ITEM 2. PROPERTIES
During the fiscal year ended June 30, 1998, the Company completed the renovation of approximately 122,000 square feet of space in a facility on approximately 7 acres located at 45 Oser Avenue, Hauppauge, New York. These premises house the principal offices and production facilities of the Company and NetSat Express. Prior to the completion of the renovation of these facilities, the Company leased 20,000 square feet of space in an industrial facility located at 375 Oser Avenue, Hauppauge, New York under an agreement which terminated on July 31, 1997. The Company has a lease on office space in Hong Kong at a monthly rental fee (including maintenance fees) of approximately $3,000. The Company also leases office space in the Atlanta, Georgia, area under a three-year lease at an initial base monthly rent of $1,750, which rental amount increases in years two and three of the lease and is currently approximately $1,900 per month.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "GCOM". The fiscal 1998 high and low closing prices are as follows:
High Low ------------------------- First Quarter (from August 13, 1997 through September 30, 1997) $ 19.63 $ 11.88 Second Quarter 19.25 10.50 Third Quarter 15.25 9.00 Fourth Quarter 14.25 8.50
At September 25, 1998, there were approximately 2,700 stockholders of record of the Company's Common Stock, as shown in the records of the Company's transfer agent.
At the close of the Nasdaq National Market on September 25, 1998, the Company's market price per share was $5.50.
As of June 30, 1998, the Company had not declared or paid dividends on its Common Stock since inception and does not expect to pay dividends in the foreseeable future.
The effective date of the Company's first registration statement (the "Registration Statement") filed on Form S-1 (Registration No. 333-22425) under the Securities Act of 1933, as amended, was August 7, 1997. The class of securities registered was Common Stock. The offering commenced on August 8, 1997 and all securities were sold in the offering. The managing underwriters for the offering were PaineWebber Incorporated and C.E. Unterberg, Towbin.
Pursuant to the Registration Statement, the Company registered and sold 3,162,500 shares of Common Stock for an aggregate offering price of $31,625,000. The Company incurred total expenses in the offering of approximately $3,721,000 of which approximately $2,214,000 represented underwriting discounts and commissions and approximately $1,507,000 represented other expenses. All such payments were direct or indirect payments to others. The net offering proceeds to the Company after deducting the total expenses were approximately $27,904,000.
From the effective date of the Registration Statement to June 30, 1998, the approximate amount of the net offering proceeds used were $3.4 million to fund capital expenditures and investing activities and $12.1 million for working capital purposes, increased selling and marketing efforts, and increased internal research and development expenses. All such payments were direct or indirect payments to others.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial Statements.
(2) EBITDA represents earnings before minority interests in operations of consolidated subsidiary, interest income, net, income taxes, depreciation and amortization expense. EBITDA does not represent cash flows as defined by generally accepted accounting principles and does not necessarily indicate that cash flows are sufficient to fund all the Company's cash needs. EBITDA is a financial measure commonly used in the Company's industry and should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other measures of liquidity determined in accordance with generally accepted accounting principles. EBITDA may not be comparable to other similarily titled measures of other companies.
(3) The Company records an order in backlog when it receives a firm contract or purchase order which identifies product quantities, sales price and delivery dates. Backlog represents the amount of unrecorded revenue on undelivered orders and a percentage of revenues from sales of products that have been shipped but have not been accepted by the customer. The Company's backlog at any given time is not necessarily indicative of future period revenues. See "Business-Backlog."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-K contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed in "Risk Factors" as well as those discussed elsewhere in this Form 10-K.
OVERVIEW
Since the Company's inception, substantially all of the Company's revenue has been generated by its satellite ground segment-related operations. Contracts for these ground segment systems and networks have been in virtually all cases fixed-price contracts. Profitability of such contracts is subject to inherent uncertainties as to the cost of performance. In addition to possible errors or omission in making initial estimates, cost overruns may be incurred as a result of unforeseen obstacles including both physical conditions and unexpected problems encountered in engineering design and testing. Since the Company's business may at certain times be concentrated in a limited number of large contracts, a significant cost overrun on any contract could have a material adverse effect on the Company's business, financial condition and results of operations. The period from contract award through installation of ground segment systems and networks supplied by the Company generally requires from three to 12 months. The Company uses the percentage of completion method of accounting for contract revenues, upon the achievement of certain milestones. Accordingly, most of the revenue from sales of products is typically recognized when the product is shipped, with the balance recognized at the time of acceptance by the customer. Revenues from providing services are recognized at the time the service is performed. Costs of revenues are generally recorded based on the relationship of the amount of projected final costs to the percentage of revenue recorded for the specific contract. See Note 2 of Notes to Consolidated Financial Statements.
Costs of revenues consist primarily of the costs of purchased material, direct labor and related overhead expenses, project-related travel, living costs and subcontractor salaries. Selling and marketing expenses consist primarily of salaries and travel and living costs for sales and marketing personnel. Research and development expenses consist primarily of salaries and related overhead expenses paid to engineers. The Company also benefits from research and development conducted by its strategic suppliers. See "Business-Research and Development." General and administrative expenses consist of expenses associated with the Company's management, accounting, contract and administrative functions. The Company anticipates that selling and marketing, research and development and general and administrative expenses will continue to increase during the next several years due to expected increases in personnel and expenses related to supporting the Company's expanding customer base.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of total revenues for the periods indicated:
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
Revenues. Revenues, which were primarily derived from sales of ground segment systems and networks, increased by $21.9 million, or 60.4%, to $58.1 million for the fiscal year ended June 30, 1998 from $36.2 million for the fiscal year ended June 30, 1997. The increase was primarily the result of a negotiated contract with Sonangol, U.E.E. as well as an overall increase in the number of shipments and/or completion of contracts as the Company continued to expand its businesses. Revenues for the three month period ended June 30, 1998 decreased by 25.2% to $11.0 million from $14.7 million for the same period in the previous year as a result of the decline in bookings in previous quarters as a result of the economic conditions in the Pacific Rim region, Russia and other international markets. The Company expects the trend in revenues that adversely affected its results of operations for the three month period ended June 30, 1998 to continue to impact the Company. These trends include the difficult economic conditions in the Pacific Rim region, Russia and other international markets and the decrease in bookings received by the Company from these regions.
Gross Profit. Gross profit increased by $4.4 million to $8.6 million for the fiscal year ended June 30, 1998 from $4.2 million for the fiscal year ended June 30, 1997. The increase was primarily due to the increase in the shipment of ground segment systems and networks. Gross profit as a percentage of revenues was 14.8% for the fiscal year ended June 30, 1998 compared to 11.5% for the fiscal year ended June 30, 1997. The increase was due primarily to a significant negotiated contract with Sonangol, U.E.E., which resulted in higher gross profit margin offset in part by an increase in orders awarded through a competitive bidding process, which typically result in lower gross profit margins than negotiated contracts.
Selling and Marketing. Selling and marketing expenses increased by $0.9 million, or 27.6%, to $4.2 million for the fiscal year ended June 30, 1998 from $3.3 million for the fiscal year ended June 30, 1997. The increase was primarily due to the increase in the number of bids and proposals prepared by the Company, as well as an increase in marketing personnel from 25 at June 30, 1997 to 35 at June 30, 1998. Selling and marketing expenses as a
percentage of revenues was 7.2% for the fiscal year ended June 30, 1998 compared to 9.1% for the fiscal year ended June 30, 1997.
Research and Development. Research and development expenses increased by $0.5 million, or 83.1%, to $1.2 for the fiscal year ended June 30, 1998 from $0.6 million for the fiscal year ended June 30, 1997 due to an increase in development costs associated with custom solutions. Research and development expenses as a percentage of revenues increased to 2.1% for the fiscal year ended June 30, 1998 from 1.8% for the fiscal year ended June 30, 1997.
General and Administrative. General and administrative expenses increased by $1.6 million, or 45.3%, to $5.0 million for the fiscal year ended June 30, 1998 from $3.4 million for the fiscal year ended June 30, 1997, but decreased as a percentage of revenues to 8.6% for the fiscal year ended June 30, 1998 from 9.5% for the fiscal year ended June 30, 1997. The increase in general and administrative expenses resulted primarily from an increase of approximately $0.7 million in legal and other costs associated with operating a public company, and an increase of approximately $0.5 million in personnel and related expenses to support the continued growth of the Company's business.
Interest Income. Interest income increased by $1.0 million to $1.3 million for the fiscal year ended June 30, 1998 from $0.3 million for the fiscal year ended June 30, 1997. The increase was primarily the result of the investment of remaining net proceeds from the Company's initial public offering.
NetSat Express. During the fiscal year ended June 30, 1998, the Company's consolidated consolidated subsidiary NetSat Express experienced an increase in revenues of approximately $0.6 million to approximately $0.7 million from approximately $0.1 million for the year ended June 30, 1997. The increase resulted from the implementation of Access Plus services in January 1998, an increase in the number of PC Vector equipment sales and related activations. The increase in loss from operations associated with NetSat Express of approximately $0.2 million to $1.7 million for the fiscal year ended June 30, 1998 from $1.5 million for the year ended June 30, 1997 was mainly attributable to initial start up costs associated with providing Access Plus and PC Vector services.
FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
Revenues. Revenues, which were derived from sales of ground segment systems and networks, increased by $22.7 million, or 168.8%, to $36.2 million for the fiscal year ended June 30, 1997 from $13.5 million for the fiscal year ended June 30, 1996. The increase was primarily the result of an increase in the number of shipments and/or completion of contracts from 22 for the fiscal year ended June 30, 1996 to 47 for the fiscal year ended June 30, 1997.
Gross Profit. Gross profit increased by $1.9 million to $4.2 million for the fiscal year ended June 30, 1997 from $2.2 million for the fiscal year ended June 30, 1996. The increase was primarily due to the increase in the shipment of ground segment systems and networks. Gross profit as a percentage of revenues was 11.5% for the fiscal year ended June 30, 1997 compared to 16.6% for the fiscal year ended June 30, 1996. Such decrease was due primarily to an increase in orders awarded through a competitive bidding process, which typically result in lower gross profit margins than negotiated contracts and a contract awarded in the previous year with an unusually high profit margin.
Selling and Marketing. Selling and marketing expenses increased by $1.4 million, or 71.4%, to $3.3 million for the fiscal year ended June 30, 1997 from $1.9 million for the fiscal year ended June 30, 1996. The increase was primarily due to the opening of marketing offices in Hong Kong and in Atlanta, Georgia, the hiring of selling and marketing personnel for NetSat Express, which accounted for approximately $0.6 million, or 17.5%, of the selling and marketing expenses for the year and the increase in the number of bids and proposals prepared by the Company. Selling and marketing expenses as a percentage of revenues was 9.1% for the fiscal year ended June 30, 1997 compared to 14.2% for the fiscal year ended June 30, 1996.
Research and Development. Research and development expenses decreased by $0.1 million, or 8.9%, to $0.6 million for the fiscal year ended June 30, 1997 from $0.7 million for the fiscal year ended June 30, 1996 due to a decline in development costs associated with customizable systems. Research and development expenses as a percentage of revenues decreased to 1.8% for the fiscal year ended June 30, 1997 from 5.3% for the fiscal year ended June 30, 1996.
General and Administrative. General and administrative expenses increased by $1.5 million, or 77.3%, to $3.4 million for the fiscal year ended June 30, 1997 from $1.9 million for the fiscal year ended June 30, 1996, but decreased as a percentage of revenues to 9.5% for the fiscal year ended June 30, 1997 from 14.4% for the fiscal year ended June 30, 1996. The increase in general and administrative expenses resulted from personnel increases to service the increasing customer base for the Company's ground segment business as well as the hiring of NetSat Express administrative personnel, which accounted for approximately $0.6 million, or 17.6%, of the general and administrative expenses for the year.
QUARTERLY RESULTS
The following tables set forth certain unaudited financial information for each of the eight fiscal quarters in the period ended June 30, 1998. The Company believes that this information has been presented on the same basis as the audited Consolidated Financial Statements appearing elsewhere in the Prospectus and in the opinion of management all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the audited Consolidated Financial Statements of the Company and related Notes thereto included elsewhere in this Form 10-K. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
The Company may continue to experience significant quarter to quarter fluctuations in its results of operations, which may result in volatility in the price of the Company's Common Stock. Quarterly results of operations may fluctuate as a result of a variety of factors, including the timing of the initiation and completion of contracts, delays in the booking of new contracts, the demand for the Company's products and services, the introduction of new or enhanced products and services by the Company or its competitors, market acceptance of new products and services, the mix of revenues between custom-built satellite communications systems and networks designed for its
customers and standard installations provided to its customers, the growth of demand for Internet infrastructure-based products and services in developing countries, the timing of significant marketing programs, the extent and timing of the hiring of additional personnel, competitive conditions in the industry and general economic conditions in the U.S. and abroad, such as the difficult economic conditions and currency devaluations in the Pacific Rim region, Russia and other international markets which have adversely impacted and may continue to adversely impact the Company's quarterly results. Due to the foregoing factors, it is likely that in one or more future quarters the Company's operating results will be below the expectations of public market analysts and investors. Such an event could have a material adverse effect on the price of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily from the sale of equity securities and, to a lesser degree, from stockholder loans. Through June 30, 1998, the Company raised approximately $49.1 million of net proceeds through a public offering of its Common Stock and private offerings of its Common Stock and Convertible Preferred Stock. During the fiscal year ended June 30, 1998, the Company received net proceeds of approximately $28.7 million from sales of Common Stock through the Company's Initial Public Offering. In addition, the Company received approximately $0.6 million in proceeds from the exercise of stock options and warrants during the fiscal year ended June 30, 1998.
At June 30, 1998, the Company had working capital of $31.7 million, including cash and cash equivalents of $21.3 million, restricted cash of $4.4 million, accounts receivable of $18.0 million, inventories of $1.6 million and prepaid and other current assets of $0.6 million, offset by $13.0 million in accounts payable and $1.2 million in accrued expenses.
The Company has experienced negative cash flow from operations since its inception. Such negative cash flows were due to the net losses, increases in accounts receivable and decreases in accounts payable during the respective periods. Net cash used in operating activities for the fiscal years ended June 30, 1998, 1997 and 1996 was $5.9 million, $2.0 million and $2.5 million, respectively.
Management anticipates that NetSat Express will experience negative cash flow for at least the next 12 months as a result of additional capital investments required for continued development of its operations in Eastern Europe and losses from operations.
Several factors had a major effect on the Company's liquidity during the fiscal year ended June 30, 1998. First, revenues increased substantially as a result of a significant increase in contract deliveries and completed installations. The higher revenues increased the Company's working capital needs, as accounts receivable increased by approximately $3.7 million and accounts payable decreased by approximately $3.0 million during the fiscal year ended June 30, 1998. Offsetting this increase was an increase in accrued expenses of approximately $0.1 million. Because the Company records progress payments as an offset to inventory, the approximately $0.7 million decrease in net inventory during the fiscal year is lower than might be expected based on the increased level of activity and shipments against progress payments for contracts completed (a decrease of approximately $3.4 million from June 30, 1997 to June 30, 1998). Inventory levels may be expected to increase as work proceeds on newly acquired and existing contracts.
The second factor affecting liquidity during the fiscal year ended June 30, 1998 was the Company's investment activities. The Company increased its investment in its strategic suppliers by approximately $0.8 million during the fiscal year and purchased approximately $1.6 million in additional computer, machinery and test equipment. In addition, the Company completed renovation of its new office and assembly facility for which it spent approximately $1.0 million in cash on improvements and has spent an additional $0.8 million on furniture and fixtures.
The third major factor affecting liquidity was the completion of an initial public offering of Common Stock and the exercise of options and warrants during the fiscal year ended June 30, 1998. Net proceeds of these
transactions were approximately $29.3 million leaving the Company with cash and cash equivalents at the end of the fiscal year of approximately $21.3 million, which does not include $4.4 million of restricted cash.
The Company has incurred losses since its inception and therefore has not been subject to federal income taxes. Through June 30, 1998, the Company, for income tax purposes, has generated net operating loss carryforwards of approximately $8.2 million which may be available to reduce future taxable income and future tax liabilities. These carryforwards expire through 2013. The Tax Reform Act of 1986 provides for an annual limitation on the use of net operating loss carryforwards (following certain ownership changes) that could significantly limit the Company's ability to utilize these carryforwards. The exercise of options or warrants or in connection with future sales of equity could limit the Company's ability to utilize the aforementioned carryforwards to reduce future taxable income and tax liabilities. Additionally, because the United States tax laws limit the time during which these carryforwards may be applied against future taxes, the Company may not be able to take full advantage of these attributes for federal income tax purposes.
The Company has a $7.5 million credit facility consisting of (1) a $5.0 million secured domestic line of credit and (2) a $2.5 million secured export-import guaranteed line of credit. Each line of credit bears interest at the prime rate plus 1/2% per annum and is collateralized by a first security interest on all assets.
The Company's future capital requirements will depend upon many factors, including the extent to which it is able to locate additional strategic suppliers in whose technology it wishes to invest, the success of the Company's marketing efforts in both the satellite ground segment and Internet services fields, the demand, nature and timing of customer orders and the extent to which it must conduct research and development efforts internally. Based on current plans, the Company believes that its existing capital resources will be sufficient to meet its capital requirements for at least the next 12 months.
RISK FACTORS
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company, which was formed in August 1994, has a limited operating history upon which an evaluation of the Company can be based and has incurred significant operating losses since its inception. The Company has financed its operations to date primarily from the sale of equity securities and, to a lesser degree, from stockholder loans. The Company generated its first revenue from its ground segment systems and networks business in June 1995 and has generated only minimal revenues from its satellite-delivered data communications services business, which commenced operations in July 1996. The Company incurred operating losses of $1.1 million, $2.3 million, $2.7 million and $0.5 million during the fiscal years ended June 30, 1995, 1996, 1997 and 1998, respectively and may incur further operating losses as it attempts to expand its business. The Company's ability to expand its business and generate additional revenues and future positive operating and net income is dependent, in large part, on its ability to obtain new contracts and the profitability of such contracts, and there can be no assurance that the Company will generate significant additional revenues or report quarterly or annual positive operating or net income. As of June 30, 1998, the Company had an accumulated deficit of $6.5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
INHERENT RISK OF INTERNATIONAL OPERATIONS
Most of the Company's revenues are derived from sales to customers outside the United States. The Company anticipates that foreign sales will continue to account for a significant portion of total revenues in the foreseeable future. The Company's foreign sales are generally denominated in U.S. dollars. Consequently, the decrease in the value of foreign currencies relative to the U.S. dollar, such as the currency devaluations in the Pacific Rim region, Russia and other international currencies, has adversely affected and may continue to adversely affect the demand for the Company's products and services by increasing the price of the Company's products and services in the
currency of the countries in which they are sold. Additional risks inherent in the Company's international business activities include various and changing regulatory requirements, costs and risks of relying upon local subcontractors for the installation of its ground segment systems and networks, increased sales and marketing expenses, availability of export licenses, tariffs and other trade barriers, political and economic instability, difficulties in staffing and managing foreign operations, potentially adverse taxes, complex foreign laws and treaties and the possibility of difficulty in accounts receivable collections. The recent economic and monetary crisis in the Pacific Rim countries, including Korea, Malaysia, Thailand, Philippines, Indonesia and other countries in the region, as well as the recent economic and monetary declines in Russia, has resulted in a decreased demand in such countries and other foreign regions for capital equipment such as the ground segment systems and networks supplied by the Company. The difficult economic conditions in the Pacific Rim region, Russia and other international markets and the decrease in bookings received by the Company from these and other foreign regions have adversely effected the Company's results of operations for the fourth quarter of 1998 and the Company expects that these negative trends will continue to adversely impact it. In addition, the Company is subject to the Foreign Corrupt Practices Act (the "FCPA") which may place the Company at a competitive disadvantage to foreign companies, which are not subject to the FCPA. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations.
QUARTERLY FLUCTUATIONS
The Company may continue to experience significant quarter to quarter fluctuations in its results of operations, which may result in volatility in the price of the Company's Common Stock. Quarterly results of operations may fluctuate as a result of a variety of factors, including the timing of the initiation and completion of contracts, delays in the booking of new contracts, the demand for the Company's products and services, the introduction of new or enhanced products and services by the Company or its competitors, market acceptance of new products and services, the mix of revenues between custom-built satellite communications systems and networks designed for its customers and standard installations provided to its customers, the growth of demand for Internet infrastructure-based products and services in developing countries, the timing of significant marketing programs, the extent and timing of the hiring of additional personnel, competitive conditions in the industry and general economic conditions in the U.S. and abroad, such as the difficult economic conditions and currency devaluations in the Pacific Rim region, Russia and other international markets which have adversely impacted, and may continue to, adversely impact the Company's quarterly results. See "Inherent Risk of International Operations". Due to the foregoing factors, it is likely that in one or more future quarters the Company's operating results will be below the expectations of public market analysts and investors. Such an event could have a material adverse effect on the price of the Company's Common Stock.
INTENSE COMPETITION; LIMITED BARRIERS TO ENTRY
The markets for both ground segment systems and networks and satellite-delivered data communications services are highly competitive. Many of the Company's competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than those available to the Company. As a result, such competitors may be able to develop and expand their products and services more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products and services than can the Company. In addition, there are limited barriers to entry in the Company's markets and certain of the Company's strategic suppliers and customers have technologies and capabilities in the Company's product areas and could choose to compete with the Company or to replace the Company's products or services with their own. The entry of new competitors, the decision by a strategic ally to compete with the Company or the decision by a customer to develop and employ in-house capability to satisfy its satellite communications needs could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company anticipates that its competitors may develop or acquire competing products or that provide functionality that is similar to that provided by the Company's products and that such products may be offered at significantly lower prices or bundled with other products. In addition, current and potential competitors in both markets in which the Company competes have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products and services to address the needs of the Company's current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross profit margins and loss of market share, any of which would have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on the Company's business, financial condition and results of operations.
The Company also is dependent on the continued success and development of the satellite communications industry, which itself competes with other technologies such as terrestrial microwave, copper wire and fiber optic communications systems. Any failure of the satellite communications industry to continue to develop, or any technological development which significantly improves the capacity, cost or efficiency of such competing systems relative to satellite systems, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Rapid Industry Change; Technological Obsolescence."
RELIANCE ON STRATEGIC RELATIONSHIPS
The Company is dependent on certain customers and suppliers for the development and expansion of its ground segment system and network business. However, such relationships are not governed by any contract and accordingly neither the Company nor such customers or suppliers are obligated to maintain such strategic relationships. There can be no assurance that the Company will be able to maintain such strategic relationships, that its strategic customers and suppliers will continue to assist the Company by developing and expanding its business and by providing research and development expertise, or that such strategic customers and suppliers will not actually compete with the Company in the future. See "Intense Competition; Limited Barriers to Entry."
In addition, the Company relies on the Personal Earth Station and DirecPC technologies provided by HNS, a subsidiary of Hughes Electronics Corp. in connection with the operation of NetSat Express's satellite-delivered data communications services business. Each project for which NetSat Express uses HNS' DirecPC technology will require the grant of a license from HNS to NetSat Express. HNS is under no obligation to grant such licenses and there can be no assurance that NetSat Express will be able to negotiate such licensing arrangements with HNS on acceptable terms, or at all. In addition, failure to maintain a business relationship with HNS would have a material adverse effect on the Company's business, financial condition and results of operations.
Because the Company intends to provide its satellite-delivered data communications services almost entirely in developing markets where the Company has little or no market experience, the Company will also be dependent on local partners in such markets to provide marketing expertise and knowledge of the local regulatory environment in order to facilitate the acquisition of necessary licenses and access to existing customers. The Company has not yet formally established an alliance with a local partner. The Company's failure to form and maintain such alliances with local partners, or the preemption or disruption of such alliances by the actions of the Company's competitors or otherwise, would adversely affect the Company's ability to penetrate and compete successfully in such emerging markets. There can be no assurance that the Company will be able to compete successfully in the future in such markets or that competition will not have a material adverse effect on the Company's business, financial condition and results of operations.
RISK OF CUSTOMER CONCENTRATION
The Company typically relies upon a small number of customers for a large portion of its revenues. For example, approximately 29% of the Company's revenues in fiscal 1998 were derived from sales to Sonangol, U.E.E. At June 30, 1998, $12.2 million, or approximately 28% of the Company's backlog, was accounted for by a contract between the Company and Transworld Communications Services, Inc. and $7.1 million, or approximately 16% of the Company's backlog, was accounted for by a contract between the Company and Sonangol, U.E.E. The Company expects that in the near term a significant portion of its revenues will continue to be derived from one or a limited number of customers (the identity of whom may vary from period to period) as the Company seeks to expand its business and its customer base. The reduction, delay, or cancellation of orders from one or more of such significant customers would have a material adverse effect on the Company's business, financial condition and results of operations.
RISK OF MANAGEMENT OF RAPID GROWTH
The Company has been significantly and rapidly expanding its operations since its inception. In order to pursue successfully the opportunities presented by the ground segment and emerging satellite-delivered communications and Internet/intranet-infrastructure markets, the Company will be required to continue to expand its operations. Such expansion has placed, and is expected to continue to place, a significant strain on the Company's personnel, management, financial and other resources. In order to manage any future growth effectively, the Company will, among other things, be required to attract, train, motivate and manage a significantly larger number of employees successfully to conduct product engineering and management, product implementation, sales activity and customer support activities; manage higher working capital requirements; and improve its operating and financial systems. Any failure to manage any future growth in an efficient manner and at a pace consistent with the Company's business could have a material adverse effect on the Company's business, financial condition and results of operations.
RISK OF FIXED-PRICE CONTRACTS
Virtually all of the Company's contracts for installation of ground segment systems and networks are on a fixed-price basis. Profitability of such contracts is subject to inherent uncertainties as to the cost of performance. In addition to possible errors or omissions in making initial estimates, cost overruns may be incurred as a result of unforeseen obstacles, including both physical conditions and unexpected problems encountered in engineering, design and testing. Since the Company's business may at certain times be concentrated in a limited number of large contracts, a significant cost overrun on any one contract could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk of Customer Concentration."
EMPHASIS ON DEVELOPING MARKETS; UNCERTAIN MARKET POTENTIAL
The Company believes a substantial portion of the growth in demand for its ground segment systems and networks and its recently launched satellite-delivered data communications services will come from customers in developing countries. There can be no assurance that such increases in demand will occur or that prospective customers will accept such products and services in sufficient quantities or at all. The degree to which the Company is able to penetrate potential markets in developing countries will be affected in major part by the speed with which other competing elements of the communications infrastructure, such as telephone lines, other satellite-delivered solutions and fiber optic cable and television cable, are installed in the developing countries and with respect to the Company's data communications services, on the effectiveness of the Company's local partners in such markets. The failure to have its products and services accepted in developing countries would have a material adverse effect on the Company's business, financial condition and
results of operations. See "Intense Competition; Limited Barriers to Entry" and "Reliance on Strategic Relationships."
RAPID INDUSTRY CHANGE; TECHNOLOGICAL OBSOLESCENCE
The telecommunications industry, including the satellite communications ground segment systems and networks and data communication services businesses, is characterized by rapid and continuous technological change. Future technological advances in the telecommunications industry may result in the availability of new products or services that could compete with the satellite ground segment products and services provided by the Company or render the Company's products and services obsolete. There can be no assurance that the Company will be successful in developing and introducing new products and services that meet changing customer needs or in responding to technological changes or evolving industry standards in a timely manner, if at all, or that services or technologies developed by others will not render the Company's products or services noncompetitive. Any failure by the Company to respond to changing market conditions, technological developments, evolving industry standards or changing customer requirements, or the development of competing technology or products that render the Company's products and services noncompetitive or obsolete would have a material adverse effect on the Company's business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to accept only two digit entries in the data code field. These data code fields will need to accept four digit entries to distinguish 21st century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Although the Company's internal systems as well as the software it installs in its satellite ground segment systems and networks are designed to be Year 2000 compliant, there can be no assurance that such systems and software contain all necessary date code changes.
The Company and its customers may be affected by Year 2000 issues. Compliance with Year 2000 requirements may disrupt the Company's ability to continue designing, assembling and installing its satellite ground segment systems and networks. The Company may also incur certain expenditures in connection with Year 2000 compliance. Additionally, even if the Company's internal systems and the software it installs in its ground segment systems and networks are Year 2000 compliant, there can be no assurance that the equipment the Company obtains from third-party vendors and incorporates into its ground segment systems and networks is Year 2000 compliant. If such equipment is not Year 2000 compliant, it could disrupt the ability of the Company's customers to use the Company's ground segment systems and networks. In addition, there can be no assurance that equipment operated by third parties that interface with or contain the Company's products will timely achieve Year 2000 compliance. Furthermore, if the Company's ground segment systems and networks were unable to be used by the Company's customers because of Year 2000 compliance problems, there can be no assurance that the Company's customers will not commence litigation against the Company for such systems and networks failure. Any of the foregoing could result in a material adverse effect on the Company's business, financial condition and results of operations.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company currently procures most of the critical components and services for its products from single or limited sources in connection with specific contracts and does not otherwise carry significant inventories or have long-term or exclusive supply contracts with its source vendors. The Company has from time to time experienced delays in receiving products from certain of its vendors due to quality control or manufacturing problems, shortages of materials or components or product design difficulties. There can be no assurance that similar problems will not recur or that replacement products will be available when needed at commercially reasonable rates, or at all. If the Company were to change certain of its vendors, the Company would be
required to perform additional testing procedures upon the components supplied by such new vendors, which could prevent or delay product shipments. Additionally, prices could increase significantly in connection with changes of vendors. Any inability of the Company to obtain timely deliveries of materials of acceptable quality or timely services, or any significant increase in the prices of materials or services, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk of Fixed-Price Contracts" and "Quarterly Fluctuations".
RISK OF FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS
The Company is subject to various federal laws and regulations which may have negative effects on the Company. The Company operates a teleport in Hauppauge, New York, which is subject to FCC Rules and Regulations. The Company has obtained certain licenses from the FCC for both domestic and international operation of the teleport and must operate it in compliance with FCC Rules and Regulations for the term of the license. There can be no assurance that the Company will be able to obtain additional licenses that may be required or maintain the necessary licenses.
Under the FCC Rules and Regulations, non-U.S. citizens or their representatives, foreign governments, or corporations otherwise subject to control by non-U.S. citizens, may not own more than 20% of a licensee directly, or, if the FCC finds it consistent with the public interest, may not own more than 25% of the parent of a licensee. Non-U.S. citizens may not serve as officers of a licensee or as members of a licensee's board of directors, although the FCC may waive this requirement in whole or in part. Failure to comply with these requirements may result in the FCC issuing an order to the entity requiring divestiture of alien ownership to bring the entity into compliance with the FCC Rules and Regulations. In addition, fines, a denial of renewal or revocation of the license are possible. The Company has no knowledge of any present foreign ownership which would result in a violation of the FCC Rules and Regulations, but there can be no assurance that foreign holders will not in the future hold more than 20% or 25% of the Common Stock of the Company.
Regulatory schemes in countries in which the Company may seek to provide its satellite-delivered data communications services may impose impediments on the Company's operations. Certain countries in which the Company intends to operate have telecommunications laws and regulations that do not currently contemplate technical advances in broadcast technology such as Internet/intranet transmission by satellite. There can be no assurance that the present regulatory environment in any such country will not be changed in a manner which may have a material adverse impact on the Company's business. The Company or its local partners typically must obtain authorization for each country in which the Company provides its satellite-delivered data communications services. Although the Company believes that it or its local partners will be able to obtain the requisite licenses and approvals from the countries in which the Company intends to provide service, the regulatory schemes in each country are different and thus there may be instances of noncompliance of which the Company is not aware. Although the Company believes these regulatory schemes will not prevent the Company from pursuing its business plan, there can be no assurance such licenses and approvals are or will remain sufficient in the view of foreign regulatory authorities, or that necessary licenses and approvals will be granted on a timely basis in all jurisdictions in which the Company wishes to offer its services or that restrictions applicable thereto will not be unduly burdensome.
The Company's Internet operations (other than the operation of a teleport) are not currently subject to direct government regulation in most countries, and there are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is likely that a number of laws and regulations may be adopted at the local, national or international levels with respect to the Internet, covering issues such as user privacy and expression, pricing of products and services, taxation, advertising, intellectual property rights, information security or the convergence of traditional communication services with Internet communications. For example, the Telecommunications Act of 1996 (the constitutionality of certain portions of which is currently under challenge) was recently enacted in the United States, and imposes criminal penalties via the Communications Decency Act on anyone who distributes obscene, lascivious or indecent communications over the Internet. It is anticipated
that a substantial portion of the Company's Internet operations will be carried out in countries which may impose greater regulation of the content of information coming into the country than that which is generally applicable in the United States. To the extent that the Company provides content as a part of its Internet services, it will be subject to any such laws regulating content. Moreover, the adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for the Company's Internet services or increase the Company's cost of doing business or in some other manner have a material adverse effect on the Company's business, operating results and financial condition. In addition, the applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel and personal privacy is uncertain. The vast majority of such laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Changes to such laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace which could reduce demand for the Company's services, could increase the Company's cost of doing business as a result of costs of litigation or increased product development costs, or could in some other manner have a material adverse effect on the Company's business, financial condition and results of operations.
The sale of the Company's ground segment systems and networks outside the United States is subject to compliance with the regulations of the United States Export Administration Regulations. The absence of comparable restrictions on competitors in other countries may adversely affect the Company's competitive position. In addition, in order to ship its products into European Union countries, the Company must satisfy certain technical requirements. If the Company were unable to comply with such requirements with respect to a significant quantity of the Company's products, the Company's sales in Europe could be restricted, which could have a material adverse effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on its executive officers and certain technical, managerial and marketing personnel. The loss of the services of any of these individuals or group of individuals could have a material adverse effect on the Company's business, financial condition and results of operations. The Company maintains term life insurance in the amount of $1.0 million on David E. Hershberg, the Chairman and Chief Executive Officer of the Company and term life insurance in the amount of $0.5 million for each of Messrs. Miller, DiCicco, Woodring, Yablonski and Melfi, all of whom are officers of the Company. The Company believes that its future success also will depend significantly upon its ability to attract, motivate and retain additional highly skilled technical, managerial and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, assimilating and retaining the personnel it requires to grow and operate profitably.
PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
The Company relies heavily on the technological and creative skills of its personnel, new product developments, computer programs and designs, frequent product enhancements, reliable product support and proprietary technological expertise in maintaining its competitive position, and lacks patent protection for its products and services. There can be no assurance that others will not independently develop or acquire substantially equivalent techniques or otherwise gain access to the Company's proprietary and confidential technological expertise or disclose such technologies or that the Company can ultimately protect its rights to such proprietary technological expertise.
The Company generally relies on confidentiality agreements with its consultants, key employees and sales representatives to protect its proprietary technological expertise, and generally controls access to and distribution of its technology, software and other proprietary information. Despite these precautions, there can be no assurance that such agreements will not be breached, that the Company will have adequate remedies for any such breach or
that a third party will not copy or otherwise obtain and use the Company's products or technology without authorization or develop similar products or technology independently. Failure by the Company to maintain protection of its proprietary technological expertise for any reason could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company is subject to the risk of alleged infringement of intellectual property rights of others. Most of the Company's officers and employees were formerly officers or employees of other companies in the industry. The Company believes that neither it nor its officers or employees have violated any agreements with, or obligations to, prior employers. Although the Company is not aware of any pending or threatened infringement claims with respect to the Company's current or future products, there can be no assurance that third parties, including previous employers, will not assert such claims or that any such claims will not require the Company to enter into license arrangements or result in protracted and costly litigation, regardless of the merits of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Furthermore, litigation may be necessary to enforce or protect the Company's intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company currently has three patent applications pending in the United States and a PCT application, corresponding to one of the United States applications, is pending in a number of foreign jurisdictions. The Company also intends to seek further patents on its technology, if appropriate. There can be no assurance that patents will issue from any of the Company's pending or any future applications or that any claims allowed from such applications will be of sufficient scope or strength, or be issued in all countries where the Company's products can be sold, to provide meaningful protection or any commercial advantage to the Company. Also, competitors of the Company may be able to design around the Company's patents. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely.
The Company has filed applications for trademark registration of Globecomm Systems Inc. in the United States, China, the European Union and the Russian Federation and of NetSat Express in the United States, Singapore, the European Union, the Russian Federation and Brazil, and intends to seek registration of other trademarks in the future. There can be no assurance that registrations will be granted from any of the Company's pending or future applications, or that any registrations that are granted to the Company will prevent others from using similar trademarks in connection with related goods and services.
RISK OF CONCENTRATED OWNERSHIP
As of September 25, 1998, the Company's officers and directors, and their affiliates beneficially own approximately 2,236,985 shares, constituting approximately 23.2% of the Company's outstanding Common Stock. These stockholders, if acting together, may be able to exert significant influence over the election of directors and other corporate actions requiring stockholder approval.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, acceptance of satellite communication services in developing countries, and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations, which have affected the market price of securities of many companies in the telecommunications and
high technology industries. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. See "Quarterly Fluctuations."
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------------------------
The Company is subject to a variety of risks, including foreign currency exchange rate fluctuations relating to certain purchases from foreign vendors. In the normal course of business, the Company assesses these risks and has established policies and procedures to manage its exposure to fluctuations in foreign currency values.
The Company's objective to managing its exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates for certain purchases from foreign vendors, if applicable. Accordingly, the Company utilizes foreign currency forward contracts to hedge its exposure on firm commitments denominated in foreign currency. As of June 30, 1998, the Company has only one such foreign currency forward contract to hedge its exposure relating to a commitment to purchase approximately U.S. $3.2 million of equipment from a vendor in Swedish Krona. The Company's hedge with respect to this transaction reduces, but does not eliminate, the impact of foreign currency exchange rate movements. If there were an adverse change in the exchange rate of Swedish Krona of 10%, the expected effect on net income would be immaterial.
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 14(a) of Part IV of the Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ---------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
On November 27, 1996, the Company dismissed PricewaterhouseCoopers LLP as its independent accountants. The reports of PricewaterhouseCoopers LLP on the Company's financial statements for the two fiscal years prior to such dismissal contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with its audits for the year ended June 30, 1996 and for the period from August 17, 1994 (inception) through June 30, 1995, and through November 27, 1996, there have been no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for such years. The decision to change firms was approved by the Company's Board of Directors. The Company had requested that PricewaterhouseCoopers LLP furnish it with a letter addressed to the Commission stating whether or not it agrees with the above statements. A copy of such letter was filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 333-22425).
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT --------------------------------------------------
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 "Compliance with Reporting Requirements" 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 and Other Information" in the Registrant's Proxy Statement to be filed with the SEC.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
Information in response to this item is incorporated herein by reference to "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement to be filed with the SEC.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
Information in response to this item is incorporated herein by reference to "Certain Transactions" in the Registrant's Proxy Statement to be filed with the SEC.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ----------------------------------------------------------------
(A) (1) FINANCIAL STATEMENTS
CONTENTS
(2) FINANCIAL STATEMENT SCHEDULES
None
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in Financial Statements or notes thereto.
(3)EXHIBITS
Exhibit No. - ----------- 3.1 Amended and Restated Certificate of Incorporation (filed herewith)
3.3 Amended and Restated By-Laws of the Registrant (filed herewith)
4.2 See Exhibits 3.1 and 3.3 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of the Registrant defining rights of holders of Common Stock of the Registrant. (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-1, File No. 333-22425 (the "Registration Statement"))
10.1 Form of Registration Rights Agreement dated as of February 1997 (incorporated by reference to exhibit 10.1 of the Registration Statement).
10.2 Form of Registration Rights Agreement dated May 30, 1996 (incorporated by reference to exhibit 10.2 of the Registration Statement).
10.3 Form of Registration Rights Agreement dated December 31, 1996, as amended (incorporated by reference to exhibit 10.3 of the Registration Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock dated November 9, 1995 between the Registrant and Thomson-CSF (incorporated by reference to exhibit 10.4 of the Registration Statement).
10.5 Investment Agreement dated February 12, 1996 by and between Shiron Satellite Communications (1996) Ltd. and the Registrant (incorporated by reference to exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the Registrant (incorporated by reference to exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding dated December 18, 1996 by and between NetSat Express, Inc. and Applied Theory Communications, Inc. (incorporated by reference to exhibit 10.7 of the Registration Statement).
10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by reference to exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement dated as of January 27, 1997 between the Registrant and David E. Hershberg (incorporated by reference to exhibit 10.9 of the Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the Registrant and Kenneth A. Miller (incorporated by reference to exhibit 10.10 of the Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between Eaton Corporation and the Registrant (incorporated by reference to exhibit 10.13 of the Registration Statement).
10.12 1997 Stock Incentive Plan (incorporated by reference to exhibit 10.14 of the Registration Statement).
10.13 Investment Agreement dated August 21, 1998 by and between McKibben Communications LLC and the Registrant (filed herewith).
16.1 Letter from PricewaterhouseCoopers LLP (incorporated by reference to exhibit 16.1 of the Registration Statement).
21.1 Subsidiary of the Registrant (filed herewith).
23.1 Consent of Ernst & Young LLP (filed herewith).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
27 Financial Data Schedule (filed herewith).
* Confidential treatment granted for portions of this agreement.
(B) REPORTS ON FORM 8-K
None
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 of the undersigned, thereunto duly authorized.
GLOBECOMM SYSTEMS INC.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Globecomm Systems Inc.
We have audited the accompanying consolidated balance sheets of Globecomm Systems Inc. at June 30, 1998 and 1997 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Melville, New York August 7, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Globecomm Systems Inc.
In our opinion, the accompanying consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the results of operations and cash flows of Globecomm Systems Inc. and its subsidiary for the year ended June 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP New York, New York August 23, 1996, except as to Note 1, which is as of August 5, 1997
GLOBECOMM SYSTEMS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Globecomm Systems Inc. (the "Company") was incorporated in the State of Delaware on August 17, 1994. The Company designs, assembles and installs satellite ground segment systems and networks which support a wide range of satellite communications applications including fixed, mobile and direct broadcast services as well as certain military applications.
On July 18, 1997, the Board of Directors authorized and, on August 5, 1997 the stockholders approved a 2.85-for-one stock split of the outstanding shares of common stock, and amended and restated the Company's certificate of incorporation increasing the number of authorized shares of common stock to 22,000,000 and preferred stock to 3,000,000, and changing the par value of its common and preferred stock to $.001. All common stock, stock option and warrant data has been restated to reflect the stock split.
The Company has incurred operating losses since its inception and had an accumulated deficit at June 30, 1998 of $6,525,000. Such losses have resulted principally from general and administrative and selling and marketing expenses associated with the Company's operations. The Company expects that its cash and working capital requirements will continue to increase in connection with the Company's plans to continue to expand operations. Management believes that its existing capital resources will be sufficient to meet its working capital needs through June 30, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the Company and its majority-owned subsidiary, NetSat Express, Inc. ("NetSat Express"). All significant intercompany balances and transactions have been eliminated in consolidation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the financial statements and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company uses the percentage-of-completion method of accounting for contract revenues, upon the achievement of certain milestones. Accordingly, revenue from long-term, fixed-price contracts, are generally recorded based on the relationship of total costs incurred to date to total projected final costs. Contract costs generally include purchased material, direct labor, overhead and other indirect costs. Anticipated contracted losses are recognized as they become known.
Revenues from sales of products and services are generally recognized when the product is shipped or the service is performed.
INVENTORIES
Inventories, which consist primarily of costs incurred in connection with specific customer contracts, are stated at the lower of cost or market value.
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid instruments with a maturity of three months or less at the time of purchase.
FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation and amortization. Depreciation of fixed assets is provided on a straight-line basis over their estimated useful lives of three to twenty-five years. Certain leased office equipment has been capitalized. These amounts are included in fixed assets within the accompanying consolidated balance sheets and are being amortized over the estimated useful lives of the equipment.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
INCOME TAXES
The financial statements have been prepared in conformity with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". This statement requires recognition of deferred income taxes under the liability method.
BASIC AND DILUTED LOSS PER SHARE AND PRO FORMA BASIC AND DILUTED LOSS PER SHARE
During the year ended June 30, 1998, Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 128 ("Statement 128"), "Earnings Per Share" became effective. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share.
Basic loss per share for the year ended June 30, 1998 is based on the weighted average number of common shares outstanding during the period. Diluted loss per share for the year ended June 30, 1998 excluded the effect of approximately 891,000 stock options and approximately 23,000 warrants as the effect of inclusion would have been anti-dilutive as the Company reported a net loss for the year ended June 30, 1998.
Pro forma basic loss per share for the year ended June 30, 1997 is based on the weighted average number of shares of common stock outstanding including the conversion of the Class A and Class B Convertible Preferred Stock into common stock, which occurred upon the consummation of the Company's initial public offering. However, in accordance with Staff Accounting Bulletin 98 of the Securities and Exchange Commission, options to purchase common stock for nominal consideration have been reflected in diluted loss per share for all periods presented in a manner similar to a stock split, even if anti-dilutive. Historical losses per share have not been presented because such amounts are not deemed meaningful due to the significant change in the Company's capital structure which occurred in connection with the initial public offering.
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term maturities of these instruments.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock options because, as discussed below in Note 8, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based-Compensation" ("Statement 123"), requires the use of option valuation models that were not developed for use in valuing employee and director stock options.
LONG-LIVED ASSETS
When impairment indicators are present, the Company reviews the carrying value of its long-lived assets to determine the ultimate recoverability of their unamortized values using future undiscounted cash flow analyses.
SEGMENT DISCLOSURES
As of June 30, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement 131"). Statement 131 supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise". Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement 131 did not affect results of operations or financial position, but did affect the disclosure of segment information (see Note 12).
3. INVENTORY
Inventory consists of the following:
JUNE 30, 1998 JUNE 30, 1997 ------------------------------ (IN THOUSANDS)
Raw materials ........ $ 78 $ 51 Work-in-progress ..... 3,778 7,877 ----------------------- 3,856 7,928 Less progress payments 2,273 5,635 ----------------------- $1,583 $2,293 =======================
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(a) On February 12, 1996, the Company purchased 10% of the common stock of Shiron, an Israeli company, for $150,000 and, during October 1996, exercised an option to purchase an additional 9% for $135,000. The Company has an option to purchase up to a total of a 30% interest of Shiron in accordance with the terms of the purchase agreement. As of June 30, 1998, the Company's interest in Shiron was diluted to 11.6%.
(b) During August 1996, the Company purchased 19% of the common stock of Euro, a Delaware corporation, for $240,000 with a one year option to purchase an additional 10% at a price ranging from $125,000 to $200,000
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
depending upon the exercise date. In August 1997, the Company exercised its option to purchase an additional 10% for $200,000. As of June 30, 1998, the Company's interest in Euro was diluted to 22.9%. The financial position and results of operations of Euro at June 30, 1998 were not material.
(c) On August 30, 1996, the Company purchased 5% of the common stock of Newpoint Technologies (formerly C-Grams Unlimited Inc.), a New Hampshire corporation, for approximately $400,000. In May 1997, the Company purchased an additional 1.6% for $150,000. In August and September 1997, the Company purchased additional common stock of Newpoint Technologies for $400,000. As of June 30, 1998, the Company's interest in Newpoint Technologies has been diluted to 10.3%. The Company has an option to purchase an additional 9.7% at a price in accordance with the terms of the agreement.
(d) On November 18, 1996, the Company purchased 15% of the common stock of Armer, an Arizona corporation, for $150,000 and in March 1997 purchased an additional 2% for $50,000. The Company has an option to purchase up to an additional 8% at a price of $25,000 for each additional 1% through December 31, 1997.
(e) On January 13, 1998, the Company purchased 6.7% of the common stock of JCTC, a New Jersey corporation, for approximately $214,000. The Company has a two-year option to purchase an additional 6.7% for $200,000. In addition, the Company has an additional option to purchase up to a total of 20% interest in JCTC provided the Company has purchased the first option. The price of the second option will be the then current market price or the last price for which JCTC's common stock has been sold.
The above investments have been accounted for at cost, except for Euro which has been accounted for under the equity method, since the Company does not have the ability to exercise significant influence over operating and financial policies of the investees.
6. COMMON STOCK
SALES OF COMMON STOCK
In August 1997, the Company completed an initial public offering of 3,162,500 shares of common stock for an aggregate offering price of $31,625,000. The Company incurred total expenses in the offering of approximately $3,721,000 of which approximately $2,214,000 represented underwriting discounts and commissions and approximately $1,507,000 represented other related expenses. The net offering proceeds to the Company after deducting the total expenses were approximately $27,904,000.
During November 1996, a minority shareholder in the Company's subsidiary, NetSat Express, agreed to exchange its 19,000 shares (representing approximately 2%) of NetSat Express for approximately 30,000 shares in the Company. The shares in the Company were valued at $8.07 per share at the date of the agreement. The transaction was completed during April 1997 and, accordingly, the Company recorded goodwill of approximately $243,000.
During the year ended June 30, 1996, the Company sold approximately 210,000 shares of its common stock to various investors. Proceeds from the sale of these shares totaled approximately $966,000, net of related expenses of approximately $17,000.
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1995, the Company completed a private placement offering in which the Company issued approximately 1,219,000 shares of common stock to various investors. Proceeds from the issuance of these shares totaled approximately $5,032,000, including approximately $861,000 of stock subscriptions received in July 1995, and net of related expenses of approximately $1,402,000. In satisfaction of these related expenses, the Company paid approximately $670,000 in cash and issued approximately 156,000 shares of its common stock valued at approximately $732,000. Additionally, in connection with this offering, the Company sold to one of its investors for approximately $4,000, a five-year warrant to purchase approximately 107,000 shares of the Company's common stock at a price of $5.26 per share. The warrant contains certain anti-dilution provisions as specified in the warrant agreement. On January 24, 1997, the investor exercised the outstanding warrant.
STOCK ISSUED TO CONSULTANTS
During November 1996, the Company issued a ten-year warrant to five consultants for future services to purchase an aggregate of approximately 64,000 shares of common stock at a price per share of $8.07, equal to the fair market value of the shares at the date of issuance. During the year ended June 30, 1998, warrants to purchase 6,700 shares of common stock were exercised.
During the year ended June 30, 1996, the Company issued approximately 10,000 shares of its common stock to a consultant in payment for his efforts in assisting in various Company matters. These shares were purchased by the consultant at a price of $.04 per share. Consulting expense recorded as a result of this transaction amounted to approximately $46,000, which represents the difference between the fair market value of the shares at the date of issuance and the purchase price.
ISSUANCE OF COMMON STOCK AS COMMISSION
On November 9, 1995, and in connection with the Company's sale of approximately 200,000 shares of its common stock to an investor also during the year ended June 30, 1996, the Company entered into a commitment to issue up to 5% of its share capital as follows: (i) 1% of the then outstanding share capital of the Company upon receipt of sales orders from this stockholder totaling $1,500,000 and (ii) an additional 1% of the then outstanding share capital of the Company upon the receipt of each of four subsequent increments of $3,000,000 in sales orders from this stockholder. This commitment expired in May 1998.
In November 1995, the Company issued approximately 37,000 shares of its common stock to this investor, or 1% of the then outstanding share capital. This issuance resulted in approximately $174,000 of commission expense based on the fair market value of the shares at the date of issuance, which was also the date of the agreement. As of June 30, 1996, this entire amount was included in prepaid expenses within the consolidated balance sheet as the related orders were not recorded as revenue during the year ended June 30, 1996. Such amount was included in selling and marketing expense in the accompanying consolidated statement of operations during the year ended June 30, 1997, the period in which the related revenue was recognized.
In addition, the investor was granted certain preemptive and other rights regarding future issuances of securities of the Company including (i) a preemptive right to purchase up to 15% of the total number of securities offered in any public offering undertaken by the Company and (ii) the right to participate in any private offering to the extent required to maintain its percentage ownership in the Company as well as the right to nominate a director to the Board of Directors. These rights survive for so long as the investor's stock ownership does not fall below 5% of the outstanding share capital of the Company as a result of the investor selling or otherwise disposing of a portion of its shares.
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE PREFERRED STOCK
In December 1996, the Company issued approximately 485,000 shares (including approximately 53,000 shares issued as commission) of its Class B convertible preferred stock ("Class B Convertible") at $28.00 per share to investors. Proceeds from the sales of these shares totaled $10,965,000, net of related cash expenses of $1,135,000. In March 1997, and in connection with certain anti-dilution provisions related to a sale of common stock to an investor during the year ended June 30, 1996, the Company issued approximately 29,000 shares of Class B Convertible at $28.00 per share.
On May 30, 1996, the Company issued approximately 156,000 shares of its Class A convertible preferred stock ("Class A Convertible") at $16.00 per share to investors. Proceeds from the sale of these shares totaled $2,485,000, net of related expenses of $15,000. In addition, during August 1996, the Company issued approximately 16,000 shares of Class A Convertible at $16.00 per share to an investor.
The Class A Convertible and Class B Convertible outstanding at the time of the Company's initial public offering in August 1997 was converted into approximately 1,958,000 shares of common stock.
8. STOCK OPTION PLANS
In February 1995, the Company adopted a stock option plan (the "Employee Stock Option Plan"), which provided that the Company may grant employees options to acquire up to an aggregate of 285,000 shares of the Company's common stock. During December 1996, the Company increased the number of shares it may grant to 1,710,000. The options generally vest in equal installments over a four-year period and expire on the tenth anniversary of the date of grant.
In June 1995, the Company adopted a stock option plan (the "Director Stock Option Plan"), which provides that the Company may grant outside directors options to acquire up to an aggregate of 285,000 shares of the Company's common stock. The options vest annually in equal installments over a three-year period commencing on the date of grant. The options expire the earlier of five years from the date of grant or three years from concluding service as director of the Company.
On February 26, 1997, the Company's Board of Directors authorized, and the stockholders subsequently approved, the 1997 Stock Incentive Plan ("1997 Plan"), which serves as a successor plan to the Employee Stock Option Plan and Director Stock Option Plan. The 1997 Plan provides for an increase of 285,000 shares to previously existing stock option plans, among other matters.
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE PLAN
The following table summarizes activity in employee stock options (in thousands except for per share amounts):
As a result of stock options granted during the years ended June 30, 1997, 1996 and 1995, the Company recorded compensation expense of approximately $56,000, $43,000 and $99,000 during the years ended June 30, 1998, 1997 and 1996, respectively, based on the difference between the fair market value of the shares and the option exercise prices at the dates of grant. As of June 30, 1998, remaining compensation expense to be recorded through the year ended June 30, 2001 was approximately $309,000. As of June 30, 1998, approximately 567,000 employee stock options were exercisable.
DIRECTOR PLAN
Pursuant to the Director Stock Option Plan, in June 1995, the Company granted certain outside directors options to purchase approximately 128,000 shares of the Company's common stock at $3.51 per share. As a result of these grants, the Company recorded compensation expense during the years ended June 30, 1998, 1997 and 1996, of $15,000, $40,000 and $93,000, respectively, based on the fair market value of the shares at the date of grant. As of June 30, 1998, there was no additional compensation expense to be recorded relating to these grants. During January 1997, an additional outside director was granted approximately 43,000 options at $8.07 per share, the estimated fair value of such shares on the date of grant. During November 1997, an additional outside director was granted 15,000 options at $15.75 per share, the fair value of such shares on the date of grant. As of June 30, 1998, approximately 86,000 options were exercisable and 57,000 were exercised during the year ended June 30, 1998.
STATEMENT 123
Pro forma information regarding net loss and net loss per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its stock options granted subsequent to July 1, 1995 under the fair value method of that Statement. The fair value for these options was estimated using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996: risk-free interest rate of 6.5%, volatility factor of the expected market price of the Company's common stock of .51 (1998) and .40 (1997 and 1996), a weighted-average expected life of the option of six years and no dividend yields.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 --------------------------------------
Pro forma net loss (in thousands)....... $ (1,868) $ (3,433) Pro forma net loss per share............ $ (0.22) $ (0.56)
The following tables summarize information about employee and director stock options outstanding at June 30, 1998 (option amounts in thousands):
WEIGHTED- AVERAGE RANGE OF REMAINING EXERCISE OPTIONS OPTIONS CONTRACTUAL PRICES OUTSTANDING EXERCISABLE LIFE (YEARS) - ------------------------------------------------------------------------- $3.51 - $4.68 879 477 7.3 $7.02 - $10.50 695 171 8.5 $11.38 - $15.75 204 5 9.3 $17.13 - $18.38 18 0 9.3 ========================================================================= $3.51 - $18.38 1,796 653 8.0 =========================================================================
The Company has reserved approximately 2,205,000 shares of common stock for issuance upon exercise of all outstanding options and warrants at June 30, 1998.
9. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE FROM STOCKHOLDER
On December 8, 1995, the Company loaned $150,000 to an employee, who is also a stockholder of the Company. Interest was receivable at an annual rate of 5%. The note was due on June 30, 1996 and was extended until June 30, 1997. On June 13, 1997, the full amount of principal plus accrued interest in the aggregate amount of approximately $153,000 was repaid.
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE AND LOAN PAYABLE TO STOCKHOLDER
On October 28, 1994, the Company received $315,000 in exchange for a note payable to the Company's chief executive officer, who is also a stockholder of the Company. Interest is payable at an annual rate of 6%. Principal and any unpaid interest are payable in full upon demand at any time on or after October 28, 1995. Interest expense related to this note was approximately $9,000 and $19,000, during the years ended June 30, 1997 and 1996, respectively. The note payable and accrued interest was paid on January 14, 1997.
During the period ended June 30, 1995, the Company also received non-interest bearing working capital loan advances of approximately $81,000 from the Company's chief executive officer, of which $60,000 was repaid during the period ended June 30, 1995 and approximately $21,000 was repaid during the year ended June 30, 1996.
10. PENSION PLAN
The Company maintains a 401(k) plan which covers substantially all employees of the Company. Participants may elect to contribute from 1% to 20% of their pre-tax compensation. Participant contributions up to 4% of pre-tax compensation were fully matched by the Company during the years ended June 30, 1998, 1997 and 1996. The plan also provides for discretionary contributions by the Company. The Company contributed approximately $242,000, $117,000 and $42,000 to the plan during the years ended June 30, 1998, 1997 and 1996, respectively. There were no discretionary contributions made by the Company during the years ended June 30, 1998, 1997 and 1996.
11. INCOME TAXES
As a result of losses incurred from inception, the Company has available net operating loss carryforwards ("NOL's") of approximately $8.2 million ($5.1 million and $3.1 million for Globecomm Systems Inc. and NetSat Express, respectively) for income tax purposes which expire through 2013. However, as a result of significant ownership changes and separate company limitations it is anticipated that an annual limitation will be applied to the Company's utilization of the NOL's.
As the Company has had cumulative losses and there is no assurance of future taxable income, a valuation allowance has been established to offset deferred tax assets. The components of the Company's net deferred tax assets are as follows:
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At June 30, 1996, the Company had a valuation allowance for deferred tax assets of $1,230,000. In addition, approximately $455,000 of the valuation allowance, if recognized, will be allocated directly to stockholders' equity relating to non-qualified dispositions of stock option exercises.
12. SEGMENT INFORMATION
The Company operates through two business segments. Its Ground Segment Systems and Networks Segment, through Globecomm Systems Inc., is engaged in the design, assembly and installation of ground segment systems and network solutions for the complex and changing communications requirements of its customers. The Company's ground segment systems typically consist of an earth station and ancillary subsystems such as microwave links for back-haul of traffic to a central office or generators for emergency power restoral. An earth station is an integrated system consisting of antennas, transmitting and receiving equipment, modulation/demodulation equipment, monitor and control systems and voice, data and video network interface equipment. Its Data Communications Services Segment, through the NetSat Express subsidiary, is engaged in providing high-speed, satellite-delivered data communications to developing markets worldwide. NetSat Express is currently providing Internet access to customers who have limited or no access to terrestrial network infrastructure capable of supporting the economical delivery of such services.
The Company's reportable segments are business units that offer different products and services. The reportable segments are each managed separately because they provide distinct products and services.
The following is business segment information as of and for the years ended June 30, 1998 and 1997, as NetSat Express commenced operations during July 1996:
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION (CONTINUED)
JUNE 30, 1998 JUNE 30, 1997 ------------------------------------- (IN THOUSANDS)
Assets: Ground Segment Systems and Networks.. $ 60,894 $ 34,201 Data Communications Services......... 1,169 125 Intercompany eliminations............ (3,719) (1,040) ------------------------------------- Total assets........................... $ 58,344 $ 33,286 =====================================
Depreciation and amortization: Ground Segment Systems and Networks.. $ 592 $ 326 Data Communications Services......... 58 8 ------------------------------------- Total depreciation and amortization.... $ 650 $ 334 =====================================
Expenditures for long-lived assets: Ground Segment Systems and Networks.. $ 2,878 $ 6,686 Data Communications Services......... 584 79 ------------------------------------- Total expenditures for long-lived assets............................... $ 3,462 $ 6,765 =====================================
13. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
The Company designs, assembles and installs satellite ground segment systems and networks for customers in diversified geographic locations. The Company performs ongoing credit evaluations of its customers' financial condition and in most cases requires a letter of credit or cash in advance for foreign customers. Historically, the Company has not incurred significant losses from trade receivables.
Sales to one major customer accounted for approximately 29% and two major customers accounted for approximately 42% (29% and 13%) and 61% (43% and 18%) of the Company's net revenues for the years ended June 30, 1998, 1997 and 1996, respectively.
Revenues from foreign sales accounted for 69% (33% Africa, 17% Asia, 9% Middle East, 9% Europe and 1% South America), 40% (28% Asia, 11% Europe and 1% Africa) and 22% (13% Europe, 5% Africa and 4% Asia) of total revenues for the years ended June 30, 1998, 1997 and 1996, respectively.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade receivables. The Company places its cash and cash equivalents with high quality financial institutions. Substantially all cash and cash equivalents are held in two financial institutions at June 30, 1998. Cash equivalents are comprised of short-term debt instruments, certificates of deposit or direct or guaranteed obligations of the United States, which are held to maturity and approximate cost. At times, cash may be in excess of FDIC insurance limits.
14. FINANCIAL INSTRUMENTS
The Company has entered into a foreign currency forward contract designed to minimize the exposure to exchange rate fluctuations on a purchase commitment denominated in Swedish Krona. At June 30, 1998, this contract, which matures on December 18, 1998, was for the purchase of Swedish Krona for a
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
total of approximately $3.2 million. Gains or losses which relate to such contracts are recognized upon payment of the purchase commitment as an adjustment to the carrying value of the related inventory.
15. COMMITMENTS
LINE OF CREDIT
The Company has a $7.5 million credit facility consisting of (1) a $5.0 million secured domestic line of credit and (2) a $2.5 million secured export-import guaranteed line of credit. Each line of credit bears interest at the prime rate plus 1/2% per annum and is collateralized by a first security interest on all assets. Such line of credit expires in October 1998.
LETTERS OF CREDIT
The Company utilizes standby letters of credit to secure certain bid proposals and performance guarantees in the normal course of business. The Company provides cash collateral for a majority of these letters of credit. As of June 30, 1998 and 1997, cash collateral related to bid proposals amounted to approximately $588,000 and $1,257,000, respectively, and cash collateral related to performance guarantees amounted to approximately $3,828,000, and $280,000, respectively. These amounts are included in restricted cash in the accompanying consolidated balance sheets.
LEASE COMMITMENTS
Future minimum payments under non-cancelable leases for office space and equipment with terms of one year or more, consist of the following at June 30, 1998 (in thousands):
CAPITAL OPERATING LEASES LEASES --------------------------------
Year ending June 30, 1999...................... $ 19 $ 107 Year ending June 30, 2000...................... - 6 Year ending June 30, 2001...................... - 1 -------------------------------- Total minimum lease payments................... 19 $ 114 ================ Less amounts representing interest............. 1 -------------- Present value of net minimum lease payments.... $ 18 ==============
EMPLOYMENT AGREEMENTS
During January 1997, the Company entered into three-year employment agreements with two of its officers for an aggregate amount of $325,000 per year. The Company will have certain obligations to the two officers if they are terminated for disability, cause or following a change in control.
16. SUBSEQUENT EVENTS (UNAUDITED)
On August 20, 1998, the Company purchased 18.75% of the future profits, losses and equity (subject to certain liquidation and income preference) of McKibben Communications, LLC, a California limited liability corporation, for $1.5 million. The Company has a two-year option to purchase up to an additional 11.25% for $1.5 million.
GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On September 1, 1998, the Company's Board of Directors authorized the repurchase of up to $2.0 million of the Company's outstanding common stock. The repurchase program allows for purchases to be made intermittently, through open market and privately negotiated transactions. Timing, price, quantity and the manner of purchase will be at the discretion of the Company's management subject to compliance with the applicable securities laws. Any repurchased shares under the repurchase program will be used for general corporate purposes.
INDEX TO EXHIBITS: - ------------------ Exhibit No. - ----------- 3.1 Amended and Restated Certificate of Incorporation (filed herewith)
3.3 Amended and Restated By-Laws of the Registrant (filed herewith)
4.2 See Exhibits 3.1 and 3.3 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of the Registrant defining rights of holders of Common Stock of the Registrant. (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-1, File No. 333-22425 (the "Registration Statement"))
10.1 Form of Registration Rights Agreement dated as of February 1997 (incorporated by reference to exhibit 10.1 of the Registration Statement).
10.2 Form of Registration Rights Agreement dated May 30, 1996 (incorporated by reference to exhibit 10.2 of the Registration Statement).
10.3 Form of Registration Rights Agreement dated December 31, 1996, as amended (incorporated by reference to exhibit 10.3 of the Registration Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock dated November 9, 1995 between the Registrant and Thomson-CSF (incorporated by reference to exhibit 10.4 of the Registration Statement).
10.5 Investment Agreement dated February 12, 1996 by and between Shiron Satellite Communications (1996) Ltd. and the Registrant (incorporated by reference to exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the Registrant (incorporated by reference to exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding dated December 18, 1996 by and between NetSat Express, Inc. and Applied Theory Communications, Inc. (incorporated by reference to exhibit 10.7 of the Registration Statement).
10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by reference to exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement dated as of January 27, 1997 between the Registrant and David E. Hershberg (incorporated by reference to exhibit 10.9 of the Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the Registrant and Kenneth A. Miller (incorporated by reference to exhibit 10.10 of the Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between Eaton Corporation and the Registrant (incorporated by reference to exhibit 10.13 of the Registration Statement).
10.12 1997 Stock Incentive Plan (incorporated by reference to exhibit 10.14 of the Registration Statement).
10.13 Investment Agreement dated August 21, 1998 by and between McKibben Communications LLC and the Registrant (filed herewith).
16.2 Letter from PricewaterhouseCoopers LLP (incorporated by reference to exhibit 16.1 of the Registration Statement).
21.1 Subsidiary of the Registrant (filed herewith).
23.1 Consent of Ernst & Young LLP (filed herewith).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
27 Financial Data Schedule (filed herewith).
* Confidential treatment granted for portions of this agreement.