-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q3uS9S8tXfk10xKWct9R8AYvcJQvued2dYgN9G9/pXLRw+l+401SB9z0FjxrFfsM qiMzDk5xrArKdpoff5mgjg== 0000950136-02-000436.txt : 20020414 0000950136-02-000436.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950136-02-000436 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLOBECOMM SYSTEMS INC CENTRAL INDEX KEY: 0001031028 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 113225567 FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22839 FILM NUMBER: 02549343 BUSINESS ADDRESS: STREET 1: 375 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162319800 MAIL ADDRESS: STREET 1: 375 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: WSI COMMUNICATIONS INC DATE OF NAME CHANGE: 19970121 10-Q 1 file001.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 000-22839 GLOBECOMM SYSTEMS INC. (Exact name of Registrant as specified in its charter) DELAWARE 11-3225567 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 45 OSER AVENUE, 11788 HAUPPAUGE, NY (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 231-9800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of February 12, 2002, there were 12,753,268 shares outstanding of the Registrant's common stock, par value $.001. 1 GLOBECOMM SYSTEMS INC. Index to the December 31, 2001 Form 10-Q
Page ---- Part I -- Financial Information Item 1. Consolidated Financial Statements ....................................................................3 Consolidated Balance Sheets -- As of December 31, 2001 (unaudited) and June 30, 2001..................3 Consolidated Statements of Operations (unaudited) -- For the three and six months ended December 31, 2001 and 2000..........................................................................4 Consolidated Statement of Changes in Stockholders' Equity (unaudited) -- For the six months ended December 31, 2001.............................................................................5 Consolidated Statements of Cash Flows (unaudited) -- For the six months ended December 31, 2001 and 2000..........................................................................6 Notes to Consolidated Financial Statements (unaudited)................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................11 Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................................23 Part II -- Other Information Item 1. Legal Proceedings....................................................................................23 Item 2. Changes in Securities and Use of Proceeds............................................................23 Item 3. Defaults Upon Senior Securities......................................................................23 Item 4. Submission of Matters to a Vote of Security Holders..................................................23 Item 5. Other Information....................................................................................24 Item 6. Exhibits and Reports on Form 8-K.....................................................................24 Signatures...........................................................................................27
2 PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS GLOBECOMM SYSTEMS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30, ------------ -------- 2001 2001 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $42,485 $45,038 Restricted cash 809 588 Accounts receivable, net 25,346 25,337 Inventories 11,162 15,285 Prepaid expenses and other current assets 1,208 803 ------------------------------ Total current assets 81,010 87,051 Fixed assets, net 28,915 30,456 Goodwill and other assets, net 7,445 7,492 ------------------------------ Total assets $117,370 $124,999 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 14,248 $ 15,317 Deferred revenue 5,598 5,825 Accrued payroll and related fringe benefits 949 931 Other accrued expenses 3,081 3,609 Deferred liability 600 300 Capital lease obligations 450 430 ------------------------------ Total current liabilities 24,926 26,412 Deferred liability, less current portion 3,041 3,341 Capital lease obligations, less current portion 9,875 10,105 Commitments and contingencies Stockholders' equity: Series A Junior Participating, shares authorized, issued and outstanding: none at December 31, 2001 and June 30, 2001 -- -- Common stock, $.001 par value, 22,000,000 shares authorized, shares issued: 12,902,738 at December 31, 2001 and 12,865,591 at June 30, 2001 13 13 Additional paid-in capital 123,510 123,276 Accumulated deficit (42,896) (36,997) Accumulated other comprehensive income (loss) 3 (57) Treasury stock, at cost, 149,745 shares at December 31, 2001 and 147,745 at June 30, 2001 (1,102) (1,094) ------------------------------ Total stockholders' equity 79,528 85,141 ------------------------------ Total liabilities and stockholders' equity $117,370 $124,999 ==============================
See accompanying notes. 3 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------------- ---------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 -------------------------------------- ---------------------------------- Revenues $22,647 $26,824 $46,867 $53,268 Costs of revenues 19,857 20,664 41,256 41,994 -------------------------------------- ---------------------------------- Gross profit 2,790 6,160 5,611 11,274 -------------------------------------- ---------------------------------- Operating expenses: Network operations 1,411 1,381 2,760 2,137 Selling and marketing 1,615 1,944 3,221 4,040 Research and development 173 157 420 367 General and administrative 2,655 4,537 5,302 9,031 -------------------------------------- ---------------------------------- Total operating expenses 5,854 8,019 11,703 15,575 -------------------------------------- ---------------------------------- Loss from operations (3,064) (1,859) (6,092) (4,301) Other income (expense): Interest income 254 868 677 1,846 Interest expense (241) (2,077) (484) (4,028) Gain on sale of investment -- 304 -- 304 -------------------------------------- ---------------------------------- Loss before income taxes and minority interests in operations of consolidated subsidiary (3,051) (2,764) (5,899) (6,179) Provision for income taxes -- (580) -- (995) -------------------------------------- ---------------------------------- Loss before minority interests in operations of consolidated subsidiary (3,051) (3,344) (5,899) (7,174) Minority interests in operations of consolidated subsidiary -- (555) -- (518) -------------------------------------- ---------------------------------- Net loss $(3,051) $(3,899) $(5,899) $(7,692) ====================================== ================================== Basic and diluted net loss per common share $ (0.24) $ (0.33) $ (0.46) $ (0.65) ====================================== ================================== Weighted-average shares used in the calculation of basic and diluted net loss per common share 12,719 11,890 12,718 11,885 ====================================== ==================================
See accompanying notes. 4 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 (IN THOUSANDS) (UNAUDITED)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TREASURY STOCK TOTAL --------------- PAID-IN ACCUMULATED COMPREHENSIVE ------------------- STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) SHARES AMOUNT EQUITY ------------------------------------------------------------------------------------------ Balance at June 30, 2001 12,866 $ 13 $123,276 $ (36,997) $(57) 148 $ (1,094) $ 85,141 Proceeds from exercise of stock options 7 -- 25 -- -- -- -- 25 Issuance of common stock in connection with employee stock purchase plan 30 -- 154 -- -- -- -- 154 Stock options granted for services -- -- 55 -- -- -- -- 55 Purchase of treasury stock -- -- -- -- -- 2 (8) (8) Comprehensive loss: Net loss -- -- -- (5,899) -- -- -- (5,899) Gain from foreign currency translation -- -- -- -- 60 -- -- 60 Total comprehensive loss -- -- -- -- -- -- -- (5,839) ------------------------------------------------------------------------------------------ Balance at December 31, 2001 12,903 $ 13 $123,510 $ (42,896) $ 3 150 $ (1,102) $ 79,528 ==========================================================================================
See accompanying notes. 5 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED --------------------------------------- DECEMBER 31, DECEMBER 31, 2001 2000 --------------------------------------- OPERATING ACTIVITIES: Net loss $ (5,899) $ (7,692) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,955 4,840 Provision for doubtful accounts 120 341 Stock compensation expense 55 37 Deferred income taxes -- 995 Gain on sale of investment -- (304) Minority interests in operations of consolidated subsidiary -- 518 Interest on capital lease obligations -- 486 Changes in operating assets and liabilities: Accounts receivable (55) (6,620) Inventories 4,147 385 Prepaid expenses and other current assets (405) (812) Other assets 47 505 Accounts payable (1,083) (2,120) Deferred revenue (258) 1,669 Accrued payroll and related fringe benefits 18 93 Other accrued expenses (532) 26 --------------------------------------- Net cash used in operating activities (1,890) (7,653) --------------------------------------- INVESTING ACTIVITIES: Purchases of fixed assets, net of non-cash capital lease expenditures (413) (4,720) Restricted cash (221) (336) Proceeds from sale of investment -- 204 --------------------------------------- Net cash used in investing activities (634) (4,852) --------------------------------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 25 196 Proceeds from sale of common stock in connection with employee stock purchase plan 154 194 Payments under capital leases (210) (192) Purchase of treasury stock (8) - --------------------------------------- Net cash (used in) provided by financing activities (39) 198 --------------------------------------- Effect of foreign currency translation on cash 10 (27) Net decrease in cash and cash equivalents (2,553) (12,334) Cash and cash equivalents at beginning of period 45,038 65,289 --------------------------------------- Cash and cash equivalents at end of period $ 42,485 $ 52,955 =======================================
See accompanying notes. 6 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results for such periods have been included. The consolidated balance sheet at June 30, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The results of operations for the three and six months ended December 31, 2001 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2002, or for any future period. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended June 30, 2001 and the accompanying notes thereto contained in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 28, 2001. Comprehensive loss Comprehensive loss for the three and six months ended December 31, 2001 of approximately $2,965,000 and $5,839,000 includes a foreign currency translation (loss) gain of approximately ($3,000) and $60,000 and an unrealized gain on available-for-sale equity securities of approximately $89,000 and $0 for the three and six months ended December 31, 2001, respectively. The Company's comprehensive loss for the three and six months ended December 31, 2000 of approximately $3,939,000 and $7,748,000 includes a foreign currency translation loss of approximately $11,000 and $27,000 and an unrealized loss on available-for-sale equity securities of approximately $29,000 and $29,000 for the three and six months ended December 31, 2000, respectively. Income Taxes In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income. For the three and six months ended December 31, 2001 and the year ended June 30, 2001, the Company incurred a net loss, and accordingly, management provided a full valuation allowance for the net deferred tax assets. For the three and six months ended December 31 2000, the Company realized approximately $580,000 and $995,000, respectively, of deferred tax assets based on projected fiscal 2001 taxable income. 2. GOODWILL AND OTHER ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141, Business Combinations ("SFAS No. 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations completed on or after July 1, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain specified criteria. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. SFAS No. 142 also requires that the Company 7 identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. On July 1, 2001, the Company adopted the new rules on business combinations and accounting for goodwill and other intangible assets. The Company's previous business combinations were accounted for using the purchase method of accounting. Goodwill has a net carrying amount of approximately $7,441,000 at December 31, 2001. Application of the nonamortization provisions of SFAS No. 142 is expected to result in a decrease in net loss of approximately $860,000, or $.07 per diluted share, for all of fiscal 2002. The Company has completed its assessment of the assets impacted by the adoption of SFAS No. 142, and based upon such review, no impact to the carrying value of goodwill was identified. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company's net loss and net loss per basic and diluted share would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------ ------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 ------------------------------------ ------------------------------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Reported net loss $(3,051) $(3,899) $(5,899) $(7,692) Add back goodwill amortization -- 39 -- 78 ------------------------------------ ---------------------------------- Adjusted net loss $(3,051) $(3,860) $(5,899) $(7,614) ==================================== ================================== Basic and diluted net loss per common share: As reported $ (0.24) $ (0.33) $ (0.46) $ (0.65) Goodwill amortization -- 0.01 -- 0.01 ------------------------------------ ---------------------------------- Adjusted basic and diluted net loss per common share $ (0.24) $ (0.32) $ (0.46) $ (0.64) ==================================== ==================================
3. RESTRUCTURING CHARGE In connection with management's plan to reduce costs and to improve NetSat's operating efficiencies, the Company recorded a restructuring charge of approximately $1,950,000 during the fourth quarter of fiscal year ended June 30, 2001. The restructuring charge is primarily associated with the discontinuance of certain NetSat product lines to enhance the Company's strategic redeployment of its consolidated operating activities, enabling the Company to offer its customers end-to-end satellite communications solutions while combining operations and reducing costs. Through December 31, 2001, $1,700,000 was charged against the restructuring accrual leaving a balance of approximately $250,000 at December 31, 2001. 4. BASIC AND DILUTED NET LOSS PER COMMON SHARE The Company computes net loss per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic and diluted net loss per common share is computed by dividing the net loss for the period by the weighted-average number of common and dilutive equivalent shares outstanding for the period. Common equivalent shares consist of the incremental common shares issuable upon the conversion of preferred stock (using an if-converted method) and incremental shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Incremental common equivalent shares are excluded from the calculation of diluted net loss per share if their effect is anti-dilutive. Diluted net loss per share for the three and six months ended December 31, 2001, excludes the effect of approximately 66,000 and 108,000 stock options, respectively, as their effect would have been anti-dilutive. Diluted net loss per share for the three and six months ended December 31, 2000, excludes the effect of approximately 286,000 and 433,000 stock options and approximately 3,000 and 13,000 warrants, respectively, as their effect would have been anti-dilutive. 8 5. INVENTORIES Inventories, which consist primarily of work-in-progress from costs incurred in connection with specific customer contracts, are stated at the lower of cost (using the first-in, first-out method of accounting) or market value. Inventories consist of the following: DECEMBER 31, JUNE 30, 2001 2001 ------------------------------- (UNAUDITED) (IN THOUSANDS) Raw materials and component parts $ 595 $ 608 Work-in-progress 10,567 14,677 ------------------------------- $ 11,162 $ 15,285 =============================== 6. SEGMENT INFORMATION The Company operates through two business segments. Its ground segment systems, networks and enterprise solutions segment, through Globecomm Systems Inc., is engaged in the design, assembly and installation of ground segment systems, networks and enterprise solutions for the complex and changing communications requirements of its customers. Its data communications services segment, through its wholly owned subsidiary NetSat Express Inc., is engaged in providing high-speed, satellite-delivered data communications to developing markets worldwide. NetSat Express is currently providing Internet access to customers who have limited or no access to terrestrial network infrastructure capable of supporting the economical delivery of such services. The Company's reportable segments are business units that offer different products and services. The reportable segments are each managed separately because they provide distinct products and services. The following is the Company's business segment information for the three and six months ended December 31, 2001 and 2000 and as of December 31, 2001 and June 30, 2001:
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 ------------------------------- -------------------------------- (IN THOUSANDS) (UNAUDITED) (UNAUDITED) Revenues: Ground segment systems, networks and enterprise solutions $ 17,627 $22,878 $ 36,563 $ 43,535 Data communications services 5,808 7,056 12,072 13,857 Intercompany eliminations (788) (3,110) (1,768) (4,124) --------------- -------------- ----------------- ------------- Total revenues $ 22,647 $26,824 $ 46,867 $ 53,268 =============== ============== ================= ============= Loss from operations: Ground segment systems, networks and enterprise solutions $ (1,459) $ (62) $ (2,623) $ (191) Data communications services (1,605) (1,743) (3,472) (4,091) Interest income 254 868 677 1,846 Interest expense (241) (2,077) (484) (4,028) Gain on sale of investment - 304 - 304 Provision for income taxes - (580) - (995) Minority interests in operations of consolidated subsidiary - (555) - (518) Intercompany eliminations - (54) 3 (19) --------------- -------------- ----------------- ------------- Net loss $ (3,051) $(3,899) $ (5,899) $ (7,692) =============== ============== ================= =============
9
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 -------------------------------- ----------------------------------- (IN THOUSANDS) (UNAUDITED) (UNAUDITED) Depreciation and amortization: Ground segment systems, networks and enterprise solutions $ 446 $ 426 $ 892 $ 852 Data communications services 484 2,051 1,069 3,991 Intercompany eliminations (3) (3) (6) (3) ------------ ------------- --------------- ------------- Total depreciation and amortization $ 927 $ 2,474 $ 1,955 $ 4,840 ============ ============= =============== ============= Expenditures for long-lived assets: Ground segment systems, networks and enterprise solutions $ 159 $ 916 $ 298 $ 1,425 Data communications services 35 2,670 115 4,079 Intercompany eliminations -- (126) -- (126) ------------ ------------- --------------- ------------- Total expenditures for long-lived assets $ 194 $ 3,460 $ 413 $ 5,378 ============ ============= =============== =============
DECEMBER 31, JUNE 30, 2001 2001 (UNAUDITED) ------------------ -------------- (IN THOUSANDS) Assets: Ground segment systems, networks and enterprise solutions $ 132,944 $ 136,103 Data communications services 22,304 21,985 Intercompany eliminations (37,878) (33,089) ------------------ ----------- Total assets $ 117,370 $ 124,999 ================== =========== 7. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"). The basis for recognition and measurement model under SFAS No. 121 for assets held for use and held for sale has been retained. SFAS No. 144 removes goodwill from its scope, thus eliminating SFAS No. 121's requirement to allocate goodwill to long-lived assets to be tested for impairment. The accounting for goodwill now is subject to the provisions of SFAS No. 141 and 142 on business combinations and other intangible assets. SFAS No. 144 provides guidance on differentiating between assets held and used, held for sale, and held for disposal other than by sale. SFAS No. 144 continues to require a three-step approach for recognizing and measuring the impairment of assets to be held and used. This new statement is effective for financial statements issued for fiscal years beginning after December 31, 2001 and is to be applied prospectively. The Company does not expect the adoption of this statement to have a material impact on the Company's financial position, result of operations or liquidity. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Quarterly Report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below as well as those discussed in our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. OVERVIEW Since our inception, a majority of our revenues have been generated by our ground segment systems, networks and enterprise solutions business. Contracts for these ground segment systems and networks and communications services have been fixed-price contracts in virtually all cases. Profitability of such contracts is subject to inherent uncertainties as to the cost of performance. In addition to possible errors or omissions in making initial estimates, cost overruns may be incurred as a result of unforeseen obstacles including both physical conditions and unexpected problems encountered in engineering design and testing. Since our business may at times be concentrated in a limited number of large contracts, a significant cost overrun on any contract could have a material adverse effect on our business, financial condition and results of operations. The period from contract award through installation of ground segment systems and networks and communications services supplied by us generally is from three to twelve months. We recognize revenue in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, for our short-term (less than twelve months in term) production-type contracts that are sold separately as stand-alone ground segment systems. Such contracts typically require less engineering, drafting and design efforts than other longer-term production-type projects and usually require customer acceptance upon completion of installation of the equipment at the customers' site. Accordingly, we typically recognize 80-90% of the contract value upon shipment with the balance recognized upon receipt of the customers' final acceptance. Installation is not deemed to be essential to the functionality of the equipment since installation is mechanical in nature and does not require significant change to the features or capability of the equipment, or require complex software integration and interfacing. In addition, the customer or other vendors can install the equipment; and generally the cost of installation is approximately 10-20% of the sales value of the related equipment. Payments received in advance by customers are deferred until shipment and are presented as deferred revenue. We use the percentage-of-completion method of accounting to recognize revenue for our long-term (in excess of twelve months in term), more complex production-type contracts that are generally integrated into complete ground segment networks, upon the achievement of certain contractual milestones, in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. NetSat Express' revenues are derived primarily from Internet access service fees and sales of hardware and equipment. Service revenues from Internet access are recognized ratably over the period in which services are provided. Sales of hardware and equipment are recognized upon shipment. Payments received in advance of providing Internet access services are deferred until the period such services are provided and are presented as deferred revenue. Contract costs generally include purchased material, direct labor, overhead and other indirect costs. Anticipated contracted losses are recognized as they become known. Costs of revenues consist primarily of the costs of purchased materials, direct labor and related overhead expenses, project-related travel, living costs and subcontractor salaries. In addition, cost of revenues relating to Internet access service fees consists primarily of satellite space segment charges and Internet connectivity fees. Network operations expenses consist primarily of costs associated with the operation of the network operations center on a twenty-four hour a day, seven day a week basis including personnel and related costs. Selling and marketing expenses consist primarily of salaries, travel and living costs for sales and marketing personnel. Research and development expenses consist primarily of salaries and related overhead expenses paid to engineers. General and administrative expenses consist of expenses associated with our management, finance, contract and administrative functions. 11 RESULTS OF OPERATIONS Three and Six Months Ended December 31, 2001 and 2000 Revenues. Revenues decreased by $4.2 million, or 15.6%, to $22.6 million for the three months ended December 31, 2001 and decreased by $6.4 million, or 12.0% to $46.9 million for the six months ended December 31, 2001 compared to $26.8 million and $53.3 million for the three and six months ended December 31, 2000. The decrease reflects the uncertainty surrounding the global economic slowdown in the telecommunications industry, resulting in customers and prospects continuing to delay projects. Gross Profit. Gross profit decreased by $3.4 million, or 54.7%, to $2.8 million for the three months ended December 31, 2001 and decreased by $5.7 million or 50.2%, to $5.6 million for the six months ended December 31, 2001 from $6.2 million and $11.3 million for the three and six months ended December 31, 2000. Gross profit as a percentage of revenues for the three months ended December 31, 2001, decreased to 12.3%, compared to 23.0% for the three months ended December 31, 2000 and for the six months ended December 31, 2001 decreased to 12.0% compared to 21.2% for the six months ended December 31, 2000. This decrease is attributable to a lower revenue base resulting from the delay or cancellation of projects and certain unutilized satellite transponder capacity. We expect our gross margins to decline in the future due to the under-utilization of satellite transponder space and the global economic slowdown in the telecommunications industry. Network Operations. Network operations expenses remained relatively consistent at $1.4 million for the three months ended December 31, 2001 and 2000 and increased by $0.6 million, or 29.2%, to $2.8 million, for the six months ended December 31, 2001 compared to $2.1 million for the comparable six months ended December 31, 2000. The increase is due to the continuing expansion of our network operations center and related expenses to support the service base. Selling and Marketing. Selling and marketing expenses decreased by $0.3 million, or 16.9%, to $1.6 million for the three months ended December 31, 2001 and decreased by $0.8 million, or 20.3%, to $3.2 million, for the six months ended December 31, 2001 compared to $1.9 million and $4.0 million for the comparable three and six months ended December 31, 2000. This decrease is attributable to a cost reduction program, which included a reduction in work force partially offset by additional selling and marketing efforts, which included the addition of a Corporate Vice President of Sales and Marketing. Research and Development. Research and development expenses remained relatively consistent at $0.2 million and $0.4 million, respectively, for the three and six months ended December 31, 2001 and 2000. General and Administrative. General and administrative expenses decreased by $1.9 million, or 41.5%, to $2.7 million for the three months ended December 31, 2001 and decreased by $3.7 million, or 41.3%, to $5.3 million, for the six months ended December 31, 2001 compared to $4.5 million and $9.0 million for the comparable three and six months ended December 31, 2000. General and administrative expenses as a percentage of revenues for the three months ended December 31, 2001 decreased to 11.7% compared to 16.9% for the three months ended December 31, 2000 and decreased for the six months ended December 31, 2001 to 11.3% compared to 17.0% for the six months ended December 31, 2000. The decrease in general and administrative expenses is primarily due to reduced depreciation expense related to the renegotiation of one of our capitalized lease arrangements to an operating lease arrangement in the fourth quarter of fiscal 2001. Interest Income. Interest income decreased by $0.6 million, or 70.7%, to $0.3 million for the three months ended December 31, 2001 compared to $0.9 million for the three months ended December 31, 2000, and decreased by $1.2 million, or 63.3%, to $0.7 million for the six months ended December 31, 2001 compared to $1.8 million for the six months ended December 31, 2000. The decrease is primarily the result of a decline in interest rates and reduced cash balances due to cash used in operations during the six months ended December 31, 2001 and the fiscal year ended June 30, 2001. Interest Expense. Interest expense decreased by $1.8 million, or 88.4%, to $0.2 million for the three months ended December 31, 2001 compared to $2.1 million for the three months ended December 31, 2000, and decreased by $3.5 million, or 88.0%, to $0.5 million for the six months ended December 31, 2001 compared to $4.0 million for the six months ended December 31, 2000. The decrease primarily relates to the renegotiation of capitalized lease arrangements to operating lease arrangements in the fourth quarter of fiscal 2001. 12 Gain on Sale of Investment. The gain on sale of investment of $0.3 million during the second quarter of fiscal 2001 relates to the sale of our interest in a cost method investment. Provision for Income Taxes. Provision for income taxes decreased by $0.6 million, or 100.0%, for the three months ended December 31, 2001 and decreased $1.0 million, or 100%, for the six months ended December 31, 2001 compared to the three and six months ended December 31, 2000. As the Company incurred a net loss for the three and six months ended December 31, 2001 and the Company provided a full valuation allowance for its net deferred tax assets, accordingly no provision for income taxes was recorded during fiscal 2002. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, we had working capital of $56.1 million, including cash and cash equivalents of $42.5 million, restricted cash of $0.8 million, net accounts receivable of $25.3 million, inventories of $11.2 million and prepaid expenses and other current assets of $1.2 million, offset by $14.2 million in accounts payable, $5.6 million in deferred revenue and $5.1 million in accrued expenses and other current liabilities. Net cash used in operating activities during the six months ended December 31, 2001 was $1.9 million, which primarily relates to the current period net loss of $5.9 million offset by a decrease in inventories of $4.1 million due to the completion of certain jobs. Net cash used in investing activities during the six months ended December 31, 2001 was $0.6 million. During the six months ended December 31, 2001, we used cash of $0.4 million to purchase fixed assets primarily related to the continuing expansion of the network operations center in order to support the Company's service base. Effective December 15, 2001, the Company modified its bank agreement and increased the credit facility to $5.4 million from $5.0 million. The modified credit facility, which has substantially the same terms as the previous facility consists of (1) a $2.0 million secured domestic line of credit and (2) a $3.4 million secured export-import guaranteed line of credit. Each line of credit bears interest at the prime rate (4.75% at December 31, 2001) plus 0.50% per annum and is collateralized by a first security interest on all our assets. The credit facility, which expires on February 15, 2002, contains certain financial covenants, which the Company was in compliance with at December 31, 2001. While the Company intends to renew this credit facility, there can be no assurances that it will renew such facility, or that, if renewed, it will contain terms and conditions favorable to the Company. As of December 31, 2001, no amounts were outstanding under this credit facility. We also lease satellite space segment services and other equipment under various operating lease agreements, which expire in various years through 2007. Future minimum lease payments due on these leases through December 31, 2002 are approximately $19.4 million. On November 7, 2001, the Board of Directors authorized a stock repurchase program of up to $2.0 million of the Company's outstanding stock, representing approximately 3.7% of the total shares outstanding on that date. On November 15, 2001, the Company repurchased 2,000 shares at a price of $4.45 per share. The timing, price, quantity and manner of future purchases will be at the discretion of management, depending on market conditions and other factors, subject to compliance with the applicable securities laws. We expect that our cash and working capital requirements for operating activities will increase as we continue to implement our business strategy. Management anticipates that we will experience negative cash flows due to continued operating losses by NetSat Express, Inc. as a result of a decrease in orders and continued under-utilization of satellite transponder space. Our future capital requirements will depend upon many factors, including the success of our marketing efforts in the ground segment systems, networks, and communications services business, the nature and timing of customer orders, the extent to which we are able to locate additional strategic suppliers in whose technology we wish to invest, the extent to which we must conduct research and development efforts internally and potential acquisitions of complementary businesses, products or technologies. Based on current plans, we believe that our existing capital resources will be sufficient to meet working capital requirements through December 31, 2002. However, we cannot assure you that there will be no change that would consume available resources significantly before that time. For example, recent terrorist attacks on the United States, as well as future events occurring in response to or in connection with them, including, without limitation, future terrorist attacks against the United States or its allies or military or trade 13 or travel disruptions impacting our ability to sell and market our products and services in the United States and internationally may impact our results of operations. Additional funds may not be available when needed and even if available, additional funds may be raised through financing arrangements and/or the issuance of preferred or common stock or convertible securities on terms and prices significantly more favorable than those of the currently outstanding common stock, which could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders. If adequate funds are unavailable, we may be required to delay, scale back or eliminate some of our operating activities, including without limitation, the timing and extent of our marketing programs, the extent and timing of hiring additional personnel and our research and development activities and operating activities of NetSat Express. We cannot assure you that additional financing will be available to us on acceptable terms, or at all. CERTAIN BUSINESS CONSIDERATIONS RISK FACTORS WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW AND EXPECT OUR LOSSES TO CONTINUE. We have incurred significant net losses since we began operating in August 1994. We incurred net losses of $5.9 million for the six months ended December 31, 2001, $18.7 million during the fiscal year ended June 30, 2001 and $3.6 million during the fiscal year ended June 30, 2000. As of December 31, 2001, our accumulated deficit was approximately $42.9 million. We anticipate that we will continue to incur net losses. Our ability to achieve and maintain profitability will depend upon our ability to generate significant revenues through new customer contracts and the expansion of our existing products and services, including our communications services. We cannot assure you that we will be able to obtain new customer contracts or generate significant additional revenues from those contracts or any new products or services that we introduce. Even if we become profitable, we may not sustain or increase our profits on a quarterly or annual basis in the future. SINCE SALES OF SATELLITE COMMUNICATIONS EQUIPMENT ARE DEPENDENT ON THE GROWTH OF COMMUNICATIONS NETWORKS, AS MARKET DEMAND FOR THESE NETWORKS DECLINES, OUR REVENUE AND PROFITABILITY ARE LIKELY TO DECLINE. We derive, and expect to continue to derive, a significant amount of revenue from the sale of satellite ground segment systems and networks. If the long-term growth in demand for communications networks does not occur as we expect, the demand for our satellite ground segment systems and networks may decline or grow more slowly than we expect. As a result, we may not be able to grow our business, our revenue may decline from current levels and our results of operations may be harmed. The demand for communications networks and the products used in these networks is affected by various factors, many of which are beyond our control. For example, general economic conditions have recently deteriorated and affected the overall rate of capital spending by our customers. Also, many companies are finding it increasingly difficult to raise capital to finish building their communications networks and therefore are placing fewer orders with our customers. The current economic slowdown has resulted in a softening of demand from our customers. We believe that this slowdown is generally the result of slower than forecasted growth in a number of key segments, including communications infrastructure equipment, resulting from a reduction in the capital spending of service providers. We cannot predict the extent to which this softening of demand will continue. Further, increased competition among satellite ground segment systems and networks manufacturers may lead to overcapacity and falling prices. RISKS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS COULD RESTRICT OUR ABILITY TO EXPAND GLOBALLY AND HARM OUR BUSINESS AND PROSPECTS. We market and sell our products and services in the United States and internationally. We anticipate that international sales will continue to account for a significant portion of our total revenues for the foreseeable future. We presently conduct our international sales in the following geographic areas: Africa, the Asia-Pacific Region, Australia, Central and South America, Eastern and Central Europe and the Middle East. There are some risks inherent in conducting our business internationally, including: o general political and economic instability in international markets, as well as a result of the terrorist attacks in the United States on September 11, 2001 and the related outbreak of hostilities, could impede our ability to deliver our products and services to customers and harm our results of operations; o changes in regulatory requirements could restrict our ability to deliver services to our international customers; 14 o export restrictions, tariffs, licenses and other trade barriers could prevent us from adequately equipping our network facilities; o differing technology standards across countries may impede our ability to integrate our products and services across international borders; o protectionist laws and business practices favoring local competition may give unequal bargaining leverage to key vendors in countries where competition is scarce, significantly increasing our operating costs; o increased expenses associated with marketing services in foreign countries; o decreases in value of foreign currency relative to the U.S. dollar; o relying on local subcontractors for installation of our products and services; o difficulties in staffing and managing foreign operations; o potentially adverse taxes; o complex foreign laws and treaties; and o difficulties in collecting accounts receivable. These and other risks could impede our ability to manage our international operations effectively, limit the future growth of our business, increase our costs and require significant management attention. IF WE ARE NOT SUCCESSFUL IN SELLING OUR COMMUNICATIONS SERVICES TO OUR CUSTOMERS FOR WHOM WE HAVE HISTORICALLY PROVIDED SATELLITE GROUND SEGMENT SYSTEMS AND NETWORKS, OUR RESULTS OF OPERATIONS WILL BE HARMED. We have historically provided our customers with satellite ground segment systems and networks as a product on a project basis. We intend on marketing to our customers our communications services. These services not only provide the implementation of the satellite ground segment systems and networks but also provides the ongoing operation and maintenance of these systems and networks. If we are not successful in selling these communications services to our existing customers it will harm our results of operations. IF NETSAT EXPRESS DOES NOT EXECUTE ITS BUSINESS STRATEGY OR IF THE MARKET FOR ITS SERVICES FAILS TO DEVELOP OR DEVELOPS MORE SLOWLY THAN IT EXPECTS, OUR RESULTS OF OPERATIONS WILL BE HARMED AND OUR STOCK PRICE MAY BE ADVERSELY AFFECTED. NetSat Express' future revenues and results of operations are dependent on its execution of its business strategy and the development of the market for its current and future services. In particular, the current level and manner of utilization of NetSat Express' transponder space as well as a decrease in orders currently being experienced continues to harm our results of operation, and our gross profit margins in particular. If NetSat does not efficiently and substantially utilize its transponder space capacity or increase its level of orders, our results of operations, and our gross profit margins in particular, will be harmed. We cannot assure you that the transponder space will be efficiently and substantially utilized or that an increase in orders will be realized. CURRENCY DEVALUATIONS IN THE FOREIGN MARKETS IN WHICH WE OPERATE COULD DECREASE DEMAND FOR OUR PRODUCTS AND SERVICES. We denominate our foreign sales in U.S. dollars. Consequently, decreases in the value of local currencies relative to the U.S. dollar in the markets in which we operate, adversely affect the demand for our products and services by increasing the price of our products and services in the currencies of the countries in which they are sold. The difficult economic conditions in international markets and the resulting foreign currency devaluations have led to a decrease in demand for our products and services and the decrease in bookings received by us from these foreign regions has adversely effected our results of operations for the six months ended December 31, 2001 and the fiscal year ended June 30, 2001. We expect that these negative trends will continue to adversely impact our results of operations. 15 YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY. Our future revenues and results of operations may significantly fluctuate due to a combination of factors, including: o general political and economic conditions in the United States and abroad as a result of the terrorist attacks on September 11, 2001 and the related outbreak of hostilities; o the length of time needed to initiate and complete customer contracts; o delays and/or a decrease in the booking of new contracts; o the demand for and acceptance of our existing products and services; o the cost of providing our products and services; o the introduction of new and improved products and services by us or our competitors; o market acceptance of new products and services; o the mix of revenue between our standard products, custom-built products and our communications services; o the timing of significant marketing programs; o our ability to hire and retain additional personnel; o the competition in our markets; and o difficult global economic conditions and the currency devaluations in international markets which have, and may continue to, adversely impact our quarterly results. Accordingly, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is possible that in future periods our results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of our common stock to decline. OUR MARKETS ARE HIGHLY COMPETITIVE AND WE HAVE MANY ESTABLISHED COMPETITORS, AND WE MAY LOSE MARKET SHARE AS A RESULT. The markets in which we operate are highly competitive and this competition could harm our ability to sell our products and services on prices and terms favorable to us. Our primary competitors in the satellite ground segment and networks market include vertically integrated satellite systems providers like Nippon Electric Corporation, systems integrators like IDB Systems, a division of MCI WorldCom Inc. and equipment manufacturers who also provide integrated systems like Andrew Corporation and Vertex-RSI. In the communications services and Internet access services markets, we compete with other satellite communication companies who provide similar services, like Loral CyberStar, Inc. and PanAmSat Corporation and Verestar, as well as other Internet services providers. In addition, we may compete with other communications service providers like Teleglobe, Inc. and MCI WorldCom Inc. We anticipate that our competitors may develop or acquire services that provide functionality that is similar to that provided by our services and that those services may be offered at significantly lower prices or bundled with other services. In addition, we anticipate that continuing deregulation worldwide is expected to result in the formation of a significant number of new competitive service providers over the next two to three years. These competitors have the financial resources to withstand substantial price competition and may be in a better position to endure difficult economic conditions in international markets, and may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements. Moreover, many of our competitors have more extensive customer bases, broader customer relationships and broader industry alliances that 16 they could use to their advantage in competitive situations. The markets in which we operate have limited barriers to entry and we expect that we will face additional competition from existing competitors and new market entrants in the future. Moreover, our current and potential competitors have established or may establish strategic relationships among themselves or with third parties to increase the ability of their products and services to address the needs of our current and prospective customers. Existing and new competitors with their potential strategic relationships may rapidly acquire significant market share, which would harm our business and financial condition. IF THE SATELLITE COMMUNICATIONS INDUSTRY FAILS TO CONTINUE TO DEVELOP OR NEW TECHNOLOGY MAKES IT OBSOLETE OUR BUSINESS AND FINANCIAL CONDITION WILL BE HARMED. Our business is dependent on the continued success and development of satellite communications technology, which competes with terrestrial communications transport technologies like terrestrial microwave, coaxial cable and fiber optic communications systems. If the satellite communications industry fails to continue to develop, or any technological development significantly improves the cost or efficiency of competing terrestrial systems relative to satellite systems, then our business and financial condition would be materially harmed. WE MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OUR CAPITAL REQUIREMENTS IN THE FUTURE. We have incurred negative cash flows from operations in each year since our inception. We believe that our available cash resources will be sufficient to meet our working capital and capital expenditure requirements through December 31, 2002. However, our future liquidity and capital requirements are difficult to predict, as they depend on numerous factors, including the success of our existing product and service offerings as well as competing technological and market developments. We may need to raise additional funds in order to meet additional working capital requirements and to support additional capital expenditures. Should this need arise, additional funds may not be available when needed and, even if additional funds are available, we may not find the terms favorable or commercially reasonable. If adequate funds are unavailable, we may be required to delay, reduce or eliminate some of our operating activities, including marketing programs, hiring of additional personnel and research and development programs. If we raise additional funds by issuing equity securities, our existing stockholders will own a smaller percentage of our capital stock and new investors may pay less on average for their securities than, and could have rights superior to, existing stockholders. WE RELY ON OUR RELATIONSHIPS WITH RESELLERS IN DEVELOPING COUNTRIES WITH EMERGING MARKETS FOR SALES OF OUR PRODUCTS AND SERVICES AND THE LOSS OR FAILURE OF ANY OF THESE RELATIONSHIPS MAY HARM OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND SERVICES. We intend to provide our products and services and NetSat Express' services almost entirely in developing countries where we have little or no market experience. We intend to rely on resellers in those markets to provide their expertise and knowledge of the local regulatory environment in order to make access to customers in emerging markets easier. If we are unable to maintain these relationships, or develop new ones in other emerging markets, our ability to enter into and compete successfully in developing countries would be adversely affected. A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUE, AND THE LOSS OF A KEY CUSTOMER WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION. We rely on a small number of customers for a large portion of our revenues and expect that a significant portion of our revenues will continue to be derived from a limited number of customers. We anticipate that our operating results in any given period will continue to depend to a significant extent upon revenues from large contracts with a small number of customers. As a result of this concentration of our customer base, a loss of or decrease in business from one or more of these customers would materially adversely affect our results of operations and financial condition. OUR INABILITY TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION COULD SERIOUSLY HARM OUR ABILITY TO EFFECTIVELY RUN OUR BUSINESS. Since our inception, we have continued to increase the scope of our operations. This growth has placed, and our anticipated growth will continue to place, a significant strain on our personnel, management, financial and other resources. Any failure to manage our growth effectively could seriously harm our ability to respond to customers, 17 monitor the quality of our products and services and maintain the overall efficiency of our operations. In order to continue to pursue the opportunities presented by our satellite-based communications services, we plan to continue to hire key officers and other employees and to increase our operating expenses by broadening our customer support capabilities, expanding our sales and marketing operations and improving our operating and financial systems. If we fail to manage any future growth in an efficient manner, and at a pace consistent with our business, our results of operations, financial condition and business will be harmed. WE ANTICIPATE SIGNIFICANT REVENUES FROM FOUR CONTRACTS AND A MODIFICATION OR TERMINATION OF ALL OR ANY OF THESE CONTRACTS WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We have agreements with four customers to provide equipment and services, which we expect to generate substantial revenues. If any of these customers are unable to implement their business plans, the market for their services declines, or all or any of the customers modifies or terminates its agreement with us, our results of operations and financial condition would be harmed. WE ARE PAID A FIXED PRICE IN MOST OF OUR CUSTOMER CONTRACTS, AND ANY VARIATION BETWEEN THE FIXED PRICE AND THE ACTUAL COST OF PERFORMANCE MAY HARM OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. A majority of our customer contracts are on a fixed-price basis. The profitability of these contracts is subject to inherent uncertainties in the cost of performance, including costs related to unforeseen obstacles and unexpected problems encountered in engineering, design and testing of our products and services. Because a significant portion of our revenues is dependent upon a small number of customers, if the fixed price is significantly less than the actual cost of performance on any one contract, our results of operations and financial condition could be adversely affected. IF OUR PRODUCTS AND SERVICES ARE NOT ACCEPTED IN DEVELOPING COUNTRIES WITH EMERGING MARKETS, OUR REVENUES WILL BE IMPAIRED. We anticipate that a substantial portion of the growth in the demand for our products and services will come from customers in developing countries due to a lack of basic communications infrastructure in these countries. However, we cannot guarantee an increase in the demand for our products and services in developing countries or that customers in these countries will accept our products and services at all. Our ability to penetrate emerging markets in developing countries is dependent upon various factors including: o the speed at which communications infrastructure, including terrestrial microwave, coaxial cable and fiber optic communications systems, which compete with satellite-based services, is built; o the effectiveness of our local value-added resellers and sales representatives in marketing and selling our products and services; and o the acceptance of our products and services by customers. If our products and services are not accepted, or the market potential we anticipate does not develop, our revenues will be impaired. WE DEPEND UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE EMPLOYEES OR RECRUIT ADDITIONAL QUALIFIED PERSONNEL, WHICH WOULD HARM OUR BUSINESS. Our future performance depends on the continued service of our key technical, managerial and marketing personnel; in particular, David Hershberg, Kenneth Miller, Patrick Flemming, Stephen Yablonski and Donald Woodring. The employment of any of our key personnel could cease at any time subject to prior notice. Our future success depends upon our ability to attract, retain and motivate highly skilled employees. Because the competition for qualified employees among companies in the satellite communications industry and the networking industry is intense, we may not be successful in recruiting or retaining qualified personnel, which would harm our business. 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. 18 Unauthorized use of our intellectual property by third parties may damage our business. We rely on trademark, trade secret and patent protection and contracts including confidentiality and license agreements with our employees, customers, strategic collaborators, consultants and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without our authorization. We currently have been granted two patents in the United States, for remote access to the Internet using satellites, and for satellite communication with automatic frequency control, and have two patent applications pending in the United States. We also intend to seek further patents on our technology, if appropriate. We cannot assure you that patents will be issued for any of our pending or future patents or that any claims allowed from such applications will be of sufficient scope, or be issued in all countries where our products and services can be sold, to provide meaningful protection or any commercial advantage to us. Also, our competitors may be able to design around our patents. The laws of some foreign countries in which our products and services are or may be developed, manufactured or sold may not protect our products and services or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products and services more likely. We have filed applications for trademark registration of Globecomm Systems Inc., Globecomm, and GSI in the United States and various other countries, and have been granted registrations for some of these terms in Europe and Russia. We have received trademark registrations for NetSat Express in the United States, the European Community, Russia, and Brazil. We have various other trademarks registered or pending for registration in the United States and in other countries and may intend to seek registration of other trademarks and service marks in the future. We cannot assure you that registrations will be granted from any of our pending or future applications, or that any registrations that are granted will prevent others from using similar trademarks in connection with related goods and services. DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME CONSUMING AND EXPENSIVE, AND IF WE ARE NOT SUCCESSFUL, COULD CAUSE SUBSTANTIAL EXPENSES AND DISRUPT OUR BUSINESS. We cannot be sure that our products, services, technologies, and advertising we employ in our business do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Prosecuting infringers and defending against intellectual property infringement claims could be time consuming and expensive, and regardless of whether we are or are not successful, could cause substantial expenses and disrupt our business. We may incur substantial expenses in defending against these third party claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability and/or may materially disrupt the conduct of, or necessitate the cessation of, our business. THROUGH THEIR OWNERSHIP, OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES MAY BE ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER OUR MANAGEMENT. As of February 12, 2002, our officers and directors, and their affiliates beneficially own approximately 1.8 million shares, constituting approximately 13.6% of our outstanding common stock. These stockholders, acting together, may be able to exert significant influence over the election of directors and other corporate actions requiring stockholder approval. WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGES, WHICH WOULD MAKE OUR PRODUCTS AND SERVICES BECOME NON-COMPETITIVE AND OBSOLETE. The telecommunications industry, including satellite-based communications services, is characterized by rapidly changing technologies, frequent new product and service introductions and evolving industry standards. If we are unable, for technological or other reasons, to develop and introduce new products and services or enhancements to existing products and services in a timely manner or in response to changing market conditions or customer requirements, our products and services would become non-competitive and obsolete, which would harm our business, results of operations and financial condition. WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE OUR SOLE OR A LIMITED SOURCE OF SUPPLY, AND THE LOSS OF THESE SUPPLIERS WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We currently obtain most of our critical components and services from single or limited sources and generally do not maintain significant inventories or have long-term or exclusive supply contracts with our source vendors. We 19 have from time to time experienced delays in receiving products from vendors due to lack of availability, quality control or manufacturing problems, shortages of materials or components or product design difficulties. We may experience delays in the future and replacement services or products may not be available when needed, or at all, or at commercially reasonable rates or prices. If we were to change some of our vendors, we would have to perform additional testing procedures on the service or product supplied by the new vendors, which would prevent or delay the availability of our products and services. Furthermore, our costs could increase significantly if we need to change vendors. If we do not get timely deliveries of quality products and services, or if there are significant increases in the prices of these products or services, it could have a material adverse effect on our business, results of operations and financial condition. WE MAY BE UNABLE TO LEASE TRANSPONDER SPACE ON SATELLITES, WHICH COULD LIMIT OUR ABILITY TO PROVIDE OUR SERVICES TO OUR CUSTOMERS. We and NetSat Express lease transponder space on satellites in order to provide communications and Internet services to our customers and the customers of NetSat Express. The supply of transponder space serving a geographic region on earth is limited by the number of satellites that are in orbit above that geographic region. If companies that own and deploy satellites in orbit underestimate the demand for transponder space in a given geographic area or they are simply unable to build and launch enough satellites to keep up with increasing demand, the price for leasing transponder space could rise, increasing our cost of operations or we simply may not be able to lease enough transponder space where needed to meet the demands of our customers. We currently anticipate that the rapid growth in the demand for satellite-based communications worldwide could lead to a short-term shortage of transponder space. WE RELY ON NETSAT EXPRESS, OUR WHOLLY OWNED SUBSIDIARY, FOR OUR MAIN SUPPLY OF SPACE SEGMENT ON SATELLITES. IF ITS BUSINESS FAILS OR WE ARE OTHERWISE UNABLE TO CONTINUE TO RELY ON NETSAT EXPRESS FOR THIS SUPPLY, OUR BUSINESS MAY BE HARMED. We currently depend on NetSat Express for a majority of our transponder space on satellites. We do not have a long-term agreement in place with NetSat Express, as most of our needs are filled on a purchase order basis. If NetSat Express is unable to develop its business or if we are unable to continue to rely on its supply for space segment, then we will have to find alternative suppliers. If we are unable to find another supplier of transponder space or if we are unable to find one on terms favorable to us, then our business may be harmed. OUR NETWORK MAY EXPERIENCE SECURITY BREACHES, WHICH COULD DISRUPT OUR SERVICES. Our network infrastructure may be vulnerable to computer viruses, break-ins, denial of service attacks and similar disruptive problems caused by our customers or other Internet users. Computer viruses, break-ins, denial of service attacks or other problems caused by third parties could lead to interruptions, delays or cessation in service to our customers. There currently is no existing technology that provides absolute security, and the cost of minimizing these security breaches could be prohibitively expensive. We may face liability to customers for such security breaches. Furthermore, these incidents could deter potential customers and adversely affect existing customer relationships. SATELLITES UPON WHICH WE RELY MAY BE DAMAGED OR LOST, OR MALFUNCTION. The damage, loss or malfunction of any of the satellites used by us, or a temporary or permanent malfunction of any of the satellites upon which we rely, would likely result in the interruption of our satellite-based communications services. This interruption would have a material adverse effect on our business, results of operations and financial condition. OUR STOCK PRICE IS HIGHLY VOLATILE. Our stock price has fluctuated substantially since our initial public offering, which was completed in August 1997. The market price for our common stock, like that of the securities of many telecommunications and high technology industry companies, is likely to remain volatile based on many factors, including the following: o quarterly variations in operating results; o announcements of new technology, products or services by us or any of our competitors; 20 o acceptance of satellite-based communication services and Internet access services in developing countries with emerging markets; o changes in financial estimates or recommendations by security analysts; or o general market conditions, including, but not limited to, results of the terrorist attacks on September 11, 2001 and the related outbreak of hostilities. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often extremely expensive and diverts management's attention and resources, which could significantly harm our business. A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING YOUR SHARES OF STOCK AT A PREMIUM TO THE MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS. Various provisions with respect to votes in the election of directors, special meetings of stockholders, and advance notice requirements for stockholder proposals and director nominations of our amended and restated certificate of incorporation, bylaws and Section 203 of the General Corporation Laws of the State of Delaware could make it more difficult for a third party to acquire us, even if doing so might be beneficial to you and our other stockholders. In addition, we have a poison pill in place that could make an acquisition of us by a third party more difficult. RISKS RELATED TO GOVERNMENT APPROVALS WE ARE SUBJECT TO MANY GOVERNMENT REGULATIONS, AND FAILURE TO COMPLY WITH THEM WILL HARM OUR BUSINESS. OPERATIONS AND USE OF SATELLITES We are subject to various federal laws and regulations, which may have negative effects on our business. We operate Federal Communications Commission, or FCC, licensed earth stations in Hauppauge, New York, subject to the Communications Act of 1934, as amended (the Act), and the rules and regulations of FCC. Pursuant to the Act and rules, we have obtained and are required to maintain radio transmission licenses from the FCC for both domestic and foreign operations of our earth stations. These licenses should be renewed by the FCC in the normal course as long as we remain in compliance with FCC rules and regulations. However, we cannot guarantee that the FCC will grant additional licenses when our existing licenses expire, nor are we assured that the FCC will not adopt new or modified technical requirements that will require us to incur expenditures to modify or upgrade our equipment as a condition of retaining our licenses. We are also required to comply with FCC regulations regarding the exposure of humans to radio frequency radiation from our earth stations. These regulations, as well as local land use regulations, restrict our freedom to choose where to locate our earth stations. FOREIGN OWNERSHIP We may, in the future, be required to seek FCC approval for foreign ownership if we operate as a common carrier and ownership of our stock exceeds the specified criteria. Failure to comply with these policies may result in an order to divest the offending foreign ownership, fines, denial of license renewal, and/or license revocation proceedings against the licensee by the FCC. FOREIGN REGULATIONS Regulatory schemes in countries in which we may seek to provide our satellite-delivered data communications services may impose impediments on our operations. Some countries in which we intend to operate have telecommunications laws and regulations that do not currently contemplate technical advances in telecommunications technology like Internet/intranet transmission by satellite. We cannot assure you that the present regulatory environment in any of those countries will not be changed in a manner, which may have a material adverse impact on our business. Either we or our local partners typically must obtain authorization for each country in which we provide our satellite-delivered data communications services. The regulatory schemes in each country are different, and thus 21 there may be instances of noncompliance of which we are not aware. We cannot assure you that our licenses and approvals are or will remain sufficient in the view of foreign regulatory authorities, or that necessary licenses and approvals will be granted on a timely basis in all jurisdictions in which we wish to offer our products and services or that restrictions applicable thereto will not be unduly burdensome. REGULATION OF THE INTERNET Due to the increasing popularity and use of the Internet it is possible that a number of laws and regulations may be adopted at the local, national or international levels with respect to the Internet, covering issues including user privacy and expression, pricing of products and services, taxation, advertising, intellectual property rights, information security or the convergence of traditional communication services with Internet communications. It is anticipated that a substantial portion of our Internet operations will be carried out in countries, which may impose greater regulation of the content of information coming into the country than that which is generally applicable in the United States; for example, privacy regulations in 35 countries in Europe and content restrictions in countries including the Republic of China. To the extent that we provide content as a part of our Internet services, it will be subject to laws regulating content. Moreover, the adoption of laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our Internet services or increase our cost of doing business or in some other manner have a material adverse effect on our business, operating results and financial condition. In addition, the applicability to the Internet of existing laws governing issues including property ownership, copyrights and other intellectual property issues, taxation, libel and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace which could reduce demand for our products and services, could increase our cost of doing business as a result of costs of litigation or increased product development costs, or could in some other manner have a material adverse effect on our business, financial condition and results of operations. TELECOMMUNICATIONS TAXATION, SUPPORT REQUIREMENTS, AND ACCESS CHARGES All telecommunications carriers providing domestic services in the United States are required to contribute a portion of their gross revenues for the support of universal telecommunications services; and some telecommunications services are subject to special taxation and to contribution requirements to support services to special groups, like persons with disabilities. Our services may be subject to new or increased taxes and contribution requirements that could affect our profitability, particularly if we are not able to pass them through to customers for either competitive or regulatory reasons. Internet services are currently exempt from charges that long distance telephone companies pay for access to the networks of local telephone companies in the U.S. Efforts have been made from time to time, and may be made again in the future, to eliminate this exemption. If these access charges are imposed on telephone lines used to reach Internet service providers, and/or if flat rate telephone services for Internet access are eliminated or curtailed, the cost to customers who access our satellite facilities using telephone company-provided facilities could increase to an extent that could discourage the demand for our services. Likewise, the demand for our services in other countries may be affected by the availability and cost of local telephone or other telecommunications facilities to reach our facilities. EXPORT OF TELECOMMUNICATIONS EQUIPMENT The sale of our ground segment systems, networks, and communications services outside the United States is subject to compliance with the regulations of the United States Export Administration Regulations. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In addition, in order to ship our products into other countries, the products must satisfy the technical requirements of that particular country. If we were unable to comply with such requirements with respect to a significant quantity of our products, our sales in those countries could be restricted, which could have a material adverse effect on our business, results of operations and financial condition. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to a variety of risks, including foreign currency exchange rate fluctuations relating to certain purchases from foreign vendors. In the normal course of business, we assess these risks and have established policies and procedures to manage our exposure to fluctuations in foreign currency values. Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates for certain purchases from foreign vendors, if applicable. Accordingly, we utilize from time to time foreign currency forward contracts to hedge our exposure on firm commitments denominated in foreign currency. As of December 31, 2001, we had no such foreign currency forward contracts. Our results of operations and cash flows are subject to fluctuations due to changes in interest rates primarily from our investment of available cash balances in money market funds with portfolios of investment grade corporate and U.S. government securities, and secondly, our fixed long-term capital lease agreement. Under our current positions, we do not use interest rate derivative instruments to manage exposure to interest rate changes. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's Annual Meeting of Stockholders was held on November 15, 2001 (the "Annual Meeting"). (b) The matters voted upon at the Annual Meeting and the results of the voting were as follows: (i) The following individuals were elected by the Stockholders to serve as Directors: Board Member In Favor Against ------------ -------- ------- Richard E. Caruso 11,080,349 385,333 Benjamin Duhov 11,135,649 330,033 David E. Hershberg 10,987,601 478,081 Kenneth A. Miller 11,135,849 329,833 A. Robert Towbin 11,135,849 329,833 C.J. Waylan 11,135,849 329,833 Donald G. Woodring 11,135,849 329,833 Stephen C. Yablonski 11,134,954 330,728 (ii) The amendment to the Company's 1997 Stock Incentive Plan to increase the number of shares of common stock authorized to be issued from 3,476,463 to 4,276,463 was voted upon as follows: 5,674,210 shares in favor; 1,215,043 shares against; and 48,769 shares abstaining. 23 (iii) The appointment of Ernst & Young LLP as independent auditors of the Company to serve for the year ending June 30, 2002 was voted upon as follows: 11,428,871 shares in favor; 20,813 shares against; and 15,998 shares abstaining. ITEM 5. OTHER INFORMATION During the fiscal year ended June 30, 2001, Ernst & Young LLP provided audit, audit related and non-audit services to the Company as follows: (a) Audit Fees: Aggregate fees billed for professional services rendered for the audit of the Company's fiscal year 2001 annual financial statements and review of the interim financial statements included in the Company's quarterly reports on Form 10-Q for fiscal year 2001: approximately $132,000. (b) Financial Information Systems Design and Implementation Fees: none (c) All Other Fees: Aggregate fees billed for professional services rendered for all services other than those professional services covered in the section captioned "Audit Fees" for the Company's fiscal year 2001 (such services including (i) income tax compliance and consulting services; (ii) filing of certain SEC registration statements; and (iii) consultation on accounting standards and transactions): approximately $166,000. The Audit Committee of the Board of Directors of the Company has considered whether provision of the services described in sections (b) and (c) above is compatible with maintaining the independent accountant's independence and has determined that such services have not adversely affected Ernst & Young LLP's independence. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Index to Exhibits: Exhibit No. - ----------- 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 3.2 Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated By-laws of the Company defining rights of holders of Common Stock of the Company (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-1, File No. 333-22425 (the "Registration Statement")). 10.1 Form of Registration Rights Agreement, dated as of February 1997 (incorporated by reference to exhibit 10.1 of the Registration Statement). 10.2 Form of Registration Rights Agreement, dated May 30, 1996 (incorporated by reference to exhibit 10.2 of the Registration Statement). 10.3 Form of Registration Rights Agreement, dated December 31, 1996, as amended (incorporated by reference to exhibit 10.3 of the Registration Statement). 10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock, dated November 9, 1995 between the Company and Thomson-CSF (incorporated by reference to exhibit 10.4 of the Registration Statement). 10.5 Investment Agreement, dated February 12, 1996 by and between Shiron Satellite Communications (1996) Ltd. and the Company (incorporated by reference to exhibit 10.5 of the Registration Statement). 10.6* Stock Purchase Agreement, dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the Company (incorporated by reference to exhibit 10.6 of the Registration Statement). 10.7 Memorandum of Understanding, dated December 18, 1996 by and between NetSat Express, Inc. and Applied Theory Communications, Inc. (incorporated by reference to exhibit 10.7 of the Registration Statement). 10.8 Stock Purchase Agreement, dated as of August 23, 1996 by and between NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by reference to exhibit 10.8 of the Registration Statement). 10.9 Employment Agreement, dated as of October 9, 2001, by and between David E. Hershberg and the Company (incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.10 Employment Agreement, dated as of October 9, 2001, by and between Kenneth A. Miller and the Company (incorporated by reference to Exhibit 10.10 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 24 10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between Eaton Corporation and the Company (incorporated by reference to exhibit 10.13 of the Registration Statement). 10.12 Amended and Restated 1997 Stock Incentive Plan (incorporated by reference to exhibit 4 of the Company's Registration Statement on Form S-8, File No. 333-54622, filed on January 30, 2001). 10.13 Investment Agreement, dated August 21, 1998 by and between McKibben Communications LLC and the Company (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended June 30, 1998). 10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.8 of the Company's Registration Statement on Form S-8, File No. 333-70527, filed on January 13, 1999). 10.15 Rights Agreement, dated as of December 3, 1998, between American Stock Transfer and Trust Company and the Company, which includes the form of Certificate of Designation for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4 of Company's Current Report on Form 8-K dated December 3, 1998). 10.16 Common Stock Purchase Agreement, dated August 11, 1999 between NetSat Express, Inc. and Globix Corporation (incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year ended June 30, 1999). 10.17 Series A Preferred Stock Purchase Agreement, dated August 11, 1999 between NetSat Express, Inc. and George Soros (incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended June 30, 1999). 10.18 Common Stock Purchase Agreement, dated October 28, 1999 between NetSat Express, Inc., Globecomm Systems, Inc. and Reuters Holdings Switzerland SA (incorporated by reference to Exhibit 10.18 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 1999). 10.19 Negotiable Promissory Note, dated April 1, 2001, by and between Donald G. Woodring and the Company (incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended June 30, 2001). 10.20 Employment Agreement, dated as of October 9, 2001, by and between Stephen C. Yablonski and the Company (incorporated by reference to Exhibit 10.20 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.21 Employment Agreement, dated as of October 9, 2001, by and between Andrew C. Melfi and the Company (incorporated by reference to Exhibit 10.21 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.22 Employment Agreement, dated as of October 9, 2001, by and between Donald G. Woodring and the Company (incorporated by reference to Exhibit 10.22 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.23 Employment Agreement, dated as of October 9, 2001, by and between Paul J. Johnson and the Company (incorporated by reference to Exhibit 10.23 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.24 Employment Agreement, dated as of October 9, 2001, by and between Paul Eterno and the Company (incorporated by reference to Exhibit 10.24 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.25 Promissory Note Secured By Stock Pledge Agreement, dated September 4, 2001, by and between David E. Hershberg and the Company (incorporated by reference to Exhibit 10.25 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 25 10.26 Promissory Note Secured By Stock Pledge Agreement, dated September 4, 2001, by and between Kenneth A. Miller and the Company (incorporated by reference to Exhibit 10.26 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.27 Employment Agreement, dated as of January 25, 2002, by and between G. Patrick Flemming and the Company (filed herewith). * Confidential treatment granted for portions of this agreement. (b) Reports on Form 8-K None 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GLOBECOMM SYSTEMS INC. ---------------------- Date: February 14, 2002 /s/ David E. Hershberg ---------------------- David E. Hershberg Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: February 14, 2002 /s/ Andrew C. Melfi ------------------- Andrew C. Melfi Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 27 Index to Exhibits: Exhibit No. - ----------- 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 3.2 Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated By-laws of the Company defining rights of holders of Common Stock of the Company (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-1, File No. 333-22425 (the "Registration Statement")). 10.1 Form of Registration Rights Agreement, dated as of February 1997 (incorporated by reference to exhibit 10.1 of the Registration Statement). 10.2 Form of Registration Rights Agreement, dated May 30, 1996 (incorporated by reference to exhibit 10.2 of the Registration Statement). 10.3 Form of Registration Rights Agreement, dated December 31, 1996, as amended (incorporated by reference to exhibit 10.3 of the Registration Statement). 10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock, dated November 9, 1995 between the Company and Thomson-CSF (incorporated by reference to exhibit 10.4 of the Registration Statement). 10.5 Investment Agreement, dated February 12, 1996 by and between Shiron Satellite Communications (1996) Ltd. and the Company (incorporated by reference to exhibit 10.5 of the Registration Statement). 10.6* Stock Purchase Agreement, dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the Company (incorporated by reference to exhibit 10.6 of the Registration Statement). 10.7 Memorandum of Understanding, dated December 18, 1996 by and between NetSat Express, Inc. and Applied Theory Communications, Inc. (incorporated by reference to exhibit 10.7 of the Registration Statement). 10.8 Stock Purchase Agreement, dated as of August 23, 1996 by and between NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by reference to exhibit 10.8 of the Registration Statement). 10.9 Employment Agreement, dated as of October 9, 2001, by and between David E. Hershberg and the Company (incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.10 Employment Agreement, dated as of October 9, 2001, by and between Kenneth A. Miller and the Company (incorporated by reference to Exhibit 10.10 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between Eaton Corporation and the Company (incorporated by reference to exhibit 10.13 of the Registration Statement). 10.12 Amended and Restated 1997 Stock Incentive Plan (incorporated by reference to exhibit 4 of the Company's Registration Statement on Form S-8, File No. 333-54622, filed on January 30, 2001). 10.13 Investment Agreement, dated August 21, 1998 by and between McKibben Communications LLC and the Company (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended June 30, 1998). 10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.8 of the Company's Registration Statement on Form S-8, File No. 333-70527, filed on January 13, 1999). 10.15 Rights Agreement, dated as of December 3, 1998, between American Stock Transfer and Trust Company and the Company, which includes the form of Certificate of Designation for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4 of Company's Current Report on Form 8-K dated December 3, 1998). 10.16 Common Stock Purchase Agreement, dated August 11, 1999 between NetSat Express, Inc. and Globix Corporation (incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year ended June 30, 1999). 28 10.17 Series A Preferred Stock Purchase Agreement, dated August 11, 1999 between NetSat Express, Inc. and George Soros (incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended June 30, 1999). 10.18 Common Stock Purchase Agreement, dated October 28, 1999 between NetSat Express, Inc., Globecomm Systems, Inc. and Reuters Holdings Switzerland SA (incorporated by reference to Exhibit 10.18 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 1999). 10.19 Negotiable Promissory Note, dated April 1, 2001, by and between Donald G. Woodring and the Company (incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended June 30, 2001). 10.20 Employment Agreement, dated as of October 9, 2001, by and between Stephen C. Yablonski and the Company (incorporated by reference to Exhibit 10.20 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.21 Employment Agreement, dated as of October 9, 2001, by and between Andrew C. Melfi and the Company (incorporated by reference to Exhibit 10.21 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.22 Employment Agreement, dated as of October 9, 2001, by and between Donald G. Woodring and the Company (incorporated by reference to Exhibit 10.22 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.23 Employment Agreement, dated as of October 9, 2001, by and between Paul J. Johnson and the Company (incorporated by reference to Exhibit 10.23 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.24 Employment Agreement, dated as of October 9, 2001, by and between Paul Eterno and the Company (incorporated by reference to Exhibit 10.24 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.25 Promissory Note Secured By Stock Pledge Agreement, dated September 4, 2001, by and between David E. Hershberg and the Company (incorporated by reference to Exhibit 10.25 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.26 Promissory Note Secured By Stock Pledge Agreement, dated September 4, 2001, by and between Kenneth A. Miller and the Company (incorporated by reference to Exhibit 10.26 of the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.27 Employment Agreement, dated as of January 25, 2002, by and between G. Patrick Flemming and the Company (filed herewith). * Confidential treatment granted for portions of this agreement. 29 EX-10.27 3 file002.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement"), made and entered into this 25th day of January 2002, by and between Globecomm Systems, a Delaware corporation with principal offices located at 45 Oser Avenue, Hauppauge, NY 11788 (the "Company"), and G. Patrick Flemming (the "Executive"). WITNESSETH WHEREAS, the Company has a need for the Executive's personal services in an executive capacity; and WHEREAS, the Executive possesses the necessary strategic, financial, planning, operational and managerial skills necessary to fulfill those needs; and WHEREAS, the Executive has been providing services to the Company as its Corporate Vice President, Sales and Marketing since November 5, 2001; and WHEREAS, the Company desires to maintain the continuity of its management team and provide the Executive with incentive to remain with the Company; and WHEREAS, the Executive and the Company desire to enter into a formal Employment Agreement to fully recognize the contributions of Executive to the Company and to assure continuous harmonious performance of the affairs of the Company. NOW, THEREFORE, in consideration of the mutual promises, terms, provisions, and conditions contained herein, the parties agree as follows: 1. Position. -------- The Company hereby agrees to employ the Executive to serve in the role of Corporate Vice President, Sales and Marketing of the Company, subject to the limitation set forth herein. As such, the Executive shall be responsible for directing and managing the corporate Sales and Marketing function subject to the authority of the President, Globecomm Systems. The Executive accepts such employment upon the terms and conditions set forth herein, and further agrees to perform to the best of his abilities the duties generally associated with his/her position, as well as such other duties commensurate with his/her position as Corporate Vice President, Sales and Marketing as may be reasonably assigned by the Company. The Executive shall, at all times during the Term, report directly to the President, Globecomm Systems Inc. The Executive shall perform his/her duties diligently and faithfully and shall devote his/her full business time and attention to such duties. 2. Term of Employment and Renewal. The term of Executive's employment under this Agreement will commence on the date of this Agreement (the "Effective Date"). Subject to the provisions of Section 10 of this Agreement, the term of Executive's employment hereunder shall be for an initial term of three (3) years from the Effective Date (the "Initial Term"). The Initial Term of this Agreement shall be automatically extended for successive one (1) year periods (each a "Renewal Period") unless the Company or the Executive gives written notice to the other at least ninety (90) days prior to the expiration of the Initial Term, or a Renewal Period, of such party's election not to extend this Agreement. References herein to the "Term" shall mean the Initial Term as it may be so extended by one or more Renewal Periods. The last day of the Term is the "Expiration Date." 1 3. Compensation and Benefits. ------------------------- (a) Salary. Commencing on the Effective Date, the Company agrees to pay the Executive a base salary at an annual rate of two hundred seventy five thousand Dollars ($275,000), payable in such installments as is the policy of the Company (the "Salary"), but no less frequently than monthly. Thereafter, the Company shall determine appropriate increases to Executive's Salary but in no event shall diminish the amount of Executive's Salary below the initial rate, or below the increased rates. (b) Bonus. The Executive shall be eligible to receive annual bonuses at the discretion of the Company and according to performance goals to be issued by the Company to the Executive at the appropriate annual review cycle during the Term. (c) Benefits. The Executive shall be entitled to participate in all employee benefit plans which the Company provides or may establish from time to time for the benefit of its employees, including, without limitation, group life, medical, surgical, dental and other health insurance, short and long-term disability, deferred compensation, profit-sharing and similar plans. The Executive shall also be entitled to paid vacation in accordance with the Company's vacation policy, which may be accrued to a maximum of 40 days. (d) Stock Options. The Company has granted the Executive options to purchase in the Company, under the terms and conditions as set forth in the Notice Of Grant dated 11/30/01, and modified in January 2002, which shall continue in full force and effect. (e) Expenses. The Company shall pay or reimburse the Executive for all reasonable out-of-pocket expenses actually incurred by him during the Term in performing services hereunder, provided that the Executive properly accounts for such expenses in accordance with the Company's policies. 4. Confidentiality, Disclosure of Information. ------------------------------------------- (a) The Executive recognizes and acknowledges that the Executive has had and will have access to Confidential Information (as defined below) relating to the business or interests of the Company or of persons with whom the Company may have business relationships. Except as permitted herein, the Executive will not during the Term, or at any time thereafter, use, disclose or permit to be known by any other person or entity, any Confidential Information of the Company (except as required by applicable law or in connection with the performance of the Executive's duties and responsibilities hereunder). The term "Confidential Information" means information relating to the Company's business affairs, proprietary technology, trade secrets, patented processes, research and development data, know-how, market studies and forecasts, competitive analyses, pricing policies, employee lists, employment agreements (other than this Agreement), personnel policies, the substance of agreements with customers, suppliers and others, marketing arrangements, customer lists, commercial arrangements, or any other information relating to the Company's business that is not generally known to the public or to actual or potential competitors of the Company (other than through a breach of this Agreement). This obligation shall continue until such Confidential Information becomes publicly available, other than pursuant to a breach of this Section 4 by the Executive, regardless of whether the Executive continues to be employed by the Company. (b) It is further agreed and understood by and between the parties to this Agreement that all "Company Materials," which include, but are not limited to, computers, computer software, computer disks, tapes, printouts, source, HTML and other code, flowcharts, schematics, designs, graphics, drawings, photographs, charts, graphs, notebooks, customer lists, sound recordings, other tangible or intangible manifestation of content, and all other documents whether printed, typewritten, handwritten, electronic, or stored on computer disks, tapes, hard drives, or any other tangible medium, as well as samples, prototypes, models, products and the like, shall be the exclusive property of the Company and, upon termination of Executive's employment with the Company, and/or upon the request of the Company, all Company Materials, including copies thereof, as well as all other Company property then in the Executive's possession or control, shall be returned to and left with the Company. 2 5. Inventions Discovered by Executive. ---------------------------------- The Executive shall promptly disclose to the Company any invention, improvement, discovery, process, formula, or method or other intellectual property, whether or not patentable or copyrightable (collectively, "Inventions"), conceived or first reduced to practice by the Executive, either alone or jointly with others, while performing services hereunder (or, if based on any Confidential Information, at any time during or after the Term), (a) which pertain to any line of business activity of the Company, whether then conducted or then being actively planned by the Company, with which the Executive was or is involved, (b) which is developed using time, material or facilities of the Company, whether or not during working hours or on the Company premises, or (c) which directly relates to any of the Executive's work during the Term, whether or not during normal working hours. The Executive hereby assigns to the Company all of the Executive's right, title and interest in and to any such Inventions. During and after the Term, the Executive shall execute any documents necessary to perfect the assignment of such Inventions to the Company and to enable the Company to apply for, obtain and enforce patents, trademarks and copyrights in any and all countries on such Inventions, including, without limitation, the execution of any instruments and the giving of evidence and testimony, without further compensation beyond the Executive's agreed compensation during the course of the Executive's employment. Without limiting the foregoing, the Executive further acknowledges that all original works of authorship by the Executive, whether created alone or jointly with others, related to the Executive's employment with the Company and which are protectable by copyright, are "works made for hire" within the meaning of the United States Copyright Act, 17 U.S.C. ss. 101, as amended, and the copyright of which shall be owned solely, completely and exclusively by the Company. If any Invention is considered to be work not included in the categories of work covered by the United States Copyright Act, 17 U.S.C. ss. 101, as amended, such work is hereby assigned or transferred completely and exclusively to the Company. The Executive hereby irrevocably designates counsel to the Company as the Executive's agent and attorney-in-fact to do all lawful acts necessary to apply for and obtain patents and copyrights and to enforce the Company's rights under this Section. This Section 5 shall survive the termination of this Agreement. Any assignment of copyright hereunder includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as "moral rights" (collectively "Moral Rights"). To the extent such Moral Rights cannot be assigned under applicable law and to the extent the following is allowed by the laws in the various countries where Moral Rights exist, the Executive hereby waives such Moral Rights and consents to any action of the Company that would violate such Moral Rights in the absence of such consent. The Executive agrees to confirm any such waivers and consents from time to time as requested by the Company. 6. Non-Competition and Non-Solicitation. ------------------------------------ The Executive acknowledges that the Company has invested substantial time, money and resources in the development and retention of its Inventions, Confidential Information (including trade secrets), customers, accounts and business partners, and further acknowledges that during the course of the Executive's employment with the Company the Executive has had and will have access to the Company's Inventions and Confidential Information (including trade secrets), and will be introduced to existing and prospective customers, accounts and business partners of the Company. The Executive acknowledges and agrees that any and all "goodwill" associated with any existing or prospective customer, account or business partner belongs exclusively to the Company, including, but not limited to, any goodwill created as a result of direct or indirect contacts or relationships between the Executive and any existing or prospective customers, accounts or business partners. Additionally, the parties acknowledge and agree that Executive possesses skills that are special, unique or extraordinary and that the value of the Company depends upon his use of such skills on its behalf. In recognition of this, the Executive covenants and agrees that: (a) During the Term, and for a period of one year thereafter, the Executive may not, without the prior written consent of the Board, (whether as an employee, agent, servant, owner, partner, consultant, independent contractor, representative, stockholder or in any other capacity whatsoever) participate in any business that offers products or services competitive in any way to those offered by the Company or that were under active development by the Company during the Term, provided that nothing herein shall prohibit 3 the Executive from owning securities of corporations which are listed on a national securities exchange or traded in the national over-the-counter market in an amount which shall not exceed 3% of the outstanding shares of an such corporation. (b) During the Term, and for a period of one year thereafter, the Executive may not entice, solicit or encourage any Company employee to leave the employ of the Company or any independent contractor to sever its engagement with the Company, absent prior written consent to do so from the Board. (c) During the Term, and for a period of one year thereafter, the Executive may not, directly or indirectly, entice, solicit or encourage any customer, prospective customer, vendor, strategic partner or business associate of the Company to cease doing business with the Company, reduce its relationship with the Company or refrain from establishing or expanding a relationship with the Company. 7. Non-Disparagement. ----------------- The Executive hereby agrees that during the Term, and at all times thereafter, the Executive will not make any statement that is disparaging about the Company, any of its officers, directors, or shareholders, including, but not limited to, any statement that disparages the products, services, finances, financial condition, capabilities or other aspect of the business of the Company. The Executive further agrees that during the same period the Executive will not engage in any conduct that is intended to inflict harm upon the professional or personal reputation of the Company or any of its officers, directors, shareholders or employees. 8. Provisions Necessary and Reasonable. ----------------------------------- (a) The Executive agrees that (i) the provisions of Sections 4, 5, 6 and 7 of this Agreement are necessary and reasonable to protect the Company's Confidential Information, Inventions, and goodwill; (ii) the specific temporal, geographic and substantive provisions set forth in Section 6 of this Agreement are reasonable and necessary to protect the Company's business interests in part because the Company's business is international in scope; and (iii) in the event of any breach of any of the covenants set forth herein, the Company would suffer substantial irreparable harm and would not have an adequate remedy at law for such breach. In recognition of the foregoing, the Executive agrees that in the event of a breach or threatened breach of any of these covenants, in addition to such other remedies as the Company may have at law, without posting any bond or security, the Company shall be entitled to seek and obtain equitable relief, in the form of specific performance, and/or temporary, preliminary or permanent injunctive relief, or any other equitable remedy which then may be available. The seeking of such injunction or order shall not affect the Company's right to seek and obtain damages or other equitable relief on account of any such actual or threatened breach. (b) If any of the covenants contained in Sections 4, 5, 6 and 7 hereof, or any part thereof, are hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect without regard to the invalid portions. (c) If any of the covenants contained in Sections 4, 5, 6 and 7 hereof, or any part thereof, are held to be unenforceable by a court of competent jurisdiction because of the temporal or geographic scope of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or geographic area of such provision and, in its reduced form, such provision shall be enforceable. 9. Representations Regarding Prior Work and Legal Obligations. ---------------------------------------------------------- (a) The Executive represents that the Executive has no agreement or other legal obligation with any prior employer, or any other person or entity, that restricts the Executive's ability to accept employment with, or to perform any function for, the Company. 4 (b) The Executive has been advised by the Company that at no time should the Executive divulge to or use for the benefit of the Company any trade secret or confidential or proprietary information of any previous employer. The Executive expressly acknowledges that the Executive has not divulged or used any such information for the benefit of the Company. (c) The Executive acknowledges that the Executive has not and will not misappropriate any Invention that the Executive played any part in creating while working for any former employer. (d) The Executive acknowledges that the Company is basing important business decisions on these representations, and affirms that all of the statements included herein are true. 10. Termination and Severance. ------------------------- Notwithstanding the provisions of Section 2 of this Agreement, the Executive's employment hereunder may terminate under the following circumstances: (a) Termination by the Company for Cause. The Company may terminate this Agreement for Cause at any time, upon written notice to the Executive setting forth in reasonable detail the nature of such Cause. For purposes of this Agreement, Cause is defined as (i) the Executive's willful and material breach of the terms of this Agreement; (ii) the Executive's commission of any felony or any crime involving moral turpitude; or (iii) gross negligence or willful misconduct by the Executive in connection with his position hereunder, or (iv) the Executive's willful refusal to perform his duties hereunder. Upon the termination for Cause of Executive's employment, the Company shall have no further obligation or liability to the Executive other than for salary earned under this Agreement prior to the date of termination, and any accrued but unused vacation. (b) Termination by the Company Without Cause or Resignation by the Executive for Good Reason. (i) The Executive's employment hereunder may be terminated without Cause by the Company upon written notice to the Executive. The Executive may also terminate his employment hereunder for "Good Reason" upon one (1) month's written notice to the Company within thirty (30) days of the occurrence of any of the following events (A) a material breach of this Agreement by the Company, which shall be interpreted to include without limitation a failure to pay the Executive his salary or bonus, a failure to provide the Executive his benefits, or a requirement that the Executive travel a significantly larger number of days than in the previous calendar year; (B) a material reduction in the Executive's duties or responsibilities; (C) a change in the Executive's reporting relationship so that he no longer reports directly to the President; (D) a relocation of the Executive's worksite to a location 75 miles or more from its current location. (ii) Subject to Section 11, if the Company terminates the Executive's employment without Cause, or the Executive terminates his employment for Good Reason (A) the Company shall continue to pay the Executive the Salary for a two (2) year severance period commencing upon the effective date of the termination (the "Severance Period"); (B) the Company shall pay for the costs of, or reimburse the Executive for the costs he incurs in, continuing the Executive's and his eligible dependents' health insurance pursuant to COBRA for as long as the Executive (and/or his eligible dependents, as the case may be) are eligible for COBRA during the Severance Period, and then shall pay the cost of medical and dental coverage for the Executive comparable to that provided pursuant to COBRA, up to a maximum of $2000 per month; during the balance of the Severance Period; (C) during the Severance Period, the Company shall pay the cost of conversion of group term life coverage to an individual policy for the Executive; (D) during the Severance Period, the Company shall pay to the Executive a monthly lump sum cash payment equal to one-twelfth of the annual automobile allowance he received at the time of such termination; and (E) during the Severance Period, the Company shall pay to the Executive a monthly lump sum cash payment equal to one-twelfth of the non-elective deferral employer contribution made for his benefit under the 5 Company's 401(k) plan for the last fiscal year of the Company prior to the termination of Executive's employment. As a condition of receiving severance payments and benefits pursuant to this Agreement, the Executive shall execute and deliver to the Company prior to his/her receipt of such benefits a general release substantially in the form attached hereto as Exhibit A. (c) Resignation by the Executive without Good Reason. The Executive may resign his employment hereunder without Good Reason upon one (1) month's written notice to the Company. In the event of termination by the Executive pursuant to this subsection 10(c), the Company may elect to pay the Executive during the notice period (or for any remaining portion of that period) the Salary and benefits at the rate of compensation the Executive was receiving immediately before such notice of termination was tendered in lieu of actual notice. (d) Death. In the event of the Executive's death during the Term of this Agreement, the Executive's employment hereunder shall immediately and automatically terminate, and the Company shall have no further obligation or duty to the Executive or his estate or beneficiaries other than for the Salary earned under this Agreement to the date of termination and any payments or benefits due under Company policies or benefit plans. (e) Disability. The Company may terminate the Executive's employment hereunder, upon written notice to the Executive, in the event that the Executive becomes disabled during the Term through any condition of either a physical or psychological nature and, as a result, is, with or without reasonable accommodation, unable to perform the essential functions of the services contemplated hereunder for (a) a period of one hundred and twenty (120) consecutive days, or (b) for shorter periods aggregating one hundred twenty (120) days during any twelve (12) month period during the Term. Any such termination shall become effective upon mailing or hand delivery of notice that the Company has elected its right to terminate under this subsection 10(e), and the Company shall have no further obligation or duty to the Executive other than for salary earned under this Agreement prior to the date of termination and any payments or benefits previously vested and due under Company policies or benefit plans. (f) Effect of Non-Renewal. In the event that the Company gives notice of its election not to extend the Initial Term or any Renewal Period pursuant to Section 2 above, the Executive shall be entitled to payments and benefits described in Section 10(b)(ii) above commencing on the Expiration Date subject to his execution and delivery of a general release substantially in the form attached hereto as Exhibit A. (g) Change in Control. Subject to Section 11, if the Executive resigns with Good Reason within one (1) year after a Change in Control, as defined below, he will be entitled to the payments and benefits described in Section 10(b)(ii) above (the "Severance Payments") provided that, if the grounds for the termination for Good Reason are those specified in Section 10(b)(i)(B) and/or (C), and if the Company gives the Executive written notice (the "Continuation Notice"), at any time up to ten (10) days after it receives the Executive's written resignation notice, that it wishes the Executive to continue his employment until a date not later than one (1) year after the Change in Control (the "Employment Continuation Date"), the Executive shall not be entitled to the Severance Payments until and unless he remains employed by the Company through the Employment Continuation Date. Nothing in this subsection 10(g) shall obligate the Company to provide the Executive with the Severance Payments upon a termination for Cause, death or disability. If the Executive does not provide the Company notice of resignation or non-renewal at any time during the year following a Change in Control and remains employed by the Company through the first anniversary of the Change in Control, as defined below, the Executive shall be paid a one-time bonus payment of 200% of his Salary (the "Special Bonus"). The Special Bonus shall be in addition to, and not in lieu of, any Severance Payments to which Executive may otherwise become entitled under this section 10 in connection with the subsequent termination of his employment. As used herein, a "Change in Control" shall mean a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as 6 amended (the "1934 Act") whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if: (x) any person or group (as such terms are used in connection with Sections 13(d) and 14(d) of the 1934 Act) becomes the "beneficial owner" (as defined in Rule 13d-3 and 13d-5 under the 1934 Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; (y) the Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; and (z) during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the Board (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. Notwithstanding the foregoing provisions of this subsection 10(g), a "Change in Control" will not be deemed to have occurred solely because of the acquisition of securities of the Company (or any reporting requirement under the 1934 Act relating thereto) by an employee benefit plan maintained by the Company for its employees. As used herein, the "Company" may include the Company's successors subsequent to a Change in Control. 11. Benefit Limitation. ------------------ (a) Should any payments or benefits become payable hereunder in connection with a Change in Control, then the aggregate Present Value, measured as of the Change in Control, of any Severance Payments to which the Executive becomes entitled under section 10(b)(ii) of this Agreement (namely, the salary continuation payments, the continued health care coverage, the life insurance coverage, the equivalent automobile and professional service payments and the equivalent 401(k) employer contribution payments) and, if applicable, any portion of the Special Bonus under section 10(g) which is deemed to constitute a parachute payment under Section 280 G of the Internal Revenue Code of 1986, as amended (the "Code") shall in no event exceed in amount the greater of the following dollar amounts (the "Benefit Limit"): (i) 2.99 times the Executive's Average Compensation, less the Present Value, measured as of the Change in Control, of all Other Parachute Payments to which the Executive is entitled, or (ii) the amount that yields the Executive the greatest after-tax amount of benefits under this Agreement after taking into account any excise tax imposed under Code Section 4999 on his payments and benefits under section 10 of this Agreement and any Other Parachute Payments, The portion of any option that automatically vests on an accelerated basis upon a Change in Control pursuant to the terms of the agreement evidencing that option that is deemed to be a parachute payment under Code Section 280G (the "Option Parachute Payment") shall also be subject to the Benefit Limit. The Option Parachute Payment shall be calculated in accordance with the valuation provisions established under Code Section 280G and the applicable Treasury Regulations and shall include an appropriate dollar adjustment to reflect the lapse of the Executive's obligation to remain in the Company's employ as a condition to the vesting of the accelerated installment. In no event, however, shall the parachute payment attributable to any portion of such option exceed the excess of the fair market value of the accelerated option shares at the time of acceleration over the option exercise price of such shares. For purposes of applying the Benefit Limit, the value of the Executive's non-competition covenant under Section 6 of this Agreement shall be determined by an independent appraisal by a nationally recognized accounting firm acceptable to both the Executive and the Company, and a portion of his Severance Payments shall, to the extent of such appraised value, be specifically allocated as reasonable compensation for such covenant. 7 "Average Compensation" means the average of the Executive's W-2 wages from the Company for the five calendar years (or such fewer number of calendar years of employment with the Company) completed immediately prior to the calendar year in which the Change in Control occurs. Any W-2 wages for a partial year of employment will be annualized, in accordance with the frequency which such wages are paid during such partial year, before inclusion in the Executive's Average Compensation. "Other Parachute Payments" means all payments in the nature of compensation that are made to the Executive, other than the Severance Payments described in section 10(b)(ii) of this Agreement or any portion of the Special Bonus under section 10(g) deemed to constitute a parachute payment, payable in connection with a Change in Control and which accordingly qualify as parachute payments with the meaning of Code Section 280G. Other Parachute Payments shall include, without limitation, the Present Value of any Option Parachute Payment. "Present Value" means the value, determined as of the date of the Change in Control, of any payment in the nature of compensation to which the Executive becomes entitled in connection with the Change in Control. The Present Value of each such payment shall be determined in accordance with the provisions of Code Section 280G(d)(4), utilizing a discount rate equal to 120% of the applicable Federal Rate in effect at the time of such determination, compounded semi-annually to the effective date of the Change in Control. (b) In the event there is any disagreement between the Executive and the Company as to whether one or more payments to which Executive becomes entitled in connection with the Change in Control constitute parachute payments within the meaning of Code Section 280G, such dispute shall be resolved by the nationally recognized firm of certified public accountants used by the Company prior to the Change in Control (the "Accounting Firm"); provided, that if such firm declines to serve, the "Accounting Firm" shall be a nationally recognized firm of certified public accountants selected by mutual agreement of the Company and the Executive. (c) Once the requisite determinations have been made, then to the extent the aggregate Present Value, measured as of the Change in Control, of all parachute payments attributable to the Severance Payments under this Agreement and otherwise, including without limitation the Option Parachute Payment, exceeds the Benefit Limit, the following reductions shall be made to the payments and benefits under Section 10 of this Agreement, to the extent necessary to assure that such Benefit Limit is not exceeded: first, the Executive's salary continuation payments described in Section 10(b)(ii)(A) and then, if applicable, his Special Bonus under section 10(g), shall be reduced; and then the period of the Company's Company-paid health-care coverage described in Section 10(b)(ii)(B) shall be shortened. To the extent the Benefit Limit is still exceeded following such reductions, then a portion of the aggregate amount of payments described in Sections 10(b)(ii)(C), (D) and (E) shall be reduced to the extent necessary to eliminate such excess and, finally, the Option Parachute Payment shall be reduced. 12. Choice of Law. ------------- The Executive acknowledges that a substantial portion of the Company's business is based out of and directed from the State of New York. The Executive also acknowledges that during the course of the Executive's employment with the Company the Executive will have substantial contacts with New York. The validity, interpretation and performance of this Agreement shall be governed by, and construed in accordance with, the internal law of New York, without giving effect to conflict of law principles. Both parties agree that the exclusive venue for any action, demand, claim or counterclaim relating to the terms and provisions of Sections 4, 5, 6 and 7 of this Agreement, or to their breach, shall be in the state or federal courts located in Suffolk County, New York and that such courts shall have personal jurisdiction over the parties to this Agreement. 8 13. Miscellaneous. ------------- (a) Assignment. The Executive acknowledges and agrees that the rights and obligations of the Company under this Agreement may be assigned by the Company to any successors in interest. In any event, however, this Agreement shall be binding upon and inure to the benefit of any successors in interest to the Company. The Executive further acknowledges and agrees that this Agreement is personal to the Executive and that the Executive may not assign any rights or obligations hereunder. (b) Withholding. All salary, bonus and severance payments required to be made by the Company to the Executive under this Agreement shall be subject to withholding taxes, social security and other payroll deductions in accordance with the Company's policies applicable to employees of the Company at the Executive's level. (c) Entire Agreement. Except as specifically set forth herein, this Agreement sets forth the entire agreement between the parties and supersedes any prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of the Executive's employment. (d) Amendments. Any attempted modification of this Agreement will not be effective unless signed by an officer of the Company and the Executive. (e) Waiver of Breach. The Executive understands that a breach of any provision of this Agreement may only be waived by an officer of the Company. The waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. (f) Severability. If any provision of this Agreement should, for any reason, be held invalid or unenforceable in any respect by a court of competent jurisdiction, then the remainder of this Agreement, and the application of such provision in circumstances other than those as to which it is so declared invalid or unenforceable, shall not be affected thereby, and each such provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. (g) Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be effective when delivered by private messenger, private overnight mail service, or facsimile as follows (or to such other address as either party shall designate by notice in writing to the other in accordance herewith): If to the Company: Globecomm Systems Inc. 45 Oser Avenue Hauppauge, NY 11788 Attn: Chief Executive Officer With a copy to: Brobeck, Phleger & Harrison LLP 1633 Broadway, 47th Floor New York, New York 10019 Attn: Daniel Weisberg If to Executive: G. Patrick Flemming 3968 Executive Drive Palm Harbor, Florida 34685 9 (h) Survival. The Executive and the Company agree that certain provisions of this Agreement shall survive the expiration or termination of this Agreement and the termination of the Executive's employment with the Company. Such provisions shall be limited to those within this Agreement, which, by their express and implied terms, obligate either party to perform beyond the termination of the Executive's employment or termination of this Agreement. (i) Disclosure and Confidentiality. The Executive agrees to provide, and agrees that the Company similarly may provide in its discretion, a copy of the covenants contained in this Agreement to any business or enterprise which the Company may directly or indirectly own, manage, operate, finance, join, control or in which the Company participates in the ownership, management, operation, financing or control, or with which the Company may be connected or may become connected as an officer, director, executive, partner, principal, agent, representative, consultant or otherwise. The Executive also agrees that the Company may disclose a copy of this Agreement if legally required to do so, and in connection with a partnering transaction or financing, assuming that an appropriate confidentiality agreement is in place. The Executive further agrees not to disclose the existence or terms of this Agreement to any person other than the Executive's immediate family and legal, financial or accounting professional. (j) Arbitration of Disputes. Any controversy or claim arising out of this Agreement or any aspect of the Executive's relationship with the Company including the cessation thereof (other than disputes with respect to alleged violations of the covenants contained in Sections 4, 5, 6 or 7 hereof, and the Company's pursuit of the remedies described in Section 8 hereof in connection therewith) shall be resolved by arbitration in accordance with the then existing Employment Dispute Resolution Rules of the American Arbitration Association, in New York, New York, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. Except as awarded by the arbitrator pursuant to applicable statutory or legal standards, the parties shall split equally the costs of arbitration and each party shall pay its own attorneys' fees. The parties agree that the award of the arbitrator shall be final and binding. (k) Rights of Other Individuals. This Agreement confers rights solely on the Executive and the Company. This Agreement is not a benefit plan and confers no rights on any individual or entity other than the undersigned. (l) Headings. The parties acknowledge that the headings in this Agreement are for convenience of reference only and shall not control or affect the meaning or construction of this Agreement. (m) Advice of Counsel. The Executive and the Company hereby acknowledge that each party has had adequate opportunity to review this Agreement, to obtain the advice of counsel with respect to this Agreement, and to reflect upon and consider the terms and conditions of this Agreement. The parties further acknowledge that each party fully understands the terms of this Agreement and has voluntarily executed this Agreement. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the day and year set forth below. EXECUTIVE Globecomm Systems Inc. /s/ G. Patrick Flemming By: /s/ Kenneth Miller - ---------------------- ---------------------------- G. Patrick Flemming Title: President ------------------------- 10 EXHIBIT A SEPARATION AGREEMENT AND GENERAL RELEASE This Separation Agreement and General Release ("Agreement") is made and entered into this ____ day of _____, _____, by and between [COMPANY NAME] (hereinafter the "Company" or "Employer") and [EMPLOYEE NAME] ("Employee") (hereinafter collectively referred to as the "Parties"), and is made and entered into with reference to the following facts. RECITALS -------- WHEREAS, Employee was hired by the Company on or about ________, as a ____________; and WHEREAS, the Company and Employee have agreed to terminate their employment relationship effective ______, ____; and WHEREAS, the Parties each desire to resolve any potential disputes which exist or may exist arising out of Employee's employment with the Company and/or the termination thereof. NOW THEREFORE, in consideration of the covenants and promises contained herein, the Parties hereto agree as follows: AGREEMENT --------- 1. Agreement By the Company. In exchange for Employee's agreement to be bound by the terms of this entire Agreement, including but not limited to the Release of Claims in paragraph 3, the Company agrees to provide Employee with a lump-sum payment in the amount of __________ dollars ($________), less statutory deductions and withholdings, which amount represents _____ (_) weeks'/months'/years' salary at Employee's rate of pay as of the Termination Date, to be paid within ten (10) days of the Company's receipt of this Agreement, fully executed by Employee. Employee acknowledges that, absent this Agreement, s/he has no legal, contractual or other entitlement to the consideration set forth in this paragraph and that the amount set forth in this paragraph constitute valid and sufficient consideration for Employee's release of claims and other obligations set forth herein. 2. Release of Claims. Employee hereby expressly waives, releases, acquits and forever discharges the Company and its divisions, subsidiaries, affiliates, parents, related entities, partners, officers, directors, shareholders, investors, executives, managers, employees, agents, attorneys, representatives, successors and assigns (hereinafter collectively referred to as "Releasees"), from any and all claims, demands, and causes of action which Employee has or claims to have, whether known or unknown, of whatever nature, which exist or may exist on Employee's behalf from the beginning of time up to and including the date of this Agreement. As used in this paragraph, "claims," "demands," and "causes of action" include, but are not limited to, claims based on contract, whether express or implied, fraud, stock fraud, defamation, wrongful termination, estoppel, equity, tort, retaliation, intellectual property, personal injury, spoliation of evidence, emotional distress, public policy, wage and hour law, statute or common law, claims for severance pay, claims related to stock options and/or fringe benefits, claims for attorneys' fees, vacation pay, debts, accounts, compensatory damages, punitive or exemplary damages, liquidated damages, and any and all claims arising under any federal, state, or local statute, law, or ordinance prohibiting discrimination on account of race, color, sex, age, religion, sexual orientation, disability or national origin, including but not limited to, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964 as amended, the Americans with Disabilities Act, the Family and Medical Leave Act or the Employee Retirement Income Security Act. 11 3. Acceptance of Agreement/Revocation. This Agreement was received by Employee on ______, ____. Employee may accept this Agreement by returning a signed original to the Company. This Agreement shall be withdrawn if not accepted in the above manner on or before _______. 4. Confidentiality. Employee understands and agrees that this Agreement, and the matters discussed in negotiating its terms, are entirely confidential. It is therefore expressly understood and agreed that Employee will not reveal, discuss, publish or in any way communicate any of the terms, amount or fact of this Agreement to any person, organization or other entity, with the exception of his/her immediate family members and professional representatives, unless required by subpoena or court order. Employee further agrees that s/he will not, at any time in the future, make any statements to any third parties that disparage any of the Releasees personally or professionally. 5. [New York] Law Applies. This Agreement, in all respects, shall be interpreted, enforced and governed by and under the laws of the State of [New York]. Any and all actions relating to this Agreement shall be filed and maintained in the federal and/or state courts located in the State [and County of New York], and the parties consent to the jurisdiction of such courts. In any action arising out of this Agreement, or involving claims barred by this Agreement, the prevailing party shall be entitled to recover all costs of suit, including reasonable attorneys' fees. 6. Voluntary Agreement. EMPLOYEE UNDERSTANDS AND AGREES THAT S/HE MAY BE WAIVING SIGNIFICANT LEGAL RIGHTS BY SIGNING THIS AGREEMENT, AND REPRESENTS THAT S/HE HAS ENTERED INTO THIS AGREEMENT KNOWINGLY AND VOLUNTARILY, WITH A FULL UNDERSTANDING OF AND IN AGREEMENT WITH ALL OF ITS TERMS. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the dates provided below. DATED: [COMPANY NAME] ------------------------------ By: --------------------------- Its: --------------------------- DATED: [EMPLOYEE NAME] ------------------------------ -------------------------------- 12 -----END PRIVACY-ENHANCED MESSAGE-----