UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 000-22839 GLOBECOMM SYSTEMS INC. (Exact name of Registrant as specified in its charter) DELAWARE 11-3225567 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 45 OSER AVENUE, 11788 HAUPPAUGE, NY (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 231-9800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 12, 2001, there were 12,717,846 shares outstanding of the Registrant's common stock, par value $.001. 1 GLOBECOMM SYSTEMS INC. Index to the September 30, 2001 Form 10-Q Page ---- Part I -- Financial Information Item 1. Consolidated Financial Statements ....................................................................3 Consolidated Balance Sheets -- As of September 30, 2001 (unaudited) and June 30, 2001.................3 Consolidated Statements of Operations (unaudited) -- For the three months ended September 30, 2001 and 2000.........................................................................4 Consolidated Statement of Changes in Stockholders' Equity (unaudited) -- For the three months ended September 30, 2001............................................................................5 Consolidated Statements of Cash Flows (unaudited) -- For the three months ended September 30, 2001 and 2000............................................................................................6 Notes to Consolidated Financial Statements (unaudited)................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................10 Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................................22 Part II -- Other Information Item 1. Legal Proceedings....................................................................................22 Item 2. Changes in Securities and Use of Proceeds............................................................22 Item 3. Defaults Upon Senior Securities......................................................................22 Item 4. Submission of Matters to a Vote of Security Holders..................................................22 Item 5. Other Information....................................................................................22 Item 6. Exhibits and Reports on Form 8-K.....................................................................22 Signatures...........................................................................................25 2 PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS GLOBECOMM SYSTEMS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, JUNE 30, 2001 2001 ---- ---- (UNAUDITED) (AUDITED) ASSETS Current assets: Cash and cash equivalents $ 45,844 $ 45,038 Restricted cash 588 588 Accounts receivable, net 20,780 25,337 Inventories 12,305 15,285 Prepaid expenses and other current assets 668 803 -------------------------------- Total current assets 80,185 87,051 Fixed assets, net 29,647 30,456 Goodwill and other assets, net 7,483 7,492 -------------------------------- Total assets $ 117,315 $ 124,999 ================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,802 $ 15,317 Deferred revenue 4,531 5,825 Accrued payroll and related fringe benefits 1,226 931 Other accrued expenses 3,417 3,609 Deferred liability 450 300 Capital lease obligations 440 430 -------------------------------- Total current liabilities 21,866 26,412 Deferred liability, less current portion 3,191 3,341 Capital lease obligations, less current portion 9,991 10,105 Commitments and contingencies Stockholders' equity: Series A Junior Participating, shares authorized, issued and outstanding: none at September 30, 2001 and June 30, 2001 -- -- Common stock, $.001 par value, 22,000,000 shares authorized, shares issued: 12,865,591 at September 30, 2001 and June 30, 2001 13 13 Additional paid-in capital 123,276 123,276 Accumulated deficit (39,845) (36,997) Accumulated other comprehensive loss (83) (57) Treasury stock, at cost, 147,745 shares at September 30, 2001 and June 30, 2001 (1,094) (1,094) -------------------------------- Total stockholders' equity 82,267 85,141 -------------------------------- Total liabilities and stockholders' equity $ 117,315 $ 124,999 ================================ See accompanying notes. 3 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS ENDED -------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 2001 2000 -------------------------------------- Revenues $ 24,220 $ 26,444 Costs of revenues 21,399 21,330 -------------------------------------- Gross profit 2,821 5,114 -------------------------------------- Operating expenses: Network operations 1,349 756 Selling and marketing 1,606 2,096 Research and development 247 210 General and administrative 2,647 4,494 -------------------------------------- Total operating expenses 5,849 7,556 -------------------------------------- Loss from operations (3,028) (2,442) Other income (expense): Interest income 423 978 Interest expense (243) (1,951) -------------------------------------- Loss before income taxes and minority interests in operations of consolidated subsidiary (2,848) (3,415) Provision for income taxes -- (415) -------------------------------------- Loss before minority interests in operations of consolidated subsidiary (2,848) (3,830) Minority interests in operations of consolidated subsidiary -- 37 -------------------------------------- Net loss $ (2,848) $ (3,793) ====================================== Basic and diluted net loss per common share $ (0.22) $ (0.32) ====================================== Weighted-average shares used in the calculation of basic and diluted net loss per common share 12,718 11,879 ====================================== See accompanying notes. 4 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (IN THOUSANDS) (UNAUDITED) ACCUMULATED COMMON STOCK ADDITIONAL OTHER TREASURY STOCK TOTAL --------------- PAID-IN ACCUMULATED COMPREHENSIVE ------------------- STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) SHARES AMOUNT EQUITY ----------------------------------------------------------------------------------------------- Balance at June 30, 2001 12,866 $ 13 $123,276 $ (36,997) $ (57) 148 $ (1,094) $ 85,141 Comprehensive loss: Net loss (2,848) (2,848) Gain from foreign currency translation 63 63 Unrealized loss on available-for-sale equity securities (89) (89) ----------- Total comprehensive loss (2,874) ----------------------------------------------------------------------------------------------- Balance at September 30, 2001 12,866 $ 13 $123,276 $ (39,845) $ (83) 148 $ (1,094) $ 82,267 =============================================================================================== See accompanying notes. 5 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) THREE MONTHS ENDED --------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 2001 2000 --------------------------------------- OPERATING ACTIVITIES: Net loss $ (2,848) $ (3,793) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,028 2,366 Provision for doubtful accounts 63 218 Deferred income taxes -- 415 Internet access services -- (49) Minority interests in operations of consolidated subsidiary -- (37) Stock compensation expense -- 19 Interest on capital lease obligations -- 17 Changes in operating assets and liabilities: Accounts receivable 4,494 (4,992) Inventories 2,980 (2,603) Prepaid expenses and other current assets 46 264 Other assets 9 34 Accounts payable (3,515) 1,442 Deferred revenue (1,294) 163 Accrued payroll and related fringe benefits 295 450 Other accrued expenses (192) (519) --------------------------------------- Net cash provided by (used in) operating activities 1,066 (6,605) --------------------------------------- INVESTING ACTIVITIES: Purchases of fixed assets, net of non-cash capital lease expenditures (219) (1,261) Restricted cash -- (77) --------------------------------------- Net cash used in investing activities (219) (1,338) --------------------------------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options -- 27 Payments under capital leases (104) (481) --------------------------------------- Net cash used in financing activities (104) (454) --------------------------------------- Effect of foreign currency translation on cash 63 (16) Net increase (decrease) in cash and cash equivalents 806 (8,413) Cash and cash equivalents at beginning of period 45,038 65,289 --------------------------------------- Cash and cash equivalents at end of period $ 45,844 $ 56,876 ======================================= See accompanying notes. 6 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (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, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The results of operations for the three months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2002, or for any future period. 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 reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions. 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, 2001 and the accompanying notes thereto contained in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 28, 2001. Comprehensive loss Comprehensive loss for the three months ended September 30, 2001 of approximately $2,874,000 includes a foreign currency translation gain of approximately $63,000 and an unrealized loss on available-for-sale equity securities of approximately $89,000. The Company's comprehensive loss for the three months ended September 30, 2000 of approximately $3,809,000 includes a foreign currency translation loss of approximately $16,000. Income Taxes In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income. For the three months ended September 30, 2001 and the year ended June 30, 2001, the Company incurred a net loss, and accordingly, management provided a full valuation allowance for the net deferred tax assets. For the three months ended September 30 2000, the Company realized approximately $415,000 of deferred tax assets based on the amount of taxable income reported for such period. 2. GOODWILL AND OTHER ASSETS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations ("SFAS No. 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations completed on or after July 1, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain specified criteria. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. SFAS No. 142 also requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. 7 On July 1, 2001, the Company adopted the new rules on business combinations and accounting for goodwill and other intangible assets. The Company's previous business combinations were accounted for using the purchase method of accounting. Goodwill has a net carrying amount of approximately $7,441,000, net of accumulated amortization of $458,000 at September 30, 2001 and June 30, 2001. Application of the nonamortization provisions of SFAS No. 142 resulted in a decrease in net loss of approximately $215,000 ($.02 per diluted share) for the three months ended September 30, 2001 and is expected to result in a decrease in net loss of approximately $860,000 ($.07 per diluted share) for fiscal 2002. During the quarter ended September 30, 2001, the Company performed the first of the required impairment tests of goodwill and determined that no impairment losses have been deemed necessary. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company's net loss and net loss per diluted share would have been as follows: SEPTEMBER 30, SEPTEMBER 30, 2001 2000 ------------------------------------------------------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Reported net loss $ (2,848) $ (3,793) Add back goodwill amortization - 39 ------------------------------------------------------- Adjusted net loss $ (2,848) $ (3,754) ======================================================= Basic and diluted net loss per common share: As reported $ (0.22) $ (0.32) Goodwill amortization - - ------------------------------------------------------- Adjusted basic and diluted net loss per common share $ (0.22) $ (0.32) ======================================================= 3. RESTRUCTURING CHARGE During April 2001, in connection with management's plan to reduce costs and to improve NetSat's operating efficiencies, the Company recorded a restructuring charge of approximately $1,950,000 during the fourth quarter of fiscal year ended June 30, 2001. The restructuring charge is primarily associated with the discontinuance of certain NetSat product lines to enhance the Company's strategic redeployment of its consolidated operating activities, enabling the Company to offer its customers end-to-end satellite communications solutions while combining operations and reducing costs. At September 30, 2001 and June 30, 2001, approximately $250,000 and $500,000 of the restructuring charge is accrued and included in other accrued expenses in the accompanying consolidated balance sheets, respectively. 4. BASIC AND DILUTED NET LOSS PER COMMON SHARE The Company computes net loss per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic and diluted net loss per common share is computed by dividing the net loss for the period by the weighted-average number of common and dilutive equivalent shares outstanding for the period. Common equivalent shares consist of the incremental common shares issuable upon the conversion of preferred stock (using an if-converted method) and incremental shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Incremental common equivalent shares are excluded from the calculation of diluted net loss per share if their effect is anti-dilutive. Diluted net loss per share for the three months ended September 30, 2001 and 2000, excludes the effect of approximately 120,000 and 583,000 stock options and approximately 0 and 20,000 warrants, respectively, as their effect would have been anti-dilutive. 5. INVENTORIES Inventories, which consist primarily of work-in-progress from costs incurred in connection with specific customer contracts, are stated at the lower of cost (using the first-in, first-out method of accounting) or market value. 8 Inventories consist of the following: SEPTEMBER 30, JUNE 30, 2001 2001 ---------------------------------------- (UNAUDITED) (AUDITED) (IN THOUSANDS) Raw materials and component parts $ 567 $ 608 Work-in-progress 11,738 14,677 ---------------------------------------- $ 12,305 $ 15,285 ======================================== 6. SEGMENT INFORMATION The Company operates through two business segments. Its Ground Segment Systems, Networks and Enterprise Solutions Segment, through Globecomm Systems Inc., is engaged in the design, assembly and installation of ground segment systems, networks and enterprise solutions for the complex and changing communications requirements of its customers. Its Data Communications Services Segment, through its wholly-owned subsidiary NetSat Express Inc., is engaged in providing high-speed, satellite-delivered data communications to developing markets worldwide. NetSat Express is currently providing Internet access to customers who have limited or no access to terrestrial network infrastructure capable of supporting the economical delivery of such services. The Company's reportable segments are business units that offer different products and services. The reportable segments are each managed separately because they provide distinct products and services. The following is the Company's business segment information for the three months ended September 30, 2001 and 2000 and as of September 30, 2001 and June 30, 2001: THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 ---------------------------------------- (UNAUDITED) (IN THOUSANDS) Revenues: Ground Segment Systems, Networks and Enterprise Solutions $ 18,936 $ 20,657 Data Communications Services 6,264 6,801 Intercompany eliminations (980) (1,014) -------------- -------------- Total revenues $ 24,220 $ 26,444 ============== ============== Loss from operations: Ground Segment Systems, Networks and Enterprise Solutions $ (1,164) $ (129) Data Communications Services (1,867) (2,348) Interest income 423 978 Interest expense (243) (1,951) Provision for income taxes -- (415) Minority interests in operations of consolidated subsidiary -- 37 Intercompany eliminations 3 35 -------------- -------------- Net loss $ (2,848) $ (3,793) ============== ============== Depreciation and amortization: Ground Segment Systems, Networks and Enterprise Solutions $ 446 $ 426 Data Communications Services 585 1,940 Intercompany eliminations (3) -- -------------- -------------- Total depreciation and amortization $ 1,028 $ 2,366 ============== ============== 9 THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 ------------------------------------------- (UNAUDITED) (IN THOUSANDS) Expenditures for long-lived assets: Ground Segment Systems, Networks and Enterprise Solutions $ 139 $ 509 Data Communications Services 80 1,409 --------------- ---------------- Total expenditures for long-lived assets $ 219 $ 1,918 =============== ================ SEPTEMBER 30, JUNE 30, 2001 2001 (UNAUDITED) (AUDITED) ------------------------------------------- (IN THOUSANDS) Assets: Ground Segment Systems, Networks and Enterprise Solutions $ 130,040 $ 136,103 Data Communications Services 22,943 21,985 Intercompany eliminations (35,668) (33,089) --------------- ---------------- Total assets $ 117,315 $ 124,999 ================ ============== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Quarterly Report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below as well as those discussed 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. OVERVIEW Since our inception, a majority of our revenues have been generated by our ground segment systems, networks and enterprise solutions business. Contracts for these ground segment systems and networks and communications services have been fixed-price contracts in virtually all cases. Profitability of such contracts is subject to inherent uncertainties as to the cost of performance. In addition to possible errors or omissions in making initial estimates, cost overruns may be incurred as a result of unforeseen obstacles including both physical conditions and unexpected problems encountered in engineering design and testing. Since our business may at times be concentrated in a limited number of large contracts, a significant cost overrun on any contract could have a material adverse effect on our business, financial condition and results of operations. The period from contract award through installation of ground segment systems and networks and communications services supplied by us generally is from three to twelve months. We recognize revenue in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, for our short-term (less than twelve months in term) production-type contracts that are sold separately as stand-alone ground segment systems. Such contracts typically require less engineering, drafting and design efforts than other longer-term production-type projects and usually require customer acceptance upon completion of installation of the equipment at the customers' site. Accordingly, we typically recognize 80-90% of the contract value upon shipment with the balance recognized upon receipt of the customers' final acceptance. Installation is not deemed to be essential to the functionality of the equipment since installation is mechanical in nature and does not require significant change to the features or capability of the equipment, or require complex software integration and interfacing. In addition, the customer or other vendors can install the equipment; and generally the cost of installation is approximately 10-20% of the sales value of the related equipment. Payments received in advance by customers are deferred until shipment and are presented as deferred revenue. 10 We use the percentage-of-completion method of accounting to recognize revenue for our long-term (in excess of twelve months in term), more complex production-type contracts that are generally integrated into complete ground segment networks, upon the achievement of certain contractual milestones, in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. NetSat Express' revenues are derived primarily from Internet access service fees and sales of hardware and equipment. Service revenues from Internet access are recognized ratably over the period in which services are provided. Sales of hardware and equipment are recognized upon shipment. Payments received in advance of providing Internet access services are deferred until the period such services are provided and are presented as deferred revenue. Contract costs generally include purchased material, direct labor, overhead and other indirect costs. Anticipated contracted losses are recognized as they become known. Costs of revenues consist primarily of the costs of purchased materials, direct labor and related overhead expenses, project-related travel, living costs and subcontractor salaries. In addition, cost of revenues relating to Internet access service fees consists primarily of satellite space segment charges and Internet connectivity fees. 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. 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 paid to engineers. General and administrative expenses consist of expenses associated with our management, finance, contract and administrative functions. We anticipate that network operations expenses and research and development expenses will continue to increase during the next several years due to expected increases in personnel and related expenses to support our increasing service base. RESULTS OF OPERATIONS Three Months Ended September 30, 2001 and 2000 Revenues. Revenues decreased by $2.2 million, or 8.4%, to $24.2 million for the three months ended September 30, 2001 compared to $26.4 million for the three months ended September 30, 2000. The decrease reflects a continuing difficult operating environment due to the global economic slowdown in the telecommunications industry. Gross Profit. Gross profit decreased by $2.3 million, or 44.8%, to $2.8 million for the three months ended September 30, 2001 from $5.1 million for the three months ended September 30, 2000. The decrease reflects less revenues generated due to the global economic slowdown. Gross profit as a percentage of revenues for the three months ended September 30, 2001, decreased to 11.6 %, compared to 19.3% for the same period in the preceding year. This decrease is attributable to an increase in costs of sales from the renegotiation of one of our capitalized lease arrangements to an operating lease arrangement in the fourth quarter of fiscal 2001 as well as a decrease in the utilization of network capacity. We expect our gross margins to decline in the future due to the under-utilization of satellite transponder space and the global economic slowdown in the telecommunications industry. Network Operations. Network operations expenses increased by $0.6 million, or 78.4%, to $1.3 million for the three months ended September 30, 2001 compared to $0.8 million for the three months ended September 30, 2000. The increase is due to the continuing expansion of our network operations center and related expenses to support the increasing service base. Selling and Marketing. Selling and marketing expenses decreased by $0.5 million, or 23.4%, to $1.6 million for the three months ended September 30, 2001 compared to $2.1 million for the three months ended September 30, 2000. This decrease is attributable to a cost reduction program, which included a reduction in work force partially offset by additional selling and marketing efforts relating to an increase in bid and proposal activity. Research and Development. Research and development expenses remained relatively consistent for the three months ended September 30, 2001 compared to the three months ended September 30, 2000. General and Administrative. General and administrative expenses decreased by $1.8 million, or 41.1%, to $2.6 million for the three months ended September 30, 2001 compared to $4.5 million for the three months ended September 30, 2000. General and administrative expenses as a percentage of revenues decreased to 10.9% for the three months ended September 30, 2001 from 17.0% for the three months ended September 30, 2000. The decrease 11 in general and administrative expenses is primarily due to reduced depreciation expense related to the renegotiation of one of our capitalized lease arrangements to an operating lease arrangement in the fourth quarter of fiscal 2001. Interest Income. Interest income decreased by $0.6 million, or 56.7%, to $0.4 million for the three months ended September 30, 2001 compared to $1.0 million for the three months ended September 30, 2000. The decrease is primarily the result of reduced cash and cash equivalents due to cash used in operating and investing activities during the fiscal year ended June 30, 2001 as well as a decline in interest rates. Interest Expense. Interest expense decreased by $1.7 million, or 87.5%, to $0.2 million for the three months ended September 30, 2001 compared to $2.0 million for the three months ended September 30, 2000. The decrease relates to the renegotiation of one of our capitalized lease arrangements to an operating lease arrangement in the fourth quarter of fiscal 2001. Provision for Income Taxes. Provision for income taxes decreased by $0.4 million, or 100.0%, for the three months ended September 30, 2001 compared to the three months ended September 30, 2000. As the Company incurred a net loss for the three months ended September 30, 2001 and since the Company provided a full valuation allowance for the net deferred tax assets at June 30, 2001, no provision for income taxes was recorded during the three months ended September 30, 2001. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, we had working capital of $58.3 million, including cash and cash equivalents of $45.8 million, restricted cash of $0.6 million, net accounts receivable of $20.8 million, inventories of $12.3 million and prepaid expenses and other current assets of $0.7 million, offset by $11.8 million in accounts payable, $4.5 million in deferred revenue and $5.5 million in accrued expenses and other current liabilities. Net cash provided by operating activities during the three months ended September 30, 2001 was $1.1 million, which primarily relates to a decrease in accounts receivable of $4.4 million due to the timing of collections on certain contract billings and a decrease in inventories of $3.0 million due to the completion of certain jobs offset by a decrease in accounts payable of $3.5 million relating to the timing of vendor payments and the current period net loss of $2.8 million. The Company maintains a $5.0 million credit facility consisting of (1) a $2.0 million secured domestic line of credit and (2) a $3.0 million secured export-import guaranteed line of credit. Each line of credit bears interest at the prime rate (6.0% at September 30, 2001) plus 0.50% per annum and is collateralized by a first security interest on all our assets. The credit facility contains certain financial covenants, which we were in compliance with at September 30, 2001. As of September 30, 2001, no amounts were outstanding under this credit facility. We also lease satellite space segment services and other equipment under various operating lease agreements, which expire in various years through 2014. Future minimum lease payments due on these leases through September 30, 2002 are approximately $20.1 million. On November 7, 2001, the Board of Directors authorized a stock repurchase program of up to $2.0 million of the Company's outstanding stock, representing approximately 3.7% of the total shares outstanding on that date. Timing, price, quantity and the manner of purchases will be at the discretion of management, depending on market conditions and other factors, subject to compliance with the applicable securities laws. We expect that our cash and working capital requirements for our operating activities will continue to increase as we expand our operations. Management anticipates that we will experience negative cash flows due to continued operating losses by NetSat Express, Inc. Our future capital requirements will depend upon many factors, including the success of our marketing efforts in the ground segment systems, networks, and communications services business, the nature and timing of customer orders, the extent to which we are able to locate additional strategic suppliers in whose technology we wish to invest, the extent to which we must conduct research and development efforts internally and potential acquisitions of complementary businesses, products or technologies. Based on current plans, we believe that our existing capital resources will be sufficient to meet working capital requirements through September 30, 2002. However, we cannot assure you that there will be no change that would consume available resources significantly before that time. For example, recent terrorist attacks on the United States, as well as future events occurring in response to or in connection 12 with them, including, without limitation, future terrorist attacks against the United States or its allies or military or trade or travel disruptions impacting our ability to sell and market our products and services in the United States and internationally may impact our results of operations. Additional funds may not be available when needed and even if available, additional funds may be raised through financing arrangements and/or the issuance of preferred or common stock or convertible securities on terms and prices significantly more favorable than those of the currently outstanding common stock, which could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders. If adequate funds are unavailable, we may be required to delay, scale back or eliminate some of our operating activities, including without limitation, the timing and extent of our marketing programs, the extent and timing of hiring additional personnel and our research and development activities and operating activities of NetSat Express. We cannot assure you that additional financing will be available to us on acceptable terms, or at all. CERTAIN BUSINESS CONSIDERATIONS RISK FACTORS WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW AND EXPECT OUR LOSSES TO CONTINUE. We have incurred significant net losses since we began operating in August 1994. We incurred net losses of $2.8 million for the three months ended September 30, 2001, $18.7 million during the fiscal year ended June 30, 2001 and $3.6 million during the fiscal year ended June 30, 2000. As of September 30, 2001, our accumulated deficit was approximately $39.8 million. We anticipate that we will continue to incur net losses. Our ability to achieve and maintain profitability will depend upon our ability to generate significant revenues through new customer contracts and the expansion of our existing products and services, including our communications services. We cannot assure you that we will be able to obtain new customer contracts or generate significant additional revenues from those contracts or any new products or services that we introduce. Even if we become profitable, we may not sustain or increase our profits on a quarterly or annual basis in the future. SINCE SALES OF SATELLITE COMMUNICATIONS EQUIPMENT ARE DEPENDENT ON THE GROWTH OF COMMUNICATIONS NETWORKS, AS MARKET DEMAND FOR THESE NETWORKS DECLINES, OUR REVENUE AND PROFITABILITY ARE LIKELY TO DECLINE. We derive, and expect to continue to derive, a significant amount of revenue from the sale of satellite ground segment systems and networks. If the long-term growth in demand for communications networks does not occur as we expect, the demand for our satellite ground segment systems and networks may decline or grow more slowly than we expect. As a result, we may not be able to grow our business, our revenue may decline from current levels and our results of operations may be harmed. The demand for communications networks and the products used in these networks is affected by various factors, many of which are beyond our control. For example, general economic conditions have recently deteriorated and affected the overall rate of capital spending by our customers. Also, many companies are finding it increasingly difficult to raise capital to finish building their communications networks and therefore are placing fewer orders with our customers. We believe that the current economic slowdown may result in a softening of demand from our customers. We believe that this slowdown is generally the result of slower than forecasted growth in a number of key segments, including communications infrastructure equipment, resulting from a reduction in the capital spending of service providers. We cannot predict the extent to which this softening of demand will continue. Further, increased competition among satellite ground segment systems and networks manufacturers may lead to overcapacity and falling prices. RISKS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS COULD RESTRICT OUR ABILITY TO EXPAND GLOBALLY AND HARM OUR BUSINESS AND PROSPECTS. We market and sell our products and services in the United States and internationally. We anticipate that international sales will continue to account for a significant portion of our total revenues for the foreseeable future. We presently conduct our international sales in the following geographic areas: Africa, the Asia-Pacific Region, Australia, Central and South America, Eastern and Central Europe and the Middle East. There are some risks inherent in conducting our business internationally, including: o political and economic instability in international markets, as well as a result of the terrorist attacks in the United States on September 11, 2001 and the related outbreak of hostilities, could impede our ability to deliver our products and services to customers and harm our results of operations; o changes in regulatory requirements could restrict our ability to deliver services to our international customers; 13 o export restrictions, tariffs, licenses and other trade barriers could prevent us from adequately equipping our network facilities; o differing technology standards across countries may impede our ability to integrate our products and services across international borders; o protectionist laws and business practices favoring local competition may give unequal bargaining leverage to key vendors in countries where competition is scarce, significantly increasing our operating costs; o increased expenses associated with marketing services in foreign countries; o decreases in value of foreign currency relative to the U.S. dollar; o relying on local subcontractors for installation of our products and services; o difficulties in staffing and managing foreign operations; o potentially adverse taxes; o complex foreign laws and treaties; and o difficulties in collecting accounts receivable. These and other risks could impede our ability to manage our international operations effectively, limit the future growth of our business, increase our costs and require significant management attention. IF WE ARE NOT SUCCESSFUL IN SELLING OUR COMMUNICATIONS SERVICES TO OUR CUSTOMERS FOR WHOM WE HAVE HISTORICALLY PROVIDED SATELLITE GROUND SEGMENT SYSTEMS AND NETWORKS, OUR RESULTS OF OPERATIONS WILL BE HARMED. We have historically provided our customers with satellite ground segment systems and networks as a product on a project basis. We intend on marketing to our customers our communications services. These services not only provide the implementation of the satellite ground segment systems and networks but also provides the ongoing operation and maintenance of these systems and networks. If we are not successful in selling these communications services to our existing customers it will harm our results of operations. IF NETSAT EXPRESS DOES NOT EXECUTE ITS BUSINESS STRATEGY OR IF THE MARKET FOR ITS SERVICES FAILS TO DEVELOP OR DEVELOPS MORE SLOWLY THAN IT EXPECTS, OUR STOCK PRICE MAY BE ADVERSELY AFFECTED. NetSat Express' future revenues and results of operations are dependent on its execution of its business strategy and the development of the market for its current and future services. In particular, the current level of utilization of NetSat Express' transponder space continues to harm our results of operation, and our gross profit margins in particular. If NetSat does not substantially utilize its transponder space, our results of operations, and our gross profit margins in particular, will be further harmed. We cannot assure you that the transponder space will be substantially utilized. CURRENCY DEVALUATIONS IN THE FOREIGN MARKETS IN WHICH WE OPERATE COULD DECREASE DEMAND FOR OUR PRODUCTS AND SERVICES. We denominate our foreign sales in U.S. dollars. Consequently, decreases in the value of local currencies relative to the U.S. dollar in the markets in which we operate, adversely affect the demand for our products and services by increasing the price of our products and services in the currencies of the countries in which they are sold. The difficult economic conditions in international markets and the resulting foreign currency devaluations have led to a decrease in demand for our products and services and the decrease in bookings received by us from these and other foreign regions has adversely effected our results of operations for the fiscal year ended June 30, 2001 and the three months ended September 30, 2001. We expect that these negative trends will continue to adversely impact our results of operations. 14 YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY. Our future revenues and results of operations may significantly fluctuate due to a combination of factors, including: o general political and economic conditions in the United States and abroad as a result of the terrorist attacks on September 11, 2001 and the related outbreak of hostilities; o the length of time needed to initiate and complete customer contracts; o delays and/or a decrease in the booking of new contracts; o the demand for and acceptance of our existing products and services; o the cost of providing our products and services; o the introduction of new and improved products and services by us or our competitors; o market acceptance of new products and services; o the mix of revenue between our standard products, custom-built products and our communications services; o the timing of significant marketing programs; o our ability to hire and retain additional personnel; o the competition in our markets; and o difficult global economic conditions and the currency devaluations in international markets which have, and may continue to, adversely impact our quarterly results. Accordingly, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is possible that in future periods our results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of our common stock to decline. OUR MARKETS ARE HIGHLY COMPETITIVE AND WE HAVE MANY ESTABLISHED COMPETITORS, AND WE MAY LOSE MARKET SHARE AS A RESULT. The markets in which we operate are highly competitive and this competition could harm our ability to sell our products and services on prices and terms favorable to us. Our primary competitors in the satellite ground segment and networks market include vertically integrated satellite systems providers like Nippon Electric Corporation, systems integrators like IDB Systems, a division of MCI WorldCom Inc. and equipment manufacturers who also provide integrated systems like Andrew Corporation and Vertex-RSI. In the communications services and Internet access services markets, we compete with other satellite communication companies who provide similar services, like Loral CyberStar, Inc. and PanAmSat Corporation and Verestar, as well as other Internet services providers. In addition, we may compete with other communications service providers like Teleglobe, Inc. and MCI WorldCom Inc. 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. In addition, we anticipate that continuing deregulation worldwide is expected to result in the formation of a significant number of new competitive service providers over the next two to three years. These competitors have the financial resources to withstand substantial price competition and may be in a better position to endure difficult economic conditions in international markets, and may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements. Moreover, many of our competitors have more extensive customer bases, broader customer relationships and broader 15 industry alliances that they could use to their advantage in competitive situations. The markets in which we operate have limited barriers to entry and we expect that we will face additional competition from existing competitors and new market entrants in the future. Moreover, our current and potential competitors have established or may establish strategic relationships among themselves or with third parties to increase the ability of their products and services to address the needs of our current and prospective customers. Existing and new competitors with their potential strategic relationships may rapidly acquire significant market share, which would harm our business and financial condition. IF THE SATELLITE COMMUNICATIONS INDUSTRY FAILS TO CONTINUE TO DEVELOP OR NEW TECHNOLOGY MAKES IT OBSOLETE OUR BUSINESS AND FINANCIAL CONDITION WILL BE HARMED. Our business is dependent on the continued success and development of satellite communications technology, which competes with terrestrial communications transport technologies like terrestrial microwave, coaxial cable and fiber optic communications systems. If the satellite communications industry fails to continue to develop, or any technological development significantly improves the cost or efficiency of competing terrestrial systems relative to satellite systems, then our business and financial condition would be materially harmed. WE MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OUR CAPITAL REQUIREMENTS IN THE FUTURE. We have incurred negative cash flows from operations in each year since our inception. We believe that our available cash resources will be sufficient to meet our working capital and capital expenditure requirements through September 30, 2002. However, our future liquidity and capital requirements are difficult to predict, as they depend on numerous factors, including the success of our existing product and service offerings as well as competing technological and market developments. We may need to raise additional funds in order to meet additional working capital requirements and to support additional capital expenditures. Should this need arise, additional funds may not be available when needed and, even if additional funds are available, we may not find the terms favorable or commercially reasonable. If adequate funds are unavailable, we may be required to delay, reduce or eliminate some of our operating activities, including marketing programs, hiring of additional personnel and research and development programs. If we raise additional funds by issuing equity securities, our existing stockholders will own a smaller percentage of our capital stock and new investors may pay less on average for their securities than, and could have rights superior to, existing stockholders. WE RELY ON OUR RELATIONSHIPS WITH RESELLERS IN DEVELOPING COUNTRIES WITH EMERGING MARKETS FOR SALES OF OUR PRODUCTS AND SERVICES AND THE LOSS OR FAILURE OF ANY OF THESE RELATIONSHIPS MAY HARM OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND SERVICES. We intend to provide our products and services and NetSat Express' services almost entirely in developing countries where we have little or no market experience. We intend to rely on resellers in those markets to provide their expertise and knowledge of the local regulatory environment in order to make access to customers in emerging markets easier. If we are unable to maintain these relationships, or develop new ones in other emerging markets, our ability to enter into and compete successfully in developing countries would be adversely affected. A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUE, AND THE LOSS OF A KEY CUSTOMER WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION. We rely on a small number of customers for a large portion of our revenues and expect that a significant portion of our revenues will continue to be derived from a limited number of customers. We anticipate that our operating results in any given period will continue to depend to a significant extent upon revenues from large contracts with a small number of customers. As a result of this concentration of our customer base, a loss of or decrease in business from one or more of these customers would materially adversely affect our results of operations and financial condition. OUR INABILITY TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION COULD SERIOUSLY HARM OUR ABILITY TO EFFECTIVELY RUN OUR BUSINESS. Since our inception, we have continued to increase the scope of our operations. This growth has placed, and our anticipated growth will continue to place, a significant strain on our personnel, management, financial and other resources. Any failure to manage our growth effectively could seriously harm our ability to respond to customers, 16 monitor the quality of our products and services and maintain the overall efficiency of our operations. In order to continue to pursue the opportunities presented by our satellite-based communications services, we plan to continue to hire key officers and other employees and to increase our operating expenses by broadening our customer support capabilities, expanding our sales and marketing operations and improving our operating and financial systems. If we fail to manage any future growth in an efficient manner, and at a pace consistent with our business, our results of operations, financial condition and business will be harmed. WE ANTICIPATE SIGNIFICANT REVENUES FROM FIVE CONTRACTS AND A MODIFICATION OR TERMINATION OF ALL OR ANY OF THESE CONTRACTS WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We have agreements with five customers to provide equipment and services, which we expect to generate substantial revenues. If any of these customers are unable to implement their business plans, the market for their services declines, or all or any of the customers modifies or terminates its agreement with us, our results of operations and financial condition would be harmed. WE ARE PAID A FIXED PRICE IN MOST OF OUR CUSTOMER CONTRACTS, AND ANY VARIATION BETWEEN THE FIXED PRICE AND THE ACTUAL COST OF PERFORMANCE MAY HARM OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. A majority of our customer contracts are on a fixed-price basis. The profitability of these contracts is subject to inherent uncertainties in the cost of performance, including costs related to unforeseen obstacles and unexpected problems encountered in engineering, design and testing of our products and services. Because a significant portion of our revenues is dependent upon a small number of customers, if the fixed price is significantly less than the actual cost of performance on any one contract, our results of operations and financial condition could be adversely affected. IF OUR PRODUCTS AND SERVICES ARE NOT ACCEPTED IN DEVELOPING COUNTRIES WITH EMERGING MARKETS, OUR REVENUES WILL BE IMPAIRED. We anticipate that a substantial portion of the growth in the demand for our products and services will come from customers in developing countries due to a lack of basic communications infrastructure in these countries. However, we cannot guarantee an increase in the demand for our products and services in developing countries or that customers in these countries will accept our products and services at all. Our ability to penetrate emerging markets in developing countries is dependent upon various factors including: o the speed at which communications infrastructure, including terrestrial microwave, coaxial cable and fiber optic communications systems, which compete with satellite-based services, is built; o the effectiveness of our local value-added resellers and sales representatives in marketing and selling our products and services; and o the acceptance of our products and services by customers. If our products and services are not accepted, or the market potential we anticipate does not develop, our revenues will be impaired. WE DEPEND UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE EMPLOYEES OR RECRUIT ADDITIONAL QUALIFIED PERSONNEL, WHICH WOULD HARM OUR BUSINESS. Our future performance depends on the continued service of our key technical, managerial and marketing personnel; in particular, David Hershberg, Kenneth Miller, Stephen Yablonski and Donald Woodring. The employment of any of our key personnel could cease at any time subject to prior notice. Our future success depends upon our ability to attract, retain and motivate highly skilled employees. Because the competition for qualified employees among companies in the satellite communications industry and the networking industry is intense, we may not be successful in recruiting or retaining qualified personnel, which would harm our business. 17 UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR BUSINESS. We regard our trademarks, trade secrets and other intellectual property as beneficial to our success. Unauthorized use of our intellectual property by third parties may damage our business. We rely on trademark, trade secret and patent protection and contracts including confidentiality and license agreements with our employees, customers, strategic collaborators, consultants and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without our authorization. We currently have been granted two patents in the United States, for remote access to the Internet using satellites, and for satellite communication with automatic frequency control, and have two patent applications pending in the United States. We also intend to seek further patents on our technology, if appropriate. We cannot assure you that patents will be issued for any of our pending or future patents or that any claims allowed from such applications will be of sufficient scope, or be issued in all countries where our products and services can be sold, to provide meaningful protection or any commercial advantage to us. Also, our competitors may be able to design around our patents. The laws of some foreign countries in which our products and services are or may be developed, manufactured or sold may not protect our products and services or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products and services more likely. We have filed applications for trademark registration of Globecomm Systems Inc., Globecomm, and GSI in the United States and various other countries, and have been granted registrations for some of these terms in Europe and Russia. We have received trademark registrations for NetSat Express in the United States, the European Community, Russia, and Brazil. We have various other trademarks registered or pending for registration in the United States and in other countries and may intend to seek registration of other trademarks and service marks in the future. We cannot assure you that registrations will be granted from any of our pending or future applications, or that any registrations that are granted will prevent others from using similar trademarks in connection with related goods and services. DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME CONSUMING AND EXPENSIVE, AND IF WE ARE NOT SUCCESSFUL, COULD CAUSE SUBSTANTIAL EXPENSES AND DISRUPT OUR BUSINESS. We cannot be sure that our products, services, technologies, and advertising we employ in our business do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Prosecuting infringers and defending against intellectual property infringement claims could be time consuming and expensive, and regardless of whether we are or are not successful, could cause substantial expenses and disrupt our business. We may incur substantial expenses in defending against these third party claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability and/or may materially disrupt the conduct of, or necessitate the cessation of, our business. THROUGH THEIR OWNERSHIP, OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES MAY BE ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER OUR MANAGEMENT. As of November 12, 2001, our officers and directors, and their affiliates beneficially own approximately 1.8 million shares, constituting approximately 13.5% of our outstanding common stock. These stockholders, acting together, may be able to exert significant influence over the election of directors and other corporate actions requiring stockholder approval. WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGES, WHICH WOULD MAKE OUR PRODUCTS AND SERVICES BECOME NON-COMPETITIVE AND OBSOLETE. The telecommunications industry, including satellite-based communications services, is characterized by rapidly changing technologies, frequent new product and service introductions and evolving industry standards. If we are unable, for technological or other reasons, to develop and introduce new products and services or enhancements to existing products and services in a timely manner or in response to changing market conditions or customer requirements, our products and services would become non-competitive and obsolete, which would harm our business, results of operations and financial condition. 18 WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE OUR SOLE OR A LIMITED SOURCE OF SUPPLY, AND THE LOSS OF THESE SUPPLIERS WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We currently obtain most of our critical components and services from single or limited sources and generally do not maintain significant inventories or have long-term or exclusive supply contracts with our source vendors. We have from time to time experienced delays in receiving products from vendors due to lack of availability, quality control or manufacturing problems, shortages of materials or components or product design difficulties. We may experience delays in the future and replacement services or products may not be available when needed, or at all, or at commercially reasonable rates or prices. If we were to change some of our vendors, we would have to perform additional testing procedures on the service or product supplied by the new vendors, which would prevent or delay the availability of our products and services. Furthermore, our costs could increase significantly if we need to change vendors. If we do not get timely deliveries of quality products and services, or if there are significant increases in the prices of these products or services, it could have a material adverse effect on our business, results of operations and financial condition. WE MAY BE UNABLE TO LEASE TRANSPONDER SPACE ON SATELLITES, WHICH COULD LIMIT OUR ABILITY TO PROVIDE OUR SERVICES TO OUR CUSTOMERS. We and NetSat Express lease transponder space on satellites in order to provide communications and Internet services to our customers and the customers of NetSat Express. The supply of transponder space serving a geographic region on earth is limited by the number of satellites that are in orbit above that geographic region. If companies that own and deploy satellites in orbit underestimate the demand for transponder space in a given geographic area or they are simply unable to build and launch enough satellites to keep up with increasing demand, the price for leasing transponder space could rise, increasing our cost of operations or we simply may not be able to lease enough transponder space where needed to meet the demands of our customers. We currently anticipate that the rapid growth in the demand for satellite-based communications worldwide could lead to a short-term shortage of transponder space. WE RELY ON NETSAT EXPRESS, OUR WHOLLY-OWNED SUBSIDIARY, FOR OUR MAIN SUPPLY OF SPACE SEGMENT ON SATELLITES. IF ITS BUSINESS FAILS OR WE ARE OTHERWISE UNABLE TO CONTINUE TO RELY ON NETSAT EXPRESS FOR THIS SUPPLY, OUR BUSINESS MAY BE HARMED. We currently depend on NetSat Express for a majority of our transponder space on satellites. We do not have a long-term agreement in place with NetSat Express, as most of our needs are filled on a purchase order basis. If NetSat Express is unable to develop its business or if we are unable to continue to rely on their supply for space segment, then we will have to find alternative suppliers. If we are unable to find another supplier of transponder space or if we are unable to find one on terms favorable to us, then our business may be harmed. OUR NETWORK MAY EXPERIENCE SECURITY BREACHES, WHICH COULD DISRUPT OUR SERVICES. Our network infrastructure may be vulnerable to computer viruses, break-ins, denial of service attacks and similar disruptive problems caused by our customers or other Internet users. Computer viruses, break-ins, denial of service attacks or other problems caused by third parties could lead to interruptions, delays or cessation in service to our customers. There currently is no existing technology that provides absolute security, and the cost of minimizing these security breaches could be prohibitively expensive. We may face liability to customers for such security breaches. Furthermore, these incidents could deter potential customers and adversely affect existing customer relationships. SATELLITES UPON WHICH WE RELY MAY BE DAMAGED OR LOST, OR MALFUNCTION. The damage, loss or malfunction of any of the satellites used by us, or a temporary or permanent malfunction of any of the satellites upon which we rely, would likely result in the interruption of our satellite-based communications services. This interruption would have a material adverse effect on our business, results of operations and financial condition. OUR STOCK PRICE IS HIGHLY VOLATILE. Our stock price has fluctuated substantially since our initial public offering, which was completed in August 1997. The market price for our common stock, like that of the securities of many telecommunications and high technology industry companies, is likely to remain volatile based on many factors, including the following: 19 o quarterly variations in operating results; o announcements of new technology, products or services by us or any of our competitors; o acceptance of satellite-based communication services and Internet access services in developing countries with emerging markets; o changes in financial estimates or recommendations by security analysts; or o general market conditions, including, but not limited to, results of the terrorist attacks on September 11, 2001 and the related outbreak of hostilities. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often extremely expensive and diverts management's attention and resources, which could significantly harm our business. A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING YOUR SHARES OF STOCK AT A PREMIUM TO THE MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS. Various provisions with respect to votes in the election of directors, special meetings of stockholders, and advance notice requirements for stockholder proposals and director nominations of our amended and restated certificate of incorporation, bylaws and Section 203 of the General Corporation Laws of the State of Delaware could make it more difficult for a third party to acquire us, even if doing so might be beneficial to you and our other stockholders. In addition, we have a poison pill in place that could make an acquisition of us by a third party more difficult. RISKS RELATED TO GOVERNMENT APPROVALS WE ARE SUBJECT TO MANY GOVERNMENT REGULATIONS, AND FAILURE TO COMPLY WITH THEM WILL HARM OUR BUSINESS. OPERATIONS AND USE OF SATELLITES We are subject to various federal laws and regulations, which may have negative effects on our business. We operate Federal Communications Commission, or FCC licensed earth stations in Hauppauge, New York, subject to the Communications Act of 1934, as amended (the Act), and the rules and regulations of FCC. Pursuant to the Act and rules, we have obtained and are required to maintain radio transmission licenses from the FCC for both domestic and foreign operations of our earth stations. These licenses should be renewed by the FCC in the normal course as long as we remain in compliance with FCC rules and regulations. However, we cannot guarantee that additional licenses will be granted by the FCC when our existing licenses expire, nor are we assured that the FCC will not adopt new or modified technical requirements that will require us to incur expenditures to modify or upgrade our equipment as a condition of retaining our licenses. We are also required to comply with FCC regulations regarding the exposure of humans to radio frequency radiation from our earth stations. These regulations, as well as local land use regulations, restrict our freedom to choose where to locate our earth stations. FOREIGN OWNERSHIP We may, in the future, be required to seek FCC approval for foreign ownership if we operate as a common carrier and ownership of our stock exceeds the specified criteria. Failure to comply with these policies may result in an order to divest the offending foreign ownership, fines, denial of license renewal, and/or license revocation proceedings against the licensee by the FCC. FOREIGN REGULATIONS Regulatory schemes in countries in which we may seek to provide our satellite-delivered data communications services may impose impediments on our operations. Some countries in which we intend to operate have telecommunications laws and regulations that do not currently contemplate technical advances in telecommunications technology like Internet/intranet transmission by satellite. We cannot assure you that the present regulatory 20 environment in any of those countries will not be changed in a manner, which may have a material adverse impact on our business. Either we or our local partners typically must obtain authorization for each country in which we provide our satellite-delivered data communications services. The regulatory schemes in each country are different, and thus there may be instances of noncompliance of which we are not aware. We cannot assure you that our licenses and approvals are or will remain sufficient in the view of foreign regulatory authorities, or that necessary licenses and approvals will be granted on a timely basis in all jurisdictions in which we wish to offer our products and services or that restrictions applicable thereto will not be unduly burdensome. REGULATION OF THE INTERNET Due to the increasing popularity and use of the Internet it is possible that a number of laws and regulations may be adopted at the local, national or international levels with respect to the Internet, covering issues including user privacy and expression, pricing of products and services, taxation, advertising, intellectual property rights, information security or the convergence of traditional communication services with Internet communications. It is anticipated that a substantial portion of our Internet operations will be carried out in countries which may impose greater regulation of the content of information coming into the country than that which is generally applicable in the United States; for example, privacy regulations in 35 countries in Europe and content restrictions in countries including the Republic of China. To the extent that we provide content as a part of our Internet services, it will be subject to laws regulating content. Moreover, the adoption of laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our Internet services or increase our cost of doing business or in some other manner have a material adverse effect on our business, operating results and financial condition. In addition, the applicability to the Internet of existing laws governing issues including property ownership, copyrights and other intellectual property issues, taxation, libel and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace which could reduce demand for our products and services, could increase our cost of doing business as a result of costs of litigation or increased product development costs, or could in some other manner have a material adverse effect on our business, financial condition and results of operations. TELECOMMUNICATIONS TAXATION, SUPPORT REQUIREMENTS, AND ACCESS CHARGES All telecommunications carriers providing domestic services in the United States are required to contribute a portion of their gross revenues for the support of universal telecommunications services; and some telecommunications services are subject to special taxation and to contribution requirements to support services to special groups, like persons with disabilities. Our services may be subject to new or increased taxes and contribution requirements that could affect our profitability, particularly if we are not able to pass them through to customers for either competitive or regulatory reasons. Internet services are currently exempt from charges that long distance telephone companies pay for access to the networks of local telephone companies in the U.S. Efforts have been made from time to time, and may be made again in the future, to eliminate this exemption. If these access charges are imposed on telephone lines used to reach Internet service providers, and/or if flat rate telephone services for Internet access are eliminated or curtailed, the cost to customers who access our satellite facilities using telephone company-provided facilities could increase to an extent that could discourage the demand for our services. Likewise, the demand for our services in other countries may be affected by the availability and cost of local telephone or other telecommunications facilities to reach our facilities. EXPORT OF TELECOMMUNICATIONS EQUIPMENT The sale of our ground segment systems, networks, and communications services outside the United States is subject to compliance with the regulations of the United States Export Administration Regulations. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In addition, in order to ship our products into other countries, the products must satisfy the technical requirements of that particular country. If we were unable to comply with such requirements with respect to a significant quantity of our products, our sales in those countries could be restricted, which could have a material adverse effect on our business, results of operations and financial condition. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to a variety of risks, including foreign currency exchange rate fluctuations relating to certain purchases from foreign vendors. In the normal course of business, we assess these risks and have established policies and procedures to manage our exposure to fluctuations in foreign currency values. Our objective to managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates for certain purchases from foreign vendors, if applicable. Accordingly, we utilize from time to time foreign currency forward contracts to hedge our exposure on firm commitments denominated in foreign currency. As of September 30, 2001, we had no such foreign currency forward contracts. Our results of operations and cash flows are subject to fluctuations due to changes in interest rates primarily from our investment of available cash balances in money market funds with portfolios of investment grade corporate and U.S. government securities, and secondly, our fixed long-term capital lease agreement. Under our current positions, we do not use interest rate derivative instruments to manage exposure to interest rate changes. PART II -- OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information On November 7, 2001, the Board of Directors authorized a stock repurchase program of up to $2.0 million of the Company's outstanding stock, representing approximately 3.7% of the total shares outstanding on that date. Timing, price, quantity and the manner of purchases will be at the discretion of management, depending on market conditions and other factors, subject to compliance with the applicable securities laws. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Index to Exhibits: Exhibit No. 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 22 3.2 Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated By-laws of the Company defining rights of holders of Common Stock of the Company (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-1, File No. 333-22425 (the "Registration Statement")). 10.1 Form of Registration Rights Agreement, dated as of February 1997 (incorporated by reference to exhibit 10.1 of the Registration Statement). 10.2 Form of Registration Rights Agreement, dated May 30, 1996 (incorporated by reference to exhibit 10.2 of the Registration Statement). 10.3 Form of Registration Rights Agreement, dated December 31, 1996, as amended (incorporated by reference to exhibit 10.3 of the Registration Statement). 10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock, dated November 9, 1995 between the Company and Thomson-CSF (incorporated by reference to exhibit 10.4 of the Registration Statement). 10.5 Investment Agreement, dated February 12, 1996 by and between Shiron Satellite Communications (1996) Ltd. and the Company (incorporated by reference to exhibit 10.5 of the Registration Statement). 10.6* Stock Purchase Agreement, dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the Company (incorporated by reference to exhibit 10.6 of the Registration Statement). 10.7 Memorandum of Understanding, dated December 18, 1996 by and between NetSat Express, Inc. and Applied Theory Communications, Inc. (incorporated by reference to exhibit 10.7 of the Registration Statement). 10.8 Stock Purchase Agreement, dated as of August 23, 1996 by and between NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by reference to exhibit 10.8 of the Registration Statement). 10.9 Employment Agreement, dated as of October 9, 2001, by and between David E. Hershberg and the Company (filed herewith). 10.10 Employment Agreement, dated as of October 9, 2001, by and between Kenneth A. Miller and the Company (filed herewith). 10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between Eaton Corporation and the Company (incorporated by reference to exhibit 10.13 of the Registration Statement). 10.12 Amended and Restated 1997 Stock Incentive Plan (incorporated by reference to exhibit 4 of the Company's Registration Statement on Form S-8, File No. 333-54622, filed on January 30, 2001). 10.13 Investment Agreement, dated August 21, 1998 by and between McKibben Communications LLC and the Company (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended June 30, 1998). 10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.8 of the Company's Registration Statement on Form S-8, File No. 333-70527, filed on January 13, 1999). 10.15 Rights Agreement, dated as of December 3, 1998, between American Stock Transfer and Trust Company and the Company, which includes the form of Certificate of Designation for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4 of Company's Current Report on Form 8-K dated December 3, 1998). 10.16 Common Stock Purchase Agreement, dated August 11, 1999 between NetSat Express, Inc. and Globix Corporation (incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year ended June 30, 1999). 23 10.17 Series A Preferred Stock Purchase Agreement, dated August 11, 1999 between NetSat Express, Inc. and George Soros (incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended June 30, 1999). 10.18 Common Stock Purchase Agreement, dated October 28, 1999 between NetSat Express, Inc., Globecomm Systems, Inc. and Reuters Holdings Switzerland SA (incorporated by reference to Exhibit 10.18 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 1999). 10.19 Negotiable Promissory Note, dated April 1, 2001, by and between Donald G. Woodring and the Company (incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended June 30, 2001). 10.20 Employment Agreement, dated as of October 9, 2001, by and between Stephen C. Yablonski and the Company (filed herewith). 10.21 Employment Agreement, dated as of October 9, 2001, by and between Andrew C. Melfi and the Company (filed herewith). 10.22 Employment Agreement, dated as of October 9, 2001, by and between Donald G. Woodring and the Company (filed herewith). 10.23 Employment Agreement, dated as of October 9, 2001, by and between Paul J. Johnson and the Company (filed herewith). 10.24 Employment Agreement, dated as of October 9, 2001, by and between Paul Eterno and the Company (filed herewith). 10.25 Promissory Note Secured By Stock Pledge Agreement, dated September 4, 2001, by and between David E. Hershberg and the Company (filed herewith). 10.26 Promissory Note Secured By Stock Pledge Agreement, dated September 4, 2001, by and between Kenneth A. Miller and the Company (filed herewith). * Confidential treatment granted for portions of this agreement. (b) Reports on Form 8-K None 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GLOBECOMM SYSTEMS INC. (Registrant) Date: November 14, 2001 /s/ David E. Hershberg ---------------------- David E. Hershberg Chief Executive Officer and Chairman of the Board of Directors Date: November 14, 2001 /s/ Andrew C. Melfi ------------------- Andrew C. Melfi Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 25 Index to Exhibits: Exhibit No. ------------ 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 3.2 Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated By-laws of the Company defining rights of holders of Common Stock of the Company (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-1, File No. 333-22425 (the "Registration Statement")). 10.1 Form of Registration Rights Agreement, dated as of February 1997 (incorporated by reference to exhibit 10.1 of the Registration Statement). 10.2 Form of Registration Rights Agreement, dated May 30, 1996 (incorporated by reference to exhibit 10.2 of the Registration Statement). 10.3 Form of Registration Rights Agreement, dated December 31, 1996, as amended (incorporated by reference to exhibit 10.3 of the Registration Statement). 10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock, dated November 9, 1995 between the Company and Thomson-CSF (incorporated by reference to exhibit 10.4 of the Registration Statement). 10.5 Investment Agreement, dated February 12, 1996 by and between Shiron Satellite Communications (1996) Ltd. and the Company (incorporated by reference to exhibit 10.5 of the Registration Statement). 10.6* Stock Purchase Agreement, dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the Company (incorporated by reference to exhibit 10.6 of the Registration Statement). 10.7 Memorandum of Understanding, dated December 18, 1996 by and between NetSat Express, Inc. and Applied Theory Communications, Inc. (incorporated by reference to exhibit 10.7 of the Registration Statement). 10.8 Stock Purchase Agreement, dated as of August 23, 1996 by and between NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by reference to exhibit 10.8 of the Registration Statement). 10.9 Employment Agreement, dated as of October 9, 2001, by and between David E. Hershberg and the Company (filed herewith). 10.10 Employment Agreement, dated as of October 9, 2001, by and between Kenneth A. Miller and the Company (filed herewith). 10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between Eaton Corporation and the Company (incorporated by reference to exhibit 10.13 of the Registration Statement). 10.12 Amended and Restated 1997 Stock Incentive Plan (incorporated by reference to exhibit 4 of the Company's Registration Statement on Form S-8, File No. 333-54622, filed on January 30, 2001). 10.13 Investment Agreement, dated August 21, 1998 by and between McKibben Communications LLC and the Company (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended June 30, 1998). 10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.8 of the Company's Registration Statement on Form S-8, File No. 333-70527, filed on January 13, 1999). 10.15 Rights Agreement, dated as of December 3, 1998, between American Stock Transfer and Trust Company and the Company, which includes the form of Certificate of Designation for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4 of Company's Current Report on Form 8-K dated December 3, 1998). 10.16 Common Stock Purchase Agreement, dated August 11, 1999 between NetSat Express, Inc. and Globix Corporation (incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year ended June 30, 1999). 26 10.17 Series A Preferred Stock Purchase Agreement, dated August 11, 1999 between NetSat Express, Inc. and George Soros (incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended June 30, 1999). 10.18 Common Stock Purchase Agreement, dated October 28, 1999 between NetSat Express, Inc., Globecomm Systems, Inc. and Reuters Holdings Switzerland SA (incorporated by reference to Exhibit 10.18 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 1999). 10.19 Negotiable Promissory Note, dated April 1, 2001, by and between Donald G. Woodring and the Company (incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended June 30, 2001). 10.20 Employment Agreement, dated as of October 9, 2001, by and between Stephen C. Yablonski and the Company (filed herewith). 10.21 Employment Agreement, dated as of October 9, 2001, by and between Andrew C. Melfi and the Company (filed herewith). 10.22 Employment Agreement, dated as of October 9, 2001, by and between Donald G. Woodring and the Company (filed herewith). 10.23 Employment Agreement, dated as of October 9, 2001, by and between Paul J. Johnson and the Company (filed herewith). 10.24 Employment Agreement, dated as of October 9, 2001, by and between Paul Eterno and the Company (filed herewith). 10.25 Promissory Note Secured By Stock Pledge Agreement, dated September 4, 2001, by and between David E. Hershberg and the Company (filed herewith). 10.26 Promissory Note Secured By Stock Pledge Agreement, dated September 4, 2001, by and between Kenneth A. Miller and the Company (filed herewith). * Confidential treatment granted for portions of this agreement.