and XTAR satellites, we are focusing efforts on upgrading the existing auto-acquisition products for both X and Ka band. Under a NATO contract we are developing a new X band vehicle and trailer mounted satellite terminal solution. This past year we formally launched a new X band Micro 45 cm satellite terminal, the TomCattm
X band product. Recently, we completed government certification of our Ka band 1.2 Meter Auto-Explorer for use on WGS satellites. The explorer product line includes a range of terminals highlighted below:
TomCattm
X Band is a light-weight, man-transportable X band satellite communications system that sets-up and can be operational within minutes. The TomCattm
weighs just 35 pounds and can reach downlink capacity of up to 3Mbps and uplink capacity of 1.5Mbps. The terminal was designed to address the growing use of the U.S. military’s new wideband global satellite system for use in tactical environments and other rapid response applications.
Auto-Explorer 0.77/1.0/1.2 Meter Ku Band terminals were designed for ease of operation by non-satellite personnel by incorporating automatic satellite acquisition technology. These satellite terminals include an integrated electronics package designed to incorporate the radio frequency, monitor and control and satellite modem components into an outdoor mounted package.
Auto-Explorer 1.2 Meter Ka Band is a self-contained, portable, auto-acquisition terminal for Ka band satcom applications, specifically tailored for the government’s WGS constellation of satellites.
Auto-Explorer 1.2 Meter X Band is an auto-aligning flyaway that brings the benefits of a self-contained, portable, auto-acquisition satellite terminal to military and government users accessing X band satellites.
Explorer TES is a trailer mounted transportable earth station antenna that serves as a primary earth station or remote hub for the most demanding applications.
GlobalStorm 2400/3700 is a trailer based earth station antenna systems are utilized for field communications, featuring 2.4 meter and 3.7 meter antennas which are large enough for difficult links.
Explorer Pallet is a vehicle-mounted transportable satellite communication pallet antenna providing single or multi-band terminals for operation on X band military satellites as well as C, Ku and Ka band commercial satellites.
AxxSys®
Network Management System
Our pre-engineered products also include a line of AxxSys network management systems designed for management and control of satellite-terrestrial networks and include flexible interface devices that can be configured to communicate with satellite communications equipment and networking equipment from various manufacturers. The following details our products in this category:
AxxSys® Network Management Systems are computer-based network management systems that monitor and control satellite communication equipment and satellite terminal networks. AxxSys-based network management systems provide status reporting locally or remotely and provide the ability to manage distributed satellite communications networks on a global basis. Our current version AxxSys Orion monitors and controls all of the terrestrial elements of a satellite communications network. This includes the ability to manage other network elements, such as, routers, microwave, fiber and wireless subsystems. Deployed over an industry-standard IP network, it is capable of monitoring and controlling from dozens to thousands of devices. Network management systems are key to simplifying operations and maintenance of satellite-based networks and, therefore, add value to the systems and networks we integrate.
SpyGlass Carrier Monitoring Systems®
are computer-based carrier monitoring tools for service providers who need to monitor and manage their transmissions to ensure service reliability and availability. Our SpyGlass®
family of carrier monitoring tools integrates with the AxxSys network management system to provide ease of operation.
Systems Design and Integration Product
We design, integrate, install, test and commission complex communication and media networks solutions to meet the needs of our customers. Our custom systems design and integration services are largely focused on requirements for media broadcast and distribution solutions, satellite earth stations, uplink centers, broadcast centers and next generation IP-based networks. This segment of our business is based on our core engineering expertise in satellite earth stations and network design, media-broadcast engineering, IP network engineering and network management system design.
We maintain facilities for complete in-plant testing of all our systems before delivery in order to assure all performance specifications will be met during installation at the customer’s site. We employ formal total quality management programs and other training programs, and have been certified by the International Organization of Standards quality certification process for ISO 9001, a standard that enumerates specific requirements an organization must follow in order to assure consistent quality in the supply of products and services. The certification process qualifies us for access to virtually all domestic and international projects, and we believe that this represents a competitive advantage.
An illustrative example of our system design and integration solution product is our project with a major media and entertainment company, or the customer. This customer is one of the world’s largest mobile carriers, with a 25% share in the India market. In considering the Direct to Home (“DTH”) business, the customer’s vision was that with competitive DTH service in place, it could go to market to thousands of retail outlets in over 50 cities as well as by texting sales offers to mobile subscribers. In addition to the immediate DTH opportunity, the customer was also thinking long-term. The consumption of video entertainment is undergoing a revolution, and they wanted to position themselves to enter emerging
markets for video-on-demand, IPTV and mobile video with an economical solution platform. After considering all of their requirements, we were chosen for our ability to provide fully integrated solutions, based on our knowledge of leading-edge technologies and integration expertise.
Our solution started with designing and installing a DTH program acquisition and uplink center. We have built uplink facilities for some of the world’s leading satellite television networks, from Sky and DirecTV to ASTRO and Star TV. The customer’s acquisition and uplink center featured two 11.3 meter Ku-band antennas, eighteen 4.5 meter receive-only antennas and our AxxSys Orion monitor and control system. The process of designing the broadcast center involved a combination of technologies that had not been brought together before on this scale. One innovative technology utilized was MPEG-4 compression, which offered a 25% bandwidth savings. A second innovation was the comprehensive use of Internet protocol inside the broadcast center. They wanted every bit of content entering the broadcast center to be encoded as IP, despite the fact that it would be converted to DVB-S2 and multiplexed before going up onto the satellite. We also designed and built a Network Operations Center for the broadcast center. In addition to the usual confidence monitoring system with its “video wall,” Indian law required the development of a compliance monitoring system that recorded and stored all broadcast content for 90 days.
Making the facility IP-centric is a key to the future for the customer. To this end, we developed a new architecture called a Media Processing Center (MPC). Because we encode everything as IP upon ingest, the MPC speaks IP as its native format. Today, they are focusing on the DTH market; however, going forward, the MPC architecture will allow them to easily introduce IPTV, with minimal modifications, and to provide a platform for other video services, including IP-based mobile TV. The MPC architecture requires that every piece of equipment in the facility be selected with the future in mind. The conditional access system has the ability, with upgrades, to control IPTV streams and mobile TV streams for over 250 plus channels with basic, premium and pay-per-view movie channels. Our approach required the encoder and multiplexer supplier to provide advanced compression that would work across all potential platforms. When tying all the systems together, we devised a highly distributed solution that provides better reliability and avoids a single point of failure.
The customer’s new DTH service has received very positive feedback. They conducted picture quality analyses at locations around the country and found that the quality of their video was superior to competitors from the first day of service.
Sales and Marketing
We continually evaluate our sales and marketing efforts as we expand our product and service offerings. We approach the marketplace from both a market and a product perspective. We market our products and services to a diverse group of market verticals that include government, enterprise, media, maritime and wireless service providers. We have structured our sales and marketing approach to respond effectively to the opportunities in these markets.
Our corporate sales offices sell and market our products and services in the United States and internationally in specific vertical markets within the government and commercial markets. Our specific government vertical markets currently consist of Afghanistan, the United States Department of Defense, domestic and international intelligence agencies and civilian and diplomatic markets. The commercial sales offices focus mainly on broadcast, wireless/cellular service providers, enterprise and maritime customers.
One of our goals is to brand the Globecomm name as an end-to-end managed network service provider. As we continue to expand our reach into new markets, we must expand our name brand recognition to these markets as well. This will include updating marketing material which illustrates the synergy in the integration of all entities. This material is aimed both at potential customers and helping support the effort of continued training of the personnel in our global offices. Ensuring that each person understands the breadth of our capabilities is vital to ensuring that we maximize the potential business from each of our existing and new customers.
Our regional business teams sell and market our products and services in concert with the corporate sales offices. Business teams are located in New York, the GSM and Cachendo teams are located in Maryland, the Mach 6 and C2C teams are located in the Netherlands, the Telaurus team is located in New Jersey and the Evosat team is located in South Africa. The teams focus on targeted trade shows, demos and consultants teamed with company-wide events and marketing. We believe that this focused effort, along with the development of the corporate sales offices to proactively market our offerings to specific market segments, will lead to increased market share across all business units.
These regional business teams are responsible for orders in the regions and/or markets to which they are assigned, as well as for the delivery of our products and services and for account management of our existing customers. Currently, we have regional business teams responsible for the Americas, Asia Pacific and Eastern Atlantic (Africa, the Middle East and Europe) regions. We also have a business team dedicated to the government marketplace, and a GSM service team which is focused largely on the U.S. government marketplace. Furthermore, the Mach6 and C2C business teams provide services and infrastructure to governments and organizations internationally while our Evosat business unit provides connectivity and products worldwide.
In addition, we have expert teams who are focused on leveraging our know-how in IP networking, broadcast technology, pre-engineered systems, network management systems and network services to provide added value to our products, services and solutions. The strength of our expert teams allows us to continue our Annual Technology Forum.
The regional business and technology focused expert teams work together with the corporate sales offices to identify, develop and maintain customer relationships through local sales representatives, sales executives and account managers. Together, they develop close and continuing relationships with our customers. Our local sales representatives provide a local presence in their regions and identify prospective customers for our sales executives. Our account managers may also function as project engineers for network integration and service initiation programs for their accounts. We believe this account management focus provides continuity and loyalty between our customers and us. We also believe that our approach fosters long-term relationships that lead to follow-on work and referrals to new customers. These accounts also provide us with a market for the new products and services that we develop. In addition, we obtain sales leads through referrals from industry suppliers.
We use direct mailings, print advertising and social media to targeted markets and trade publications to enhance awareness and acquire leads for our direct and indirect sales teams. We create brand awareness by participating in industry trade shows sponsored by organizations like the International Telecommunications Union, the National Association of Broadcasters, Armed Forces Communications and Electronics Association, Communication Media Management Association and other industry associations. Globecomm plans to participate in multiple corporate sponsored tradeshows over the next year, including SATCON and SATELLITE 2011 in the satellite communications industry; IBC and NAB for the media vertical, several government tradeshows including MILCOM and LANDWARNET, wireless shows including CTIA, CANSO and RCA, enterprise shows including Streaming Media East and West and maritime shows including Posidonia and SMM. We also provide marketing information on our website and conduct joint marketing programs with sales representatives in various regions to reach new customers.
Competition
In the satellite infrastructure solutions market, we believe that our ability to compete successfully is based primarily on our reputation and the ability to provide a solution that meets the customer’s requirements, including competitive pricing, performance, on-time delivery, reliability and customer support.
In the communications services market, we believe that our ability to compete successfully is based primarily on our reputation and providing prompt delivery and initiation of service, competitive pricing, consistent and reliable connections and high-quality customer support.
Our primary competitors in the infrastructure solutions market generally fall into two groups: (1) system integrators such as Thales, Data Path and SED Systems and (2) equipment manufacturers who also provide integrated systems, such as General Dynamics, SATCOM Technologies, Viasat, Alcatel and ND Satcom AG.
In the end-to-end satellite-based enterprise solutions and broadcast services markets, we compete with other satellite communication companies who provide similar services, such as Ascent Media, Globecast and Convergent Media Systems. In addition, in managed network services we may compete with other communications services providers such as Caprock and Segovia, and satellite owners like SES Americom 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.
Current and potential participants in the markets in which we compete have established or may establish cooperative relationships among themselves or with third parties. These cooperative relationships may increase the ability of their products and services to address the needs of our current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge that will enable them to acquire significant market share rapidly. We believe that increased competition is likely to result in price reductions, reduced gross profit margins and loss of market share, any of which would have a material adverse effect on our business, results of operations and financial condition.
Acquisitions
On March 5, 2010, we acquired from Carrier to Carrier Telecom Holdings Ltd (the “Seller”), a privately owned company, all of the issued shares of C2C, a company incorporated in the Netherlands, and the business assets of Evocomm each of C2C and Evocomm being a wholly-owned subsidiary of the Seller. Pursuant to the terms of the acquisition we also acquired from Evocomm all the issued shares of Evosat (Pty) Ltd (“Evosat”), a company incorporated in South Africa.
C2C employs approximately 21 staff and provides satellite services across Africa, the Middle East, Europe and Asia, and maintains services in the Atlantic, Mediterranean, Gulf of Mexico and Indian Ocean regions through its teleport facility in the Netherlands. Evosat and Evocomm employ approximately 11 staff and provide Immarsat land-based BGAN (Broadband Global Area Networks) and maritime-based fleet broadband capabilities.
Pursuant to the terms of the Acquisition Agreement, we paid a cash purchase price of $15.0 million (funded through $2.5 million of the Company’s current cash position and $12.5 million through a five-year, acquisition term loan (the “Acquisition Loan”) provided by Citibank, N.A. on March 5, 2010, issued under the Company’s existing credit facility). The Seller also may be entitled to receive additional cash payments of up to an aggregate of $10.9 million, subject to an earn-out based upon the acquired businesses achieving certain earnings milestones within twenty-four months following the closing. We have estimated the fair value of the earn-out to be $4.4 million which has been recorded in the consolidated balance sheet.
Customers
We have established a diversified base of customers in a variety of market verticals. Our customers include government, enterprise, media, maritime and wireless service providers. We typically rely upon a small number of customers for a large portion of our revenues. We derived 12% of our revenues in the year ended June 30, 2010 from Northrop Grumman Information Technologies Inc. We expect that in the near term a significant portion of our revenues will continue to be derived from a limited number of customers (the identity of whom may vary from year to year) as we seek to expand our business and customer base.
Backlog
At June 30, 2010, our backlog was approximately $163.9 million compared to approximately $153.9 million at June 30, 2009. We record an order in backlog when we receive a firm contract or
purchase order, which identifies product quantities, sales price, service dates and delivery dates. Backlog represents the amount of unrecorded revenue on undelivered orders and services to be provided and a percentage of revenues from sales of products that have been shipped where installation has not been completed and final acceptance has not been received from the customer. Our backlog at any given time is not necessarily indicative of future period revenues. A substantial portion of our backlog is comprised of large orders, the cancellation of any of which could have a material adverse effect on our operating results. For example, at June 30, 2010, $62.4 million, or approximately 38.1%, of our backlog represented contracts with two customers. We cannot assure you that these contracts or any others in our backlog will not be cancelled, delayed or revised. See the section entitled “Risk Factors.”
Product Design, Assembly and Testing
We assign a project team to each of our customer contracts. Each team is led by a project engineer who is responsible for execution of the project. This includes engineering and design, assembly and testing, installation and customer acceptance. A project may include engineers, integration specialists, buyer-planners and an operations team. Our standard satellite ground segment systems are manufactured using a standard modular production process. Typically, long-term projects require significant customer-specific engineering, drafting and design efforts. Once the system is designed, the integration specialist works with the buyer-planner and the operations team to assure a smooth transfer from the engineering phase to the integration phase. The integration phase consists mainly of integrating the purchased equipment, components and subsystems into a complete functioning system. Assembly, integration and test operations are conducted on both an automated and manual basis.
We maintain facilities for complete in-plant testing of all our systems before delivery in order to assure all performance specifications will be met during installation at the customer’s site. We employ formal total quality management programs and other training programs, and have been certified by the International Organization of Standards quality certification process for ISO 9001, a standard that enumerates specific requirements an organization must follow in order to assure consistent quality in the supply of products and services. The certification process qualifies us for access to virtually all domestic and international projects, and we believe that this represents a competitive advantage.
Research and Development
We have developed internal research and development resources in Internet protocol networks, content delivery networks, broadcast systems, network management systems and pre-engineered systems. The costs of developing new technologies are funded by our investments and by development funded by specific customer program requirements. This approach provides us with a cost-effective means to develop new technology, while minimizing our direct research and development expenditures. Furthermore, we believe that our research and development capabilities allow us to offer added value in developing solutions for our customers, while at the same time we maintain the opportunity to develop products through our strategic supplier relationships. Our internal research and development efforts generally focus on the development of products and services not available from other suppliers to the industry. Current efforts are focused on continued development of our software-based distributed core network to support our wireless hosted switch service offering for our service provider customers, development of multimedia broadcast data center solutions for direct to home, TV to mobile devices and IPTV applications, expanding X and Ka band product capabilities, enhancements to pre-engineered AxxSys network management systems for all our earth terminal and network customers and pre-engineered Explorer satellite systems for our government customers and enhancements to our se@comm maritime communications suite of software products and value added services. For the years ended June 30, 2010, 2009 and 2008, we have incurred approximately $3.3 million, $2.4 million, and $1.9 million, respectively, in internal research and development expenses.
Intellectual Property
We rely heavily on the technological and creative skills of our personnel, new product developments, computer programs and designs, frequent product enhancements, reliable product support and proprietary technological expertise in maintaining our competitive position. We have secured patent protection on some of our products, and have secured trademarks and service marks to protect some of our products and services.
We currently have been granted six patents in the United States, one for remote access to the Internet using satellites, another for satellite communication with automatic frequency control, another for a monitor and control system for satellite communications networks and the like, another for implementing facsimile and data communications using Internet protocols, and two for a dish antenna kit including alignment tool. We have one other patent pending in the United States for a distributed satellite-based cellular network. We currently have one Patent Cooperation Treaty patent application pending for implementing facsimile and data communications using Internet protocols. We also intend to seek additional patents on our technology, if appropriate. We have received trademark registration for Globecomm and GSI in the United States and Russia, and for Globecomm Systems Inc. in the European Community, Russia, and the People’s Republic of China. We have also received trademark registrations in the United States for MBB2001, CTF 2001, CES 2001 and AxxSys, which relate to our pre-engineered systems; for SkyBorne, relating to our broadcasting services; for se@comm and other marks relating to our maritime services; for the GSI logo; and for various other marks related to our products and services. We have other trademarks and service marks pending and intend to seek registration of other trademarks and service marks in the future.
Government Regulations
Operations and Use of Satellites
We are subject to various federal laws and regulations, which may have negative effects on our business. We operate Federal Communications Commission, or FCC, licensed teleports in Hauppauge, New York, and Laurel, Maryland, subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. Pursuant to the FCC Act and FCC rules and regulations, we have obtained or applied for, and are required to maintain radio transmission licenses from the FCC for both domestic and foreign operations of our teleports. We have also obtained and maintain authorization issued under Section 214 of the FCC Act to act as a telecommunications carrier, which authorization also extends to GNSC, and have obtained and maintain similar authorization for Telaurus. We have also obtained a license from Agentschap Telecom, the licensing authority in The Netherlands, for the teleports operated by Mach 6 and C2C in The Netherlands. These licenses should be renewed in the normal course as long as we remain in compliance with applicable rules and regulations relating to the licenses. However, we cannot guarantee that additional licenses will be granted when our existing licenses expire, nor can we assure you that the applicable regulatory agencies 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 teleports. These regulations, as well as local land use regulations, restrict our freedom to choose where to locate our teleports.
The licenses and authorizations held by Globecomm for the licensed teleport in Hauppauge, New York, extend to GNSC and GNSC currently provides services in accordance with the requirements of the Globecomm licenses and authorizations. GNSC and GSM may in the future seek to obtain licenses and/or authorizations to provide services in their own names; however, we cannot guarantee that such additional licenses and authorizations will be granted by the FCC.
Common Carrier Regulation
We currently provide services to our customers on a private carrier and on a common carrier basis. Our operations as a common carrier require us to comply with the FCC’s requirements for common carriers. These requirements include, but are not limited to, providing our rates and service terms, being forbidden from unjust and unreasonable discrimination among customers, notifying the FCC before discontinuing service and complying with FCC equal employment opportunity regulations and reporting requirements.
Foreign Ownership
The FCC Act and FCC regulations impose restrictions on foreign ownership of our teleports. These requirements generally forbid more than 20% ownership or control of an FCC licensee by non-United States citizens and more than 25% ownership of a licensee’s parent by non-United States citizens. The FCC may authorize foreign ownership in the licensee’s parent in excess of these percentages. Under current policies, the FCC has granted these authorizations where the applicant does not control monopoly or bottleneck facilities and the foreign owners are citizens of countries that are members of the World Trade Organization or provide equivalent competitive opportunities to United States citizens.
We may, in the future, be required to seek FCC approval if foreign ownership of our stock exceeds the thresholds mentioned above. Failure to comply with these policies could 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. We have no knowledge of any present foreign ownership which would result in a violation of the FCC rules and regulations.
Some of our U.S. government contracts also impose restrictions on foreign ownership of our Company. These contracts require that we identify whenever a foreign person has 5% or greater ownership or control of our Company and take steps to mitigate the control and influence such foreign persons have on our business. If we are not able to effectively mitigate such control or influence, we may lose our eligibility for those U.S. government contracts where foreign ownership or controlling interest of the contractor is a factor in contractor selection.
Foreign Regulations
Regulatory schemes in countries in which we may seek to provide our satellite-delivered services may impose impediments on our operations. Some countries in which we operate or 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 sales representatives typically must obtain authorization for each country in which we provide our satellite-delivered services. Although we believe that we or our local sales representatives will be able to obtain the requisite licenses and approvals from the countries in which we intend to provide products and services, the regulatory schemes in each country are different, and thus there may be instances of noncompliance of which we are not aware. Although we believe these regulatory schemes will not prevent us from pursuing our business plan, we cannot assure you that our licenses and approvals are or will remain sufficient in the view of foreign regulatory authorities. In addition, we cannot assure you that necessary licenses and approvals will be granted on a timely basis, or at all, in all jurisdictions in which we wish to offer our products and services or that the applicable restrictions will not be unduly burdensome.
Regulation of the Internet
Our Internet operations (other than the operation of a teleport) are not currently subject to direct government regulation in the United States or most other countries, and there are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet it is 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 like 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.
We anticipate that a substantial portion of our Internet operations will be carried out in countries which may impose greater regulation of the content of information coming into their country than that which is generally applicable in the United States. Examples of this include privacy regulations in Europe and content restrictions in countries, such as the People’s Republic of China. To the extent that we provide content as a part of our Internet services, we 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 otherwise negatively affect our business. In addition, the applicability to the Internet of existing laws governing issues including property ownership, copyrights and other intellectual property issues, taxation, libel and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace. These changes could reduce demand for our products and services or could increase our cost of doing business as a result of costs of litigation or increased product development costs.
Telecommunications Taxation, Support Requirements and Access Charges
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, telecommunications relay services for the deaf and/or other regulatory fees. We are subject to some of these fees and we may be subject to other fees or 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.
Broadband Internet access services provided by telephone companies are currently classified as information services under the Communications Act and therefore not considered a telecommunications service subject to payment of access charges to local telephone companies in the United States. Should this situation change or other charges be imposed, the increased cost to our customers who use telephone company provided facilities to connect with our satellite facilities could discourage the demand for our services. Likewise, the demand for our services in other countries could be affected by the availability and cost of local telephone or other telecommunications services required to connect with our facilities in those countries.
Export of Telecommunications Equipment
The sale of our products and services outside the United States is subject to compliance with the regulations of the United States Export Administration and, in certain instances, with International Traffic in Arms 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 or implement our services in some countries, these products or services must satisfy the technical requirements of the particular country. If we were unable to comply with these requirements with respect to a significant quantity of our products, our sales in those countries could be restricted, which could have a material adverse effect on our business, financial condition and results of operations.
Employees
As of June 30, 2010, we had 416 full-time employees, including 188 in engineering and program management, 105 in the manufacturing, operations support and network operations, 49 in sales and marketing and 74 in management and administration. Our employees are not covered by any collective bargaining agreements. We believe that our relations with our employees are good.
Financial Information About Geographic Areas
Revenues from foreign sales as a percentage of total revenues for each of the three years in the period ended June 30, 2010 are set forth in Note 17 of the Notes to Consolidated Financial Statements.
Financial Information About Business Segments
The revenues and operating profits of each business segment for each of the three years in the period ended June 30, 2010 and the identifiable assets attributable to each business segment as of June 30, 2010 and June 30, 2009 are set forth in Note 16 of the Notes to Consolidated Financial Statements.
Available information
We maintain an Internet website at www.globecommsystems.com where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to these reports and all other SEC documents are available without charge, as soon as reasonably practicable following the time that they are filed with or furnished to the SEC. Information contained on our website does not constitute a part of this Annual Report on Form 10-K.
Item 1A.
Item 1A.
Risk Factors
Risks Related to Our Business
Reductions in telecommunications equipment and systems spending have negatively affected our revenues and profitability of our infrastructure solutions segment, which may not be offset by the growth in our services segment.
During the past several years, as a consequence of the worldwide financial and economic crisis and continuing business downturn, the global economy has been adversely impacted and nearly all businesses, including ours, have faced uncertain economic environments. As a result of the current global economic conditions, our customers have reduced and may continue to reduce their budgets for spending on telecommunications equipment and systems. As a consequence, our current customers and other prospective customers may postpone, reduce or even forego the purchase of our products and systems, which could adversely affect our revenues and profitability. For the year ended June 30, 2010, our infrastructure solutions segment in particular was impacted by these factors. It is currently difficult to assess whether or not future bookings or revenues in this segment will meet or exceed the levels experienced in the recent past. The growth of our services segment in recent periods may not be sufficient to offset any prolonged continuation of a decline in business in our infrastructure segment.
A limited number of customer contracts account for a significant portion of our revenues, and the inability to replace a key customer contract or the failure of the customer to implement its plans 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 two customers to provide equipment and services, from which we expect to generate a significant portion of our revenues. If our key customers are unable to implement their business plans, the market for these customers’ services declines, political or military conditions make performance impossible or if any or all of the major customers modify or terminate their agreements with us, and we are unable to replace these contracts, our results of operations, business and financial condition would be materially harmed.
We derive a substantial portion of our revenues from the government marketplace, and a downturn in this marketplace would adversely affect us.
In the year ended June 30, 2010, we derived 62% of our consolidated revenues from the government marketplace. This business tends to have higher gross margins than other markets we serve. A future
reduction in the proportion of our business from the government marketplace would negatively impact our results of operations.
There are a number of other risks associated with the government marketplace; specifically, purchasing decisions of agencies are subject to political influence, contracts are subject to cancellation if government funding becomes unavailable, and unsuccessful bidders may challenge contracts that are awarded to us, which can lead to increased costs, delays and possible loss of contracts. In particular, the current government involvement in supporting various financial institutions and mounting government deficits will likely result in failures to fund various government programs. A withdrawal of military forces from areas of conflict could result in curtailed spending in military programs in which we participate, particularly in Afghanistan, from which we have generated a significant amount of revenue in recent periods.
Risks associated with operating in international markets, including areas of conflict, could restrict our ability to expand globally and harm our business and prospects.
We market and sell a substantial portion of our products and services internationally. We anticipate that international sales will continue to account for a significant portion of our total revenues for the foreseeable future, including revenues from our Mach 6, Telaurus, C2C and Evocomm acquisitions, with a significant portion of the international revenue coming from developing countries, including countries in areas of conflict like Afghanistan. There are a number of risks inherent in conducting our business internationally, including:
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general political and economic instability in international markets, including the hostilities in Iraq and Afghanistan, could impede our ability to deliver our products and services to customers;
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difficulties in collecting accounts receivable could affect our results of operations;
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changes in regulatory requirements could restrict our ability to deliver services to our international customers, including the addition of a country to the list of sanctioned countries under the International Emergency Economic Powers Act or similar legislation;
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export restrictions, tariffs, licenses and other trade barriers could prevent us from adequately equipping our network facilities;
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differing technology standards across countries may impede our ability to integrate our products and services across international borders;
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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;
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increased expenses associated with marketing services in foreign countries could affect our ability to compete;
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relying on local subcontractors for installation of our products and services could adversely impact the quality of our products and services;
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difficulties in staffing and managing foreign operations could affect our ability to compete;
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complex foreign laws and treaties could affect our ability to compete; and
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potentially adverse taxes could affect our results of operations.
These and other risks could impede our ability to manage our international operations effectively, limit the future growth and profitability of our business, increase our costs and require significant management attention.
Our service revenue has increased as a percentage of total revenue and if our service revenue decreases or margins decrease, our results of operations will be harmed.
The future revenues and results of operations of our services segment are dependent on the development of the market for its current and future services. In fiscal 2010, services revenues increased to 60% of total revenues compared to 48% and 32% in fiscal 2009 and 2008, respectively. The service business tends to have significantly higher gross margins than our infrastructure solutions business. A future reduction in the proportion of our services business would disproportionately impact our results of operations.
We derive a substantial portion of our revenues from fixed-price projects, under which we assume greater financial risk if we fail to accurately estimate the costs of the projects.
We derive a substantial portion of our revenues from fixed-price projects. We assume greater financial risks on a fixed-price project than on a time-and-expense based project. If we miscalculate the resources or time we need for these fixed-price projects, the costs of completing these projects may exceed our original estimates, which would negatively impact our financial condition and results of operations.
Future acquisitions and strategic investments may divert our resources and management’s attention, results may fall short of expectations and, as a result, our operating results may be difficult to forecast and may be volatile.
We have made several recent acquisitions and intend to continue pursuing acquisitions or investments in complementary businesses, technologies and product lines as a key component of our growth strategy. Any future acquisitions or investments may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses related to intangibles assets. Acquisitions involve numerous risks, including:
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failure of the acquisition or investment to meet the expectations upon which we made a decision to proceed;
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difficulties in the integration of the operations, technologies, products and personnel of an acquired business;
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diversion of management’s attention from other business concerns;
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substantial transaction costs;
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the potential of significant goodwill and intangibles write-offs in the future in the event that an acquisition or investment does not meet expectations;
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increased expenses associated with the consummation and integration of an acquisition; and
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loss of key employees, customers or suppliers of any acquired business.
We cannot assure you that any acquisition or strategic investment will be successful and will not adversely affect our business, results of operations or financial condition.
In the event of a catastrophic loss affecting our operations in Hauppauge, New York, Laurel, Maryland or the Netherlands, our results of operations would be harmed.
GNSC’s revenues and results of operations are dependent on the infrastructure of the network operations center and the Kenneth A. Miller International Teleport at our headquarters in Hauppauge, New York. Similarly, GSM’s and C2C’s revenues and results of operations are dependent on the infrastructure of the network operations center and teleport at our Laurel, Maryland and Netherlands facilities, respectively. A catastrophic event to any of these facilities or to the infrastructure of the surrounding areas would result in significant delays in restoring services capabilities. These capabilities permit us to offer an integrated suite of products and services and the incapacity of our communications
infrastructure would also negatively impact our ability to sell our infrastructure solutions. This would result in the loss of revenues and adversely affect our business, results of operations and financial condition.
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 infrastructure solutions market generally fall into two groups: (1) system integrators, like Thales, Rockwell Collins, and SED Systems, and (2) equipment manufacturers who also provide integrated systems, like General Dynamics, SATCOM Technologies, Viasat, Alcatel and ND Satcom AG.
In the end-to-end satellite-based enterprise solutions and broadcast services markets, we compete with other satellite communication companies who provide similar services, like Ascent Media, Globecast, and Convergent Media Systems. In addition, in our services segment we may compete with other communications service providers such as Caprock and Segovia, and satellite owners like SES Americom 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, 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. The potential strategic relationships of existing and new competitors may rapidly acquire significant market share, which would harm our business and financial condition.
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:
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the speed at which communications infrastructure, including terrestrial microwave, coaxial cable and fiber optic communications systems, which compete with satellite-based services, is built;
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the effectiveness of our local resellers and sales representatives in marketing and selling our products and services; and
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the acceptance of our products and services by customers.
If our products and services are not accepted, or the market potential we anticipate does not develop, our revenues will be impaired.
Since sales of satellite communications equipment are dependent on the growth of communications networks, if market demand for these networks does not increase from recent depressed levels, our revenue and profitability are likely to decline.
We derive, and expect to continue to derive, a significant amount of revenues from the sale of satellite infrastructure solutions. If the long-term growth in demand for communications networks does not increase from recent depressed levels, the demand for our infrastructure solutions may decline or grow more slowly than we expect. Further, increased competition among satellite ground segment systems and network manufacturers has increased pricing pressures and depressed margins. As a result, we may not be able to grow our infrastructure business, our revenues 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, the uncertain general economic conditions have affected the overall rate of capital spending by many of our customers. Also, many companies have found it difficult to raise capital to finish building their communications networks and, therefore, have placed fewer orders. Past economic slowdowns resulted in a softening of demand from our customers. We cannot predict the extent to which demand will increase, nor the timing of such demand.
We depend upon certain key personnel and may not be able to retain these employees. If we lose the services of these individuals or cannot hire additional qualified personnel, our business will be harmed.
Our success also depends to a substantial degree on our ability to attract, motivate and retain highly-qualified personnel. There is considerable competition for the services of highly-qualified technical and engineering personnel. We may not be able either to retain our current personnel or hire additional qualified personnel if and when needed.
Our future performance depends on the continued service of our key technical, managerial and marketing personnel; in particular, David Hershberg, our Chairman and Chief Executive Officer, and Keith Hall, our President and Chief Operating Officer, are key to our success based upon their individual knowledge of the markets in which we operate. The employment of any of our key personnel could cease at any time.
Satellites upon which we rely may malfunction or be damaged or lost.
In the delivery of our services, we lease space segment from various satellite transponder vendors. The damage or loss of any of the satellites used by us, or the 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 could have a material adverse effect on 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 could materially adversely affect our business, results of operations and financial condition.
We currently obtain most of our critical components and services from limited sources and generally do not maintain significant inventories or have long-term or exclusive supply contracts with our 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 receive 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. We may face liability to customers for such security breaches. Furthermore, these incidents could deter potential customers and adversely affect existing customer relationships.
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 if 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 not be able to keep pace with technological changes, which would make our products and services become non-competitive and obsolete.
The telecommunications industry, including satellite-based communications services, is characterized by rapidly changing technologies, frequent new product and service introductions and evolving industry standards. If we are unable, for technological or other reasons, to develop and introduce new products and services or enhancements to existing products and services in a timely manner or in response to changing market conditions or customer requirements, our products and services would become non-competitive and obsolete, which would harm our business, results of operations and financial condition.
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 six patents, and have one patent and one provisional patent application pending in the United States. We currently have one Patent Cooperation Treaty patent application pending. 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 patent applications or that any claims allowed from such applications will be of sufficient scope, or be issued in all countries where our products and services can be sold, to provide meaningful protection or any commercial advantage to us. Also, our competitors may be able to design around our patents. The laws of some foreign countries in which our products and services are or may be developed, manufactured or sold may not protect our products and services or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products and services more likely.
We have registered the trademarks Globecomm, GSI and Telaurus in the United States and various other countries, and the trademark Mach 6 in The Netherlands. We have various other trademarks and service marks 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 the products, services, technologies and advertising we employ in our business do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. 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, segments of our business.
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our stock price is volatile.
From July 1, 2009 through June 30, 2010, our stock price ranged from a low of $6.34 per share to a high of $8.99 per share. The market price of our common stock, like that of the securities of many telecommunications and high technology industry companies, could be subject to significant fluctuations and is likely to remain volatile based on many factors, including the following:
•
quarterly variations in operating results;
•
announcements of new technology, products or services by us or any of our competitors;
•
changes in financial estimates or recommendations by securities analysts;
•
general market conditions; or
•
domestic and international economic factors unrelated to our performance.
Additionally, numerous factors relating to our business may cause fluctuations or declines in our stock price.
The stock markets in general and the markets for telecommunications stocks in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
Because our common stock is thinly traded, it may be difficult to sell shares of our common stock into the markets without experiencing significant price volatility.
Our common stock is currently traded on the Nasdaq Global Market. Because of the relatively small number of shares that are traded, it may be difficult for an investor to find a purchaser for shares of our common stock without experiencing significant price volatility. We cannot guarantee that an active trading market will develop, that our common stock will have a higher trading volume than it has historically had or that it will maintain its current market price. This illiquidity could have a material adverse effect on the market price of our stock.
A third party could be prevented from acquiring shares of our 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, by-laws and Section 203 of the General Corporation Law 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 our stockholders. In addition, we have entered into employment agreements with our senior executives that have change of control provisions that would add substantial costs to an acquisition of us by a third party.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our future earnings, capital requirements, financial condition, future prospects and other factors as the board of directors might deem relevant. If we do not pay dividends our stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
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 FCC licensed teleports in Hauppauge, New York, and Laurel, Maryland subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. We cannot guarantee that the FCC will grant renewals 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 teleports. These regulations, as well as local land use regulations, restrict our freedom to choose where to locate our teleports. 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 Regulations
Regulatory schemes in countries in which we may seek to provide our satellite-delivered 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 that may have a material adverse impact on our business. Either we or our local partners typically must obtain authorization from each country in which we provide our satellite-delivered 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, including but not limited to privacy regulations in numerous European countries and content restrictions in countries such as the People’s 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, the laws do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace which could reduce demand for our products and services, could increase our cost of doing business as a result of costs of litigation or increased product development costs, or could in some other manner have a material adverse effect on our business, financial condition and results of operations.
Telecommunications Taxation, Support Requirements, and Access Charges
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, telecommunications relay services for the deaf, and/or other regulatory fees. We are subject to some of these fees, and we may be subject to other fees or 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.
Broadband Internet access services provided by telephone companies are currently classified as Information Services under the Communications Act and therefore not considered a telecommunications service subject to payment of access charges to local telephone companies in the United States. Should this situation change or other charges be imposed, the increased cost to our customers who use telephone-company provided facilities to connect with our satellite facilities could discourage the demand for our services. Likewise, the demand for our services in other countries could be affected by the availability and cost of local telephone or other telecommunications services required to connect with our facilities in those countries.
Export of Telecommunications Equipment
The sale of our infrastructure solutions outside the United States is subject to compliance with the United States Export Administration Regulations and, in certain circumstances, with the International Traffic in Arms 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 and implement our services in some 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.
Foreign Ownership
We may, in the future, be required to seek FCC or other government approval if foreign ownership of our stock exceeds certain specified criteria. Failure to comply with these policies could 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, or denial of certain contracts from other United States government agencies.
Item 1B.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Item 2.
Properties
We own a facility containing approximately 122,000 square feet of space on approximately seven acres located at 45 Oser Avenue, Hauppauge, New York. This facility houses our principal offices, teleport facility and production facilities, as well as the offices and network operations center of GNSC. We also own a facility containing approximately 20,000 square feet of space on approximately three acres located in Laurel, Maryland, which houses the teleport facility and network operations center of GSM. We lease warehouse space in Hauppauge, New York and rent office space in Laurel, Maryland, Cedar Knolls, NJ, Arlington, Virginia, the Netherlands, the United Kingdom, Germany, the United Arab Emirates, Singapore, Hong Kong, Afghanistan, and South Africa. We believe that our facilities are adequate for our current needs and for the foreseeable future; we also expect that suitable additional space will be available as needed. Total monthly rent expense for these locations is approximately $195,000.
Item 3.
Item 3.
Legal Proceedings
None.
Item 4.
Item 4.
Removed and Reserved
None.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the Nasdaq Global Market under the symbol “GCOM.” The quarterly high and low sales prices of our common stock for fiscal 2010 and 2009 are as follows:
At September 9, 2010, there were approximately 3,900 stockholders of record of our common stock, as shown in the records of our transfer agent.
At the close of the Nasdaq Global Market on September 9, 2010, our market price per share was $7.03.
As of June 30, 2010, we had not declared or paid dividends on our common stock since inception and we do not expect to pay dividends in the foreseeable future.
The table below sets forth securities we have authorized for issuance under our equity compensation plans.
Equity Compensation Plan Information as of June 30, 2010
(1)
Shares were issued as part of the Globecomm Systems Inc./Telaurus 2009 Special Equity Incentive Plan, which was established in connection with the acquisition of Telaurus. The Compensation Committee of our board of directors administers the plan. The plan allowed for (i) stock option grants with a ten-year limit on exercise from the date of the grant (with 1/4 of the stock option grant vesting on the anniversary of the date of the grant each year for four years), (ii) restricted stock grants (with 1/3 of the restricted stock grant becoming transferable on the anniversary of the date of the grant each year for three years) and (iii) restricted stock unit grants (with 1/3 of the restricted stock unit grant becoming transferable on the anniversary of the date of the grant each year for three years). Under the
plan, awards could be granted with respect to 60,000 shares of common stock of the Company, 35,000 shares of which were granted in the form of restricted stock. Pursuant to its terms, no further awards may be made under the plan. Awards are subject to adjustments upon certain changes in our common stock or other corporate events.
Performance Graph
Set forth below is a graph comparing the cumulative total stockholder return, assuming dividend reinvestment of $100 invested in the Company’s common stock on June 30, 2005 through June 30, 2010 with the cumulative total return, assuming dividend reinvestment of $100 invested in the Nasdaq Global Market (U.S.) Index and a Self Constructed Peer Group Index. The peer group consists of the following companies: Comtech Telecommunications Corp., EMS Technologies, Inc., ViaSat, Inc., and Telecommunication Systems Inc.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Globecomm Systems Inc., The NASDAQ Composite Index
And A Peer Group
*
$100 invested on 6/30/05 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
Item 6.
Item 6.
Selected Financial Data
Our selected consolidated financial data as of and for each of the five years in the period ended June 30, 2010 have been derived from our audited consolidated financial statements. EBITDA represents net income before interest income, interest expense, provision (benefit) for income taxes, depreciation and amortization expense and gain on liquidation of foreign subsidiary. EBITDA does not represent cash flows defined by accounting principles generally accepted in the United States and does not necessarily indicate that our cash flows are sufficient to fund all of our cash needs. We disclose EBITDA since it is a financial
measure commonly used in our industry. EBITDA facilitates internal comparisons of our historical financial position and operating performance on a more consistent basis, we also use EBITDA in measuring performance relative to that of our competitors and in evaluating acquisition opportunities. EBITDA is not meant to be considered a substitute or replacement for net income as prepared in accordance with accounting principles generally accepted in the United States. EBITDA may not be comparable to other similarly titled measures of other companies.
We record an order in backlog when we receive a firm contract or purchase order, which identifies product quantities, sales price, service dates and delivery dates. Backlog represents the amount of unrecorded revenue on undelivered orders and services to be provided and a percentage of revenues from sales of products that have been shipped where installation has not been completed and final acceptance has not been received from the customer. Our backlog at any given time is not necessarily indicative of future period revenues.
Selected Financial Data
(In thousands, except per share data)
(a)
During fiscal 2008 we recorded a non-recurring tax benefit of $12.5 million primarily due to our recognition of a significant portion of our deferred tax assets through a reduction in our deferred tax asset valuation allowance. See Note 15 of the Notes to Consolidated Financial Statements.
(b)
The increase in cash at June 30, 2008 is due to approximately $36.4 million in net proceeds from an offering of equity securities completed in August and September 2007.
(c)
Capital expenditures of $17.8 million primarily related to the purchase of network operations center and teleport assets primarily for a large program with Showtime Network Inc. as to which service began on July 1, 2007. In addition, we upgraded our facility to meet the requirements of our increase in business levels.
(d)
The increase in long term liabilities at June 30, 2007 is primarily due to a term loan used to partially fund the acquisition of GlobalSat. The balance of the term loan was repaid on September 26, 2007.
(e)
The increase in long term liabilities at June 30, 2010 is primarily due to a term loan used to partially fund the acquisition of C2C, Evocomm and Evosat on March 5, 2010.
Item 7.
Item 7.
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 Annual Report on Form 10-K. 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, our dependence on a limited number of contracts for a high percentage of our revenues and a significant reduction in revenues from the government marketplace. These risks and others are more fully described in the “Risk Factors” section and
elsewhere in this Annual Report on Form 10-K. 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
Our business is global and subject to technological and business trends in the telecommunications marketplace. We derive much of our revenue from the government marketplace and developing countries. Our business is therefore affected by geopolitical developments involving areas of the world in which our customers are located, particularly in developing countries and areas of the world involved in armed conflicts, which directly impacts our military-related sector business.
The products and services we offer include: pre-engineered products, systems design and integration services, access, hosted, and lifecycle support services. To provide these products and services, we engineer all the necessary satellite and terrestrial facilities as well as provide the integration services required to implement those facilities. We also operate and maintain managed networks and provide life cycle support services on an ongoing basis. Our customers generally have network service requirements that include point-to-point or point-to-multipoint connections via a hybrid network of satellite and terrestrial facilities. In addition to the government marketplace, these customers are communications service providers, commercial enterprises and media and content broadcasters.
Since our products and services are often sold into areas of the world which do not have fiber optic land-based networks, a substantial portion of our revenues are derived from, and are expected to continue to be derived from, developing countries. These countries carry with them more enhanced risks of doing business than in developed areas of the world, including the possibility of armed conflicts or the risk that more advanced land-based telecommunications will be implemented over time, and less developed legal protection for intellectual property.
In the year ended June 30, 2010, 12% of our revenues were derived from Northrop Grumman Information Technologies Inc. Although the identity of customers and contracts may vary from period to period, we have been, and expect to continue to be, dependent on revenues from a small number of customers or contracts in each period in order to meet our financial goals. From time to time these customers are located in developing countries or otherwise subject to unusual risks.
As a consequence of the worldwide financial and economic crisis and continuing business downturn that has occurred during the past several years, our customers have reduced and may continue to reduce their budgets for spending on equipment and systems, which has impacted our infrastructure segment revenues, resulting in an operating loss in this segment in the years ended June 30, 2010 and 2009.
Revenues related to contracts for infrastructure solutions and 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. Cost overruns may be incurred as a result of unforeseen obstacles, including both physical conditions and unexpected problems encountered in engineering design and testing. Since our business is frequently concentrated in a limited number of large contracts, a significant cost overrun on any contract could have a material adverse effect on our business, financial condition and results of operations.
Contract costs generally include purchased material, direct labor, overhead and other direct costs. Anticipated contract losses are recognized, as they become known. Costs from infrastructure solutions consist primarily of the costs of purchased materials (including shipping and handling costs), direct labor and related overhead expenses, project-related travel and living costs and subcontractor salaries. Costs from services consist primarily of satellite space segment charges, voice termination costs, network operations expenses 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 the satellites 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 and depreciation. 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. General and administrative expenses consist of expenses associated with our management, finance, contract, and administrative functions, as well as amortization of intangible assets.
Critical Accounting Policies
Certain of our accounting policies require judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate. Actual results may differ from these judgments under different assumptions or conditions. Our accounting policies that require management to apply significant judgment include:
Revenue Recognition - Infrastructure Solutions
We recognize revenue 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, collectability 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 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 our long-term complex production-type projects. Revenue is recognized on our standard satellite ground segment systems upon shipment and acceptance of factory performance testing which is when title transfers to the customer. The amount of revenues recorded on each standard production-type contract is reduced by the customer’s contractual holdback amount, which typically requires 10% to 30% of the contract value to be retained by the customer until installation and final acceptance is complete. The customer generally becomes obligated to pay 70% to 90% of the contract value upon shipment and acceptance of factory performance testing. Installation is not deemed to be essential to the functionality of the system since installation does not require significant changes to the features or capabilities of the equipment, does not require complex software integration and interfacing and we have not experienced any difficulties installing such equipment. In addition, the customer or other third party vendors can install the equipment. The estimated relative fair value of the installation services is determined by management, which is typically less than the customer’s contractual holdback percentage. If the holdback is less than the fair value of installation, we will defer recognition of revenues, determined on a contract-by-contract basis equal to the fair value of the installation services. Payments received in advance by customers are deferred until shipment and are presented as deferred revenues.
We recognize revenue using the percentage-of-completion method of accounting upon the achievement of certain contractual milestones, for our non-standard, complex production-type contracts for the production of satellite ground segment systems and equipment that are generally integrated into the customer’s 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 customer’s 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 inventories balance.
The timing of our revenue recognition is primarily driven by achieving shipment, final acceptance or other contractual milestones. Project risks including project complexity, political and economic instability in certain regions in which we operate, export restrictions, tariffs, licenses and other trade barriers which
may result in the delay of the achievement of revenue milestones. A delay in achieving a revenue milestone may negatively impact our results of operations.
Costs from Infrastructure 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. Typically, these contracts are fixed price projects. We use estimates of the costs applicable to various elements which we believe are reasonable. Our estimates, are assessed continually during the term of these contracts and costs are subject to revisions as the contract progresses to completion. These estimates are subjective based on management’s assessment of project risk. These risks may include project complexity and political and economic instability in certain regions in which we operate. Revisions in cost estimates are reflected in the period in which they become known. A significant revision in an estimate may negatively impact our results of operations. In the event an estimate indicates that a loss will be incurred at completion, we record the loss as it becomes known.
Goodwill and Other Intangibles Assets
Goodwill represents the excess of the purchase price of businesses over the fair value of the identifiable net assets acquired. The amount of goodwill recorded in our balance sheet has significantly increased over the recent past as we have made several acquisitions. Goodwill and other indefinite life intangible assets are tested for impairment at least annually. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit (calculated using a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment charge. The impairment test is dependent upon estimated future cash flows of the services segment. There have been no events during the year ended June 30, 2010 that resulted in the impairment of any goodwill or other intangible assets.
Deferred tax assets
We regularly estimate our ability to recover deferred income taxes, report such deferred tax assets at the amount that is determined to be more-likely-than-not recoverable, and we have to estimate our income taxes in each of the taxing jurisdictions in which we operate. This process involves estimating our current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing revenue and expenses for tax and accounting purposes. These differences may result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.
We are required to assess the likelihood that our deferred tax assets, which include net operating loss carry forwards and temporary differences that are expected to be deductible in future years, will be recoverable from future taxable income or other tax planning strategies. If recovery is not likely, we have to provide a valuation allowance based on our estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods, the effect of temporary differences, the expected reversal of deferred tax liabilities and available tax planning strategies.
At June 30, 2010 and June 30, 2009, we had a liability for unrecognized tax benefits of approximately $1,085,000 and $106,000, respectively which if recognized in the future, would favorably impact our effective tax rate.
We record both accrued interest and penalties related to income tax matters, if any, in the provision for income taxes in the accompanying consolidated statements of operations. At June 30, 2010 and June 30, 2009 we had not accrued any amounts for the potential payment of penalties and interest.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the appropriate vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options and the expected volatility of our stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on our consolidated financial statements.
As of June 30, 2010 there was approximately $3,891,000 of unrecognized compensation cost related to non-vested stock-based compensation related to the restricted shares and restricted share units. The cost is expected to be recognized over a weighted-average period of 2.0 years. As of June 30, 2010 there was approximately $173,000 of unrecognized compensation cost related to non-vested outstanding stock options. The cost is expected to be recognized over a weighted-average period of 2.1 years.
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 creditworthiness of the customer. An assessment of the inherent risks in conducting our business with foreign customers is also made since a significant portion of our revenues is international. Management specifically analyzes accounts receivable, historical bad debts, customer concentrations, customer creditworthiness 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.
Recent Accounting Pronouncements
On July 1, 2009 the Company adopted the accounting pronouncement relating to business combinations, including assets acquired and liabilities assumed arising from contingencies. Changes for business combination transactions pursuant to this pronouncement include, among others, expensing acquisition-related transaction costs as incurred, the recognition of contingent consideration arrangements at their acquisition date fair value and capitalization of in-process research and development assets acquired at their acquisition date fair value. The adoption of this pronouncement resulted in the inclusion of acquisition related costs of $940,000 in general and administrative expenses in the year ended June 30, 2010.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), Multiple-Deliverable Revenue Arrangements which updates ASC Topic 605-25, Multiple Elements Arrangements, of the FASB codification. ASU 2009-13 provides new guidance on how to determine if an arrangement involving multiple deliverables contains more than one unit of accounting, and if so allows companies to allocate arrangement considerations in a manner more consistent with the economics of the transaction. ASU 2009-13 is effective for the Company, prospectively, for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010 (the Company’s fiscal year 2011); however, early application is permitted. The Company is currently evaluating the impact of adopting ASU 2009-13 on its financial statements.
Results of Operations
Fiscal Years Ended June 30, 2010 and 2009
Our consolidated results of operations for the year ended June 30, 2010 include results of Mach 6, Telaurus, C2C, Evocomm and Evosat. These acquisitions took place on February 27, 2009, May 29, 2009, and March 5, 2010 (for C2C, Evocomm and Evosat), respectively, and were not included in the corresponding periods in fiscal 2009, except for four months of results for Mach 6 and one month of Telaurus.
Revenues from Infrastructure Solutions. Revenues from infrastructure solutions increased by $3.2 million, or 3.6%, to $92.0 million for the fiscal year ended June 30, 2010 from $88.8 million for the fiscal year ended June 30, 2009. The increase in revenue was due to the timing of revenue milestones reached in the system design and integration offering offset by a decrease in revenue in pre-engineered systems primarily driven by a decline in bookings of contract orders due to the global economic slowdown, which resulted in government and commercial customers and prospects delaying or cancelling projects which, in particular affected pre-engineered systems. Due to the current global economic conditions, it is difficult to assess whether or not future bookings and revenue will meet or exceed levels experienced in the fiscal year ended June 30, 2009 and June 30, 2008.
Revenues from Services. Revenues from services increased by $54.5 million, or 66.9%, to $135.8 million for the fiscal year ended June 30, 2010 from $81.3 million for the fiscal year ended June 30, 2009. The increase in revenues was due to $33.5 million of revenue from Mach 6, Telaurus, C2C and Evocomm along with an increase in our access service offering primarily in the government marketplace.
Costs from Infrastructure Solutions. Costs from infrastructure solutions increased by $2.1 million, or 2.8%, to $76.0 million for the fiscal year ended June 30, 2010 from $73.9 million for the fiscal year ended June 30, 2009. The gross margin from infrastructure solutions increased to 17.4% for the fiscal year ended June 30, 2010 compared to 16.8% for the fiscal year ended June 30, 2009. The increase in gross margin was mainly attributable to product mix, specifically the increase in margin in the government marketplace.
Costs from Services. Costs from services increased by $38.4 million, or 63.0%, to $99.4 million for the fiscal year ended June 30, 2010 from $61.0 million for the fiscal year ended June 30, 2009. Gross margin for services increased to 26.8% for the fiscal year ended June 30, 2010 compared to 25.0% for the fiscal year ended June 30, 2009. The increase in the gross margin was primarily driven by an increase in revenue in the government marketplace. The increase in gross margin in the services segment has been a key driver in the increase in our consolidated income from operations. The future relationship between the revenue and margin growth of our operating segments will depend on a variety of factors, including the timing of major contracts, which are difficult to predict.
Selling and Marketing. Selling and marketing expenses increased by $2.0 million, or 15.3%, to $15.0 million for the fiscal year ended June 30, 2010 from $13.0 million for the fiscal year ended June 30, 2009. The increase was primarily a result of marketing expenses of $2.2 million incurred at Mach 6, Telaurus, C2C and Evocomm, partially offset by a decrease in salary and salary-related expenses and other marketing expenses due to previous cost savings initiatives.
Research and Development. Research and development expenses increased by $1.0 million, or 39.7%, to $3.3 million for the fiscal year ended June 30, 2010 from $2.4 million for the fiscal year ended June 30, 2009. The increase was principally due to costs associated with expanding X and Ka band product capabilities, along with research and development costs of $0.7 million at Telaurus.
General and Administrative. General and administrative expenses increased by $8.0 million, or 50.2%, to $24.0 million for the fiscal year ended June 30, 2010 from $16.0 million for the fiscal year ended June 30, 2009. The increase was a result of $4.8 million of general and administrative expenses incurred at Mach 6, Telaurus, C2C and Evocomm (inclusive of an increase of $0.8 million of amortization of intangibles related to these acquisitions), acquisition-related costs of approximately $0.9 million, an increase in the pay for performance plan based on operating results, $0.5 million to record to the fair value of forward contracts to purchase euros to settle a purchase obligation, and an increase in salary and salary-related expenses due to increases in headcount. Acquisition-related costs of $0.9 million were included in fiscal 2010, but not in fiscal 2009, due to a change in accounting principles adopted July 1, 2009.
Interest Income. Interest income decreased by $0.1 million, or 27.7%, to $0.4 million for the fiscal year ended June 30, 2010 from $0.5 million for the fiscal year ended June 30, 2009, as a result of a decrease in interest rates.
Interest Expense. Interest expense increased by $0.1 million, as a result of the issuance of debt on March 5, 2010 related to the acquisition of C2C and Evocomm.
Interest Expense earn-out. The interest expense earn-out is a result of the earn-out accrual related to the acquisition of C2C and Evocomm on March 5, 2010.
Provision for income taxes. The provision for income taxes increased as a result of the increase in income before income taxes partially offset by a decrease in our effective rate to 23% for the year ended June 30, 2010 from 27% for the year ended June 30, 2009. The effective rate for the year ended June 30, 2010 included a net benefit for non recurring tax adjustments which primarily represented research and development tax credits related to fiscal years 2006 through 2009. Our effective rate for fiscal 2010 excluding these non recurring items was 37%. The effective rate for the year ended June 30, 2009 includes a discrete tax benefit associated with non-taxable life insurance proceeds due to the passing of our former President and a research and development tax credit.
Fiscal Years Ended June 30, 2009 and 2008
Our consolidated results of operations for the fiscal year ended June 30, 2009 include results of Mach 6 and Telaurus since these acquisitions took place on February 27, 2009 and May 29, 2009, respectively. In the fiscal year ended June 30, 2009, the services segment business results included four months (March through June 2009) and one month (June 2009), for Mach 6 and Telaurus, respectively, since the acquisition dates in the fiscal year ended June 30, 2009.
Revenues from Infrastructure Solutions. Revenues from infrastructure solutions decreased by $44.8 million, or 33.5%, to $88.8 million for the fiscal year ended June 30, 2009 from $133.6 million for the fiscal year ended June 30, 2008. The decrease in revenues from record highs in the year ended June 30, 2008 was primarily driven by a decline in bookings of contract orders due to the global economic slowdown resulting in government and commercial customers and prospects delaying or cancelling projects.
Revenues from Services. Revenues from services increased by $18.5 million, or 29.3%, to $81.3 million for the fiscal year ended June 30, 2009 from $62.9 million for the fiscal year ended June 30, 2008. The increase in revenues was primarily due to an increase in access and lifecycle support service offerings primarily to the government marketplace along with $5.8 million of revenue from Mach 6 and Telaurus.
Costs from Infrastructure Solutions. Costs from infrastructure solutions decreased by $32.8 million, or 30.8%, to $73.9 million for the fiscal year ended June 30, 2009 from $106.7 million for the fiscal year ended June 30, 2008. The gross margin from infrastructure solutions decreased to 16.8% for the fiscal year ended June 30, 2009 compared to 20.2% for the fiscal year ended June 30, 2008. The decrease in gross margin was mainly attributable to a decrease in sales in the higher margin pre-engineered systems product line in the government marketplace.
Costs from Services. Costs from services increased by $13.3 million, or 27.8%, to $61.0 million for the fiscal year ended June 30, 2009 from $47.7 million for the fiscal year ended June 30, 2008. Gross margin for services increased to 25.0% for the fiscal year ended June 30, 2009 compared to 24.1% for the fiscal year ended June 30, 2008. The increase in the gross margin was primarily driven by an increase in revenue in the government marketplace.
Selling and Marketing. Selling and marketing expenses increased by $2.1 million, or 19.4%, to $13.0 million for the fiscal year ended June 30, 2009 from $10.9 million for the fiscal year ended June 30, 2008. The increase was a result of an increase in salary and salary related expenses for additional marketing personnel, costs associated with the launching of Cachendo in July 2008 along with marketing expenses of $0.6 million incurred at Mach 6 and Telaurus.
Research and Development. Research and development expenses increased by $0.5 million, or 25.0%, to $2.4 million for the fiscal year ended June 30, 2009 from $1.9 million for the fiscal year ended June 30, 2008. The increase was principally due to costs associated with expanding X and Ka band product capabilities along with research and development costs of $0.1 million at Telaurus.
General and Administrative. General and administrative expenses increased by $0.1 million, or 0.4%, to $16.0 million for the fiscal year ended June 30, 2009 from $15.9 million for the fiscal year ended June 30, 2008. The increase was due to an increase in stock compensation expense along with general and administrative expenses of $1.2 million at Mach 6 and Telaurus partially offset by a decrease in the Company’s pay for performance plan based on current results of operations and a decrease in amortization of intangibles. The stock compensation expense in the three months ended September 30, 2008 included the accelerated vesting of the restricted stock of our former President, who passed away on July 20, 2008, partially offset by $0.5 million of life insurance proceeds we received.
Interest Income. Interest income decreased by $1.2 million, or 69.2%, to $0.5 million for the fiscal year ended June 30, 2009 from $1.7 million for the fiscal year ended June 30, 2008, as a result of a decrease in interest rates and reduction in cash balances. Beginning in the three months ended December 31, 2008, in order to reduce our investment risk, we transferred our excess cash into money market funds with portfolios in treasury notes which earn lower rates than our previous investment vehicles. In August 2009, our excess cash was transferred out of money market funds with portfolios in treasury notes to an account with a financial institution bearing a higher interest rate.
Interest Expense. Interest expense of $0.3 million for the fiscal year ended June 30, 2008 is a result of the acquisition loan used to partially fund the acquisition of GlobalSat. On September 26, 2007, the Company repaid the principal balance of the acquisition term loan.
Provision (Benefit) for income taxes. Our effective income tax rate was 27% for the year ended June 30, 2009. The effective rate includes a discrete tax benefit associated with non-taxable life insurance proceeds due to the passing of our former President and a federal research and development tax credit. During fiscal 2008 we recorded a non-recurring tax benefit of $12.5 million primarily due to our recognition of a significant portion of our deferred tax assets through a reduction in our deferred tax asset valuation allowance based on positive evidence from our earnings trends.
Liquidity and Capital Resources
At June 30, 2010, we had working capital of $76.7 million, including cash and cash equivalents of $42.9 million, restricted cash of $5.0 million, net accounts receivable of $49.2 million, inventories of $34.5 million, prepaid expenses and other current assets of $3.1 million and current deferred income taxes of $1.6 million, offset by $36.9 million in accounts payable, $2.3 million in deferred revenues, $6.4 million in accrued payroll and related fringe benefits, $11.5 million in accrued expenses and $2.5 million in current portion of long term debt.
At June 30, 2009, we had working capital of $74.6 million, including cash and cash equivalents of $44.0 million, net accounts receivable of $45.4 million, inventories of $17.0 million, prepaid expenses and other current assets of $2.3 million and deferred income taxes of $1.1 million, offset by $22.5 million in
accounts payable, $5.3 million in deferred revenue, $4.3 million in accrued payroll and related fringe benefits and $3.1 million in other accrued expenses.
Net cash provided by operating activities during the fiscal year ended June 30, 2009 was $13.6 million, which primarily related to an increase in accounts payable of $11.3 million due to the increase in inventories and timing of payments to vendors, net income of $7.9 million, a non-cash item representing depreciation and amortization expense of $7.5 million primarily related to depreciation expense related to the network operations center and satellite earth station equipment and amortization expense related to acquisitions, non-cash stock compensation expense of $2.3 million, an increase in accrued expenses of $2.1 million resulting from customer deposits received as part of service agreements, a decrease in deferred income taxes of $2.0 million primarily due to net income generated in the period partially offset by research and development credits for fiscal years ended June 30, 2006 through June 30, 2009, and an increase in accrued payroll and related fringe benefits of $1.8 million due to awards under the pay for performance plan and an increase in headcount, partially offset by an increase in inventory of $17.1 million due to timing of shipments and purchases of equipment for milestones to be reached in future periods, a decrease in deferred revenue of $3.1 million due to timing differences between project billings and revenue recognition milestones resulting from specific customer contracts, and an increase in accounts receivable of $1.1 million due to increase in revenue and timing of customer payments.
Net cash provided by operating activities during the fiscal year ended June 30, 2009 was $9.0 million, which primarily related to a decrease in accounts receivable of $9.6 million due to the timing of billings and collections from customers and a reduction in revenue in the fiscal year ended June 30, 2009, a non-cash item representing depreciation and amortization expense of $6.0 million primarily related to depreciation expense related to the network operations center and satellite earth station equipment and amortization of intangibles, net income of $3.3 million, non cash stock compensation expense of $2.3 million and a decrease in deferred income taxes of $1.1 million due to net income generated in the period, offset by a decrease in accounts payable of $6.5 million relating to the reduction in revenue and the timing of vendor payments in the fiscal year ended June 30, 2009, a decrease in deferred revenue of $4.8 million due to timing differences between project billings and revenue recognition milestones resulting from specific customer contracts, and a decrease in accrued payroll and related fringe benefits of $1.9 million primarily due to a significant reduction in awards under the pay for performance plan based on fiscal 2009 operating results.
Net cash used in investing activities during the fiscal year ended June 30, 2010 was $28.0 million, which consisted of $13.9 million related to the acquisition of C2C, Evocomm and Evosat, capital expenditures of $8.8 million related to the purchase of hosted mobile core switch asset, network operations center and teleport assets and $5.0 million of restricted cash related to a potential earnout for C2C and Evocomm acquisitions.
Net cash used in investing activities during the fiscal year ended June 30, 2009 was $16.7 million, which consisted of $6.0 million related to the acquisition of Mach 6, $6.4 million related to the acquisition of Telaurus and capital expenditures of $4.3 million related to the purchase of network operations center and teleport assets.
Net cash provided by financing activities during the fiscal year ended June 30, 2010 was $13.4 million, which primarily related to $12.5 million of borrowings from the term note used to fund the acquisition of C2C and Evocomm, $1.1 million related to proceeds from the exercise of stock options, and $0.5 million related to proceeds from the sale of common stock, partially offset by $0.6 million of repayments on the Acquisition loan.
Net cash provided by financing activities during the fiscal year ended June 30, 2009 was $0.3 million, which related to proceeds from the exercise of stock options.
On May 28, 2010, we entered into Amendment No. 4 to our committed secured credit facility with Citibank, N.A. The credit facility has been extended and expires on May 26, 2011. The credit facility is comprised of a $65 million line of credit (the “Line”) and a foreign exchange line in the amount of $15 million. The Line includes the following sublimits: (a) $30 million available for standby letters of credit;
(b) $20 million available for commercial letters of credit; (c) a line for up to two term loans, each having a term of no more than five years, in the aggregate amount of up to $40 million that can be used for acquisitions; and (d) $10 million available for revolving credit borrowings. At our discretion, advances under the Line bear interest at the prime rate or LIBOR plus applicable margin based on the Company’s leverage ratio and are collateralized by a first priority security interest on all of the personal property of the Company. At June 30, 2010, the applicable margin on the LIBOR rate was 225 basis points. The Company is required to comply with various ongoing financial covenants, including with respect to the Company’s leverage ratio, liquidity ratio, minimum cash balance, debt service ratio, EBITDA minimums and minimum capital base, with which the Company was in compliance at June 30, 2010. As of June 30, 2010, in addition to the Acquisition Loan described above there were standby letters of credit of approximately $8.1 million, which were applied against and reduced the amounts available under the credit facility.
We lease satellite space segment services and other equipment under various operating lease agreements, which expire in various years through fiscal 2016. Future minimum lease payments due on these leases through June 30, 2011 are approximately $41.3 million.
We expect that our cash and working capital requirements for operating activities may increase as we continue to implement our business strategy. Management anticipates additional working capital requirements for work in progress for orders as obtained and that we may periodically experience negative cash flows due to variances in quarter to quarter operating performance and if cash is used to fund any future acquisitions of complementary businesses, technologies and intellectual property. We will use existing working capital and, if required, use our credit facility to meet these additional working capital requirements.
Our future capital requirements will depend upon many factors, including the success of our marketing efforts in the infrastructure solutions and services business, the nature and timing of customer orders and the level of capital requirements related to the expansion of our service offerings. Based on current plans, we believe that our existing capital resources will be sufficient to meet working capital requirements at least through June 30, 2011. However, we cannot assure you that there will be no unforeseen events or circumstances that would consume available resources significantly before that time.
Additional funds may not be available when needed and, even if available, additional funds may be raised through financing arrangements and/or the issuance of preferred or common stock or convertible securities on terms and prices significantly more favorable than those of the currently outstanding common stock, which could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders. If adequate funds are unavailable, we may be required to delay, scale back or eliminate some of our operating activities, including, without limitation, capital expenditures, research and development activities, and the timing and extent of our marketing programs, and we may be required to reduce headcount. We cannot assure you that additional financing will be available to us on acceptable terms, or at all.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Contractual Obligations and Commercial Commitments
At June 30, 2010, we had contractual obligations and commercial commitments as follows (in thousands):
Item 7A.
Item 7A.
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. Accordingly, we may utilize from time to time foreign currency forward contracts to hedge our exposure on firm commitments denominated in foreign currency. In January 2010, we entered into foreign currency forward exchange contracts to purchase approximately 2.3 million Euros to cover specific purchase commitments for an infrastructure program for material to be purchased within the next year. We recorded approximately $0.5 million loss to general and administrative expense in the year ended June 30, 2010 to adjust these contracts to market value as of June 30, 2010. There will be fluctuation in our results quarter to quarter as we mark to market these forward exchange contracts. At June 30, 2010 we had open foreign currency forward exchange contracts to purchase approximately 2.3 million Euros. Holding other variables constant, if there were a ten percent devaluation in the Euro, it would result in a $0.3 million unrealized loss to be recorded in the results of operations.
Our results of operations and cash flows are subject to fluctuations due to changes in interest rates primarily from rates earned on our excess available cash balances and from our variable interest rate long-term debt. Under our current positions, we do not use interest rate derivative instruments to manage exposure to interest rate changes.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to the Consolidated Financial Statements listed in Item 15(a) of Part IV of this Annual Report on Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our Chief Executive Officer and the Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2010 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
Management’s Report on Internal Control Over Financial Reporting. Under Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d - 15(f) under the Exchange Act) as of the end of each fiscal year and to report, based on that assessment, whether the Company’s internal control over financial reporting is effective.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
The Company’s management has evaluated the effectiveness of the Company’s internal control over financial reporting as of June 30, 2010. In making this assessment, the Company’s management used the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting.
Based on management’s processes and assessment, as described above, management has concluded that, as of June 30, 2010, the Company’s internal control over financial reporting was effective. We have excluded from this assessment the operations of C2C, Evocomm and Evosat since these subsidiaries were acquired in the year ended June 30, 2010. C2C, Evocomm and Evosat contributed approximately $6.2 million and $0.7 million of revenue and net income, respectively, for the year ended June 30, 2010. Internal controls over financial reporting, no matter how well designed, have inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of June 30, 2010 has been audited by our independent auditors, as stated in their report, which appears in the “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting” on page of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter (the fourth quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Certain information in response to this item is incorporated herein by reference to “Election of Directors” and “Executive Officers” in Globecomm Systems Inc.’s Proxy Statement to be filed with the Securities and Exchange Commission (the “SEC”). Information on compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement to be filed with the SEC.
Item 11.
Item 11.
Executive Compensation
Information in response to this item is incorporated herein by reference to “Executive Compensation Tables” in the Registrant’s Proxy Statement to be filed with the SEC.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information in response to this item is incorporated herein by reference to “Security Ownership” in the Registrant’s Proxy Statement to be filed with the SEC.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Information in response to this item is incorporated herein by reference to “Certain Relationships and Related Person Transactions” in the Registrant’s Proxy Statement to be filed with the SEC.
Item 14.
Item 14.
Principal Accounting Fees and Services
Information in response to this item is incorporated herein by reference to “Fees Paid to Independent Registered Public Accounting Firm” in the Registrant’s Proxy Statement to be filed with the SEC.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting regulation from the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) Index of Exhibits
**
Portions of this agreement have been omitted and filed separately with the secretary of the Securities and Exchange Commission pursuant to a confidential treatment request.
(B)
Exhibits
The response to this portion of Item 15 is submitted as a separate section of this report.
(C)
Financial Statement Schedules
The response to this portion of Item 15 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Globecomm Systems Inc.
We have audited the accompanying consolidated balance sheets of Globecomm Systems Inc. (the “Company”) as of June 30, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2010. Our audits also included the financial statement schedule listed in the index at item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Globecomm Systems Inc. at June 30, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company adopted the guidance issued in Financial Accounting Standards Board (“FASB”) Statement No. 141(R), “Business Combinations” (codified in FASB Accounting Standards Codification Topic 805, “Business Combinations”) on July 1, 2009.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Globecomm Systems Inc.’s internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 13, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Jericho, New York
September 13, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
Globecomm Systems Inc.
We have audited Globecomm Systems Inc.’s internal control over financial reporting as of June 30, 2010 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Globecomm Systems Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Carrier to Carrier Telecom B.V. (“C2C”), Evolution Communications Group Limited BVI (“Evocomm”), or Evosat SA Proprietary Ltd (“Evosat”) which are included in the 2010 consolidated financial statements of Globecomm Systems Inc. and constituted approximately $9.9 million and $4.3 million of total and net assets, respectively, as of June 30, 2010 and approximately $6.2 million and $0.7 million of revenue and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Globecomm Systems Inc. also did not include an evaluation of the internal control over financial reporting of C2C, Evocomm and Evosat.
In our opinion, Globecomm Systems Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2010 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Globecomm Systems Inc. as of June 30, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2010 and our report dated September 13, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Jericho, New York
September 13, 2010
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
See accompanying notes.
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See accompanying notes.
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED JUNE 30, 2010, 2009 AND 2008
(In thousands)
See accompanying notes.
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
1.
Organization and Description of Business
Globecomm Systems Inc. (“Globecomm”) was incorporated in the State of Delaware on August 17, 1994. The Company’s core business provides end-to-end, value-added satellite-based communications solutions. This business supplies infrastructure solutions for satellite-based communications including hardware and software to support a wide range of satellite systems. The Company’s wholly-owned subsidiaries, Globecomm Network Services Corporation (“GNSC”), Globecomm Services Maryland LLC (“GSM”), Cachendo LLC (“Cachendo”), B.V. Mach 6 (“Mach 6”), Telaurus Communications LLC (“Telaurus”), Melat Networks Inc. (“Melat”), Evolution Communications Group Limited B.V.I. (“Evocomm”), Carrier to Carrier Telecom B.V. (“C2C”) and Evosat SA Proprietary Ltd (“Evosat”) provide satellite communication services capabilities.
2.
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries, Globecomm Network Services Corporation, Globecomm Services Maryland LLC, Cachendo LLC, B.V. Mach 6, Telaurus Communications LLC, Melat Networks Inc., Evolution Communications Group Limited B.V.I., Carrier to Carrier Telecom B.V. and Evosat SA Proprietary Ltd (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
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 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, collectability 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% 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 the Company has 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, the Company will defer recognition of
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
Significant Accounting Policies (continued)
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 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 direct costs. Anticipated contracted losses are recognized as they become known.
Revenues from services consist of the access, hosted and lifecycle support service lines for a broad variety of communications applications. Service revenues are recognized ratably over the period in which services are provided. Payments received in advance of services are deferred until the period such services are provided and are presented as deferred revenues in the accompanying consolidated balance sheets.
Costs from Infrastructure Solutions
Costs from infrastructure solutions consist primarily of the costs of purchased materials (including shipping and handling costs), direct labor and related overhead expenses, project-related travel and living costs and subcontractor salaries.
Costs from Services
Costs from services relating to Internet-based services consist primarily of satellite space segment charges, Internet connectivity fees, voice termination costs and network operations expenses. 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 Operation Centers, on a twenty-four hour a day, seven-day a week basis, including personnel and related costs and depreciation.
Research and Development
Research and development expenditures are expensed as incurred.
Inventories
Inventories, which consist primarily of work-in-progress from costs incurred in connection with specific customer contracts, are stated at the lower of cost (using the first-in, first-out method of accounting) or market value. Progress payments received under long-term contracts are netted against inventories.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
Significant Accounting Policies (continued)
Cash Equivalents
The Company classifies highly liquid financial instruments with a maturity, at the purchase date, of three months or less as cash equivalents.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized and repairs and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from three to twenty-five years. Amortization of leasehold improvements and leased equipment is calculated using the straight-line method over the shorter of the lease term or estimated useful life of the asset.
Fair Value Measurements
The recorded amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values because of the short maturity of these instruments. The carrying value of our debt approximates fair value due to the variable interest rate.
Stock-Based Compensation
The measurement of stock-based compensation expense is based on the fair value of the award at the date of the grant. Stock-based compensation expense is generally recognized over the vesting period.
The fair value of options granted under the Company’s 1997 and 2006 Plans was estimated at date of grant using a Black-Scholes option pricing model with the following assumptions for the years ended June 30, 2010, 2009 and 2008: weighted average risk-free interest rate of 1.7% (2010), 1.6% (2009) and 3.7% (2008), weighted average volatility factor of the expected market price of the Company’s common stock of .56 (2010), .53 (2009) and .52 (2008), no dividend yields and a weighted-average expected life of the options of four years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions. 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.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price of businesses over the fair value of the identifiable net assets acquired. Goodwill and other indefinite life intangible assets are no longer amortized, but instead tested for impairment at least annually. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit (calculated using a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment charge.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
Significant Accounting Policies (continued)
Long-Lived Assets
For other than goodwill and indefinite life intangibles, when impairment indicators are present, the Company reviews the carrying value of its assets in determining the ultimate recoverability of their unamortized values using future undiscounted cash flows expected to be generated by the assets. If such assets are considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds the future discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. No impairment was noted on the long-lived assets at June 30, 2010 and 2009.
The Company evaluates the periods of amortization in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized cost will be allocated to the increased or decreased number of remaining periods in the revised lives.
Income Taxes
Deferred Tax Assets
Consistent with the provisions of ASC Topic No. 740, Income Taxes, the Company regularly estimates the ability to recover deferred income taxes, reports such deferred tax assets at the amount that is determined to be more-likely-than-not recoverable, and estimates income taxes in each of the taxing jurisdictions in which the Company operates. This process involves estimating current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing revenue and expenses for tax and accounting purposes. These differences may result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. The Company is required to assess the likelihood that the deferred tax assets, which include net operating loss carry forwards and temporary differences that are expected to be deductible in future years, will be recoverable from future taxable income or other tax planning strategies. If recovery is not likely, a valuation allowance must be provided based on estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods, the effect of temporary differences, the expected reversal of deferred tax liabilities, and available tax planning strategies.
The Company is subject to taxation in the U.S. and various state and foreign taxing jurisdictions. The Company’s federal tax returns for the 2007 through 2009 tax years remain subject to examination. The Company files in numerous state and foreign jurisdictions with varying statutes of limitation.
Product Warranties
The Company offers warranties on its contracts, the specific terms and conditions of which vary depending upon the contract and work performed. Generally, a basic limited warranty, including parts and labor, is provided to customers for one year. The Company can recoup certain of these costs through product warranties it holds with its original equipment manufacturers, which typically are one year in term. Historically, warranty expense has been minimal, however, management periodically assesses the need for any additional warranty reserve.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
Significant Accounting Policies (continued)
Foreign exchange contracts
In January 2010, the Company entered into foreign currency forward exchange contracts to purchase approximately 2.3 million Euros (approximately $3.3 million U.S. Dollars) to cover specific purchase commitments for an infrastructure program. As the contracts do not qualify for hedge accounting, the Company recorded approximately $494,000 to general and administrative expense in the year ended June 30, 2010 to adjust these contracts to market value as of June 30, 2010.
Restricted Cash
Restricted cash primarily consists of cash held in escrow for potential earn-out payments to previous owners of C2C and Evocomm if certain milestones are reached.
Comprehensive Income
Comprehensive income for the years ended June 30, 2010 and 2009 of approximately $7,625,000 and $3,383,000 includes a foreign currency translation (loss) gain of approximately $(277,000) and $84,000, respectively.
Recent Accounting Pronouncements
On July 1, 2009 the Company adopted the accounting pronouncement relating to business combinations, including assets acquired and liabilities assumed arising from contingencies. Changes for business combination transactions pursuant to this pronouncement include, among others, expensing acquisition-related transaction costs as incurred, the recognition of contingent consideration arrangements at their acquisition date fair value and capitalization of in-process research and development assets acquired at their acquisition date fair value. The adoption of this pronouncement resulted in the inclusion of acquisition related costs of $940,000 in general and administrative expenses in the year ended June 30, 2010.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), Multiple-Deliverable Revenue Arrangements which updates ASC Topic 605-25, Multiple Elements Arrangements, of the FASB codification. ASU 2009-13 provides new guidance on how to determine if an arrangement involving multiple deliverables contains more than one unit of accounting, and if so allows companies to allocate arrangement considerations in a manner more consistent with the economics of the transaction. ASU 2009-13 is effective for the Company, prospectively, for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (the Company’s fiscal year 2011); early application is permitted. The Company is currently evaluating the impact of adopting ASU 2009-13 on its financial statements.
3.
Acquisitions
On March 5, 2010, the Company, acting through its indirect wholly-owned subsidiaries Globecomm Holdings B.V. and Globecomm (BVI) Ltd, acquired from Carrier to Carrier Telecom Holdings Ltd (the “Seller”), a privately owned company, all of the issued shares of Carrier to Carrier Telecom B.V. (“C2C”), a company incorporated in the Netherlands, and the business assets of Evocomm Communications Limited, or “Evocomm”, each of C2C and Evocomm being a wholly-owned subsidiary of the Seller. Pursuant to the terms of the acquisition the Company also acquired from Evocomm all the issued shares of Evosat (Pty) Ltd (“Evosat”), a company incorporated in South Africa.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
Acquisitions (continued)
C2C employs approximately 21 staff and provides satellite services across Africa, the Middle East, Europe and Asia, and maintains services in the Atlantic, Mediterranean, Gulf of Mexico and Indian Ocean regions through its teleport facility in the Netherlands. Evosat and Evocomm employ approximately 11 staff and provide Immarsat land-based BGAN (Broadband Global Area Networks) and maritime-based fleet broadband capabilities.
Pursuant to the terms of the Acquisition Agreement, the Company paid a cash purchase price of $15.0 million (funded through $2.5 million of the Company’s current cash position and $12.5 million through the Acquisition Loan (as defined below) issued under the Company’s existing credit facility). The Seller also may be entitled to receive additional cash payments of up to an aggregate of $10.9 million, subject to an earn-out based upon the acquired businesses achieving certain earnings milestones within twenty-four months following the closing. The Company has estimated the fair value of the earn-out to be $4.4 million, calculated using a discounted cash flow method, which has been recorded in the consolidated balance sheet.
The Company has accounted for the acquisition as a purchase under the purchase method of accounting. The assets and liabilities of C2C and Evocomm are recorded as of the acquisition date at their respective fair values and consolidated with those of the Company. The excess of the purchase price over the net assets acquired was recorded as goodwill of approximately $11,666,000. Since this is a foreign entity, the goodwill and intangible assets are not deductible for income tax purposes.
The purchase price allocation was as follows (in thousands):
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
Acquisitions (continued)
The C2C and Evocomm acquisition contributed approximately $6.2 million and $0.7 million of revenue and net income, respectively for the year ended June 30, 2010.
The following unaudited pro forma information assumes that the acquisition of C2C and Evocomm occurred on July 1, 2008, after giving effect to certain adjustments, including amortization of intangibles, increased interest expense on the Acquisition Loan, decreased interest income due to use of cash to partially fund the acquisition, and income tax adjustments. The pro forma results are not necessarily indicative of the results of operations that would actually have occurred had the transaction taken place on the date indicated or of the results that may occur in the future:
On May 29, 2009, the Company, acting through its wholly owned subsidiary Telaurus LLC, acquired the entire business operations of Telaurus Communications LLC (the “Seller”), a privately owned company, including all of the issued stock of the Seller’s wholly-owned subsidiary Telaurus Communications Pte. Ltd., a company incorporated in Singapore.
Pursuant to the terms of the acquisition, the Company acquired the entire business operations of the Seller for a cash purchase price of $6.1 million (funded through the Company’s existing cash position). The Seller also was entitled to receive up to 335,000 shares of the Company’s common stock and up to 1,000,000 warrants to purchase shares of the Company’s common stock, subject to an earn-out based upon the acquired business achieving certain earnings milestones within twelve months following the closing. Based on results of the earn-out period, which expired on May 31, 2010, the former owners of Telaurus received approximately 104,000 common shares, and approximately $353,000 in cash on January 22, 2010, and 113,000 common shares, approximately $586,000 in cash and 244,910 warrants to purchase common stock at an exercise price of $10.00 on July 28, 2010. The warrants expire on July 28, 2013.
Telaurus is a service provider concentrated in the maritime sector, government and satellite service providers. Telaurus employs approximately 28 staff and has recurring service revenues in the maritime marketplace. The acquisition of Telaurus provided the Company with further entry into the growing maritime market currently being served by the Company.
The Company has accounted for the acquisition as a purchase under the purchase method of accounting. The assets and liabilities of Telaurus are recorded as of the acquisition date at their respective fair values and consolidated with those of the Company. The excess of the purchase price over the net assets acquired was recorded as goodwill and other intangible assets of approximately $9,946,000 and is deductible for income tax purposes over 15 years.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
Acquisitions (continued)
The purchase price allocation, which includes approximately $289,000 in transaction related costs, was as follows (in thousands):
The Company recorded additional goodwill of approximately $3,315,000 in the year ended June 30, 2010 related to achievement of the earn-out provision at Telaurus.
On February 27, 2009, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Stichting Administratiekantoor Mach 6, a foundation incorporated under the laws of the Netherlands, P.Visser Beheer B.V., a private company with limited liability incorporated under the laws of the Netherlands, Post Beheer B.V., a private company with limited liability incorporated under the laws of the Netherlands, Mr. Petrus Johannes Anthonius Visser, Mr. Albert Jan Post and B.V. Mach 6 (“Mach 6”).
Pursuant to the terms of the Purchase Agreement, the Company acquired 100% of the shares of Mach 6 for a purchase price of $5.7 million in cash (which was funded through the Company’s existing cash position). The Sellers were also entitled to receive up to 300,000 shares of the Company’s common stock, subject to an earn-out based on certain net income milestones, which provided that such net income milestones be achieved within twelve months of the acquisition date. These net income milestones were not achieved and the earn-out period has expired.
Mach 6 is a service provider and teleport operator, experienced in multiple vertical markets such as the maritime sector, government and satellite service providers. Mach 6 employs approximately 24 staff and has recurring service revenues in the government and maritime marketplaces. The acquisition of Mach 6 provided the Company with further entry into the growing maritime market and adds further penetration into government markets, currently being served by the Company.
The Company has accounted for the acquisition as a purchase under the purchase method of accounting, the assets and liabilities of Mach 6 are recorded as of the acquisition date at their respective fair values and consolidated with those of the Company. The excess of the purchase price over the net assets acquired was recorded as goodwill and other intangible assets of approximately $5,968,000. Since this is a foreign entity, the goodwill and intangible assets are not deductible for income tax purposes.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
Acquisitions (continued)
The purchase price allocation, which includes approximately $289,000 in transaction related costs, was as follows (in thousands):
In the year ended June 30, 2010, the services segment results of operations included four months (March through June) for C2C’s, Evocomm’s and Evosat’s operating results, since the date of acquisition.
In the year ended June 30, 2009, the services segment results of operations included four months (March through June) and one month (June 2009), for Mach 6 and Telaurus, respectively, since the dates of acquisition.
On a proforma basis, had the Mach 6 and Telaurus acquisitions taken place as of the beginning of the periods presented, our results of operations for those periods would not have been materially affected.
4.
Accounts Receivable
Accounts receivable include amounts billed but not paid by customers pursuant to retainage provisions in connection with infrastructure solutions contracts. At June 30, 2009 there was approximately $1,130,000 billed but not paid by customers under retainage provisions in connection with long-term contracts. Such balances are included in accounts receivable in the accompanying consolidated balance sheet as of June 30, 2009. Amounts were collected within one year.
5.
Inventories
Inventories consist of the following:
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6.
Fixed Assets
Fixed assets consist of the following:
Depreciation expense of approximately $5,994,000, $5,206,000 and $4,867,000 was included in the statement of operations in the years ended June 30, 2010, 2009 and 2008, respectively.
7.
Goodwill and Intangibles
The Company performs the goodwill impairment test annually in the fourth quarter. No impairment was noted on the goodwill and indefinite life intangible assets at June 30, 2010 and 2009. The carrying value of goodwill, which relates to the services reporting unit was as follows (in thousands):
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7.
Goodwill and Intangibles (continued)
Intangibles subject to amortization consist of the following:
Amortization expense of approximately $1,485,000, $762,000 and $875,000 was included in general and administrative expenses in the years ended June 30, 2010, 2009 and 2008, respectively.
Amortization expense for the next five years related to these intangible assets is expected to be as follows (in thousands):
8.
Long-Term Debt
As of June 30, 2010 debt consisted of the following (in thousands):
Acquisition Loan
The purchase of C2C and Evocomm was funded, in part, through a five-year $12,500,000 acquisition term loan (“Acquisition Loan”) provided by Citibank, N.A on March 5, 2010, under the Company’s existing credit facility. The Acquisition Loan bears interest at the prime rate or LIBOR plus 225 basis points, at the Company’s discretion. The balance is to be paid in equal monthly installments, excluding interest, of approximately $208,333 beginning on April 1, 2010. The interest rate in effect as of June 30, 2010 was approximately 2.8%. At June 30, 2010, $11,875,000 was outstanding of which $2,500,000 was due within one year. The Company is required to comply with various ongoing financial covenants described below, with
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8.
Long-Term Debt (continued)
which the Company was in compliance as of June 30, 2010. Future minimum payments under this agreement, excluding interest, for the next five years are expected to be as follows (in thousands):
Line of Credit
On May 28, 2010, the Company entered into Amendment No. 4 to the committed secured credit facility with Citibank, N.A. The credit facility has been extended and expires on May 26, 2011. The credit facility is comprised of a $65 million line of credit (the “Line”) and a foreign exchange line in the amount of $15 million. The Line includes the following sublimits: (a) $30 million available for standby letters of credit; (b) $20 million available for commercial letters of credit; (c) a line for up to two term loans, each having a term of no more than five years, in the aggregate amount of up to $40 million that can be used for acquisitions; and (d) $10 million available for revolving credit borrowings. At the discretion of the Company, advances under the Line bear interest at the prime rate or LIBOR plus applicable margin based on the Company’s leverage ratio and are collateralized by a first priority security interest on all of the personal property of the Company. At June 30, 2010 the applicable margin on the LIBOR rate was 225 basis points. The Company is required to comply with various ongoing financial covenants, including with respect to the Company’s leverage ratio, liquidity ratio, minimum cash balance, debt service ratio, EBITDA minimums and minimum capital base, with which the Company was in compliance at June 30, 2010. As of June 30, 2010, in addition to the Acquisition Loan described above there were standby letters of credit of approximately $8.1 million, which were applied against and reduced the amounts available under the credit facility.
9.
Common Stock
Offering
During the year ended June 30, 2008, the Company completed an offering of equity securities totaling $38,812,500 in gross proceeds. The Company sold 3,450,000 shares of common stock at a price of $11.25 per share. Expenses incurred totaled approximately $2,412,000, of which approximately $2,135,000 represented underwriting discounts and commissions and approximately $277,000 represented other expenses which resulted in net proceeds of approximately $36,400,000. Stephens Inc. acted as a joint lead bookrunner in the offering. Because A. Robert Towbin serves on the Company’s Board of Directors and as an Executive Vice President and Managing Director of Stephens Inc., Stephens Inc. may be deemed to be an “affiliate” of Globecomm under Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. Accordingly, the offering was made in compliance with the applicable provisions of Rule 2720, which require that the offering price of the common stock be no higher than that recommended by a “qualified independent underwriter,” as defined in Rule 2720.
10.
Stock Incentive and Stock Purchase Plans
On November 22, 2006, the Company’s Board of Directors authorized, and the stockholders subsequently approved, the 2006 Stock Incentive Plan (“2006 Plan”), which provides for grants of stock options or restricted stock awards to employees, directors and consultants of the Company for an aggregate
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10.
Stock Incentive and Stock Purchase Plans (continued)
of 850,000 shares of the Company’s common stock. In November 2009, the Company’s stockholders approved an amendment to the 2006 Plan whereby the number of shares authorized for issuance under the 2006 Plan increased by 1,500,000. At June 30, 2010 there were 1,030,900 shares available for grant under the 2006 Plan.
On February 26, 1997, the Company’s Board of Directors authorized, and the stockholders subsequently approved, the 1997 Stock Incentive Plan (“1997 Plan”), which authorized the granting to employees, directors and consultants of the Company options to purchase an aggregate of 2,280,000 shares of the Company’s common stock. In November 2000 and 2001, the Company’s stockholders approved amendments to the 1997 Plan whereby the number of shares authorized for issuance under the 1997 Plan increased by 800,000 shares in fiscal 2001 and 2002. In November 2004, the Company’s stockholders approved amendments to the 1997 Plan whereby the number of shares authorized for issuance under the 1997 Plan increased by 1,000,000 shares. On November 22, 2006, the Company terminated the 1997 Plan and cancelled all remaining unissued shares totaling approximately 1,311,000. No new options can be granted from the 1997 Plan.
Options granted under the 1997 Plan and 2006 Plan may be either incentive or non-qualified stock options. The exercise price of an option shall be determined by the Company’s Board of Directors or compensation committee of the board at the time of grant, however, in the case of an incentive stock option the exercise price may not be less than 100% of the fair market value of such stock at the time of the grant, or less than 110% of such fair market value in the case of options granted to a 10% owner of the Company’s stock.
Employee options generally vest annually in equal installments over a four-year period and expire on the tenth anniversary of the date of grant. Director options granted upon initial election to the Board of Directors vest one third on the grant date and an additional one third on each of the next two succeeding anniversaries of the date of grant. Each additional annual grant vests immediately. All director options expire the earlier of ten years from the date of grant or one year from concluding service as a director of the Company. Restricted stock awards generally vest annually in equal installments over a three-year period. One restricted grant of 202,000 shares (granted in February 2009) vested one third on the grant date and an additional one third on each of the next two succeeding anniversaries of the date of grant.
The following table summarizes the Company’s stock option activity (in thousands, except per share amounts):
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10.
Stock Incentive and Stock Purchase Plans (continued)
The following table summarizes information about stock options outstanding at June 30, 2010 (in thousands, except per share amounts):
Restricted shares and restricted stock units granted under the 2006 Plan totaled 398,000 and 587,000 shares in the years ended June 30, 2010 and 2009, respectively. The weighted average grant date fair value of restricted shares and restricted stock units granted during the years ended June 30, 2010 and 2009 was $7.60 and $6.26. As of June 30, 2010 there was approximately $3,891,000 of unrecognized compensation cost related to non-vested stock-based compensation related to the restricted shares and restricted share units. The cost is expected to be recognized over a weighted-average period of 2.0 years. As of June 30, 2010 there was approximately $173,000 of unrecognized compensation cost related to non-vested outstanding stock options. The cost is expected to be recognized over a weighted-average period of 2.1 years.
The Company has reserved approximately 1,844,000 shares of its common stock for issuance upon exercise of all available and outstanding options, warrants, and unvested restricted shares and restricted share units at June 30, 2010.
On September 23, 1998, the Board of Directors adopted, and the stockholders subsequently approved, the 1999 Employee Stock Purchase Plan (“1999 Plan”). Pursuant to the 1999 Plan, 400,000 shares of the Company’s common stock will be reserved for issuance. The 1999 Plan is intended to provide eligible employees of the Company, and its participating affiliates, the opportunity to acquire an interest in the Company at the lesser of 85% of fair market value at date of grant or date of purchase through participation in the payroll-deduction based employee stock purchase plan. The Board of Directors suspended the 1999 Plan effective July 1, 2005. At June 30, 2010, the number of remaining shares available for issuance under the 1999 Plan (if the Board of Directors were to lift the Plan suspension in the future) was 121,321.
11.
Basic and Diluted Net Income Per Common Share
Basic net income per common share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding for the period. For diluted net income per common share, the weighted average shares include the incremental common shares issuable upon the exercise of stock options and warrants and unvested restricted shares and restricted stock units (using the treasury stock method). The incremental common shares for stock options, warrants and unvested restricted shares and restricted stock units are excluded from the calculation of diluted net income per share, if their effect is anti-dilutive. Diluted net income per share for the years ended June 30, 2010, 2009 and 2008, excludes the effect of approximately 418,000, 967,000, and 450,000 stock options, warrants and
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11.
Basic and Diluted Net Income Per Common Share (continued)
unvested restricted shares and restricted stock units in the calculation of the incremental common shares, respectively, as their effect would have been anti-dilutive.
12.
Fair Value Measurements
The Company has categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
ASC 820 - Fair Value Measurements and Disclosures requires the use of observable market inputs (quoted market prices) when measuring fair value and requires Level 1 quoted price to be used to measure fair value whenever possible.
Foreign currency forward exchange contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
The fair value of indefinite-lived assets, which consists of goodwill, is measured on a non-recurring basis in connection with the Company’s annual goodwill impairment test (see Note 7 of the Notes to Consolidated Financial Statements). The fair value of the reporting unit to which goodwill has been assigned is determined using a projected discounted cash flow analysis based on unobservable inputs including gross profit, discount rate, working capital requirements, capital expenditures, depreciation and terminal value assumptions and are classified within Level 3 of the valuation hierarchy.
13.
Retirement Plan
The Company maintains a 401(k) plan, which covers substantially all employees of the Company. Participants may elect to contribute from 1% to 75% of their pre-tax compensation, subject to elective deferral limitations under Section 403 of the Internal Revenue Code. The plan allows for a matching contribution equal to the discretionary percentage of a participating employee not to exceed 4% of their compensation by the Company. Effective January 1, 2009, the Company changed the matching contribution to a maximum of 4% of their compensation not to exceed $2,500 per employee per calendar year. Effective January 1, 2010, the Company changed the matching contribution to a maximum of 4% of their compensation not to exceed $3,500 per employee per calendar year. The Company contributed approximately $581,000, $667,000, and $881,000 to the 401(k) plan during the years ended June 30, 2010, 2009 and 2008, respectively. In addition, the plan also provides for discretionary profit sharing contributions by the Company. There were no discretionary profit sharing contributions made by the Company during the years ended June 30, 2010, 2009 and 2008.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14.
Related Party Transactions
During fiscal 2001, the Company advanced $200,000 to a former executive officer of the Company. The Company received a promissory note payable on December 31, 2002 for this advance, which bore interest at an annual rate of 5.0% payable quarterly.
During fiscal 2002, the Company increased the $200,000 loan to $300,000 and amended the promissory note accordingly. During fiscal 2003, this former executive officer resigned from the board of directors and pursuant to a letter agreement (the “agreement”) the Company consolidated the then outstanding loan and advances receivable from this former executive officer and current employee of the Company into a $321,000 promissory note. Under the terms of the letter agreement the Company forgave the outstanding principal and interest amounts due on the promissory note in five annual installments beginning in January 2004 so long as the former executive officer remains an employee of the Company, subject to the terms of the agreement. The remaining principal balance of $65,000 was forgiven in March 2008.
In August and September 2007, the Company completed an offering of equity securities totaling $38,812,500 in gross proceeds. The Company sold 3,450,000 shares of common stock at a price of $11.25 per share. Expenses incurred totaled approximately $2,412,000, of which approximately $2,135,000 represented underwriting discounts and commissions and approximately $277,000 represented other expenses which resulted in net proceeds of approximately $36,400,000. Stephens Inc. acted as a joint lead bookrunner in the offering. Because A. Robert Towbin serves on the Company’s Board of Directors and as an Executive Vice President and Managing Director of Stephens Inc., Stephens Inc. may be deemed to be an “affiliate” of Globecomm under Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. Accordingly, the offering was made in compliance with the applicable provisions of Rule 2720, which require that the offering price of the common stock be no higher than that recommended by a “qualified independent underwriter,” as defined in Rule 2720.
15.
Income Taxes
The Company computes income taxes using the liability method. Accordingly, deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to the differences between the carrying amount of the assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities are determined by using enacted tax laws and rates in effect when the differences are expected to reverse. Net deferred tax assets are recorded when it is more likely than not that such tax benefits will be realized.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15.
Income Taxes (continued)
Significant components of the Company’s deferred tax assets (liabilities) are as follows:
During fiscal 2010, 2009 and 2008, the Company recorded a tax provision (benefit) of approximately $2,343,000, $1,193,000, and $(12,158,000) respectively. Information pertaining to the Company’s provision (benefit) for income taxes is as follows:
For the year ended June 30, 2010, the Company’s deferred tax asset valuation allowance increased by approximately $64,000 primarily related to losses in certain foreign jurisdictions for which no benefit has been provided. In addition, the Company recorded a deferred tax liability of $1,699,000 for intangibles related to the acquisition of C2C, Evocomm and Evosat.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15.
Income Taxes (continued)
As of June 30, 2010, the deferred tax asset valuation allowance of approximately $6,698,000 relates to net operating losses related to excess stock based compensation expense deductions of approximately $6,264,000, write-down of investments of approximately $383,000 and foreign net operating losses for which no benefit has been provided of approximately $51,000. If the remaining valuation allowance were to be reversed, approximately $6,264,000 would be allocated to additional paid-in-capital as such amounts are attributable to the tax effects of excess compensation deductions from exercises of employee stock options. The remainder of the valuation allowance would reduce income tax expense.
As of June 30, 2010, the Company had federal net operating loss carryforwards of approximately $36,232,000 which will expire at various dates beginning in 2020 through 2024, if not utilized. The Company also had various tax credits of approximately $4,413,000 including approximately $3,616,000 for research and development tax credits expiring at various dates beginning in 2021 through 2024 and approximately $797,000 for alternative minimum tax credits which may be carried forward indefinitely. The Company’s state NOLs expire at various dates beginning in 2022.
Federal income and foreign withholding taxes have not been provided on approximately $1,081,000 of undistributed earnings of international subsidiaries at June 30, 2010. The Company intends to reinvest these earnings in its foreign operations indefinitely, except where it is able to repatriate these earnings to the United States without material incremental tax provision. The determination and estimation of the future income tax consequences in all relevant taxing jurisdictions involves the application of highly complex tax laws in the countries involved, particularly in the United States, and is based on the tax profile of the Company in the year of earnings repatriation. Accordingly, it is not practicable to determine the amount of tax associated with such undistributed earnings. The Company has foreign net operating loss carryforwards of $181,000 which do not expire.
The reconciliation of tax provision (benefit) computed at the U.S. federal statutory tax rates to the effective income tax rates on pre-tax income are as follows:
In the fourth quarter of the year ended June 30, 2010, upon the completion of analysis, the Company recorded $1,454,000 for a non-recurring tax benefit which primarily relates to research and development tax credits for fiscal years 2006 through 2009.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15.
Income Taxes (continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties is as follows:
At June 30, 2010, the Company had a liability for unrecognized tax benefits of approximately $1,085,000, which, if recognized in the future, would favorably impact the Company’s effective tax rate. On a quarterly basis, the Company evaluates its tax positions and revises its estimates accordingly. The Company believes that none of these tax positions will be resolved within the next twelve months. The Company records both accrued interest and penalties related to income tax matters, if any, in the provision for income taxes in the accompanying consolidated statements of operations. As of June 30, 2010, the Company had not accrued any amounts for the potential payment of penalties and interest.
The Company is no longer subject to U.S. Federal income tax examinations prior to 2006. The periods subject to examination for the Company’s state jurisdictions are generally for the years ended 2006 through 2008.
16.
Segment Information
The Company operates through two business segments. Its infrastructure solutions segment, through Globecomm Systems Inc., is engaged in the design, assembly and installation of ground segment systems and networks. Its services segment, through GNSC, GSM, Cachendo, Mach 6, Telaurus, Melat, Evocomm, C2C, and Evosat provides satellite communication services capabilities.
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.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16.
Segment Information (continued)
The following is the Company’s business segment information for the years ended June 30, 2010, 2009 and 2008 and as of June 30, 2010 and 2009:
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16.
Segment Information (continued)
At June 30, 2010, the Company had total assets of approximately $12,837,000 including cash and cash equivalents of approximately $2,386,000 and long lived assets of approximately $2,631,000 located in the Netherlands and South Africa, associated with its wholly-owned subsidiaries, Mach 6, C2C, Evocomm and Evosat.
17.
Significant Customers and Concentrations of Credit Risk
The Company provides infrastructures solutions and provides services for customers in diversified geographic locations. Credit risk with respect to accounts receivable is concentrated due to the limited number of customers. The timing of cash realization is determined based upon the contract or service agreements with the customers. The Company performs ongoing credit evaluations of its customers’ financial condition and in some cases requires a letter of credit or cash in advance for foreign customers. The Company evaluates the collectibility of accounts receivable based on numerous factors, including past transaction history with customers and their credit worthiness. The Company’s estimate of its allowance for doubtful accounts is periodically adjusted when the Company becomes aware of a specific customer’s inability to meet its financial obligations, or as a result of changes in the overall aging of accounts receivable. Allowances related to accounts receivable at June 30, 2010 and 2009, were approximately $1,988,000, and $1,043,000, respectively.
For the year ended June 30, 2010, one customer accounted for 12% of the Company’s consolidated revenues and for the years ended June 30, 2009 and 2008, one customer accounted for 12% and 19% of the Company’s consolidated revenues, respectively.
Revenues earned from infrastructure solutions are attributed to the geographic location to which the equipment is shipped. Revenues earned from services are attributed to the geographic location in which the services are being provided. Revenues attributed to the United States for the years ended June 30, 2010, 2009 and 2008 were 42%, 51% and 52%, respectively. Revenues from foreign sales as a percentage of total consolidated revenues are as follows:
The Company places its cash and cash equivalents with high quality financial institutions. Approximately 92% and 97% of all cash and cash equivalents are held in one financial institution at June 30, 2010 and 2009. Cash and cash equivalents is in excess of Federal Deposit Insurance Company insurance limits.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18.
Commitments and Contingencies
Lease Commitments
The Company currently leases satellite space segment services, office space, teleport services and other equipment under various operating leases, which expire in various years through 2016. As leases expire, it can be expected that in the normal course of business they will be renewed or replaced.
Future minimum lease payments under non-cancelable operating leases with terms of one year or more consist of the following at June 30, 2010 (in thousands):
Rent expense for satellite space segment services, office space, teleport services, and other equipment was approximately $30,428,000, $21,091,000 and $18,694,000 for years ended June 30, 2010, 2009 and 2008, respectively.
Employment Agreements
The Company has entered into employment agreements with certain employees. The Company will have certain obligations to these individuals if they are terminated including severance of approximately $5,600,000. Each employment agreement renews automatically for additional terms of one year, unless either party provides written notice to the other party of its intention to terminate the agreement.
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19.
Quarterly Information (unaudited)
The following tables set forth unaudited consolidated financial information for each of the eight fiscal quarters in the period ended June 30, 2010.
(a)
In the fourth quarter of the year ended June 30, 2010, upon the completion of analysis, the Company recorded $1,454,000 for a non-recurring tax benefit which primarily relates to research and development tax credits for fiscal years 2006 through 2009.
GLOBECOMM SYSTEMS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(a)
Reduction in allowance due to write-off of accounts receivable balances (net of recovery).
(b)
Increase (reduction) in valuation allowance for net deferred tax assets.
S-1
Index of Exhibits
**
Portions of this agreement have been omitted and filed separately with the secretary of the Securities and Exchange Commission pursuant to a confidential treatment request.