e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission file number: 000-22839
Globecomm Systems Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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11-3225567
(I.R.S. Employer
Identification No.) |
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45 Oser Avenue,
Hauppauge, NY
(Address of principal executive offices)
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11788
(Zip Code) |
Registrants telephone number, including area code: (631) 231-9800
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of May 5, 2011, there were 22,421,632 shares of the registrants Common Stock outstanding.
GLOBECOMM SYSTEMS INC.
Index to the March 31, 2011 Form 10-Q
2
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
GLOBECOMM
SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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March 31, |
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June 30, |
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2011 |
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2010 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
39,521 |
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$ |
42,863 |
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Restricted cash |
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5,028 |
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5,025 |
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Accounts receivable, net |
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55,515 |
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|
49,222 |
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Inventories |
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47,445 |
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34,486 |
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Prepaid expenses and other current assets |
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5,372 |
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3,100 |
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Deferred income taxes |
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1,603 |
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1,602 |
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Total current assets |
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154,484 |
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136,298 |
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Fixed assets, net |
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39,447 |
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37,839 |
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Goodwill |
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40,594 |
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40,594 |
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Intangibles, net |
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14,542 |
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16,196 |
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Deferred income taxes |
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3,679 |
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7,635 |
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Other assets |
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2,232 |
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2,148 |
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Total assets |
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$ |
254,978 |
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$ |
240,710 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
31,035 |
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$ |
36,929 |
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Deferred revenues |
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9,400 |
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|
2,290 |
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Accrued payroll and related fringe benefits |
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|
5,869 |
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6,390 |
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Other accrued expenses |
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15,892 |
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11,477 |
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Current portion of long-term debt |
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2,500 |
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2,500 |
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Total current liabilities |
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64,696 |
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59,586 |
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Other liabilities |
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801 |
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2,443 |
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Long term debt |
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7,500 |
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9,375 |
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Deferred income taxes |
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2,203 |
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2,203 |
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Commitments and contingencies |
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Stockholders equity: |
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Series A Junior Participating, shares
authorized, issued and outstanding: none at
March 31, 2011 and June 30, 2010 |
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Common stock, $.001 par value, 50,000,000
shares authorized, shares issued: 22,829,416
at March 31, 2011 and 22,050,635 at June 30,
2010 |
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23 |
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22 |
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Additional paid-in capital |
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194,969 |
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189,401 |
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Accumulated deficit |
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(12,516 |
) |
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(19,346 |
) |
Treasury stock, at cost, 465,351 shares at
March 31, 2011 and June 30, 2010 |
|
|
(2,781 |
) |
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|
(2,781 |
) |
Accumulated other comprehensive income (loss) |
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|
83 |
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|
(193 |
) |
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Total stockholders equity |
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179,778 |
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167,103 |
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Total liabilities and stockholders equity |
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$ |
254,978 |
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$ |
240,710 |
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See accompanying notes.
3
GLOBECOMM
SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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March 31, |
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March 31, |
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March 31, |
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March 31, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenues from services |
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$ |
45,963 |
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$ |
34,018 |
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$ |
136,159 |
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$ |
96,196 |
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Revenues from infrastructure solutions |
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16,520 |
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18,782 |
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49,771 |
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61,362 |
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Total revenues |
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62,483 |
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52,800 |
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185,930 |
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157,558 |
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Costs and operating expenses: |
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Costs from services |
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31,691 |
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24,822 |
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95,768 |
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70,907 |
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Costs from infrastructure solutions |
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12,866 |
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14,853 |
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40,073 |
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50,486 |
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Selling and marketing |
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4,251 |
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3,943 |
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12,928 |
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10,817 |
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Research and development |
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723 |
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760 |
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2,732 |
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2,272 |
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General and administrative |
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7,547 |
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6,478 |
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20,533 |
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17,209 |
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Earn-out fair value adjustments |
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|
400 |
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|
23 |
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|
2,549 |
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23 |
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Total costs and operating expenses |
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57,478 |
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|
50,879 |
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174,583 |
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151,714 |
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Income from operations |
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|
5,005 |
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|
1,921 |
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|
11,347 |
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|
5,844 |
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Interest income |
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|
44 |
|
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|
58 |
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|
144 |
|
|
|
326 |
|
Interest expense |
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|
(69 |
) |
|
|
(27 |
) |
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|
(218 |
) |
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|
(27 |
) |
|
|
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|
|
|
|
|
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|
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|
Income before income taxes |
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|
4,980 |
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|
|
1,952 |
|
|
|
11,273 |
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|
6,143 |
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|
|
|
|
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|
|
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|
|
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Provision for income taxes |
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|
1,992 |
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|
707 |
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|
4,443 |
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|
2,256 |
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|
|
|
|
|
|
|
|
|
|
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|
Net income |
|
$ |
2,988 |
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|
$ |
1,245 |
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|
$ |
6,830 |
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|
$ |
3,887 |
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Basic net income per common share |
|
$ |
0.14 |
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|
$ |
0.06 |
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$ |
0.32 |
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$ |
0.19 |
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|
Diluted net income per common share |
|
$ |
0.14 |
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|
$ |
0.06 |
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|
$ |
0.31 |
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|
$ |
0.19 |
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|
|
|
|
|
|
|
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|
|
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|
Weighted-average shares used in the
calculation of basic net income
per common share |
|
|
21,442 |
|
|
|
20,601 |
|
|
|
21,230 |
|
|
|
20,466 |
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|
|
|
|
|
|
|
|
|
|
|
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|
Weighted-average shares used in the
calculation of diluted net income
per common share |
|
|
22,104 |
|
|
|
21,030 |
|
|
|
21,830 |
|
|
|
20,884 |
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes.
4
GLOBECOMM
SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2011
(In thousands)
(Unaudited)
|
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Accumulated |
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Additional |
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Other |
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Total |
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|
Common Stock |
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|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
Balance at June 30, 2010 |
|
|
22,051 |
|
|
$ |
22 |
|
|
$ |
189,401 |
|
|
$ |
(19,346 |
) |
|
$ |
(193 |
) |
|
|
465 |
|
|
$ |
(2,781 |
) |
|
$ |
167,103 |
|
Proceeds from exercise of stock options |
|
|
237 |
|
|
|
|
|
|
|
1,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,475 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
2,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,513 |
|
Grant of restricted shares |
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|
428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from stock compensation
plan |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
Grant of shares for Telaurus earn-out |
|
|
113 |
|
|
|
1 |
|
|
|
895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
896 |
|
Grant of warrants for Telaurus earn-out |
|
|
|
|
|
|
|
|
|
|
676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
676 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,830 |
|
Gain from foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011 |
|
|
22,829 |
|
|
$ |
23 |
|
|
$ |
194,969 |
|
|
$ |
(12,516 |
) |
|
$ |
83 |
|
|
|
465 |
|
|
$ |
(2,781 |
) |
|
$ |
179,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
GLOBECOMM
SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,830 |
|
|
$ |
3,887 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,832 |
|
|
|
5,391 |
|
Provision for doubtful accounts |
|
|
496 |
|
|
|
679 |
|
Deferred income taxes |
|
|
3,956 |
|
|
|
2,086 |
|
Stock compensation expense |
|
|
2,513 |
|
|
|
1,704 |
|
Tax benefit from stock compensation plan |
|
|
9 |
|
|
|
2 |
|
Earn-out fair value adjustments |
|
|
2,549 |
|
|
|
23 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(6,354 |
) |
|
|
1,969 |
|
Inventories |
|
|
(12,867 |
) |
|
|
(16,191 |
) |
Prepaid expenses and other current assets |
|
|
(2,077 |
) |
|
|
362 |
|
Other assets |
|
|
(12 |
) |
|
|
(156 |
) |
Accounts payable |
|
|
(6,394 |
) |
|
|
3,410 |
|
Deferred revenue |
|
|
7,110 |
|
|
|
1,361 |
|
Accrued payroll and related fringe benefits |
|
|
(558 |
) |
|
|
298 |
|
Other accrued expenses |
|
|
1,980 |
|
|
|
1,292 |
|
Other liabilities |
|
|
17 |
|
|
|
(131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,030 |
|
|
|
5,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Purchases of fixed assets |
|
|
(6,619 |
) |
|
|
(6,823 |
) |
Acquisition of business, net of cash received |
|
|
|
|
|
|
(13,901 |
) |
Cash payment for Telaurus earn out |
|
|
(586 |
) |
|
|
(353 |
) |
Restricted cash |
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(7,205 |
) |
|
|
(26,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
1,475 |
|
|
|
181 |
|
Borrowings under C2C acquisition loan |
|
|
|
|
|
|
12,500 |
|
Proceeds from sale of common stock |
|
|
|
|
|
|
497 |
|
Repayments of debt |
|
|
(1,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(400 |
) |
|
|
13,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash equivalents |
|
|
233 |
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(3,342 |
) |
|
|
(6,958 |
) |
Cash and cash equivalents at beginning of period |
|
|
42,863 |
|
|
|
44,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
39,521 |
|
|
$ |
37,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
221 |
|
|
$ |
|
|
Cash paid for income taxes |
|
|
693 |
|
|
|
342 |
|
See accompanying notes.
6
GLOBECOMM
SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements. In the
opinion of management, all material adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the results for such periods have been included.
The consolidated balance sheet at June 30, 2010 has been derived from the audited consolidated
financial statements at that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete financial
statements. The results of operations for the three and nine months ended March 31, 2011, are not
necessarily indicative of the results that may be expected for the full fiscal year ending June 30,
2011, or for any future period.
The accompanying consolidated financial statements should be read in conjunction with the
audited consolidated financial statements of the Company for the fiscal year ended June 30, 2010
and the accompanying notes thereto contained in the Companys Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on September 13, 2010.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and
indirect wholly-owned subsidiaries, Globecomm Network Services Corporation (GNSC), Globecomm
Services Maryland LLC (GSM), Cachendo LLC (Cachendo), B.V. Mach 6 (Mach 6), Telaurus
Communications LLC (Telaurus), Melat Networks Inc. (Melat), Evolution Communications Group
Limited B.V.I. (Evocomm), Carrier to Carrier Telecom B.V. (C2C) and Evosat SA Proprietary Ltd
(Evosat) (collectively, the Company). All significant intercompany balances and transactions
have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue Recognition
The Company recognizes revenue for its production-type contracts that are sold separately as
standard satellite ground segment systems when persuasive evidence of an arrangement exists, the
selling price is fixed or determinable, collectability is reasonably assured, delivery has occurred
and the contractual performance specifications have been met. The Companys standard satellite
ground segment systems produced in connection with these contracts are typically short-term (less
than twelve months in term) and manufactured using a standard modular production process. Such
systems require less engineering, drafting and design efforts than the Companys long-term complex
production-type projects. Revenue is recognized on the Companys standard satellite ground segment
systems upon shipment and acceptance of factory performance testing which is when title transfers
to the customer. The amount of revenues recorded on each standard production-type contract is
reduced by the customers contractual holdback amount, which typically requires 10% to 30% of the
contract value to be retained by the customer until installation and final acceptance is complete.
The customer generally becomes obligated to pay 70% to 90% of the contract value upon shipment and
acceptance of factory performance testing. Installation is not deemed to be essential to the
functionality of the system since installation does not require significant changes to the features
or capabilities of the equipment, does not require complex software integration and interfacing and
the Company has not experienced any difficulties installing such equipment. In addition, the
customer or other third
7
party vendors can install the equipment. The estimated value of the installation services is
determined by management, which is typically less than the customers contractual holdback
percentage. If the holdback is less than the estimated value of installation, the Company will
defer recognition of revenues, determined on a contract-by-contract basis equal to the estimated
value of the installation services. Payments received in advance by customers are deferred until
shipment and are presented as deferred revenues in the accompanying consolidated balance sheets.
The Company recognizes revenue using the percentage-of-completion method of accounting upon
the achievement of certain contractual milestones for its non-standard, complex production-type
contracts for the production of satellite ground segment systems and equipment that are generally
integrated into the customers satellite ground segment network. The equipment and systems produced
in connection with these contracts are typically long-term (in excess of twelve months in term) and
require significant customer-specific engineering, drafting and design effort in order to
effectively integrate all of the customizable earth station equipment into the customers ground
segment network. These contracts generally have larger contract values, greater economic risks and
substantive specific contractual performance requirements due to the engineering and design
complexity of such systems and related equipment. Progress payments received in advance by
customers are netted against the inventory balances in the accompanying consolidated balance
sheets.
Revenues from services consist of the access, hosted and lifecycle support service lines for a
broad variety of communications applications. Service revenues are recognized ratably over the
period in which services are provided. Payments received in advance of services are deferred until
the period such services are provided and are presented as deferred revenues in the accompanying
consolidated balance sheets.
Costs from Services
Costs from services relating to Internet-based services consist primarily of satellite space
segment charges, Internet connectivity fees, voice termination costs and network operations
expenses. Satellite space segment charges consist of the costs associated with obtaining satellite
bandwidth (the measure of capacity) used in the transmission of services to and from the satellites
leased from operators. Network operations expenses consist primarily of costs associated with the
operation of the Network Operation Centers, on a twenty-four hour a day, seven-day a week basis,
including personnel and related costs and depreciation.
Costs from Infrastructure Solutions
Costs from infrastructure solutions consist primarily of the costs of purchased materials
(including shipping and handling costs), direct labor and related overhead expenses,
project-related travel and living costs and subcontractor salaries.
Research and Development
Research and development expenditures are expensed as incurred.
Stock-Based Compensation
Stock compensation expense was approximately $797,000 and $2,513,000 for the three and nine
months ended March 31, 2011, respectively. Stock compensation expense was approximately $640,000
and $1,704,000 for the three and nine months ended March 31, 2010, respectively. As of March 31,
2011, there was approximately $124,000 of unrecognized compensation cost related to non-vested
outstanding stock options. The cost is expected to be recognized over a weighted-average period of
2.3 years. As of March 31, 2011, there was approximately $4,486,000 of unrecognized compensation
cost related to non-vested stock-based compensation related to restricted shares. The cost is
expected to be recognized over a weighted-average period of 2.0 years.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price of businesses over the fair value of the
identifiable net assets acquired. Goodwill and other indefinite life intangible assets are no
longer amortized, but instead tested for
8
impairment at least annually. The impairment test for goodwill uses a two-step approach, which
is performed at the reporting unit level. Step one compares the fair value of the reporting unit
(calculated using a discounted cash flow method) to its carrying value. If the carrying value
exceeds the fair value, there is a potential impairment and step two must be performed. Step two
compares the carrying value of the reporting units goodwill to its implied fair value (i.e., fair
value of the reporting unit less the fair value of the units assets and liabilities, including
identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value,
the excess is required to be recorded as an impairment charge. The Company performs the goodwill
impairment test annually in the fourth quarter. There have been no events in the nine months ended
March 31, 2011 that would indicate that goodwill and indefinite life intangible assets were
impaired.
Comprehensive Income
Comprehensive income for the three and nine months ended March 31, 2011 of approximately
$2,778,000 and $7,106,000, respectively, includes an unrealized foreign currency translation loss
of approximately $210,000 and a gain of approximately $276,000, respectively. Comprehensive income
for the three and nine months ended March 31, 2010 of approximately $1,193,000 and $3,851,000
includes a foreign currency translation loss of approximately $52,000 and $36,000, respectively.
Income Taxes
Deferred Tax Assets
Consistent with the provisions of ASC Topic No. 740, Income Taxes, the Company regularly
estimates the ability to recover deferred income taxes, reports such deferred tax assets at the
amount that is determined to be more-likely-than-not recoverable, and estimates income taxes in
each of the taxing jurisdictions in which the Company operates. This process involves estimating
current tax expense together with assessing any temporary differences resulting from the different
treatment of certain items, such as the timing for recognizing revenue and expenses for tax and
accounting purposes. These differences may result in deferred tax assets and liabilities, which are
included in the consolidated balance sheets. The Company is required to assess the likelihood that
the deferred tax assets, which include net operating loss carry forwards and temporary differences
that are expected to be deductible in future years, will be recoverable from future taxable income
or other tax planning strategies. If recovery is not likely, a valuation allowance must be provided
based on estimates of future taxable income in the various taxing jurisdictions, and the amount of
deferred taxes that are ultimately realizable. The provision for current and deferred taxes
involves evaluations and judgments of uncertainties in the interpretation of complex tax
regulations. This evaluation considers several factors, including an estimate of the likelihood of
generating sufficient taxable income in future periods, the effect of temporary differences, the
expected reversal of deferred tax liabilities, and available tax planning strategies.
Uncertainty in Tax Positions
The Company recognizes in its financial statements the benefits of tax return positions if
that tax position is more likely than not to be sustained on audit based on its technical merits.
At March 31, 2011, the Company had a liability for unrecognized tax benefits of approximately
$1,425,000, which, if recognized in the future, would favorably impact the Companys effective tax
rate. On a quarterly basis, the Company evaluates its tax positions and revises its estimates
accordingly. The Company believes that none of these tax positions will be resolved within the
next twelve months. The Company records both accrued interest and penalties related to income tax
matters, if any, in the provision for income taxes in the accompanying consolidated statements of
operations. As of March 31, 2011, the Company had not accrued any amounts for the potential
payment of penalties and interest.
The Company is subject to taxation in the U.S. and various state and foreign taxing
jurisdictions. The Companys federal tax returns for the 2008 through 2010 tax years remain subject
to examination. The Company files returns in numerous state jurisdictions with varying statutes of
limitation.
Product Warranties
The Company offers warranties on its contracts, the specific terms and conditions of which
vary depending
9
upon the contract and work performed. Generally, a basic limited warranty, including parts and
labor, is provided to customers for one year. The Company can recoup certain of these costs
through product warranties it holds with its original equipment manufacturers, which typically have
terms of one year. Historically, warranty expense has been minimal, however, management
periodically assesses the need for any additional warranty reserve.
Foreign Exchange Contracts
In January 2010, the Company entered into foreign currency forward exchange contracts to
purchase approximately 2.3 million Euros (approximately $3.3 million) to cover specific purchase
commitments for an infrastructure program. In July 2010, October 2010 and January 2011, the Company
purchased approximately 1.0 million, 0.1 million, and 1.2 millon Euros, respectively, under these
forward exchange contracts. As a result, the Company has no forward exchange contracts remaining
as of March 31, 2011. As the contracts did not qualify for hedge accounting, the Company recorded
approximately $136,000 and $515,000 of gain in general and administrative expense in the three and
nine months ended March 31, 2011, respectively, to adjust these
contracts to market value.
Restricted Cash
Restricted cash primarily consists of cash held in escrow for potential earn-out payments to
previous owners of C2C and Evocomm if certain milestones are reached.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update No. 2009- 13,
Multiple-Deliverable Revenue Arrangements (ASU 2009-13) which updates ASC Topic 605-25, Revenue
Recognition Multiple element arrangements, of the FASB codification. ASU 2009-13 provides new
guidance on how to determine if an arrangement involving multiple deliverables contains more than
one unit of accounting, and if so allows companies to allocate arrangement considerations in a
manner more consistent with the economics of the transaction. ASU 2009-13 was effective for the
Company for revenue arrangements entered into or materially modified in fiscal years beginning on
or after June 15, 2010. The adoption of this pronouncement did not have a material impact on the
Companys financial condition or results of operations for the three and nine months ended March
31, 2011.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires
new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3
fair value measurements and clarifies existing disclosures of inputs and valuation techniques for
Level 2 and 3 fair value measurements. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosure of activity within Level 3 fair value measurements, which is
effective for fiscal years beginning after December 15, 2010, and for interim periods within those
years. This update did not have a material impact on the Companys fair value disclosures.
In April 2010, the FASB issued ASU 2010-13, CompensationStock Compensation (Topic 718) -
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades (A Consensus of the FASB Emerging Issues Task
Force) (ASU 2010-13). ASU 2010-13 clarifies that a share-based payment award with an exercise
price denominated in the currency of a market in which a substantial portion of the entitys equity
securities trades should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, such an award should not be classified as a liability
if it otherwise qualifies as equity. This clarification of existing practice is effective for
fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2010, with early application permitted. The adoption of this pronouncement will not have a material
impact on the Companys consolidated financial condition or results of operations.
2. Basic and Diluted Net Income Per Common Share
Basic net income per common share is computed by dividing the net income for the period by the
weighted-average number of common shares outstanding for the period. For diluted earnings per share
the weighted
10
average shares include the incremental common shares issuable upon the exercise of stock
options, warrants, and unvested restricted shares (using the treasury stock method). The
incremental common shares for stock options, warrants and unvested restricted shares are excluded
from the calculation of diluted net income per share, if their effect is anti-dilutive. Diluted net
income per share for the three and nine months ended March 31, 2011 excludes the effect of
approximately 75,000 and 365,000 stock options, restricted shares and warrants in the calculation
of the incremental common shares, as their effect would have been anti-dilutive. Diluted net
income per share for the three and nine months ended March 31, 2010 excludes the effect of
approximately 836,000 stock options and restricted shares in the calculation of the incremental
common shares as their effect would have been anti-dilutive.
3. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2011 |
|
|
June 30, |
|
|
|
(Unaudited) |
|
|
2010 |
|
|
|
(In thousands) |
|
Raw materials and component parts |
|
$ |
1,212 |
|
|
$ |
1,392 |
|
Work-in-progress |
|
|
47,520 |
|
|
|
34,368 |
|
|
|
|
|
|
|
48,732 |
|
|
|
35,760 |
|
Less progress payments |
|
|
1,287 |
|
|
|
1,274 |
|
|
|
|
|
|
$ |
47,445 |
|
|
$ |
34,486 |
|
|
|
|
4. Segment Information
The Company operates through two business segments. Its services segment, through GNSC, GSM,
Cachendo, Mach 6, Telaurus, Melat, Evocomm, C2C, and Evosat, provides satellite communication
services capabilities. Its infrastructure solutions segment, through Globecomm Systems Inc., is
engaged in the design, assembly and installation of ground segment systems and networks.
The Companys reportable segments are business units that offer different services and
products. The reportable segments are each managed separately because they provide distinct
services and products.
11
The following is the Companys business segment information for the three and nine months
ended March 31, 2011 and 2010 and as of March 31, 2011 and June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
50,233 |
|
|
$ |
35,834 |
|
|
$ |
145,682 |
|
|
$ |
102,831 |
|
Infrastructure solutions |
|
|
16,520 |
|
|
|
18,849 |
|
|
|
49,929 |
|
|
|
62,193 |
|
Intercompany eliminations |
|
|
(4,270 |
) |
|
|
(1,883 |
) |
|
|
(9,681 |
) |
|
|
(7,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
62,483 |
|
|
$ |
52,800 |
|
|
$ |
185,930 |
|
|
$ |
157,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
6,642 |
|
|
$ |
4,307 |
|
|
$ |
16,487 |
|
|
$ |
11,225 |
|
Infrastructure solutions |
|
|
(1,603 |
) |
|
|
(2,388 |
) |
|
|
(5,093 |
) |
|
|
(5,327 |
) |
Interest income |
|
|
44 |
|
|
|
58 |
|
|
|
144 |
|
|
|
326 |
|
Interest expense |
|
|
(69 |
) |
|
|
(27 |
) |
|
|
(218 |
) |
|
|
(27 |
) |
Intercompany eliminations |
|
|
(34 |
) |
|
|
2 |
|
|
|
(47 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
4,980 |
|
|
$ |
1,952 |
|
|
$ |
11,273 |
|
|
$ |
6,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
2,066 |
|
|
$ |
1,535 |
|
|
$ |
5,529 |
|
|
$ |
4,006 |
|
Infrastructure solutions |
|
|
445 |
|
|
|
444 |
|
|
|
1,320 |
|
|
|
1,411 |
|
Intercompany eliminations |
|
|
(6 |
) |
|
|
(9 |
) |
|
|
(17 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
2,505 |
|
|
$ |
1,970 |
|
|
$ |
6,832 |
|
|
$ |
5,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
1,118 |
|
|
$ |
747 |
|
|
$ |
6,191 |
|
|
$ |
6,088 |
|
Infrastructure solutions |
|
|
169 |
|
|
|
193 |
|
|
|
428 |
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures for long-lived assets |
|
$ |
1,287 |
|
|
$ |
940 |
|
|
$ |
6,619 |
|
|
$ |
6,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2011 |
|
|
June 30, |
|
|
|
(Unaudited) |
|
|
2010 |
|
|
|
(In thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
Services |
|
$ |
146,962 |
|
|
$ |
130,866 |
|
Infrastructure solutions |
|
|
225,458 |
|
|
|
207,053 |
|
Intercompany eliminations |
|
|
(117,442 |
) |
|
|
(97,209 |
) |
|
|
|
Total assets |
|
$ |
254,978 |
|
|
$ |
240,710 |
|
|
|
|
5. Long-Term Debt
Line of Credit
On May 28, 2010, the Company entered into Amendment No. 4 to the committed secured credit
facility with Citibank, N.A. The credit facility has been extended and expires on May 26, 2011.
The credit facility is comprised of a $65 million line of credit (the Line) and a foreign
exchange line in the amount of $15 million. The Line includes the following sublimits: (a) $30
million available for standby letters of credit; (b) $20 million available for commercial letters
of credit; (c) a line for up to two term loans, each having a term of no more than five
12
years, in the aggregate amount of up to $40 million that can be used for acquisitions; and (d) $10
million available for revolving credit borrowings. At the discretion of the Company, advances
under the Line bear interest at the prime rate or LIBOR plus applicable margin based on the
Companys leverage ratio and are collateralized by a first priority security interest on all of the
personal property of the Company. At March 31, 2011, the applicable margin on the LIBOR rate was
250 basis points. The Company is required to comply with various ongoing financial covenants,
including with respect to the Companys leverage ratio, liquidity ratio, minimum cash balance, debt
service ratio, EBITDA minimums and minimum capital base, with which the Company was in compliance
at March 31, 2011. As of March 31, 2011, in addition to the C2C Acquisition Loan described below
there were standby letters of credit of approximately $6.9 million, which were applied against and
reduced the amounts available under the credit facility.
C2C Acquisition Loan
The purchase of C2C and Evocomm was funded, in part, through a five-year $12.5 million
acquisition term loan ( C2C Acquisition Loan) provided by Citibank, N.A on March 5, 2010, under the
then-existing credit facility. The C2C Acquisition Loan bears interest at the prime rate or LIBOR plus
250 basis points, at the Companys discretion. The balance is to be paid in equal monthly
installments, excluding interest, of approximately $208,333 beginning on April 1, 2010. The
interest rate in effect as of March 31, 2011 was approximately 2.8%. At March 31, 2011,
$10,000,000 was outstanding of which $2,500,000 was due within one year. Remaining minimum
payments under this agreement, excluding interest, for the following fiscal years are as follows
(in thousands):
|
|
|
|
|
2011 |
|
$ |
625 |
|
2012 |
|
|
2,500 |
|
2013 |
|
|
2,500 |
|
2014 |
|
|
2,500 |
|
2015 |
|
|
1,875 |
|
ComSource Acquisition Loan
Subsequent to March 31, 2011, on April 7, 2011, the Company entered into Amendment No. 5 to
its credit facility with Citibank, N.A., revising the definition and treatment of certain
covenants. Further, the Company entered into an $18.0 million Term Loan Note (the ComSource
Acquisition Loan). The ComSource Acquisition Loan was incurred to fund part of the acquisition of
ComSource Inc. described below in Subsequent Events. The ComSource Acquisition Loan provides that
the Company will pay to Citibank, N.A. sixty consecutive monthly principal installments of $300,000
each plus applicable interest.
6. Acquisitions
On March 5, 2010, the Company, acting through its indirect wholly-owned subsidiaries Globecomm
Holdings B.V. and Globecomm (BVI) Ltd., acquired from Carrier to Carrier Telecom Holdings Ltd (the
Seller), a privately owned company, all of the issued shares of Carrier to Carrier Telecom B.V.
(C2C), a company incorporated in the Netherlands, and the business assets of Evocomm
Communications Limited (Evocomm) each of C2C and Evocomm being a wholly-owned subsidiary of the
Seller. Pursuant to the terms of the acquisition, the Company also acquired from Evocomm all the
issued shares of Evosat (Pty) Ltd (Evosat), a company incorporated in South Africa.
C2C employs approximately 21 staff and provides satellite services across Africa, the Middle
East, Europe and Asia, and maintains services in the Atlantic, Mediterranean, Gulf of Mexico and
Indian Ocean regions through its teleport facility in the Netherlands. Evosat and Evocomm employ
approximately 11 staff and provide Immarsat land-based BGAN (Broadband Global Area Networks) and
maritime-based fleet broadband capabilities.
Pursuant to the terms of the acquisition agreement, the Company paid a cash purchase price of
$15.0 million (funded through $2.5 million of the Companys current cash position and $12.5 million
through the C2C Acquisition Loan (as defined above) issued under the Companys existing credit
facility). The Seller also may be entitled to receive additional cash payments of up to an
aggregate of $10.9 million, subject to an earn-out based
13
upon the acquired businesses achieving certain earnings milestones within twenty-four months
following the closing. In April 2011, the former owners of C2C and Evocomm received $4.5 million
based on the results of the first twelve month earn out period, which reduced the future potential
earn-out payments to a maximum of $5.9 million.
The following unaudited pro forma information assumes that the acquisition of C2C and Evocomm
occurred on July 1, 2009, after giving effect to certain adjustments, including amortization of
intangibles, increased interest expense on the C2C Acquisition Loan, decreased interest income due
to use of cash to partially fund the acquisition, and income tax adjustments. The pro forma results
are not necessarily indicative of the results of operations that would actually have occurred had
the transaction taken place on the date indicated or of the results that may occur in the future:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2010 |
|
|
|
(in thousands, except per share data) |
|
Revenues |
|
$ |
56,527 |
|
|
$ |
171,970 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,312 |
|
|
$ |
4,568 |
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.06 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.06 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
On May 29, 2009, the Company, acting through its wholly-owned subsidiary Telaurus LLC,
acquired the entire business operations of Telaurus Communications LLC (Telaurus), a privately
owned company, including all of the issued stock of Telauruss wholly-owned subsidiary Telaurus
Communications Pte. Ltd., a company incorporated in Singapore.
Pursuant to the terms of the acquisition the former owners of Telaurus received approximately
113,000 common shares, approximately $586,000 in cash and 244,910 warrants to purchase common stock
at an exercise price of $10.00 on July 28, 2010 based on results of the earn-out period, which
expired on May 31, 2010. The warrants expire on July 28, 2013.
7. Goodwill and Intangibles
Intangibles subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
Est. useful life |
|
|
|
(In thousands) |
|
Customer relationships |
|
$ |
16,279 |
|
|
$ |
16,279 |
|
|
8-18 years |
Software |
|
|
1,287 |
|
|
|
1,287 |
|
|
5 years |
Contracts backlog |
|
|
1,771 |
|
|
|
1,771 |
|
|
6 months-2 years |
Covenant not to compete |
|
|
125 |
|
|
|
125 |
|
|
3-4 years |
Trademark |
|
|
82 |
|
|
|
82 |
|
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
19,544 |
|
|
|
19,544 |
|
|
|
|
|
Less accumulated amortization |
|
|
5,002 |
|
|
|
3,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net |
|
$ |
14,542 |
|
|
$ |
16,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of approximately $505,000 and $1,522,000 was included in general and
administrative expenses in the three and nine months ended March 31, 2011, respectively.
Amortization expense of $330,000 and $1,033,000 was included in general and administrative expenses
in the three and nine months ended March 31, 2010, respectively.
Total remaining amortization expense for the following fiscal years related to these
intangible assets is expected to be as follows (in thousands):
14
|
|
|
|
|
2011 |
|
$ |
506 |
|
2012 |
|
|
1,889 |
|
2013 |
|
|
1,607 |
|
2014 |
|
|
1,582 |
|
2015 |
|
|
1,289 |
|
8. Fair Value Measurements
The Company has categorized our assets and liabilities recorded at fair value based upon the
fair value hierarchy. The levels of fair value hierarchy are as follows:
Level 1Quoted prices in active markets for identical assets or liabilities.
Level 2Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the related asset or liabilities.
Level 3Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of assets or liabilities.
ASC 820 Fair Value Measurements and Disclosures requires the use of observable market
inputs (quoted market prices) when measuring fair value and requires Level 1 quoted price to be
used to measure fair value whenever possible.
Foreign currency forward exchange contracts are classified within Level 2, as the valuation
inputs are based on quoted prices and market observable data of similar instruments.
There were no transfers in or out of Level 1 and 2 in the three and nine months ended March
31, 2011.
The fair value of indefinite-lived assets, which consists of goodwill, is measured on a
non-recurring basis in connection with the Companys annual goodwill impairment test. The fair
value of the reporting unit to which goodwill has been assigned is determined using a projected
discounted cash flow analysis based on unobservable inputs including gross profit, discount rate,
working capital requirements, capital expenditures, depreciation and terminal value assumptions and
are classified within Level 3 of the valuation hierarchy.
The book value of the Companys $10,000,000 of debt approximates fair value based upon its
variable interest rate.
9. Subsequent Events
The Company entered into an Agreement and Plan of Merger effective as of April 8, 2011 with
ComSource Inc. (ComSource). Pursuant to the agreement, a newly-formed subsidiary of the Company
merged with and into ComSource in exchange for an initial cash purchase price of $20.0 million,
funded through $2.0 million of existing cash and $18.0 million through the ComSource Acquisition
Loan, as described above. To the extent that working capital at the effective time is less or more
than $400,000, there may be a post-closing adjustment to the purchase price.
Former ComSource shareholders are also entitled to receive additional cash payments of up to
an aggregate of $21.0 million, subject to an earn-out based upon the acquired business achieving
certain earnings milestones within twenty-four months following the closing.
ComSource employs 48 staff and provides independent testing and evaluation of a variety of
telecommunications equipment and related recurring long term application support, including new
feature sets. Client testing includes basic performance, data assurance, reliability and system
security. The acquisition of ComSource provides the Company with further entry into the growing
wireless market.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations
with the consolidated financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q. This discussion contains, in addition to historical information,
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, based on our current expectations, assumptions, estimates and projections. These
forward-looking statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of certain
factors, such as, among others, uncertain demand for our services and products due to economic and
industry-specific conditions, the risks associated with operating in international markets,
including areas of conflict, our dependence on a limited number of contracts for a high percentage
of our revenues, our concentration of government contracts and the impact on our customers or
potential customers of the uncertain worldwide economic climate. These risks and others are more
fully described in the Risk Factors section of this Quarterly Report and in our other filings
with the Securities and Exchange Commission, including our Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q. We undertake no obligation to update publicly any forward-looking statements
for any reason, even if new information becomes available or other events occur in the future.
Overview
Our business is global and subject to technological and business trends in the
telecommunications marketplace. We derive much of our revenue from the government marketplace and
developing countries. Our business is therefore affected by geopolitical developments involving
areas of the world in which our customers are located, particularly in developing countries and
areas of the world involved in armed conflicts, which directly impact our military-related sector
business, particularly with regard to the conflict in Afghanistan.
The services and products we offer include: access, hosted, lifecycle support services,
pre-engineered products, and systems design and integration services. To provide these services
and products, we engineer all the necessary satellite and terrestrial facilities as well as provide
the integration services required to implement those facilities. We also operate and maintain
managed networks and provide life cycle support services on an ongoing basis. Our customers
generally have network service requirements that include point-to-point or point-to-multipoint
connections via a hybrid network of satellite and terrestrial facilities. In addition to the
government marketplace, these customers are communications service providers, commercial
enterprises and media and content broadcasters.
Since our services and products are often sold into areas of the world which do not have fiber
optic land-based networks, a substantial portion of our revenue is derived from, and is expected to
continue to be derived from, developing countries. These countries carry with them more enhanced
risks of doing business than in developed areas of the world, including the possibility of armed
conflicts or the risk that more advanced land-based telecommunications will be implemented over
time, and less developed legal protection for intellectual property.
In the three and nine months ended March 31, 2011, 21% and 22% of our revenues were derived
from Northrop Grumman Information Technologies Inc., respectively. Although the identity of
customers and contracts may vary from period to period, we have been, and expect to continue to be,
dependent on revenues from a small number of customers or contracts in each period in order to meet
our financial goals. From time to time these customers are located in developing countries or
otherwise subject to unusual risks.
As a consequence of the worldwide financial and economic crisis and that has occurred during
the past several years and lingering economic uncertainty, our customers have reduced and may
continue to reduce their budgets for spending on equipment and systems, which has impacted our
infrastructure segment revenues, resulting in an operating loss in this segment in the three and
nine months ended March 31, 2011 and the years ended
June 30, 2010 and 2009. We are also experiencing a shift in our infrastructure business from numerous smaller
orders to ones that are larger and include various milestones which affect revenue recognition.
This may result in more significant quarter-to-quarter shifts in revenues from this segment in the
future. We expect an increase in revenues from this segment in the fiscal 2011 fourth quarter as
a result of this shift.
The decrease in cash provided by operating activities for the nine months ended March
31, 2011 as compared to the nine months ended March 31, 2010 was primarily due to the
increase in inventories and the payment of accounts payable during the current period. This
increase was the result of inventory purchases related to a significant contract in the
infrastructure business expected to be shipped in fiscal 2012. We have not recognized certain
revenues from this contract as a result of not yet achieving certain contract milestones.
Moreover, this contract carries an unusually low margin which will negatively impact our gross
margin in fiscal 2012 as milestones are reached.
Revenues related to contracts for infrastructure solutions and services have been fixed-price
contracts in a majority of cases. Profitability of such contracts is subject to inherent
uncertainties as to the cost of performance. Cost overruns may be incurred as a result of
unforeseen obstacles, including both physical conditions and unexpected problems encountered in
engineering design and testing. Since our business is frequently concentrated in
16
a limited number of large contracts, a significant cost overrun on any contract could have a
material adverse effect on our business, financial condition and results of operations.
Costs from infrastructure solutions consist primarily of the costs of purchased materials
(including shipping and handling costs), direct labor and related overhead expenses,
project-related travel and living costs and subcontractor salaries. Anticipated contract losses are
recognized as they become known. Costs from services consist primarily of satellite space segment
charges, voice termination costs, network operations expenses and Internet connectivity fees.
Satellite space segment charges consist of the costs associated with obtaining satellite bandwidth
(the measure of capacity) used in the transmission of services to and from the satellites leased
from operators. Network operations expenses consist primarily of costs associated with the
operation of the network operations center on a twenty-four hour a day, seven-day a week basis,
including personnel and related costs and depreciation. Selling and marketing expenses consist
primarily of salaries, travel and living costs for sales and marketing personnel. Research and
development expenses consist primarily of salaries and related overhead expenses. General and
administrative expenses consist of expenses associated with our management, finance, contract, and
administrative functions, as well as amortization of intangible assets.
Critical Accounting Policies
Certain of our accounting policies require judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty. These judgments are based on our historical experience, the terms
of existing contracts, our observance of trends in the industry, information provided by our
customers, and information available from other outside sources, as appropriate. Actual results may
differ from these judgments under different assumptions or conditions. Our accounting policies that
require management to apply significant judgment include:
Revenue Recognition Infrastructure Solutions
We recognize revenue for our production-type contracts that are sold separately as standard
satellite ground segment systems when persuasive evidence of an arrangement exists, the selling
price is fixed or determinable, collectability is reasonably assured, delivery has occurred and the
contractual performance specifications have been met. Our standard satellite ground segment systems
produced in connection with these contracts are typically short-term (less than twelve months in
term) and manufactured using a standard modular production process. Such systems require less
engineering, drafting and design efforts than our long-term complex production-type projects.
Revenue is recognized on our standard satellite ground segment systems upon shipment and acceptance
of factory performance testing which is when title transfers to the customer. The amount of
revenues recorded on each standard production-type contract is reduced by the customers
contractual holdback amount, which typically requires 10% to 30% of the contract value to be
retained by the customer until installation and final acceptance is complete. The customer
generally becomes obligated to pay 70% to 90% of the contract value upon shipment and acceptance of
factory performance testing. Installation is not deemed to be essential to the functionality of the
system since installation does not require significant changes to the features or capabilities of
the equipment, does not require complex software integration and interfacing and we have not
experienced any difficulties installing such equipment. In addition, the customer or other third
party vendors can install the equipment. The estimated value of the installation services is
determined by management, which is typically less than the customers contractual holdback
percentage. If the holdback is less than the estimated value of installation, we will defer
recognition of revenues, determined on a contract-by-contract basis equal to the estimated value of
the installation services. Payments received in advance by customers are deferred until shipment
and are presented as deferred revenues.
We recognize revenue using the percentage-of-completion method of accounting upon the
achievement of certain contractual milestones, for our non-standard, complex production-type
contracts for the production of satellite ground segment systems and equipment that are generally
integrated into the customers satellite ground segment network. The equipment and systems produced
in connection with these contracts are typically long-term (in excess of twelve months in term) and
require significant customer-specific engineering, drafting and design effort in order to
effectively integrate all of the customizable earth station equipment into the customers ground
segment network. These contracts generally have larger contract values, greater economic risks and
substantive specific contractual performance requirements due to the engineering and design
complexity of such systems and related equipment. Progress payments received in advance by
customers are netted against the inventories balance.
17
The timing of our revenue recognition is primarily driven by achieving shipment, final
acceptance or other contractual milestones. Project risks including project complexity, political
and economic instability in certain regions in which we operate, export restrictions, tariffs,
licenses and other trade barriers which may result in the delay of the achievement of revenue
milestones. A delay in achieving a revenue milestone may negatively impact our results of
operations.
Costs from Infrastructure Solutions
Costs related to our production-type contracts and our non-standard, complex production-type
contracts rely on estimates based on total expected contract costs. Typically, these contracts are
fixed price projects. We use estimates of the costs applicable to various elements which we believe
are reasonable. Our estimates are assessed continually during the term of these contracts and costs
are subject to revisions as the contract progresses to completion. These estimates are subjective
based on managements assessment of project risk. These risks may include project complexity and
political and economic instability in certain regions in which we operate. Revisions in cost
estimates are reflected in the period in which they become known. A significant revision in an
estimate may negatively impact our results of operations. In the event an estimate indicates that
a loss will be incurred at completion, we record the loss as it becomes known.
Goodwill and Other Intangible Assets Impairment
Goodwill represents the excess of the purchase price of businesses over the fair value of the
identifiable net assets acquired. The amount of goodwill recorded in our balance sheet has
significantly increased over the recent past as we have made several acquisitions. Goodwill and
other indefinite life intangible assets are tested for impairment at least annually. The
impairment test for goodwill uses a two-step approach, which is performed at the reporting unit
level. Step one compares the fair value of the reporting unit (calculated using a discounted cash
flow method) to its carrying value. If the carrying value exceeds the fair value, there is a
potential impairment and step two must be performed. Step two compares the carrying value of the
reporting units goodwill to its implied fair value (i.e., fair value of the reporting unit less
the fair value of the units assets and liabilities, including identifiable intangible assets). If
the carrying value of goodwill exceeds its implied fair value, the excess is required to be
recorded as an impairment charge. The impairment test is dependent upon estimated future cash flows
of the services segment. There have been no events during the nine months ended March 31, 2011
that would indicate that the goodwill and indefinite life intangible assets were impaired.
Deferred tax assets
We regularly estimate our ability to recover deferred income taxes, report such deferred tax
assets at the amount that is determined to be more-likely-than-not recoverable, and we have to
estimate our income taxes in each of the taxing jurisdictions in which we operate. This process
involves estimating our current tax expense together with assessing any temporary differences
resulting from the different treatment of certain items, such as the timing for recognizing revenue
and expenses for tax and accounting purposes. These differences may result in deferred tax assets
and liabilities, which are included in our consolidated balance sheets.
We are required to assess the likelihood that our deferred tax assets, which include net
operating loss carry forwards and temporary differences that are expected to be deductible in
future years, will be recoverable from future taxable income or other tax planning strategies. If
recovery is not likely, we have to provide a valuation allowance based on our estimates of future
taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are
ultimately realizable. The provision for current and deferred taxes involves evaluations and
judgments of uncertainties in the interpretation of complex tax regulations. This evaluation
considers several factors, including an estimate of the likelihood of generating sufficient taxable
income in future periods, the effect of temporary differences, the expected reversal of deferred
tax liabilities and available tax planning strategies.
At March 31, 2011 and June 30, 2010 we had a liability for unrecognized tax benefits of
approximately $1,425,000 and $1,085,000, respectively, which if recognized in the future, would
favorably impact our effective tax rate.
18
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the value of the award
and is recognized as expense over the appropriate vesting period. Determining the fair value of
stock-based awards at the grant date requires judgment, including estimating the expected term of
stock options and the expected volatility of our stock. In addition, judgment is required in
estimating the amount of stock-based awards that are expected to be forfeited. If actual results
differ significantly from these estimates or different key assumptions were used, it could have a
material effect on our consolidated financial statements.
As of March 31, 2011, there was approximately $124,000 of unrecognized compensation cost
related to unvested outstanding stock options. The cost is expected to be recognized over a
weighted-average period of 2.3 years. As of March 31, 2011, there was approximately $4,486,000 of
unrecognized compensation cost related to unvested stock-based compensation related to restricted
shares. The cost is expected to be recognized over a weighted-average period of 2.0 years.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. We assess the customers ability to pay based on a
number of factors, including our past transaction history with the customer and the
creditworthiness of the customer. An assessment of the inherent risks in conducting our business
with foreign customers is also made since a significant portion of our revenues is international.
Management specifically analyzes accounts receivable, historical bad debts, customer
concentrations, customer creditworthiness and current economic trends. If the financial condition
of our customers were to deteriorate in the future, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Inventories
Inventories consist primarily of work-in-progress from costs incurred in connection with
specific customer contracts, which are stated at the lower of cost or market value. In assessing
the realizability of inventories, we are required to make estimates of the total contract costs
based on the various elements of the work-in-progress. It is possible that changes to these
estimates could cause a reduction in the net realizable value of our inventories.
Valuation of contingent consideration
We maintain a liability for contingent consideration related to potential earn-out payments to
the former shareholders of C2C and Evocomm if certain milestones are met. These amounts are
estimated based on a number of factors including likelihood of meeting those milestones based on
forecasted results. We review these estimates and updated forecasts on a quarterly basis and
record adjustments as required. In the three and nine months ended March 31, 2011 we recorded
expense of approximately $400,000 and $2,549,000, respectively, in operating results relating to
this estimate.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable
Revenue Arrangements (ASU 2009-13) which updates ASC Topic 605-25, Multiple Elements
Arrangements, of the FASB codification. ASU 2009-13 provides new guidance on how to determine if
an arrangement involving multiple deliverables contains more than one unit of accounting, and if so
allows companies to allocate arrangement considerations in a manner more consistent with the
economics of the transaction. ASU 2009-13 was effective for the Company, for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010. The
adoption of this pronouncement did not have a material impact on the financial condition or results
of operations for the three and nine months ended March 31, 2011.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires
new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3
fair value measurements and clarifies
19
existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value
measurements. The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosure
of activity within Level 3 fair value measurements, which is effective for fiscal years beginning
after December 15, 2010, and for interim periods within those years. This update did not have a
material impact on the Companys fair value disclosures.
In April 2010, the FASB issued ASU 2010-13, CompensationStock Compensation (Topic 718) -
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades (A Consensus of the FASB Emerging Issues Task
Force) (ASU 2010-13). ASU 2010-13 clarifies that a share-based payment award with an exercise
price denominated in the currency of a market in which a substantial portion of the entitys equity
securities trades should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, such an award should not be classified as a liability
if it otherwise qualifies as equity. This clarification of existing practice is effective for
fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2010, with early application permitted. The adoption of this pronouncement will not have a material
impact on the consolidated financial condition or results of operations.
Results of Operations
Three and Nine Months Ended March 31, 2011 and 2010
Our consolidated results of operations for the three and nine months ended March 31, 2011
include results of C2C, Evocomm and Evosat since the acquisition of these entities which took place
on March 5, 2010.
Revenues from Services. Revenues increased by $11.9 million, or 35.1%, to $46.0 million for
the three months ended March 31, 2011 and increased by $40.0 million, or 41.5%, to $136.2 million
for the nine months ended March 31, 2011, compared to $34.0 million and $96.2 million for the three
and nine months ended March 31, 2010, respectively. The increase in revenues for the three and
nine months ended March 31, 2011 was due to an increase in our access service offering primarily in
the government marketplace, along with a net increase of $3.5 million and $12.8 million,
respectively, of revenue from C2C and Evocomm.
Revenues from Infrastructure Solutions. Revenues decreased by $2.3 million, or 12.0%, to $16.5
million for the three months ended March 31, 2011 and decreased by $11.6 million, or 18.9%, to
$49.8 million for the nine months ended March 31, 2011, compared to $18.8 million and $61.4 million
for the three and nine months ended March 31, 2010, respectively. The decrease in revenues was
primarily driven by a decline in bookings of contract orders due to the global economic slowdown,
which resulted in government and commercial customers and prospects delaying or cancelling projects
which affected, in particular, pre-engineered systems. Due to the current global economic
conditions it is currently difficult to assess whether or not future bookings will meet or exceed
levels experienced in the past.
Costs from Services. Costs from services increased by $6.9 million, or 27.7%, to
$31.7 million for the three months ended March 31, 2011 and increased by $24.9 million, or 35.1%,
to $95.8 million for the nine months ended March 31, 2011, compared to $24.8 million and $70.9
million for the three and nine months ended March 31, 2010, respectively. Gross margin increased to
31.1% of revenues for the three months ended March 31, 2011 and increased to 29.7% of revenues for
the nine months ended March 31, 2011, compared to 27.0% and 26.3% for the three and nine months
ended March 31, 2010, respectively. The increase in the gross margin was primarily driven by an
increase in revenue in the government marketplace. The increase in gross margin in the services
segment has been a key driver in the increase in our consolidated income from operations. The
future relationship between the revenue and margin growth of our operating segments will depend on
a variety of factors, including the timing of major contracts, which are difficult to predict.
Costs from Infrastructure Solutions. Costs from infrastructure solutions decreased
by $2.0 million, or 13.4%, to $12.9 million for the three months ended March 31, 2011 and decreased
by $10.4 million, or 20.6%, to $40.1 million for the nine months ended March 31, 2011, compared to
$14.9 million and $50.5 million for the three and nine months ended March 31, 2010, respectively.
The gross margin increased to 22.1% in the three months
20
ended March 31, 2011 and increased to 19.5% for the nine months ended March 31, 2011, compared
to 20.9% and 17.7% for the three and nine months ended March 31, 2010, respectively. This increase
in gross margin in the three and nine months ended March 31, 2011 was mainly attributable to an
increase in sales in the government marketplace, along with an equipment sale with lower than
normal margin in the three and nine months ended March 31, 2010.
Selling and Marketing. Selling and marketing expenses increased by $0.3 million, or 7.8%, to
$4.3 million for the three months ended March 31, 2011 and increased by $2.1 million, or 19.5%, to
$12.9 million for the nine months ended March 31, 2011, compared to $3.9 million and $10.8 million
for the three and nine months ended March 31, 2010, respectively. The increase was a result of
increased proposal activity and marketing efforts in infrastructure, an increase in head count, and
net increase of $0.1 million and $0.5 million of expenses for the three and nine months ended March
31, 2011, respectively, incurred at C2C and Evocomm.
Research and Development. Research and development expenses remained relatively consistent
for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 and
increased by $0.5 million, or 20.2%, to $2.7 million for the nine months ended March 31, 2011,
compared to $2.3 million for the nine months ended March 31, 2010. The increase was principally
due to costs associated with expanding X and Ka band product capabilities and expanding the Tempo
Enterprise Media Platform.
General and Administrative. General and administrative expenses increased by $1.1 million, or
16.5%, to $7.5 million for the three months ended March 31, 2011 and increased by $3.3 million, or
19.3%, to $20.5 million for the nine months ended March 31, 2011, compared to $6.5 million and
$17.2 million for the three and nine months ended March 31, 2010, respectively. The
increase in the three months ended March 31, 2011 was a result of additional net expenses of $0.7
million incurred at C2C and Evocomm along with an increase in the accrual for the Companys pay for
performance plan and an increase in headcount, partially offset by a decrease in acquisition costs
of $0.5 million and reduction of foreign currency expense of $0.3 million compared to previous
period due to the settlement of forward contracts to purchase Euros (includes $0.1 million gain in
the three months ended March 31, 2011 along with $0.2 million reduction of expense due to inclusion
of $0.2 million loss recorded in same period last year). The increase in the nine months ended
March 31, 2011 was a result of additional net expenses of $2.5 million for the nine months ended
March 31, 2011 incurred at C2C and Evocomm along with an increase in headcount and stock
compensation expense and an increase in the accrual for the Companys pay for performance plan,
partially offset by a decrease in acquisition costs of $0.5 million and reduction of foreign
currency expense of $0.7 million compared to previous period due to the settlement of forward
contracts to purchase Euros (includes $0.5 million gain in the nine months ended March 31, 2011
along with $0.2 million reduction of expense due to inclusion of $0.2 million loss recorded in same
period last year).
Earn-out Fair Value Adjustments. Charges of $0.4 million and $2.1 million in the three and
nine months ended March 31, 2011 are a result of the earn-out accrual related to the acquisition of
C2C and Evocomm on March 5, 2010. The nine months amount includes an adjustment of $2.1 million due
to C2C and Evocomm performing better than our original forecasts based on current and future
anticipated results.
Interest Income. Interest income decreased by 24.1% to $44,000 for the three months ended
March 31, 2011 and decreased by $0.2 million, or 55.8%, to $0.1 million for the nine months ended
March 31, 2011, compared to $0.1 million and $0.3 million for the three and nine months ended March
31, 2010, respectively, as a result of a decrease in interest rates and a decrease in the
unrestricted cash balance.
Interest Expense. Interest expense increased by $42,000 to $0.1 million for the three months
ended March 31, 2011 and increased by $0.2 million to $0.2 million for the nine months ended March
31, 2011, as a result of the issuance of debt on March 5, 2010 related to the acquisition of C2C
and Evocomm.
Provision for Income Taxes. The provision for income taxes increased by $1.3 million, or
181.8%, to $2.0 million for the three months ended March 31, 2011 and increased by $2.2 million, or
96.9%, to $4.4 million for the nine months ended March 31, 2011, compared to $0.7 million and $2.3
million for the three and nine months ended March 31, 2010, respectively. The provision for income
taxes increased as a result of the increase in income before income taxes. The effective rate was
40% and 39% for the three and nine months ended March 31, 2011, respectively, compared to 36% and
37% for the three and nine months ended March 31, 2010, respectively. The
21
effective rate increased mainly due to the earn-out fair value adjustment that is not
deductible for tax purposes. This increase was partially offset by a research and development
credit for fiscal 2005, a benefit for the extension of the research and development credit that was
enacted in the Tax Relief Act of 2010 that is retroactive to January 1, 2010 along with benefits
for lower tax rates in certain foreign jurisdictions.
Liquidity and Capital Resources
At March 31, 2011, we had working capital of $89.8 million, including cash and cash
equivalents of $39.5 million, restricted cash of $5.0 million, net accounts receivable of $55.5
million, inventories of $47.4 million, prepaid expenses and other current assets of $5.4 million
and current deferred income taxes of $1.6 million, offset by $31.0 million in accounts payable,
$9.4 million in deferred revenues, $5.9 million in accrued payroll and related fringe benefits,
$15.9 million in other accrued expenses and $2.5 million in current portion of long term debt.
At June 30, 2010, we had working capital of $76.7 million, including cash and cash equivalents
of $42.9 million, restricted cash of $5.0 million, net accounts receivable of $49.2 million,
inventories of $34.5 million, prepaid expenses and other current assets of $3.1 million and current
deferred income taxes of $1.6 million, offset by $36.9 million in accounts payable, $2.3 million in
deferred revenues, $6.4 million in accrued payroll and related fringe benefits, $11.5 million in
accrued expenses and $2.5 million in current portion of long term debt.
Net cash provided by operating activities during the nine months ended March 31, 2011 was $4.0
million. This primarily related to a decrease in deferred revenue of $7.1 million due to timing
differences between project billings and revenue recognition milestones resulting from specific
customer contracts, net income of $6.8 million, a non-cash item representing depreciation and
amortization expense of $6.8 million comprised of depreciation expense related to the network
operations center and satellite earth station equipment and amortization expense related to
acquisitions, a decrease in deferred income taxes of $4.0 million due to net income generated in
the period, earn-out fair value adjustments of $2.5 million and non-cash stock compensation
expense of $2.5 million offset by an increase in inventory of $12.9 million due to the timing of
shipments and purchases of equipment for milestones to be reached in future periods mainly
attributable to one large long-term program, a decrease in accounts payable of $6.4 million due to
the timing of inventory purchases and payments to vendors, and an increase in accounts receivable
of $6.4 million due to the timing of billings and collections from customers.
Net cash provided by operating activities during the nine months ended March 31, 2010 was $6.0
million, which primarily related to a non-cash item representing depreciation and amortization
expense of $5.4 million primarily related to depreciation expense related to the network operations
center and satellite earth station equipment and amortization expense related to acquisitions, net
income of $3.9 million, an increase in accounts payable of $3.4 million due to the increase in
inventories and timing of payments to vendors, a decrease in deferred income taxes of $2.1 million
due to net income generated in the period, a decrease in accounts receivable of $2.0 million due to
the timing of billings and collections from customers, non-cash stock compensation expense of $1.7
million, an increase in deferred revenue of $1.4 million due to timing differences between project
billings and revenue recognition milestones resulting from specific customer contracts, an increase
in accrued expenses of $1.3 million resulting from customer deposits received as part of service
agreements, and provision for doubtful accounts of $0.7 million partially offset by an increase in
inventory of $16.2 million due to timing of shipments and purchases of equipment for milestones to
be reached in future periods.
Net cash used in investing activities during the nine months ended March 31, 2011 was $7.2
million, which related to the purchase of network operations center and teleport assets of $6.6
million and the cash payment for the Telaurus earn-out of approximately $0.6 million.
Net cash used in investing activities during the nine months ended March 31, 2010 was $26.1
million, which consisted of $13.9 million related to the acquisition of C2C and Evocomm, capital
expenditures of $6.8 million related to the purchase of hosted mobile core switch assets, network
operations center and teleport assets and $5.0 million of restricted cash related to a potential
earnout for C2C and Evocomm acquisition.
Net cash used in financing activities during the nine months ended March 31, 2011 was $0.4
million, which primarily related to repayment of long-term debt of $1.9 million partially offset by
$1.5 million of proceeds from the exercise of stock options.
22
Net cash provided by financing activities during the nine months ended March 31, 2010 was
$13.2 million, which primarily related to $12.5 million of borrowings from the term note used to
fund the acquisition of C2C and Evocomm, $0.5 million related to proceeds from the sale of common
stock and $0.2 million related to proceeds from the exercise of stock options.
On May 28, 2010, we entered into Amendment No. 4 to our committed secured credit facility with
Citibank, N.A. The credit facility has been extended and expires on May 26, 2011. The credit
facility is comprised of a $65 million line of credit (the Line) and a foreign exchange line in
the amount of $15 million. The Line includes the following sublimits: (a) $30 million available
for standby letters of credit; (b) $20 million available for commercial letters of credit; (c) a
line for up to two term loans, each having a term of no more than five years, in the aggregate
amount of up to $40 million that can be used for acquisitions; and (d) $10 million available for
revolving credit borrowings. At our discretion, advances under the Line bear interest at the
prime rate or LIBOR plus applicable margin based on the Companys leverage ratio and are
collateralized by a first priority security interest on all of the personal property of the
Company. At March 31, 2011, the applicable margin on the LIBOR rate was 250 basis points. The
Company is required to comply with various ongoing financial covenants, including with respect to
the Companys leverage ratio, liquidity ratio, minimum cash balance, debt service ratio, EBITDA
minimums and minimum capital base, with which the Company was in compliance at March 31, 2011. As
of March 31, 2011, $10.0 million was outstanding under the C2C Acquisition Loan, of which $2.5
million was due within one year. In addition there were standby letters of credit of approximately
$6.9 million, which were applied against and reduced the amounts available under the credit
facility as of March 31, 2011.
On April 7, 2011, we entered into Amendment No. 5 to our credit facility with Citibank, N.A.,
revising the definition and treatment of certain covenants. Further, we entered into the $18.0
million ComSource Acquisition Loan. The ComSource Acquisition Loan was issued to fund part of the
acquisition price of ComSource Inc. described below. The ComSource Acquisition Loan provides that
we will pay to Citibank, N.A. sixty consecutive monthly principal installments of $300,000 each
plus applicable interest.
We entered into, and simultaneously closed, an Agreement and Plan of Merger (the Merger
Agreement) as of April 8, 2011 with ComSource Inc. (ComSource). Pursuant to the Merger
Agreement, a newly-formed subsidiary merged with and into ComSource in exchange for an initial cash
purchase price of $20.0 million, funded through $2.0 million of existing cash and $18.0 million
through the ComSource Acquisition Loan, as described above. To the extent that working capital at
the effective time was less or more than $400,000, there may be a post-closing adjustment to the
purchase price.
Former ComSource shareholders are also entitled to receive additional cash payments of up to
an aggregate of $21.0 million, subject to an earn-out based upon the acquired business achieving
certain earnings milestones within twenty-four months following the closing.
We lease satellite space segment services and other equipment under various operating lease
agreements, which expire in various years through fiscal 2015. Future minimum lease payments due on
these leases through March 31, 2012 are approximately $35.3 million.
At March 31, 2011, we had contractual obligations and other commercial commitments as
follows (in thousands):
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Contractual
Obligations |
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
More than 5 years |
|
Operating leases |
|
$ |
56,521 |
|
|
$ |
35,309 |
|
|
$ |
16,173 |
|
|
$ |
4,870 |
|
|
$ |
169 |
|
Long-term debt |
|
|
10,000 |
|
|
|
2,500 |
|
|
|
5,000 |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations |
|
$ |
66,521 |
|
|
$ |
37,809 |
|
|
$ |
21,173 |
|
|
$ |
7,370 |
|
|
$ |
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
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|
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|
|
|
|
Amount of Commitment Expiration Per Period |
|
Other
Commercial Commitments |
|
Total Amounts Committed |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
More Than 5 years |
|
Standby letters of credit |
|
$ |
6,859 |
|
|
$ |
3,676 |
|
|
$ |
3,183 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments |
|
$ |
6,859 |
|
|
$ |
3,676 |
|
|
$ |
3,183 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our tax liability for uncertain tax positions was approximately $1,425,000 at March 31, 2011.
Until formal resolutions are reached between us and the tax authorities, the timing and amount of a
possible audit settlement for uncertain tax benefits is not practicable. Therefore, we do not
include this obligation in the table of contractual obligations.
We expect that our cash and working capital requirements for operating activities may increase
as we continue to implement our business strategy, including to fund any future acquisitions of
complementary businesses, technologies and intellectual property. Management anticipates
additional working capital requirements for work in progress for orders as obtained and that we may
periodically experience negative cash flows due to variances in quarter to quarter operating
performance. We will use existing working capital and, if required, use our credit facility to
meet these additional working capital requirements.
Our future capital requirements will depend upon many factors, including the success of our
marketing efforts in the infrastructure solutions and services business, the nature and timing of
customer orders and the level of capital requirements related to the expansion of our service
offerings. Based on current plans, we believe that our existing capital resources will be
sufficient to meet working capital requirements at least through March 31, 2012. However, we cannot
assure you that there will be no unforeseen events or circumstances that would consume available
resources significantly before that time.
Additional funds may not be available when needed and, even if available, additional funds may
be raised through financing arrangements and/or the issuance of preferred or common stock or
convertible securities on terms and prices significantly more favorable than those of the currently
outstanding common stock, which could have the effect of diluting or adversely affecting the
holdings or rights of our existing stockholders. If adequate funds are unavailable, we may be
required to delay, scale back or eliminate some of our operating activities, including, without
limitation, capital expenditures, research and development activities, the timing and extent of our
marketing programs, and we may be required to reduce headcount. We cannot assure you that
additional financing will be available to us on acceptable terms, or at all.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to a variety of risks, including foreign currency exchange rate fluctuations
relating to certain purchases from foreign vendors. In the normal course of business, we assess
these risks and have established policies and procedures to manage our exposure to fluctuations in
foreign currency values.
Our objective in managing our exposure to foreign currency exchange rate fluctuations is to
reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign
currency exchange rates. Accordingly, we may utilize from time to time foreign currency forward
contracts to hedge our exposure on firm commitments denominated in foreign currency. In January
2010, we entered into foreign currency forward exchange contracts to purchase approximately 2.3
million Euros to cover specific purchase commitments for
24
material for an infrastructure program. In July 2010, October 2010 and January 2011, the Company
purchased approximately 1.0 million, 0.1 million, and 1.2 million Euros, respectively, under these
forward exchange contracts. We recorded approximately $0.1 million and $0.5 million gain to
general and administrative expense in the three and nine months ended March 31, 2011, respectively,
to adjust these contracts to market value. At March 31, 2011 we had no
remaining foreign currency forward exchange contracts.
Our results of operations and cash flows are subject to fluctuations due to changes in
interest rates primarily from rates earned on our excess available cash balances and from our
variable interest rate long-term debt. Under our current positions, we do not use interest rate
derivative instruments to manage exposure to interest rate changes. A change in our interest rate
of 50 basis points on our long-term debt would have resulted in additional interest expense of
approximately $13,000 and $41,000 in the three and nine months ended March 31, 2011.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) are designed to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and Exchange Commission.
Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our
disclosure controls and procedures as of March 31, 2011 and, based on their evaluation, have
concluded that the disclosure controls and procedures were effective as of such date.
Changes in Internal Control Over Financial Reporting. There have been no changes in our
internal control over financial reporting that occurred during the most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Risks Related to Our Business
Reductions in telecommunications equipment and systems spending have negatively affected our
revenues and profitability of our infrastructure solutions segment, which may not be offset by the
growth in our services segment.
During the past several years, as a consequence of the worldwide financial and economic crisis
and business downturn, the global economy has been adversely impacted and nearly all businesses,
including ours, have faced uncertain economic environments. As a result of the current global
economic conditions, our customers have reduced and may continue to reduce their budgets for
spending on telecommunications equipment and systems. As a consequence, our current customers and
other prospective customers may postpone, reduce or even forego the purchase of our products and
systems, which could adversely affect our revenues and profitability. For the three and nine months
ended March 31, 2011 and the year ended June 30, 2010, our infrastructure solutions segment in
particular was impacted by these factors and incurred operating losses. It is currently difficult
to assess whether or not future bookings or revenues in this segment will meet or exceed the levels
experienced in the recent past. The growth of our services segment in recent periods may not be
sufficient to offset any prolonged continuation of a decline in business in our infrastructure
segment.
A limited number of customer contracts account for a significant portion of our revenues, and the
inability to replace a key customer contract or the failure of the customer to implement its plans
would adversely affect our results of operations, business and financial condition.
25
We rely on a small number of customer contracts for a large portion of our revenue.
Specifically, we have agreements with two customers to provide equipment and services, from which
we expect to generate a significant portion of our revenues. In addition, most of ComSources
revenues are generated by or through a single customer. If our key customers are unable to
implement their business plans, the market for these customers services declines, political or
military conditions make performance impossible or if any or all of the major customers modify or
terminate their agreements with us, and we are unable to replace these contracts, our results of
operations, business and financial condition would be materially harmed.
We derive a substantial portion of our revenues from the government marketplace, and a downturn in
this marketplace would adversely affect us.
In the three and nine months ended March 31, 2011, we derived 68% and 62%, respectively of our
consolidated revenues from the government marketplace. This business tends to have higher gross
margins than other markets we serve. A future reduction in the proportion of our business from the
government marketplace would negatively impact our results of operations.
There are a number of other risks associated with the government marketplace; specifically,
purchasing decisions of agencies are subject to political influence, contracts are subject to
cancellation if government funding becomes unavailable, and unsuccessful bidders may challenge
contracts that are awarded to us, which can lead to increased costs, delays and possible loss of
contracts. In particular, the mounting government deficits and efforts to reduce expenditures in
upcoming budgets will likely result in failures to fund various government programs. A withdrawal
of military forces from areas of conflict could result in curtailed spending in military programs
in which we participate, particularly in Afghanistan, from which we have generated a significant
amount of revenue in recent periods and from which combat troops are scheduled to be withdrawn by
the end of 2014.
We often act as a subcontractor, particularly in the government marketplace and our results could
be adversely affected by the prime contractors inability to obtain or renew its contracts with the
ultimate customer.
We regularly act as subcontractor to prime contractors, principally in the government
marketplace. In these subcontractor arrangements, we have no control over the contracting process
and we may not be able to influence or control issues that arise between the prime contractor and
its customer. Our future success may be materially impaired if the companies for which we serve as
subcontractor cannot obtain or renew their contracts with the ultimate customer, which has happened
in the past. Also, disputes between a prime contractor and its customer could result in a customer
terminating the contract, which could negatively impact our operating results.
Risks associated with operating in international markets, including areas of conflict, could
restrict our ability to expand globally and harm our business and prospects.
We market and sell a substantial portion of our services and products internationally. We
anticipate that international sales will continue to account for a significant portion of our total
revenues for the foreseeable future, including revenues from our Mach 6, Telaurus, C2C and Evocomm
acquisitions, with a significant portion of the international revenue coming from developing
countries, including countries in areas of conflict like Afghanistan. There are a number of risks
inherent in conducting our business internationally, including:
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|
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general political and economic instability in international markets, including the
hostilities in Iraq and Afghanistan, could impede our ability to deliver our services
and products to customers; |
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|
|
difficulties in collecting accounts receivable could affect our results of
operations; |
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|
|
changes in regulatory requirements could restrict our ability to deliver services to
our international customers, including the addition of a country to the list of
sanctioned countries under the International Emergency Economic Powers Act or similar
legislation; |
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|
|
export restrictions, tariffs, licenses and other trade barriers could prevent us
from adequately equipping our network facilities; |
26
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|
|
differing technology standards across countries may impede our ability to integrate
our services and products across international borders; |
|
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|
protectionist laws and business practices favoring local competition may give
unequal bargaining leverage to key vendors in countries where competition is scarce,
significantly increasing our operating costs; |
|
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|
increased expenses associated with marketing services in foreign countries could
affect our ability to compete; |
|
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|
relying on local subcontractors for installation of our services and products could
adversely impact the quality of our services and products; |
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|
difficulties in staffing and managing foreign operations could affect our ability
to compete; |
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|
complex foreign laws and treaties could affect our ability to compete; and |
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|
potentially adverse taxes could affect our results of operations. |
These and other risks could impede our ability to manage our international operations
effectively, limit the future growth and profitability of our business, increase our costs and
require significant management attention.
Our service revenue has increased as a percentage of total revenue and if our service revenue
decreases or margins decrease, our results of operations will be harmed.
GNSCs, GSMs, Cachendos, Mach 6s, Telauruss, Evocomms, C2Cs and Evosats future revenues
and results of operations are dependent on the development of the market for their current and
future services. In the nine months ended March 31, 2011, services revenues were 73% of total
revenue, compared to 61% for the nine months ended March 31, 2010. In fiscal 2010, services
revenues increased to 60% of total revenues compared to 48% and 32% in fiscal 2009 and 2008,
respectively. The service business tends to have significantly higher gross margins than our
infrastructure solutions business. A future reduction in the proportion of our services business
would disproportionately impact our results of operations
We derive a substantial portion of our revenues from fixed-price projects, under which we assume
greater financial risk if we fail to accurately estimate the costs of the projects.
We derive a substantial portion of our revenues from fixed-price projects. We assume greater
financial risks on a fixed-price project than on a time-and-expense based project. If we
miscalculate the resources or time we need for these fixed-price projects, the costs of completing
these projects may exceed our original estimates, which would negatively impact our financial
condition and results of operations.
Future acquisitions and strategic investments may divert our resources and managements attention,
results may fall short of expectations and, as a result, our operating results may be difficult to
forecast and may be volatile.
We have made several recent acquisitions and intend to continue pursuing acquisitions or
investments in complementary businesses, technologies and product lines as a key component of our
growth strategy. Any future acquisitions or investments may result in the use of significant
amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt,
amortization expenses related to intangibles assets and fair value adjustments related to earn
outs. Acquisitions involve numerous risks, including:
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failure of the acquisition or investment to meet
the expectations upon which we made a decision to
proceed; |
|
|
|
|
difficulties in the integration of the operations,
technologies, products and personnel of an acquired |
27
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business; |
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diversion of managements attention from other business concerns; |
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substantial transaction costs; |
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the potential of significant goodwill and
intangibles write-offs in the future in the event that
an acquisition or investment does not meet
expectations; |
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increased expenses associated with the consummation and integration of an acquisition; and |
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loss of key employees, customers or suppliers of any acquired business. |
We cannot assure you that any acquisition or strategic investment will be successful and will
not adversely affect our business, results of operations or financial condition.
In the event of a catastrophic loss affecting our operations in Hauppauge, New York, Laurel,
Maryland or the Netherlands, our results of operations would be harmed.
GNSCs revenues and results of operations are dependent on the infrastructure of the network
operations center and the Kenneth A. Miller International Teleport at our headquarters in
Hauppauge, New York. Similarly, GSMs and C2Cs revenues and results of operations are dependent
on the infrastructure of the network operations center and teleport at our Laurel, Maryland and
Netherlands facilities, respectively. A catastrophic event to any of these facilities or to the
infrastructure of the surrounding areas would result in significant delays in restoring services
capabilities. These capabilities permit us to offer an integrated suite of services and products
and the incapacity of our communications infrastructure would also negatively impact our ability to
sell our infrastructure solutions. This would result in the loss of revenues and adversely affect
our business, results of operations and financial condition.
Our markets are highly competitive and we have many established competitors, and we may lose market
share as a result.
The markets in which we operate are highly competitive and this competition could harm our
ability to sell our services and products on prices and terms favorable to us. Our primary
competitors in the infrastructure solutions market generally fall into two groups: (1) system
integrators, like Thales, Rockwell Collins, and SED Systems, and (2) equipment manufacturers who
also provide integrated systems, like General Dynamics, SATCOM Technologies, Viasat, Alcatel and ND
Satcom AG.
In the end-to-end satellite-based enterprise solutions and broadcast services markets, we
compete with other satellite communication companies who provide similar services, like Ascent
Media, Globecast, and Convergent Media Systems. In addition, in our services segment we may compete
with other communications service providers such as Caprock and Segovia, and satellite owners like
SES Americom and Intelsat. We anticipate that our competitors may develop or acquire services that
provide functionality that is similar to that provided by our services and that those services may
be offered at significantly lower prices or bundled with other services. These competitors may have
the financial resources to withstand substantial price competition, may be in a better position to
endure difficult economic conditions in international markets and may be able to respond more
quickly than we can to new or emerging technologies and changes in customer requirements. Moreover,
many of our competitors have more extensive customer bases, broader customer relationships and
broader industry alliances than we do that they could use to their advantage in competitive
situations.
The markets in which we operate have limited barriers to entry, and we expect that we will
face additional competition from existing competitors and new market entrants in the future.
Moreover, our current and potential competitors have established or may establish strategic
relationships among themselves or with third parties to increase the ability of their services and
products to address the needs of our current and prospective customers. The potential strategic
relationships of existing and new competitors may rapidly acquire significant market share, which
would harm our business and financial condition.
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If our services and products are not accepted in developing countries with emerging markets, our
revenues will be impaired.
We anticipate that a substantial portion of the growth in the demand for our services and
products will come from customers in developing countries due to a lack of basic communications
infrastructure in these countries. However, we cannot guarantee an increase in the demand for our
services and products in developing countries or that customers in these countries will accept our
services and products at all. Our ability to penetrate emerging markets in developing countries is
dependent upon various factors including:
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the speed at which communications infrastructure, including terrestrial microwave,
coaxial cable and fiber optic communications systems, which compete with
satellite-based services, is built; |
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the effectiveness of our local resellers and sales representatives in marketing and
selling our services and products; and |
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the acceptance of our services and products by customers. |
If our services and products are not accepted, or the market potential we anticipate does not
develop, our revenues will be impaired.
Since sales of satellite communications equipment are dependent on the growth of communications
networks, if market demand for these networks does not increase from recent depressed levels, our
revenue and profitability are likely to decline.
We derive, and expect to continue to derive, a significant amount of revenues from the sale of
satellite infrastructure solutions. If the long-term growth in demand for communications networks
does not increase from recent depressed levels, the demand for our infrastructure solutions may
decline or grow more slowly than we expect. Further, increased competition among satellite ground
segment systems and network manufacturers has increased pricing pressures and depressed margins.
As a result, we may not be able to grow our infrastructure business, our revenues may decline from
current levels and our results of operations may be harmed. The demand for communications networks
and the products used in these networks is affected by various factors, many of which are beyond
our control. For example, the uncertain general economic conditions have affected the overall rate
of capital spending by many of our customers. Also, many companies have found it difficult to raise
capital to finish building their communications networks and, therefore, have placed fewer orders.
Past economic slowdowns resulted in a softening of demand from our customers. We cannot predict the
extent to which demand will increase, nor the timing of such demand.
We depend upon certain key personnel and may not be able to retain these employees. If we lose the
services of these individuals or cannot hire additional qualified personnel, our business will be
harmed.
Our success also depends to a substantial degree on our ability to attract, motivate and
retain highly-qualified personnel. There is considerable competition for the services of
highly-qualified technical and engineering personnel. We may not be able either to retain our
current personnel or hire additional qualified personnel if and when needed.
Our future performance depends on the continued service of our key technical, managerial and
marketing personnel; in particular, David Hershberg, our Chairman and Chief Executive Officer, and
Keith Hall, our President and Chief Operating Officer, are key to our success based upon their
individual knowledge of the markets in which we operate. The employment of any of our key
personnel could cease at any time, which would harm our future performance.
Satellites upon which we rely may malfunction or be damaged or lost.
In the delivery of our services, we lease space segment from various satellite transponder
vendors. The damage or loss of any of the satellites used by us, or the temporary or permanent
malfunction of any of the satellites
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upon which we rely, would likely result in the interruption of our satellite-based communications
services. This interruption could have a material adverse effect on our business, results of
operations and financial condition.
We depend on our suppliers, some of which are our sole or a limited source of supply, and the loss
of any of these suppliers could materially adversely affect our business, results of operations and
financial condition.
We currently obtain most of our critical components and services from limited sources and
generally do not maintain significant inventories or have long-term or exclusive supply contracts
with our vendors. We have from time to time experienced delays in receiving products from vendors
due to lack of availability, quality control or manufacturing problems, shortages of materials or
components or product design difficulties. We may experience delays in the future and replacement
services or products may not be available when needed, or at all, or at commercially reasonable
rates or prices. If we were to change some of our vendors, we would have to perform additional
testing procedures on the service or product supplied by the new vendors, which would prevent or
delay the availability of our services and products. Furthermore, our costs could increase
significantly if we need to change vendors. If we do not receive timely deliveries of quality
services and products, or if there are significant increases in the prices of these products or
services, it could have a material adverse effect on our business, results of operations and
financial condition.
Our network may experience security breaches, which could disrupt our services.
Our network infrastructure may be vulnerable to computer viruses, break-ins, denial of service
attacks and similar disruptive problems caused by our customers or other Internet users. Computer
viruses, break-ins, denial of service attacks or other problems caused by third parties could lead
to interruptions, delays or cessation in service to our customers. There currently is no existing
technology that provides absolute security. We may face liability to customers for such security
breaches. Furthermore, these incidents could deter potential customers and adversely affect
existing customer relationships.
If the satellite communications industry fails to continue to develop or new technology makes it
obsolete, our business and financial condition will be harmed.
Our business is dependent on the continued success and development of satellite communications
technology, which competes with terrestrial communications transport technologies like terrestrial
microwave, coaxial cable and fiber optic communications systems. Fiber optic communications systems
have penetrated areas in which we have traditionally provided services. If the satellite
communications industry fails to continue to develop, or if any technological development
significantly improves the cost or efficiency of competing terrestrial systems relative to
satellite systems, then our business and financial condition would be materially harmed.
We may not be able to keep pace with technological changes, which would make our services and
products become non-competitive and obsolete.
The telecommunications industry, including satellite-based communications services, is
characterized by rapidly changing technologies, frequent new service and product introductions and
evolving industry standards. If we are unable, for technological or other reasons, to develop and
introduce new services and products or enhancements to existing services and products in a timely
manner or in response to changing market conditions or customer requirements, our services and
products would become non-competitive and obsolete, which would harm our business, results of
operations and financial condition.
Unauthorized use of our intellectual property by third parties may damage our business.
We regard our trademarks, trade secrets and other intellectual property as beneficial to our
success. Unauthorized use of our intellectual property by third parties may damage our business. We
rely on trademark, trade secret, patent protection and contracts, including confidentiality and
license agreements with our employees, customers, strategic collaborators, consultants and others,
to protect our intellectual property rights. Despite our precautions, it may be possible for third
parties to obtain and use our intellectual property without our authorization.
We currently have been granted six patents, and have one patent and one provisional patent
application
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pending in the United States. We currently have one Patent Cooperation Treaty patent
application pending. We also intend to seek further patents on our technology, if appropriate. We
cannot assure you that patents will be issued for any of our pending or future patent applications
or that any claims allowed from such applications will be of sufficient scope, or be issued in all
countries where our services and products can be sold, to provide meaningful protection or any
commercial advantage to us. Also, our competitors may be able to design around our patents. The
laws of some foreign countries in which our services and products are or may be developed,
manufactured or sold may not protect our services and 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 our
technology and services and products more likely.
We have registered the trademarks Globecomm, GSI and Telaurus in the United States and various
other countries, and the trademark Mach 6 in The Netherlands. We have various other trademarks and
service marks registered or pending for registration in the United States and in other countries
and may seek registration of other trademarks and service marks in the future. We cannot assure you
that registrations will be granted from any of our pending or future applications, or that any
registrations that are granted will prevent others from using similar trademarks in connection with
related goods and services.
Defending against intellectual property infringement claims could be time consuming and expensive,
and if we are not successful, could cause substantial expenses and disrupt our business.
We cannot be sure that the products, services, technologies and advertising we employ in our
business do not or will not infringe valid patents, trademarks, copyrights or other intellectual
property rights held by third parties. We may be subject to legal proceedings and claims from time
to time relating to the intellectual property of others in the ordinary course of our business.
Prosecuting infringers and defending against intellectual property infringement claims could be
time consuming and expensive, and regardless of whether we are or are not successful, could cause
substantial expenses and disrupt our business. We may incur substantial expenses in defending
against these third party claims, regardless of their merit. Successful infringement claims against
us may result in substantial monetary liability and/or may materially disrupt the conduct of, or
necessitate the cessation of, segments of our business.
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our stock price is volatile.
From April 1, 2010 through March 31, 2011, our stock price ranged from a low of $6.52 per
share to a high of $12.34 per share. The market price of our common stock, like that of the
securities of many telecommunications and high technology industry companies, could be subject to
significant fluctuations and is likely to remain volatile based on many factors, including the
following:
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quarterly variations in operating results; |
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announcements of new technology, products or services by us or any of our
competitors; |
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changes in financial estimates or recommendations by securities analysts; |
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general market conditions, including periods of significant volatility; or |
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domestic and international economic factors unrelated to our performance. |
Additionally, numerous factors relating to our business may cause fluctuations or declines in
our stock price.
The stock markets in general and the markets for telecommunications stocks in particular have
experienced extreme volatility that has often been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the trading price of
our common stock.
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Because our common stock is thinly traded, it may be difficult to sell shares of our common stock
into the markets without experiencing significant price volatility.
Our common stock is currently traded on the Nasdaq Global Market. Because of the relatively
small number of shares that are traded, it may be difficult for an investor to find a purchaser for
shares of our common stock without experiencing significant price volatility. We cannot guarantee
that an active trading market will develop, that our common stock will have a higher trading volume
than it has historically had or that it will maintain its current market price. This illiquidity
could have a material adverse effect on the market price of our stock.
A
third party could be prevented from acquiring shares of our stock at a premium to the market price because of our anti-takeover provisions.
Various provisions with respect to votes in the election of directors, special meetings of
stockholders, and advance notice requirements for stockholder proposals and director nominations of
our amended and restated certificate of incorporation, by-laws and Section 203 of the General
Corporation Law of the State of Delaware could make it more difficult for a third party to acquire
us, even if doing so might be beneficial to our stockholders. In addition, we have entered into
employment agreements with our senior executives that have change of control provisions that would
add substantial costs to an acquisition of us by a third party.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any
return on investment may be limited to the value of our stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash
dividends on our common stock in the foreseeable future. The payment of dividends on our common
stock will depend on our future earnings, capital requirements, financial condition, future
prospects and other factors as the board of directors might deem relevant. If we do not pay
dividends our stock may be less valuable because a return on your investment will only occur if our
stock price appreciates.
Risks Related to Government Approvals
We are subject to many government regulations, and failure to comply with them will harm our
business.
Operations and Use of Satellites
We are subject to various federal laws and regulations, which may have negative effects
on our business. We operate FCC licensed teleports in Hauppauge, New York, and Laurel, Maryland
subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and
regulations of the FCC. We cannot guarantee that the FCC will grant renewals when our existing
licenses expire, nor are we assured that the FCC will not adopt new or modified technical
requirements that will require us to incur expenditures to modify or upgrade our equipment as a
condition of retaining our licenses. We are also required to comply with FCC regulations regarding
the exposure of humans to radio frequency radiation from our teleports. These regulations, as well
as local land use regulations, restrict our freedom to choose where to locate our teleports. In
addition, prior to a third party acquisition of us, we would need to seek approval from the FCC to
transfer the radio transmission licenses we have obtained to the third party upon the consummation
of the acquisition. However, we cannot assure you that the FCC will permit the transfer of these
licenses. These approvals may make it more difficult for a third party to acquire us.
Foreign Regulations
Regulatory schemes in countries in which we may seek to provide our satellite-delivered
services may impose impediments on our operations. Some countries in which we intend to operate
have telecommunications laws and regulations that do not currently contemplate technical advances
in telecommunications technology like Internet/intranet transmission by satellite. We cannot assure
you that the present regulatory environment in any of those countries will not be changed in a
manner that may have a material adverse impact on our business. Either we or our local partners
typically must obtain authorization from each country in which we provide our satellite-delivered
services. The regulatory schemes in each country are different, and thus there may be instances of
noncompliance of which we are not aware. We cannot assure you that our licenses and approvals are
or will remain
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sufficient in the view of foreign regulatory authorities, or that necessary licenses and approvals
will be granted on a timely basis in all jurisdictions in which we wish to offer our services and
products or that restrictions applicable thereto will not be unduly burdensome.
Regulation of the Internet
Due to the increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the local, national or international levels with respect to
the Internet, covering issues including user privacy and expression, pricing of services and
products, taxation, advertising, intellectual property rights, information security or the
convergence of traditional communication services with Internet communications. It is anticipated
that a substantial portion of our Internet operations will be carried out in countries that may
impose greater regulation of the content of information coming into the country than that which is
generally applicable in the United States, including but not limited to privacy regulations in
numerous European countries and content restrictions in countries such as the Peoples Republic of
China. To the extent that we provide content as a part of our Internet services, it will be subject
to laws regulating content. Moreover, the adoption of laws or regulations may decrease the growth
of the Internet, which could in turn decrease the demand for our Internet services or increase our
cost of doing business or in some other manner have a material adverse effect on our business,
operating results and financial condition. In addition, the applicability of existing laws
governing issues including property ownership, copyrights and other intellectual property issues,
taxation, libel, court jurisdiction and personal privacy to the Internet is uncertain. The vast
majority of these laws were adopted prior to the advent of the Internet and related technologies
and, as a result, the laws do not contemplate or address the unique issues of the Internet and
related technologies. Changes to these laws intended to address these issues, including some
recently proposed changes, could create uncertainty in the marketplace which could reduce demand
for our services and products, could increase our cost of doing business as a result of costs of
litigation or increased product development costs, or could in some other manner have a material
adverse effect on our business, financial condition and results of operations.
Telecommunications Taxation, Support Requirements, and Access Charges
Telecommunications carriers providing domestic services in the United States are required to
contribute a portion of their gross revenues for the support of universal telecommunications
services, telecommunications relay services for the deaf, and/or other regulatory fees. We are
subject to some of these fees, and we may be subject to other fees or new or increased taxes and
contribution requirements that could affect our profitability, particularly if we are not able to
pass them through to customers for either competitive or regulatory reasons.
Broadband Internet access services provided by telephone companies are currently classified as
Information Services under the Communications Act and therefore not considered a telecommunications
service subject to payment of access charges to local telephone companies in the United States.
Should this situation change or other charges be imposed, the increased cost to our customers who
use telephone-company provided facilities to connect with our satellite facilities could discourage
the demand for our services. Likewise, the demand for our services in other countries could be
affected by the availability and cost of local telephone or other telecommunications services
required to connect with our facilities in those countries.
Export of Telecommunications Equipment
The sale of our infrastructure solutions outside the United States is subject to compliance
with the United States Export Administration Regulations and, in certain circumstances, with the
International Traffic in Arms Regulations. The absence of comparable restrictions on competitors in
other countries may adversely affect our competitive position. In addition, in order to ship our
products into and implement our services in some countries, the products must satisfy the technical
requirements of that particular country. If we were unable to comply with such requirements with
respect to a significant quantity of our products, our sales in those countries could be
restricted, which could have a material adverse effect on our business, results of operations and
financial condition.
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Foreign Ownership
We may, in the future, be required to seek FCC or other government approval if foreign
ownership of our stock exceeds certain specified criteria. Failure to comply with these policies
could result in an order to divest the offending foreign ownership, fines, denial of license
renewal and/or license revocation proceedings against the licensee by the FCC, or denial of certain
contracts from other United States government agencies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Removed and Reserved
Item 5. Other Information
None
Item 6. Exhibits
Exhibit No.
3.1 |
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Amended and Restated Certificate of Incorporation of the Registrant, filed as Exhibit 3.1 to
the Annual Report on Form 10-K dated September 28, 1998 (Reg. No. 000-22839) (the Annual
Report), and hereby incorporated by reference. |
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3.2 |
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Amended and Restated By-Laws of the Registrant, filed as Exhibit 3.3 to the Annual Report,
and hereby incorporated by reference. |
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31.1 |
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Chief Executive Officer Certification required by Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as amended (filed herewith). |
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31.2 |
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Chief Financial Officer Certification required by Rules 13a- 14 and 15d- 14 under the
Securities Exchange Act of 1934, as amended (filed herewith). |
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Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GLOBECOMM SYSTEMS INC.
(Registrant)
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Date: May 10, 2011 |
/s/ DAVID E. HERSHBERG
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David E. Hershberg |
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Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) |
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Date: May 10, 2011 |
/s/ ANDREW C. MELFI
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Andrew C. Melfi |
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Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer) |
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Index to Exhibits:
Exhibit No.
31.1 |
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Chief Executive Officer Certification required by Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as amended (filed herewith). |
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31.2 |
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Chief Financial Officer Certification required by Rules 13a- 14 and 15d- 14 under the
Securities Exchange Act of 1934, as amended (filed herewith). |
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32 |
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Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith). |
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