UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2013
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 incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 45 Oser Avenue, Hauppauge, NY (Address of principal executive offices) |
11788 (Zip Code) | |
Registrant’s telephone number, including area code: (631) 231-9800
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on which registered | |
| COMMON STOCK, $0.001 PAR VALUE | NASDAQ GLOBAL MARKET |
Securities registered pursuant to Section 12(g) of the Act: None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ¨ No x
Based on the closing sale price on the Nasdaq Global Market on December 31, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock, $0.001 par value per share (the “Common Stock”) held by non-affiliates of the registrant on such date was approximately $243.4 million. For purposes of this calculation, only executives and directors are deemed to be affiliates of the registrant.
As of September 9, 2013, there were 23,869,506 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Current Report on Form 8-K, filed with the SEC on August 29, 2013, and the exhibits thereto, each of which is incorporated by reference into this Annual Report on Form 10-K.
PART I
| Item 1. | Business |
Overview
Globecomm Systems Inc. (“we”, “our”, “us”, the “Company” or “Globecomm”), incorporated in Delaware in August 1994, is a leading global communications solutions provider. Employing our expertise in emerging communication technologies, including satellite and other transport mediums, we are able to offer a comprehensive suite of system integration, system products, and network services enabling a complete end-to-end solution for our customers. We believe our integrated approach of in-house design and engineering expertise combined with a world-class global network and our 24 by 7 (“24/7”) network operating centers provide us a unique competitive advantage. We focus this value proposition in selective vertical markets, including government, wireless, media, enterprise and maritime.
As a communications solutions provider we leverage our global network to provide customers managed access services to the United States Internet backbone, video content, the public switched telephone network or their corporate headquarters or government offices. We currently have customers for which we are providing these solutions in the United States, Europe, South America, Africa, the Middle East and Asia.
Globally, communications networks are moving rapidly toward being Internet protocol-based (“IP”) providing a lower cost of implementation and the flexibility these networks offer. Satellite-based communications complement this trend as many of the regions in the world lack the “next generation” terrestrial networks required to accommodate the rapid and reliable transmission of the vast amounts of information underlying the growth in traffic. Even in a well connected area of the globe, satellite communications offer a diverse network path in support of disaster recovery and network augmentation.
Definitive Merger Agreement
On August 25, 2013, we entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Wasserstein Cosmos Co-Invest, L.P., a Delaware limited partnership (“Parent”), and Cosmos Acquisition Corp., an indirect wholly owned subsidiary of Parent (“Merger Subsidiary”). Parent and Merger Subsidiary are affiliates of Wasserstein & Co., LP. Pursuant to the terms of the Merger Agreement, and subject to the conditions thereof, Merger Subsidiary will merge with and into Globecomm, and Globecomm will become an indirect wholly owned subsidiary of Parent (the “Merger”). The Merger Agreement was unanimously approved by our board of directors.
At the effective time and as a result of the Merger, each outstanding share of Globecomm common stock, other than shares owned by us, Parent or any subsidiary of either Parent or us and shares with respect to which appraisal rights are properly exercised and not withdrawn, will be converted into the right to received $14.15, in cash, without interest.
For details regarding the Merger and copies of the Merger Agreement, see our Current Report on Form 8-K filed with the SEC on August 29, 2013, and the exhibits thereto, each of which is hereby incorporated by reference.
The information set forth in this Annual Report does not take into account the pending Merger or any impact thereof on the operations and prospects of Globecomm following the consummation of the Merger except as explicitly set forth under the heading “Risks Related to Our Business” and “Cautionary Note Regarding Forward Looking Statements” below.
Growth Strategy
Our growth strategy continues to focus on the development of recurring revenue streams by leveraging our engineering expertise and our global network to provide IP networking solutions for
1
mission critical applications. Our strong service platform allows us to continue to develop additional value-added, application-based solutions for our core customers. We will continue to focus on maturing this global platform as we integrate our acquisitions and expand the reach of our solution offerings.
We have supplemented our organic growth through acquisitions. We plan to continue to employ a selective and disciplined approach when evaluating acquisition opportunities.
We focus our efforts toward increasing market share through vertical markets with the creation of value-added service solutions in emerging market niches. This has been supplemented by an ongoing effort to identify and develop select research and development projects and network components into marketable shared-service “hosted” platforms. With the natural cycle of technology advancement and the continued convergence of communications applications to IP, we continue to aggressively pursue new addressable market opportunities.
Solution Offerings
We provide our communication solutions through two business segments; services and infrastructure. Our services segment is focused on providing communication solutions that include our base service line offerings: Managed Network Services; Application Services; Professional Services; and Lifecycle Support Services. Our infrastructure segment is engaged in the design, assembly and installation of ground segment systems and networks, which includes both our pre-engineered products and our custom systems design and integration product lines.
Services Solution Overview
We work to continually evolve our service offerings to meet the communication needs of our customers. Our customer base has grown as our service and customer support have proven the value of outsourced solutions. Our strategy includes offering flexible service-based solutions with fixed monthly pricing in order to make it easy for our customers to support an outsourcing decision.
Our global satellite-based network is comprised of three teleport or data center facilities; our Kenneth A. Miller International Teleport, located in Hauppauge, New York, our facility located in Laurel, Maryland and our facility located in the Netherlands. These facilities are interconnected via terrestrial transmission and are used to transport signals to serve customers in Latin America, the United States, Canada, Europe, the Middle East, Africa and Asia. Our facilities are designed to meet stringent requirements for high-speed data communications and leverage redundant critical systems and uninterruptible power supplies with back-up power generation to ensure high reliability and availability.
To supplement our global network, we also lease facility services in Los Angeles, Hong Kong, the United Kingdom, the Netherlands and Poland, as well as other locations, to enable seamless access and global connectivity for our customers. This is further enabled by leased satellite capacity and by high-capacity fiber connections between facilities and public Point of Presence (POP) locations.
We have built and staff a centralized global network operation center, or NOC, at our Hauppauge, New York facility. We also have regional NOCs in Maryland and the Netherlands. The NOCs operate 24/7 to monitor customer networks, provide help desk services, respond to customer inquiries and initiate new services. The NOCs provide technology specific engineers to assist our customers with troubleshooting and problem resolution. We utilize our internally developed AxxSys Orion application to monitor and control satellite communication equipment and satellite terminal networks at our NOCs. At our facility in Laurel, Maryland and our facilities in the Netherlands, we have regional data centers that provide 24/7 localized technical support to our customers. We also leverage these facilities to dispatch technical personnel to support our Lifecycle Support Services offering.
Our service offerings are continuously being fine-tuned, partly through customer-funded programs and partly through internally funded programs. Our goal is to create high-value, customized application-based solutions for our customers, which are based on standardized building blocks, or service lines. The following service lines are the focal point of our evolving strategy.
2
Managed Network Service Line
The Managed Network service line consists of the Access and Hosted product lines.
The Access product line enables global data, voice and video transport services. Access incorporates our ability to provide solutions leveraging our global network to provide broadband access anywhere around the globe. The Access product line is the backbone of our service solutions and is the key driver of our overall revenue streams. The Access product line includes the following:
Access Plus utilizes a combination of terrestrial connectivity, satellite bandwidth and our teleports, along with a variety of remote very small aperture terminals, or VSATs, or a network of VSATs, to provide end-to-end connectivity. Our VSAT hubs, at our teleports, coupled with the extension and expansion of our terrestrial backbone network to these locations provide us with global VSAT coverage. This coverage and flexibility provide a wide range of services encompassing fundamental satellite technologies, including:
| • | Single Channel per Carrier (SCPC) |
| • | Multiple Channel per Carrier (MCPC) |
| • | Time Division Multiple Access (iDirect) |
| • | Deterministic SCPC (Vipersat) |
| • | Broadband Global Area Network (BGAN) |
Access Video Backhaul based upon Access Plus, is specifically developed for video-centric delivery. The primary technology enabling this service is the Digital Video Broadcast standard (DVB/DVB-S2). Our Access Video Backhaul product leverages the core service elements with a greater concentration on maximizing video throughput while ensuring the highest service availability into potentially residential-grade reception systems or to cable head ends. The current evolution of IP-centric video delivery will continue to shape new technologies in this arena. The current adoption of H.264 and MPEG-4 technologies has been slow, though they continue to gain ground. As the industry evolves, we will continue to position the Access Video Backhaul product within the market to offer the greatest amount of value to the end user. Specifically, we look to retain the current platform in place and continue to offer services with only gradual adaptation of the new technology to ensure a broad market access until end-users have widely adopted the new technology.
Access Voice Termination is also based upon the Access Plus product and is specifically designed for voice termination services. We are licensed by the FCC and we provide high quality, toll-based termination of voice calls while leveraging high compression and highly reliable connectivity between the Globecomm network and the voice origination network. This differentiates us from many low cost providers. In addition, we often take advantage of utilizing pre-existing links, which allows us to position the Access Voice Termination product as extremely competitive alongside high value voice over IP providers while delivering a superior service in terms of features (caller ID, signaling pass through, etc.) and overall quality.
Access Bandwidth is one of the largest elements of our cost of doing business, but it is also an asset which we utilize as a source of revenue. We lease and resell over one GHz of total satellite bandwidth across the globe for different frequencies, coverage areas and polarizations. Given the level of our demand, we are able to leverage our buying power in the satellite provider market, and are often capable of procuring bandwidth at very competitive rates. Accordingly, we leverage our current inventory of capacity or resell our provider’s capacity. We continually attempt to optimize and consolidate bandwidth to ensure attractive margins while being cost-competitive compared to our competitors and competing mediums. This service affords us the ability to provide long-term satellite bandwidth resale opportunities with minimal overall risk.
3
Access Maritime is technically similar to our Access Plus line but is customized by us for the maritime industry, and supports traditional narrowband services as well as broadband IP based services. This product provides vessel owners and operators with a diverse range of services, including; e-mail, Internet access, remote network management, on board Wi-Fi, virtual private network and voice over IP applications. Access Maritime utilizes all available technologies from Inmarsat, Iridium, Thuraya, and traditional VSAT providers to provide a full feature set of solutions to the maritime market. We will look to capitalize on the convergence of these various technologies in order to provide a single ubiquitous service to the maritime market that will help drive higher IP throughput at a lower cost to the vessel operator.
Access Hardware products range from VSAT terminals to IP-centric routing hardware and co-location hardware. The ability to offer a complete solution through the Access Hardware product line enables the delivery of our services on a global level. Frequently, our Access Hardware products are shipped, installed and maintained globally. Our Access Hardware product line provides us with the opportunity to offer lifecycle support services for this equipment.
AccessX® our X-Band-based service is also technically similar to our Access Plus line, though customized for the military market, and operates on commercial X-Band frequencies. Commercial X-Band frequencies have only recently been made available for use. We can offer X-Band services through our partnership with our Poland teleport operator. We have successfully tested and operated on XTAR and Paradigm X-Band fleets into our TomCat® product. We are one of the only providers that manufacture microsat terminals and can provide the service into these terminals via our Access X® service offering.
The Hosted product line is based on creating scalable solution offerings leveraging our facilities which provide cost-effective outsourced capabilities to niche market segments. Our hosted product line is currently positioned to address the needs of the enterprise, media, maritime and wireless vertical markets. The Hosted product line includes the following:
Hosted Cellular allows our customers the ability to outsource their switching services through a full-featured hosted mobile switching center for GSM/UMTS and CDMA/EVDO technologies. The target customer base includes hundreds of small to mid-sized cellular operators in North America, emerging cellular operators globally and large international operators extending their coverage and/or meeting Universal Services Obligations. This particular product is driven by leveraging our core service elements, including:
| • | Our GSM-UMTS/HSPA Switching/Core Platform; |
| • | Our CDMA-EVDO Switching/Core Platform; |
| • | Domestic and international connectivity for voice, data and Internet; |
| • | Our network of Tier 1 IP terrestrial providers at our teleport locations and the interconnectivity between our teleport facilities; |
| • | Our large pool of diverse satellite bandwidth coverage, frequencies and providers; and |
| • | Our centralized global NOC. |
The hosted value proposition is focused on creating alternative, cost-effective solutions to establish or grow cellular networks while delivering a compelling return on investment with lower capital requirements and operating expenses. In some cases, the hosted model represents the only viable financial model. The solution provides a cost-effective way to introduce new services and technologies to an existing network (2G to 4G migration, SMS, MMS, etc.) and an affordable solution to deliver cellular services to unserved areas while meeting government-imposed Universal Services Obligations. Lastly, the solution provides an accepted and “trusted” source where large, established cellular operators are comfortable that its roaming customers will interoperate with our hosted customers and are paid under their respective roaming agreements.
4
We house our mobile switching center in our Kenneth A. Miller International Teleport. The switching systems are part of a complete central office facility that provides all the systems and services required to support a cellular operator. Our satellite solution incorporates mobile signaling but keeps voice traffic off the satellite, which minimizes operational cost, optimizes quality of service for local calling and allows remote geographic areas to join the GSM network with a small investment in base stations and VSATs.
Our Ericsson GSM/UMTS Switching Core (“Core”) positions us to expand this business. The Core will provide a full featured hosted GSM/UMTS (2G/3G) platform to scale the hosted business in North America and internationally with the ability to migrate to LTE/ 4G in the future.
Hosted Video minimizes customer capital and operating expenditures and is positioned to address the needs of the enterprise and media market verticals. A key differentiator for us in providing high quality networked service is the ability to leverage our facility in Hauppauge, New York, allowing for outstanding satellite and terrestrial connectivity. This product includes both the hardware for hosting the services and the software platforms for customers to securely publish process and distribute their content. This solution also allows viewers to interact with the content and provides stakeholders with valuable viewership reporting. The capabilities for our Hosted Video product include:
| • | Publishing platform for hosting of Video On Demand content; |
| • | Media processing infrastructure for the transcoding of live and on-demand content for viewing across hybrid networks and for viewing on televisions, computers and mobile devices; |
| • | Security platforms to ensure secure content delivery and digital rights management across diverse networks; |
| • | Streaming media platform for delivery across hybrid network topologies; |
| • | Interactive platform allowing viewers to interact with live presenters and on-demand content; and |
| • | Administrative platform providing customers with back office control and reporting. |
Applications Services Line
Our Application Services line includes internally developed application-based services. The Applications Services Line includes the following:
TempoSM is a hosted terrestrial enterprise media platform that provides enterprises with a single platform to deliver interactive employee communications to a global audience. This service provides a secure platform to publish content, conduct interactive live events, and manage each viewer’s access to programming through the personal computer, television, and the mobile handheld device. Tempo’sSM advanced technology operates in a complete browser environment without the need for any additional plugins, applications or programs to be installed on any device. In addition, TempoSM offers interactive, high quality video broadcasts with integrated polling and chat features, and captures meaningful analytics on viewing behavior and testing results to improve effectiveness of enterprise communications.
AxxSys® Network Management System
Our line of AxxSys® network management systems designed for management and control of satellite-terrestrial networks and include flexible interface devices that can be configured to communicate with satellite communications equipment and networking equipment from various manufacturers. The following details our products in this category:
AxxSys® Network Management Systems are software computer-based network management systems that monitor and control satellite communication equipment and satellite terminal networks. AxxSys-based network management systems provide status reporting locally or remotely and provide the ability to manage distributed satellite communications networks on a global basis.
5
Our current version AxxSys Orion monitors and controls all of the terrestrial elements of a satellite communications network. This includes the ability to manage other network elements, such as routers, microwave, fiber and wireless subsystems. Deployed over an industry-standard IP network, it is capable of monitoring and controlling from dozens to thousands of devices. Network management systems are key to simplifying operations and maintenance of satellite-based networks and, therefore, add value to the systems and networks we integrate.
SpyGlass Carrier Monitoring Systems® are computer-based carrier monitoring tools for service providers who need to monitor and manage their transmissions to ensure service reliability and availability. Our SpyGlass® family of carrier monitoring tools integrates with the AxxSys network management system to provide ease of operation.
Lifecycle Support Services Line
Our Lifecycle Support Services line includes efforts required to implement and maintain our customer’s networks 24/7. These services include field installation, network monitoring, help desk and maintenance. We are able to offer these services by leveraging our global network of certified personnel. We have government-cleared personnel as well as commercial personnel across the globe supporting our Lifecycle Support Services. In addition, we have global maintenance partners that provide us access to skilled technicians worldwide, which allow us to quickly expand and contract our workforce globally. We provide the following products on either a stand-alone basis, or bundled with other service lines or infrastructure solutions:
Network Monitoring and Help Desk solutions provide 24/7 monitoring of satellite and terrestrial network systems and networks. Status and alarm monitoring coupled with our help desk services provide our customers with the ability to outsource monitoring of their networks. We provide customers with network troubleshooting and problem resolution support with escalation to technical resources personnel to address problems requiring detailed technical knowledge of equipment, systems and/or networking. We utilize a remedy-based trouble ticket system to track problems through conclusion. Customized reports are issued by our help desk to meet our customers’ requirements.
Installation and Maintenance solutions provide installation and maintenance services of satellite and terrestrial infrastructure at customer locations anywhere in the world. We have an established worldwide network of field technicians, consisting of both employees and contractors, to provide on-site services for customer networks. These technicians enable us to provide cost-effective, quick-response services for installation and required maintenance.
Our Lifecycle Support products are composed of four distinct phases: design, installation, maintenance, and customer service. This approach aligns business and technical requirements at every phase.
Design — During this phase, we work with our customers to develop a comprehensive, detailed design that meets their current business and technical requirements and incorporates specifications to support availability, reliability, security, scalability and performance. Custom solutions are created to meet the customers’ unique requirements to enable integration with their existing network infrastructure. A variety of plans are developed during the design phase to guide activities such as configuring and testing connectivity, deploying and commissioning the proposed system, migrating network services, demonstrating network functionality and validating network operation.
Installation — Our global network of field technicians provides on-site, cost-effective, quick-response services for installation and required maintenance. Technicians are certified based on their skills. We have amassed a database of technicians who support network operations ranging from a simple VSAT to a complex hybrid network with IP networking responsibility across the globe.
Maintenance — Our full-service maintenance package provides customers with complete coverage in an economical, convenient and timely manner, all for a fixed monthly fee per location. With the full-service maintenance approach, we assume all responsibility for the network, including stocking a spares pool and restoring downlink systems to working order. Our maintenance service process
6
involves remote troubleshooting at our NOC, followed up by an overnight shipment of a replacement item to the site in question. The field installation crew would also be dispatched and arrive on location at the time when the spare item has been received.
Customer Service — Lifecycle Support Services would not be complete without customer care and improvement. Customer service is an integral part of our general business model, though it is most visible in our Lifecycle Support Service. From the point of view of the engineering effort in the overall sales process, customer service plays an important role in our ability to generate future business.
Professional Services Line
Our Professional Services line is driven by our ability to provide outsourced resource expertise. We act as trusted advisors to our government and commercial clients by providing end-to-end technology solutions. We provide these services on either a stand-alone basis, or bundled with other service lines or infrastructure solutions.
Advisory solutions provide engineering expertise for executive level consulting, IT strategic alignment and policy development and enterprise architecture. This service centers on providing the necessary advice to clients on the acquisition and utilization of IT and on business strategy, security, modeling, engineering, operations and change management.
Consulting solutions provide engineering services for customers who need our engineering specialists and program managers to complement their internal staff in systems design and testing, security engineering and integration services.
Infrastructure Solutions Overview
Our infrastructure solutions consist of the design, engineering and installation of complex ground segment systems and networks, which are deployed in communications and media delivery networks for the government, media, wireless and enterprise verticals. We combine our expert engineering and design capabilities with state-of-the-art technologies and products to provide solutions for implementing and maintaining satellite earth stations, uplink centers, media broadcast centers and IP communication networks. In the case of complex IP-based networks, our infrastructure solutions support a wide range of network applications and facilitate “quadruple play” services, comprised of video, data, voice and wireless communications.
We offer complete turn-key solutions, providing system architecture and design, equipment rack and cable design and integration, site layout and design, all required civil works, power systems and installation and commissioning. Our experienced team offers all levels of training, staff augmentation and comprehensive lifecycle support.
Pre-Engineered Products
A key component of our infrastructure solutions is our product line of pre-engineered fixed and mobile/transportable satellite terminals and software-based network management systems, which are marketed under the Summit™, Explorer™ and AxxSys® Orion brands. These product solutions are designed to address the government and commercial marketplace. Summit fixed satellite terminals have antenna apertures ranging from sub-meter to eighteen meters in diameter using pre-engineered building blocks that assure high reliability and rapid response. Explorer mobile/transportable satellite terminals have antenna apertures ranging from sub-meter to four meters in diameter using highly integrated electronic and mechanical packaging techniques in order to provide ease of transport, light weight and a small form factor. The AxxSys® network management systems provide the capability to efficiently and securely manage, monitor and control small to large scale networks. A brief description of each product line is provided below:
Summit Product Line — Fixed Satellite Terminals
Summit fixed earth station antennas come in configurations ranging from sub-meter up to eighteen-meter diameter, customized for each installation from a field-proven set of blocks that provides high
7
reliability satellite communications. Summit earth station terminals include all satcom electronics (L through Ka-band and all intermediate frequencies) needed to meet the customer’s requirements for transmit, receive and interface to terrestrial networks, either integrated within the antenna or a separate shelter or building. All our products include complete system documentation along with our commitment to provision and commission the products into service.
Explorer Product Line — Transportable Satellite Terminals
Explorer satellite terminals are custom-configured for each customer’s requirements based on pre-engineered building block components with proven mission critical service in the field. The result is a mix of high performance at an affordable cost. The product has integrated electronics for L, C, X, Ku and Ka bands which are suited for a wide range of military, institutional, news gathering, enterprise, disaster recovery and other applications. This product is available in antenna sizes ranging from sub-meter up to four meters. Depending on the requirements, they can be configured as vehicle-mounted, trailer-mounted, transportable or fly-away terminals.
These products provide cost-effective, two-way communications in locations where traditional communication infrastructure is inadequate or nonexistent. The Explorer product line includes a range of terminals highlighted below:
TomCat™ X Band is a light-weight, man-transportable X band satellite communications system that sets up and can be operational within minutes. The TomCat™ weighs just 35 pounds and can reach a downlink capacity of up to 3Mbps and an uplink capacity of 1.5Mbps. The terminal was designed to address the growing use of the U.S. military’s WGS system for use in tactical environments and other rapid response applications.
Auto-Explorer™ 0.77 Meter Ku Band terminals were designed for ease of operation by non-satellite personnel by incorporating automatic satellite acquisition technology. These satellite terminals include an integrated electronics package designed to incorporate the radio frequency, monitor and control and satellite modem components into an outdoor mounted package.
Auto-Explorer™ 1.2 Meter Multi Band is a self-contained, portable, auto-acquisition terminal for X, Ku and Ka band satcom applications, specifically tailored for the government’s WGS constellation of satellites. The system is configurable for single, dual or tri-band operation, depending on customer requirements. The versatile, auto-aligning VSAT antenna uses band-specific feed cartridges with integrated RF electronics to enable quick and simple frequency conversion in the field from X to Ku to Ka satellite bands. The X and Ka band variants are certified for WGS operation.
Auto-Explorer™ 1.2 Meter Multi Band Lightweight Transport (LT) terminal utilizes integrated carbon fiber technology and reduced weight component, making it a lightweight alternative to the existing Auto-Explorer 1.2 Meter terminals. The LT is fully IATA compliant for checked airline baggage. It offers a three transport case solution, with each case weighing less than 70 pounds. The versatile, auto-aligning VSAT antenna uses band-specific feed cartridges with integrated RF electronics to enable quick and simple frequency conversion in the field from X to Ku to Ka satellite bands. The X band variants are certified for WGS operation.
Explorer TES is a trailer mounted transportable earth station that serves as a primary gateway or remote access point for the most demanding applications.
GlobalStorm 2400/3700 is a trailer based earth station system that is utilized for field communications, featuring 2.4 meter and 3.7 meter antennas which are large enough for difficult links.
Explorer Pallet is a vehicle-mounted transportable satellite communication pallet terminal that provides single or multi-band electronics for operation on military and commercial satellites.
Systems Design and Integration Product
We design, integrate, install, test and commission complex communication and media network solutions to meet the needs of our customers. Our custom systems design and integration services are
8
largely focused in three areas (1) requirements for media broadcast and distribution solutions, including complex Media Processing Centers, Direct-to-Home (DTH) and IPTV solutions, Master Control & Origination Centers and Studios and DVB-T2 product solutions; (2) satellite networks and earth stations, teleport uplink centers, broadcast centers; and (3) complex, multi-technology, next generation IP-based communications network solutions. This part of our business is based on our core engineering expertise in satellite and terrestrial network design, wireless technology and solutions, media-broadcast engineering, along with network management software solution design.
We maintain facilities for complete in-plant testing of all our systems before delivery in order to assure all performance specifications will be met during installation at the customer’s site. We employ formal total quality management programs and other training programs, and have been certified by the International Organization of Standards quality certification process for ISO 9001, a standard that enumerates specific requirements an organization must follow in order to assure consistent quality in the supply of products and services. The certification process qualifies us for access to virtually all domestic and international projects, and we believe that this represents a competitive advantage.
Sales and Marketing
We continue to mature our sales and marketing approach as we expand our solution offerings. We market our solutions to several market verticals which include government, wireless, media, enterprise and maritime. We have developed a corporate sales and marketing approach enabling us to proactively address opportunities in these vertical markets. We also continue to look for opportunities to exploit our offerings in new market verticals.
In addition to our corporate market vertical approach we leverage regional business team offices. This enables us to effectively support existing customers, targeted trade shows and demos teamed with company-wide events and marketing with a local presence. We believe that this regional effort, along with the corporate market vertical strategy enables us to optimize our ability to find and respond to potential opportunities. Our regional business team’s offices have responsibility for the Americas, Asia Pacific and EMEA (Europe, the Middle East and Africa) regions.
Supporting this sales and marketing approach we have expert teams who are focused on leveraging our know-how in IP networking, broadcast technology, wireless networks, pre-engineered systems, network management systems, software development and network services to provide added value to our products and services. The strength of our expert teams is highlighted at our Annual Technology Forum.
The corporate sales and regional business teams along with our expert teams work together to identify, develop and maintain close and continuing customer relationships. We believe this customer account management focus provides continuity and loyalty between our customers and us. This approach fosters long-term relationships that lead to follow-on work and referrals to new customers. These accounts also provide us with a market for new products and services that we develop.
We will continue to leverage and implement the Globecomm brand globally. This brand is synonymous with global communication excellence. As we continue to expand our reach into new markets, we will expand our name brand recognition to these markets as well.
We use direct mailings, print advertising and social media to targeted markets and trade publications to enhance awareness and acquire leads. We create brand awareness by participating in industry trade shows sponsored by organizations like the International Telecommunications Union, the National Association of Broadcasters, Armed Forces Communications and Electronics Association, Communication Media Management Association and other industry associations. Globecomm plans to participate in multiple corporate sponsored tradeshows over the next year, including SATCON, AFRICOM and SATELLITE 2014 in the satellite communications industry; CABSAT and NAB for the media vertical, several government tradeshows including MILCOM and LANDWARNET, wireless shows including CTIA, CANTO and RCA, enterprise shows including Streaming Media East and West and maritime shows including Digital Ship, Posidonia and SMM. We also provide marketing information on our website and conduct joint marketing programs with sales representatives in various regions to reach new customers.
9
Competition
In the communications services market, we believe that our ability to compete successfully is based primarily on our reputation and providing prompt delivery and initiation of service, competitive pricing, consistent and reliable connections and high-quality customer support.
In the enterprise and broadcast solutions markets, we compete with other communication companies who provide similar services, such as Encompass Digital Media Inc. and Hughes Networks Systems, LLC. In addition, we may compete with other communications services providers such as CapRock and Inmarsat Government, 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.
In the satellite infrastructure solutions market, we believe that our ability to compete successfully is based primarily on our reputation and the ability to provide a solution that meets the customer’s requirements, including competitive pricing, performance, on-time delivery, reliability and customer support.
Our primary competitors in the infrastructure solutions market generally fall into two groups: (1) system integrators such as Thales, Rockwell Collins and SED Systems and (2) equipment manufacturers who also provide integrated systems, such as General Dynamics, SATCOM Technologies, ViaSat Inc., Alcatel and ND Satcom AG.
Current and potential participants in the markets in which we compete have established or may establish cooperative relationships among themselves or with third parties. These cooperative relationships may increase the ability of their products and services to address the needs of our current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge that will enable them to acquire significant market share rapidly. We believe that increased competition is likely to result in price reductions, reduced gross profit margins and loss of market share, any of which would have a material adverse effect on our business, results of operations and financial condition.
Customers
We have established a diversified base of customers in a variety of market verticals, including providing services directly to end-clients as a prime contractor and as a subcontractor under other prime contractors. Our customers include government, enterprise, media, maritime and wireless service providers. We typically rely upon a small number of customers, or prime contractors in the case we are acting as a subcontractor, and which we generally refer to in the aggregate as customers, for a large portion of our revenues. We have contracted with Inmarsat Government as its subcontractor under a U.S. Government program, to provide services similar to those provided to Northrop. This subcontract is expected to continue to be material to our results of operations. We derived 13% of our revenue in the year ended June 30, 2013 under this program from both of these contractors combined under which we earn comparably higher profit margins. In addition we derived 10% of our revenues in the year ended June 30, 2013 from US Army CECOM. A significant portion of this revenue with US Army CECOM is derived from a multi-year, $74 million agreement (“Contract A”) which is a pass-through subcontract entailing little risk of unexpected costs and under which we earn comparatively low profit margins. Contract A was complete as of January 2013. We expect that in the near term a significant portion of our revenues will continue to be derived from a limited number of customers (the identity of whom may vary from year to year) or other contractors, as we seek to expand our business and customer base. The U.S. Government could reduce or terminate a prime contract under which we are a subcontractor, irrespective of the quality of our services as a subcontractor. See the section entitled “Risk Factors.”
Backlog
At June 30, 2013, our backlog was approximately $172.8 million compared to approximately $188.7 million at June 30, 2012. Our services segment backlog was $127.6 million and $103.3 million as of June 30, 2013 and 2012, respectively. Our infrastructure solutions segment backlog was $45.1 million and
10
$85.4 million as of June 30, 2013 and 2012, respectively. The decrease is driven by a decline in bookings of contract orders due to continued economic slowdown, which has resulted in government and commercial customers delaying or cancelling projects along with the reduction due to the completion of Contract A during fiscal 2013. We record an order in backlog when we receive a firm contract or purchase order, which identifies product quantities, sales price, service dates and delivery dates. Backlog represents the amount of unrecorded revenue on undelivered orders and services to be provided and a percentage of revenues from sales of products that have been shipped where installation has not been completed and final acceptance has not been received from the customer. Our backlog at any given time is not necessarily indicative of future period revenues. A substantial portion of our backlog is comprised of large orders, the cancellation of any of which could have a material adverse effect on our operating results. For example, at June 30, 2013, $57.1 million, or approximately 33.0%, of our backlog represented contracts with two services segment customers. We cannot assure you that these contracts or any others in our backlog will not be cancelled, delayed or revised. See the section entitled “Risk Factors.”
Product Design, Assembly and Testing
Within our infrastructure solutions business, we assign a project team to each of our customer contracts. Each team is led by a project engineer who is responsible for execution of the project. This includes engineering and design, assembly and testing, installation and customer acceptance. A project may include engineers, integration specialists, buyer-planners and an operations team. Our standard satellite ground segment systems are manufactured using a standard modular production process. Typically, long-term projects require significant customer-specific engineering, drafting and design efforts. Once the system is designed, the integration specialist works with the buyer-planner and the operations team to assure a smooth transfer from the engineering phase to the integration phase. The integration phase consists mainly of integrating the purchased equipment, components and subsystems into a complete functioning system. Assembly, integration and test operations are conducted on both an automated and manual basis.
We maintain facilities for complete in-plant testing of all our systems before delivery in order to assure all performance specifications will be met during installation at the customer’s site. We employ formal total quality management programs and other training programs, and have been certified by the International Organization of Standards quality certification process for ISO 9001, a standard that enumerates specific requirements an organization must follow in order to assure consistent quality in the supply of products and services.
Research and Development
We have developed internal research and development resources in IP networks, wireless networks, content delivery networks, broadcast systems, network management systems and pre-engineered systems. The costs of developing new technologies are funded by our investments and by development funded by specific customer program requirements. This approach provides us with a cost-effective means to develop new technology, while minimizing our direct research and development expenditures. Furthermore, we believe that our research and development capabilities allow us to offer added value in developing solutions for our customers, while at the same time we maintain the opportunity to develop products through our strategic supplier relationships. Our internal research and development efforts generally focus on the development of products and services not available from other suppliers to the industry. Current efforts are focused on expanding the Tempo Enterprise Media Platform, enhancements to pre-engineered AxxSys network management systems for all our earth terminal and network customers and pre-engineered Explorer satellite systems for our government customers and enhancements to our se@comm maritime communications suite of software products and value added services. For the years ended June 30, 2013, 2012 and 2011, we incurred approximately $4.3 million, $6.3 million, and $4.3 million, respectively, in internal research and development expenses.
Intellectual Property
We rely heavily on the technological and creative skills of our personnel, new product developments, computer programs and designs, frequent product enhancements, reliable product
11
support and proprietary technological expertise in maintaining our competitive position. We have secured patent protection on some of our products, and have secured trademarks and service marks to protect some of our products and services.
We currently have been granted six patents in the United States, one for remote access to the Internet using satellites, another for satellite communication with automatic frequency control, another for a monitor and control system for satellite communications networks and the like, another for implementing facsimile and data communications using Internet protocols, and two for a dish antenna kit including alignment tool and one in Canada for implementing facsimile and data communications using Internet protocols. We have one other patent pending in the United States for a distributed satellite-based cellular network. We also intend to seek additional patents on our technology, if appropriate. We have received trademark registration for Globecomm, GSI and Telaurus in the United States and various other countries, and for Globecomm Systems Inc. in the European Community, Russia, and the People’s Republic of China. We have also received trademark registrations in the United States for MBB2001, CTF 2001, CES 2001 and AxxSys, which relate to our pre-engineered systems; for se@comm and other marks relating to our maritime services; for TEMPO and other marks relating to our services business; for the GSI logo; and for various other marks related to our products and services. We have other trademarks and service marks pending and intend to seek registration of other trademarks and service marks in the future.
Government Regulations
Operations and Use of Satellites
We are subject to various federal laws and regulations, which may have negative effects on our business. We operate Federal Communications Commission, or FCC, licensed teleports in Hauppauge, New York, and Laurel, Maryland, subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. Pursuant to the FCC Act and FCC rules and regulations, we have obtained or applied for, and are required to maintain radio transmission licenses from the FCC for both domestic and foreign operations of our teleports. We have also obtained and maintain authorization issued under Section 214 of the FCC Act to act as a telecommunications carrier. We have also obtained a license from Agentschap Telecom, the licensing authority in The Netherlands, for the teleports operated by us in The Netherlands. These licenses should be renewed in the normal course as long as we remain in compliance with applicable rules and regulations relating to the licenses. However, we cannot guarantee that renewal licenses will be granted when our existing licenses expire, nor can we assure you that the applicable regulatory agencies will not adopt new or modified technical requirements that will require us to incur expenditures to modify or upgrade our equipment as a condition of retaining our licenses.
We are also required to comply with FCC regulations regarding the exposure of humans to radio frequency radiation from our teleports. These regulations, as well as local land use regulations, restrict our freedom to choose where to locate our teleports.
Common Carrier Regulation
We currently provide services to our customers on a private carrier and on a common carrier basis. Our operations as a common carrier require us to comply with the FCC’s requirements for common carriers. These requirements include, but are not limited to, providing our rates and service terms, being forbidden from unjust and unreasonable discrimination among customers, notifying the FCC before discontinuing service and complying with FCC equal employment opportunity regulations and reporting requirements.
Foreign Ownership
The FCC Act and FCC regulations impose restrictions on foreign ownership of certain FCC licenses that we may hold. These requirements generally forbid more than 20% ownership of an FCC licensee by non-United States citizens and more than 25% ownership of a licensee’s parent by non-United States
12
citizens. The FCC may authorize indirect foreign ownership in excess of these percentages so long as such ownership is not inconsistent with the public interest.
To the extent we hold these licenses, we may, in the future be required to seek FCC approval if foreign ownership of our stock is to exceed the thresholds mentioned above. Failure to comply with these requirements could result in an order to block or divest the offending foreign ownership, fines, denial of license renewal and/or license revocation proceedings against the licensee by the FCC. We have no knowledge of any present foreign ownership which would result in a violation of these foreign ownership restrictions.
Some of our U.S. government contracts also impose restrictions on foreign ownership of our Company. These contracts require that we identify whenever a foreign person has 5% or greater ownership or control of our Company and take steps to mitigate the control and influence such foreign persons have on our business. If we are not able to effectively mitigate such control or influence, we may lose our eligibility for those U.S. Government contracts where foreign ownership or controlling interest of the contractor is a factor in contractor selection.
Foreign Regulations
Regulatory schemes in countries in which we may seek to provide our satellite-delivered services may impose impediments on our operations. Some countries in which we operate or intend to operate have telecommunications laws and regulations that do not currently contemplate technical advances in telecommunications technology like Internet/intranet transmission by satellite. We cannot assure you that the present regulatory environment in any of those countries will not be changed in a manner which may have a material adverse impact on our business. Either we or our local sales representatives typically must obtain authorization for each country in which we provide our satellite-delivered services. Although we believe that we or our local sales representatives will be able to obtain the requisite licenses and approvals from the countries in which we intend to provide products and services, the regulatory schemes in each country are different, and thus there may be instances of noncompliance of which we are not aware. Although we believe these regulatory schemes will not prevent us from pursuing our business plan, we cannot assure you that our licenses and approvals are or will remain sufficient in the view of foreign regulatory authorities. In addition, we cannot assure you that necessary licenses and approvals will be granted on a timely basis, or at all, in all jurisdictions in which we wish to offer our products and services or that the applicable restrictions will not be unduly burdensome.
Regulation of the Internet
Our Internet operations (other than the operation of a teleport) are not currently subject to direct government regulation in the United States or most other countries, and there are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet it is possible that a number of laws and regulations may be adopted at the local, national or international levels with respect to the Internet, covering issues like user privacy and expression, pricing of products and services, taxation, advertising, intellectual property rights, information security or the convergence of traditional communication services with Internet communications.
We anticipate that a substantial portion of our Internet operations will be carried out in countries which may impose greater regulation of the content of information coming into their country than that which is generally applicable in the United States. Examples of this include privacy regulations in Europe and content restrictions in countries, such as the People’s Republic of China. To the extent that we provide content as a part of our Internet services, we will be subject to laws regulating content. Moreover, the adoption of laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our Internet services, or increase our cost of doing business or otherwise negatively affect our business. In addition, the applicability to the Internet of existing laws governing issues including property ownership, copyrights and other intellectual property issues, taxation, libel and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the
13
Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace. These changes could reduce demand for our products and services or could increase our cost of doing business as a result of costs of litigation or increased product development costs.
Telecommunications Taxation, Support Requirements and Access Charges
Telecommunications carriers providing domestic services in the United States are required to contribute a portion of their gross revenues for the support of universal telecommunications services, telecommunications relay services for the deaf and/or other regulatory fees. We are subject to some of these fees and we may be subject to other fees or to new or increased taxes and contribution requirements that could affect our profitability, particularly if we are not able to pass them through to customers for either competitive or regulatory reasons.
Broadband Internet access services provided by telephone companies are currently classified as information services under the Communications Act and therefore not considered a telecommunications service subject to payment of access charges to local telephone companies in the United States. Should this situation change or other charges be imposed, the increased cost to our customers who use telephone company provided facilities to connect with our satellite facilities could discourage the demand for our services. Likewise, the demand for our services in other countries could be affected by the availability and cost of local telephone or other telecommunications services required to connect with our facilities in those countries.
Export of Telecommunications Equipment
The sale of our products and services outside the United States is subject to compliance with the regulations of the United States Export Administration and, in certain instances, with International Traffic in Arms regulations. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In addition, in order to ship our products into or implement our services in some countries, these products or services must satisfy the technical requirements of the particular country. If we were unable to comply with these requirements with respect to a significant quantity of our products, our sales in those countries could be restricted, which could have a material adverse effect on our business, financial condition and results of operations.
Employees
As of June 30, 2013, we had 483 full-time employees, including 219 in engineering and program management, 114 in manufacturing, operations support and network operations, 70 in sales and marketing and 80 in management and administration. Our employees are not covered by any collective bargaining agreements. We believe that our relations with our employees are good.
Financial Information About Geographic Areas
Revenues from foreign sales as a percentage of total revenues for each of the three years in the period ended June 30, 2013 are set forth in Note 15 of the Notes to Consolidated Financial Statements. Foreign assets and long lived-assets located in foreign locations are set forth in Note 14 of the Notes to Consolidated Financial Statements.
Financial Information About Business Segments
The revenues and operating results of each business segment for each of the three years in the period ended June 30, 2013 and the identifiable assets attributable to each business segment as of June 30, 2013 and June 30, 2012 are set forth in Note 14 of the Notes to Consolidated Financial Statements.
14
Available information
We maintain an Internet website at www.globecommsystems.com where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to these reports and all other SEC documents are available without charge, as soon as reasonably practicable following the time that they are filed with or furnished to the SEC. Information contained on our website does not constitute a part of this Annual Report on Form 10-K.
| Item 1A. | Risk Factors |
Risks Related to Our Business
There are risks and uncertainties associated with our proposed acquisition by Wasserstein Cosmos Co-Invest, L.P.
The announcement and pendency of the Merger may adversely affect our business due to customers’ and employees’ uncertainty and other disruptions as well as intensified competition from our competitors as they attempt to take advantage of these uncertainties. In addition, we have incurred substantial legal and other expenses in connection with the pending Merger. All of these factors may have an adverse effect on our consolidated financial position, results of operations or cash flows.
Under the terms of the Merger Agreement, we have agreed to operate our business in the ordinary course consistent with past practice, as well as to refrain from taking certain actions in the conduct of our business without the acquiring party’s prior written consent until the consummation of the Merger. Actions that may require the acquiring party’s consent include, but are not limited to, entry into or amendment of material contracts, new indebtedness, major capital expenditures, loans and investments, acquisitions, and issuances of securities. These restrictions could adversely affect our business and have an adverse effect on our consolidated financial position, results of operations or cash flows.
Our merger is subject to certain conditions to closing that could result in the Merger not being completed or being delayed, either of which could negatively impact our stock price and future business and results of operations.
Consummation of the Merger is subject to certain conditions, including (i) the adoption of the Merger Agreement by the Company’s stockholders, (ii) the absence of any law or order prohibiting the closing, (iii) the expiration or termination of any applicable statutory waiting periods and any National Industrial Security Program Operating Manual requirements having been met, (iv) to the extent necessary, receipt of approval from the Committee on Foreign Investment in the United States, (v) the receipt of certain FCC consents and the completion of certain actions relating to certain of the FCC licenses, (vi) the satisfaction of a financial test by the Company, (vii) the absence of any Material Adverse Effect (as defined in the Merger Agreement) with respect to the Company, (viii) the absence of certain events relating to Company’s financial statements, (ix) the absence of any debarment of the Company from contracting with the federal government of the United States, and (x) other customary closing conditions. Failure to complete the Merger would prevent our company from realizing the anticipated benefits of the Merger.
We have already incurred and expect to continue to incur significant costs associated with transaction fees, professional services and other costs related to the Merger. In the event that the Merger is not completed, we will remain liable for these costs and expenses. Furthermore, the Merger Agreement contains certain customary termination payments which may be incurred by Globecomm. If the Merger Agreement is terminated, upon specified circumstances, Globecomm would be required to pay Parent a termination fee. If payment of a termination fee is due from Globecomm, the amount of the termination fee will be $10,200,000, except that such termination fee will be reduced to $3,400,000 if the
15
Merger Agreement is terminated by either party due to Globecomm’s stockholders failing to adopt the Merger Agreement in certain circumstances (such amount reflecting a reasonable estimate of the acquiring party’s out-of-pocket fees and expenses (including fees and expenses of third party advisors), overhead costs and charges and lost opportunity costs). In addition, the current market price of our common stock may reflect a market assumption that the Merger will occur, and a failure to complete the Merger could result in a negative perception by the market of us generally and a resulting decline in the market price of our common stock. Any delay in the consummation of the Merger or any uncertainty about the consummation of the merger could also negatively impact our future business and results of operations.
Potential legal proceedings in connection with the Merger could adversely affect our business and divert management’s attention and resources from other matters.
Class action lawsuits may be filed by third parties challenging the contemplated Merger. Globecomm, members of our board of directors, the acquiring party and members of the acquiring party’s board of directors, among others, may be named as defendants in these class action lawsuits brought by Globecomm stockholders challenging the Merger. If lawsuits are filed and the plaintiffs are successful, they may prevent the parties from completing the Merger in the expected timeframe, if at all, and, in any event, lawsuits, if filed, could adversely affect our business, financial position and results of operations and divert management’s attention and resources from other matters.
Since sales of telecommunications equipment are dependent on the growth of communications networks, if market demand for these networks does not increase from recent depressed levels, the revenue and profitability of our infrastructure solutions segment are likely to decline, which may not be offset by growth in our services segment.
We derive, and expect to continue to derive, a significant amount of revenues from the sale of telecommunications equipment, in particular, satellite infrastructure solutions. During the past several years many businesses, including ours, have faced uncertain economic environments and cutbacks in government spending. If the long-term growth in demand for communications networks does not increase from recent depressed levels, the demand for our infrastructure solutions may continue to decline or grow more slowly than we expect. 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, many companies have found it difficult to raise capital to finish building their communications networks and, therefore, have placed fewer orders and government budgetary constraints are likely to reduce demand for products and services such as those we offer. Our infrastructure solutions segment in particular was impacted by this decreased demand and capital spending by our customers and we have incurred operating losses in that segment for several years. 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. We cannot predict whether, or the extent to which, demand will increase, nor the timing of any increase. The growth and profitability 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, including those in which we provide subcontractor services for a prime contractor, 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, including the loss of a prime contract by a prime contractor, would adversely affect our results of operations, business and financial condition.
We rely on a small number of customer contracts, including those in which we provide subcontractor services for a prime contractor, for a large portion of our revenue. In the year ended June 30, 2013, 13%
16
and 10% of our revenues were derived from each of Inmarsat Government and US Army CECOM, respectively. We have performed work as a subcontractor to Inmarsat Government since February 2012 for services for the U.S. Government. This subcontract is expected to continue to be material to our results of operations and has provided profit margin significantly above our norm. In addition, a significant portion of the revenue from US Army CECOM is derived from a multi-year, $74 million agreement which is a pass-through subcontract entailing little risk of unexpected costs and under which we earn comparatively low profit margins. 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, or a prime contractor we are working with loses its contract, and we are unable to replace these contracts, our results of operations, business and financial condition would be materially harmed.
We have derived, from time to time, a substantial portion of our revenues from the government marketplace, and a downturn or other reduction in defense spending in this marketplace, including as a result of the U.S. government’s so-called sequester and U.S. military’s withdrawal from combat in Afghanistan would adversely affect us.
In the year ended June 30, 2013, we derived 64% of our consolidated revenues from the government marketplace. This business, in particular the service segment therein, tends to have higher gross margin percentage than other markets we serve. A future reduction in the proportion of our business from the government marketplace, or the recent decreases and expected further decreases in the government agency budgets, would negatively impact our future 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 and Congressional initiatives have resulted in failures to fund various government programs. In particular, the current so-called sequester has had, and may continue to have, a dampening effect on U.S. government spending. 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 currently expected to be completely 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 contractor’s inability to obtain or renew its contracts with the ultimate customer.
We regularly act as subcontractor to prime contractors (or subcontractors), 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, irrespective of the quality of our services as a subcontractor. Similar considerations apply when we act as a subcontractor to a subcontractor.
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, with a significant portion of the international revenue coming from developing
17
countries, including countries in areas of conflict like Iraq and Afghanistan. There are a number of risks inherent in conducting our business internationally, including:
| • | 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; |
| • | longer payment terms and difficulties in collecting accounts receivable could affect our results of operations; |
| • | 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; |
| • | export restrictions, tariffs, licenses and other trade barriers could prevent us from adequately equipping our network facilities; |
| • | differing technology standards across countries may impede our ability to integrate our services and products across international borders; |
| • | 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; |
| • | increased expenses associated with marketing services in foreign countries could affect our ability to compete; |
| • | relying on local subcontractors for installation of our services and products could adversely impact the quality of our services and products; |
| • | difficulties in staffing and managing foreign operations could affect our ability to compete; |
| • | complex foreign laws and treaties could affect our ability to compete; and |
| • | 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.
Since our service revenue has generally increased as a percentage of total revenue in prior periods and generally have higher gross margins, if our service revenue decreases or service margins decrease, our results of operations will be harmed.
Future revenues and results of operations of our services business are dependent on the development of the market for their current and future services. In the year ended June 30, 2013, services revenues were 62% of total revenue, compared to 58% and 69% in fiscal 2012 and 2011, respectively. The decrease in service revenue as a percentage of total revenue in fiscal 2012 was also due to increase in revenue in infrastructure from Contract A. The service business tends to have significantly higher gross margin percentage 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. In the years ended June 30, 2013 and June 30, 2012, we recorded $3.3 million and $1.5
18
million, respectively, for additional costs incurred on fixed-price contracts in the infrastructure solutions segment. The additional costs were due in large part to unexpected difficulties and consequential substantial costs associated with engineering and production issues.
Future acquisitions and strategic investments may divert our resources and management’s attention, results may fall short of expectations and, as a result, our operating results may be difficult to forecast and may be volatile.
We have made several acquisitions and intend to continue pursuing acquisitions or investments in complementary businesses, technologies and product lines as a key component of our growth strategy. Any future acquisitions or investments may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses related to intangibles assets. Acquisitions involve numerous risks, including:
| • | volatility in reported results due to the reassessment of the valuation of any earn-out provisions included in acquisition transactions; |
| • | 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 business; |
| • | diversion of management’s attention from other business concerns; |
| • | substantial transaction costs even if the acquisition is abandoned prior to completion; |
| • | the potential of significant goodwill and intangibles write-offs in the future in the event that an acquisition or investment does not meet expectations; |
| • | increased expenses associated with the consummation and integration of an acquisition; and |
| • | loss of key employees, customers or suppliers of any acquired business. |
We cannot assure you that any acquisition or strategic investment will be consummated, 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.
The services segment’s revenues and results of operations are dependent on the infrastructure of the network operations center and the Kenneth A. Miller International Teleport at our headquarters in Hauppauge, New York, the network operations centers and teleports at our Laurel, Maryland and Netherlands facilities. 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, such as Thales, Rockwell Collins and SED Systems, and (2) equipment manufacturers who also provide integrated systems, such as General Dynamics, SATCOM Technologies, Viasat Inc., Alcatel and ND Satcom AG.
19
In the enterprise and broadcast solutions markets, we compete with other communication companies which provide similar services, such as Encompass Digital Media Inc. and Hughes Networks Systems, LLC. In addition, we may compete with other communications services providers such as CapRock and Inmarsat Government, 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.
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:
| • | the speed at which communications infrastructure, including terrestrial microwave, coaxial cable and fiber optic communications systems, which compete with satellite-based services, is built; |
| • | the effectiveness of our local resellers and sales representatives in marketing and selling our services and products; and |
| • | 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.
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.
20
Satellites upon which we rely may malfunction or be damaged or lost.
In the delivery of our services, we lease space segment from various satellite transponder vendors. The damage or loss of any of the satellites used by us, or the temporary or permanent malfunction of any of the satellites upon which we rely, would likely result in the interruption of our satellite-based communications services. This interruption could have a material adverse effect on our business, results of operations and financial condition.
We depend on our suppliers, some of which are our sole or a limited source of supply, and the loss of these suppliers could materially adversely affect our business, results of operations and financial condition.
We currently obtain most of our critical components and services from limited sources and generally do not maintain significant inventories or have long-term or exclusive supply contracts with our vendors. We have from time to time experienced delays in receiving products from vendors due to lack of availability, quality control or manufacturing problems, shortages of materials or components or product design difficulties. We may experience delays in the future and replacement services or products may not be available when needed, or at all, or at commercially reasonable rates or prices. If we were to change some of our vendors, we would have to perform additional testing procedures on the service or product supplied by the new vendors, which would prevent or delay the availability of our 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.
21
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 seven patents, and have five patent applications pending in the United States and one patent application pending in a foreign country. 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.
We have registered the trademarks Globecomm, GSI and Telaurus in the United States and various other countries, and the trademark Mach 6 in The Netherlands. We have various other trademarks and service marks registered or pending for registration in the United States and in other countries and may seek registration of other trademarks and service marks in the future. We cannot assure you that registrations will be granted from any of our pending or future applications, or that any registrations that are granted will prevent others from using similar trademarks in connection with related goods and services.
Defending against intellectual property infringement claims could be time consuming and expensive, and if we are not successful, could cause substantial expenses and disrupt our business.
We cannot be sure that the products, services, technologies and advertising we employ in our business do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Prosecuting infringers and defending against intellectual property infringement claims could be time consuming and expensive, and regardless of whether we are or are not successful, could cause substantial expenses and disrupt our business. We may incur substantial expenses in defending against these third party claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability and/or may materially disrupt the conduct of, or necessitate the cessation of, segments of our business.
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our stock price is volatile.
From July 1, 2012 through August 31, 2013, our stock price ranged from a low of $9.50 per share to a high of $14.91 per share. The price for our common stock in the Merger Agreement is $14.15 per share. The market price of our common stock, like that of the securities of many telecommunications and high technology industry companies, could be subject to significant fluctuations and is likely to remain volatile based on many factors, including the following:
| • | quarterly variations in operating results; |
| • | announcements of new technologies, products or services by us or any of our competitors; |
| • | anticipated strategic transactions in which we might participate |
| • | changes in financial estimates or recommendations by securities analysts; |
| • | general market conditions, including periods of significant volatility; or |
| • | domestic and international economic factors unrelated to our performance. |
22
Additionally, numerous factors relating to our business may cause fluctuations or declines in our stock price.
The stock markets in general and the markets for telecommunications stocks in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
Because our common stock is thinly traded, it may be difficult to sell shares of our common stock into the markets without experiencing significant price volatility.
Our common stock is currently traded on the Nasdaq Global Market. Because of the relatively small number of shares that are traded as well as the concentration of ownership of our common stock, it may be difficult for an investor to find a purchaser for shares of our common stock without experiencing significant price volatility. Based solely on information contained in SEC filings, as of August 27, 2013, seven institutional groups of shareholders beneficially own 46% of our outstanding common stock; investment decisions by these shareholders could significantly affect the liquidity and price of our common stock and could result in a substantial shift in ownership of our company. 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. Although these provisions will not impact our ability to complete the Merger, if the Merger is not completed, they will remain in place and may adversely impact possible future transactions.
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.
Our business could be negatively affected as a result of actions of activist shareholders.
Several of the institutional holders of our common stock have filed Schedule 13Ds with the SEC and are considered “activist” shareholders. Responding to actions by activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. The perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners. We cannot assure that the execution of the Merger Agreement or any failure to the complete the Merger will not result in disputes between us and these activist shareholders.
23
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 also have licenses from Agentschap Telecom, the licensing authority in The Netherlands, for the teleports operated by Mach 6 and C2C in The Netherlands. We cannot guarantee that the applicable government agencies will grant renewals when our existing licenses expire, nor are we assured that the agencies will not adopt new or modified technical requirements that will require us to incur expenditures to modify or upgrade our equipment as a condition of retaining our licenses. We are also required to comply with 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. We will apply for transfer of our FCC licenses in connection with the Merger; however, we cannot assure you that the FCC will permit the transfer of these licenses or the timing of any such approvals.
Common Carrier Regulations
We currently provide services to our customers on a private carrier and on a common carrier basis. Our operations as a common carrier require us to comply with the FCC’s requirements for common carriers. These requirements include, but are not limited to, providing our rates and service terms, being forbidden from unjust and unreasonable discrimination among customers, notifying the FCC before discontinuing service and complying with FCC equal employment opportunity regulations and reporting requirements. We intend to request termination of our common carrier licenses and to apply for private carrier status in connection with the Merger. We cannot assure you that the FCC will approve our applications.
Foreign Regulations
Regulatory schemes in countries in which we may seek to provide our satellite-delivered services may impose impediments on our operations. Some countries in which we intend to operate have telecommunications laws and regulations that do not currently contemplate technical advances in telecommunications technology like Internet/intranet transmission by satellite. We cannot assure you that the present regulatory environment in any of those countries will not be changed in a manner that may have a material adverse impact on our business. Either we or our local partners typically must obtain authorization from each country in which we provide our satellite-delivered services. The regulatory schemes in each country are different, and thus there may be instances of noncompliance of which we are not aware. We cannot assure you that our licenses and approvals are or will remain sufficient in the view of foreign regulatory authorities, or that necessary licenses and approvals will be granted on a timely basis in all jurisdictions in which we wish to offer our 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
24
information coming into the country than that which is generally applicable in the United States, including but not limited to privacy regulations in numerous European countries and content restrictions in countries such as the People’s Republic of China. To the extent that we provide content as a part of our Internet services, it will be subject to laws regulating content. Moreover, the adoption of laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our Internet services or increase our cost of doing business or in some other manner have a material adverse effect on our business, operating results and financial condition. In addition, the applicability of existing laws governing issues including property ownership, copyrights and other intellectual property issues, taxation, libel, court jurisdiction and personal privacy to the Internet is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, the laws do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace which could reduce demand for our 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.
Foreign Ownership
To the extent we hold certain FCC licenses subject to foreign ownership restrictions, we may in the future be required to seek FCC approval if foreign ownership of our stock is to exceed certain specified levels. Failure to comply with these requirements could result in an order to block or 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.
25
Foreign Corrupt Practices Act
In light of the nature of countries in which we sell products and services, we are subject to the Foreign Corrupt Practices Act, or the FCPA, which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for actions taken by strategic or local partners or representatives. If we or our intermediaries fail to comply with the requirements of the FCPA, or similar laws of other countries, such as the UK Anti-Bribery Act, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could have a material adverse effect on our business, results of operations, financial conditions and cash flows.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. These forward-looking statements represent Globecomm’s expectations or beliefs concerning future events, including the timing of the Merger and other information relating to the Merger. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. All statements in this Annual Report regarding our future strategy, future operations, projected financial position, estimated future revenue, projected costs, future prospects, results that might be obtained by pursuing management’s current plans and objectives, including those related to the merger, are forward-looking statements. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. They discuss Globecomm’s future expectations or state other forward-looking information and may involve known and unknown risks over which Globecomm has no control. Those risks include, (i) the risk that the Merger may not be completed in a timely manner or at all, which may adversely affect Globecomm’s business and the price of the common stock of Globecomm, (ii) the failure to satisfy of the conditions to the consummation of the Merger, including the adoption of the Merger Agreement by the stockholders of Globecomm and the receipt of certain governmental and regulatory approvals, (iii) the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement, including a termination under circumstances that could require us to pay a termination fee, (iv) the effect of the announcement or pendency of the Merger on Globecomm’s business relationships, operating results and business generally, (v) the potential adverse effect on Globecomm’s business, properties and operations because of certain covenants Globecomm agreed to in the Merger Agreement, (vi) risks that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the Merger, (vii) risks related to diverting management’s attention from Globecomm’s ongoing business operations, (viii) the outcome of any legal proceedings that may be instituted against us related to the Merger Agreement or the Merger and (ix) the amount of the costs, fees, expenses and charges related to the Merger Agreement and Merger. Other important risks that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report and in our subsequent filings with the Securities and Exchange Commission (“SEC”). Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this Annual Report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or
26
achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties
We own a facility containing approximately 122,000 square feet of space on approximately seven acres located at 45 Oser Avenue, Hauppauge, New York. This facility houses our principal offices, teleport, network operations center and production space. We also own a facility containing approximately 20,000 square feet of space on approximately three acres located in Laurel, Maryland, which houses the teleport facility and network operations center. We lease warehouse and production space in Hauppauge, New York; lease land in Netherlands for a teleport facility; and rent office space in Laurel, Maryland, Frederick, Maryland, Cedar Knolls, NJ, Arlington, Virginia, the Netherlands, the United Kingdom, Germany, the United Arab Emirates, Singapore, Afghanistan, and South Africa. We believe that our facilities are adequate for our current needs and for the foreseeable future; we also expect that suitable additional space will be available as needed. Total monthly rent expense for these locations is approximately $236,000.
Item 3. Legal Proceedings
On October 11, 2012, Harvey Wenz filed a purported shareholder class action complaint in New York State Supreme Court, Suffolk County, captioned Wenz v. Globecomm Systems Inc., et al., Index No. 031747/2012 (N.Y. Sup. Ct. Suffolk County), seeking to enjoin the annual shareholder meeting of the Company scheduled for November 15, 2012 until the Company made certain additional disclosures. On October 22, 2012, the complaint was amended to add as a plaintiff Joan Wenz, another purported shareholder of the Company. Plaintiffs alleged that the Directors of the Company breached their fiduciary duties by failing to disclose in the Company’s October 5, 2012 Definitive Proxy Statement certain information concerning proposals in the Proxy to (i) amend the 2006 Stock Incentive Plan, and (ii) provide stockholders with a non-binding, advisory vote on the Company’s compensation program for its named executives. The lawsuit also alleged that the Company aided and abetted these alleged breaches of fiduciary duty. In addition to an injunction, plaintiffs sought unspecified damages and attorneys’ fees. On November 2, 2012, plaintiffs moved by order to show cause for a preliminary injunction enjoining the November 15, 2012 shareholder vote as the two proposals noted above. The court denied plaintiffs’ motion for a preliminary injunction on November 14, 2012. On November 29, 2012, plaintiffs voluntarily discontinued the action with prejudice as to themselves and without prejudice as to all other Globecomm shareholders.
Item 4. Mine Safe Disclosures
Not Applicable.
27
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is quoted on the Nasdaq Global Market under the symbol “GCOM.” The quarterly high and low sales prices of our common stock for fiscal 2013 and 2012 are as follows:
| High | Low | |||||||
| 2013 |
||||||||
| Quarter ended September 30, 2012 |
$ | 13.44 | $ | 9.50 | ||||
| Quarter ended December 31, 2012 |
12.00 | 10.11 | ||||||
| Quarter ended March 31, 2013 |
12.80 | 10.86 | ||||||
| Quarter ended June 30, 2013 |
13.34 | 11.23 | ||||||
| 2012 |
||||||||
| Quarter ended September 30, 2011 |
$ | 16.43 | $ | 10.63 | ||||
| Quarter ended December 31, 2011 |
14.62 | 11.83 | ||||||
| Quarter ended March 31, 2012 |
16.00 | 13.29 | ||||||
| Quarter ended June 30, 2012 |
14.92 | 9.44 | ||||||
At September 9, 2013, there were approximately 2,800 stockholders of record of our common stock, as shown in the records of our transfer agent.
At the close of the Nasdaq Global Market on September 9, 2013, our market price per share was $13.95.
As of June 30, 2013, we had not declared or paid dividends on our common stock since inception and we do not expect to pay dividends in the foreseeable future. We are precluded from issuing dividends as long as we have amounts outstanding under our credit facility.
28
Performance Graph
Set forth below is a graph comparing the cumulative total stockholder return, assuming dividend reinvestment of $100 invested in the Company’s common stock on June 30, 2008 through June 30, 2013 with the cumulative total return, assuming dividend reinvestment of $100 invested in the Nasdaq Global Market (U.S.) Index and a Self Constructed Peer Group Index. The peer group consists of the following companies: Comtech Telecommunications Corp., Harris Corporation, ViaSat, Inc., and Telecommunication Systems Inc.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Globecomm Systems Inc., the NASDAQ Composite Index, and a Peer Group
| * | $100 invested on 6/30/08 in stock or index, including reinvestment of dividends. |
| Fiscal year ending June 30. |
29
| Item 6. | Selected Financial Data |
Our selected consolidated financial data as of and for each of the five years in the period ended June 30, 2013 have been derived from our audited consolidated financial statements. EBITDA represents net income before interest income, interest expense, provision for income taxes, and depreciation and amortization expense. EBITDA does not represent cash flows defined by accounting principles generally accepted in the United States and does not necessarily indicate that our cash flows are sufficient to fund all of our cash needs. We disclose EBITDA since it is a financial measure commonly used in our industry. EBITDA facilitates internal comparisons of our historical financial position and operating performance on a more consistent basis, we also use EBITDA in measuring performance relative to that of our competitors and in evaluating acquisition opportunities. EBITDA is not meant to be considered a substitute or replacement for net income as prepared in accordance with accounting principles generally accepted in the United States. EBITDA may not be comparable to other similarly titled measures of other companies.
We record an order in backlog when we receive a firm contract or purchase order, which identifies product quantities, sales price, service dates and delivery dates. Backlog represents the amount of unrecorded revenue on undelivered orders and services to be provided and a percentage of revenues from sales of products that have been shipped where installation has not been completed and final acceptance has not been received from the customer. Our backlog at any given time is not necessarily indicative of future period revenues.
30
Selected Financial Data
(In thousands, except per share data)
| Years Ended June 30, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Statements of Operations Data: |
||||||||||||||||||||
| Revenues from services |
$ | 199,069 | $ | 220,921 | $ | 188,700 | $ | 135,796 | $ | 81,344 | ||||||||||
| Revenues from infrastructure solutions |
120,545 | 160,980 | 85,491 | 92,021 | 88,817 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenues |
319,614 | 381,901 | 274,191 | 227,817 | 170,161 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Costs and operating expenses: |
||||||||||||||||||||
| Costs from services |
132,573 | 152,302 | 131,329 | 99,424 | 60,995 | |||||||||||||||
| Costs from infrastructure solutions |
110,517 | 142,831 | 70,423 | 75,974 | 73,877 | |||||||||||||||
| Selling and marketing |
17,870 | 19,576 | 18,015 | 14,977 | 12,985 | |||||||||||||||
| Research and development |
4,308 | 6,251 | 4,304 | 3,342 | 2,392 | |||||||||||||||
| General and administrative |
31,787 | 34,432 | 30,038 | 23,957 | 15,954 | |||||||||||||||
| Earn-out fair value adjustments |
— | (11,874 | ) | 4,824 | 178 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total costs and operating expenses |
297,055 | 343,518 | 258,933 | 217,852 | 166,203 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income from operations |
22,559 | 38,383 | 15,258 | 9,965 | 3,958 | |||||||||||||||
| Other income (expense): |
||||||||||||||||||||
| Interest income |
331 | 246 | 186 | 386 | 534 | |||||||||||||||
| Interest expense |
(394 | ) | (574 | ) | (410 | ) | (106 | ) | — | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income before income taxes |
22,496 | 38,055 | 15,034 | 10,245 | 4,492 | |||||||||||||||
| Provision for income taxes |
7,257 | 9,492 | 6,046 | 2,343 | 1,193 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income from continuing operations |
$ | 15,239 | $ | 28,563 | $ | 8,988 | $ | 7,902 | $ | 3,299 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Basic net income from continuing operations per common share |
$ | 0.67 | $ | 1.29 | $ | 0.42 | $ | 0.38 | $ | 0.16 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Diluted net income from continuing operations per common share |
$ | 0.66 | $ | 1.26 | $ | 0.41 | $ | 0.38 | $ | 0.16 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Weighted-average shares used in the calculation of basic net income from continuing operations per common share |
22,690 | 22,078 | 21,332 | 20,560 | 20,219 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Weighted-average shares used in the calculation of diluted net income from continuing operations per common share |
23,096 | 22,711 | 22,026 | 20,992 | 20,507 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
31
| Years Ended June 30, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Other Operating Data: |
||||||||||||||||||||
| Net income |
$ | 15,239 | $ | 28,563 | (c) | $ | 8,988 | (c) | $ | 7,902 | $ | 3,299 | ||||||||
| Other (income) expense, net |
63 | 328 | 224 | (280 | ) | (534 | ) | |||||||||||||
| Provision for income taxes |
7,257 | 9,492 | 6,046 | 2,343 | 1,193 | |||||||||||||||
| Depreciation and amortization |
12,087 | 12,614 | 9,703 | 7,479 | 5,968 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| EBITDA |
$ | 34,646 | $ | 50,997 | $ | 24,961 | $ | 17,444 | $ | 9,926 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Cash flows provided by operating activities |
$ | 35,895 | $ | 48,201 | $ | 16,506 | $ | 13,560 | $ | 9,011 | ||||||||||
| Cash flows used in investing activities |
(16,467 | ) | (19,344 | ) | (28,494 | ) | (28,026 | ) | (16,719 | ) | ||||||||||
| Cash flows (used in) provided by financing activities |
(4,234 | ) | (4,669 | ) | 16,891 | 13,449 | 339 | |||||||||||||
| Capital expenditures |
11,767 | 14,844 | 9,363 | 8,772 | 4,336 | |||||||||||||||
| Backlog at end of year |
172,764 | 188,730 | 231,997 | 163,937 | 153,865 | |||||||||||||||
| June 30, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Balance Sheet Data: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 87,286 | $ | 72,196 | $ | 47,964 | $ | 42,863 | $ | 44,034 | ||||||||||
| Working capital |
128,334 | 109,837 | 79,686 | 76,712 | 74,644 | |||||||||||||||
| Total assets |
308,241 | 310,067 | 294,611 | 240,710 | 191,539 | |||||||||||||||
| Long term liabilities |
20,969 | 27,290 | 33,517 | (b) | 14,021 | (a) | 1,506 | |||||||||||||
| Total stockholders’ equity |
244,453 | 219,388 | 183,790 | 167,103 | 154,812 | |||||||||||||||
| (a) | The increase in long term liabilities at June 30, 2010 is primarily due to a term loan used to partially fund the acquisition of C2C and Evocomm in March 2010. |
| (b) | The increase in long term liabilities at June 30, 2011 is primarily due to a term loan used to partially fund the acquisition of ComSource in April 2011. |
| (c) | Amount includes an earn-out fair value gain of $11.9 million in the year ended June 30, 2012 and an earn-our fair value expense of $4.8 million in the year ended June 30, 2011 related to the accrual for acquisition earn-out payments. |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion of our financial condition and results of operations with the consolidated financial statements and related notes and the risks and other factors described in the “Risk Factors” sections included elsewhere in this Annual Report. See also the “Cautionary Note Regarding Forward Looking Statements” above.
Overview
Our business is global and subject to technological and business trends in the telecommunications marketplace. We derive much of our revenue from the government marketplace and developing countries. Our business is therefore affected by geopolitical developments involving areas of the world in which our customers are located, particularly in developing countries and areas of the world involved in armed conflicts, which directly impacts our military-related business. Our business may also be affected by the government’s budgetary issues and its recent efforts to reduce the national deficit and defense spending, which may have a significant effect on our results of operations.
32
The services and products we offer include: managed networks, application services, professional services and lifecycle support services, pre-engineered and systems design and integration products. 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 government entities, our 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 revenues are derived from, and are expected to continue to be derived from, developing countries. These countries carry with them more enhanced risks of doing business than in developed areas of the world, including the possibility of armed conflicts or the risk that more advanced land-based telecommunications will be implemented over time, and less developed legal protection for intellectual property.
During the past several years many businesses including ours, have faced uncertain economic environments. If the long-term growth in demand for communications networks does not increase from recent depressed levels, the demand for our infrastructure solutions may continue to decline or grow more slowly than we expect. 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, many companies have found it difficult to raise capital to finish building their communications networks and, therefore, have placed fewer orders. Our infrastructure solutions segment in particular was impacted by this decreased demand and capital spending by our customers, and we have continued to incur operating losses in this segment over the past several years. We cannot predict the extent to which demand will increase, nor the timing of such demand. The growth and profitability 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.
In the year ended June 30, 2013, 13% and 10% of our revenues were derived from services rendered to Inmarsat Government and US Army CECOM, respectively. We have performed work as a subcontractor to Inmarsat Government since February 2012 for services for the U.S. Government. This subcontract is expected to be material to our results of operations and has provided profit margin significantly above our norm. In addition, a significant portion of the revenue with US Army CECOM is derived from Contract A. 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 our services to these customers are located in developing countries or otherwise subject to unusual risks.
In a majority of cases, revenues related to contracts for infrastructure solutions and services have been fixed-price contracts. The profitability of such contracts is subject to inherent uncertainties as to the cost of performance. Cost overruns may be incurred as a result of unforeseen obstacles, including both physical conditions and unexpected problems encountered in engineering design and testing. Since our business is frequently concentrated in a limited number of large contracts, a significant cost overrun on any single contract could have a material adverse effect on our business, financial condition and results of operations. In the years ended June 30, 2013, June 30, 2012 and June 30, 2011, we recorded $2.5 million, $1.5 million and $2.1 million, respectively, for additional costs incurred on a fixed-price contract in the infrastructure segment (“Contract B”). In addition, in the year ended June 30, 2013, we recorded $0.8 million for additional costs incurred on another fixed-price contract. The additional costs in each case were due in large part to unexpected difficulties resulting in substantial costs associated with engineering and production issues. The revenues expected to be recognized in fiscal year 2014 associated with both loss programs will have no profit margin associated with them, which will negatively impact our gross margin percentages in fiscal 2014 as milestones are reached, as they have negatively impacted our gross margin percentages in the fiscal years ended June 30, 2013 and June 30, 2012.
33
Contract costs generally include purchased material, direct labor, overhead and other direct costs. Anticipated contract losses are recognized, as they become known. Costs from infrastructure solutions consist primarily of the costs of purchased materials (including shipping and handling costs), direct labor and related overhead expenses, project-related travel and living costs and subcontractor costs. Costs from services consist primarily of satellite space segment charges, voice termination costs, network operations expenses and Internet connectivity fees. Satellite space segment charges consist of the costs associated with obtaining satellite bandwidth (the measure of capacity) used in the transmission of services to and from the satellites leased from operators. Network operations expenses consist primarily of costs associated with the operation of the network operations center on a twenty-four hour a day, seven-day a week basis, including personnel and related costs and depreciation. Selling and marketing expenses consist primarily of salaries, travel and living costs for sales and marketing personnel. Research and development expenses consist primarily of salaries and related overhead expenses. General and administrative expenses consist of expenses associated with our management, finance, contract and administrative functions, as well as amortization of intangible assets.
Critical Accounting Policies
Certain of our accounting policies require judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate. Actual results may differ from these judgments under different assumptions or conditions. Our accounting policies that require management to apply significant judgment include:
Revenue Recognition—Infrastructure Solutions
We recognize revenue for our production-type contracts that are sold separately as standard satellite ground segment systems when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, collectability is reasonably assured, delivery has occurred and the contractual performance specifications have been met. Our standard satellite ground segment systems produced in connection with these contracts are typically short-term (less than twelve months in term) and manufactured using a standard modular production process. Such systems require less engineering, drafting and design efforts than our long-term complex production-type projects. Revenue is recognized on our standard satellite ground segment systems upon shipment and acceptance of factory performance testing which is when title transfers to the customer. The amount of revenues recorded on each standard production-type contract is reduced by the customer’s contractual holdback amount, which typically requires 10% to 30% of the contract value to be retained by the customer until installation and final acceptance is complete. The customer generally becomes obligated to pay 70% to 90% of the contract value upon shipment and acceptance of factory performance testing. Installation is not deemed to be essential to the functionality of the system since installation does not require significant changes to the features or capabilities of the equipment, does not require complex software integration and interfacing and we have not experienced any difficulties installing such equipment. In addition, the customer or other third party vendors can install the equipment. The estimated value of the installation services is determined by management, which is typically less than the customer’s contractual holdback percentage. If the holdback is less than the 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 customer’s satellite ground segment network. The equipment and systems produced in connection with these contracts are typically long-term (in excess of twelve months in term) and require significant customer-specific engineering, drafting and design effort in order to effectively integrate all of the
34
customizable earth station equipment into the customer’s ground segment network. These contracts generally have larger contract values, greater economic risks and substantive specific contractual performance requirements due to the engineering and design complexity of such systems and related equipment. Progress payments received in advance by customers are netted against the inventories balance.
The timing of our revenue recognition is primarily driven by achieving shipment, final acceptance or other contractual milestones. Project risks including project complexity, political and economic instability in certain regions in which we operate, export restrictions, tariffs, licenses and other trade barriers which may result in the delay of the achievement of revenue milestones. A delay in achieving a revenue milestone may negatively impact our results of operations.
We enter into multiple-element arrangements with our customers including hardware, engineering solutions, professional services and maintenance services. For arrangements involving multiple deliverables, we evaluate and separate each deliverable to determine whether it represents a separate unit of accounting based on whether the delivered item has value to the customer on a stand-alone basis. Consideration is allocated to each deliverable based on the item’s relative selling price. We use a hierarchy to determine the selling price to be used to allocate revenue to each deliverable as follows: (i) vendor-specific objective evidence of the selling price; (ii) third party evidence of selling price; and (iii) best estimate of selling price.
Costs from Infrastructure Solutions
Costs related to our production-type contracts and our non-standard, complex production-type contracts rely on estimates based on total expected contract costs. Typically, these contracts are fixed price projects. We use estimates of the costs applicable to various elements which we believe are reasonable. Our estimates are assessed continually during the term of these contracts and costs are subject to revisions as the contract progresses to completion. These estimates are subjective based on management’s assessment of project risk. These risks may include project complexity and political and economic instability in certain regions in which we operate. Revisions in cost estimates are reflected in the period in which they become known. A significant revision in an estimate may negatively impact our results of operations. In the event an estimate indicates that a loss will be incurred at completion, we record the loss as it becomes known.
Goodwill
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 is tested for impairment at least annually. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit (calculated using a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment charge. The impairment test is dependent upon estimated future cash flows of the services segment. There have been no events during the year ended June 30, 2013 that would indicate that the goodwill was impaired.
Long-Lived Assets
For other than goodwill, when impairment indicators are present, we review the carrying value of the assets in determining the ultimate recoverability of their unamortized values using future undiscounted cash flows expected to be generated by the assets. If such assets are considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds
35
the future discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. No impairment was noted on the long-lived assets at June 30, 2013 and 2012.
We evaluate the periods of amortization in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized cost will be allocated to the increased or decreased number of remaining periods in the revised lives.
Deferred tax assets
We regularly estimate our ability to recover deferred income taxes, report such deferred tax assets at the amount that is determined to be more-likely-than-not recoverable, and we have to estimate our income taxes in each of the taxing jurisdictions in which we operate. This process involves estimating our current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing revenue and expenses for tax and accounting purposes. These differences may result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.
We are required to assess the likelihood that our deferred tax assets, which include net operating loss carry forwards and temporary differences that are expected to be deductible in future years, will be recoverable from future taxable income or other tax planning strategies. If recovery is not likely, we have to provide a valuation allowance based on our estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods, the effect of temporary differences, the expected reversal of deferred tax liabilities and available tax planning strategies.
At June 30, 2013 and June 30, 2012, we had a liability for unrecognized tax benefits of approximately $1,621,000 and $1,475,000, respectively, which if recognized in the future, would favorably impact our effective tax rate.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the appropriate vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options, and the expected volatility of our stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on our consolidated financial statements.
As of June 30, 2013 there was approximately $5,399,000 of unrecognized compensation cost related to non-vested stock-based compensation related to the restricted shares and restricted share units. The cost is expected to be recognized over a weighted-average period of 1.9 years. As of June 30, 2013 there was approximately $66,000 of unrecognized compensation cost related to non-vested outstanding stock options. The cost is expected to be recognized over a weighted-average period of 1.7 years.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We assess the customer’s ability to pay based on a number of factors, including our past transaction history with the customer and the creditworthiness of the customer. An assessment of the inherent risks in conducting our business with foreign customers is also made since a significant portion of our revenues is international. Management specifically analyzes accounts receivable, historical bad debts, customer concentrations, customer creditworthiness and
36
current economic trends. If the financial condition of our customers were to deteriorate in the future, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories consist primarily of work-in-progress from costs incurred in connection with specific customer contracts, which are stated at the lower of cost or market value. In assessing the realizability of inventories, we are required to make estimates of the total contract costs based on the various elements of the work-in-progress. It is possible that changes to these estimates could cause a reduction in the net realizable value of our inventories.
Recent Accounting Pronouncements
In September 2011, the FASB issued amended guidance intended to simplify how entities test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance did not have an impact on our consolidated financial condition or results of operations.
In June 2011, the FASB issued amended guidance that revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). The ASU does not change the items that must be reported in OCI. For public entities, the ASU’s amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have an impact on our consolidated financial condition or results of operations.
In July 2012, the FASB issued guidance that allows an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is not more likely than not that the indefinite-lived intangible asset is impaired. An entity no longer will be required to perform the quantitative impairment test of indefinite-lived intangible assets if, after it assesses that the totality of events and circumstances, the entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this is pronouncement will not have a material impact on our consolidated financial condition or results of operations.
In February 2013, the FASB issued guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This guidance is effective for periods beginning after December 15, 2012. The adoption of this is pronouncement will not have a material impact on our consolidated financial condition or results of operations.
37
Results of Operations
Fiscal Years Ended June 30, 2013 and 2012
Revenues from Services. Revenues from services decreased by $21.9 million, or 9.9%, to $199.1 million for the fiscal year ended June 30, 2013 from $220.9 million for the fiscal year ended June 30, 2012. The decrease in revenues was primarily due to a non-recurring significant equipment sale of $12.8 million at ComSource in the fiscal year ended June 30, 2012 along with a decrease in our Access service offering primarily in the government marketplace due to reduction in services in Iraq and Afghanistan. We expect to continue to experience declines due to withdrawal of troops in Iraq and Afghanistan.
Revenues from Infrastructure Solutions. Revenues from infrastructure solutions decreased by $40.4 million, or 25.1%, to $120.5 million for the fiscal year ended June 30, 2013 from $161.0 million for the fiscal year ended June 30, 2012. The decrease in revenues was primarily driven by the achievement of revenue milestones under Contract A which was complete as of January 2013. Due to the current global economic conditions it is difficult to currently assess future revenue levels or gross margin in our infrastructure segment.
Costs from Services. Costs from services decreased by $19.7 million, or 13.0%, to $132.6 million for the fiscal year ended June 30, 2013 from $152.3 million for the fiscal year ended June 30, 2012. Gross margin for services increased to 33.4% for the fiscal year ended June 30, 2013 compared to 31.1% for the fiscal year ended June 30, 2012. The increase in the gross margin was primarily driven by a non-recurring significant equipment sale with lower margin at ComSource in the year ended June 30, 2012. 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 $32.3 million, or 22.6%, to $110.5 million for the fiscal year ended June 30, 2013 from $142.8 million for the fiscal year ended June 30, 2012. The gross margin from infrastructure solutions decreased to 8.3% for the fiscal year ended June 30, 2013 compared to 11.3% for the fiscal year ended June 30, 2012. The decrease in gross margin percentage was primarily due to $2.5 million of additional costs incurred on fixed price contracts primarily due to Contract B. The Company expects the margin to remain at the more recent lower levels in fiscal 2014 as milestones are reached under Contract B, which carries no margin.
Selling and Marketing. Selling and marketing expenses decreased by $1.7 million, or 8.7%, to $17.9 million for the fiscal year ended June 30, 2013 from $19.6 million for the fiscal year ended June 30, 2012. The decrease was a result of cost cutting initiatives.
Research and Development. Research and development expenses decreased by $1.9 million, or 31.1%, to $4.3 million for the fiscal year ended June 30, 2013 from $6.3 million for the fiscal year ended June 30, 2012. The decrease was principally due to higher than normal costs in the year ended June 30, 2012 associated with certain development programs such as the Tempo Enterprise Media Platform and infrastructure program related development that has been completed.
General and Administrative. General and administrative expenses decreased by $2.6 million, or 7.7%, to $31.8 million for the fiscal year ended June 30, 2013 from $34.4 million for the fiscal year ended June 30, 2012. The decrease was a result of a decrease in bad debt expense of $0.9 million primarily due to a recovery of $0.6 million in December 2012, a decrease in amortization of intangibles of approximately $0.7 million and a decrease in accruals for our management incentive plan and other cost cutting initiatives.
Earn-out Fair Value Adjustments. The gain in the year ended June 30, 2012 was due to the unforeseen loss of funding on a ComSource program in September 2011 and reduction in the forecasted results due to delays in funding of new programs in the year ended June 30, 2012. The earn-out period has concluded and there was no liability accrued as of June 30, 2013.
38
Interest Income. Interest income increased by $0.1 million, or 34.6%, primarily as a result of an increase in the cash balance during the year.
Interest Expense. Interest expense decreased by $0.2 million, or 31.4% as a result of the decrease in outstanding debt resulting from the monthly repayments.
Provision for Income Taxes. The provision for income taxes decreased by $2.2 million, or 23.5%, to $7.3 million for the fiscal year ended June 30, 2013 compared to $9.5 million for the fiscal year ended June 30, 2012. The provision for income taxes decreased as a result of the decrease in income before income taxes (excluding earn-out fair value adjustments). The effective rate was 32% for the fiscal year ended June 30, 2013 compared to 25% for the fiscal year ended June 30, 2012. The effective rate was lower in fiscal 2012 due to the earn-out fair value gain in fiscal 2012 which is not included in taxable income. Fiscal year ended June 30, 2013 included a reduction in tax expense and taxes payable for the tax impact of foreign income exclusion related to fiscal years 2001 thru 2009 of approximately $0.5 million reducing the effective rate by approximately 2%.
Fiscal Years Ended June 30, 2012 and 2011
Our consolidated results of operations for the year ended June 30, 2012 included the results of ComSource. This acquisition took place on April 8, 2011 and was not included in the corresponding period in fiscal 2011, except for the three months subsequent to the acquisition date.
Revenues from Services. Revenues from services increased by $32.2 million, or 17.1%, to $220.9 million for the fiscal year ended June 30, 2012 from $188.7 million for the fiscal year ended June 30, 2011. The increase in revenues included an increase of $27.6 million of revenue from ComSource in the year ended June 30, 2012 along with an increase in our Access service offering primarily in the government marketplace.
Revenues from Infrastructure Solutions. Revenues from infrastructure solutions increased by $75.5 million, or 88.3%, to $161.0 million for the fiscal year ended June 30, 2012 from $85.5 million for the fiscal year ended June 30, 2011. The increase in revenues was primarily driven by the achievement of revenue milestones under Contract A, a program with lower than normal margin, due primarily to the competitive climate. Due to the current global economic conditions it is difficult to currently assess future revenue levels or gross margin in our infrastructure segment.
Costs from Services. Costs from services increased by $21.0 million, or 16.0%, to $152.3 million for the fiscal year ended June 30, 2012 from $131.3 million for the fiscal year ended June 30, 2011. Gross margin for services increased to 31.1% for the fiscal year ended June 30, 2012 compared to 30.4% for the fiscal year ended June 30, 2011.
Costs from Infrastructure Solutions. Costs from infrastructure solutions increased by $72.4 million, or 102.8%, to $142.8 million for the fiscal year ended June 30, 2012 from $70.4 million for the fiscal year ended June 30, 2011. The gross margin from infrastructure solutions decreased to 11.3% for the fiscal year ended June 30, 2012 compared to 17.6% for the fiscal year ended June 30, 2011. The decrease in gross margin was mainly attributable to significant revenue from Contract A, which has lower than normal margin. The Company expects a significant amount of revenues under Contract A with lower than normal margins, due primarily to the competitive climate, to be shipped in the next fiscal year.
Selling and Marketing. Selling and marketing expenses increased by $1.6 million, or 8.7%, to $19.6 million for the fiscal year ended June 30, 2012 from $18.0 million for the fiscal year ended June 30, 2011. The increase was a result of increased proposal activity and marketing efforts in infrastructure, an increase in head count, and an increase in marketing expenses of $0.4 million by ComSource.
Research and Development. Research and development expenses increased by $1.9 million, or 45.2%, to $6.3 million for the fiscal year ended June 30, 2012 from $4.3 million for the fiscal year ended June 30, 2011. The increase was principally due to costs associated with certain development programs
39
such as the Tempo Enterprise Media Platform, auto explorer enhancements, developing an offering in managed location-based services for worldwide maritime asset tracking, and infrastructure program related development.
General and Administrative. General and administrative expenses increased by $4.4 million, or 14.6%, to $34.4 million for the fiscal year ended June 30, 2012 from $30.0 million for the fiscal year ended June 30, 2011. The increase was a result of a $3.8 million increase in general and administrative expenses incurred at ComSource (inclusive of an increase of $1.2 million of amortization of intangibles related to this acquisition), along with an increase in headcount and an increase in the Company’s pay for performance plan.
Earn-out Fair Value Adjustments. The gain in the year ended June 30, 2012 was due to the unforeseen loss of funding on a ComSource program in September 2011 and reduction in the forecasted results due to delays in funding of new programs in the year ended June 30, 2012. The expense in the year end June 30, 2011 includes additional expense recorded due to C2C and Evocomm performing better than our original forecasts along with a settlement reached for the second twelve month earn-out period due to the improved performance.
Interest Income. Interest income increased by $0.1 million, or 32.3%, as a result of an increase in the cash balance during the year.
Interest Expense. Interest expense increased by $0.2 million, or 40.0%, as a result of the issuance of debt on April 8, 2011 related to the acquisition of ComSource.
Provision for income taxes. The provision for income taxes increased by $3.4 million, or 57.0%, to $9.5 million for the fiscal year ended June 30, 2012 compared to $6.0 million for the fiscal year ended June 30, 2011. The provision for income taxes increased as a result of the increase in income before income taxes (excluding earn-out fair value adjustments). The effective rate was 25% for the fiscal year ended June 30, 2012 compared to 40% for the fiscal year ended June 30, 2011. The effective rate was lower in fiscal 2012 and higher in fiscal 2011 due to the earn-out fair value gain in fiscal 2012 and expense in fiscal 2011 which are not included or deducted from taxable income, respectively.
Liquidity and Capital Resources
At June 30, 2013, we had working capital of $128.3 million, including cash and cash equivalents of $87.3 million, net accounts receivable of $58.4 million, inventories of $17.1 million, prepaid expenses and other current assets of $4.1 million, and deferred income taxes of $4.3 million, offset by $21.9 million in accounts payable, $4.3 million in deferred revenues, $3.3 million in accrued payroll and related fringe benefits, $7.2 million in accrued expenses, and $6.1 million in current portion of long term debt.
At June 30, 2012, we had working capital of $109.8 million, including cash and cash equivalents of $72.2 million, net accounts receivable of $59.2 million, inventories of $30.7 million, prepaid expenses and other current assets of $4.1 million and deferred income taxes of $7.0 million, offset by $34.0 million in accounts payable, $4.6 million in deferred revenues, $6.7 million in accrued payroll and related fringe benefits, $11.9 million in accrued expenses and $6.1 million in current portion of long term debt.
Net cash provided by operating activities during the fiscal year ended June 30, 2013 was $35.9 million, which primarily related to net income of $15.2 million, a decrease in inventory of $13.5 million due to the timing of shipments and milestones reached on certain jobs primarily related to milestones on Contract B, a non-cash item representing depreciation and amortization expense of $12.1 million primarily due to depreciation expense related to the hosted mobile core switch assets, satellite earth station equipment, Tempo Enterprise Media Platform assets and the network operations center, and amortization expense related to acquisitions, non-cash stock compensation expense of $3.9 million, tax benefit from stock compensation plan of $3.8 million, a decrease in deferred income taxes of $3.1 million primarily due to net income generated in the period, partially offset by a decrease in
40
accounts payable of $12.3 million due to the timing of inventory purchases and payments to vendors, and a decrease in accrued payroll and related fringe benefits of $3.5 million due to a decrease in the accrual for our management incentive plan and the discretionary 401(k) matching contribution.
Net cash provided by operating activities during the fiscal year ended June 30, 2012 was $48.2 million, which primarily related to net income of $28.6 million, a non-cash item representing depreciation and amortization expense of $12.6 million primarily due to depreciation expense related to the network operations center, satellite earth station equipment and hosted mobile core switch asset and amortization expense related to acquisitions, a decrease in inventory of $11.5 million due to the timing of shipments on certain jobs, a decrease in deferred income taxes of $5.2 million primarily due to net income generated in the period, an increase in accounts payable of $4.4 million relating to the increase in revenue and timing of vendor payments, non-cash stock compensation expense of $3.5 million, tax benefit from stock compensation plan of $3.6 million, partially offset by earn-out fair value adjustments of $11.9 million due to the unforeseen loss of funding on a program in September 2011 and reduction in the forecasted results due to delays in funding of new programs related to the ComSource earn-out, a decrease in deferred revenue of $8.9 million due to timing differences between project billings and revenue recognition milestones resulting from specific customer contracts and an increase in accounts receivable of $2.8 million due to the timing of billings and collections from customers.
Net cash used in investing activities during the fiscal year ended June 30, 2013 was $16.5 million, which included $11.8 million of purchases of Tempo Enterprise Media Platform assets, the implementation of an enterprise resource planning software system, hosted mobile core switch assets, teleport assets and the network operations center, and the payment for the ComSource earn-out of $4.7 million.
Net cash used in investing activities during the fiscal year ended June 30, 2012 was $19.3 million, which included $14.8 million of purchases of teleport assets and network operations center assets, the implementation of an enterprise resource planning software system and $4.5 million for the final payment for the C2C and Evocomm earn-out.
Net cash used in financing activities during the fiscal year ended June 30, 2013 was $4.2 million, which primarily related to repayment of long term debt of $6.1 million partially offset by $1.3 million of proceeds from the exercise of warrants and $0.6 million of proceeds from the exercise of stock options.
Net cash used in financing activities during the fiscal year ended June 30, 2012 was $4.7 million, which primarily related to repayment of long term debt of $6.1 million partially offset by $1.3 million of proceeds from the exercise of stock options and $0.1 million of proceeds from the exercise of warrants.
On July 18, 2011, we entered into a secured credit facility with Citibank N.A. which expires October 31, 2014. The credit facility is comprised of a $72.5 million line of credit (the “Line”) which includes the following sublimits: (a) $30 million available for standby letters of credit; (b) $10 million available for commercial letters of credit; (c) a line for term loans, each having a term of no more than five years, in the aggregate amount of up to $50 million that can be used for acquisitions; and (d) $15 million available for revolving credit borrowings. We are required to pay a commitment fee on the average daily unused portion of the total commitment based on our consolidated leverage ratio (currently 25 basis points per annum) payable quarterly in arrears.
At our discretion, advances under the Line bear interest at the prime rate or LIBOR plus applicable margin based on our leverage ratio and are collateralized by a first priority security interest on all of our personal property. At June 30, 2013, the applicable margin on the LIBOR rate was 200 basis points. We are required to comply with various ongoing financial covenants, including with respect to our leverage ratio, minimum cash balance, fixed charge coverage ratio and EBITDA minimums, with which we were in compliance at June 30, 2013. As of June 30, 2013, $14.6 million was outstanding under acquisition loans, of which $6.1 million was due within one year. In addition, there were standby letters of credit of approximately $8.1 million, which were applied against and reduced the amounts available under the credit facility as of June 30, 2013.
41
We lease satellite space segment services and other equipment and office space under various operating lease agreements, which expire in various years through fiscal 2022. Future minimum lease payments due on these leases through June 30, 2014 are approximately $19.0 million.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Contractual Obligations and Commercial Commitments
At June 30, 2013, we had contractual obligations and commercial commitments as follows (in thousands):
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations |
Total | Less than 1 year |
1-3 years | 4-5 years | More than 5 years |
|||||||||||||||
| Operating leases |
$ | 29,640 | $ | 18,999 | $ | 9,208 | $ | 1,417 | $ | 16 | ||||||||||
| Long-term debt |
14,575 | 6,100 | 8,475 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total contractual obligations |
$ | 44,215 | $ | 25,099 | $ | 17,683 | $ | 1,417 | $ | 16 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 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 |
$ | 8,148 | $ | 7,600 | $ | 548 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total commercial commitments |
$ | 8,148 | $ | 7,600 | $ | 548 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Our tax liability for uncertain tax positions was approximately $1.6 million at June 30, 2013. Until formal resolutions are reached between us and the tax authorities, the timing and amount of possible audit settlements 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. Management anticipates additional working capital requirements for work in progress for orders as obtained and that we may periodically experience negative cash flows due to variances in quarter to quarter operating performance and if cash is used to fund any future acquisitions of complementary businesses, technologies and intellectual property. We will use existing working capital and, if required, use our credit facility to meet these additional working capital requirements.
Our future capital requirements will depend upon many factors, including the success of our marketing efforts in the services and infrastructure solutions business, the nature and timing of customer orders and the level of capital requirements related to the expansion of our service offerings. Based on current plans, we believe that our existing capital resources will be sufficient to meet working capital requirements at least through June 30, 2014. 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.
42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to a variety of risks, including foreign currency exchange rate fluctuations relating to certain purchases from foreign vendors. In the normal course of business, we assess these risks and have established policies and procedures to manage our exposure to fluctuations in foreign currency values.
Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates. Accordingly, we may utilize from time to time foreign currency forward contracts to hedge our exposure on firm commitments denominated in foreign currency.
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 $90,000 in the year ended June 30, 2013.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to the Consolidated Financial Statements listed in Item 15(a) of Part IV of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2013 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
Management’s Report on Internal Control Over Financial Reporting. Under Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d – 15(f) under the Exchange Act) as of the end of each fiscal year and to report, based on that assessment, whether the Company’s internal control over financial reporting is effective.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
The Company’s management has evaluated the effectiveness of the Company’s internal control over financial reporting as of June 30, 2013. In making this assessment, the Company’s management used the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (COSO) in “Internal Control-Integrated Framework.” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting.
43
Based on management’s processes and assessment, as described above, management has concluded that, as of June 30, 2013, the Company’s internal control over financial reporting was effective. Internal controls over financial reporting, no matter how well designed, have inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of June 30, 2013 has been audited by our independent auditors, as stated in their report, which appears in the “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting” on page F-2 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter (the fourth quarter in the case of the annual report) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
44
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Director Information
The name, age, business experience, director qualifications and certain other information regarding each of the nominees for director are set forth on the following pages.
| Director Nominee |
Age | Position with the Company |
Director Since |
|||||||
| David E. Hershberg |
76 | Chairman and Chief Executive Officer | 1994 | |||||||
| Keith A. Hall |
44 | President and Chief Operating Officer | 2009 | |||||||
| Richard E. Caruso |
67 | Director(1)(2)(3)(5) | 2000 | |||||||
| Harry L. Hutcherson, Jr. |
71 | Director(1)(4)(5) | 2003 | |||||||
| Brian T. Maloney |
59 | Director(1)(2)(3)(4)(5) | 2002 | |||||||
| Jack A. Shaw |
74 | Director(2)(3)(4)(5) | 2004 | |||||||
| A. Robert Towbin |
78 | Director(5) | 1997 | |||||||
| C. J. Waylan |
72 | Director(1)(2)(3)(4)(5) | 1997 | |||||||
| (1) | Member of Audit Committee. |
| (2) | Member of Compensation Committee. |
| (3) | Member of Nominating and Corporate Governance Committee. |
| (4) | Member of Strategy Committee. |
| (5) | The Board of Directors has determined, based on written inquiries, that these directors are independent as defined in Section 5605(a)(2) of the NASDAQ Stock Market Rules. |
David E. Hershberg founded the Company in 1994 and has been its Chief Executive Officer and Chairman of the Board of Directors since its inception. In addition, Mr. Hershberg was President of the Company from September 2008 to June 2009. From 1976 to 1994, Mr. Hershberg was the President of Satellite Transmission Systems, Inc. (“STS”), a provider of satellite ground segment systems and networks, which he founded and which became a subsidiary of California Microwave, Inc. (“CMI”), and is currently part of Narda Satellite Networks, a subsidiary of L3 Communications Corporation. From 1990 to 1994, Mr. Hershberg also served as Group President of the Satellite Communications Group of CMI, where he also had responsibility for EFData, Inc., a manufacturer of satellite communications modems, and for Viasat Technology Corp., a manufacturer of communications systems that specialized in portable and mobile satellite communications equipment. Mr. Hershberg was a director of Primus Telecommunications Group, Inc. (“Primus”) from 1995 to 2009. Mr. Hershberg holds a B.S. in Electrical Engineering from Rensselaer Polytechnic Institute, an M.S. in Electrical Engineering from Columbia University and an M.S. in Management Science from Stevens Institute of Technology.
Mr. Hershberg brings to the Board of Directors over 50 years of experience in the satellite communications industry. As the founder of the Company, he adds in-depth knowledge, strong leadership capabilities, strategic planning and mergers and acquisitions experience, an understanding of a broad range of technologies and operating expertise. He has founded or was responsible for several satellite communication companies becoming successful. During his 18 years as President and Chief Executive Officer of STS, the company became the global leader and premier company in the field of satellite communications ground station systems. Mr. Hershberg’s prior experience on the Primus board of directors provides the Company with in-depth knowledge on proper board oversight, including valuable perspectives and insights from his prior service on the Primus compensation committee. As an industry pioneer, he serves on numerous industry panels and speaks at many satellite communication conferences.
Keith A. Hall has been President and Chief Operating Officer and a director of the Company since July 2009. From June 2008 to June 2009, Mr. Hall served as Senior Vice President and General Manager
45
of Globecomm Network Services and from 2003 to June 2008, he served as Vice President and General Manager of Globecomm Network Services Corporation. Mr. Hall served as Senior Director of Project Management of Globecomm Network Services Corporation from 2000 to 2003. From 1996 to 1999, Mr. Hall was employed by Globecomm Systems as a Senior Project Engineer. From 1992 to 1996, Mr. Hall was employed by STS as a Systems Engineer. Mr. Hall holds a B.S.E.E. from Auburn University and an M.B.A. from Dowling College.
As President and Chief Operating Officer of the Company, Mr. Hall brings to the Board of Directors business leadership, strategic planning and acquisition and operating experience. With over 20 years of knowledge of the satellite communications industry and his prior role serving as the Company’s Senior Vice President and General Manager of the Company’s Network Services, he has extensive experience in growing the services portion of the Company’s business.
Richard E. Caruso has been a senior executive in the telecommunications and consulting industries. Since 2010 he has been at GlobalLogic, a research and development services company. He is currently the General Manager of the Communications Business Unit of GlobalLogic. During 2008, Mr. Caruso served as Managing Director, Communications Industry of Tata Consulting Services, an information technology consulting and outsourcing company. From 2004 to 2007, Mr. Caruso was Managing Director, Technology, Communications & Media Industries of BearingPoint, Inc., a provider of business consulting, systems integration and managed services. From 2001 to 2003, Mr. Caruso was a Senior Partner at TechLeaders Consulting, LLC, an information technology consulting company. From 1999 to 2001, Mr. Caruso served as President of Hosting Solutions and Storage Networking at Nortel Networks Corporation, a global supplier of networking solutions and services. From 1994 to 1999, Mr. Caruso served as Vice President and General Manager of Global Solutions for IBM’s Communications Sector. From 1983 to 1994, Mr. Caruso held various senior executive positions with Bellcore/Telcordia, including Corporate Vice President of Technology and Industry Markets. From 1969 to 1983, Mr. Caruso held various positions at AT&T Bell Labs, most recently Executive Director of the Network Provisioning Systems Lab. Mr. Caruso holds a B.S. in Industrial Engineering from Rutgers University and an M.S. in Industrial Engineering from the New Jersey Institute of Technology.
Mr. Caruso’s current role at GlobalLogic brings to the Board of Directors business leadership, strategic planning and a market perspective. His past experience at IBM, along with other senior management positions previously held at Bellcore/Telcordia and Nortel Networks, have given him extensive experience in the communications and information technology industries. This technology experience contributes to the Board of Directors’ understanding of the impact of changing technology on the Company’s business. Mr. Caruso also provides a global business perspective, based on his leadership at IBM. He currently serves as a member of the Company’s Audit and Nominating and Corporate Governance Committees and is the Chairperson of the Company’s Compensation Committee.
Harry L. Hutcherson, Jr. has been affiliated with Navigant Consulting, Inc. (formerly, Peterson Consulting) as an independent contract consultant providing financial analytical and business consulting on various large projects since 1992. From 1977 through 1992, Mr. Hutcherson was an audit partner of Arthur Andersen LLP. Mr. Hutcherson is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants, the Greater Washington Society of Certified Public Accountants and the Virginia State Society of Certified Public Accountants. Mr. Hutcherson holds a B.S. in Accounting from the University of Richmond.
Mr. Hutcherson brings financial expertise to the Board of Directors as a former senior partner at a major international accounting firm. With his financial analytical and business consulting experience, he also brings significant management expertise to the Board of Directors. Mr. Hutcherson was nominated to serve as a director on the Company’s Board of Directors due to his extensive experience in business, finance, accounting and auditing, SEC reporting, public company management and mergers and acquisitions. Additionally, he provides the Board of Directors with consulting on risk management and fraud controls. He currently serves as the Chairperson and financial expert of the Company’s Audit Committee, and is a member of the Company’s Strategy Committee.
46
Brian T. Maloney is currently an independent consultant in the technology and telecommunications industries. Mr. Maloney served as Chief Executive Officer of Ygomi LLC, a private equity firm, from October 2008 through October 2009. From May 2006 to January 2008, Mr. Maloney was President of Global Industries at Unisys Corporation, a worldwide information technology consulting services and solutions company. Prior to joining Unisys Corporation, Mr. Maloney was an independent consultant in the telecommunications industry from January 2005 to April 2006. From 2002 to September 2004, Mr. Maloney served as Chief Operating Officer for Perot Systems Corporation. From 1978 to 2002, Mr. Maloney held various positions with AT&T, most recently as Senior Vice President of AT&T, and as President and Chief Executive Officer of AT&T Solutions. Mr. Maloney received a B.S. in English from Hunter College and an M.A. in English from Columbia University.
As a former president and chief executive officer of AT&T Solutions, Mr. Maloney brings to the Board of Directors business leadership, strategic planning, human resources and operating experience from a large diversified company. Based on his past experiences at AT&T Solutions and as an independent consultant in the technology and telecommunications sector, he has extensive experience in the communications industry. Mr. Maloney also provides a global business perspective, based on his leadership role in global business operations at Unisys Corporation. Mr. Maloney’s recent role at a private equity firm provides the Board of Directors with capital markets, mergers and acquisitions and corporate finance expertise. He currently serves as a member of the Company’s Audit, Compensation and Strategy Committees and is Chairperson of the Company’s Nominating and Corporate Governance Committee.
Jack A. Shaw is currently retired. He held various positions at Hughes Electronics Corporation (“Hughes”) from 1998 to December 2003, most recently as its President and Chief Executive Officer and as a member of its board of directors. From 1998 to 2001, Mr. Shaw served as Senior Executive Vice President of Hughes. Mr. Shaw is currently a director of Sirius XM Radio Inc. (“Sirius XM”) and is a senior member of the Institute of Electrical and Electronics Engineers. He is also on the Board of Trustees of Trine University. Mr. Shaw holds a B.S. in Electrical Engineering from Purdue University.
As a former president and chief executive officer of Hughes, Mr. Shaw brings to the Board of Directors business leadership and strategic planning, mergers and acquisitions and international operating experience. With his past experience at Hughes, and as a current director of Sirius XM, a large satellite radio company and a publicly-traded company, he has extensive experience in the satellite communications industry. His current role on the Sirius XM board of directors provides the Company with in-depth knowledge on proper board oversight, as well as valuable perspectives and insights from his service on their nominating and corporate governance and compensation committees. He currently serves as a member of the Company’s Compensation, Nominating and Corporate Governance and Strategy Committees.
A. Robert Towbin has been the Executive Vice President of Stephens Inc. since 2006, prior to which he served as a managing Director from December 2001 to 2005. Mr. Towbin is a Director of Intertrust Technologies, a private company owned by Sony, Phillips and Stephens, Inc. From 2000 to 2001, he was Co-Chairman of C.E. Unterberg, Towbin Co. and from 1995 to 1999 was Senior Managing Director of C.E. Unterberg, Towbin. From 1994 to 1996, Mr. Towbin was President and Chief Executive Officer of the Russian-American Enterprise Fund, a U.S. government-owned investment fund, and later, Vice Chairman of its successor fund, the U.S. Russia Investment Fund. Mr. Towbin was a Managing Director of Lehman Brothers and Co-Head of High Technology Investment Banking from 1987 to 1994. From 1959 to 1987, Mr. Towbin was Vice Chairman and a Director of L.F. Rothschild, Unterberg, Towbin Holdings Inc. and its predecessor companies. Mr. Towbin served on the board of directors of the following public companies: Anken Chemical Corp., AVX Corporation, Bradley Real Estate, Convergent Technology, Empire Airlines, Gerber Scientific, Inc., Graphic Controls Corp., Kyocera, J. Rothschild Holdings, PLC, North Fork Bancorporation, Inc., Plessey, Inc. and Pulte Homes Corp. Mr. Towbin holds a B.A. from Dartmouth College.
With over 50 years of experience in investment banking, Mr. Towbin brings to the Board of Directors relevant experience in the areas of capital markets, finance, executive leadership and mergers
47
and acquisitions and broad international business exposure. Mr. Towbin’s prior experience on the board of directors of a number of other public companies provides the Company with in-depth knowledge on proper board oversight. With over 15 years of service, he also provides continuity to the Board of Directors.
C. J. Waylan is a retired executive from the telecommunication and satellite communications industries. Dr. Waylan served as Executive Vice President for GTE Mobilnet and President of GTE Spacenet Corporation (collectively, “GTE”) until his retirement in 1996. From 1996 to 1997, he was Executive Vice President of NextWave Telecom, Inc., a start-up provider of wireless communications and from 1997 to 2006, he was President and Chief Executive Officer of CCI International, NV, a mobile satellite communications company. Dr. Waylan was a member of the board of directors of Radyne Corporation (“Radyne”) from 2000 to 2008 and served as Chairman of the board for the last two years. He was also a director of CCI International, NV from 1997 to 2006. He holds a B.S. from the University of Kansas as well as an M.S. in Electrical Engineering and a Ph.D. from the Naval Postgraduate School.
Based on Dr. Waylan’s prior executive officer roles at GTE, he brings to the Board of Directors industry experience, business leadership, strategic planning, human resources and mergers and acquisitions and operating experience. As a former Chairman of the board of directors of Radyne, a publicly-traded company, Dr. Waylan brings to the Board of Directors relevant experience in the areas of operations, management, finance, executive leadership, strategic planning and corporate governance. He also brings to the Board of Directors valuable perspectives and insights from his prior service on Radyne’s corporate governance and nominating committee and compensation committee. With over 15 years of service, he also provides continuity to the Board of Directors. He currently serves as a member of the Company’s Audit, Compensation and Nominating and Corporate Governance Committees, and is the Chairperson of the Company’s Strategy Committee.
Audit Committee
The Audit Committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of the Company’s independent registered public accounting firm, the scope of the annual audits, the fees to be paid to the independent registered public accounting firm, the performance of the Company’s independent registered public accounting firm and the accounting practices of the Company. The Audit Committee also serves as the Board of Directors’ Qualified Legal Compliance Committee within the meaning of Section 307 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Board of Directors has determined that Mr. Hutcherson is qualified as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of the Securities and Exchange Commission (“SEC”) Regulation S-K. The Board of Directors has determined that Mr. Hutcherson is independent, as defined in Section 5605(a)(2) of the NASDAQ Stock Market Rules. The Audit Committee held five meetings during fiscal 2013.
Additionally, the Audit Committee reviews and approves all related party transactions required to be disclosed pursuant to the rules of the SEC. See “Compensation Discussion and Analysis—Approval of Related Party Transactions” below.
Executive Officers Who Are Not Directors
Following are the Company’s executive officers who are not directors:
Andrew C. Melfi, 60, has served as Senior Vice President since March 2009, as Treasurer since September 1997 and as Chief Financial Officer since joining the Company in January 1996. From September 1997 to February 2009, Mr. Melfi served as Vice President. From 1982 to 1995, he was the Controller of STS. Mr. Melfi holds an M.B.A. and a B.B.A. in Accounting from Dowling College.
Thomas C. Coyle, 63, has served as Senior Vice President and General Manager of Globecomm Systems since June 2008, and prior to that time, he served as Vice President and General Manager from
48
2003 to 2008. From 2001 to 2003, he served as Vice President of Managed Networks of Globecomm Systems and from 1999 to 2001, as Senior Director of Engineering of Globecomm Systems. From 1994 to 1998, he was Director of Systems Programs for STS. Prior to joining STS, he was employed by Norden Systems, a division of United Technologies Corp. from 1972 to 1993, where he held positions as a Radar Systems Design Engineer, Engineering Manager and Program Manager. Mr. Coyle holds a B.S.E.E. from Hofstra University.
Andrew Silberstein, 53, has served as Senior Vice President and General Manager of Globecomm Network Services since November 2010. From November 2009 to October 2010, he served as Vice President and General Manager of Globecomm Network Services. From March 2009 to November 2009, he served as Vice President, Hosted Services of Globecomm Network Services. He also served as Managing Director of the Asia Pacific Region for the Company from September 1995 to August 2000. From September 2000 to February 2009, he was employed by Schema Inc., a global provider of network optimization software solutions, where he served as President and Chief Operating Officer. From January 1986 to August 1995, he held various management positions at STS. Prior to joining STS, he held a position at Booz Allen & Hamilton, providing technical consulting services to commercial and government clients from August 1982 to December 1985. Mr. Silberstein holds B.S. in Electrical Engineering from Rutgers University, M.S. in Electrical Engineering from Johns Hopkins University, and an Executive M.B.A in Marketing and Finance from the Technion—Israel Institute of Technology.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s directors, certain officers and any persons holding more than ten percent of the Common Stock are required to report their ownership of the Common Stock and any changes in that ownership to the SEC and the NASDAQ MarketWatch Surveillance Department. Specific due dates for these reports have been established by the SEC, and the Company is required to report in this proxy statement any failure to file by these dates during the fiscal year ended June 30, 2013. Based solely upon a review of Forms 3, 4 and 5, and amendments thereto, furnished to the Company and written representations made by the Company’s officers and directors, the Company believes that during the fiscal year ended June 30, 2013, all filing requirements under Section 16(a) applicable to its officers, directors and persons holding more than ten percent of the Common Stock were complied with on a timely basis.
Directors’ Compensation
The compensation program for non-employee directors consists of cash retainers, committee fees, meeting fees and restricted stock awards.
From July 1, 2012 through June 30, 2013, those fees consisted of the following:
| • | Retainer per director for service on the Board of Directors: $40,000 per year (each director also receives a payment of $1,500 or $750 for each in-person or telephonic meeting, respectively, which is held in addition to the scheduled quarterly meetings of the Board of Directors); |
| • | Audit Committee member: $10,000 per year; |
| • | Audit Committee Chairperson: $18,000 per year; |
| • | Compensation Committee member: $4,000 per year; |
| • | Compensation Committee Chairperson: $6,000 per year; |
| • | Nominating and Corporate Governance Committee member: $3,000 per year; |
| • | Nominating and Corporate Governance Committee Chairperson: $6,000 per year; |
| • | Strategy Committee member: $3,000 per year; and |
| • | Strategy Committee Chairperson: $6,000 per year. |
49
Non-employee directors on the Nominating and Corporate Governance Committee, Strategy Committee and who attend independent directors meetings also receive a payment of $1,500 or $750 for each in-person or telephonic meeting, respectively, which is not held at the scheduled quarterly meetings of the Board of Directors.
These non-employee directors are also reimbursed for certain expenses incurred in connection with attendance at meetings of the Board of Directors. Directors who are also employees of the Company do not receive any compensation for their service as directors.
During fiscal 2013, Messrs. Caruso, Hutcherson, Maloney, Shaw and Towbin and Dr. Waylan were each granted 3,000 shares of restricted stock for their service on the Board of Directors under the Automatic Stock Issuance Program of the Company’s 2006 Plan under the September 20, 2012 amendment replacing the automatic stock option grants with automatic grants of restricted shares of the Company’s Common Stock. Each non-employee director is granted 9,000 restricted shares when the individual initially is appointed to the Board and 3,000 restricted shares when the individual is reelected to the Board. The restricted share grants to non-employee directors generally have the same terms as grants under the Stock Issuance Program. The grants will vest over three years, with one-third of the grant vesting on each of the next three annual stockholder meetings following the grant date.
As plan administrator of the 2006 Plan, the Compensation Committee may, in its discretion, grant stock from time to time to non-employee members of the Board of Directors under the stock issuance program of the 2006 Plan and grant options from time to time to non-employee members of the Board of Directors under the discretionary option grant program of the 2006 Plan. The basis for such grants is the Compensation Committee’s assessment of each director’s contributions to the Company over the course of the year, as well as the competitiveness of the Company’s overall director compensation compared to similar companies in the market.
Directors’ Compensation in Fiscal 2013
| Name of Director(a) |
Fees Earned or Paid in Cash(1) ($) (b) |
Option Awards ($) (c) |
Stock Awards(2) ($) (d) |
Total ($) (e) |
||||||||||||
| David E. Hershberg(3) |
— | — | — | — | ||||||||||||
| Keith A. Hall(3) |
— | — | — | — | ||||||||||||
| Richard E. Caruso |
68,750 | — | 31,650 | 100,400 | ||||||||||||
| Harry L. Hutcherson, Jr. |
71,500 | — | 31,650 | 103,150 | ||||||||||||
| Brian T. Maloney |
73,500 | — | 31,650 | 105,150 | ||||||||||||
| Jack A. Shaw |
59,750 | — | 31,650 | 91,400 | ||||||||||||
| A. Robert Towbin |
48,250 | — | 31,650 | 79,900 | ||||||||||||
| C. J. Waylan |
75,750 | — | 31,650 | 107,400 | ||||||||||||
| (1) | Reflects cash retainers, committee fees and meeting fees earned by non-employee directors for services provided during fiscal 2013. The director fees are paid on a quarterly basis. The table below shows a breakdown of the fees for fiscal 2013. |
| (2) | Reflects the aggregate grant date fair market value for each director’s grant of restricted stock in the fiscal year, determined in accordance with the Financial Accounting Standards Board ASC Topic 718. The stock awards are based on the closing price of the Company’s common stock of $10.55 on the Nasdaq Global Market on November 15, 2012 (the date on which the stock was awarded). The assumptions used in the valuation are discussed in Note 2 to our consolidated financial statements included in this annual report on Form 10-K for the year ended June 30, 2013. There were no option awards granted to non-employee directors during fiscal 2013. |
50
| (3) | Is an employee director and, therefore, does not receive compensation for service on the Board of Directors. |
The following table details the cash retainers, committee fees and meeting fees earned by non-employee directors for services provided during fiscal 2013:
| Name of Director |
Board
of Directors Fee(1) ($) |
Audit Committee Fee ($) |
Compensation Committee Fee ($) |
Nominating and Corporate Governance Fee(2) ($) |
Strategy Committee Fee(3) ($) |
Total ($) |
||||||||||||||||||
| Richard E. Caruso |
49,000 | 10,000 | 6,000 | 3,750 | — | 68,750 | ||||||||||||||||||
| Harry L. Hutcherson, Jr. |
49,000 | 18,000 | — | — | 4,500 | 71,500 | ||||||||||||||||||
| Brian T. Maloney |
48,250 | 10,000 | 4,000 | 6,750 | 4,500 | 73,500 | ||||||||||||||||||
| Jack A. Shaw |
48,250 | — | 4,000 | 3,750 | 3,750 | 59,750 | ||||||||||||||||||
| A. Robert Towbin |
48,250 | — | — | — | — | 48,250 | ||||||||||||||||||
| C. J. Waylan |
50,500 | 10,000 | 4,000 | 3,750 | 7,500 | 75,750 | ||||||||||||||||||
| (1) | There were ten telephonic meetings and one live meeting of the Board of Directors in addition to the regularly scheduled quarterly meetings of the Board of Directors, for which an additional $9,000 was paid to each director during fiscal 2013, with the exceptions of Mr. Maloney, who did not attend one telephonic meeting and was paid $750 less and Messrs. Shaw and Towbin who were paid $750 less as they attended the live meeting telephonically. There was also one special meeting in Washington, D.C. for which an additional $1,500 was paid to Dr. Waylan. |
| (2) | There was one additional meeting of the Nominating and Corporate Governance Committee, for which an additional $750 was paid to Messrs. Caruso, Maloney, Shaw and Dr. Waylan. |
| (3) | There were two additional meetings of the Strategy Committee, for which an additional $1,500 was paid to Messrs. Hutcherson, Maloney, and Dr. Waylan and $750 to Mr. Shaw who attended one meeting. |
The table below shows the aggregate number of stock options and restricted stock held by non-employee directors as of June 30, 2013:
| Name of Director |
Stock Options (in shares)(1) |
Restricted Stock (in shares)(2) |
||||||
| Richard E. Caruso |
5,000 | 3,467 | ||||||
| Harry L. Hutcherson, Jr. |
35,000 | 4,467 | ||||||
| Brian T. Maloney |
37,045 | 4,467 | ||||||
| Jack A. Shaw |
25,000 | 4,467 | ||||||
| A. Robert Towbin |
45,000 | 4,467 | ||||||
| C. J. Waylan |
35,000 | 4,467 | ||||||
| (1) | Until the 2011 annual meeting of stockholders, each of the non-employee directors was granted under our Automatic Option Grant Program of the 2006 Plan a fully vested option to purchase 5,000 shares of Common Stock of the Company on the date of each annual meeting of stockholders at which such director was re-elected to the Board of Directors. In lieu of the Automatic Option Grant Program of the 2006 Plan, the non-employee directors were granted 2,200 shares of restricted stock of the Company in fiscal 2012, of which 733 are vested. Upon implementation of the Automatic Stock Issuance Program of the 2006 Plan as amended September 20, 2012, the non-employee directors are granted 3,000 shares of restricted stock of the Company in lieu of the former Automatic Option Grant Program. |
| (2) | Each of the non-employee directors was granted 3,000 shares of restricted stock of the Company during fiscal 2010, all 3,000 of which are vested. In lieu of the Automatic Option Grant Program of the 2006 Plan, the non-employee directors were granted 2,200 shares of restricted stock of the |
51
| Company in fiscal 2012, of which 733 are vested. Upon implementation of the Automatic Stock Issuance Program of the 2006 Plan as amended September 20, 2012, the non-employee directors were granted 3,000 shares of restricted stock of the Company in fiscal 2013, none of which are vested. |
Director Equity Ownership Targets
On September 20, 2012, the Compensation Committee set a target (“Director Equity Target”) for equity ownership for the non-employee directors (“Outside Directors”). The Director Equity Target for each of the Outside Directors is $100,000 in value. At the first Compensation Committee meeting following each fiscal year end, the Committee will value all forms of equity held as of the date of the Compensation Committee meeting, whether or not vested (including options and restricted stock) and any automatic equity grant to be made to the director upon their reelection at the following annual meeting of the stockholders. The value of the Outside Directors’ holdings for the purposes of computing the Director Equity Target will equal the total number of shares held or deemed held times the average closing price of the common stock for the last six months of the preceding fiscal year. Each of the Outside Directors shall have five years to reach the Director Equity Target. As of the date of this report, the Compensation Committee has not met for purposes of computing the Director Equity Target; as of October 5, 2012 valuation date, all Outside Directors had holdings above their Director Equity Target.
During the succeeding fiscal year, any Outside Director not then meeting their Director Equity Target may not dispose of equity in the Company until they reaches his Director Equity Target. To the extent that the Outside Director holds or is deemed to hold shares valued in excess of his Director Equity Target at the annual valuation date, he may dispose of the number of shares having a value in excess of the Director Equity Target (the “Maximum Disposable Shares”), The Maximum Disposable Shares will be calculated at each annual review of the value of the Outside Director’s holdings. Notwithstanding the foregoing, the Outside Director may sell shares to satisfy tax obligations arising from a grant or vesting of shares or options and such disposition will not be considered in determining the number of shares disposed of for the purposes of the Maximum Disposal Shares. The Committee and the Board may grant hardship exceptions to the restrictions on disposition.
Code of Ethics and Business Conduct
The Company has adopted a Code of Ethics and Business Conduct applicable to our employees and representatives. A copy of our Code of Ethics and Business Conduct was filed as an exhibit to our Annual Report on Form 10-K for the year ended June 30, 2004 and is incorporated by reference in this Report.
Item 11. Executive Compensation
Named Executive Officers
Messrs. Hershberg, Hall, Melfi, Coyle and Silberstein constituted the Company’s Named Executive Officers for fiscal 2013.
Oversight and Objectives of the Executive Compensation Program
As stated in the Compensation Committee’s charter, its purpose is (i) to assist the Board of Directors in carrying out its responsibilities regarding compensation of the Company’s executive officers and directors, (ii) to evaluate the performance of the Company’s executive officers and (iii) to administer the Company’s stock and incentive compensation plans and recommend changes in such plans, as needed, to the Board of Directors.
At June 30, 2013, Globecomm had five executive officers (Messrs. Hershberg, Hall, Melfi, Coyle and Silberstein) and these individuals had a broad array of responsibilities and authority within the Company. The five individuals (Messrs. Hershberg, Hall, Melfi, Coyle and Silberstein) identified in the Summary Compensation Table below, including the Chief Executive Officer and the Chief Financial Officer, are collectively referred to in this proxy statement as the “Named Executive Officers.”
52
The Compensation Committee has the authority to retain compensation consultants, outside counsel and/or other advisors to provide independent advice and assistance in connection with the execution of its responsibilities. It also has the authority to obtain advice and assistance from internal and external legal, human resource or other advisors. The Compensation Committee works directly with our Senior Vice President of Human Resources on the compensation program.
The objectives of our executive compensation program are to attract and retain executive talent, to foster excellent performance by executives whose contributions drive the success of the Company and to create value for stockholders. Our program is structured to provide a compensation package that pays better than the market median for superior performance, offers rewards to executives based on Company and individual performance and aligns the interests of management and stockholders through incentives that encourage annual and long-term results.
For the last several years, the Compensation Committee has utilized the Radford Global Technology Survey Report (the “Radford Survey”), which is produced by Aon Consulting, Inc., to assist in the evaluation of Globecomm’s executive compensation program and to help determine the compensation to be paid to executives. The Radford Survey provides data, by position, for base salary and for cash and equity incentives reported by participating companies. Historically, the Company has relied on the Radford Survey primarily for benchmarking compensation information. The Radford Survey has generally been relied upon because it is a recognized leader for market data in the executive compensation field. Furthermore, the Compensation Committee believes that the companies it studies, given their similarities to Globecomm, provide the most meaningful competition to the Company for talent. Starting in fiscal 2011 the Compensation Committee also utilized the Equilar Inc. Executive Insight Total Compensation Survey Report (“Equilar Survey”) as additional benchmarking compensation information.
Benchmarking
For determination of executive compensation for fiscal 2013, the Compensation Committee reviewed the Radford Survey, which summarized compensation data (available as of April 11, 2012) from approximately 700 companies in the telecommunications products and services and network equipment/product industries. The Radford Survey considered the following variables in processing the survey for the Company: (i) type of industry (telecommunications products and services; network equipment/products); (ii) last fiscal year annual revenues ($200 million to $499.9 million); (iii) geographic region (the northeast portion of the United States) and (iv) job description. The Committee targeted compensation levels using the 50th percentile of the Radford Survey as a benchmark, though it also took into account other, more subjective factors in making its compensation decisions. The Compensation Committee has determined that for future determinations, fixing an arbitrary percentile target is inappropriate.
The Compensation Committee also utilized the Equilar Survey, which is a customized report utilizing data from peer companies (i) in the telecom technology and services industry with revenues in the range of $225 million to $325 million, and (ii) comprised of a peer group derived from the most recent Institutional Shareholder Services (ISS) Proxy Advisory Services Report. In addition to the variables above, the Equilar Survey provided data on the following categories: base salary, actual bonus percentage, actual bonus value, stock option value, restricted stock value, total direct compensation and other compensation. The Compensation Committee targeted compensation levels using the Mean (weighted average) of the Equilar Survey data as a benchmark. Again, specific targets are not expected to be utilized by the Compensation Committee in future deliberations.
The Compensation Committee has not made a determination regarding executive compensation for fiscal 2014 in light of the pending Merger.
The Compensation Committee plans to use the Radford Survey, Equilar Survey, and a new survey, the Towers Watson General Industry Executive Compensation Survey Report (“Tower Watson Survey”), for determining future executive compensation. However, it may consider other benchmarking
53
resources, either as a replacement for or supplement to the Radford Survey, Equilar Survey, or Towers Watson Survey. In determining which benchmarking resources it will use, the Compensation Committee will consider the Company’s acquisitions and changing profile, as well as individual contributions to the Company’s growth and success.
Components of the Compensation Program
The principal components of the Company’s compensation program consist of (i) base salaries, (ii) annual performance-based bonuses and (iii) long-term equity awards.
The Compensation Committee reviews the compensation of the Company’s executives on an annual basis, taking into account such factors as competitive compensation levels, the executive’s responsibilities, experience and contributions, and the Company’s performance. The Compensation Committee believes that a substantial portion of executive officer compensation should be tied to short-term and long-term Company performance. The Compensation Committee periodically reviews the Company’s overall executive compensation program against competitive practices and trends, and generally reviews and analyzes the Radford, Equilar and independent surveys, marketplace data and other available information for comparable companies. A significant percentage of executive compensation is normally designed to be performance-based and varies from year to year based on corporate and individual performance.
Base Salary
The Company has entered into an employment agreement with each of its Named Executive Officers that establishes a minimum base salary for the executive. The salary levels are reviewed on an annual basis to ensure that they are appropriate in comparison to other companies within the industry. The salary levels are also reviewed on an annual basis in light of each individual’s responsibilities, contributions and performance. Executives are eligible for merit increases to base salary on an annual basis.
The Compensation Committee did not approve salary increases for the Named Executive Officers in fiscal 2013 based on a recommendation from the Chief Executive Officer of the Company, and in light of the Company’s fiscal 2013 business plan, as well as the then current economic conditions of the Company, its industry and the global financial situation. The base salary for each of the Named Executive Officers for fiscal 2013 was as follows:
| Named Executive Officer |
Base Salary |
|||
| David E. Hershberg |
$ | 575,000 | ||
| Keith A. Hall |
425,000 | |||
| Andrew C. Melfi |
370,000 | |||
| Thomas C. Coyle |
310,000 | |||
| Andrew Silberstein |
275,000 | |||
The Compensation Committee did not approve salary increases for the Named Executive Officers for fiscal 2014 in light of the pending Merger.
Annual Incentives
The Company’s executives were generally eligible to receive annual performance-based cash bonuses in fiscal 2013.
During fiscal 2013, the Compensation Committee approved the 2013 Insider Management Incentive Plan (the “2013 MIP”), which was based on data obtained from the Radford and Equilar Surveys. The 2013 MIP provides for cash bonus opportunities based on a Company-wide operating income performance target for Messrs. Hershberg, Hall and Melfi. Operating income is defined as income from operations excluding earn-out fair value adjustments. For Messrs. Coyle and Silberstein, the 2013 MIP
54
provides for cash bonus opportunities based on financial performance targets for Company-wide operating income and team operating income (collectively, the “2013 Targets”), that are weighted 50% and 50%, respectively. If the 2013 Targets were met or exceeded, participants were eligible to receive cash bonuses based on a pre-established target percentage of their base salaries, which for fiscal 2013 ranged from 30% to 50% of base salary, plus, an additional bonus of up to 45% to 75% of base salary for exceeding the 2013 Targets, based on a pro-ration factor for up to 30% of the 2013 Targets, subject to Compensation Committee discretion. A pro-ration bonus was also possible if the 2013 Target performance level was not met, so long as the Company’s financial performance exceeded 90% of the 2013 Targets threshold amount. The maximum bonus under the 2013 MIP for fiscal 2013 that Named Executive Officers could achieve ranged from 75% to 125% of base salary, depending upon the executive officer’s position, as set forth in the table below.
Messrs. Hershberg, Hall and Melfi had bonus opportunities under the 2013 MIP for fiscal 2013, subject to the Compensation Committee’s discretion, as follows:
| Named Executive Officer |
Target Bonus Opportunity (as a % of Base Salary) |
Additional Bonus Opportunity (as a % of Base Salary) |
Maximum Bonus Opportunity (as a % of Base Salary) |
|||||||||
| Exceed target by 30% | Cumulative | |||||||||||
| David E. Hershberg |
50 | % | 75 | % | 125 | % | ||||||
| Keith A. Hall |
45 | % | 70 | % | 115 | % | ||||||
| Andrew C. Melfi |
40 | % | 60 | % | 100 | % | ||||||
Messrs. Coyle and Silberstein had bonus opportunities under the 2013 MIP for fiscal 2013, subject to the Compensation Committee’s discretion, as follows:
| Named Executive Officer |
Target Bonus Opportunity (as a % of Base Salary) |
Additional Bonus Opportunity (as a % of Base Salary) |
Maximum Bonus Opportunity (as a % of Base Salary) |
|||||||||||||||||
| Exceed target by 30% | Cumulative | |||||||||||||||||||
| Company- (50%) |
Team (50%) |
Company- wide operating Income (50%) |
Team (50%) |
|||||||||||||||||
| Thomas C. Coyle |
15 | % | 15 | % | 22.5 | % | 22.5 | % | 75 | % | ||||||||||
| Andrew Silberstein |
15 | % | 15 | % | 22.5 | % | 22.5 | % | 75 | % | ||||||||||
For fiscal 2013, the Company-wide operating income was $22,559,000, which did not exceed the Company-wide operating income target of $27,328,000 for the same period.
With respect to Mr. Coyle, fiscal 2013 team operating income was an operating loss of $9,283,000 which did not meet the team operating income target of an operating loss of $1,362,000 for the same period.
With respect to Mr. Silberstein, fiscal 2013 team operating income was $29,080,000, which exceeded the team operating income target of $21,700,000.
Based on the results for fiscal 2013, $82,500 was allocated to the executive officers from the bonus pool.
Messrs. Hershberg, Hall and Melfi did not receive any additional Target Bonus Opportunity as the Company did not meet the Company-wide operating income target.
Based on the results for fiscal 2013, Mr. Coyle did not receive any additional Target Bonus Opportunity as the Company-wide operating income target and his team operating income target were not met.
Based on the results for fiscal 2013, Mr. Silberstein would have earned 30% of his base salary based on earning the full Target Bonus Opportunity 15% and the full Additional Bonus Opportunity of 15% in connection with exceeding his team operating income target. He did not receive any additional Target
55
Bonus Opportunity as the Company did not meet the Company-wide operating income target. Based on overall Company performance no bonus was awarded to Mr. Silberstein.
During fiscal 2012, the Compensation Committee approved the 2012 Insider Management Incentive Plan (the “2012 MIP”), which was based on data obtained from the Radford and Equilar Surveys. The 2012 MIP provides for cash bonus opportunities based on a Company-wide operating income performance target for Messrs. Hershberg, Hall and Melfi. Operating income is defined as income from operations excluding earn-out fair value adjustments. For Messrs. Coyle and Silberstein, the 2012 MIP provides for cash bonus opportunities based on financial performance targets for Company-wide operating income and team operating income (collectively, the “2012 Targets”), that were weighted 50% and 50%, respectively. If the 2012 Targets were met or exceeded, participants were eligible to receive cash bonuses based on a pre-established target percentage of their base salaries, which for fiscal 2012 ranged from 30% to 50% of base salary, plus an additional bonus of up to 45% to 75% of base salary for exceeding the 2012 Targets, based on a pro-ration factor for up to 30% of the 2012 Targets, subject to Compensation Committee discretion. A pro-ration bonus was also possible if the 2012 Target performance level was not met, so long as the Company’s financial performance exceeded 90% of the 2012 Targets threshold amount. The maximum bonus under the 2012 MIP for fiscal 2012 that Named Executive Officers could achieve ranged from 75% to 125% of base salary, depending upon the executive officer’s position, as set forth in the table below.
Messrs. Hershberg, Hall and Melfi had bonus opportunities under the 2012 MIP for fiscal 2012, subject to the Compensation Committee’s discretion, as follows:
| Named Executive Officer |
Target Bonus Opportunity (as a % of Base Salary) |
Additional Bonus Opportunity (as a % of Base Salary) |
Maximum Bonus Opportunity (as a % of Base Salary) |
|||||||||
| Exceed target by 30% | Cumulative | |||||||||||
| David E. Hershberg |
50 | % | 75 | % | 125 | % | ||||||
| Keith A. Hall |
45 | % | 70 | % | 115 | % | ||||||
| Andrew C. Melfi |
40 | % | 60 | % | 100 | % | ||||||
Messrs. Coyle and Silberstein had bonus opportunities under the 2012 MIP for fiscal 2012, subject to the Compensation Committee’s discretion, as follows:
| Named Executive Officer |
Target Bonus Opportunity (as a % of Base Salary) |
Additional Bonus Opportunity (as a % of Base Salary) |
Maximum Bonus Opportunity (as a % of Base Salary) |
|||||||||||||||||
| Exceed target by 30% |
Cumulative | |||||||||||||||||||
| Company- (50%) |
Team (50%) |
Company- wide operating Income (50%) |
Team (50%) |
|||||||||||||||||
| Thomas C. Coyle |
15 | % | 15 | % | 22.5 | % | 22.5 | % | 75 | % | ||||||||||
| Andrew Silberstein |
15 | % | 15 | % | 22.5 | % | 22.5 | % | 75 | % | ||||||||||
For fiscal 2012, the Company-wide operating income was $26,509,000, which exceeded the Company-wide operating income target of $26,100,000 for the same period.
With respect to Mr. Coyle, for fiscal 2012, team operating income was an operating loss of $4,385,000, which did not meet the team operating income target of an operating loss of $1,000,000 for the same period.
With respect to Mr. Silberstein, for fiscal 2012, the team operating income was $23,146,000, which was less than the team operating income target of $23,500,000, however above the $21,150,000 minimum threshold.
Based on the results for fiscal 2012, $833,000 was allocated to the executive officers from the bonus pool.
56
Messrs. Hershberg, Hall and Melfi each earned the full Target Bonus Opportunity, 50%, 45%, and 40%, respectively as well as a portion of the Additional Bonus Opportunity of 4%, 4%, and 3%, respectively, in connection with the Company exceeding the Company-wide operating income target and therefore earned 54%, 49% and 43% of base salary, respectively.
Based on the results for fiscal 2012, Mr. Coyle earned 16% of his base salary based on earning the full Target Bonus Opportunity 15% and a portion of the Additional Bonus Opportunity 1% in connection with the Company exceeding the Company-wide operating income target. He did not receive any additional Target Bonus Opportunity as the Company did not meet his team operating income target.
Based on the results for fiscal 2012, Mr. Silberstein earned 16% of his base salary based on earning the full Target Bonus Opportunity 15% and a portion of the Additional Bonus Opportunity 1% in connection with the Company exceeding the Company-wide operating income target. Additionally, his team operating income target was at 98.5% of the target and based on the pro-ration bonus provision he received 13% of his Target Bonus Opportunity, and a discretionary bonus of approximately $27,500 for a total bonus equal to approximately 39% of his base salary.
During fiscal 2011, the Compensation Committee approved the 2011 Insider Management Incentive Plan (the “MIP”), which was based on data obtained from the Radford Consulting and Equilar Inc. Surveys. The MIP provides for cash bonus opportunities based on a Company-wide adjusted EBITDA financial performance target for Messrs. Hershberg, Hall and Melfi. For Messrs. Coyle and Silberstein, the MIP provides for cash bonus opportunities based on financial performance targets of a Company-wide adjusted EBITDA and team operating income (collectively, the “Targets”), that are weighted 25% and 75%, respectively. If the adjusted EBITDA targets were met or exceeded, participants were eligible to receive cash bonuses based on a pre-established target percentage of their base salaries, which for fiscal 2011 ranged from 30% to 50% of base salary. An additional bonus of up to 60% to 75% of base salary for exceeding the applicable Company and team targets, subject to the Compensation Committee’s discretion. A bonus was also possible if the target performance level was not met, so long as the Company’s financial performance exceeded a threshold amount. The maximum bonus under the MIP for fiscal 2011 that Named Executive Officers could achieve ranged from 90% to 125% of base salary, depending upon the executive officer’s position, as set forth in the table below.
Messrs. Hershberg, Hall and Melfi had bonus opportunities under the MIP for fiscal 2011, subject to the Compensation Committee’s discretion, as follows:
| Executive Officer |
Target
Bonus Opportunity (as a % of Base Salary) |
Additional
Bonus Opportunity (as a % of Base Salary) |
Additional
Bonus Opportunity (as a % of Base Salary) |
Maximum
Bonus Opportunity (as a % of Base Salary) |
||||||||||||
| Exceed target by 15% |
Exceed target by 30% |
Cumulative | ||||||||||||||
| David E. Hershberg |
50 | % | 25 | % | 50 | % | 125 | % | ||||||||
| Keith A. Hall |
40 | % | 30 | % | 40 | % | 110 | % | ||||||||
| Andrew C. Melfi |
35 | % | 30 | % | 35 | % | 100 | % | ||||||||
Messrs. Coyle and Silberstein had bonus opportunities under the MIP for fiscal 2011, subject to the Compensation Committee’s discretion, as follows:
| Target
Bonus Opportunity (as a % of Base Salary) |
Additional
Bonus Opportunity (as a % of Base Salary) |
Additional
Bonus Opportunity (as a % of Base Salary) |
Maximum
Bonus Opportunity (as a % of Base Salary) |
|||||||||||||||||||||||||
| Exceed target by 15% | Exceed target by 30% | Cumulative | ||||||||||||||||||||||||||
| Based on (25%) |
Based on team (75%) |
Based on (25%) |
Based on (75%) |
Based on (25%) |
Based on (75%) |
|||||||||||||||||||||||
| Thomas C. Coyle |
7.5 | % | 22.5 | % | 7.5 | % | 22.5 | % | 7.5 | % | 22.5 | % | 90 | % | ||||||||||||||
| Andrew Silberstein |
7.5 | % | 22.5 | % | 7.5 | % | 22.5 | % | 7.5 | % | 22.5 | % | 90 | % | ||||||||||||||
57
For the fiscal year ended June 30, 2011, the Company-wide adjusted EBITDA was $33,932,000, which exceeded the Company-wide adjusted EBITDA target of $29,357,000 for the same period.
With respect to Mr. Coyle, for the fiscal year ended June 30, 2011, team operating income was an operating loss of $6,640,000, which did not meet the team operating income target of an operating loss of $1,693,000 for the same period.
With respect to Mr. Silberstein, for the fiscal year ended June 30, 2011, the team operating income was $21,896,000, which exceeded the team operating income target of $19,215,000.
Based on the results for fiscal year 2011, $725,500 was allocated to the executive officers from the bonus pool. Messrs. Hershberg, Hall and Melfi each earned the full Target Bonus Opportunity in connection with the Company meeting the Company-wide adjusted EBITDA target and therefore earned 50%, 40% and 35% of base salary, respectively.
Based on the results for fiscal year 2011, Mr. Coyle received 7.5% of his base salary (which is 25% of the Target Bonus Opportunity) in connection with the Company meeting the Company-wide adjusted EBITDA target. He did not receive any additional Target Bonus Opportunity as the Company did not meet the team operating income target.
Based on the results for fiscal year 2011, Mr. Silberstein earned 7.5% of his base salary (which is 25% of the Target Bonus Opportunity) in connection with the Company meeting the Company-wide adjusted EBITDA target. Additionally, because his team operating income target was met and based on the overall performance of Globecomm Network Services segment and in the Compensation Committee’s discretion, he earned the remaining 22.5% of his Target Bonus Opportunity as well as the 22.5% Additional Bonus Opportunity tied to team operating income, and a discretionary bonus of approximately $11,000 for a total bonus equal to approximately 56% of his base salary.
Long-Term Incentive Compensation
The Company’s executive officers may receive long-term incentive awards, such as stock options and restricted stock that link their compensation with the long-term performance of the Company, align their interests with stockholders and encourage career service. During fiscal 2011, the Compensation Committee approved general guidelines for long-term incentive awards. While the Compensation Committee had discretion in connection with awards, the guidelines followed by the Compensation Committee generally provided for the executive officers to accumulate a range from 2.5 to 4 times their salary in restricted stock over a five year period.
Based on the annual review process, acquisitions, and in order to better align their interests with those of the Company’s stockholders, the Compensation Committee approved restricted stock grants to Named Executive Officers in fiscal 2013 as follows:
| Named Executive Officer |
Shares Granted | |||
| David E. Hershberg |
50,000 | |||
| Keith A. Hall |
35,000 | |||
| Andrew C. Melfi |
20,000 | |||
| Thomas C. Coyle |
10,000 | |||
| Andrew Silberstein |
13,000 | |||
The shares of restricted stock granted in fiscal 2013 are subject to a three-year vesting schedule.
58
Officer Equity Ownership Targets
On September 20, 2012, the Compensation Committee set a target for equity ownership for the Named Executive Officers (“Officer Equity Target”). The Officer Equity Target is based on a multiple of the Named Executive Officer’s base salary for the previous fiscal year. The multiples for the determining the Officer Equity Targets of the current Named Executive Officers are:
| Named Executive Officer |
Base Salary Multiple | |||
| David E. Hershberg |
4 times | |||
| Keith A. Hall |
3 times | |||
| Andrew C. Melfi |
2 times | |||
| Thomas C. Coyle |
1 times | |||
| Andrew Silberstein |
1 times | |||
Each of the Named Executive Officers shall have five years to reach the Officer Equity Target. At the first Compensation Committee meeting following each fiscal year end, the Committee will value all forms of equity held as of the date of, whether or not vested (including options and restricted stock) as well as equity awards authorized at the Compensation Committee meeting. The value of the Named Executive Officer’s holdings for the purposes of computing the Officer Equity Target will equal the total number of shares held or deemed held times the average closing price of the common stock for the last six months of the preceding fiscal year. As of the date of this report, the Compensation Committee has not met for purposes of computing the Officer Equity Target; as of October 5, 2012 valuation date, all Named Executive Officers had holdings above their Officer Equity Target.
During the succeeding fiscal year, any Named Executive Officer not then meeting his Officer Equity Target may not dispose of equity in the Company until he reaches his Officer Equity Target. To the extent that the Named Executive Officer holds or is deemed to hold shares valued in excess of his Officer Equity Target at the annual valuation date, he may dispose of the number of shares having a value in excess of the Officer Equity Target (the “Maximum Disposable Shares”), the Maximum Disposable Shares will be calculated at each annual review of the value of the Named Executive Officer’s holdings. Notwithstanding the foregoing, the Named Executive Officer may sell shares to satisfy tax obligations arising from a grant or vesting of shares or options and such disposition will not be considered in determining the number of shares disposed of for the purposes of the Maximum Disposal Shares. The Committee and the Board may grant hardship exceptions to the restrictions on disposition.
Retirement Plans
Executive officers participate in our 401(k) retirement plan under the same rules that apply to other employees, and they may elect to defer a percentage of their compensation each year subject to plan limits and caps imposed by the Internal Revenue Service (maximum contributions of $17,500 for 2013, plus make-up supplements permitted for those aged 50 and up). Effective January 1, 2012, the Company recommended, and the Board of Directors approved, a matching contribution to a maximum of 4% of the employee’s compensation not to exceed $7,500 per employee per calendar year. There is no matching contribution effective January 1, 2013, based on the Board of Directors recommendation due to the operating performance of the Company.
59
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with the Company’s management. Based on that review and discussion, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this in this annual report.
The Compensation Committee
Richard E. Caruso (Chairperson)
Brian T. Maloney
Jack A. Shaw
C.J. Waylan
60
EXECUTIVE COMPENSATION TABLES
Summary Compensation Table for Fiscal Year 2013
The table below shows the compensation, for the past three completed fiscal years, of the Chief Executive Officer, the Chief Financial Officer, the three other highest paid executive officers who were serving as executive officers on June 30, 2013. These five individuals are the Named Executive Officers for fiscal 2013.
| Name and Principal Position(a) |
Year (b) |
Salary ($) (c) |
Stock Awards(1) ($) (d) |
Non-Equity Incentive Plan Compensation ($) (e) |
All
Other Compensation ($) (f) |
Total ($) (g) |
||||||||||||||||||
| David E. Hershberg |
||||||||||||||||||||||||
| Chairman and Chief Executive Officer |
2013 | 578,871 | 527,500 | — | 57,080 | (2) | 1,163,451 | |||||||||||||||||
| 2012 | 607,164 | 475,080 | 309,916 | 53,455 | 1,445,615 | |||||||||||||||||||
| 2011 | 576,745 | 242,550 | 277,500 | 39,500 | 1,136,295 | |||||||||||||||||||
| Keith A. Hall |
||||||||||||||||||||||||
| President and Chief Operating Officer |
2013 | 425,817 | 369,250 | — | 15,250 | (2) | 810,317 | |||||||||||||||||
| 2012 | 446,458 | 321,000 | 206,692 | 17,000 | 991,150 | |||||||||||||||||||
| 2011 | 396,400 | 277,200 | 158,000 | 15,000 | 846,600 | |||||||||||||||||||
| Andrew C. Melfi |
||||||||||||||||||||||||
| Senior Vice President, Chief Financial Officer and Treasurer |
||||||||||||||||||||||||
| 2013 | 372,134 | 211,000 | — | 12,750 | (3) | 595,884 | ||||||||||||||||||
| 2012 | 374,210 | 192,600 | 159,539 | 14,500 | 740,849 | |||||||||||||||||||
| 2011 | 350,534 | 207,900 | 122,500 | 12,500 | 693,434 | |||||||||||||||||||
| Thomas C. Coyle |
||||||||||||||||||||||||
| Senior Vice President, General Manager of Globecomm Systems |
||||||||||||||||||||||||
| 2013 | 313,577 | 105,500 | — | 9,750 | (3) | 428,827 | ||||||||||||||||||
| 2012 | 325,731 | 131,700 | 50,126 | 11,500 | 519,057 | |||||||||||||||||||
| 2011 | 300,849 | 69,300 | 22,500 | 9,500 | 402,149 | |||||||||||||||||||
| Andrew Silberstein |
||||||||||||||||||||||||
| Senior Vice President, General Manager of Globecomm Network Services |
||||||||||||||||||||||||
| 2013 | 275,000 | 137,150 | — | 6,000 | (4) | 418,150 | ||||||||||||||||||
| 2012 | 273,617 | 128,400 | 107,002 | 6,000 | 515,019 | |||||||||||||||||||
| 2011 | 258,707 | 138,600 | 145,000 | 6,000 | 548,307 | |||||||||||||||||||
| (1) | Reflects the aggregate grant date fair value for each grant of restricted stock in the fiscal year, determined in accordance with the Financial Accounting Standards Board ASC Topic 718. The stock awards are based on the closing price of the Company’s common stock on the Nasdaq Global Market on the date on which the stock was awarded. The assumptions used in the valuation are discussed in Note 2 to our consolidated financial statements included in this annual report on Form 10-K. |
61
| (2) | Includes perquisites comprised of reimbursement for tax services and life insurance, in each case provided pursuant to the terms of an employment agreement, a car allowance and an employer contribution to 401(k) retirement plan. |
| (3) | Includes perquisites comprised of a car allowance and an employer contribution to 401(k) retirement plan. |
| (4) | The aggregate incremental cost to the Company of the perquisites in fiscal 2013 did not on an individual basis exceed $10,000, and consequently, pursuant to SEC rules, are not disclosed. |
Grants of Plan-Based Awards for Fiscal Year 2013
The table below provides information regarding the stock options and restricted stock granted to the Named Executive Officers during fiscal 2013.
| Estimated Future Payouts Under Non-Equity Incentive Plan Awards |
Estimated Future Payouts Under Equity Incentive Plan Awards |
All
Other Stock Awards: Number of Shares of Stock or Units (#) (i) |
All
Other Option Awards: Number of Securities Underlying Options (#) (j) |
Exercise or Base Price of Option Awards ($/Sh) (k) |
Grant Date Fair Value of Stock and Option Awards(1) ($) (l) |
|||||||||||||||||||||||||||||||||||||||
| Name (a) |
Grant Date (b) |
Threshold ($) (c) |
Target (#) (d) |
Maximum (#) (e) |
Threshold (#) (f) |
Target (#) (g) |
Maximum (#) (h) |
|||||||||||||||||||||||||||||||||||||
| David E. Hershberg |
11/15/2012 | — | — | — | — | — | — | 50,000 | — | — | 527,500 | |||||||||||||||||||||||||||||||||
| Keith A. Hall |
11/15/2012 | — | — | — | — | — | — | 35,000 | — | — | 369,250 | |||||||||||||||||||||||||||||||||
| Andrew C. Melfi |
11/15/2012 | — | — | — | — | — | — | 20,000 | — | — | 211,000 | |||||||||||||||||||||||||||||||||
| Thomas C. Coyle |
11/15/2012 | — | — | — | — | — | — | 10,000 | — | — | 105,500 | |||||||||||||||||||||||||||||||||
| Andrew Silberstein |
11/15/2012 | — | — | — | — | — | — | 13,000 | — | — | 137,150 | |||||||||||||||||||||||||||||||||
| (1) | Reflects the aggregate grant date fair value for each grant of restricted stock or stock options in the applicable fiscal year, determined in accordance with the Financial Accounting Standards Board ASC Topic 718. The terms include a three-year vesting schedule, with one-third vesting on each of the first three anniversaries of the date of grant. |
62
Outstanding Equity Awards at Fiscal Year-End
The table below provides information regarding the stock options and restricted stock held by the Named Executive Officers as of June 30, 2013.
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||||
| Name |
Grant Date | Number of Securities Underlying Unexercised Options Exercisable (#) (b) |
Number of Securities Underlying Unexercised Options Unexercisable (#) (c) |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) |
Option Exercise Price ($) (e) |
Option Expiration Date (f) |
Number of Shares or Units of Stock That Have Not Vested (#) (g) |
Market Value of Shares or Units of Stock That Have Not Vested(1) ($) (h) |
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (i) |
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (j) |
||||||||||||||||||||||||||||||
| David E. Hershberg |
09/26/2003 | 20,000 | — | — | 3.35 | 9/25/2013 | — | — | — | — | ||||||||||||||||||||||||||||||
| 01/05/2005 | 12,500 | — | — | 6.51 | 1/04/2015 | — | — | — | — | |||||||||||||||||||||||||||||||
| 08/25/2010 | — | — | — | — | — | 11,667 | 147,474 | — | — | |||||||||||||||||||||||||||||||
| 08/09/2011 | — | — | — | — | — | 24,667 | 311,791 | — | — | |||||||||||||||||||||||||||||||
| 11/15/2012 | — | — | — | — | — | 50,000 | 632,000 | — | — | |||||||||||||||||||||||||||||||
| Keith A. Hall |
09/26/2003 | 68 | — | — | 3.35 | 9/25/2013 | — | — | — | — | ||||||||||||||||||||||||||||||
| 01/05/2005 | 3,000 | — | — | 6.51 | 1/04/2015 | — | — | — | — | |||||||||||||||||||||||||||||||
| 08/25/2010 | — | — | — | — | — | 13,334 | 168,542 | — | — | |||||||||||||||||||||||||||||||
| 08/09/2011 | — | — | — | — | — | 16,667 | 210,671 | — | — | |||||||||||||||||||||||||||||||
| 11/15/2012 | — | — | — | — | — | 35,000 | 442,400 | — | — | |||||||||||||||||||||||||||||||
| Andrew C. Melfi |
08/25/2010 | — | — | — | — | — | 10,000 | 126,400 | — | — | ||||||||||||||||||||||||||||||
| 08/09/2011 | — | — | — | — | — | 10,000 | 126,400 | — | — | |||||||||||||||||||||||||||||||
| 11/15/2012 | — | — | — | — | — | 20,000 | 252,800 | — | — | |||||||||||||||||||||||||||||||
| Thomas C. Coyle |
08/25/2010 | — | — | — | — | — | 3,334 | 42,142 | — | — | ||||||||||||||||||||||||||||||
| 08/09/2011 | — | — | — | — | — | 3,334 | 42,142 | — | — | |||||||||||||||||||||||||||||||
| 11/17/2011 | — | — | — | — | — | 3,334 | 42,142 | — | — | |||||||||||||||||||||||||||||||
| 11/15/2012 | — | — | — | — | — | 10,000 | 126,400 | — | — | |||||||||||||||||||||||||||||||
| Andrew Silberstein |
03/02/2009 | 5,000 | — | — | 4.80 | 03/01/2019 | — | — | — | — | ||||||||||||||||||||||||||||||
| 08/25/2010 | — | — | — | — | — | 6,667 | 84,271 | — | — | |||||||||||||||||||||||||||||||
| 08/09/2011 | — | — | — | — | — | 6,667 | 84,271 | — | — | |||||||||||||||||||||||||||||||
| 11/15/2012 | — | — | — | — | — | 13,000 | 164,320 | — | — | |||||||||||||||||||||||||||||||
| (1) | The value shown was determined by multiplying the number of shares of restricted stock by the closing price of our Common Stock on June 30, 2013. All shares of restricted stock include a three-year vesting schedule, with one-third vesting on each of the first three anniversaries of the date of grant. |
63
Option Exercises and Stock Vested for Fiscal Year 2013
The table below provides information for the Named Executive Officers with respect to stock options exercised and restricted stock awards vested during fiscal 2013.
| Option Awards | Stock Awards | |||||||||||||||
| Named Executive Officer (a) |
Number of Shares Acquired on Exercise (#) (b) |
Value Realized on Exercise(1) ($) (c) |
Number of Shares Acquired on Vesting (#) (d) |
Value Realized on Vesting(2) ($) (e) |
||||||||||||
| David E. Hershberg |
8,000 | 64,489 | 37,334 | 422,660 | ||||||||||||
| Keith A. Hall |
910 | 7,235 | 31,666 | 357,976 | ||||||||||||
| Andrew C. Melfi |
— | — | 21,667 | 244,620 | ||||||||||||
| Thomas C. Coyle |
— | — | 11,665 | 129,015 | ||||||||||||
| Andrew Silberstein |
— | — | 13,334 | 151,140 | ||||||||||||
| (1) | The amounts in this column reflect the aggregate dollar amount realized upon the exercise of the options, determined by calculating the difference between the market price of the underlying securities at exercise and the exercise price of the options. |
| (2) | The amounts in this column reflect the aggregate dollar amount realized upon the vesting of stock determined by multiplying the number of shares of stock that vested by the market value of the shares on the vesting date. |
Employment Agreements
The Company entered into employment agreements (the “Executive Agreements”) with Messrs. Hershberg (and amended in January 2009 and June 2013) and Melfi in October 2001 (and amended in January 2009), Hall in June 2008 (replaced by a new agreement in July 2009) and Coyle in June 2008 (and amended in January 2009) and Silberstein in June 2011. The Executive Agreements continue from year to year, unless terminated earlier by either party by written notice of termination given to the other party. Each Executive Agreement entitles the relevant Named Executive Officer to all employee benefits generally made available to executive officers.
The Executive Agreements specify duties and minimum compensation commitments. The Executive Agreements also provide for severance benefits in certain circumstances and impose restrictive covenants, which relate to, among other things, confidentiality and competition. The Compensation Committee determined, at the time the Executive Agreements were entered into and, where applicable, amended, that the Executive Agreements and, where applicable, amendments, were appropriate for the relevant Named Executive Officers. The contracts provide varying benefit levels based on the executive’s responsibilities, and the agreements serve as a retention device for executives who meet these requirements. The Company entered into the Executive Agreements to fully recognize the executives’ contributions, to maintain the continuity of the management team in order to assure continuous, harmonious performance of the Company’s affairs and to provide the executives with an incentive to remain with the Company.
As a result of salary increases during the terms of their Employment Agreements, as of June 30, 2013 the Company was required to compensate Messrs. Hershberg, Hall, Melfi, Coyle and Silberstein with annual base salaries of $575,000, $425,000, $370,000, $310,000 and $275,000 respectively, which amounts are reviewed annually by the Board of Directors and subject to increase at the Board of Directors’ discretion. The Named Executive Officers may also receive annual performance-based cash bonuses. Each of Messrs. Hershberg, Melfi, Hall, Coyle and Silberstein were required to devote his full-time efforts to the Company.
64
Potential Payments Upon Termination or Change in Control
If the Company terminates any of the Executive Agreements, other than for disability or cause, or if any Named Executive Officer terminates his employment with the Company for good reason (“Good Reason”), at June 30, 2013, the Company would have had the following obligations: (i) to continue to pay to each of Messrs. Hershberg, Hall, Melfi, Coyle and Silberstein his then applicable annual base salary for a specified period commencing upon the effective date of the termination (the “Severance Period”); the Severance Period was three years for Messrs. Hershberg, Hall and Melfi, two years for Mr. Coyle and one year for Mr. Silberstein; (ii) during each year of the Severance Period, to pay for continued health benefits up to a maximum of $2,000 per month; (iii) during each year of the Severance Period, to pay the annual automobile allowance, currently $12,000, $9,000, $9,000, $6,000 and $6,000 for Messrs. Hershberg, Hall, Melfi, Coyle and Silberstein, respectively; (iv) during each year of the Severance Period, to pay to the relevant Named Executive Officer the amount of the non-elective deferral employer contribution made under the Company’s 401(k) plan for such Named Executive Officer’s last fiscal year with the Company prior to termination of employment; (v) to pay the cost of converting the group term life insurance coverage to an individual policy and (vi) during each year of the Severance Period, to pay $2,500 for the annual professional service allowance for Mr. Hershberg; provided that, in each case the Named Executive Officer must execute and deliver to the Company a general release as a condition of receiving the benefits and payments above.
Good Reason is defined as a material breach of the Executive Agreement by the Company, which includes a failure to pay salary or bonus, a failure to provide benefits, a requirement to travel significantly more days than in the previous calendar year (with respect to Messrs. Hershberg and Melfi), a material reduction in duties and responsibilities, a change in the reporting relationship or a relocation of the worksite to a location 75 miles or more from its current location.
The table below shows the benefits that would be payable to the Named Executive Officers under the Executive Agreements or otherwise, had each applicable Named Executive Officer been terminated without cause or for Good Reason on June 30, 2013:
| Named Executive Officer |
Severance Salary(1) |
Medical/Dental Continuation(2) |
Other Benefits(3) |
Vacation Payout |
Early Vesting of Stock Options(4) |
Vesting
of Restricted Stock(5) |
Total | |||||||||||||||||||||
| David E. Hershberg |
$ | 1,725,000 | $ | 72,000 | $ | 104,207 | $ | 45,934 | $ | — | $ | — | $ | 1,947,140 | ||||||||||||||
| Keith A. Hall |
1,275,000 | 76,250 | 40,110 | 33,951 | — | — | 1,425,311 | |||||||||||||||||||||
| Andrew C. Melfi |
1,110,000 | 74,738 | 45,750 | 29,557 | — | — | 1,260,045 | |||||||||||||||||||||
| Thomas C. Coyle |
620,000 | 48,000 | 27,230 | 24,764 | — | — | 719,994 | |||||||||||||||||||||
| Andrew Silberstein |
275,000 | 25,417 | 7,385 | 1,550 | — | — | 309,351 | |||||||||||||||||||||
| (1) | The amounts in this column represent the aggregate base salary to be paid to the Named Executive Officers during the Severance Period. |
| (2) | The amounts in this column represent the aggregate amounts of medical and dental continuation coverage the Named Executive Officers would receive during the Severance Period, based on the Company’s current rates. |
| (3) | The amounts in this column represent the aggregate amounts the Named Executive Officers would receive during the Severance Period for (a) the automobile allowance, (b) the non-elective deferral employer contribution made under the Company’s 401(k) plan for the last fiscal year of the Company prior to the termination of employment, (c) the estimated cost to converting the group term life insurance coverage to an individual policy and (d) the annual professional service allowance, which is for Mr. Hershberg only. |
| (4) | The Executive Agreements do not provide for early vesting of stock options; in any event, all currently outstanding options are fully vested for each Named Executive Officer. |
| (5) | The Executive Agreements do not provide for early vesting of restricted stock grants. |
65
The benefits available to a Named Executive Officer in the event of a change in control (a “Change in Control”) differ from those available if such Named Executive Officer is terminated without cause or for Good Reason. Change in Control is defined as any person or group becoming the beneficial owner, directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities; the Company being part of a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; and during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the Board of Directors (including, for this purpose, any new director whose election or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors.
Pursuant to the Globecomm Systems Inc. 1997 Stock Incentive Plan and the 2006 Plan, with respect to options granted prior to its amendment in August 2011, all outstanding stock options and restricted stock held by any executive officer (as well as those held by other employees) will become fully vested upon certain changes in control of the Company.
Pursuant to the 2006 Plan, as amended, in the event that the Company shall be the surviving corporation in any merger or consolidation (except a merger or consolidation as a result of which the holders of shares of common stock receive securities of another corporation), all outstanding stock options and restricted stock on the date of such transaction shall pertain to and apply to the securities which a holder of the number of shares of common stock subject to such stock option or restricted stock would have received in such transaction. In the event of other transactions, the plan administrator shall have the discretion to cancel and make payment for such outstanding awards, allow delayed exercise of such awards or provide for the exchange of such awards.
If the Named Executive Officer does not provide the Company notice of resignation and remains employed by the Company through the first anniversary of a Change in Control, he would be paid a one-time bonus payment equal to 50% of his then-applicable annual base salary (the “Retention Bonus”); provided that the Named Executive Officer must execute and deliver to the Company a general release as a condition of receiving the Retention Bonus.
If, within one year after a Change in Control, a Named Executive Officer gives notice of his resignation for Good Reason due to either a material reduction in the individual’s duties or responsibilities or a change in the individual’s reporting relationship and the Company requests that he continue his employment until a date no later than the first anniversary of the Change in Control, then the Named Executive Officer will receive the severance payments and benefits described above only if he continues his employment until that date.
If the payments to a Named Executive Officer (including the value of accelerated vesting of stock options and restricted stock) in connection with a Change in Control exceed three times the individual’s five-year average compensation from the Company, the portion of the payments that exceeds one times the individual’s average compensation will be subject to a 20% excise tax. The Executive Agreements provide that the severance payments and the Retention Bonus will be reduced to the extent necessary to prevent the imposition of the excise tax, unless the Named Executive Officer would retain a greater net payment by receiving the full amount and paying the excise tax. The amount of compensation that is subject to the excise tax would not be deductible for federal tax purposes by the Company.
66
The table below shows the benefits that would be payable under the 2006 Plan had there been a Change in Control on June 30, 2013:
| Named Executive Officer |
Early Vesting of Stock Options(1) |
Vesting
of Restricted Stock(2) |
||||||
| David E. Hershberg |
$ | — | $ | 1,091,262 | ||||
| Keith A. Hall |
— | 821,613 | ||||||
| Andrew C. Melfi |
— | 505,600 | ||||||
| Thomas C. Coyle |
— | 252,825 | ||||||
| Andrew Silberstein |
— | 332,862 | ||||||
| (1) | All currently outstanding options are fully vested for each Named Executive Officer. The value shown is determined by multiplying the number of stock options on the date of grant by the fair value calculated in accordance with the Financial Accounting Standards Board ASC Topic 718. |
| (2) | The value shown was determined by multiplying the number of shares of restricted stock by the closing price of our Common Stock on June 30, 2013. |
The amounts shown above are those that the Named Executive Officers would have received had there been a Change in Control on June 30, 2013, and the individual remained employed. The table below shows the benefits that would be payable to the Named Executive Officers under the 2006 Plan and the Executive Agreements, as applicable, had there been both a Change in Control and a termination of employment without cause or for Good Reason on June 30, 2013.
| Named Executive Officer |
Severance Salary(1) |
Medical/ Dental Continuation(2) |
Other Benefits(3) |
Vacation Payout |
Early Vesting of Stock Options(4) |
Vesting
of Restricted Stock(5) |
Total(6) | |||||||||||||||||||||
| David E. Hershberg |
$ | 1,725,000 | $ | 72,000 | $ | 104,207 | $ | 45,934 | $ | — | $ | 1,091,262 | $ | 3,038,402 | ||||||||||||||
| Keith A. Hall |
1,275,000 | 76,250 | 40,110 | 33,951 | — | 821,613 | 2,246,923 | |||||||||||||||||||||
| Andrew C. Melfi |
1,110,000 | 74,738 | 45,750 | 29,557 | — | 505,600 | 1,765,645 | |||||||||||||||||||||
| Thomas C. Coyle |
620,000 | 48,000 | 27,230 | 24,764 | — | 252,825 | 972,820 | |||||||||||||||||||||
| Andrew Silberstein |
275,000 | 25,417 | 7,385 | 1,550 | — | 332,862 | 642,213 | |||||||||||||||||||||
| (1) | The amounts in this column represent the current aggregate base salary to be paid to the Named Executive Officers upon termination of employment without cause or for good reason in conjunction with a change in control. |
| (2) | The amounts in this column represent the aggregate amounts of medical and dental continuation coverage the Named Executive Officers would receive upon termination of employment without cause or for Good Reason in conjunction with a change in control, based on the Company’s current rates. |
| (3) | The amounts in this column represent the aggregate amounts the Named Executive Officers would receive upon termination of employment without cause or for Good Reason in conjunction with a change in control for (a) the automobile allowance, (b) the non-elective deferral employer contribution made under the Company’s 401(k) plan for the last fiscal year of the Company prior to the termination of employment, (c) the estimated cost to converting the group term life insurance coverage to an individual policy and (d) the annual professional service allowance, which would be for Mr. Hershberg only. |
| (4) | All currently outstanding options are fully vested for each Named Executive Officer. |
67
| (5) | The value shown was determined by multiplying the number of shares of restricted stock by the closing price of our Common Stock on June 30, 2013. |
| (6) | The amounts listed for Messrs. Hershberg, Hall, Melfi, Coyle and Silberstein do not exceed three times their average compensation, therefore no excise tax would be required pursuant to Section 280G and 4999 of the Internal Revenue Code. |
In the event the Company gives notice of election not to extend the initial term or any renewal term of the Executive Agreements with any of Messrs. Hershberg, Hall or Melfi, the executive would be entitled to 3 years of severance payments and benefits.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Security Ownership
The following table sets forth certain information, as of September 9, 2013, with respect to the beneficial ownership of shares of the Company’s Common Stock of (i) all stockholders known by the Company to be the beneficial owners of more than 5% of its outstanding Common Stock, (ii) each director, nominee for director and the Company’s Named Executive Officers (the latter referring to the Company’s Chief Executive Officer, Chief Financial Officer, the next three most highly paid executive officers during the fiscal year ended June 30, 2013) and (iii) all current directors and executive officers of the Company as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to shares of Common Stock.
| Name and Address of Beneficial Owner(1) |
Number of Shares of Common Stock Beneficially Owned(2) |
Percentage of Shares Outstanding |
||||||
| Wellington Management Company, LLP(3) |
||||||||
| 280 Congress Street |
||||||||
| Boston, MA 10022 |
2,492,646 | 10.44 | % | |||||
| Smithwood Advisors, LP(4) |
||||||||
| 1999 Avenue of the Stars, Suite 2040 |
||||||||
| Los Angeles, CA 90067 |
1,500,000 | 6.28 | % | |||||
| BlackRock, Inc.(5) |
||||||||
| 40 East 52nd Street |
||||||||
| New York, NY 10022 |
1,493,939 | 6.26 | % | |||||
| Lynn E. Gorguze(6) |
||||||||
| 1200 Prospect Street, Suite 325 |
||||||||
| LaJolla, CA 92037 |
1,454,436 | 6.09 | % | |||||
| Dimensional Fund Advisors LP(7) |
||||||||
| Palisades West, Building One |
||||||||
| 6300 Bee Cave Road |
||||||||
| Austin, TX 78746 |
1,431,239 | 6.00 | % | |||||
| NSB Advisors LLC(8) |
||||||||
| 200 Westage Business Center Drive, Suite 228 |
||||||||
| Fishkill, NY 12524 |
1,384,712 | 5.80 | % | |||||
| Discovery Group I, LLC(9) |
||||||||
| 191 North Wacker Drive, Suite 1685 |
||||||||
| Chicago, IL 60606 |
1,379,607 | 5.78 | % | |||||
68
| Name and Address of Beneficial Owner(1) |
Number of Shares of Common Stock Beneficially Owned(2) |
Percentage of Shares Outstanding |
||||||
| David E. Hershberg |
188,636 | (10) | * | |||||
| Keith A. Hall |
109,109 | (11) | * | |||||
| Andrew C. Melfi |
79,768 | * | ||||||
| Thomas C. Coyle |
40,620 | * | ||||||
| Andrew Silberstein |
30,107 | (12) | * | |||||
| A. Robert.Towbin |
59,790 | (13) | * | |||||
| C. J. Waylan |
48,200 | (14) | * | |||||
| Harry L. Hutcherson, Jr |
43,200 | (14) | * | |||||
| Brian T. Maloney |
45,245 | (15) | * | |||||
| Jack A. Shaw |
33,200 | (16) | * | |||||
| Richard E. Caruso |
12,200 | (17) | * | |||||
| All current directors and executive officers as a group (11 persons) |
690,075 | (18) | 2.86 | % | ||||
| * | Represents less than 1%. |
| (1) | Except as otherwise indicated, (i) the stockholders named in the table have sole voting and investment power with respect to all shares beneficially owned by them and (ii) the address of all stockholders listed in the table is c/o Globecomm Systems Inc., 45 Oser Avenue, Hauppauge, New York 11788. |
| (2) | The number of shares of Common Stock outstanding as of September 9, 2013 was 23,869,506. Except as otherwise indicated, amounts shown for each stockholder include (i) all restricted and unrestricted shares of Common Stock owned by each stockholder and (ii) shares of Common Stock underlying options exercisable within 60 days of September 9, 2013. |
| (3) | Other than the information relating to its percentage ownership of our Common Stock, based solely on information contained in a Schedule 13F filed with the SEC on August 7, 2013 by Wellington Management Company, LLP, or “Wellington.” In the Wellington Schedule 13F, Wellington reported shared voting power of 1,678,881 shares and shared dispositive power of 2,492,646 shares. In total, Wellington clients own more than 10% of the Company’s stock. However, no individual client, and no group of clients that have the authority to act as a voting bloc, own or control 10% or more of the Company’s stock in their Wellington managed accounts. |
| (4) | Other than the information relating to its percentage ownership of our Common Stock, based solely on information contained in a Schedule 13D filed with the SEC on January 3, 2013, by Smithwood Advisors LP, or “Smithwood.” In the Smithwood Schedule 13D, Smithwood reported shared voting power and shared dispositive power over 1,500,000 shares. |
| (5) | Other than the information relating to its percentage ownership of our Common Stock, based solely on information contained in a Schedule 13G/A filed with the SEC on February 6, 2013 by BlackRock, Inc., or “BlackRock.” In the BlackRock Schedule 13G/A, BlackRock reported sole voting power and sole dispositive power of 1,493,939 shares. |
| (6) | Other than the information relating to its percentage ownership of our Common Stock, based solely on information contained in a Schedule 13G filed with the SEC on February 14, 2013, by Lynn E. Gorguze. In the Lynn E. Gorguze Schedule 13G, Lynn E. Gorguze reported sole voting and dispositive power over 717,803 shares, and shared voting and dispositive power over 736,633 shares. |
| (7) | Other than the information relating to its percentage ownership of our Common Stock, based solely on information contained in a Schedule 13G/A filed with the SEC on February 11, 2013, by Dimensional Fund Advisors LP, or “Dimensional.” In the Dimensional Schedule 13G/A, Dimensional reported sole voting power over 1,393,439 shares and sole dispositive power over 1,431,239 shares. As stated in the Dimensional Schedule 13G/A, Dimensional furnishes investment |
69
| advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts (such investment companies, trusts and accounts, collectively referred to as the “Funds”). In certain cases, subsidiaries of Dimensional may act as an adviser or sub-adviser to certain Funds. In its role as investment advisor, sub-adviser and/or manager, neither Dimensional nor its subsidiaries (collectively, the “Dimensional Entities”) possess voting and/or investment power over the securities of the Company that are owned by the Funds, and may be deemed to be the beneficial owner of the shares of the Company held by the Funds. However, all securities reported in the Dimensional Schedule 13G/A are owned by the Funds. The Dimensional Entities disclaimed beneficial ownership of such securities in the Dimensional Schedule 13G/A. |
| (8) | Other than the information relating to its percentage ownership of our Common Stock, based solely on information contained in a Schedule 13G/A filed with the SEC on February 13, 2013 by NSB Advisors LLC, or “NSB.” In the NSB Schedule 13G/A, NSB reported sole dispositive power of 1,384,712 shares. Based on information that NSB has provided to the Company, NSB is a money manager that invests for a broad range of clients. NSB maintains no ownership interest in the securities held by its clients and unless a client delegates proxy-voting authority to the firm, clients retain their right to vote shares. |
| (9) | Other than the information relating to its percentage ownership of our Common Stock, based solely on information contained in a Schedule 13D filed with the SEC on December 31, 2012 by Discovery Group I, LLC or “Discovery”. In the Discovery Schedule 13D, Discovery reported shared voting power and shared dispositive power of 1,379,607 shares. Discovery indicated that the purchase of the shares was through two private investment partnerships, over which Discovery exercises discretionary investment management authority. Daniel J. Donaghue and Michael R. Murphy are disclosed as managing members of Discovery. |
| (10) | Includes 32,500 shares of Common Stock issuable upon the exercise of stock options. |
| (11) | Includes 3,068 shares of Common Stock issuable upon the exercise of stock options. |
| (12) | Includes 5,000 shares of Common Stock issuable upon the exercise of stock options. |
| (13) | Includes 35,000 shares of Common Stock issuable upon the exercise of stock options. |
| (14) | Includes 35,000 shares of Common Stock issuable upon the exercise of stock options. |
| (15) | Includes 37,045 shares of Common Stock issuable upon the exercise of stock options. |
| (16) | Includes 25,000 shares of Common Stock issuable upon the exercise of stock options. |
| (17) | Includes 5,000 shares of Common Stock issuable upon the exercise of stock options. |
| (18) | See Notes (10) through (17) above. |
The table below sets forth securities we have authorized for issuance under our equity compensation plans.
Equity Compensation Plan Information as of June 30, 2013
| Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plan approved by security holders |
362,416 | $ | 7.65 | 1,340,921 | ||||||||
| Equity compensation plan not approved by security holders(1) |
22,000 | 6.82 | — | |||||||||
|
|
|
|
|
|||||||||
| Total |
384,416 | $ | 7.60 | 1,340,921 | ||||||||
|
|
|
|
|
|||||||||
| (1) | Shares were issued as part of the Globecomm Systems/Telaurus 2009 Special Equity Incentive Plan, which was established in connection with the acquisition of Telaurus. The Compensation Committee |
70
| of our board of directors administers the plan. The plan allowed for (i) stock option grants with a ten-year limit on exercise from the date of the grant (with 1/4 of the stock option grant vesting on the anniversary of the date of the grant each year for four years), (ii) restricted stock grants (with 1/3 of the restricted stock grant vesting on the anniversary of the date of the grant each year for three years) and (iii) restricted stock unit grants (with 1/3 of the restricted stock unit grant becoming transferable on the anniversary of the date of the grant each year for three years). Under the plan, awards could be granted with respect to 60,000 shares of common stock of the Company, 35,000 shares of which were granted in the form of options. Pursuant to its terms, no further awards may be made under the plan. Awards are subject to adjustments upon certain changes in our common stock or other corporate events. |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Approval of Related Party Transactions
The Company has established a policy and procedures for approval of Company transactions with related parties (the “Policy”). The Audit Committee is charged with administering the Policy. The Policy broadly defines “related parties” and “related party transactions” and encompasses those parties and transactions which would require disclosure under SEC rules.
All employees, officers and directors of the Company are required to report any proposed transaction that might be subject to the Policy to the Company’s Chief Financial Officer and to the Chairman of the Audit Committee. Transactions that should have been brought to the Audit Committee and are discovered after they have been implemented must be submitted for ratification. In assessing a related party transaction, the Audit Committee will consider such factors as it deems appropriate, including, without limitation: (i) the business reasons for the Company to enter into the related party transaction; (ii) the commercial reasonableness of the terms of the related party transaction; (iii) the materiality of the related party transaction to the Company; (iv) whether the terms of the related party transaction are fair to the Company and on the same basis as would apply if the transaction did not involve a related party; (v) the extent of the related party’s interest in the related party transaction; (vi) if applicable, the impact of the related party transaction on a non-employee director’s independence and (vii) the actual or apparent conflict of interest of the related party participating in the related party transaction.
The Audit Committee is authorized to condition approval of a related party transaction and may not approve the transaction unless it has determined that, upon consideration of all relevant information, the proposed transaction is in, or not inconsistent with, the best interests of the Company and its shareholders. No transactions subject to the Policy were brought to the attention of the Audit Committee for approval or ratification during fiscal 2013.
| Item 14. | Principal Accounting Fees and Services |
Fees Paid to Independent Registered Public Accounting Firm
The following is a summary of the fees billed to the Company for audit, audit-related and non-audit services provided by Ernst & Young LLP to the Company for the fiscal years ended June 30, 2013 and June 30, 2012:
| Fee Category |
Fiscal 2013 | Fiscal 2012 | ||||||
| Audit Fees |
$ | 638,000 | $ | 564,000 | ||||
| Audit-Related Fees |
28,000 | — | ||||||
| Tax Fees |
156,000 | 263,000 | ||||||
| All Other Fees |
— | — | ||||||
|
|
|
|
|
|||||
| Total Fees |
$ | 822,000 | $ | 827,000 | ||||
|
|
|
|
|
|||||
71
Audit Fees: Consists of the aggregate fees billed for professional services rendered for the audit of the Company’s annual financial statements and the effectiveness of internal controls over financial reporting and review of the interim financial statements included in the Company’s quarterly reports on Form 10-Q and services that are normally provided by Ernst & Young LLP in connection with statutory and regulatory filings or engagements. Fiscal 2012, includes the audit of an employee benefit plan.
Audit-Related Fees: Consists of the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “Audit Fees”.
Tax Fees: Consists of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. During fiscal 2013 and 2012 the Company received assistance regarding its international tax planning and research and development tax credits.
All Other Fees: Consists of the aggregate fees billed for products and services other than the services reported above. There were no such fees in the years presented.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by Ernst & Young LLP. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for audit services a year in advance, and any pre-approval for permissible non-audit services is detailed as to the particular service or category of services. Ernst & Young LLP and the Company’s management are required to periodically report to the Audit Committee the fees for the services performed by Ernst & Young LLP and the extent of services provided by Ernst & Young LLP in accordance with this pre-approval.
72
| Item 15. | Exhibits, Financial Statement Schedules |
| (A) (1) | Index to Consolidated Financial Statements |
|||||||
| F-1 | ||||||||
| F-3 | ||||||||
| Consolidated Statements of Operations for the years ended June 30, 2013, 2012 and 2011 |
|
F-4 |
| |||||
| Consolidated Statements of Comprehensive Income for the years ended June 30, 2013, 2012, 2011 |
F-5 | |||||||
|
|
F-6 |
| ||||||
| Consolidated Statements of Cash Flows for the years ended June 30, 2013, 2012 and 2011 |
|
F-7 |
| |||||
| F-8 | ||||||||
| (2) | Index to Consolidated Financial Statement Schedule |
|||||||
| Schedule II—Valuation and Qualifying Accounts | S-1 | |||||||
All other schedules for which provision is made in the applicable accounting regulation from the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
73
(3) Index of Exhibits
| Exhibit |
||
| 2.1 | Agreement and Plan of Merger, dated as of August 25, 2013, among Globecomm Systems Inc., Wasserstein Cosmos Co-Invest, L.P. and Cosmos Acquisition Corp. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, dated August 29, 2013). | |
| 3.1 | Amended and Restated Certificate of Incorporation dated August 5, 1997, as amended February 9, 2005 (incorporated by reference to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1998). | |
| 3.2 | Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1998). | |
| 4.2 | See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated By-laws of the Registrant defining rights of holders of Common Stock of the Registrant (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1, File No. 333-22425 (the “Registration Statement”)). | |
| 10.1 | Employment Agreement dated as of October 9, 2001 by and between the Registrant and David E. Hershberg (incorporated by reference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). | |
| 10.2 | The Amended and Restated 1997 Stock Incentive Plan (incorporated by reference to Exhibit 99 of the Registrant’s Registration Statement on Form S-8 Registration, File No. 333-112351). | |
| 10.3 | 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.8 of the Registrant’s Registration Statement on Form S-8, File No. 333-70527). | |
| 10.4 | Employment Agreement, dated as of October 9, 2001, by and between Andrew C. Melfi and the Registrant (incorporated by reference to Exhibit 10.21 of the Registrant’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). | |
| 10.5 | Amendment to Employment Agreement, dated as of May 15, 2008, by and between Andrew C. Melfi and the Registrant (incorporated by reference to Exhibit 10.20 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2008). | |
| 10.6 | Employment Agreement, dated as of June 30, 2008, by and between Tom Coyle and the Registrant (incorporated by reference to Exhibit 10.24 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2008). | |
| 10.7 | Amendment to Employment Agreement, dated as of January 21, 2009, by and between David E. Hershberg and the Registrant (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K dated January 21, 2009). | |
| 10.8 | Amendment to Employment Agreement, dated as of January 21, 2009, by and between, Andrew C. Melfi and the Registrant (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K, dated January 21, 2009). | |
| 10.9 | Amendment to Employment Agreement, dated as of January 21, 2009, by and between, Thomas C. Coyle and the Registrant (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K, dated January 21, 2009). | |
| 10.10 | Employment Agreement, dated as of July 21, 2009, by and between Keith Hall and the Registrant (incorporated by reference to Exhibit 10.23 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2009). | |
74
| Exhibit |
||
| 10.11 | Globecomm Systems Inc./Telaurus 2009 Special Equity Incentive Plan (incorporated by reference to Exhibit 10.25 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2009). | |
| 10.12 | Employment Agreement, dated as of June 23, 2011, by and between Andrew Silberstein and the Registrant (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, dated June 23, 2011). | |
| 10.13 | Credit Agreement, dated July 18, 2011 by and between the Registrant and Citibank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, dated July 18, 2011). | |
| 10.14 | Amended and Restated 2006 Stock Incentive Plan (incorporated by reference to Appendix A of Registrant’s proxy statement filed October 15, 2012). | |
| 10.15 | Amendment 2 to Employment Agreement, dated as of September 10, 2013, by and between, David E. Hershberg and the Registrant (filed herewith). | |
| 10.16 | Equity Commitment Letter, dated as of August 25, 2013, between Wasserstein Partners III, LP and Wasserstein Cosmos Co-Invest, L.P. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, dated August 29, 2013). | |
| 10.17 | Guaranty, dated as of August 25, 2013, by Wasserstein Partners III, LP, in favor of Globecomm Systems Inc. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, dated August 29, 2013). | |
| 14 | Registrant’s Code of Ethics and Business Conduct (incorporated by reference to Exhibit 14 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2004). | |
| 21 | Subsidiaries of the Registrant (filed herewith). | |
| 23 | Consent of Independent Registered Public Accounting Firm (filed herewith). | |
| 31.3 | Chief Executive Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended (filed herewith). | |
| 31.4 | Chief Financial Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended (filed herewith). | |
| 32 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002 (filed herewith). | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
(B) Exhibits
The response to this portion of Item 15 is submitted as a separate section of this report.
(C) Financial Statement Schedules
The response to this portion of Item 15 is submitted as a separate section of this report.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GLOBECOMM SYSTEMS INC. | ||||||
| Date: September 13, 2013 | By: | /s/ DAVID E. HERSHBERG | ||||
| David E. Hershberg, | ||||||
| Chairman of the Board and | ||||||
| Chief Executive Officer | ||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /s/ DAVID E. HERSHBERG David E. Hershberg |
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
9/13/13 | ||
| /s/ ANDREW C. MELFI Andrew C. Melfi |
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
9/13/13 | ||
| /s/ KEITH A. HALL Keith A. Hall |
President and Chief Operating Officer and Director |
9/13/13 | ||
| /s/ RICHARD E. CARUSO Richard E. Caruso |
Director |
9/13/13 | ||
| /s/ HARRY L. HUTCHERSON Jr. Harry L. Hutcherson Jr. |
Director |
9/13/13 | ||
| /s/ BRIAN T. MALONEY Brian T. Maloney |
Director |
9/13/13 | ||
| /s/ JACK A. SHAW Jack A. Shaw |
Director |
9/13/13 | ||
| /s/ A. ROBERT TOWBIN A. Robert Towbin |
Director |
9/13/13 | ||
| /s/ C.J. WAYLAN C.J. Waylan |
Director |
9/13/13 | ||
76
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Globecomm Systems Inc.
We have audited the accompanying consolidated balance sheets of Globecomm Systems Inc. (the “Company”) as of June 30, 2013 and 2012 and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2013. Our audits also included the financial statement schedule listed in the index at item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Globecomm Systems Inc. at June 30, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Globecomm Systems Inc.’s internal control over financial reporting as of June 30, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated September 13, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Jericho, New York
September 13, 2013
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Globecomm Systems Inc.
We have audited Globecomm Systems Inc.’s internal control over financial reporting as of June 30, 2013 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Globecomm Systems Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Globecomm Systems Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2013; based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Globecomm Systems Inc. as of June 30, 2013 and 2012 and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2013 and our report dated September 13, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Jericho, New York
September 13, 2013
F-2
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| June 30, 2013 |
June 30, 2012 |
|||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 87,286 | $ | 72,196 | ||||
| Accounts receivable, net |
58,426 | 59,224 | ||||||
| Inventories |
17,076 | 30,664 | ||||||
| Prepaid expenses and other current assets |
4,056 | 4,101 | ||||||
| Deferred income taxes |
4,309 | 7,041 | ||||||
|
|
|
|
|
|||||
| Total current assets |
171,153 | 173,226 | ||||||
| Fixed assets, net |
50,367 | 47,712 | ||||||
| Goodwill |
68,818 | 68,463 | ||||||
| Intangibles, net |
16,576 | 19,331 | ||||||
| Other assets |
1,327 | 1,335 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 308,241 | $ | 310,067 | ||||
|
|
|
|
|
|||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 21,943 | $ | 34,017 | ||||
| Deferred revenues |
4,269 | 4,626 | ||||||
| Accrued payroll and related fringe benefits |
3,264 | 6,728 | ||||||
| Other accrued expenses |
7,243 | 11,918 | ||||||
| Current portion of long term debt |
6,100 | 6,100 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
42,819 | 63,389 | ||||||
| Other liabilities |
111 | 230 | ||||||
| Long term debt |
8,475 | 14,575 | ||||||
| Deferred income taxes |
12,383 | 12,485 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Series A Junior Participating, shares authorized, shares |
— | — | ||||||
| Common stock, $.001 par value, shares authorized: 50,000,000 |
24 | 24 | ||||||
| Additional paid-in capital |
214,735 | 205,162 | ||||||
| Retained earnings |
33,444 | 18,205 | ||||||
| Treasury stock, at cost, 465,351 shares in 2013 and 2012 |
(2,781 | ) | (2,781 | ) | ||||
| Accumulated other comprehensive loss |
(969 | ) | (1,222 | ) | ||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
244,453 | 219,388 | ||||||
|
|
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | 308,241 | $ | 310,067 | ||||
|
|
|
|
|
|||||
See accompanying notes.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Years Ended June 30, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Revenues from services |
$ | 199,069 | $ | 220,921 | $ | 188,700 | ||||||
| Revenues from infrastructure solutions |
120,545 | 160,980 | 85,491 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total revenues |
319,614 | 381,901 | 274,191 | |||||||||
|
|
|
|
|
|
|
|||||||
| Costs and operating expenses: |
||||||||||||
| Costs from services |
132,573 | 152,302 | 131,329 | |||||||||
| Costs from infrastructure solutions |
110,517 | 142,831 | 70,423 | |||||||||
| Selling and marketing |
17,870 | 19,576 | 18,015 | |||||||||
| Research and development |
4,308 | 6,251 | 4,304 | |||||||||
| General and administrative |
31,787 | 34,432 | 30,038 | |||||||||
| Earn-out fair value adjustments |
— | (11,874 | ) | 4,824 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total costs and operating expenses |
297,055 | 343,518 | 258,933 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income from operations |
22,559 | 38,383 | 15,258 | |||||||||
| Other income (expense): |
||||||||||||
| Interest income |
331 | 246 | 186 | |||||||||
| Interest expense |
(394 | ) | (574 | ) | (410 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Income before income taxes |
22,496 | 38,055 | 15,034 | |||||||||
| Provision for income taxes |
7,257 | 9,492 | 6,046 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income |
$ | 15,239 | $ | 28,563 | $ | 8,988 | ||||||
|
|
|
|
|
|
|
|||||||
| Basic net income per common share |
$ | 0.67 | $ | 1.29 | $ | 0.42 | ||||||
|
|
|
|
|
|
|
|||||||
| Diluted net income per common share |
$ | 0.66 | $ | 1.26 | $ | 0.41 | ||||||
|
|
|
|
|
|
|
|||||||
| Weighted-average shares used in the calculation of basic net income per common share |
22,690 | 22,078 | 21,332 | |||||||||
|
|
|
|
|
|
|
|||||||
| Weighted-average shares used in the calculation of diluted net income per common share |
23,096 | 22,711 | 22,026 | |||||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes.
F-4
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| Years Ended June 30, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Net income |
$ | 15,239 | $ | 28,563 | $ | 8,988 | ||||||
| Other comprehensive income, net of tax: |
||||||||||||
| Foreign currency translation |
$ | 253 | $ | (1,440 | ) | $ | 411 | |||||
|
|
|
|
|
|
|
|||||||
| Comprehensive income |
$ | 15,492 | $ | 27,123 | $ | 9,399 | ||||||
|
|
|
|
|
|
|
|||||||
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED JUNE 30, 2013, 2012 AND 2011
(In thousands)
|
Common Stock |
Additional Paid-in Capital |
Retained Earnings (Deficit) |
Accumulated Other Comprehensive (Loss) Income |
Treasury Stock | Total Stockholders’ Equity |
|||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| Balance at June 30, 2010 |
22,051 | $ | 22 | $ | 189,401 | $ | (19,346 | ) | $ | (193 | ) | 465 | $ | (2,781 | ) | $ | 167,103 | |||||||||||||||
| Proceeds from exercise of stock options |
325 | — | 1,991 | — | — | — | — | 1,991 | ||||||||||||||||||||||||
| Stock compensation expense |
— | — | 3,679 | — | — | — | — | 3,679 | ||||||||||||||||||||||||
| Grant of restricted shares |
439 | 1 | — | — | — | — | — | 1 | ||||||||||||||||||||||||
| Tax benefit from stock compensation plan |
— | — | 45 | — | — | — | — | 45 | ||||||||||||||||||||||||
| Grant of shares for Telaurus earn-out |
113 | — | 896 | — | — | — | — | 896 | ||||||||||||||||||||||||
| Grant of warrants for Telaurus earn-out |
— | — | 676 | — | — | — | — | 676 | ||||||||||||||||||||||||
| Net income |
— | — | — | 8,988 | — | — | — | 8,988 | ||||||||||||||||||||||||
| Foreign currency translation |
— | — | — | — | 411 | — | — | 411 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at June 30, 2011 |
22,928 | 23 | 196,688 | (10,358 | ) | 218 | 465 | (2,781 | ) | 183,790 | ||||||||||||||||||||||
| Proceeds from exercise of stock options |
228 | 1 | 1,310 | — | — | — | — | 1,311 | ||||||||||||||||||||||||
| Proceeds from exercise of warrants |
12 | — | 120 | — | — | — | — | 120 | ||||||||||||||||||||||||
| Stock compensation expense |
— | — | 3,476 | — | — | — | — | 3,476 | ||||||||||||||||||||||||
| Grant of restricted shares |
342 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Tax benefit from stock compensation plan |
— | — | 3,568 | — | — | — | — | 3,568 | ||||||||||||||||||||||||
| Net income |
— | — | — | 28,563 | — | — | — | 28,563 | ||||||||||||||||||||||||
| Foreign currency translation |
— | — | — | — | (1,440 | ) | — | — | (1,440 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at June 30, 2012 |
23,510 | 24 | 205,162 | 18,205 | (1,222 | ) | 465 | (2,781 | ) | 219,388 | ||||||||||||||||||||||
| Proceeds from exercise of stock options |
140 | — | 610 | — | — | — | — | 610 | ||||||||||||||||||||||||
| Proceeds from exercise of warrants |
126 | — | 1,256 | — | — | — | — | 1,256 | ||||||||||||||||||||||||
| Stock compensation expense |
— | — | 3,867 | — | — | — | — | 3,867 | ||||||||||||||||||||||||
| Grant of restricted shares |
407 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Tax benefit from stock compensation plan |
— | — | 3,840 | — | — | — | — | 3,840 | ||||||||||||||||||||||||
| Net income |
— | — | — | 15,239 | — | — | — | 15,239 | ||||||||||||||||||||||||
| Foreign currency translation |
— | — | — | — | 253 | — | — | 253 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at June 30, 2013 |
24,183 | $ | 24 | $ | 214,735 | $ | 33,444 | $ | (969 | ) | 465 | $ | (2,781 | ) | $ | 244,453 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
See accompanying notes.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended June 30, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Operating Activities: |
||||||||||||
| Net income |
$ | 15,239 | $ | 28,563 | $ | 8,988 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
| Depreciation and amortization |
12,087 | 12,614 | 9,703 | |||||||||
| Provision for doubtful accounts |
(191 | ) | 734 | 949 | ||||||||
| Deferred income taxes |
3,070 | 5,178 | 5,226 | |||||||||
| Stock compensation expense |
3,867 | 3,476 | 3,679 | |||||||||
| Tax benefit from stock compensation plan |
3,840 | 3,568 | 45 | |||||||||
| Earn-out fair value adjustments |
— | (11,874 | ) | 4,824 | ||||||||
| Changes in operating assets and liabilities (net of impact of acquisitions): |
||||||||||||
| Accounts receivable |
661 | (2,821 | ) | (8,618 | ) | |||||||
| Inventories |
13,479 | 11,549 | (463 | ) | ||||||||
| Prepaid expenses and other current assets |
77 | 1,382 | (2,242 | ) | ||||||||
| Other assets |
22 | 840 | 86 | |||||||||
| Accounts payable |
(12,274 | ) | 4,421 | (6,114 | ) | |||||||
| Deferred revenues |
(390 | ) | (8,877 | ) | 1,091 | |||||||
| Accrued payroll and related fringe benefits |
(3,468 | ) | 333 | (12 | ) | |||||||
| Other accrued expenses |
(5 | ) | (1,079 | ) | 112 | |||||||
| Other liabilities |
(119 | ) | 194 | (748 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities |
35,895 | 48,201 | 16,506 | |||||||||
|
|
|
|
|
|
|
|||||||
| Investing Activities: |
||||||||||||
| Purchases of fixed assets |
(11,767 | ) | (14,844 | ) | (9,363 | ) | ||||||
| Acquisition of businesses, net of cash received |
— | — | (19,070 | ) | ||||||||
| Cash payment for earn-outs |
(4,700 | ) | (4,500 | ) | (5,086 | ) | ||||||
| Restricted cash |
— | — | 5,025 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in investing activities |
(16,467 | ) | (19,344 | ) | (28,494 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Financing Activities: |
||||||||||||
| Proceeds from exercise of stock options |
610 | 1,311 | 1,991 | |||||||||
| Proceeds from exercise of warrants |
1,256 | 120 | — | |||||||||
| Borrowings under acquisition loans |
— | — | 18,000 | |||||||||
| Repayments of debt |
(6,100 | ) | (6,100 | ) | (3,100 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash (used in) provided by financing activities |
(4,234 | ) | (4,669 | ) | 16,891 | |||||||
|
|
|
|
|
|
|
|||||||
| Effect of foreign currency translation on cash |
(104 | ) | 44 | 198 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net increase in cash and cash equivalents |
15,090 | 24,232 | 5,101 | |||||||||
| Cash and cash equivalents at beginning of year |
72,196 | 47,964 | 42,863 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of year |
$ | 87,286 | $ | 72,196 | $ | 47,964 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental Disclosure of Cash Flow Information: |
||||||||||||
| Cash paid for interest |
$ | 403 | $ | 601 | $ | 364 | ||||||
| Cash paid for income taxes |
1,254 | 920 | 630 | |||||||||
See accompanying notes.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
| 1. | Organization and Description of Business |
Globecomm Systems Inc. (“Globecomm”), incorporated in the State of Delaware on August 17, 1994, is a global communications solutions provider. Employing expertise in emerging communication technologies, including satellite and other transport mediums, the Company offers a comprehensive suite of system integration, system products, and network services providing complete end-to-end solutions. The Company’s wholly-owned subsidiaries, Globecomm Network Services Corporation (“GNSC”), Globecomm Services Maryland LLC (“GSM”), Cachendo LLC (“Cachendo”), B.V. Mach 6 (“Mach 6”), Telaurus Communications LLC (“Telaurus”), Melat Networks Inc. (“Melat”), Evolution Communications Group Limited B.V.I. (“Evocomm”), Carrier to Carrier Telecom B.V. (“C2C”), Globecomm Systems SA Proprietary Ltd (formerly, Evosat SA Proprietary Ltd) (“Globecomm SA”) and ComSource Inc. (“ComSource”) provide communication services.
| 2. | Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries, GNSC, GSM, Cachendo, Mach 6, Telaurus, Melat, Evocomm, C2C, Globecomm SA and ComSource (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue for its production-type contracts that are sold separately as standard satellite ground segment systems when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, collectability is reasonably assured, delivery has occurred and the contractual performance specifications have been met. The Company’s standard satellite ground segment systems produced in connection with these contracts are typically short-term (less than twelve months in term) and manufactured using a standard modular production process. Such systems require less engineering, drafting and design efforts than the Company’s long-term complex production-type projects. Revenue is recognized on the Company’s standard satellite ground segment systems upon shipment and acceptance of factory performance testing which is when title transfers to the customer. The amount of revenues recorded on each standard production-type contract is reduced by the customer’s contractual holdback amount, which typically requires 10% to 30% of the contract value to be retained by the customer until installation and final acceptance is complete. The customer generally becomes obligated to pay 70% to 90% of the contract value upon shipment and acceptance of factory performance testing. Installation is not deemed to be essential to the functionality of the system since installation does not require significant changes to the features or capabilities of the equipment, does not require complex software integration and interfacing and the Company has not experienced any difficulties installing such equipment. In addition, the customer or other third party vendors can install the equipment. The estimated value of the installation services is determined by management, which is typically less than the customer’s contractual holdback percentage. If the holdback is less than the estimated value of installation, the Company will defer recognition of revenues, determined on a
F-8
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Significant Accounting Policies (continued) |
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 customer’s satellite ground segment network. The equipment and systems produced in connection with these contracts are typically long-term (in excess of twelve months in term) and require significant customer-specific engineering, drafting and design effort in order to effectively integrate all of the customizable earth station equipment into the customer’s ground segment network. These contracts generally have larger contract values, greater economic risks and substantive specific contractual performance requirements due to the engineering and design complexity of such systems and related equipment. Progress payments received in advance by customers are netted against the inventory balances in the accompanying consolidated balance sheets.
Revenues from services consist of the managed networks, application services, professional services and lifecycle support service lines. 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.
The Company enters into multiple-element arrangements with its customers including hardware, engineering solutions, professional services and maintenance services. For arrangements involving multiple deliverables, the Company evaluates and separates each deliverable to determine whether it represents a separate unit of accounting based on whether the delivered item has value to the customer on a stand-alone basis. Consideration is allocated to each deliverable based on the item’s relative selling price. The Company uses a hierarchy to determine the selling price to be used to allocate revenue to each deliverable as follows: (i) vendor-specific objective evidence of the selling price; (ii) third party evidence of selling price; and (iii) best estimate of selling price.
Costs from Services
Costs from services consist primarily of satellite space segment charges, fiber 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 24 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 costs.
Research and Development
Research and development expenditures are expensed as incurred.
F-9
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Significant Accounting Policies (continued) |
Inventories
Inventories, which consist primarily of work-in-progress from costs incurred in connection with specific customer contracts, are stated at the lower of cost (using the first-in, first-out method of accounting) or market value. Progress payments received under long-term contracts are netted against inventories.
Cash Equivalents
The Company classifies highly liquid financial instruments with a maturity, at the purchase date, of three months or less as cash equivalents.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized and repairs and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from three to twenty-five years. Amortization of leasehold improvements and leased equipment is calculated using the straight-line method over the shorter of the lease term or estimated useful life of the asset.
Stock-Based Compensation
The measurement of stock-based compensation expense is based on the fair value of the award at the date of the grant. Stock-based compensation expense is recognized over the vesting period.
The fair value of options granted under the Company’s 1997 and 2006 Plans was estimated at date of grant using a Black-Scholes option pricing model with the following assumptions for the year ended June 30, 2011: weighted average risk-free interest rate of 1.4%, weighted average volatility factor of the expected market price of the Company’s common stock of .57, no dividend yield and a weighted-average expected life of the options of four years. There were no options granted in the years ended June 30, 2013 and 2012.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and forfeiture rates.
Goodwill
Goodwill represents the excess of the purchase price of businesses over the fair value of the identifiable net assets acquired. Goodwill is tested for impairment at least annually. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit (calculated using a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment charge. The Company performs the goodwill impairment test annually in the fourth quarter. There have been no events in the year ended June 30, 2013 that would indicate that goodwill was impaired.
Long-Lived Assets
For other than goodwill, when impairment indicators are present, the Company reviews the carrying value of its assets in determining the ultimate recoverability of their unamortized values using future
F-10
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Significant Accounting Policies (continued) |
undiscounted cash flows expected to be generated by the assets. If such assets are considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds the future discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. No impairment was noted on the long-lived assets at June 30, 2013 and 2012.
The Company evaluates the periods of amortization in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized cost will be allocated to the increased or decreased number of remaining periods in the revised lives.
Income Taxes
Deferred Tax Assets
Consistent with the provisions of ASC Topic No. 740, Income Taxes, the Company regularly estimates the ability to recover deferred income taxes, reports such deferred tax assets at the amount that is determined to be more-likely-than-not recoverable, and estimates income taxes in each of the taxing jurisdictions in which the Company operates. This process involves estimating current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing revenue and expenses for tax and accounting purposes. These differences may result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. The Company is required to assess the likelihood that the deferred tax assets, which include net operating loss carry forwards and temporary differences that are expected to be deductible in future years, will be recoverable from future taxable income or other tax planning strategies. If recovery is not likely, a valuation allowance must be provided based on estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods, the effect of temporary differences, the expected reversal of deferred tax liabilities, and available tax planning strategies.
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 June 30, 2013, the Company had a liability for unrecognized tax benefits of approximately $1,621,000, which, if recognized in the future, would favorably impact the Company’s effective tax rate. On a quarterly basis, the Company evaluates its tax positions and revises its estimates accordingly. The Company believes that none of these tax positions will be resolved within the next twelve months. The Company records both accrued interest and penalties related to income tax matters, if any, in the provision for income taxes in the accompanying consolidated statements of operations. As of June 30, 2013, 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 Company’s federal tax returns for the fiscal 2010 through 2013 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 upon the contract and work performed. Generally, a basic limited warranty, including parts
F-11
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Significant Accounting Policies (continued) |
and labor, is provided to customers for one year. The Company can recoup certain of these costs through product warranties it holds with its original equipment manufacturers, which typically are one year in term. Historically, warranty expense has been minimal, however, management periodically assesses the need for any additional warranty reserve.
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 January 2011, the Company purchased approximately 1.2 million Euros under these forward exchange contracts. As the contracts did not qualify for hedge accounting, the Company recorded approximately $515,000 of gain in general and administrative expense in the year ended June 30, 2011, to adjust these contracts to market value.
Comprehensive Income
Comprehensive income for the years ended June 30, 2013, 2012 and 2011 of approximately $15,492,000, $27,123,000 and $9,399,000 includes a foreign currency translation gain of approximately $253,000, a loss of approximately $1,440,000 and a gain of approximately $411,000, respectively.
Recent Accounting Pronouncements
In September 2011, the FASB issued amended guidance intended to simplify how entities test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance did not have an impact on our consolidated financial condition or results of operations.
In June 2011, the FASB issued amended guidance that revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). The ASU does not change the items that must be reported in OCI. For public entities, the ASU’s amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have an impact on our consolidated financial condition or results of operations.
In July 2012, the FASB issued guidance that allows an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is not more likely than not that the indefinite-lived intangible asset is impaired. An entity no longer will be required to perform the quantitative impairment test of indefinite-lived intangible assets if, after it assesses that the totality of events and circumstances, the entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not believe that this guidance will have a material impact on our consolidated financial condition or results of operations.
F-12
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | Significant Accounting Policies (continued) |
In February 2013, the FASB issued guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This guidance is effective for periods beginning after December 15, 2012. The Company does not believe that this guidance will have a material impact on our consolidated financial condition or results of operations.
| 3. | Acquisitions |
ComSource
The Company entered into an Agreement and Plan of Merger effective as of April 8, 2011 with 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 $19.9 million, funded through $1.9 million of existing cash and $18.0 million through the ComSource Acquisition Loan (as defined below). In March 2012 the working capital adjustment was finalized according to the terms of the agreement resulting in additional purchase price of $623,000. Payments of approximately $288,000 and $335,000 were paid in February and April 2012, respectively.
As part of the acquisition, the former ComSource shareholders were also entitled to receive additional cash payments of up to $8.9 million and $12.1 million, for the 12 months ending March 31, 2012 and 2013, respectively, subject to an earn-out based upon the acquired business achieving certain earnings milestones in those 12 month periods. In July 2012, $4.7 million was paid to the former shareholders of ComSource for the earn-out period ending March 31, 2012. No earn-out payment was achieved for the earn-out period ending March 31, 2013.
ComSource employs 44 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 provided the Company with further entry into the growing wireless market.
The Company has accounted for the acquisition as a purchase under the purchase method of accounting. The assets and liabilities of ComSource were recorded as of the acquisition date at their respective fair values and consolidated with those of the Company. The excess of the purchase price over the net assets acquired was recorded as goodwill of approximately $29,145,000. The goodwill and intangible assets are not deductible for income tax purposes.
F-13
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 3. | Acquisitions (continued) |
The purchase price allocation was as follows (in thousands):
| Cash and cash equivalents |
$ | 813 | ||
| Total other current assets |
9,181 | |||
| Fixed assets |
1,936 | |||
| Other assets |
105 | |||
| Goodwill |
29,145 | |||
| Customer relationships |
8,600 | |||
| Contracts backlog |
700 | |||
| Trademarks |
300 | |||
| Liabilities |
(14,075 | ) | ||
|
|
|
|||
| Total Purchase Price |
$ | 36,705 | ||
|
|
|
The ComSource acquisition contributed approximately $3.9 million and $0.3 million of revenue and loss before taxes, respectively, for the year ended June 30, 2011.
C2C and Evocomm
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 “Carrier Seller”), a privately owned company, all of the issued shares of Carrier to Carrier Telecom B.V. (“C2C”), a company incorporated in the Netherlands, and the business assets of Evocomm Communications Limited, or “Evocomm”, each of C2C and Evocomm being a wholly-owned subsidiary of the Carrier 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 22 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 15 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 with Carrier Seller, the Company paid a cash purchase price of $15.0 million (funded through $2.5 million of the Company’s current cash position and $12.5 million through the C2C Acquisition Loan (as defined below) issued under the Company’s credit facility). The Carrier Seller also would be entitled to receive additional cash payments of up to an aggregate of $10.9 million, subject to an earn-out based upon the acquired businesses achieving certain earnings milestones within 24 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 $5.5 million. In June 2011, the Company and the former owners of C2C and Evocomm reached a settlement agreement on the second earn-out period resulting in a $4.5 million liability for the final earn-out as of June 30, 2011. In July 2011 the $4.5 million was paid to the former shareholders. Adjustments to the fair value of this earn-out resulted in a charge to earnings of approximately $4.4 million in the year ended June 30, 2011.
F-14
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 3. | Acquisitions (continued) |
Telaurus
On May 29, 2009, the Company, acting through its wholly owned subsidiary Telaurus LLC, acquired the entire business operations of Telaurus Communications LLC (the “Telaurus Seller”), a privately owned company, including all of the issued stock of the Telaurus Seller’s wholly-owned subsidiary Telaurus Communications Pte. Ltd., a company incorporated in Singapore.
Pursuant to the terms of the acquisition agreement with the Telaurus Seller, the Company acquired the entire business operations of the Telaurus Seller for a cash purchase price of $6.1 million (funded through the Company’s existing cash position). The Telaurus Seller also was entitled to receive up to 335,000 shares of the Company’s common stock and up to 1,000,000 warrants to purchase shares of the Company’s common stock, subject to an earn-out based upon the acquired business achieving certain earnings milestones within twelve months following the closing. Based on results of the earn-out period, which expired on May 31, 2010, the former owners of Telaurus received approximately 104,000 common shares, and approximately $353,000 in cash on January 22, 2010, and 113,000 common shares, approximately $586,000 in cash and 244,910 warrants to purchase common stock at an exercise price of $10.00 on July 28, 2010. The warrants expire on July 28, 2013. In the years end June 30, 2013 and 2012, 125,597 and 12,040 warrants, respectively, were exercised resulting in a remaining balance of 107,273 at June 30, 2013.
| 4. | Accounts Receivable |
Accounts receivable may include amounts billed but not paid by customers pursuant to retainage provisions in connection with infrastructure solutions contracts. At June 30, 2013 and 2012 there was approximately $1,002,000 and $0, respectively, included in accounts receivable billed but not paid by customers under retainage provisions in connection with long-term contracts. These amounts are expected to be collected within one year.
| 5. | Inventories |
Inventories consist of the following:
| June 30, 2013 |
June 30, 2012 |
|||||||
| (In thousands) | ||||||||
| Raw materials and component parts |
$ | 2,239 | $ | 1,998 | ||||
| Work-in-progress |
16,134 | 30,717 | ||||||
|
|
|
|
|
|||||
| 18,373 | 32,715 | |||||||
| Less progress payments |
1,297 | 2,051 | ||||||
|
|
|
|
|
|||||
| $ | 17,076 | $ | 30,664 | |||||
|
|
|
|
|
|||||
F-15
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 6. | Fixed Assets |
Fixed assets consist of the following:
| June 30, 2013 |
June 30, 2012 |
Depreciable life | ||||||||
| (In thousands) | ||||||||||
| Land |
$ | 2,116 | $ | 2,116 | — | |||||
| Building and improvements |
15,403 | 15,144 | 10-25 years | |||||||
| Computer equipment and software |
11,791 | 9,858 | 3-5 years | |||||||
| Machinery and equipment |
7,756 | 7,534 | 3-5 years | |||||||
| Network operations center |
37,548 | 33,048 | 3-10 years | |||||||
| Satellite earth station equipment |
29,641 | 26,816 | 10 years | |||||||
| Tempo equipment and software |
6,058 | — | 4 years | |||||||
| Furniture and fixtures |
2,493 | 2,416 | 5 years | |||||||
| Leasehold improvements |
2,332 | 2,305 | Shorter of lease term or estimated life | |||||||
| Construction in progress |
306 | 3,519 | ||||||||
|
|
|
|
|
|||||||
| 115,444 | 102,756 | |||||||||
| Less accumulated depreciation and amortization |
65,077 | 55,044 | ||||||||
|
|
|
|
|
|||||||
| $ | 50,367 | $ | 47,712 | |||||||
|
|
|
|
|
|||||||
Depreciation expense of approximately $9,180,000, $8,970,000 and $7,118,000 was included in the statement of operations in the years ended June 30, 2013, 2012 and 2011, respectively.
| 7. | Goodwill and Intangibles |
The Company performs the goodwill impairment test annually in the fourth quarter. No impairment was noted on the goodwill and intangible assets at June 30, 2013 and 2012. The carrying value of goodwill, which relates to the services reporting unit was as follows (in thousands):
| Balance at June 30, 2011 |
$ | 70,171 | ||
| Finalization of ComSource working capital and other adjustments |
(1,708 | ) | ||
|
|
|
|||
| Balance at June 30, 2012 |
68,463 | |||
| Foreign currency adjustments |
355 | |||
|
|
|
|||
| Balance at June 30, 2013 |
$ | 68,818 | ||
|
|
|
F-16
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | Goodwill and Intangibles (continued) |
Intangibles subject to amortization consist of the following:
| June 30, 2013 |
June 30, 2012 |
Est. useful life | ||||||||
| (In thousands) | ||||||||||
| Customer relationships |
24,798 | $ | 24,617 | 7-18 years | ||||||
| Software |
1,287 | 1,287 | 5 years | |||||||
| Contracts backlog |
2,442 | 2,406 | 6 months – 2 years | |||||||
| Covenant not to compete |
126 | 125 | 3-4 years | |||||||
| Trademarks |
382 | 381 | 5 years | |||||||
|
|
|
|
|
|||||||
| 29,035 | 28,816 | |||||||||
| Less accumulated amortization |
12,459 | 9,485 | ||||||||
|
|
|
|
|
|||||||
| Intangibles, net |
$ | 16,576 | $ | 19,331 | ||||||
|
|
|
|
|
|||||||
Amortization expense of approximately $2,907,000, $3,644,000 and $2,585,000 was included in general and administrative expenses in the years ended June 30, 2013, 2012 and 2011, respectively.
Amortization expense for the next five years related to these intangible assets is expected to be as follows (in thousands):
| 2014 |
$ | 2,871 | ||
| 2015 |
2,578 | |||
| 2016 |
2,228 | |||
| 2017 |
2,183 | |||
| 2018 |
1,878 |
| 8. | Long Term Debt |
As of June 30, 2013 debt consisted of the following (in thousands):
| C2C Acquisition Loan |
$ | 4,375 | ||
| ComSource Acquisition Loan |
10,200 | |||
|
|
|
|||
| Total debt |
14,575 | |||
| Less current portion |
6,100 | |||
|
|
|
|||
| Long term debt |
$ | 8,475 | ||
|
|
|
C2C Acquisition Loan
The purchase of C2C and Evocomm was funded, in part, through a five-year $12,500,000 acquisition term loan (“C2C Acquisition Loan”) provided by Citibank, N.A on March 5, 2010, under the Company’s credit facility. The C2C Acquisition Loan bears interest at the prime rate or LIBOR plus 200 basis points, at the Company’s discretion. The balance is to be paid in equal monthly instalments, excluding interest, of approximately $208,333 beginning on April 1, 2010. The interest rate in effect as of June 30, 2013 was approximately 2.2%. At June 30, 2013, $4,375,000 was outstanding of which $2,500,000 was due within one year. The Company is required to comply with various ongoing financial covenants described below, with which the Company was in compliance as of June 30, 2013.
F-17
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 8. | Long Term Debt (continued) |
ComSource Acquisition Loan
The purchase of ComSource was funded, in part, through a five-year $18,000,000 acquisition term loan (“ComSource Acquisition Loan”) provided by Citibank, N.A on April 7, 2011. The ComSource Acquisition Loan bears interest at the prime rate or LIBOR plus 200 basis points, at the Company’s discretion. The balance is to be paid in equal monthly instalments, excluding interest, of $300,000 beginning on May 1, 2011. The interest rate in effect as of June 30, 2013 was approximately 2.2%. At June 30, 2013, $10,200,000 was outstanding of which $3,600,000 was due within one year. The Company is required to comply with various ongoing financial covenants described below, with which the Company was in compliance as of June 30, 2013.
Line of Credit
On July 18, 2011, the Company entered into a secured credit facility with Citibank which expires October 31, 2014. The credit facility is comprised of a $72.5 million line of credit (the “2011 Line”) which includes the following sublimits: (a) $30 million available for standby letters of credit; (b) $10 million available for commercial letters of credit; (c) a line for term loans, each having a term of no more than five years, in the aggregate amount of up to $50 million that can be used for acquisitions; and (d) $15 million available for revolving credit borrowings. The Company is required to pay a commitment fee on the average daily unused portion of the total commitment based on the Company’s consolidated leverage ratio (currently 25 basis points per annum) payable quarterly in arrears.
At the discretion of the Company, advances under the 2011 Line bear interest at the prime rate or LIBOR plus applicable margin based on the Company’s consolidated leverage ratio and are collateralized by a first priority security interest on all of the personal property of the Company. At June 30, 2013, the applicable margin on the LIBOR rate was 200 basis points. The Company is required to comply with various ongoing financial covenants, including with respect to the Company’s leverage ratio, minimum cash balance, fixed charge coverage ratio and EBITDA minimums, with which the Company was in compliance at June 30, 2013. As of June 30, 2013, in addition to the C2C Acquisition Loan and ComSource Acquisition Loan described above there were standby letters of credit of approximately $8.1 million, which were applied against and reduced the amounts available under the credit facility.
Future minimum payments under these agreements, excluding interest, through maturity are expected to be as follows (in thousands):
| 2014 |
$ | 6,100 | ||
| 2015 |
5,475 | |||
| 2016 |
3,000 |
| 9. | Stock Incentive and Stock Purchase Plans |
On November 22, 2006, the Company’s Board of Directors authorized, and the stockholders subsequently approved, the 2006 Stock Incentive Plan (“2006 Plan”), which provides for grants of stock options or restricted stock awards to employees, directors and consultants of the Company for an aggregate of 850,000 shares of the Company’s common stock. In November 2009, the Company’s stockholders approved an amendment to the 2006 Plan whereby the number of shares authorized for issuance under the 2006 Plan increased by 1,500,000. In November 2012, the Company’s stockholders approved an amendment to the 2006 Plan whereby the number of shares authorized for issuance under the 2006 Plan increased by 1,500,000. At June 30, 2013 there were 1,340,921 shares available for grant under the 2006 Plan.
F-18
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 9. | Stock Incentive and Stock Purchase Plans (continued) |
On February 26, 1997, the Company’s Board of Directors authorized, and the stockholders subsequently approved, the 1997 Stock Incentive Plan (“1997 Plan”), which authorized the granting to employees, directors and consultants of the Company options to purchase an aggregate of 2,280,000 shares of the Company’s common stock. In November 2000 and 2001, the Company’s stockholders approved amendments to the 1997 Plan whereby the number of shares authorized for issuance under the 1997 Plan increased by 800,000 shares in fiscal 2001 and 2002. In November 2004, the Company’s stockholders approved amendments to the 1997 Plan whereby the number of shares authorized for issuance under the 1997 Plan increased by 1,000,000 shares. On November 22, 2006, the Company terminated the 1997 Plan and cancelled all remaining unissued shares totaling approximately 1,311,000. No new options can be granted from the 1997 Plan.
Options granted under the 1997 Plan and 2006 Plan may be either incentive or non-qualified stock options. The exercise price of an option shall be determined by the Company’s Board of Directors or compensation committee of the board at the time of grant, however, in the case of an incentive stock option the exercise price may not be less than 100% of the fair market value of such stock at the time of the grant, or less than 110% of such fair market value in the case of options granted to a 10% owner of the Company’s stock.
Employee options generally vest annually in equal installments over a four-year period and expire on the tenth anniversary of the date of grant. Director options granted upon initial election to the Board of Directors vest one third on the grant date and an additional one third on each of the next two succeeding anniversaries of the date of grant. Each additional annual grant vests immediately. All director options expire the earlier of ten years from the date of grant or one year from concluding service as a director of the Company. Restricted stock awards generally vest annually in equal installments over a three-year period. One restricted grant of 202,000 shares (granted in February 2009) vested one third on the grant date and an additional one third on each of the next two succeeding anniversaries of the date of grant.
The following table summarizes the Company’s stock option activity (in thousands, except per share amounts):
| Years Ended June 30, | ||||||||||||||||||||||||
| 2013 | 2012 | 2011 | ||||||||||||||||||||||
| Shares Under Option |
Weighted- Average Exercise Price |
Shares Under Option |
Weighted- Average Exercise Price |
Shares Under Option |
Weighted- Average Exercise Price |
|||||||||||||||||||
| Balance, beginning of year |
539 | $ | 6.86 | 772 | $ | 6.53 | 1,125 | $ | 6.53 | |||||||||||||||
| Grants |
— | — | — | — | 65 | 10.18 | ||||||||||||||||||
| Exercised |
(140 | ) | 4.34 | (228 | ) | 5.73 | (325 | ) | 6.13 | |||||||||||||||
| Canceled |
(12 | ) | 11.03 | (5 | ) | 6.15 | (93 | ) | 10.46 | |||||||||||||||
| Forfeited |
(3 | ) | 12.97 | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, end of year |
384 | 7.60 | 539 | 6.86 | 772 | 6.53 | ||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Exercisable, end of year |
368 | $ | 7.44 | 500 | $ | 6.61 | 706 | $ | 6.23 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Weighted-average fair value options granted during the year |
$ | 4.56 | ||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||
F-19
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 9. | Stock Incentive and Stock Purchase Plans (continued) |
The following table summarizes information about stock options outstanding at June 30, 2013 (in thousands, except per share amounts):
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Range of Exercise Price |
Number Outstanding |
Weighted- Average Remaining Contractual Life (Years) |
Weighted- Average Exercise Price |
Number Exercisable |
Weighted- Average Exercise Price |
|||||||||||||||
| $1.47 — $3.35 |
60 | 0.3 | $ | 3.29 | 60 | $ | 3.29 | |||||||||||||
| $4.29 — $6.48 |
78 | 3.1 | 5.63 | 78 | 5.63 | |||||||||||||||
| $6.51 — $10.70 |
174 | 4.4 | 7.64 | 168 | 7.62 | |||||||||||||||
| $10.99 — $14.48 |
72 | 5.2 | 13.27 | 62 | 13.31 | |||||||||||||||
|
|
|
|
|
|||||||||||||||||
| 384 | 3.6 | $ | 7.60 | 368 | $ | 7.44 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
Restricted shares and restricted stock units granted under the 2006 Plan totaled 428,000, 342,000, and 426,000 shares in the years ended June 30, 2013, 2012 and 2011, respectively. The weighted average grant date fair value of restricted shares and restricted stock units granted during the years ended June 30, 2013, 2012 and 2011 was $11.01, $12.97 and $7.06. As of June 30, 2013 there was approximately $5,399,000 of unrecognized compensation cost related to non-vested stock-based compensation related to the restricted shares and restricted share units. The cost is expected to be recognized over a weighted-average period of 1.9 years. As of June 30, 2013 there was approximately $66,000 of unrecognized compensation cost related to non-vested outstanding stock options. The cost is expected to be recognized over a weighted-average period of 1.7 years.
The Company has reserved approximately 1,270,686 shares of its common stock for issuance upon exercise of all available and outstanding options, warrants, and unvested restricted shares and restricted share units at June 30, 2013.
| 10. | Basic and Diluted Net Income Per Common Share |
Basic net income per common share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding for the period. For diluted net income per common share, the weighted average shares include the incremental common shares issuable upon the exercise of stock options and warrants and unvested restricted shares and restricted stock units (using the treasury stock method). The incremental common shares for stock options, warrants and unvested restricted shares and restricted stock units are excluded from the calculation of diluted net income per share, if their effect is anti-dilutive. Diluted net income per share for the years ended June 30, 2013, 2012 and 2011, excludes the effect of approximately 327,000, 93,000, and 109,000 stock options, warrants and unvested restricted shares and restricted stock units in the calculation of the incremental common shares, respectively, as their effect would have been anti-dilutive.
F-20
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 11. | Fair Value Measurements |
The Company has categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
ASC 820 — Fair Value Measurements and Disclosures requires the use of observable market inputs (quoted market prices) when measuring fair value and requires Level 1 quoted prices 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 year ended June 30, 2013.
At June 30, 2013, the book value of the Company’s $14,575,000 of debt approximates fair value based upon its variable interest rate.
The fair value of the earn-out accruals is determined using an analysis of projected results as compared to targets in the related acquisition agreement. This analysis was performed using an income approach valuation method based on unobservable inputs including revenues, gross profit and discount rate, along with the underlying entity’s history and outlook and are classified within Level 3 of the valuation hierarchy. The following table sets forth the changes in fair value measurements attributable to the earn-out accruals during the year ended June 30, 2013 (in thousands):
| Balance at June 30, 2012 |
$ | 4,700 | ||
| Payment of earn-out |
(4,700 | ) | ||
|
|
|
|||
| Balance at June 30, 2013 |
$ | — | ||
|
|
|
The earn-out period has concluded as of March 31, 2013 and there was no liability accrued as of June 30, 2013.
| 12. | Retirement Plan |
The Company maintains a 401(k) plan, which covers substantially all employees of the Company. Participants may elect to contribute from 1% to 75% of their pre-tax compensation, subject to elective deferral limitations under Section 403 of the Internal Revenue Code. The plan allows for a matching contribution equal to the discretionary percentage of a participating employee not to exceed 4% of their compensation by the Company. Effective January 1, 2011 and 2012 the Company changed the matching contribution to a maximum of 4% of their compensation not to exceed $5,500 and $7,500, respectively, per employee per calendar year. ComSource maintains a separate 401(k) plan. Effective January 1, 2013, there is no matching contribution. The Company recorded expense for the Company contributions of approximately $820,000, $1,597,000, and $944,000 to the 401(k) plans during the years ended June 30, 2013, 2012 and 2011, respectively.
F-21
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 13. | Income Taxes |
The components of income before taxes are as follows:
| Years Ended June 30, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| (in thousands) | ||||||||||||
| United States |
$ | 21,988 | $ | 37,252 | $ | 13,602 | ||||||
| Foreign |
508 | 803 | 1,432 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 22,496 | $ | 38,055 | $ | 15,034 | ||||||
|
|
|
|
|
|
|
|||||||
During fiscal 2013, 2012 and 2011, the Company recorded a tax provision of approximately $7,257,000 $9,492,000, and $6,046,000 respectively. Information pertaining to the Company’s provision for income taxes is as follows:
| Years Ended June 30, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| (in thousands) | ||||||||||||
| Current: |
||||||||||||
| Federal |
$ | 3,585 | $ | 3,589 | $ | 274 | ||||||
| State |
482 | 735 | 270 | |||||||||
| Foreign |
120 | (10 | ) | 276 | ||||||||
|
|
|
|
|
|
|
|||||||
| 4,187 | 4,314 | 820 | ||||||||||
| Deferred: |
||||||||||||
| Federal |
3,295 | 5,082 | 5,418 | |||||||||
| State |
(138 | ) | 82 | 95 | ||||||||
| Foreign |
(87 | ) | 14 | (287 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| 3,070 | 5,178 | 5,226 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Total provision for income taxes |
$ | 7,257 | $ | 9,492 | $ | 6,046 | ||||||
|
|
|
|
|
|
|
|||||||
The Company computes income taxes using the liability method. Accordingly, deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to the differences between the carrying amount of the assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities are determined by using enacted tax laws and rates in effect when the differences are expected to reverse. Net deferred tax assets are recorded when it is more likely than not that such tax benefits will be realized.
F-22
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 13. | Income Taxes (continued) |
Significant components of the Company’s net deferred tax liabilities are as follows:
| June 30, 2013 |
June 30, 2012 |
|||||||
| (In thousands) | ||||||||
| Deferred tax assets: |
||||||||
| Domestic net operating loss carryforwards |
$ | 63 | $ | 2,364 | ||||
| Foreign net operating loss carryforwards |
192 | 158 | ||||||
| Accruals and reserves |
3,149 | 3,290 | ||||||
| Write-down of investments |
388 | 389 | ||||||
| AMT tax credit |
1,768 | 1,310 | ||||||
| Research and development credit |
960 | 3,313 | ||||||
| Projects in progress |
(99 | ) | 390 | |||||
|
|
|
|
|
|||||
| 6,421 | 11,214 | |||||||
| Valuation allowance |
(580 | ) | (2,850 | ) | ||||
|
|
|
|
|
|||||
| 5,841 | 8,364 | |||||||
| Deferred tax liabilities: |
||||||||
| Depreciation |
(8,312 | ) | (7,888 | ) | ||||
| Intangible assets |
(5,603 | ) | (5,920 | ) | ||||
|
|
|
|
|
|||||
| Net deferred tax liabilities |
$ | (8,074 | ) | $ | (5,444 | ) | ||
|
|
|
|
|
|||||
For the year ended June 30, 2013, the Company’s deferred tax asset valuation allowance decreased by approximately $2,270,000 primarily related to excess stock based compensation deduction, as such amounts have reduced current taxes payable.
As of June 30, 2013, the deferred tax asset valuation allowance of approximately $580,000 relates to the following: write-down of investments of approximately $388,000; and foreign net operating losses for which no benefit has been provided of approximately $192,000.
As of June 30, 2013, the Company had no federal net operating loss carryforwards. The Company had various tax credits of approximately $6,887,000 including approximately $5,119,000 for research and development tax credits expiring at various dates beginning in 2025 through 2032 and approximately $1,768,000 for alternative minimum tax credits which may be carried forward indefinitely. The Company’s state NOLs expire at various dates beginning in 2022.
Federal income and foreign withholding taxes have not been provided on approximately $2,902,000 of undistributed earnings of international subsidiaries at June 30, 2013. The Company intends to reinvest the earnings in its foreign operations indefinitely, except where it is able to repatriate these earnings to the United States without material incremental tax provision. The determination and estimation of the future income tax consequences in all relevant taxing jurisdictions involves the application of highly complex tax laws in the countries involved, particularly in the United States, and is based on the tax profile of the Company in the year of earnings repatriation. Accordingly, it is not practicable to determine the amount of tax associated with such undistributed earnings. The Company has foreign net operating loss carryforwards of $685,000 which do not expire.
F-23
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 13. | Income Taxes (continued) |
The reconciliation of tax provision computed at the U.S. federal statutory tax rates to the effective income tax rates on pre-tax income are as follows:
| Years Ended June 30, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| U.S. Federal statutory rate |
35 | % | 35 | % | 35 | % | ||||||
| Research and development credit |
(1 | ) | — | (6 | ) | |||||||
| State and local taxes |
1 | 2 | 2 | |||||||||
| Earn-out fair value adjustments |
— | (11 | ) | 11 | ||||||||
| Foreign taxes |
— | — | (4 | ) | ||||||||
| Extraterritorial income exclusion |
(2 | ) | — | — | ||||||||
| Other |
(1 | ) | (1 | ) | 2 | |||||||
|
|
|
|
|
|
|
|||||||
| 32 | % | 25 | % | 40 | % | |||||||
|
|
|
|
|
|
|
|||||||
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties is as follows:
| Years Ended | ||||||||
| June 30, 2013 |
June 30, 2012 |
|||||||
| Balance at beginning of year |
$ | 1,475 | $ | 1,420 | ||||
| Additions based on tax positions taken |
146 | 55 | ||||||
|
|
|
|
|
|||||
| Balance at end of year |
$ | 1,621 | $ | 1,475 | ||||
|
|
|
|
|
|||||
At June 30, 2013, the Company had a liability for unrecognized tax benefits of approximately $1,621,000 which, if recognized in the future, would favorably impact the Company’s effective tax rate. On a quarterly basis, the Company evaluates its tax positions and revises its estimates accordingly. The Company believes that none of these tax positions will be resolved within the next twelve months. The Company records both accrued interest and penalties related to income tax matters, if any, in the provision for income taxes in the accompanying consolidated statements of operations. As of June 30, 2013, the Company had not accrued any amounts for the potential payment of penalties and interest.
The Company has identified the following jurisdictions as major jurisdictions: U.S. Federal, Maryland, New York and Virginia. The Company’s U.S. Federal and state jurisdictions remain open for the fiscal years ended 2010 through 2013.
| 14. | Segment Information |
The Company operates through two business segments. Its services segment, through GNSC, GSM, Cachendo, Mach 6, Telaurus, Melat, Evocomm, C2C, Globecomm SA and ComSource provides communication services. Its infrastructure solutions segment, through Globecomm Systems Inc., provides design, engineering and installation of complex ground segment systems and networks.
The Company’s 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.
F-24
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 14. | Segment Information (continued) |
The following is the Company’s business segment information for the years ended June 30, 2013, 2012 and 2011 and as of June 30, 2013 and 2012:
| Years Ended June 30, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| (In thousands) | ||||||||||||
| Revenues: |
||||||||||||
| Services |
$ | 200,380 | $ | 228,349 | $ | 191,147 | ||||||
| Infrastructure solutions |
121,266 | 162,113 | 85,649 | |||||||||
| Intercompany eliminations |
(2,032 | ) | (8,561 | ) | (2,605 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total revenues |
$ | 319,614 | $ | 381,901 | $ | 274,191 | ||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from operations: |
||||||||||||
| Services |
$ | 31,820 | $ | 42,796 | $ | 21,896 | ||||||
| Infrastructure solutions |
(9,283 | ) | (4,385 | ) | (6,640 | ) | ||||||
| Interest income |
331 | 246 | 186 | |||||||||
| Interest expense |
(394 | ) | (574 | ) | (410 | ) | ||||||
| Intercompany eliminations |
22 | (28 | ) | 2 | ||||||||
|
|
|
|
|
|
|
|||||||
| Income before income taxes |
$ | 22,496 | $ | 38,055 | $ | 15,034 | ||||||
|
|
|
|
|
|
|
|||||||
| Depreciation and amortization: |
||||||||||||
| Services |
$ | 10,535 | $ | 10,908 | $ | 7,976 | ||||||
| Infrastructure solutions |
1,552 | 1,706 | 1,750 | |||||||||
| Intercompany eliminations |
— | — | (23 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Total depreciation and amortization |
$ | 12,087 | $ | 12,614 | $ | 9,703 | ||||||
|
|
|
|
|
|
|
|||||||
| Years Ended June 30, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| (In thousands) | ||||||||||||
| Expenditures for fixed assets: |
||||||||||||
| Services |
$ | 10,034 | $ | 12,033 | $ | 7,971 | ||||||
| Infrastructure solutions |
1,733 | 2,811 | 1,392 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total expenditures for fixed assets |
$ | 11,767 | $ | 14,844 | $ | 9,363 | ||||||
|
|
|
|
|
|
|
|||||||
| June 30, 2013 |
June 30, 2012 |
|||||||
| (in thousands) | ||||||||
| Assets: |
||||||||
| Services |
$ | 303,726 | $ | 254,115 | ||||
| Infrastructure solutions |
262,031 | 252,630 | ||||||
| Intercompany eliminations |
(257,516 | ) | (196,678 | ) | ||||
|
|
|
|
|
|||||
| Total assets |
$ | 308,241 | $ | 310,067 | ||||
|
|
|
|
|
|||||
F-25
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 14. | Segment Information (continued) |
At June 30, 2013, the Company had total foreign assets of approximately $14,530,000 including cash and cash equivalents of approximately $3,705,000 and long lived assets of approximately $3,588,000 located in the Netherlands, South Africa, British Virgin Islands, Afghanistan and Gibraltar, associated with its wholly-owned subsidiaries, Mach 6, C2C, Evocomm, Globecomm SA and Melat.
| 15. | Significant Customers and Concentrations of Credit Risk |
The Company provides services and provides infrastructure solutions for customers in diversified geographic locations. Credit risk with respect to accounts receivable is concentrated due to the limited number of customers. The timing of cash realization is determined based upon the contract or service agreements with the customers. The Company performs ongoing credit evaluations of its customers’ financial condition and in some cases requires a letter of credit or cash in advance for foreign customers. The Company evaluates the collectability of accounts receivable based on numerous factors, including past transaction history with customers and their credit worthiness. The Company’s estimate of its allowance for doubtful accounts is periodically adjusted when the Company becomes aware of a specific customer’s inability to meet its financial obligations, or as a result of changes in the overall aging of accounts receivable. Allowances related to accounts receivable at June 30, 2013 and 2012, were approximately $1,428,000, and $1,990,000, respectively.
For the year ended June 30, 2013, two customers accounted for 13% and 10% of the Company’s consolidated revenues. For the years ended June 30, 2012 and 2011 one customer accounted for 19%.
Revenues earned from services are attributed to the geographic location in which the services are being provided. Revenues earned from infrastructure solutions are attributed to the geographic location to which the equipment is shipped. Revenues attributed to the United States for the years ended June 30, 2013, 2012 and 2011 were 44%, 57% and 41%, respectively. Revenues from foreign sales as a percentage of total consolidated revenues are as follows:
| Years Ended June 30, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Africa |
5 | % | 5 | % | 6 | % | ||||||
| North and South America |
3 | % | 1 | % | 3 | % | ||||||
| Asia |
3 | % | 4 | % | 6 | % | ||||||
| Europe |
14 | % | 9 | % | 8 | % | ||||||
| Middle East |
31 | % | 24 | % | 36 | % | ||||||
|
|
|
|
|
|
|
|||||||
| 56 | % | 43 | % | 59 | % | |||||||
|
|
|
|
|
|
|
|||||||
The Company places its cash and cash equivalents with high quality financial institutions. Approximately 90% and 91% of all cash and cash equivalents are held in one financial institution at June 30, 2013 and 2012, respectively. Cash and cash equivalents are in excess of Federal Deposit Insurance Company insurance limits.
F-26
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 16. | Commitments and Contingencies |
Lease Commitments
The Company currently leases satellite space segment services, office and warehouse space, teleport services and other equipment under various operating leases, which expire in various years through 2022. As leases expire, it can be expected that in the normal course of business they will be renewed or replaced.
Future minimum lease payments under non-cancelable operating leases with terms of one year or more consist of the following at June 30, 2013 (in thousands):
| 2014 |
$ | 18,999 | ||
| 2015 |
6,610 | |||
| 2016 |
2,598 | |||
| 2017 |
1,412 | |||
| 2018 |
5 | |||
| Thereafter |
16 | |||
|
|
|
|||
| $ | 29,640 | |||
|
|
|
Rent expense for satellite space segment services, office and warehouse space, teleport services, and other equipment was approximately $43,212,000, $48,846,000 and $40,494,000 for years ended June 30, 2013, 2012 and 2011, respectively.
| 17. | Subsequent Events |
On July 3, 2013, the Company entered into an Asset Purchase Agreement to acquire certain assets and liabilities of WorldCell Inc. as of July 1, 2013 in exchange for a purchase price of $3.8 million cash and $0.4 of services to be provided by the Company to the former owner.
On August 25, 2013, the Company, entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Wasserstein Cosmos Co-Invest, L.P., a Delaware limited partnership (“Parent”), and Cosmos Acquisition Corp., an indirect wholly owned subsidiary of Parent (“Merger Subsidiary”). Parent and Merger Subsidiary are affiliates of Wasserstein & Co., LP. Pursuant to the terms of the Merger Agreement, and subject to the conditions thereof, Merger Subsidiary will merge with and into Globecomm, and Globecomm will become an indirect wholly owned subsidiary of Parent (the “Merger”). The Merger Agreement was unanimously approved by Globecomm’s board of directors. At the effective time and as a result of the Merger, each outstanding share of Globecomm common stock, other than shares owned by Globecomm, Parent or any subsidiary of either Parent or Globecomm and shares with respect to which appraisal rights are properly exercised and not withdrawn, will be converted into the right to receive $14.15, in cash, without interest.
Consummation of the Merger is subject to certain conditions, including (i) the adoption of the Merger Agreement by the Company’s stockholders, (ii) the absence of any law or order prohibiting the closing, (iii) the expiration or termination of any applicable waiting period under the HSR Act and any International Traffic in Arms Regulations requirements and any National Industrial Security Program Operating Manual requirements having been met, (iv) to the extent necessary, receipt of approval from the Committee on Foreign Investment in the United States (or notification from CFIUS that it has determined that it does not have jurisdiction over the transactions contemplated by the Merger Agreement or has determined not to conduct a full investigation), (v) the receipt of certain FCC consents and the completion of certain actions relating to certain of the FCC licenses, (vi) the satisfaction of a financial test by the Company, (vii) the absence of any Material Adverse Effect (as defined in the
F-27
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 17. | Subsequent Events (continued) |
Merger Agreement) with respect to the Company, (viii) the absence of certain events relating to Company’s financial statements, (ix) the absence of any debarment of the Company from contracting with the federal government of the United States, and (x) other customary closing conditions.
18. Quarterly Information (unaudited)
The following tables set forth unaudited consolidated financial information for each of the eight fiscal quarters in the period ended June 30, 2013.
| Three Months Ended, | ||||||||||||||||||||||||||||||||
| June 30, | Mar. 31, | Dec. 31, | Sept. 30, | June 30, | Mar. 31, | Dec. 31, | Sept. 30, | |||||||||||||||||||||||||
| 2013 | 2013 | 2012 | 2012 | 2012 | 2012 | 2011 | 2011 | |||||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||||||||
| Statement of Operations Data: |
||||||||||||||||||||||||||||||||
| Revenues from services |
$ | 49,964 | $ | 51,761 | $ | 50,172 | $ | 47,172 | $ | 50,099 | $ | 65,931 | $ | 54,652 | $ | 50,239 | ||||||||||||||||
| Revenues from infrastructure solutions |
30,681 | 26,306 | 29,567 | 33,991 | 54,713 | 44,998 | 40,538 | 20,731 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total revenues |
80,645 | 78,067 | 79,739 | 81,163 | 104,812 | 110,929 | 95,190 | 70,970 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Costs and operating expenses: |
||||||||||||||||||||||||||||||||
| Costs from services |
31,760 | 35,030 | 33,779 | 32,004 | 35,334 | 47,182 | 35,821 | 33,965 | ||||||||||||||||||||||||
| Costs from infrastructure solutions |
28,922 | 22,816 | 26,707 | 32,072 | 48,292 | 40,047 | 36,370 | 18,122 | ||||||||||||||||||||||||
| Selling and marketing |
4,679 | 4,485 | 4,418 | 4,288 | 5,285 | 4,843 | 4,855 | 4,593 | ||||||||||||||||||||||||
| Research and development |
1,175 | 1,194 | 986 | 953 | 1,349 | 1,398 | 1,748 | 1,756 | ||||||||||||||||||||||||
| General and administrative |
8,110 | 8,071 | 7,911 | 7,695 | 9,519 | 8,179 | 8,391 | 8,343 | ||||||||||||||||||||||||
| Earn-out fair value adjustments |
— | — | — | — | (4,129 | ) | 2,829 | (4,100 | ) | (6,474 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total costs and operating expenses |
74,646 | 71,596 | 73,801 | 77,012 | 95,650 | 104,478 | 83,085 | 60,305 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Income from operations |
5,999 | 6,471 | 5,938 | 4,151 | 9,162 | 6,451 | 12,105 | 10,665 | ||||||||||||||||||||||||
| Other income (expense): |
||||||||||||||||||||||||||||||||
| Interest income |
85 | 79 | 82 | 85 | 75 | 59 | 57 | 55 | ||||||||||||||||||||||||
| Interest expense |
(85 | ) | (92 | ) | (103 | ) | (114 | ) | (111 | ) | (141 | ) | (157 | ) | (165 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Income before income taxes |
5,999 | 6,458 | 5,917 | 4,122 | 9,126 | 6,369 | 12,005 | 10,555 | ||||||||||||||||||||||||
| Provision for income taxes |
1,441 | 2,282 | 2,088 | 1,446 | 2,042 | 3,467 | 2,755 | 1,228 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income |
$ | 4,558 | $ | 4,176 | $ | 3,829 | $ | 2,676 | $ | 7,084 | $ | 2,902 | $ | 9,250 | $ | 9,327 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Basic net income per common share |
$ | 0.20 | $ | 0.18 | $ | 0.17 | $ | 0.12 | $ | 0.32 | $ | 0.13 | $ | 0.42 | $ | 0.43 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Diluted net income per common share |
$ | 0.20 | $ | 0.18 | $ | 0.17 | $ | 0.12 | $ | 0.31 | $ | 0.13 | $ | 0.41 | $ | 0.41 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Weighted-average shares used in the calculation of basic net income per common share |
22,900 | 22,804 | 22,639 | 22,425 | 22,296 | 22,213 | 22,038 | 21,769 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Weighted-average shares used in the calculation of diluted net income per common share |
23,345 | 23,190 | 22,987 | 22,859 | 22,828 | 22,839 | 22,656 | 22,537 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
F-28
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
| Description |
Balance at Beginning of Period |
Additions | Deductions | Balance at End of Period |
||||||||||||
| Year ended June 30, 2013: |
||||||||||||||||
| Reserves and allowances deducted from asset accounts: |
||||||||||||||||
| Reserve for estimated doubtful accounts receivable |
$ | 1,990,000 | $ | 409,000 | $ | (971,000 | )(a) | $ | 1,428,000 | |||||||
| Valuation allowance on deferred tax assets |
2,850,000 | — | (2,270,000 | ) | 580,000 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 4,840,000 | $ | 409,000 | $ | (3,241,000 | ) | $ | 2,008,000 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Year ended June 30, 2012: |
||||||||||||||||
| Reserves and allowances deducted from asset accounts: |
||||||||||||||||
| Reserve for estimated doubtful accounts receivable |
$ | 2,064,000 | $ | 734,000 | $ | (808,000 | )(a) | $ | 1,990,000 | |||||||
| Valuation allowance on deferred tax assets |
7,529,000 | — | (4,679,000 | ) | 2,850,000 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 9,593,000 | $ | 734,000 | $ | (5,487,000 | ) | $ | 4,840,000 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Year ended June 30, 2011: |
||||||||||||||||
| Reserves and allowances deducted from asset accounts: |
||||||||||||||||
| Reserve for estimated doubtful accounts receivable |
$ | 1,988,000 | $ | 949,000 | $ | (873,000 | )(a) | $ | 2,064,000 | |||||||
| Valuation allowance on deferred tax assets |
6,698,000 | 831,000 | — | 7,529,000 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 8,686,000 | $ | 1,780,000 | $ | (873,000 | ) | $ | 9,593,000 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | Reduction in allowance due to write-off of accounts receivable balances (net of recovery). |
S-1
Index of Exhibits
| Exhibit |
||
| 2.1 | Agreement and Plan of Merger, dated as of August 25, 2013, among Globecomm Systems Inc., Wasserstein Cosmos Co-Invest, L.P. and Cosmos Acquisition Corp. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, dated August 29, 2013). | |
| 3.1 | Amended and Restated Certificate of Incorporation dated August 5, 1997, as amended February 9, 2005 (incorporated by reference to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1998). | |
| 3.2 | Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1998). | |
| 4.2 | See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated By-laws of the Registrant defining rights of holders of Common Stock of the Registrant (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1, File No. 333-22425 (the “Registration Statement”)). | |
| 10.1 | Employment Agreement dated as of October 9, 2001 by and between the Registrant and David E. Hershberg (incorporated by reference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). | |
| 10.2 | The Amended and Restated 1997 Stock Incentive Plan (incorporated by reference to Exhibit 99 of the Registrant’s Registration Statement on Form S-8 Registration, File No. 333-112351). | |
| 10.3 | 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.8 of the Registrant’s Registration Statement on Form S-8, File No. 333-70527). | |
| 10.4 | Employment Agreement, dated as of October 9, 2001, by and between Andrew C. Melfi and the Registrant (incorporated by reference to Exhibit 10.21 of the Registrant’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). | |
| 10.5 | Amendment to Employment Agreement, dated as of May 15, 2008, by and between Andrew C. Melfi and the Registrant (incorporated by reference to Exhibit 10.20 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2008). | |
| 10.6 | Employment Agreement, dated as of June 30, 2008, by and between Tom Coyle and the Registrant (incorporated by reference to Exhibit 10.24 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2008). | |
| 10.7 | Amendment to Employment Agreement, dated as of January 21, 2009, by and between, David E. Hershberg and the Registrant (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, dated January 21, 2009). | |
| 10.8 | Amendment to Employment Agreement, dated as of January 21, 2009, by and between, Andrew C. Melfi and the Registrant (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K, dated January 21, 2009). | |
| 10.9 | Amendment to Employment Agreement, dated as of January 21, 2009, by and between, Thomas C. Coyle and the Registrant (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K, dated January 21, 2009). | |
| 10.10 | Employment Agreement, dated as of July 21, 2009, by and between Keith Hall and the Registrant (incorporated by reference to Exhibit 10.23 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2009). | |
| 10.11 | Globecomm Systems Inc./Telaurus 2009 Special Equity Incentive Plan (incorporated by reference to Exhibit 10.25 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2009). | |
| 10.12 | Employment Agreement, dated as of June 23, 2011, by and between Andrew Silberstein and the Registrant (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, dated June 23, 2011). |
| Exhibit |
||
| 10.13 | Credit Agreement, dated July 18, 2011 by and between the Registrant and Citibank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, dated July 18, 2011). | |
| 10.14 | Amended and Restated 2006 Stock Incentive Plan ((incorporated by reference to Appendix A of Registrant’s proxy statement filed October 15, 2012). | |
| 10.15 | Amendment 2 to Employment Agreement, dated as of September 10, 2013, by and between, David E. Hershberg and the Registrant (filed herewith). | |
| 10.16 | Equity Commitment Letter, dated as of August 25, 2013, between Wasserstein Partners III, LP and Wasserstein Cosmos Co-Invest, L.P. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, dated August 29, 2013). | |
| 10.17 | Guaranty, dated as of August 25, 2013, by Wasserstein Partners III, LP, in favor of Globecomm Systems Inc. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, dated August 29, 2013). | |
| 14 | Registrant’s Code of Ethics and Business Conduct (incorporated by reference to Exhibit 14 of the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2004). | |
| 21 | Subsidiaries of the Registrant (filed herewith). | |
| 23 | Consent of Independent Registered Public Accounting Firm (filed herewith). | |
| 31.3 | Chief Executive Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended (filed herewith). | |
| 31.4 | Chief Financial Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended (filed herewith). | |
| 32 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002 (filed herewith). | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |