-----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, INzM4ejGFLQJsCq+ttfwckmP32aDcF7DXqfadF+KMLa/TXWmc1nWUlNW5VhkdQk5 j2/IKh43UjznIE+xIw4xyA== 0000950136-03-002390.txt : 20030929 0000950136-03-002390.hdr.sgml : 20030929 20030929154341 ACCESSION NUMBER: 0000950136-03-002390 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030929 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22839 FILM NUMBER: 03914910 BUSINESS ADDRESS: STREET 1: 45 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162319800 MAIL ADDRESS: STREET 1: 45 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: WSI COMMUNICATIONS INC DATE OF NAME CHANGE: 19970121 10-K 1 file001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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, HAUPPAUGE, NY 11788 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 231-9800 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.001 par value (TITLE OF CLASS) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [ ] No [X] As of September 26, 2003, there were 12,576,263 shares of the registrant's common stock, $0.001 par value, outstanding, and the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $39.1 million based on the last reported sale price on the Nasdaq National Market on that date. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement of Globecomm Systems Inc. relative to the 2003 Annual Meeting of Stockholders to be held on November 18, 2003, is incorporated by reference into Part III of this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS OVERVIEW Globecomm Systems Inc., or Globecomm, was incorporated in Delaware in August 1994. We offer end-to-end, value-added satellite-based communications infrastructure and services. We do this by leveraging our core satellite ground segment systems and network capabilities, with the satellite services capabilities that are generally provided by our wholly-owned subsidiary, NetSat Express, Inc., or NetSat. The services we offer include wide area network connectivity, broadband connectivity to end users, Internet connectivity, content delivery network services, media distribution and other network services on a global basis. To provide these services, we engineer all the necessary satellite and terrestrial facilities as well as provide the integration services required to implement those facilities. We also operate and maintain these communications services on an ongoing basis. Our customers generally have network service requirements that require point-to-point or point-to-multipoint connections via a hybrid network of satellite and terrestrial facilities, and include communications service providers, commercial enterprises, multinational corporations, Internet Service Providers, or ISPs, broadcasters and other content providers and government entities. Our service business is built on the foundation of our core business as a supplier of ground segment systems and networks for satellite-based communications. We provide these ground segment systems and networks on a contract basis. These implementations include the necessary hardware and software to support a wide range of network applications using satellite, broadcast and terrestrial technologies. We provide end-to-end satellite-based service solutions around the world. We are able to offer these "one stop shopping" solutions by providing both systems infrastructure and related network services for our customers. NetSat provides the network services required for us to offer end to end solutions to ISPs, commercial enterprises, broadcasters and government customers for a wide range of network service solutions, including Internet backbone connectivity, content delivery network applications, back-office capabilities, communications points of presence, or POP, infrastructure, and network management services. SERVICES AND PRODUCTS OUR GROUND SEGMENT SYSTEMS AND NETWORKS We design, engineer, integrate and install satellite-based ground segment systems and network solutions for the complex and changing communications requirements of our customers. Our ground segment systems typically consist of an earth station and ancillary subsystems. An earth station is an integrated system consisting of antennas, radio signal transmitting and receiving equipment, modulation/demodulation equipment, monitor and control systems and voice, data and video network interface equipment. Ancillary subsystems may include microwave links or fiber optic links for the transmission of communications traffic to a central office, or generators for emergency power requirements. Our customizable modular earth stations may be sold separately as stand-alone ground segment systems or may be used as building blocks to be integrated into a complete ground segment system or network. We believe that this modular approach allows us to engineer our ground segment systems and networks to serve client-specific service requirements rapidly, cost-effectively and efficiently with minimal site preparation. All of our earth stations are configurable to conform to applicable satellite standards. MODULAR BUILDING BLOCK EARTH STATION MBB 2001(TM) These earth stations provide point-to-point high-capacity data links and hubs for satellite networks. Generally, all electronics are housed in an indoor equipment enclosure. COMMERCIAL TERMINAL CTF 2001(TM) This family of earth stations encompasses a range of general purpose, medium-capacity earth stations, and is principally used by corporate, common carrier and government networks. Generally, all radio frequency electronics are housed in weatherproof enclosures mounted on the antenna. The satellite modem is housed in an indoor equipment enclosure. COMPACT EARTH STATION CES 2001(TM) We designed this family of digital earth stations to be used principally to provide limited capacity to areas with limited or no telecommunications infrastructure. These earth stations integrate radio frequency and satellite modem components into one antenna mounted package. 2 EXPLORER C/K TRANSPORTABLE EARTH STATION. We designed this family of digital earth stations primarily for emergency communications and news gathering. The group is comprised of portable, modular earth stations designed to be quickly deployed and operated anywhere in the world. The latest model, the Explorer Ku, incorporates technology from the Compact Earth Station product line to minimize cost, size and weight. All components are mounted in separate cases, which are small enough to be easily transported by commercial carriers, including airplanes and trucks. OUR COMMUNICATIONS SERVICES We tailor our communication services to meet our customers' needs by offering standardized services and custom-engineered solutions. Our standardized services may be sold separately or may be used as building blocks as a part of a custom-engineered solution. We use our expertise in satellite communications, Internet Protocol, communications networks and information technology in designing our custom-engineered solutions. Globally, telecommunications networks are moving rapidly toward Internet Protocol based networks and services based on the lower cost of implementation and the flexibility these networks offer. Satellite-based communications complement this trend as many of the regions in the world lack the next generation terrestrial networks required to accommodate the rapid and reliable transmission of the vast amounts of information underlying the growth in traffic. Globecomm is a network service provider that offers next generation network services to service providers, ISPs, enterprises, broadcasters and governments around the world. We combine satellite and terrestrial communications networks to provide customers high-speed access services to the United States Internet backbone, corporate headquarters, government offices, as well as the public switched telephone network for private networks. We currently have customers for which we are providing such network services in Africa, the Middle East, Central and South America, Eastern and Central Europe and the Asia Pacific Region. STANDARDIZED SERVICES SKYBORNE(SM) This service offering provides point to multipoint content delivery of multimedia content. Skyborne is a video, audio and data satellite solution that serves retailers, enterprises, broadcasters, and government agencies. SkyBorne's mission is to provide highly customized and cost-effective broadcast and value-added solutions to these market segments. There are a number of market trends that may require the SkyBorne solution. Retailers are beginning to understand the importance of video promotions within their retail outlets and have developed cost models that are leading them to deploy nationwide digital signage networks. Corporations are increasingly using streaming and stored video for training and internal communications and are finding that their current terrestrial infrastructures are not able to meet the demands of video. Retailers are beginning to understand the need for customization of video and audio in their outlets and are looking for technologies which allow increased flexibility and customization. Training has become a more important focus for many enterprises, especially retailers, due to increased rates of turnover and the quickening pace of market and technology changes. ACCESS PLUS(TM) This service offering provides point to point and point to multipoint Internet connectivity for ISPs, service providers, broadcast, government and enterprise customers. These services provide asymmetrical forward and return links optimized for Internet applications. We offer two way satellite Internet connectivity as well as one way satellite Internet connectivity with terrestrial return. Our Internet access services, marketed under the Access PlusTM brand name, provide high-speed access to the United States Internet backbone. As part of this offering we provide the necessary satellite transmission services, terrestrial transit and routing services, earth stations and installation services. WIDE AREA NETWORK ANYWHERE(TM) This service offering provides high-speed networking between major POPs. We are currently providing point-to-point service to customers who require connections from our Long Island International Teleport in New York to POPs in Latin America and the Middle East. ISDN ANYWHERE(TM) This service offering provides full-time connections at rates of 64 Kbps and 128 Kbps to geographically dispersed locations. We can provide these services to organizations needing full-time digital connections for voice, data and video conferencing in locations around the world where the terrestrial infrastructure is inadequate or unavailable. BANDWIDTH ON DEMAND ANYWHERE(TM) This service offering provides high-speed data connections for intermittent use through a bandwidth subscription service. It provides data rates up to 2 Mbps to geographically dispersed locations. Customers who have high bandwidth requirements use this service to reduce their costs when they only need intermittent services, like emergency communications services. We currently offer this service in cooperation with Agility Recovery Solutions, or Agility, for business restoral requirements. 3 CUSTOM ENGINEERED SOLUTIONS The following is an example of how we provide custom-engineered communications solutions for one of our customers: THE CHALLENGE. We were selected by Agility to design, implement and operate a business restoral network for its call center restoral customers. The design of this solution required advanced Internet Protocol network engineering to build in the flexibility required by the Agility business model. THE SOLUTION. We designed, implemented and continue to operate the Agility business restoral network including routing, satellite-terrestrial transmission, twenty-four hours a day, seven days a week network operations and automatic call distribution. Agility provides communications and information technology, or IT, restoral solutions in case of service interruption at call centers and corporate IT facilities. The solutions we provide are based on Internet Protocol routed networks that provide the flexibility needed to cover both voice and data traffic, and in order to allow the network to be reconfigured rapidly to meet the restoral requirements of different customers. The call center restoral solution includes a mobile recovery trailer with telephones and computers for call center operators. The mobile recovery trailer is set up near the facility where the call center operators normally work. When working in the mobile recovery trailer because of an interruption of service within the permanent facility, the call center operators are connected to the public switched telephone network and the appropriate computer data bases via a satellite connection from the mobile recovery trailer to us. We operate the restoral network twenty-four hours a day, seven days a week and are prepared to provide end to end service when a customer of Agility declares a need for service. We are marketing this capability to the United States Government for Homeland Security requirements. [GRAPHIC OMITTED] SALES AND MARKETING We market our products and services to communications services providers, commercial enterprises, ISPs, broadcasters and other content providers and government entities. We have structured our sales and marketing approach to respond effectively to the opportunities in the communications services market, as well as the traditional ground segment systems and networks market. Our marketing activities are organized regionally, as well as on an industry-specific basis. We use both direct and indirect sales channels to market our services and products. Our direct sales force focuses on industry-specific markets, including government, broadcast and commercial enterprises Our regional business teams sell and market our communications services and ground segment systems and networks internationally. These regional business teams are responsible for orders and programs in the regions to which they are assigned, as 4 well as for the delivery of our products and services and for account management of our existing customers. Currently, we have business teams responsible for the Americas, the Asia-Pacific region, Africa, the Middle East and Europe. These regional business teams work together to identify, develop and maintain customer relationships through local sales representatives, sales executives and account managers. Together, they develop close and continuing relationships with our customers. Our sales representatives in these regions provide a local presence and identify prospective customers for our sales executives. Our account managers may also function as project engineers for network integration and service initiation programs for their accounts. We believe this account management focus provides continuity and loyalty between our customers and us. We also believe that our approach fosters long-term relationships that lead to follow-on work and referrals to new customers. These accounts also provide us with a market for the new products and services that we develop. In addition, we obtain sales leads for new customers through referrals from industry suppliers. We have sales and marketing staff located at our headquarters in Hauppauge, New York, as well as in Hong Kong, Dubai, and the United Kingdom. Our office in the United Kingdom is part of our wholly-owned subsidiary, Globecomm Systems Europe Limited. These offices provide both sales and technical support in the regions for which they have responsibility. As of June 30, 2003, we employed 37 persons with sales and marketing responsibility, of which 15 are full-time sales executives and 22 have dual engineering and sales and marketing responsibilities. Our marketing program is intended to build national and international awareness of our brand. We use direct mailings, print advertising to targeted markets and trade publications to enhance awareness and acquire leads for our direct and indirect sales teams. We create brand awareness by participating in industry trade shows sponsored by organizations like the International Telecommunications Union, the National Association of Broadcasters and the Communications Managers Association. We also provide marketing information on our web site and conduct joint marketing programs with sales representatives in various regions to reach new customers. NetSat's marketing strategy is carried out primarily through Globecomm's sales channels including Globecomm's direct sales staff and the regional business teams, as well as direct sales and marketing through the World Wide Web. CUSTOMERS We have established a diversified base of customers in a variety of industries. Our customers include communications services providers, commercial enterprises, multinational corporations, ISPs, broadcasters and other content providers and government entities. We typically rely upon a small number of customers for a large portion of our revenues. We expect that in the near term a significant portion of our revenues will continue to be derived from a limited number of customers (the identity of whom may vary from year to year) as we seek to expand our business and customer base. BACKLOG At June 30, 2003, our backlog was approximately $58.0 million compared to approximately $80.3 million at June 30, 2002. Our backlog was reduced by $35.8 million, as a result of customer contracts assigned to vendors, pursuant to settlement agreements reached in February 2003 and October 2002. We record an order in backlog when we receive a firm contract or purchase order, which identifies product quantities, sales price, service dates and delivery dates. Backlog represents the amount of unrecorded revenue on undelivered orders and services to be provided and a percentage of revenues from sales of products that have been shipped where installation has not been completed and final acceptance has not been received from the customer. Our backlog at any given time is not necessarily indicative of future period revenues. A substantial portion of our backlog is comprised of large orders, the cancellation of any of which could have a material adverse effect on our operating results. For example, at June 30, 2003, $32.8 million, or approximately 56.5%, of our backlog represented contracts with seven customers. We cannot assure you that these contracts or any others in our backlog will not be cancelled or revised. See "Risk Factors" beginning on page 21. COMMUNICATIONS INFRASTRUCTURE We built and own the teleport facility located at our headquarters in Hauppauge, New York. We are a member of the World Teleport Association (WTA) and were awarded the Teleport Operator of the Year award from the WTA for the year 2000. Our teleport is designed to meet the most stringent requirements for high-speed data communications requirements. This teleport is used to transmit and receive signals from satellites positioned to serve customers in Latin America, the United States, Canada, Europe, the Middle East and Africa. Our teleport uses redundant critical systems and uninterruptible power supplies with back-up power generation. 5 We also lease teleport services in Los Angeles to transmit and receive signals from satellites positioned to serve customers in the Pacific Rim region. Connection to the United States Internet backbone in Los Angeles is achieved through leased fiber optic circuits. We lease transponder capacity to meet the bandwidth needs of our customers. We lease multiple, redundant, high-capacity fiber connections to provide reliable Internet data, voice and data traffic to locations in New York City where it interconnects with telecommunications service providers and the United States Internet backbone. We have built and staff a network operations center, or NOC, to manage customer circuits. The NOC operates twenty-four hours per day, seven days per week to monitor customer circuits, respond to customer inquiries and initiate new services. Customers can purchase or lease from us, as a part of its service, the equipment needed at the customers' locations to transmit and receive the satellite signals. We also offer installation and maintenance services for this equipment. PRODUCT DESIGN, ASSEMBLY AND TESTING We assign a project team to each contract into which we enter. Each team is led by a project engineer who is responsible for execution of the project. This includes engineering and design, assembly and testing, installation and customer acceptance. A project may include engineers, integration specialists, buyer-planners and an operations team. Our standard satellite ground segment systems are manufactured using a standard modular production process. Typically, long-term projects require significant customer-specific engineering, drafting and design efforts. Once the system is designed, the integration specialist works with the buyer-planner and the operations team to assure a smooth transfer from the engineering phase to the integration phase. The integration phase consists mainly of integrating the purchased equipment, components and subsystems into a complete functioning system. Assembly, integration and test operations are conducted on both an automated and manual basis. We provide facilities for complete in-plant testing of all our systems before delivery in order to assure all performance specifications will be met during installation at the customer's site. We employ formal total quality management programs and other training programs, and have been certified by the International Organization of Standards quality certification process for ISO 9001, a standard that enumerates specific requirements an organization must follow in order to assure consistent quality in the supply of products and services. The certification process qualifies us for access to virtually all domestic and international projects, and we believe that this represents a competitive advantage. RESEARCH AND DEVELOPMENT We have developed internal research and development resources in Internet Protocol networks, content delivery networks, broadcast systems, network management systems, and system products. The costs of developing new technologies are funded partially by the investments made by us and partially by development funded by specific customer program requirements. This approach provides us with a cost-effective means to develop new technology, while minimizing our direct research and development expenditures. Furthermore, we believe that our research and development capabilities allow us to offer added value in developing solutions for our customers, while at the same time we maintain the opportunity to develop products through our strategic supplier relationships. Our internal research and development efforts generally focus on the development of products and services not available from other suppliers to the industry. Current efforts are focused on developing content delivery network technology for our enterprise customers, broadcast systems technology for our service provider customers and broadcast customers, network management system products for all our earth terminal and network customers and customizable systems for our government customers. For the years ended June 30, 2003, 2002 and 2001, we have incurred approximately $0.8 million, $1.2 million, and $0.9 million, respectively, in internal research and development expenses. COMPETITION In the satellite ground segment systems and networks market, we believe that our ability to compete successfully is based primarily on management's reputation and the ability to provide a solution that meets the customer's requirements, including competitive pricing, performance, on-time delivery, reliability and customer support. In the communications services market, we believe that our ability to compete successfully is based primarily on management's reputation and providing prompt delivery and initiation of service, competitive pricing, consistent and reliable connections and high-quality customer support. Our primary competitors in the satellite ground segment systems and networks market generally fall into two groups: (1) system integrators like IDB Systems, a division of MCI and (2) equipment manufacturers who also provide integrated systems, like Andrew Corporation and Tripoint Global. 6 In the end-to-end satellite-based communication solutions and communications services markets, we compete with other satellite communication companies who provide similar services, like Verestar. In addition, we may compete with other communications services providers like MCI, and satellite owners like Panamsat, Loral Skynet, New Skies Satellites N.V. and Intelsat. We anticipate that our competitors may develop or acquire services that provide functionality that is similar to that provided by our services and that those services may be offered at significantly lower prices or bundled with other services. In 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 or three years. Current and potential participants in the markets in which we compete have established or may establish cooperative relationships among themselves or with third parties. These cooperative relationships may increase the ability of their products and services to address the needs of our current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge that will enable them to acquire significant market share rapidly. We believe that increased competition is likely to result in price reductions, reduced gross profit margins and loss of market share, any of which would have a material adverse effect on our business, results of operations and financial condition. INTELLECTUAL PROPERTY We rely heavily on the technological and creative skills of our personnel, new product developments, computer programs and designs, frequent product enhancements, reliable product support and proprietary technological expertise in maintaining our competitive position. We have secured patent protection on some of our products, and have secured trademarks and service marks to protect some of our products and services. We currently have been granted three patents in the United States, one for remote access to the Internet using satellites, another for satellite communication with automatic frequency control and most recently, we have been granted a patent concerning a monitor and control system for satellite communications networks and the like. We have two other patents pending in the United States, one for implementing facsimile and data communications using Internet protocols and another for a distributed satellite-based cellular network. We currently have one Patent Cooperation Treaty patent application pending for implementing facsimile and data communications using Internet protocols. We also intend to seek additional patents on our technology, if appropriate. We have filed applications for trademark registration of Globecomm Systems Inc., Globecomm and GSI in the United States and various other countries. NetSat has received trademark registration for NetSat in the United States, the European Community, Russia and Brazil. We have also received trademark registrations in the United States for MBB2001TM, CTF2001TM, CES2001TM and AXXSYSTM, which relate to our customizable modular earth stations, and for Impact TM, which relates to our customizable ISP solutions. We have other trademarks and service marks pending and intend to seek registration of other trademarks and service marks in the future. GOVERNMENT REGULATIONS OPERATIONS AND USE OF SATELLITES We are subject to various federal laws and regulations, which may have negative effects on our business. We operate Federal Communications Commission, or FCC, licensed earth stations in Hauppauge, New York, subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. Pursuant to the FCC Act and FCC rules and regulations, we have obtained and are required to maintain radio transmission licenses from the FCC for both domestic and foreign operations of our earth stations. We have also obtained and are required to maintain authorization issued under Section 214 of the FCC Act to act as a telecommunications carrier, which authorization also extends to NetSat. These licenses should be renewed by the FCC in the normal course as long as we remain in compliance with FCC rules and regulations. However, we cannot guarantee that additional licenses will be granted by the FCC when our existing licenses expire, nor can we assure you 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. NetSat does not currently hold any FCC licenses, permits, or authorizations independent of those held by us, nor does it currently provide any FCC regulated services. Therefore, it is not subject to the FCC Act or FCC rules and regulations. However, NetSat may hold such licenses, permits, or authorizations, or provide these services in the future, and would then be required to comply with the FCC requirements. 7 COMMON CARRIER REGULATION We currently provide services to our customers on a private carrier and on a common carrier basis. Our operations as a common carrier require us to comply with the FCC's requirements for common carriers. These requirements include, but are not limited to, providing our rates and service terms, being forbidden from unjust and unreasonable discrimination among customers, notifying the FCC before discontinuing service, and complying with FCC equal employment opportunity regulations and reporting requirements. We do not currently provide telecommunications services between points in the same state and so are exempt from state regulation of our services. However, we could become subject to state telecommunications regulations if we did provide intrastate telecommunications services. FOREIGN OWNERSHIP The FCC Act and FCC regulations impose restrictions on foreign ownership of our earth stations. These requirements generally forbid more than 20% ownership or control of an FCC licensee by non-United States citizens and more than 25% ownership of a licensee's parent by non-United States citizens. The FCC may authorize foreign ownership in the licensee's parent in excess of these percentages. Under current policies, the FCC has granted these authorizations where the applicant does not control monopoly or bottleneck facilities and the foreign owners are citizens of countries that are members of the World Trade Organization or provide equivalent competitive opportunities to United States citizens. We may, in the future, be required to seek FCC approval if foreign ownership of our stock exceeds the thresholds mentioned above. Failure to comply with these policies could result in an order to divest the offending foreign ownership, fines, denial of license renewal, and/or license revocation proceedings against the licensee by the FCC. We have no knowledge of any present foreign ownership which would result in a violation of the FCC rules and regulations. 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 operate or intend to operate have telecommunications laws and regulations that do not currently contemplate technical advances in telecommunications technology like Internet/intranet transmission by satellite. We cannot assure you that the present regulatory environment in any of those countries will not be changed in a manner, which may have a material adverse impact on our business. Either we or our local sales representatives typically must obtain authorization for each country in which we provide our satellite-delivered data communications services. Although we believe that we or our local sales representatives will be able to obtain the requisite licenses and approvals from the countries in which we intend to provide products and services, the regulatory schemes in each country are different, and thus there may be instances of noncompliance of which we are not aware. Although we believe these regulatory schemes will not prevent us from pursuing our business plan, we cannot assure you that our licenses and approvals are or will remain sufficient in the view of foreign regulatory authorities. In addition, we cannot assure you that necessary licenses and approvals will be granted on a timely basis, or at all, in all jurisdictions in which we wish to offer our products and services or that the applicable restrictions will not be unduly burdensome. REGULATION OF THE INTERNET Our Internet operations (other than the operation of a teleport) are not currently subject to direct government regulation in the United States or most other countries, and there are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet it is possible that a number of laws and regulations may be adopted at the local, national or international levels with respect to the Internet, covering issues like user privacy and expression, pricing of products and services, taxation, advertising, intellectual property rights, information security, or the convergence of traditional communication services with Internet communications. We anticipate that a substantial portion of our, or NetSat's, Internet operations will be carried out in countries which may impose greater regulation of the content of information coming into their country than that which is generally applicable in the United States. Examples of this include privacy regulations in Europe and content restrictions in countries, such as the 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 otherwise negatively affect our business. In addition, the applicability to the Internet of existing laws governing issues including property ownership, copyrights and other intellectual property issues, taxation, libel and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the 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 8 intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace. These changes could reduce demand for our products and services or could increase our cost of doing business as a result of costs of litigation or increased product development costs. TELECOMMUNICATIONS TAXATION, SUPPORT REQUIREMENTS, AND ACCESS CHARGES 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. Some telecommunications services are subject to special taxation and to contribution requirements to support services to special groups, like persons with disabilities. At present, Globecomm is subject to the requirements for support of such special groups; NetSat's operations are presently deemed not subject to such requirements. 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 United States. Efforts have been made from time to time, and may be made in the future, to eliminate this exemption. If these access charges are imposed on telephone lines used to reach ISPs, 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 or the facilities of our customers. EXPORT OF TELECOMMUNICATIONS EQUIPMENT The sale of our ground segment systems, networks, and communications service solutions 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 or implement our services into some countries, these products or services must satisfy the technical requirements of the particular country. If we were unable to comply with these requirements with respect to a significant quantity of our products, our sales in those countries could be restricted, which could have a material adverse effect on our business, financial condition and results of operations. EMPLOYEES As of June 30, 2003, we had 176 full-time employees, including 82 in engineering and program management, 46 in the manufacturing, operations support, and network operations, 15 in sales and marketing, and 33 in management and administration. Our employees are not covered by any collective-bargaining agreements. We believe that our relations with our employees are good. ITEM 2. PROPERTIES We own a facility containing approximately 122,000 square feet of space on approximately seven acres located at 45 Oser Avenue, Hauppauge, New York. This facility houses our principal offices and production facilities, as well as the offices and the network operations center of NetSat. We are in the fourth year of a five-year lease at a base monthly rent of approximately $3,800 for office and operations facilities for our wholly-owned subsidiary, Globecomm Systems Europe Limited, in the United Kingdom. In addition, we have a lease for office space in Hong Kong at a monthly rental fee of approximately $1,900 and another lease for office space in Dubai at a monthly rental fee of approximately $1,600. ITEM 3. LEGAL PROCEEDINGS On August 6, 2002, we issued a notice of termination to a major customer in the Middle East for failure to pay for services rendered, and included a demand for full payment of the past due balance and specified liquidated damages for early termination. The customer responded by issuing its own notice of termination claiming certain breaches of the contract by NetSat, which claims we denied. The contract required settlement of disputes by arbitration to be held in New York and we initiated the arbitration process in December 2002. After an arbitrator was appointed and a proposed schedule for the arbitration was set, NetSat and the customer entered into a confidential settlement agreement. The customer has paid NetSat $2.0 million under the settlement ($1.0 million in both June and July 2003) and the arbitration proceeding was dismissed. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the Nasdaq National Market under the symbol "GCOM." The fiscal 2003 and 2002 high and low sales prices are as follows:
HIGH LOW ---- --- 2003 Quarter ended September 30, 2002................. $5.70 $2.40 Quarter ended December 31, 2002.................. 4.75 2.60 Quarter ended March 31, 2003..................... 3.99 2.34 Quarter ended June 30, 2003...................... 4.25 2.45 2002 Quarter ended September 30, 2001................. 7.34 4.90 Quarter ended December 31, 2001.................. 6.49 3.81 Quarter ended March 31, 2002..................... 8.40 4.85 Quarter ended June 30, 2002...................... 7.15 3.16
At September 26, 2003, there were approximately 3,300 stockholders of record of our common stock, as shown in the records of our transfer agent. At the close of the Nasdaq National Market on September 26, 2003, our market price per share was $3.35. As of June 30, 2003, we had not declared or paid dividends on our common stock since inception and we do not expect to pay dividends in the foreseeable future. The table below sets forth securities we have authorized for issuance under our equity compensation plans. EQUITY COMPENSATION PLAN INFORMATION AS OF JUNE 30, 2003
NUMBER OF SECURITIES REMAINING AVAILABLE NUMBER OF FOR FUTURE SECURITIES TO BE WEIGHTED-AVERAGE ISSUANCE UNDER ISSUED UPON EXERCISE EXERCISE PRICE EQUITY COMPENSATION OF OUTSTANDING OF OUTSTANDING PLANS (EXCLUDING OPTIONS, WARRANTS OPTIONS, WARRANTS SECURITIES REFLECTED PLAN CATEGORY AND RIGHTS AND RIGHTS IN COLUMN (A) (A) (B) (C) Equity compensation plan approved by security holders.......... 3,127,432 $ 7.51 470,569 Equity compensation plans not approved by security holders. 863,468 $ 11.16 -- --------- ------- Total..................... 3,990,900 $ 8.30 470,569 ========= ======= =======
The equity compensation plans, authorized for issuance that were adopted without the approval of the security holders, relate to outstanding warrants. During November 1996, we issued ten-year warrants, to five consultants to purchase an aggregate of 64,125 shares of common stock at a price per share of $8.07, in consideration for services rendered. During the fiscal year ended June 30, 2001, we issued five-year warrants, in connection with the purchase of minority interests in NetSat, to purchase an aggregate of 807,643 shares of common stock at a price per share of $11.375. 10 ITEM 6. SELECTED FINANCIAL DATA Our selected consolidated financial data as of and for each of the five years in the periods ended June 30, have been derived from our audited consolidated financial statements. EBITDA represents loss before minority interests in operations of our consolidated subsidiary, interest income, interest expense, provision for income taxes, depreciation and amortization expense, a gain on the sale of consolidated subsidiary's common stock and a gain on sale of investment. EBITDA does not represent cash flows defined by accounting principles generally accepted in the United States and does not necessarily indicate that our cash flows are sufficient to fund all of our cash needs. We disclose EBITDA since it is a financial measure commonly used in our industry. EBITDA is not meant to be considered a substitute or replacement for net loss as prepared in accordance with accounting principles generally accepted in the United States. EBITDA may not be comparable to other similarly titled measures of other companies. We record an order in backlog when we receive a firm contract or purchase order, which identifies product quantities, sales price, service dates and delivery dates. Backlog represents the amount of unrecorded revenue on undelivered orders and services to be provided and a percentage of revenues from sales of products that have been shipped where installation has not been completed and final acceptance has not been received from the customer. Our backlog at any given time is not necessarily indicative of future period revenues. Certain balances in the prior years have been reclassified to conform to the current year presentation. 11 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30, ------------------------------------------------------------------ 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ STATEMENTS OF OPERATIONS DATA: Revenues from ground segment systems, networks and enterprise solutions.............. $ 40,125 $ 64,101 $ 78,744 $ 69,584 $ 46,397 Revenues from data communications services....................................... 13,903 22,478 24,170 8,987 2,661 ----------- ------------- ----------- ------------ ----------- Total revenues................................... 54,028 86,579 102,914 78,571 49,058 ----------- ------------- ----------- ------------ ----------- Costs and operating expenses: Costs from ground segment systems, networks and enterprise solutions............ 39,447 57,083 70,907 60,634 41,235 Costs from data communications services..................................... 17,796 26,705 22,661 10,101 2,894 Selling and marketing.......................... 6,042 6,735 7,235 6,139 5,183 Research and development....................... 800 1,185 850 784 1,325 General and administrative..................... 9,423 11,970 9,822 8,797 5,941 Terminated acquisition costs................... -- -- -- -- 972 Asset impairment charge........................ -- 237 2,857 -- 679 Restructuring charge........................... -- -- 1,950 -- -- ----------- ------------- ----------- ------------ ----------- Total costs and operating expenses............... 73,508 103,915 116,282 86,455 58,229 ----------- ------------- ----------- ------------ ----------- Loss from operations............................. (19,480) (17,336) (13,368) (7,884) (9,171) Other income (expense): Interest income................................ 422 1,030 3,194 1,727 980 Interest expense............................... (539) (957) (6,579) (2,522) (1) Gain on sale of consolidated subsidiary's common stock.................... -- -- -- 2,353 -- Gain on sale of investment..................... -- -- 304 -- -- ----------- ------------- ----------- ------------ ----------- Loss before income taxes and minority interests in operations of consolidated subsidiary..................................... (19,597) (17,263) (16,449) (6,326) (8,192) Provision for income taxes....................... -- -- (1,600) -- -- ----------- ------------- ----------- ------------ ----------- Loss before minority interests in operations of consolidated subsidiary.......... (19,597) (17,263) (18,049) (6,326) (8,192) Minority interests in operations of consolidated subsidiary........................ -- -- (650) 2,745 -- ----------- ------------- ----------- ------------ ----------- Net loss......................................... $(19,597) $ (17,263) $ (18,699) $ (3,581) $ (8,192) =========== ============= =========== ============ =========== Basic and diluted net loss per common share.......................................... $ (1.56) $ (1.36) $ (1.55) $ (0.36) $ (0.90) =========== ============= =========== ============ =========== Weighted-average shares used in the calculation of basic and diluted net loss per common share.......................... 12,565 12,707 12,060 10,016 9,109 =========== ============= =========== ============ ===========
12
YEARS ENDED JUNE 30, ------------------------------------------------------------------ 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ OTHER OPERATING DATA: Net loss ........................................ $(19,597) $ (17,263) $ (18,699) $ (3,581) $ (8,192) Other expense (income)........................... 117 (73) 3,081 (1,558) (979) Minority interest in operations of consolidated subsidiary..................................... -- -- 650 (2,745) -- Provision for income taxes....................... -- -- 1,600 -- -- Depreciation and amortization.................... 3,532 3,661 7,229 3,347 1,267 ----------- ------------ ----------- ------------ ----------- EBITDA ........................................ $(15,948) $ (13,675) $ (6,139) $ (4,537) $ (7,904) =========== ============ =========== ============ =========== Cash flows used in operating activities.......... (14,714) (2,942) (11,823) (8,925) (4,408) Cash flows used in investing activities.......... (1,712) (2,387) (7,446) (361) (4,435) Cash flows (used in) provided by financing activities........................... (310) (1,018) (982) 62,614 (555) Capital expenditures, net of non-cash capital lease expenditures..................... 1,732 1,687 5,350 6,926 3,818 Backlog at end of year........................... 58,006 80,269 101,013 100,139 63,746
JUNE 30, ------------------------------------------------------------------ 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ BALANCE SHEET DATA: Cash and cash equivalents........................ $ 22,016 $ 38,708 $ 45,038 $ 65,289 $ 11,944 Working capital.................................. 22,040 43,702 60,399 74,531 19,450 Total assets..................................... 70,344 100,297 124,999 222,754 61,653 Long-term liabilities............................ 1,303 12,693 13,446 96,355 -- Minority interests in consolidated subsidiary..................................... -- -- -- 126 -- Series A participating preferred stock of consolidated subsidiary........................ -- -- -- 5,000 -- Total stockholders' equity....................... 47,437 67,040 85,141 90,524 36,257
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains, in addition to historical information, forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, based on our current expectations, assumptions, estimates and projections. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as, among others, uncertain demand for our services and products due to economic and industry-specific conditions, the risks associated with operating in international markets and our dependence on a limited number of contracts for a high percentage of our revenues. These risks and others are more fully described in the "Risk Factors" section and elsewhere in this Annual Report on Form 10-K. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. OVERVIEW Since our inception, a majority of our revenues have been generated by 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 a majority of 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 is frequently 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. 13 Contract costs generally include purchased material, direct labor, overhead and other direct costs. Anticipated contract losses are recognized in the period identified. Costs from ground segment systems, networks and enterprise solutions consist primarily of the costs of purchased materials (including shipping and handling costs), direct labor and related overhead expenses, project-related travel and living costs and subcontractor salaries. Costs from data communications services consist primarily of satellite space segment charges, Internet connectivity fees and network operations expenses. Satellite space segment charges consist of the costs associated with obtaining satellite bandwidth (the measure of capacity) used in the transmission of services to and from the satellite leased from operators. Network operations expenses consist primarily of costs associated with the operation of the network operations center on a twenty-four hour a day, seven day a week basis, including personnel and related costs and depreciation. Selling and marketing expenses consist primarily of salaries, travel and living costs for sales and marketing personnel. Research and development expenses consist primarily of salaries and related overhead expenses. General and administrative expenses consist of expenses associated with our management, finance, contract and administrative functions. Our business has been adversely affected by the current global economic slowdown and, in particular, the significant challenges facing the telecommunications industry worldwide. These challenges include excess bandwidth resulting from weak consumer and business demand, which has fallen far short of expectations, and the attendant financial distress facing both traditional telecommunication carriers and the new generation of competitive local exchange carriers. Moreover, as a result of the uncertainties facing the economy, corporations have seriously restricted their capital expenditures. The reduction in demand has been accompanied by significant pricing pressures and intensifying competition, while the financial difficulties of industry participants and customers have created risks associated with collectibility of accounts receivable. During fiscal 2003, we experienced a decline in bookings of contract orders as customers and prospects delayed projects. These negative trends may continue to impact our business and prospects in the future. CRITICAL ACCOUNTING POLICIES Certain of our accounting policies require judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate. Actual results may differ from these judgments under different assumptions or conditions. Our accounting policies that require management to apply significant judgment include: REVENUE RECOGNITION We recognize revenue in accordance with Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, for our production-type contracts that are sold separately as standard satellite ground segment systems when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, collectibility is reasonably assured, delivery has occurred and the contractual performance specifications have been met. Our standard satellite ground segment systems produced in connection with these contracts is typically short-term (less than twelve months in term) and manufactured using a standard modular production process. Such systems require less engineering, drafting and design efforts than our long-term complex production-type projects. Revenue is recognized on our standard satellite ground segment systems upon shipment and acceptance of factory performance testing which is when title transfers to the customer. The amount of revenues recorded on each standard production-type contract is reduced by the customer's contractual holdback amount, which typically requires 10% to 30% of the contract value to be retained by the customer until installation and final acceptance is complete. The customer generally becomes obligated to pay 70% to 90% of the contract value upon shipment and acceptance of factory performance testing. Installation is not deemed to be essential to the functionality of the system since installation does not require significant changes to the features or capabilities of the equipment, does not require complex software integration and interfacing and we have not experienced any difficulties installing such equipment. In addition, the customer or other third party vendors can install the equipment. The estimated relative fair value of the installation services is determined by management, which is typically less than the customer's contractual holdback percentage. If the holdback is less than the fair value of installation, we will defer recognition of revenues, determined on a contract-by-contract basis equal to the fair value of the installation services. Payments received in advance by customers are deferred until shipment and are presented as deferred revenues. We recognize revenue using the percentage-of-completion method of accounting upon the achievement of certain contractual milestones in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, for our non-standard, complex production-type contracts for the production of satellite ground segment systems and equipment that are generally integrated into the customers' satellite ground segment network. The equipment and systems produced in connection with these contracts are typically long-term (in excess of twelve months in term) and require significant customer-specific engineering, drafting and design effort in order to effectively integrate all of the customizable earth station equipment into the customers' ground segment network. These contracts generally have larger contract values, greater economic risks and substantive 14 specific contractual performance requirements due to the engineering and design complexity of such systems and related equipment. Progress payments received in advance by customers are netted against the inventories balance. Revenues from data communications services are derived primarily from Internet access service fees. Service revenues from Internet access are recognized ratably over the period in which services are provided. Payments received in advance of providing Internet access services are deferred until the period such services are provided and are presented as deferred revenues. COSTS FROM GROUND SEGMENT SYSTEMS, NETWORKS AND ENTERPRISE SOLUTIONS Costs related to our production-type contracts and our non-standard, complex production-type contracts rely on estimates based on total expected contract costs. We use reasonable, dependable estimates of the costs applicable to various elements. Since these contract costs depend on estimates, which are assessed continually during the term of these contracts, costs are subject to revisions as the contract progresses to completion. Revision in cost estimates are reflected in the period in which they become known. In the event an estimate indicates that a loss will be incurred at completion, we record the costs in the period identified. GOODWILL Goodwill represents the excess of the purchase price over the fair value of the net assets acquired primarily from the buyback of the minority interests of NetSat. Beginning in the fiscal year ended June 30, 2002 with our adoption of SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other indefinite life intangible assets are no longer being amortized, but instead tested for impairment at least annually. In assessing goodwill, we must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of our reporting units. Future events could cause us to conclude that impairment indicators exist and that the goodwill associated with NetSat is impaired. Any resulting impairment could have a material adverse effect on our financial condition and results of operations. ALLOWANCES FOR DOUBTFUL ACCOUNTS We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We assess the customer's ability to pay based on a number of factors, including our past transaction history with the customer and the credit worthiness of the customer. An assessment of the inherent risks in conducting our business with foreign customers is also made since a significant portion of our revenues is international. Management specifically analyzes accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness and current economic trends. If the financial condition of our customers were to deteriorate in the future, resulting in an impairment of their ability to make payments, additional allowances may be required. INVENTORIES Inventories consist primarily of work-in-progress from costs incurred in connection with specific customer contracts, which are stated at the lower of cost or market value. In assessing the realizability of inventories, we are required to make estimates of the total contract costs based on the various elements of the work-in-progress. It is possible that changes to these estimates could cause a reduction in the net realizable value of our inventories. STOCK-BASED COMPENSATION We currently measure compensation expense for stock option grants using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Under this method, we do not record compensation expense when stock options are granted as long as the exercise price is not less than the fair market value of the stock when the option is granted. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, we disclose our pro-forma net loss and pro-forma net loss per common share as if the fair value-based method had been applied in measuring compensation expense for our stock option grants. 15 RESULTS OF OPERATIONS FISCAL YEARS ENDED JUNE 30, 2003 AND 2002 Revenues from Ground Segment Systems, Networks and Enterprise Solutions. Revenues from ground segment systems, networks and enterprise solutions decreased by $24.0 million, or 37.4% to $40.1 million for the fiscal year ended June 30, 2003 from $64.1 million for the fiscal year ended June 30, 2002. The decrease related to a decrease in shipment and/or completion of contracts as a result of a decline in bookings of contract orders due to the continued uncertainty surrounding the global economic slowdown in the telecommunications industry, resulting in customers and prospects continuing to delay projects. Revenues from Data Communications Services. Revenues from data communications services decreased by $8.6 million, or 38.1% to $13.9 million for the fiscal year ended June 30, 2003 from $22.5 million for the fiscal year ended June 30, 2002. The decrease reflected changes in market conditions, including the global economic slowdown in the telecommunications industry, pricing pressures in the marketplace and penetration of fiber into areas where we have traditionally provided services, coupled with the termination of services from our largest Middle East customer in August 2002. During February 2003 and October 2002, pursuant to agreements reached with two of our vendors, we assigned contracts with future revenues of $35.8 million, which reduced our monthly recurring revenues by approximately $0.4 million. Costs from Ground Segment Systems, Networks and Enterprise Solutions. Costs from ground segment systems, networks and enterprise solutions decreased by $17.6 million, or 30.9%, to $39.4 million for the fiscal year ended June 30, 2003 from $57.1 million for the fiscal year ended June 30, 2002. The decrease is attributable to a lower revenue base. Costs as a percentage of related revenues increased to 98.3% for the fiscal year ended June 30, 2003 from 89.1% for the fiscal year ended June 30, 2002. The increase was mainly attributable to competitive margin pressure and a $4.4 million charge, principally in the fourth quarter, related to a major customer for costs to complete certain contracts. Costs from Data Communications Services. Costs from data communications services decreased by $8.9 million, or 33.4%, to $17.8 million for the fiscal year ended June 30, 2003 from $26.7 million for the fiscal year ended June 30, 2002. Costs as a percentage of related revenues increased to 128.0% for the fiscal year ended June 30, 2003 from 118.8% for the fiscal year ended June 30, 2002. The decrease in costs was primarily due to agreements reached with two of our vendors during February 2003 and October 2002, in which we significantly reduced our space segment transponder costs and obligations. These agreements will continue to reduce our future monthly space segment costs. The increase as a percentage of related revenue was due to a lower revenue base resulting from the termination of services from our largest Middle East customer in August 2002, the assignment of $35.8 million in contract revenues, plus payments of $4.1 million for termination fees related to our agreements to reduce our space segment transponder obligations. Selling and Marketing. Selling and marketing expenses decreased by $0.7 million, or 10.3%, to $6.0 million for the fiscal year ended June 30, 2003 from $6.7 million for the fiscal year ended June 30, 2002. The decrease was primarily due to reduced salary and salary related expenses, offset by severance costs associated with reductions in sales and marketing personnel. Research and Development. Research and development expenses decreased by $0.4 million, or 32.5%, to $0.8 million for the fiscal year ended June 30, 2003 from $1.2 million for the fiscal year ended June 30, 2002. The decrease was attributable to reduced internal development of monitoring and control technologies and the non-recurrence of costs associated with the development of various initial subsystems for solutions provided to a new customer in fiscal year 2002. General and Administrative. General and administrative expenses decreased by $2.5 million, or 21.3%, to $9.4 million for the fiscal year ended June 30, 2003 from $12.0 million for the fiscal year ended June 30, 2002. General and administrative expenses as a percentage of revenues increased to 17.4% for the fiscal year ended June 30, 2003 from 13.8% for the fiscal year ended June 30, 2002 primarily due to the decrease in revenues. The decrease in general and administrative expenses for the fiscal year ended June 30, 2003 primarily resulted from the non-recurrence of a $3.2 million allowance for uncollectible accounts receivable from our largest Middle East customer in the fiscal year ended June 30, 2002 (of which $1.0 million was recovered during the fourth quarter of fiscal year ended June 30, 2003), offset by the recording of a $1.5 million expense provision related to the risk of non-collection of a receivable from a major customer and an increase in insurance premiums. Asset Impairment Charge. The asset impairment charge of $0.2 million for the fiscal year ended June 30, 2002, related to a write-down of the net carrying value of goodwill relating to the acquisition of a wireless local loop telephone network solutions business during the fiscal year ended June 30, 1999. 16 Interest Income. Interest income decreased by $0.6 million, or 59.0%, to $0.4 million for the fiscal year ended June 30, 2003 from $1.0 million for the fiscal year ended June 30, 2002. The decrease was primarily due to a significant decline in cash and cash equivalents due to cash used in operations during the fiscal year ended June 30, 2003. Interest Expense. Interest expense decreased by $0.4 million, or 43.7%, to $0.5 million for the fiscal year ended June 30, 2003 from $1.0 million for the fiscal year ended June 30, 2002. The decrease was the result of less interest paid on a capital lease obligation, which was terminated in February 2003. FISCAL YEARS ENDED JUNE 30, 2002 AND 2001 Revenues from Ground Segment Systems, Networks and Enterprise Solutions. Revenues from ground segment systems, networks and enterprise solutions decreased by $14.6 million, or 18.6% to $64.1 million for the fiscal year ended June 30, 2002 from $78.7 million for the fiscal year ended June 30, 2001. The decrease related to the decrease in the shipment and/or completion of contracts as a result of a decline in bookings of contract orders due to the continued uncertainty surrounding the global economic slowdown in the telecommunications industry, resulting in customers and prospects continuing to delay projects. Revenues from Data Communications Services. Revenues from data communications services decreased by $1.7 million, or 7.0% to $22.5 million for the fiscal year ended June 30, 2002 from $24.2 million for the fiscal year ended June 30, 2001. The decrease reflected changes in market conditions including the global economic slowdown in the telecommunications industry, pricing pressures in the marketplace and penetration of fiber into areas we have traditionally provided services. Costs from Ground Segment Systems, Networks and Enterprise Solutions. Costs from ground segment systems, networks and enterprise solutions decreased by $13.8 million, or 19.5%, to $57.1 million for the fiscal year ended June 30, 2002 from $70.9 million for the fiscal year ended June 30, 2001. The decrease is attributable to a lower revenue base. Costs as a percentage of related revenues decreased to 89.1% for the fiscal year ended June 30, 2002 from 90.0% for the fiscal year ended June 30, 2001. The decrease was mainly attributable to a change in contract mix. Costs from Data Communications Services. Costs from data communications services increased by $4.0 million, or 17.8%, to $26.7 million for the fiscal year ended June 30, 2002 from $22.7 million for the fiscal year ended June 30, 2001. Costs as a percentage of related revenues increased to 118.8% for the fiscal year ended June 30, 2002 from 93.8% for the fiscal year ended June 30, 2001. The increase was primarily due to an increase in transponder costs due to the reclassification of certain satellite transponders from capital to operating leases based on the renegotiation of certain long-term lease agreements during the fiscal quarter ended June 30, 2001. The corresponding decrease was in interest expense during the fiscal year ended June 30, 2002. Selling and Marketing. Selling and marketing expenses decreased by $0.5 million, or 6.9%, to $6.7 million for the fiscal year ended June 30, 2002 from $7.2 million for the fiscal year ended June 30, 2001. The decrease was attributable to a reduction in work force in the sales and marketing department of our data communications services business in the fiscal quarter ended June 30, 2001, partially offset by the development of a new direct sales force in the ground segment systems, networks and enterprise solutions business. Research and Development. Research and development expenses increased by $0.3 million, or 39.4%, to $1.2 million for the fiscal year ended June 30, 2002 from $0.9 million for the fiscal year ended June 30, 2001. The increase was attributable to internal development of new monitoring and control technologies, as well as the initial development of various subsystems for solutions we were providing to a new customer. General and Administrative. General and administrative expenses increased by $2.1 million, or 21.9%, to $12.0 million for the fiscal year ended June 30, 2002 from $9.8 million for the fiscal year ended June 30, 2001. General and administrative expenses as a percentage of revenues increased to 13.8% for the fiscal year ended June 30, 2002 from 9.6% for the fiscal year ended June 30, 2001. The increase in general and administrative expenses for the fiscal year ended June 30, 2002 primarily resulted from the recording of a $3.2 million allowance for uncollectible accounts receivable from our largest Middle East customer, an increase in legal expenses, mainly related to settling a patent infringement case and an increase in insurance premiums, partially offset by a reduction in work force, including the reduction of the management team of our data communications services business, which took place in the fiscal quarter ended June 30, 2001. Asset Impairment Charge. The asset impairment charge of $0.2 million for the fiscal year ended June 30, 2002, related to a write-down of the net carrying value of goodwill relating to the acquisition of a wireless local loop telephone network solutions business during the fiscal year ended June 30, 1999. The asset impairment charge of $2.9 million for the fiscal year ended June 30, 2001, related to three cost basis investments that were written-down in the fiscal quarter ended June 30, 2001. Our management 17 evaluated these investments and believed it would be appropriate to write-down these investments to zero based on their financial uncertainty. Restructuring Charge. The restructuring charge of $2.5 million (of which $0.5 million was charged to costs from data communications services) for the fiscal year ended June 30, 2001 related to management's plan to reduce costs and improve the data communications services business operating efficiencies. As a result of this restructuring, we terminated 31 employees including executive management, marketing, administration and operations support personnel. The major components of the restructuring charge included severance payments to terminated employees of approximately $0.9 million, fees incurred in connection with the termination of certain leased satellite transponders of approximately $0.5 million (charged to costs from data communications services), the write-off of certain capitalized costs in the amount of approximately $0.6 million associated with our terminated financing activities and the write-off of the estimated book value of equipment in the amount of approximately $0.5 million in connection with our discontinuance of certain product lines. At June 30, 2001, approximately $0.5 million of the restructuring charge was accrued and included in other accrued expenses. During the fiscal year ended June 30, 2002, the restructuring plan was completed whereby $0.3 million was charged against the restructuring accrual for charges related to space segment cancellation fees, and $0.2 million was reversed into income (credit to costs from data communications services) due to the resolution of liabilities for less than originally estimated. Interest Income. Interest income decreased by $2.2 million, or 67.8%, to $1.0 million for the fiscal year ended June 30, 2002 from $3.2 million for the fiscal year ended June 30, 2001. The decrease was primarily due to significant decline in interest rates coupled with a decrease in cash and cash equivalents due to cash used in operations during the fiscal year ended June 30, 2002. Interest Expense. Interest expense decreased by $5.6 million, or 85.5%, to $1.0 million for the fiscal year ended June 30, 2002 from $6.6 million for the fiscal year ended June 30, 2001. The decrease was due to the reclassification of certain satellite leased transponders to operating leases from capital leases based on the renegotiation of certain long-term lease agreements during the fiscal quarter ended June 30, 2001. The corresponding increase was in costs from data communications services during the fiscal year ended June 30, 2002. Gain on Sale of Investment. The gain on sale of investment of $0.3 million for the fiscal year ended June 30, 2001, related to the sale of our interest in one of our investments, which was accounted for as a cost method investment, during the fiscal quarter ended December 31, 2000. QUARTERLY RESULTS The following tables set forth unaudited consolidated financial information for each of the eight fiscal quarters in the period ended June 30, 2003. We believe that this information has been presented on the same basis as the audited consolidated financial statements appearing elsewhere in the Annual Report on Form 10-K, and we believe all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results of operations when read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The operating results for any quarter are not necessarily indicative of the operating results for any future period. 18
THREE MONTHS ENDED, ----------------------------------------------------------------------------------------- JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, 2003 2003 2002 2002 2002 2002 2001 2001 --------- --------- --------- --------- -------- ---------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues from ground segment systems, networks and enterprise solutions..... $ 10,876 $ 9,231 $ 11,854 $ 8,164 $ 14,008 $15,120 $16,939 $18,034 Revenues from data communications services.. 3,170 3,261 3,202 4,270 5,412 5,172 5,708 6,186 --------- --------- --------- --------- --------- ---------- --------- --------- Total revenues............. 14,046 12,492 15,056 12,434 19,420 20,292 22,647 24,220 Costs and operating expenses: Costs from ground segment systems, networks and enterprise solutions..... 12,001 8,967 10,787 7,692 12,443 13,166 15,297 16,177 Costs from data communications services.. 3,326 3,697 4,484 6,289 6,486 6,698 6,410 7,111 Selling and marketing...... 1,282 1,513 1,615 1,632 1,933 1,581 1,615 1,606 Research and development... 247 131 157 265 399 366 173 247 General and administrative. 2,772 2,277 2,418 1,956 5,468 2,179 2,216 2,107 Asset impairment charge.... -- -- -- -- 237 -- -- -- --------- --------- --------- --------- --------- ---------- --------- --------- Total costs and operating expenses................. 19,628 16,585 19,461 17,834 26,966 23,990 25,711 27,248 --------- --------- --------- --------- --------- ---------- --------- --------- Loss from operations....... (5,582) (4,093) (4,405) (5,400) (7,546) (3,698) (3,064) (3,028) Other income (expense): Interest income.......... 63 73 116 170 163 190 254 423 Interest expense......... -- (76) (230) (233) (236) (237) (241) (243) --------- --------- --------- --------- --------- ---------- --------- --------- Net loss................... $ (5,519) $ (4,096) $ (4,519) $ (5,463) $ (7,619) $(3,745) $(3,051) $(2,848) ========= ========= ========= ========= ========= ========== ========= ========= Basic and diluted net loss per common share........... $ (0.44) $ (0.33) $ (0.36) $ (0.43) $ (0.60) $ (0.29) $ (0.24) $ (0.22) ========= ========= ========= ========= ========= ========== ========= ========= Weighted-average shares used in the calculation of basic and diluted net loss per common share............. 12,555 12,557 12,566 12,583 12,638 12,753 12,719 12,718 ========= ========= ========= ========= ========= ========== ========= =========
We may continue to experience significant quarter-to-quarter fluctuations in our consolidated results of operations, which may result in volatility in the price of our common stock. See "Risk Factors" beginning on page 21. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2003, we had working capital of $22.0 million, including cash and cash equivalents of $22.0 million, restricted cash of $0.6 million, net accounts receivable of $7.9 million, inventories of $11.0 million and prepaid expenses and other current assets of $2.2 million, offset by $10.6 million in accounts payable, $7.7 million in deferred revenue and $3.3 million in accrued expenses and other current liabilities. Net cash used in operating activities during the fiscal year ended June 30, 2003 was $14.7 million, which primarily related to the net loss of $19.6 million, a decrease in accounts payable of $2.4 million relating to the reduction in revenues and the timing of vendor payments, and an increase in inventories of $2.3 million due to the timing of shipments on certain jobs, an increase in other assets of $1.6 million based on an equipment lease entered into with a customer, offset by a decrease in accounts receivable of $6.5 million due to a reduction in revenues and collections on certain contract billings, an increase in deferred revenues of $4.1 million due to timing differences between project billings and revenue recognition milestones resulting from specific customer contracts and non-cash items representing depreciation and amortization expense of $3.5 million primarily related to the network operations center, satellite earth station equipment and one satellite space segment transponder, which was terminated in February 2003. 19 Net cash used in investing activities during fiscal year ended June 30, 2003 was $1.7 million, which related to the purchase of fixed assets primarily for satellite earth station equipment and our network operations center in order to support our existing service base. Net cash used in financing activities during fiscal year ended June 30, 2003 was $0.3 million, which primarily related to $0.3 million of principal payments on a capital lease for a satellite space segment transponder, which was terminated in February 2003. At June 30, 2003, we maintained a $5.0 million working capital line of credit with a bank, which bore interest at the prime rate (4.0% at June 30, 2003) and was collateralized by a first security interest on most of our assets. In May and July 2003, the credit facility was renewed for additional time while we worked to establish a new bank agreement. The credit facility, which was extended to September 10, 2003, contained certain financial covenants, with which we were in compliance with at June 30, 2003. As of June 30, 2003, no amounts were outstanding under this credit facility, however, there were outstanding standby letters of credit, bid proposals and performance guarantees of approximately $4.1 million, which were applied against and reduced the amounts available under the working capital line of credit. In September 2003, we entered into a new one year credit agreement with the existing bank, which provides for a working capital credit facility of up to $7.5 million consisting of a $3.8 million secured domestic line of credit and a $3.8 million Export-Import Bank secured guaranteed line of credit. We will be advanced up to 80% of eligible domestic accounts receivable and 90% of eligible foreign accounts receivable under each respective line of credit, as defined in the agreement. Each line of credit bears interest at the greater of 6.0% or the prime rate plus 2.0% per annum, and is collateralized by a first security interest on all of our personal property. The credit agreement allows us to borrow and apply letters of credit against the availability under each line of credit. In addition, the new credit agreement contains certain financial and other covenants, deposit requirements, monthly reporting provisions and other requirements, as defined. We lease satellite space segment services and other equipment under various operating lease agreements, which expire in various years through 2008. Future minimum lease payments due on these leases through June 30, 2004 are approximately $6.1 million. On November 7, 2001, the Board of Directors authorized a stock repurchase program whereby we can repurchase up to $2.0 million of our outstanding stock, representing approximately 3.7% of the total shares outstanding on that date. Since November 2001, we repurchased, in aggregate, a total of 256,100 shares for $1.4 million. 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 and additional working capital requirements for work in progress for orders as obtained. Our expectation is that the working capital requirements will ease as shipments are made on new orders, although we cannot assure you as the timing and amount of new orders. NetSat has had, and we expect it will continue to have, working capital requirements, which have, and will, put increased pressure on our capital resources. We have implemented strategies to reduce the drain on our resources caused by NetSat's losses. While we will continue to seek additional means to reduce NetSat's cost structure, we can only achieve our goal of improving NetSat's working capital by improving operating performance. We cannot assure you that we will successfully improve NetSat's operating performance. Our future capital requirements will depend upon many factors, including the success of our marketing efforts in the ground segment systems, networks, and data communications services business, the nature and timing of customer orders and the extent to which we must conduct research and development efforts internally. Based on current plans, we believe that our existing capital resources will be sufficient to meet working capital requirements through June 30, 2004. However, we cannot assure you that there will be no unforeseen events or circumstances that would consume available resources significantly before that time. For example, future events occurring in response to the war with Iraq, or in connection with a war, including, without limitation, future terrorist attacks against the United States or its allies or military or trade or travel disruptions impacting our ability to sell and market our products and services in the United States and internationally may impact our results of operations. Unexpected events negatively impacting international commerce, including additional conflicts in the Middle East, could defer our ability to close contracts with international customers. 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 and research and development activities and further reductions in headcount. We cannot assure you that additional financing will be available to us on acceptable terms, or at all. 20 CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS At June 30, 2003, we had contractual obligations and commercial commitments as follows (in thousands):
Contractual Obligations PAYMENTS DUE BY PERIOD ----------------------- ------------------------------------------------------------------------------------- AFTER 5 TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS YEARS --------------- ------------------ ----------- ----------- ------------- Operating leases.................... $26,275 $6,115 $12,157 $7,357 $646 --------------- ------------------ ----------- ----------- ------------- Total contractual cash obligations.. $26,275 $6,115 $12,157 $7,357 $646 =============== ================== =========== =========== ============= AMOUNT OF COMMITMENT EXPIRATION PER PERIOD -------------------------------------------------------------------- TOTAL AMOUNTS Other Commercial Commitments COMMITTED LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS OVER 5 YEARS ---------------------------- ------------------ ------------------ ----------- ----------- ------------- Standby letters of credit......... $4,069 $2,990 $ 1,079 $-- $-- --------------- ------------------ ----------- ----------- ------------- Total commercial commitments...... $4,069 $2,990 $1,079 $-- $-- =============== ================== =========== =========== =============
During fiscal 2001, we entered into two thirty-six month operating lease agreements for satellite space segment transponders on two satellites that were expected to be launched in late 2002 and operational by March 2003. Future payments due on such agreements through fiscal 2007 are approximately $6.0 million. Such satellite space segment services are scheduled to begin when the satellite transponders are commercially operational, as defined in the agreements. During fiscal 2003, we learned that the vendor has experienced significant delays in the planned launch and operational dates for the satellites. As a result of these delays, we maintain that we have a right to terminate the contracts without cost and have provided notification of such termination. The vendor has denied our assertion that we have a right to terminate the contracts without cost. If our position is sustained, total operating lease commitments would be reduced by approximately $6.0 million. RELATED PARTY TRANSACTIONS During January 2003, pursuant to a letter agreement we consolidated the then outstanding loan and advances receivable from an individual who is a former executive officer and a current employee into a $0.3 million promissory note. Under the terms of the letter agreement we will forgive the outstanding principal and interest amounts due on the promissory note in five annual installments beginning in January 2004 so long as the former executive officer remains an employee, subject to the terms of the letter agreement. 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 $19.6 million during the fiscal year ended June 30, 2003, $17.3 million during the fiscal year ended June 30, 2002 and $18.7 million during the fiscal year ended June 30, 2001. As of June 30, 2003, our accumulated deficit was $73.9 million. We anticipate that we will continue to incur net losses, although we expect them to be less than those we incurred in the fiscal year ended June 30, 2003. Our ability to achieve and maintain profitability will depend upon our ability to generate significant revenues through new profitable customer contracts and the expansion of our existing products and services, including our data communications services. We cannot assure you that we will be able to obtain new profitable 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 revenues from the sale of satellite ground segment systems and networks. If the long-term growth in demand for communications networks does not return from its depressed level, the demand for our satellite ground segment systems and networks may decline or grow more slowly than we expect. As a result, we may 21 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, the depressed level of general economic conditions has affected the overall rate of capital spending by our customers. Also, many companies have found it increasingly difficult to raise capital to finish building their communications networks and, therefore, have placed fewer orders with our customers. The economic slowdown resulted in a softening of demand from our customers. We cannot predict the extent to which demand will increase. Further, increased competition among satellite ground segment systems and networks manufacturers has increased pricing pressures. 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 with a significant portion of the international revenue coming from developing countries. 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 a number of risks inherent in conducting our business internationally, including: o general political and economic instability in international markets, including the war in Iraq, 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; 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 could effect our ability to compete; o relying on local subcontractors for installation of our products and services could adversely impact the quality of our products and services; o difficulties in staffing and managing foreign operations could effect our ability to compete; o potentially adverse taxes could adversely affect our results of operations; o complex foreign laws and treaties could affect our ability to compete; and o difficulties in collecting accounts receivable could adversely affect our results of operations. 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 NETSAT 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's revenues from data communications services have decreased during the fiscal year ended June 30, 2003. Revenues will continue to be reduced as a result of customer contracts assigned to vendors pursuant to settlement agreements reached in February 2003 and October 2002. As of June 30, 2003, the future revenues, which will be foregone, amounts to $32.2 million, of which $5.0 million relates to fiscal year ending June 30, 2004. NetSat's future revenues and results of operations are dependent on its execution of its business strategy and development of the market for its current and future services. In particular, the current level and manner of utilization of NetSat's transponder space, as well as a decrease in orders currently being experienced, continues to harm our results of operation. Despite the agreements reached with two of the Company's vendors in February 2003 and October 2002, which modified and reduced the Company's satellite bandwidth obligations, we cannot assure you that the transponder space will be 22 efficiently and substantially utilized or that an increase in orders will be realized. NetSat has had, and we expect will continue to have, cash requirements, which have and will decrease our cash resources. If NetSat does not efficiently and substantially utilize its transponder space capacity or increase its level of orders, its cash requirements may increase and our results of operations will be harmed. 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 delays and/or a decrease in the booking of new contracts; o general political and economic conditions in the United States and abroad, including the war in Iraq; o the length of time needed to initiate and complete customer contracts; o the demand for and acceptance of our existing products and services; o the cost of providing our products and services; 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 adversely impacted 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 expectations, 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 systems integrators like IDB Systems, a division of MCI and equipment manufacturers who also provide integrated systems like Andrew Corporation and Tripoint Global. In the end-to-end satellite-based communication solutions and communications services markets, we compete with other satellite communication companies who provide similar services, like Verestar. In addition, we may compete with other communications service providers like MCI and satellite owners like Panamsat, Loral Skynet, New Skies Satellites N.V. and Intelsat. We anticipate that our competitors may develop or acquire services that provide functionality that is similar to that provided by our services and that those services may be offered at significantly lower prices or bundled with other services. These competitors may have the financial resources to withstand substantial price competition 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 than we do that they could use to their advantage in competitive situations. The markets in which we operate have limited barriers to entry and we expect that we will face additional competition from 23 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. Fiber optic communications systems have penetrated areas in which we have traditionally provided services. If the satellite communications industry fails to continue to develop, or 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 June 30, 2004. 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. In particular, NetSat continues to have cash requirements, which may continue in the future. 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 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. A LIMITED NUMBER OF CUSTOMER CONTRACTS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND THE INABILITY TO REPLACE A KEY CUSTOMER CONTRACT WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION. We rely on a small number of customer contracts for a large portion of our revenue. Specifically, we have agreements with seven customers to provide equipment and services, from which we expect to generate a significant portion of our revenues. If any of these customers is unable to implement its business plan, the market for its services declines, or if all or any of the customers modifies or terminates its agreement with us, and we are unable to replace these contracts, our results of operations, business and financial condition would be materially harmed. 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 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. 24 WE DEPEND UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE EMPLOYEES. Our future performance depends on the continued service of our key technical, managerial and marketing personnel; in particular, David Hershberg, Kenneth Miller, Stephen Yablonski and Donald Woodring. The employment of any of our key personnel could cease at any time. UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR BUSINESS. We regard our trademarks, trade secrets and other intellectual property as beneficial to our success. Unauthorized use of our intellectual property by third parties may damage our business. We rely on trademark, trade secret and patent protection and contracts, including confidentiality and license agreements with our employees, customers, strategic collaborators, consultants and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without our authorization. We currently have been granted three patents in the United States, one for remote access to the Internet using satellites, another for satellite communication with automatic frequency control, and most recently, we have been granted a patent concerning a monitor and control system for satellite communications networks and the like. We have two other patents pending in the United States, one for implementing facsimile and data communications using Internet protocols and another for a distributed satellite-based cellular network. We currently have one Patent Cooperation Treaty patent application pending for implementing facsimile and data communications using Internet protocols. 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 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 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. 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. 25 WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE OUR SOLE OR A LIMITED SOURCE OF SUPPLY, AND THE LOSS OF THESE SUPPLIERS WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We currently obtain most of our critical components and services from single or limited sources and generally do not maintain significant inventories or have long-term or exclusive supply contracts with our source vendors. We have from time to time experienced delays in receiving products from vendors due to lack of availability, quality control or manufacturing problems, shortages of materials or components or product design difficulties. We may experience delays in the future and replacement services or products may not be available when needed, or at all, or at commercially reasonable rates or prices. If we were to change some of our vendors, we would have to perform additional testing procedures on the service or product supplied by the new vendors, which would prevent or delay the availability of our products and services. Furthermore, our costs could increase significantly if we need to change vendors. If we do not receive 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. 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. A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING SHARES OF OUR STOCK AT A PREMIUM TO THE MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS. Various provisions with respect to votes in the election of directors, special meetings of stockholders, and advance notice requirements for stockholder proposals and director nominations of our amended and restated certificate of incorporation, 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 our 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 Communication Commission, or FCC, licensed earth stations in Hauppauge, New York, subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of FCC. Pursuant to the FCC 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. We have also obtained and are required to maintain authorization issued under Section 214 of the FCC Act to act as a telecommunications carrier, which authorization also extends to NetSat. 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. In addition, prior to a third party acquisition of us, we would need to seek approval from the FCC to transfer the radio transmission licenses we have obtained to the third party upon the consummation of the acquisition. However, we cannot assure you that the FCC will permit the transfer of these licenses. These approvals may make it more difficult for a third party to acquire us. 26 Foreign Ownership We may, in the future, be required to seek FCC approval if foreign ownership of our stock exceeds the specified criteria. Failure to comply with these policies could result in an order to divest the offending foreign ownership, fines, denial of license renewal, and/or license revocation proceedings against the licensee by the FCC. 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 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 that 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 such as 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 of existing laws governing issues including property ownership, copyrights and other intellectual property issues, taxation, libel, court jurisdiction and personal privacy to the Internet is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, 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 United States. 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. 27 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to a variety of risks, including foreign currency exchange rate fluctuations relating to certain purchases from foreign vendors. In the normal course of business, we assess these risks and have established policies and procedures to manage our exposure to fluctuations in foreign currency values. Our objective to managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates for certain purchases from foreign vendors, if applicable. Accordingly, we may utilize from time to time foreign currency forward contracts to hedge our exposure on firm commitments denominated in foreign currency. During the fiscal years ended June 30, 2003, 2002 and 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 government securities. Under our current positions, we do not use interest rate derivative instruments to manage exposure to interest rate changes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to the Consolidated Financial Statements listed in Item 15(a) of Part IV of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a- 14(c) and 15d- 14(c) under the Securities Exchange Act of 1934, as amended). Based upon the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that we are required to disclose in reports filed under the Securities Exchange Act of 1934, as amended. There have been no significant changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a- 15(f) of the Securities Exchange Act of 1934, as amended) or in other factors during the fiscal quarter and fiscal year ended June 30, 2003 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting subsequent to the date of our most recent evaluation. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information in response to this item is incorporated herein by reference to "Election of Directors" and "Executive Officers" in Globecomm Systems Inc.'s Proxy Statement to be filed with the Securities and Exchange Commission (the "SEC"). Information on compliance with section 16(a) of the Exchange Act is incorporated herein by reference to "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement to be filed with the SEC. ITEM 11. EXECUTIVE COMPENSATION Information in response to this item is incorporated herein by reference to "Executive Compensation and Other Information" in the Registrant's Proxy Statement to be filed with the SEC. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in response to this item is incorporated herein by reference to "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement to be filed with the SEC. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this item is incorporated herein by reference to "Certain Transactions" in the Registrant's Proxy Statement to be filed with the SEC. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information in response to this item is incorporated herein by reference to "Report of the Audit Committee of the Board of Directors" in the Registrant's Proxy Statement to be filed with the SEC. 29 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) (1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors...................................................................... F-1 Consolidated Balance Sheets as of June 30, 2003 and 2002............................................ F-2 Consolidated Statements of Operations for the years ended June 30, 2003, 2002 and 2001...................................................................... F-3 Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 2003, 2002 and 2001...................................................................... F-4 Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002 and 2001...................................................................... F-5 Notes to Consolidated Financial Statements.......................................................... F-6 (2) INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts..................................................... S-1 All other schedules for which provision is made in the applicable accounting regulation from the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
30 (3) INDEX OF EXHIBITS Exhibit No. 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 3.2 Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 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 Registrant defining rights of holders of Common Stock of the Registrant (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-1, File No. 333-22425 (the "Registration Statement")). 10.1 Form of Registration Rights Agreement dated as of February 1997 (incorporated by reference to Exhibit 10.1 of the Registration Statement). 10.2 Form of Registration Rights Agreement dated May 30, 1996 (incorporated by reference to Exhibit 10.2 of the Registration Statement). 10.3 Form of Registration Rights Agreement dated December 31, 1996, as amended (incorporated by reference to Exhibit 10.3 of the Registration Statement). 10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock dated November 9, 1995 between the Registrant and Thomson-CSF (incorporated by reference to Exhibit 10.4 of the Registration Statement). 10.5 Investment Agreement dated February 12, 1996 by and between Shiron Satellite Communications (1996) Ltd. and the Registrant (incorporated by reference to Exhibit 10.5 of the Registration Statement). 10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the Registrant (incorporated by reference to Exhibit 10.6 of the Registration Statement). 10.7 Memorandum of Understanding dated December 18, 1996 by and between NetSat Express, Inc. and Applied Theory Communications, Inc. (incorporated by reference to Exhibit 10.7 of the Registration Statement). 10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by reference to Exhibit 10.8 of the Registration Statement). 10.9 Employment Agreement dated as of January 27, 1997 between the Registrant and David E. Hershberg (incorporated by reference to Exhibit 10.9 of the Registration Statement). 10.10 Employment Agreement dated as of January 27, 1997 between the Registrant and Kenneth A. Miller (incorporated by reference to Exhibit 10.10 of the Registration Statement). 10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between Eaton Corporation and the Registrant (incorporated by reference to Exhibit 10.13 of the Registration Statement). 10.12 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 of the Registration Statement). 10.13 Investment Agreement dated August 21, 1998 by and between McKibben Communications LLC and the Registrant (incorporated by reference to Exhibit 10.13 of the Registrant'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 S-8 of the S-8 Registration Statement). 10.15 Rights Agreement, dated as of December 3, 1998, between the Registrant and American Stock Transfer and Trust 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 Registrant'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 Registrant'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 Registrant'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 Registrant's Quarterly Report on Form 10-Q, for the quarter ended September 30, 1999). 10.19 Negotiable Promissory Note, dated April 1, 2001, between the Registrant and Donald Woodring (incorporated by reference to Exhibit 10.19 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.20 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 31 10.21 Employment Agreement, dated as of October 9, 2001, by and between Andrew C. Melfi and the Registrant (incorporated by reference to Exhibit 10.21 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.22 Employment Agreement, dated as of October 9, 2001, by and between Donald G. Woodring and the Registrant (incorporated by reference to Exhibit 10.22 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.23 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.24 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.25 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.26 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.27 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended December 31, 2001). 10.28* Settlement Agreement, dated as of October 1, 2002, by and between Loral Skynet(R), a division of Loral SpaceCom Corporation and the Registrant (incorporated by reference to Exhibit 10.28 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2002). 10.29 Separation Agreement and General Release, dated as of January 22, 2003, by and between G. Patrick Flemming and the Registrant (incorporated by reference to Exhibit 10.29 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended December 31, 2002). 10.30 Letter Agreement, dated as of January 31, 2003, by and between Donald G. Woodring and the Registrant (incorporated by reference to Exhibit 10.30 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended December 31, 2002). 10.31 Loan and Security Agreement, dated as of September 25, 2003, by and between Silicon Valley Bank and the Registrant (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23 Consent of Independent Auditors (filed herewith). 31.1 Chief Executive Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended (filed herewith). 31.2 Chief Financial Officer Certification required by Rules 13a- 14 and 15d- 14 under the Securities Exchange Act of 1934, as amended (filed herewith). 32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002 (filed herewith). * Confidential treatment granted for portions of this agreement. (B) REPORTS ON FORM 8-K Form 8-K (Item 7) filed on May 14, 2003 with respect to its fiscal 2003 third quarter and nine-month financial results. Form 8-K (Item 5) filed on June 27, 2003 with respect to a settlement agreement between the Registrant and a customer. (C) EXHIBITS The response to this portion of Item 15 is submitted as a separate section of this report. (D) FINANCIAL STATEMENT SCHEDULES The response to this portion of Item 15 is submitted as a separate section of this report. 32 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. GLOBECOMM SYSTEMS INC. Date: 9/29/03 By: /s/ DAVID E. HERSHBERG --------------------------------- David E. Hershberg, Chairman of the Board and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ DAVID E. HERSHBERG Chairman of the Board and 9/29/03 - ------------------------ Chief Executive Officer David E. Hershberg (Principal Executive Officer) /s/ ANDREW C. MELFI Vice President, Chief Financial 9/29/03 - ------------------------ Officer and Treasurer (Principal Financial Andrew C. Melfi and Accounting Officer /s/ KENNETH A. MILLER President and Director 9/29/03 - ------------------------ Kenneth A. Miller /s/ STEPHEN C. YABLONSKI Vice President, General Manager 9/29/03 - ------------------------ and Director Stephen C. Yablonski /s/ RICHARD E. CARUSO Director 9/29/03 - ------------------------ Richard E. Caruso /s/ BRIAN T. MALONEY Director 9/29/03 - ------------------------ Brian T. Maloney /s/ A. ROBERT TOWBIN Director 9/29/03 - ------------------------ A. Robert Towbin /s/ DANIEL S. VAN RIPER Director 9/29/03 - ------------------------ Daniel S. Van Riper /s/ C.J. WAYLAN Director 9/29/03 - ------------------------ C.J. Waylan 33 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Globecomm Systems Inc. We have audited the accompanying consolidated balance sheets of Globecomm Systems Inc. (the "Company") as of June 30, 2003 and 2002 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Globecomm Systems Inc. at June 30, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other indefinite-lived intangible assets effective July 1, 2001 to conform with the provisions of Financial Accounting Standards Board Statement No. 142, "Goodwill and Other Intangible Assets". /s/ ERNST & YOUNG LLP Melville, New York September 4, 2003 F-1 GLOBECOMM SYSTEMS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 2003 JUNE 30, 2002 ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents....................................... $ 22,016 $ 38,708 Restricted cash................................................. 608 588 Accounts receivable, net........................................ 7,865 14,999 Inventories..................................................... 10,990 8,594 Prepaid expenses and other current assets....................... 2,040 1,239 Deferred income taxes........................................... 125 138 ---------------- ---------------- Total current assets.............................................. 43,644 64,266 Fixed assets, net................................................. 17,536 28,484 Goodwill.......................................................... 7,204 7,204 Other assets...................................................... 1,960 343 ---------------- ---------------- Total assets...................................................... $ 70,344 $ 100,297 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................ $ 10,615 $ 12,918 Deferred revenues............................................... 7,666 3,541 Accrued payroll and related fringe benefits..................... 1,114 957 Other accrued expenses.......................................... 1,686 2,076 Deferred liabilities............................................ 523 600 Capital lease obligation........................................ -- 472 ---------------- ---------------- Total current liabilities......................................... 21,604 20,564 Deferred liabilities, less current portion........................ 1,303 3,060 Capital lease obligation, less current portion.................... -- 9,633 Commitments and contingencies Stockholders' equity: Series A Junior Participating, shares authorized, shares issued and outstanding: none in 2003 and 2002................. -- -- Common stock, $.001 par value, 22,000,000 shares authorized, shares issued 12,980,108 in 2003 and 12,933,062 in 2002....... 13 13 Additional paid-in capital...................................... 123,739 123,598 Accumulated deficit............................................. (73,857) (54,260) Accumulated other comprehensive loss............................ (10) (44) Treasury stock, at cost, 403,845 shares in 2003 and 349,745 shares in 2002........................................ (2,448) (2,267) ---------------- ---------------- Total stockholders' equity........................................ 47,437 67,040 ---------------- ---------------- Total liabilities and stockholders' equity........................ $ 70,344 $ 100,297 ================ ================
See accompanying notes. F-2 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30, ------------------------------------------------ 2003 2002 2001 -------------- -------------- ------------ Revenues from ground segment systems, networks and enterprise solutions........................................ $ 40,125 $ 64,101 $ 78,744 Revenues from data communications services........................ 13,903 22,478 24,170 -------------- -------------- ------------ Total revenues.................................................... 54,028 86,579 102,914 -------------- -------------- ------------ Costs and operating expenses: Costs from ground segment systems, networks and enterprise solutions...................................... 39,447 57,083 70,907 Costs from data communications services......................... 17,796 26,705 22,661 Selling and marketing........................................... 6,042 6,735 7,235 Research and development........................................ 800 1,185 850 General and administrative...................................... 9,423 11,970 9,822 Asset impairment charge......................................... -- 237 2,857 Restructuring charge............................................ -- -- 1,950 -------------- -------------- ------------ Total costs and operating expenses................................ 73,508 103,915 116,282 -------------- -------------- ------------ Loss from operations.............................................. (19,480) (17,336) (13,368) Other income (expense): Interest income................................................. 422 1,030 3,194 Interest expense................................................ (539) (957) (6,579) Gain on sale of investment...................................... -- -- 304 -------------- -------------- ------------ Loss before income taxes and minority interests in operations of consolidated subsidiary...................................... (19,597) (17,263) (16,449) Provision for income taxes........................................ -- -- (1,600) -------------- -------------- ------------ Loss before minority interests in operations of consolidated subsidiary...................................................... (19,597) (17,263) (18,049) Minority interests in operations of consolidated subsidiary....... -- -- (650) -------------- -------------- ------------ Net loss.......................................................... $ (19,597) $ (17,263) $ (18,699) ============== ============== ============ Basic and diluted net loss per common share....................... $ (1.56) $ (1.36) $ (1.55) ============== ============== ============ Weighted-average shares used in the calculation of basic and diluted net loss per common share........................... 12,565 12,707 12,060 ============== ============== ============
See accompanying notes. F-3
GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2003, 2002 AND 2001 (IN THOUSANDS) ACCUMULATED COMMON STOCK ADDITIONAL OTHER ------------------- PAID-IN ACCUMULATED COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT LOSS -------- --------- ---------- ------------- -------------- Balance at June 30, 2000........................................... 12,024 $12 $110,105 $(18,298) $17 Proceeds from exercise of stock options............................ 69 - 358 - - Issuance of common stock in connection with employee stock purchase plan........................................................... 55 - 328 - - Issuance of common stock in connection with acquisition of minority interests in consolidated subsidiary........................... 718 1 6,582 - - Issuance of warrants in connection with acquisition of minority interests in consolidated subsidiary........................... - - 5,043 - - Issuance of options in connection with acquisition of minority interests in consolidated subsidiary........................... - - 309 - - Acquisition of minority interests in consolidated subsidiary....... - - 907 - - Forfeiture of consolidated subsidiary's employee stock options..... - - (225) - - Minority interests resulting from issuance of consolidated subsidiary's common stock....................................... - - (131) - - Comprehensive loss: Net loss........................................................ - - - (18,699) - Loss from foreign currency translation.......................... - - - (55) Loss from available-for-sale securities......................... - - - - (19) Total comprehensive loss........................................... - - - - - -------- --------- ---------- ------------- -------------- Balance at June 30, 2001........................................... 12,866 13 123,276 (36,997) (57) Proceeds from exercise of stock options............................ 10 - 38 - - Issuance of common stock in connection with employee stock purchase plan........................................................... 57 - 247 - - Purchases of treasury stock (see Note 13).......................... - - - - - Issuance of stock options for services............................. - - 37 - - Comprehensive loss: Net loss........................................................ - - - (17,263) - Gain from foreign currency translation.......................... - - - - 128 Loss from available-for-sale securities......................... - - - - (115) Total comprehensive loss........................................... - - - - - -------- --------- ---------- ------------- -------------- Balance at June 30, 2002........................................... 12,933 13 123,598 (54,260) (44) Issuance of common stock in connection with employee stock purchase plan........................................................... 47 - 141 - - Purchases of treasury stock........................................ - - - - - Comprehensive loss: Net loss........................................................ - - - (19,597) - Gain from foreign currency translation.......................... - - - - 96 Loss from available-for-sale securities......................... - - - - (62) Total comprehensive loss........................................... - - - - - -------- --------- ---------- ------------- -------------- Balance at June 30, 2003........................................... 12,980 $13 $123,739 $(73,857) $(10) ======== ========= ========== ============= ============== TREASURY STOCK TOTAL DEFERRED --------------------- STOCKHOLDERS' COMPENSATION SHARES AMOUNT EQUITY -------------- --------- --------- -------------- Balance at June 30, 2000........................................... $ (218) 148 $(1,094) $ 90,524 Proceeds from exercise of stock options............................ - - - 358 Issuance of common stock in connection with employee stock purchase plan........................................................... - - - 328 Issuance of common stock in connection with acquisition of minority interests in consolidated subsidiary........................... - - - 6,583 Issuance of warrants in connection with acquisition of minority interests in consolidated subsidiary........................... - - - 5,043 Issuance of options in connection with acquisition of minority interests in consolidated subsidiary........................... - - - 309 Acquisition of minority interests in consolidated subsidiary....... - - - 907 Forfeiture of consolidated subsidiary's employee stock options..... 218 - - (7) Minority interests resulting from issuance of consolidated subsidiary's common stock...................................... - - - (131) Comprehensive loss: Net loss........................................................ - - - (18,699) Loss from foreign currency translation.......................... - - - (55) Loss from available-for-sale securities......................... - - - (19) -------------- Total comprehensive loss........................................... - - - (18,773) -------------- --------- --------- -------------- Balance at June 30, 2001........................................... - 148 (1,094) 85,141 Proceeds from exercise of stock options............................ - - - 38 Issuance of common stock in connection with employee stock purchase plan........................................................... - - - 247 Purchases of treasury stock (see Note 13).......................... - 202 (1,173) (1,173) Issuance of stock options for services............................. - - - 37 Comprehensive loss: Net loss........................................................ - - - (17,263) Gain from foreign currency translation.......................... - - - 128 Loss from available-for-sale securities......................... - - - (115) -------------- Total comprehensive loss........................................... - - - (17,250) -------------- --------- --------- -------------- Balance at June 30, 2002........................................... - 350 (2,267) 67,040 Issuance of common stock in connection with employee stock purchase plan........................................................... - - - 141 Purchases of treasury stock........................................ - 54 (181) (181) Comprehensive loss: Net loss........................................................ - - - (19,597) Gain from foreign currency translation.......................... - - - 96 Loss from available-for-sale securities......................... - - - (62) -------------- Total comprehensive loss........................................... - - - (19,563) -------------- --------- --------- -------------- Balance at June 30, 2003........................................... $ - 404 $(2,448) $ 47,437 ============== ========= ========= ==============
See accompanying notes. F-4 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED JUNE 30, ---------------------------------------------- 2003 2002 2001 ----------- ----------- --------------- OPERATING ACTIVITIES: Net loss................................................................ $(19,597) $(17,263) $ (18,699) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................................... 3,532 3,661 7,229 Change in deferred liabilities........................................ (1,834) 19 -- Gain on termination of capital lease.................................. (959) -- -- Provision for doubtful accounts....................................... 683 3,951 1,753 Deferred income taxes................................................. 13 (138) 1,942 Stock compensation expense............................................ -- 37 -- Asset impairment charge............................................... -- 237 2,857 Loss on disposal of fixed assets and other............................ -- -- 280 Minority interests in operations of consolidated subsidiary........... -- -- 650 Gain on sale of investment............................................ -- -- (304) Changes in operating assets and liabilities: Accounts receivable................................................. 6,533 6,308 (3,047) Inventories......................................................... (2,338) 6,714 (1,950) Prepaid expenses and other current assets........................... (896) (443) 588 Other assets........................................................ (1,617) 247 35 Accounts payable.................................................... (2,394) (2,449) (1,177) Deferred revenues................................................... 4,125 (2,308) (462) Accrued payroll and related fringe benefits......................... 155 26 251 Other accrued expenses.............................................. (120) (1,541) (1,769) ----------- ----------- --------------- Net cash used in operating activities................................... (14,714) (2,942) (11,823) ----------- ----------- --------------- INVESTING ACTIVITIES: Purchases of fixed assets............................................... (1,732) (1,687) (5,350) Repayment of promissory note from a related party....................... 40 -- -- Restricted cash......................................................... (20) -- (167) Issuance of promissory notes to related parties......................... -- (700) (240) Purchases of investments................................................ -- -- (100) Proceeds from sale of investments....................................... -- -- 204 Purchases of consolidated subsidiary's common stock..................... -- -- (1,212) Purchase of consolidated subsidiary's preferred stock................... -- -- (581) ----------- ----------- --------------- Net cash used in investing activities................................... (1,712) (2,387) (7,446) ----------- ----------- --------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options................................. -- 38 358 Proceeds from sale of common stock in connection with employee stock purchase plan ....................................................... 141 247 328 Purchases of treasury stock............................................. (181) (873) -- Payments under capital leases........................................... (270) (430) (1,668) ----------- ----------- --------------- Net cash used in financing activities................................... (310) (1,018) (982) ----------- ----------- --------------- Effect of foreign currency translation on cash.......................... 44 17 -- ----------- ----------- --------------- Net decrease in cash and cash equivalents............................... (16,692) (6,330) (20,251) Cash and cash equivalents at beginning of year.......................... 38,708 45,038 65,289 ----------- ----------- --------------- Cash and cash equivalents at end of year................................ $ 22,016 $ 38,708 $ 45,038 =========== =========== =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.................................................. $ 539 $ 957 $ 8,145 =========== =========== ===============
See accompanying notes. F-5 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Globecomm Systems Inc. ("Globecomm") was incorporated in the State of Delaware on August 17, 1994. The Company is an end-to-end satellite communications solutions provider. The Company's core business provides end-to-end, value-added satellite-based enterprise communications solutions. This business supplies ground segment systems and networks for satellite-based communications including hardware and software to support a wide range of satellite systems. The Company's wholly-owned subsidiary, NetSat Express, Inc. ("NetSat") provides network services solutions including Internet backbone connectivity, content delivery network applications, back-office capabilities, points of presence ("POP") infrastructure and other network management services. The Company has incurred operating losses since its inception and has an accumulated deficit at June 30, 2003 of approximately $73,857,000. Such losses have resulted principally from costs related to data communications services, general and administrative and selling and marketing expenses associated with the Company's operations. Management believes that its existing capital resources will be sufficient to meet its working capital needs through June 30, 2004. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, NetSat and Globecomm Systems Europe Limited (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Sale of Stock by Subsidiary The Company recognizes changes in the ownership percentage of its subsidiaries caused by issuances of the subsidiary's stock as an adjustment to additional paid-in capital in the consolidated statements of changes in stockholders' equity. Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, for its production-type contracts that are sold separately as standard satellite ground segment systems when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, collectibility is reasonably assured, delivery has occurred and the contractual performance specifications have been met. The Company's standard satellite ground segment systems produced in connection with these contracts are typically short-term (less than twelve months in term) and manufactured using a standard modular production process. Such systems require less engineering, drafting and design efforts than the Company's long-term complex production-type projects. Revenue is recognized on the Company's standard satellite ground segment systems upon shipment and acceptance of factory performance testing which is when title transfers to the customer. The amount of revenues recorded on each standard production-type contract is reduced by the customers' contractual holdback amount, which typically requires 10% to 30% of the contract value to be retained by the customer until installation and final acceptance is complete. The customer generally becomes F-6 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) obligated to pay 70% to 90% of the contract value upon shipment and acceptance of factory performance testing. Installation is not deemed to be essential to the functionality of the system since installation does not require significant changes to the features or capabilities of the system, does not require complex software integration and interfacing and the Company has not experienced any difficulties installing such equipment. In addition, the customer or other third party vendors can install the system. The estimated relative fair value of the installation services is determined by management, which is typically less than the customer's contractual holdback percentage. If the holdback is less than the fair value of installation, the Company will defer recognition of revenues, determined on a contract-by-contract basis equal to the fair value of the installation services. Payments received in advance by customers are deferred until shipment and are presented as deferred revenues in the accompanying consolidated balance sheets. The Company recognizes revenue using the percentage-of-completion method of accounting upon the achievement of certain contractual milestones in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, for its non-standard, complex production-type contracts for the production of satellite ground segment systems and equipment that are generally integrated into the customers' satellite ground segment network. The equipment and systems produced in connection with these contracts are typically long-term (in excess of twelve months in term) and require significant customer-specific engineering, drafting and design effort in order to effectively integrate all of the customizable earth station equipment into the customers' ground segment network. These contracts generally have larger contract values, greater economic risks and substantive specific contractual performance requirements due to the engineering and design complexity of such systems and related equipment. Progress payments received in advance by customers are netted against the inventory balances in the accompanying consolidated balance sheets. Contract costs generally include purchased material, direct labor, overhead and other direct costs. Anticipated contracted losses are recognized, as they become known. Revenues from data communications services are derived primarily from Internet access service fees. Service revenues from Internet access are recognized ratably over the period in which services are provided. Payments received in advance of providing Internet access services are deferred until the period such services are provided and are presented as deferred revenues in the accompanying consolidated balance sheets. Costs from Ground Segment Systems, Networks and Enterprise Solutions Costs from ground segment systems, networks and enterprise solutions consist primarily of the costs of purchased materials (including shipping and handling costs), direct labor and related overhead expenses, project-related travel and living costs and subcontractor salaries. Costs from Data Communications Services Costs from data communications services relating to Internet access service fees consist primarily of satellite space segment charges, Internet connectivity fees and network operations expenses. Satellite space segment charges consist of the costs associated with obtaining satellite bandwidth (the measure of capacity) used in the transmission of services to and from the satellite leased from operators, depreciation relating to capitalized satellite transponder leases and network operations expenses. Network operations expenses consist primarily of costs associated with the operation of the Network Operation Center (the "NOC"), on a twenty-four hour a day, seven-day a week basis, including personnel and related costs and depreciation. F-7 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Research and Development Research and development expenditures are expensed as incurred. Inventories Inventories, which consist primarily of work-in-progress from costs incurred in connection with specific customer contracts, are stated at the lower of cost (using the first-in, first-out method of accounting) or market value. Progress payments received under long-term contracts are netted against inventories. Cash Equivalents The Company classifies highly liquid financial instruments with a maturity, at the purchase date, of three months or less as cash equivalents. Fixed Assets Fixed assets are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized and repairs and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from three to twenty-five years. Amortization of satellite space segment transponders held under capital lease is calculated using the straight-line method over the estimated useful life of the satellite transponder. Amortization of leasehold improvements and leased equipment is calculated using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Fair Value of Financial Instruments The recorded amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of the Company's obligation under its capital lease was estimated based on the current rates offered to the Company for obligations of similar terms and maturities. The fair value of obligations under the Company's capital lease was not significantly different than the carrying value at June 30, 2002. Stock-Based Compensation The Company accounts for stock option grants using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS No. 148"). Goodwill and Other Intangible Assets Goodwill represents excess of the purchase price over the fair value of the net assets acquired. Beginning in fiscal 2002 with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other indefinite life intangible assets are no longer amortized, but instead tested for impairment at least annually. Prior to fiscal 2002, goodwill and other intangibles were amortized using the straight-line method over periods ranging from five-to-ten years (see Note 7). F-8 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Long-Lived Assets For other than goodwill and indefinite life intangibles, when impairment indicators are present, the Company reviews the carrying value of its assets in determining the ultimate recoverability of their unamortized values using future undiscounted cash flows expected to be generated by the assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. If such assets are considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds the future discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. The Company evaluates the periods of amortization continually in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized cost will be allocated to the increased or decreased number of remaining periods in the revised lives. Reclassifications Certain balances in the prior years have been reclassified to conform to the current year presentation. During fiscal 2002, the Company changed the presentation of its consolidated statement of operations to better represent current industry reporting practices. 3. ACCOUNTS RECEIVABLE At June 30, 2003, the Company had billed and unbilled accounts receivable balances outstanding for contracts in progress of $4,977,000 and $47,000, respectively, and had billed and unbilled accounts receivable balances outstanding for completed contracts of $2,841,000 and $0, respectively. At June 30, 2002, the Company had billed and unbilled accounts receivable balances outstanding for contracts in progress of $11,350,000 and $408,000, respectively, and billed and unbilled accounts receivable balances outstanding for completed contracts of $3,241,000 and $0, respectively. Accounts receivable include amounts billed but not paid by customers pursuant to retainage provisions in connection with ground segment systems, networks and enterprise solutions contracts. At June 30, 2003 and 2002, there was $120,000 and $448,000, respectively, billed but not paid by customers under retainage provisions in connection with long-term contracts. Such balances are included in accounts receivable in the accompanying consolidated balance sheets. Based on the Company's experience with similar contracts in recent years, billed receivables relating to long-term contracts are expected to be collected within one year. Unbilled amounts relating to long-term contracts include recoverable costs and accrued profit on progress completed, which have not been billed. Such amounts are billed in accordance with the contract terms, typically upon shipment of the product, achievement of contractual milestones, or completion of the contract. At June 30, 2003 and 2002, there were no unbilled amounts relating to long-term contracts included in the accompanying consolidated balance sheets. 4. INVENTORIES Inventories consist of the following:
JUNE 30, JUNE 30, 2003 2002 --------------- -------------- (IN THOUSANDS) Raw materials and component parts........................ $ 495 $ 876 Work-in-progress......................................... 10,495 7,718 --------------- -------------- $ 10,990 $ 8,594 =============== ==============
At June 30, 2003 and 2002, there were no progress payments to net against inventories under long-term contracts. F-9 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. FIXED ASSETS Fixed assets consist of the following:
JUNE 30, JUNE 30, 2003 2002 ---------------- ------------- (IN THOUSANDS) Land..................................................... $ 1,750 $ 1,750 Building and improvements................................ 5,992 5,992 Computer equipment....................................... 3,003 2,943 Machinery and equipment.................................. 2,493 2,441 Network Operations Center................................ 6,848 5,600 Satellite earth station equipment........................ 8,304 9,356 Furniture and fixtures................................... 1,331 1,308 Leasehold improvements................................... -- 29 Satellite transponders (see Note 17)..................... -- 11,256 ---------------- ------------- 29,721 40,675 Less accumulated depreciation and amortization........... 12,185 12,191 ---------------- ------------- $ 17,536 $ 28,484 ================ =============
6. INVESTMENTS The Company has various investments in strategic alliance companies that were accounted for under the cost method of accounting, as the Company does not have the ability to exercise significant influence and there are no readily determinable market values for such investments. The Company periodically evaluates the carrying value of these investments to determine that they are recorded at the lower of cost or estimated net realizable value. Due to the significant decline in the public equity markets and the financial uncertainty of such investments, during fiscal 2001 the Company's management evaluated these investments and determined it would be appropriate to write-down these investments to net realizable value. Accordingly, during the fourth quarter of fiscal 2001, the Company recorded an asset impairment charge of approximately $2,857,000, which is included in costs and operating expenses in the accompanying consolidated statement of operations for the fiscal year ended June 30, 2001, and reduced the carrying value of these investments to zero. During December 2000, the Company sold its interest in one of its investments, which was being accounted for under the cost method of accounting, and recorded a gain on sale of investments of approximately $304,000 during fiscal 2001. Such gain was included in the consolidated statement of operations for the fiscal year ended June 30, 2001. 7. GOODWILL Effective July 1, 2001, the Company adopted the new rules on accounting for goodwill and other intangible assets. Under the new rules, goodwill and other indefinite life intangible assets are no longer amortized, but instead tested for impairment at least annually. The Company completed its annual goodwill impairment tests during the fourth quarter of fiscal 2003 for both its ground segment systems, networks and enterprise solutions and data communications services reporting units. Based upon the estimated fair market values, no impairment was identified and no write-down of the net carrying value of goodwill was deemed necessary. In the fourth quarter of fiscal 2002, the Company recognized an impairment charge of approximately $237,000 in connection with its ground segment systems, networks and enterprise solutions reporting unit, representing the net carrying value of goodwill relating to the acquisition of a wireless local loop telephone network solutions business in fiscal 1999. This charge is included in costs and operating expenses in the accompanying consolidated statement of operations for the fiscal year ended June 30, 2002. The net carrying value of goodwill is approximately $7,204,000 at June 30, 2003 and 2002, which relates to the data communications services reporting unit. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company's net loss and basic and diluted net loss per common share would have been as follows: F-10 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. GOODWILL (CONTINUED)
YEARS ENDED JUNE 30, ------------------------------------------------ 2003 2002 2001 --------------- ------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Reported net loss............................................... $ (19,597) $ (17,263) $ (18,699) Add back goodwill amortization, net of tax...................... -- -- 291 --------------- ------------ ------------- Adjusted net loss............................................... $ (19,597) $ (17,263) $ (18,408) =============== ============ ============= Basic and diluted net loss per common share: As reported................................................ $ (1.56) $ (1.36) $ (1.55) Goodwill amortization...................................... -- -- 0.02 --------------- ------------ ------------- Adjusted basic and diluted net loss per common share............ $ (1.56) $ (1.36) $ (1.53) =============== ============ =============
8. COMMON STOCK Stock Issued to Consultants During November 1996, the Company issued a ten-year warrant to five consultants for services to purchase an aggregate of 64,125 shares of common stock at a price per share of $8.07, equal to the fair market value of the shares at the date of issuance. At June 30, 2003, warrants to purchase 55,825 shares of the Company's common stock noted above are outstanding and exercisable. Treasury Stock The Company has a stock repurchase program under which the Company is authorized to repurchase up to $2.0 million of its outstanding common stock. Pursuant to this plan, the Company repurchased 54,100 and 202,000 shares of common stock in fiscal 2003 and 2002, at an aggregate cost of approximately $181,000 and $1,173,000, respectively. Included in the fiscal 2002 repurchases was 200,000 shares repurchased at a fair market price of $5.82 per share from the Company's Chief Executive Officer (see Note 13). The repurchase program allows for purchases to be made intermittently, through open market and privately negotiated transactions. Timing, price, quantity and manner of purchases are at the discretion of the Company's management, depending on market conditions and other factors, subject to compliance with the applicable securities laws. 9. NETSAT RESTRUCTURING During April 2001, in connection with management's plan to reduce costs and to improve NetSat's operating efficiencies, the Company recorded a restructuring charge of approximately $2,490,000 (of which $540,000 was charged to costs from data communications services) during fiscal 2001. The restructuring was 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 integrating operations and reducing costs. As a result of this restructuring, the Company terminated 31 employees including executive management, marketing, administration and operations support personnel. The major components of the restructuring charge included severance payments to terminated NetSat employees of approximately $850,000, fees incurred in connection with the termination of certain leased satellite transponders of approximately $540,000 (charged to costs from data communications services), the write-off of certain capitalized costs in the amount of approximately $620,000 associated with NetSat's terminated financing activities and the write-off of the estimated book value of equipment in the amount of approximately $480,000 in connection with NetSat's discontinuance of certain product lines. During fiscal 2002, the restructuring plan was completed whereby $250,000 was charged against the restructuring accrual of $500,000 for charges relating to space segment cancellation fees, and $250,000 was reversed into income (credited to costs from data communications services) due to the resolution of liabilities for less than originally estimated. In connection with the Company's restructuring plan, the Company also acquired the following minority interests in NetSat: F-11 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. NETSAT RESTRUCTURING (CONTINUED) a) On March 30, 2001, the Company acquired 2,000,000 shares of NetSat's Preferred Stock and 333,334 shares of NetSat's common stock from a minority stockholder for approximately $581,000 in cash, the issuance of 233,334 shares of the Company's common stock and the issuance of a five-year warrant to purchase 262,501 shares of the Company's common stock. b) During April and May 2001, the Company acquired 4,845,704 shares of NetSat's common stock from minority stockholders for approximately $1,212,000 in cash, the issuance of 484,570 shares of the Company's common stock and the issuance of warrants to purchase 545,142 shares of the Company's common stock. c) In connection with the acquisition of the minority interests of NetSat, on May 25, 2001, the Company exchanged all of the current employees outstanding NetSat common stock options for an equal value of the Company's common stock options. As a result, 1,188,808 of NetSat common stock options were exchanged for 50,588 common stock options of the Company. In connection with these transactions, the Company wholly owns NetSat and, accordingly, recorded goodwill of approximately $7,001,000 during fiscal 2001, which represents the excess of the value of the Company's securities issued over the recorded minority interests at the time of the transactions. In accordance with the provisions of SFAS No. 142, effective July 1, 2001, the Company ceased amortizing the goodwill associated with these transactions, which at such time had a remaining balance of $6,913,000 and was being amortized over ten years. Such goodwill was tested for impairment upon the adoption of SFAS No. 142 as of July 1, 2001 and again in connection with the annual asset impairment test during the fourth quarters of fiscal 2002 and 2003 whereby no impairment was identified. 10. STOCK OPTION AND STOCK PURCHASE PLANS On February 26, 1997, the Company's Board of Directors authorized, and the stockholders subsequently approved, the 1997 Stock Incentive Plan ("1997 Plan"), which authorized the granting to employees, directors and consultants of the Company options to purchase an aggregate of 2,280,000 shares of the Company's common stock. In November 2000 and 2001, the Company's stockholders approved amendments to the 1997 Plan whereby the number of shares authorized for issuance under the 1997 Plan increased by 800,000 shares in fiscal 2001 and 2002. Options granted under the 1997 Plan may be either incentive or non-qualified stock options. The exercise price of an option shall be determined by the Company's Board of Directors or compensation committee of the board at the time of grant, however, in the case of an incentive stock option the exercise price may not be less than 100% of the fair market value of such stock at the time of the grant, or less than 110% of such fair market value in the case of options granted to a 10% owner of the Company's stock. Employee options generally vest annually in equal installments over a four-year period and expire on the tenth anniversary of the date of grant. Director options generally vest annually in equal installments over a three-year period commencing on the date of grant and expire the earlier of ten years from the date of grant or one year from concluding service as a director of the Company. The 1997 Plan provides for an automatic increase to the number of options authorized for grant by an amount equal to 1% of the shares of common stock outstanding on the last trading day of each calendar year. During fiscal 2003, 2002 and 2001, the Company increased the number of options authorized for grant under the 1997 Plan pursuant to the automatic 1% provision by 125,644, 127,529 and 119,505, respectively. At June 30, 2003, the remaining options available for grant under the 1997 Plan was 470,569. On September 23, 1998, the Board of Directors adopted, and the stockholders subsequently approved, the 1999 Employee Stock Purchase Plan ("1999 Plan"). Pursuant to the 1999 Plan, 400,000 shares of the Company's common stock will be reserved for issuance. The 1999 Plan is intended to provide eligible employees of the Company, and its participating affiliates, the opportunity to acquire an interest in the Company at 85% of fair market value at date of issuance through participation in the payroll-deduction based employee stock purchase plan. During the years ended June 30, 2003, 2002 and 2001, the Company issued 47,046, 56,821 and 54,905 shares of its common stock to participating employees in connection with the 1999 Plan. At June 30, 2003, the remaining shares available for issuance under the 1999 Plan was 196,966. F-12 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED) The following table summarizes activity in the Company's stock option plan (in thousands, except per share amounts):
YEARS ENDED JUNE 30, ---------------------------------------------------------------------------------------- 2003 2002 2001 --------------------------- --------------------------- ---------------------------- WEIGHTED- WEIGHTED- WEIGHTED- SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE OPTION PRICE OPTION PRICE OPTION PRICE --------- -------------- ---------- ------------- ---------- -------------- Balance, beginning of year... 2,914 $ 8.07 2,382 $ 9.28 1,578 $ 10.10 Grants....................... 449 3.70 734 4.79 944 7.78 Exercised.................... -- -- (10) 3.56 (69) 5.22 Canceled..................... (236) 7.11 (192) 10.86 (71) 11.24 --------- ---------- ---------- Balance, end of year......... 3,127 7.51 2,914 8.07 2,382 9.28 ========= ========== ========== Exercisable, end of year..... 1,821 $ 8.69 1,401 $ 8.87 1,170 $ 8.61 ========= ============== ========== ============= ========== ============== Weighted-average fair value of options granted during the year $ 2.40 $ 3.05 $ 5.21 ============== ============= ==============
The following table summarizes information about stock options outstanding at June 30, 2003 (in thousands, except per share amounts):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------------- ---------------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE ------------------------ ---------------- ------------------ --------------- ----------------- -------------- $ 3.10 - $ 4.42.. 882 8.7 $ 4.02 142 $ 4.19 $ 4.68 - $ 7.02.. 744 5.2 $ 5.43 543 $ 5.26 $ 7.09 - $10.63.. 1,028 5.8 $ 7.94 771 $ 8.12 $10.69 - $15.75.. 289 5.7 $ 12.87 221 $ 13.31 $17.13 - $25.25.. 164 6.2 $ 21.18 125 $ 21.16 $26.69 - $28.00.. 20 6.0 $ 27.90 19 $ 27.90 ---------------- ----------------- 3,127 6.5 $ 7.51 1,821 $ 8.69 ================ =================
The Company has reserved approximately 4,461,000 shares of its common stock for issuance upon exercise of all available and outstanding options and warrants at June 30, 2003. In connection with the acquisition of the minority interests of NetSat in fiscal 2001, the Company cancelled the NetSat 1999 Stock Incentive Plan during the fourth quarter of fiscal 2001. Fair Value Disclosures Pro-forma information regarding net loss and net loss per common share is required by SFAS No. 123 and SFAS No. 148, which also requires that the information be determined as if the Company has accounted for its stock options granted subsequent to July 1, 1995 under the fair value method of that Statement. The fair value of options granted under the Company's 1997 Plan was estimated at date of grant using a Black-Scholes option pricing model with the following assumptions for the years ended June 30, 2003, 2002 and 2001: risk-free interest rate of 3.0% (2003), 4.2% (2002) and 5.4% (2001), volatility factor of the expected market price of the Company's common stock of .79 (2003), ..75 (2002), and .81 (2001), a weighted-average expected life of the option of five years and no dividend yields. F-13 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options under the Black-Scholes option valuation model. For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro-forma information is as follows:
YEARS ENDED JUNE 30, ------------------------------------------------ 2003 2002 2001 --------------- ------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Reported net loss............................................... $ (19,597) $ (17,263) $ (18,699) Pro-forma stock compensation expense............................ (2,707) (2,690) (2,816) --------------- ------------ ------------- Pro-forma net loss.............................................. $ (22,304) $ (19,953) $ (21,515) =============== ============ ============= Reported basic and diluted net loss per common share............ $ (1.56) $ (1.36) $ (1.55) =============== ============ ============= Pro-forma basic and diluted net loss per common share........... $ (1.78) $ (1.57) $ (1.78) =============== ============ =============
During the year ended June 30, 2002 compensation expense of $37,000 was included in the reported net loss. There was no compensation expense included in reported net loss during the years ended June 30, 2003 and 2001. 11. BASIC AND DILUTED NET LOSS PER COMMON SHARE The Company computes net loss per share in accordance with the provisions of SFAS 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 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, as their effect is anti-dilutive. There were no incremental stock options and warrants for the year ended June 30 2003, to exclude from diluted net loss per share. Diluted net loss per share for the years ended June 30, 2002 and 2001, excludes the effect of approximately 172,000 and 415,000 incremental stock options and approximately 0 and 10,000 incremental warrants, respectively, as their effect would have been anti-dilutive. 12. PENSION PLAN The Company maintains a 401(k) plan, which covers substantially all employees of the Company. Participants may elect to contribute from 1% to 100% of their pre-tax compensation, subject to elective deferral limitations under Section 403 of the Internal Revenue Code. Participant contributions up to 4% of pre-tax compensation were fully matched by the Company during the years ended June 30, 2003, 2002 and 2001. In addition, the plan also provides for discretionary contributions by the Company. The Company contributed approximately $460,000, $470,000 and $539,000 to the 401(k) plan during the years ended June 30, 2003, 2002 and 2001, respectively. There were no discretionary contributions made by the Company during the years ended June 30, 2003, 2002 and 2001. 13. RELATED PARTY TRANSACTIONS During fiscal 2002, the Company advanced $300,000 to an officer of the Company. The Company received a promissory note payable on September 30, 2004, which bears interest at an annual rate of 5.0% payable quarterly, and secured by a stock pledge agreement. On May 7, 2002, the officer sold 200,000 shares of the Company's common stock at a fair market price of $5.82 per share F-14 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. RELATED PARTY TRANSACTIONS (CONTINUED) on such date to the Company in connection with its stock repurchase program. The Company deducted amounts outstanding on the promissory note together with accrued interest thereon from the gross proceeds paid to the officer in connection with this transaction. During fiscal 2002, the Company advanced $300,000 to an officer of the Company. The Company received a promissory note payable on September 30, 2004, which bears interest at an annual rate of 5.0% payable quarterly, and secured by a stock pledge agreement. At June 30, 2003 and 2002, principal amounts outstanding under this promissory note are included in other assets and accrued interest receivable thereon is included in other current assets in the accompanying consolidated balance sheets. During fiscal 2001, the Company advanced $200,000 to a former executive officer of the Company. The Company received a promissory note payable on December 31, 2002 for this advance, which bore interest at an annual rate of 5.0% payable quarterly. During fiscal 2002, the Company increased the $200,000 loan to $300,000 and amended the promissory note accordingly. During fiscal 2003, this former executive officer resigned from the board of directors and pursuant to a letter agreement (the "agreement") the Company consolidated the then outstanding loan and advances receivable from this former executive officer and current employee of the Company into a $321,000 promissory note. Under the terms of the letter agreement the Company will forgive the outstanding principal and interest amounts due on the promissory note in five annual installments beginning in January 2004 so long as the former executive officer remains an employee of the Company, subject to the terms of the agreement. At June 30, 2003, the first annual installment to be forgiven in January 2004 with accrued interest outstanding under this promissory note was included in other current assets in the accompanying consolidated balance sheet. The remaining principal amounts to be forgiven subsequent to January 2004 are included in other assets in the accompanying consolidated balance sheet. At June 30, 2002, principal amounts and accrued interest outstanding under this promissory note was included in other current assets in the accompanying consolidated balance sheet. During fiscal 2001, the Company advanced $40,000 to an officer of the Company. The Company received a promissory note payable on December 31, 2002 for this advance, which bore interest at an annual rate of 5.0% payable quarterly. During fiscal 2003, the officer repaid the principal and accrued interest outstanding in full and satisfied the promissory note. At June 30, 2002, principal amounts and accrued interest outstanding under this promissory note are included in other current assets in the accompanying consolidated balance sheet. 14. INCOME TAXES The Company computes income taxes using the liability method. Accordingly, deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to the differences between the carrying amount of the assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities are determined by using enacted tax laws and rates in effect when the differences are expected to reverse. Net deferred tax assets are recorded when it is more likely than not that such tax benefits will be realized. The income tax provision (benefit) for the years ended June 30, 2003, 2002 and 2001 calculated under the provisions of SFAS No.109, Accounting for Income Taxes, are as follows:
YEARS ENDED JUNE 30, ------------------------------------------------ 2003 2002 2001 --------------- ------------ ------------- (IN THOUSANDS) Current: Federal.................................................... $ -- $ -- $ -- State and local............................................ -- -- (342) Foreign.................................................... -- 138 -- --------------- ------------ ------------- -- 138 (342) Deferred, net of valuation allowance............................ -- (138) 1,942 --------------- ------------ ------------- $ -- $ -- $ 1,600 =============== ============ =============
F-15 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. INCOME TAXES (CONTINUED) During fiscal 2003, 2002 and 2001, the Company recorded approximately $1,000, $372,000 and $342,000 of state investment tax credits. During fiscal 2002, approximately $75,000 of the tax benefit was recorded as an offset to state and local capital taxes, approximately $138,000 was recorded as an offset to the foreign income tax provision recorded by Globecomm Systems Europe Limited and the remaining $159,000 was recorded as a reduction in general and administrative expenses in the accompanying consolidated statement of operations. In the fourth quarter of fiscal 2001, the Company acquired the remaining minority interests in NetSat from certain minority shareholders. Accordingly, for federal income tax purposes the Company and NetSat files a consolidated income tax return. Significant components of the Company's deferred tax assets (liabilities) are as follows:
JUNE 30, 2003 JUNE 30, 2002 ------------------ ----------------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards.............................. $ 27,092 $ 21,476 Projects in progress.......................................... -- 135 Accruals and reserves......................................... 2,827 1,292 Write-down of investments..................................... 806 1,280 State investment tax credit carryforwards..................... 125 138 ------------------ ----------------- 30,850 24,321 Valuation allowance for deferred tax assets..................... (27,574) (23,157) ------------------ ----------------- 3,276 1,164 Deferred tax liabilities: Depreciation and amortization................................. (3,096) (1,026) Projects in progress.......................................... (55) -- ------------------ ----------------- (3,151) (1,026) ------------------ ----------------- Net deferred tax assets......................................... $ 125 $ 138 ================== =================
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 deferred tax assets is dependent upon the generation of future taxable income prior to the expiration of any net operating loss carryforwards. Due to the uncertainty regarding the Company's ability to utilize its net operating losses in the future, the Company has provided a valuation allowance against its operating losses and temporary differences except for approximately $125,000 representing state investment tax credit carryforwards that will be utilized to offset state capital taxes on the Company's combined state tax return. For the years ended June 30, 2003, 2002 and 2001, the valuation allowance increased approximately $4,417,000, $5,756,000 and $7,743,000, respectively. Approximately $2,046,000 of the remaining valuation allowance, if recognized, will be allocated directly to stockholders' equity relating to non-qualified dispositions of stock option exercises. The Company has available net operating loss carryforwards of approximately $67,731,000 ($25,267,000 and $42,464,000 for the Company and NetSat, respectively), which are due to expire beginning in 2015 through 2023. Utilization of the net operating loss carryforwards may be subject to an annual limitation pursuant to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. F-16 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. INCOME TAXES (CONTINUED) The reconciliations of tax provision (benefit) computed at the U.S. federal statutory tax rates to the effective income tax rates on pre-tax losses are as follows:
YEARS ENDED JUNE 30, ------------------------------------------------- 2003 2002 2001 --------------- ------------ -------------- Tax at U.S. Federal statutory rate.............................. (34)% (34)% (34)% Losses for which no tax benefit was received.................... 34 34 45 State taxes..................................................... -- -- (1) --------------- ------------ -------------- --% --% 10% =============== ============ ==============
15. SEGMENT INFORMATION The Company operates through two business segments. Its ground segment systems, networks and enterprise solutions segment, through Globecomm Systems Inc. and Globecomm Systems Europe Limited, is engaged in the design, assembly and installation of ground segment systems, networks and enterprise solutions. Its data communications services segment, through NetSat, is engaged in providing high-speed, satellite-delivered data communications. NetSat also provides 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 as of and for the years ended June 30, 2003, 2002 and 2001:
YEARS ENDED JUNE 30, ------------------------------------------------ 2003 2002 2001 -------------- -------------- ------------ (IN THOUSANDS) Revenues: Ground segment systems, networks and enterprise solutions....... $ 40,125 $ 64,101 $ 78,744 Data communications services.................................... 13,903 22,478 24,170 -------------- -------------- ------------ Total revenues.................................................... $ 54,028 $ 86,579 $ 102,914 ============== ============== ============ Loss from operations: Ground segment systems, networks and enterprise solutions....... $ (12,548) $ (7,149) $ (4,865) Data communications services.................................... (6,946) (10,155) (8,538) Interest income................................................... 422 1,030 3,194 Interest expense.................................................. (539) (957) (6,579) Gain on sale of investment........................................ -- -- 304 Intercompany eliminations......................................... 14 (32) 35 -------------- -------------- ------------ Loss before income taxes and minority interest in operations of consolidated subsidiary........................... $ (19,597) $ (17,263) $ (16,449) ============== ============== ============ Depreciation and amortization: Ground segment systems, networks and enterprise solutions....... $ 1,595 $ 1,598 $ 1,695 Data communications services.................................... 1,951 2,075 5,543 Intercompany eliminations....................................... (14) (12) (9) -------------- -------------- ------------ Total depreciation and amortization............................... $ 3,532 $ 3,661 $ 7,229 ============== ============== ============
F-17 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SEGMENT INFORMATION (CONTINUED)
YEARS ENDED JUNE 30, ------------------------------------------------ 2003 2002 2001 -------------- -------------- ------------ (IN THOUSANDS) Expenditures for long-lived assets: Ground segment systems, networks and enterprise solutions....... $ 187 $ 935 $ 2,054 Data communications services.................................... 1,585 752 3,428 Intercompany eliminations....................................... (40) -- (132) -------------- -------------- ------------ Total expenditures for long-lived assets.......................... $ 1,732 $ 1,687 $ 5,350 ============== ============== ============ JUNE 30, JUNE 30, JUNE 30, 2003 2002 2001 -------------- -------------- ------------ (IN THOUSANDS) Assets: Ground segment systems, networks and enterprise solutions....... $ 118,180 $123,484 $ 136,103 Data communications services.................................... 10,405 20,106 21,985 Intercompany eliminations....................................... (58,241) (43,293) (33,089) -------------- -------------- ------------ Total assets...................................................... $ 70,344 $100,297 $ 124,999 ============== ============== ============
At June 30, 2003, 2002 and 2001, the Company had total assets of $3,177,000, $2,012,000 and $4,773,000, and long-lived assets of $56,000, $32,000 and $40,000, respectively, located in the United Kingdom, associated with its wholly-owned subsidiary, Globecomm Systems Europe Limited. 16. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK The Company designs, assembles and installs satellite ground segment systems, networks and enterprise solutions for customers in diversified geographic locations. Credit risk with respect to accounts receivable is concentrated due to the limited number of customers. The timing of cash realization is determined based upon the contract or service agreements with the customers. The Company performs ongoing credit evaluations of its customers' financial condition and in most cases requires a letter of credit or cash in advance for foreign customers. Allowances related to accounts receivable at June 30, 2003, 2002 and 2001, are approximately $4,805,000, $4,683,000 and $1,065,000, respectively. No major customer accounted for more than 10% of the Company's consolidated revenues for the year ended June 30, 2003. One major customer accounted for approximately 11% of the Company's consolidated revenues for the years ended June 30, 2002 and 2001. Revenues earned from ground segment systems, networks and enterprise solutions are attributed to the geographic location in which the equipment is shipped. Revenues earned from data communications services are attributed to the geographic location in which the services are being provided. Revenues from foreign sales as a percentage of total consolidated revenues are as follows:
YEARS ENDED JUNE 30, ------------------------------------------------- 2003 2002 2001 --------------- -------------- ------------ Africa............................................ 7% 3% 2% South America..................................... 13% 9% 8% Asia.............................................. 16% 16% 10% Europe (15% in the UK in 2002).................... 14% 31% 21% Middle East....................................... 12% 14% 13% Australia......................................... 1% 2% 2% --------------- -------------- ------------ 63% 75% 56% =============== ============== ============
F-18 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade receivables. The Company places its cash and cash equivalents with high quality financial institutions. Substantially all cash and cash equivalents are held in three financial institutions at June 30, 2003 and 2002, respectively. Cash equivalents are comprised of short-term debt instruments and certificates of deposit of direct or guaranteed obligations of the United States, which are held to maturity and approximate fair market value. At times, cash may be in excess of Federal Deposit Insurance Company insurance limits. 17. COMMITMENTS AND CONTINGENCIES Line of Credit At June 30, 2003, the Company maintained a $5,000,000 working capital line of credit with a bank, which bore interest at the prime rate (4.0% at June 30, 2003) and was collateralized by a first security interest on most of its assets. In May and July 2003, the credit facility was renewed for additional time while the Company worked to establish a new bank agreement. The credit facility, which was extended to September 10, 2003, contained certain financial covenants, with which the Company was in compliance with at June 30, 2003. As of June 30, 2003, no amounts were outstanding under this credit facility, however, there were outstanding standby letters of credit, bid proposals and performance guarantees of approximately $4,069,000, which were applied against and reduced the amounts available under the working capital line of credit. In September 2003, the Company entered into a new one year credit agreement with the existing bank, which provides for a working capital credit facility of up to $7,500,000 consisting of a $3,750,000 secured domestic line of credit and a $3,750,000 Export-Import Bank secured guaranteed line of credit. The Company will be advanced up to 80% of eligible domestic accounts receivable and 90% of eligible foreign accounts receivable under each respective line of credit, as defined in the agreement. Each line of credit bears interest at the greater of 6.0% or the prime rate plus 2.0% per annum, and is collateralized by a first security interest on all personal property of the Company. The credit agreement allows the Company to borrow and apply letters of credit against the availability under each line of credit. In addition, the new credit agreement contains certain financial and other covenants, deposit requirements, monthly reporting provisions and other requirements, as defined. The Company utilizes standby letters of credit to secure certain bid proposals, performance guarantees, and service agreements with third party vendors in the normal course of business. As of June 30, 2003 and 2002, the Company had standby letters of credit, bid proposals and performance guarantees outstanding of approximately $4,069,000 and $3,638,000, respectively, which were secured by the Company's working capital line of credit. The Company provides cash collateral for certain letters of credit. As of June 30, 2003 and 2002, the Company had cash collateral related to bid proposals of approximately $20,000 and $0, respectively, and had approximately $588,000 of cash collateral related to performance guarantees. These amounts are included in restricted cash in the accompanying consolidated balance sheets. Lease Transactions In connection with management's plan to reduce costs, the Company entered into a series of agreements that resulted in a continuous reduction of its satellite bandwidth obligations, as follows: In April 2001, the Company renegotiated a 15-year satellite space segment transponder lease entered into by NetSat during fiscal 2000, which changed the terms and economics of the agreement and resulted in a change in accounting for such lease from capital to operating. Accordingly, the change in accounting reduced the Company's capital lease obligations by approximately $84,261,000 with a corresponding reduction in net fixed assets of approximately $80,620,000, resulting in a deferred liability of approximately $3,641,000, which was being amortized into income over the remaining term of the lease. During the year ended June 30, 2002, NetSat amortized $300,000 of the deferred liability into income which is included as a credit to costs from data communications services, resulting in a balance of approximately $3,341,000 in deferred liabilities in the accompanying consolidated balance sheet at June 30, 2002. In June 2002, NetSat amended the renegotiated satellite space segment transponder lease to reduce the short-term cash commitment under such agreement in exchange for a twelve-month extension of the lease term. As a result of this modification, the Company will record the remaining lease commitment on a straight-line basis over the remaining term of the transponder lease. Accordingly, during 2002, the Company recorded a deferred liability of $319,000, to reflect the straight-lining of such lease payments. Such amount is included in deferred liabilities in the accompanying consolidated balance sheet at June 30, 2002. F-19 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. COMMITMENTS AND CONTINGENCIES (CONTINUED) In October 2002, the Company reached an agreement with one of its satellite transponder vendors, which further modified and reduced the Company's satellite bandwidth obligations. Under the terms of this agreement, the Company paid $7,574,000, which included a one-time termination fee of $3,586,000, and $3,988,000, which primarily related to outstanding invoices and an additional security deposit, assigned $31,573,000 of future contract revenues to the vendor and reduced the Company's future space segment obligations by $52,209,000. Accordingly, the Company recorded a charge to costs from data communications services of $782,000 in the second quarter of fiscal 2003, representing the difference between the $3,586,000 termination fee and the corresponding reduction in the deferred liability of $2,804,920, which was to be amortized into income over the remaining term of the lease. At June 30, 2003, the remaining balance in deferred liabilities relating to this lease was $1,620,000, which will be amortized into income over the remaining term of the lease. In February 2003, the Company reached an agreement with another of its satellite transponder vendors, which terminated its capital lease and continued the reduction of the Company's satellite bandwidth obligations. Under the terms of this agreement, the Company paid a one-time termination fee of $556,000, assigned $4,557,000 of future contract revenues to the vendor and reduced the Company's future space segment obligations by $16,563,000. The difference between the reduction of capital lease obligation of $9,835,000 and the reduction of the related net fixed assets of $8,876,000 or $959,000, less the one-time termination fee of $556,000 was recorded as a deferred gain of $403,000. The gain is being deferred as the Company has guaranteed six months of revenues assigned to the vendor. If the assigned revenues are not paid to the vendor, the Company will be responsible to satisfy the obligation. The deferred liability will be amortized into income monthly when the guaranteed payments are satisfied. During the fourth quarter of fiscal 2003, based on confirmation of payments received by the vendor, the Company amortized $196,000 of the deferred liability into income which is included as a credit to costs from data communications services, resulting in a balance of approximately $207,000 in deferred liabilities in the accompanying consolidated balance sheet at June 30, 2003. At June 30, 2002, the satellite space segment transponder under capital lease was included in fixed assets with a capitalized cost of approximately $11,256,000 and accumulated amortization of approximately $1,930,000. Lease Commitments The Company currently leases satellite space segment services, office space, teleport services and other equipment under various operating leases, which expire in various years through 2008. As leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements contain renewal options. Future minimum lease payments under non-cancelable operating leases for satellite space segment services, Internet access services, teleport services, office space and other equipment with terms of one year or more consist of the following at June 30, 2003 (in thousands): 2004........................................................ $ 6,115 2005........................................................ 6,336 2006........................................................ 5,821 2007........................................................ 5,058 2008........................................................ 2,299 Thereafter.................................................. 646 ----------------- $ 26,275 =================
Rent expense for satellite space segment services, Internet access services, teleport services, office space and other equipment was approximately $8,256,000, $17,082,000 and $11,051,000 for the years ended June 30, 2003, 2002 and 2001, respectively. In fiscal 2002, the Company entered into a forty-eight month lease agreement as the lessor of satellite earth station equipment, which is being classified as an operating lease and expires in May 2006. At June 30, 2003 and 2002, equipment under this operating lease had a net book value of approximately $416,000 and $562,000, respectively and is included in fixed assets in the accompanying consolidated balance sheets. At June 30, 2003, future minimum lease payments to be received from equipment under this operating lease are as follows: $186,000 in 2004, $186,000 in 2005 and $155,000 in 2006. F-20 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. COMMITMENTS AND CONTINGENCIES (CONTINUED) During fiscal 2001, the Company entered into two thirty-six month operating lease agreements for satellite space segment transponders on two satellites that were expected to be launched in late 2002 and operational by March 2003. Future payments due on such agreements through fiscal 2007 are approximately $6,000,000. Such satellite space segment services are scheduled to begin when the satellite transponders are commercially operational, as defined in the agreements. During fiscal 2003, the Company learned that the vendor has experienced significant delays in the planned launch and operational dates for the satellites. As of result of these delays, the Company maintains that it has a right to terminate the contracts without cost and has provided notification of such termination. The vendor has denied the Company's assertion that it has a right to terminate the contracts without cost. If the Company's position were sustained, total operating lease commitments would be reduced by approximately $6,000,000. Employment Agreements During October 2001, the Company entered into three-year employment agreements with six officers and one former officer for an aggregate amount of approximately $1,214,000 per year. The Company will have certain obligations to these individuals if they are terminated for disability or following a change in control. Each employment agreement renews automatically for additional terms of one year, unless either party provides written notice to the other party of its intention to terminate the agreement. During fiscal 2003, the Board of Directors approved increases bringing the aggregate amount to approximately $1,343,000 per year. During January 2002, the Company entered into a three-year employment agreement with an officer for an amount of $275,000 per year. The Company will have certain obligations to this officer if terminated for disability or following a change in control. The employment agreement renews automatically for additional terms of one year, unless either party provides written notice to the other party of its intention to terminate the agreement. In January 2003, the Company entered into a separation agreement and general release whereby the employment relationship with this officer was terminated. In accordance with the terms of this agreement, the Company agreed to pay the officer severance of $450,000, consisting of a lump sum payment of $250,000 and an additional $200,000 to be paid monthly for thirty-six months beginning in July 2003, based on certain conditions defined in the agreement. F-21 GLOBECOMM SYSTEMS INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS --------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER ACCOUNTS- DEDUCTIONS- END OF DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD ----------- -------------- ------------- ---------------- -------------- -------------- Year ended June 30, 2003: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts receivable...... $ 4,683,000 $ 683,000 $ -- $ (561,000) (b) $ 4,805,000 Valuation allowance on deferred tax assets............... 23,157,000 -- 4,417,000 (a) -- 27,574,000 -------------- ------------- ---------------- -------------- -------------- $27,840,000 $ 683,000 $4,417,000 $ (561,000) $32,379,000 ============== ============= ================ ============== ============== Year ended June 30, 2002: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts receivable..... $ 1,065,000 $3,951,000 $ -- $ (333,000) (b) $ 4,683,000 Valuation allowance on deferred tax assets.............. 17,401,000 -- 5,756,000 (a) -- 23,157,000 -------------- ------------- ---------------- -------------- -------------- $18,466,000 $3,951,000 $5,756,000 $ (333,000) $27,840,000 ============== ============= ================ ============== ============== Year ended June 30, 2001: Reserves and allowance deducted from asset accounts: Reserve for estimated doubtful accounts receivable..... $ 467,000 $ 680,000 $ -- $ (82,000) (b) $ 1,065,000 Valuation allowance on deferred tax assets.............. 9,658,000 -- 7,743,000 (a) -- 17,401,000 Valuation allowance on leased receivables............. -- 1,073,000 -- (1,073,000) (c) -- -------------- ------------- ---------------- -------------- -------------- $10,125,000 $1,753,000 $7,743,000 $(1,155,000) $18,466,000 ============== ============= ================ ============== ==============
(a) Increase in valuation allowance for net deferred tax assets. (b) Reduction in allowance due to write-off of accounts receivable balances (net of recovery). (c) Reduction in reserve due to write-off of leased receivables. S-1 INDEX OF EXHIBITS: EXHIBIT NO. 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1999). 3.2 Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 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 Registrant defining rights of holders of Common Stock of the Registrant (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-1, File No. 333-22425 (the "Registration Statement")). 10.1 Form of Registration Rights Agreement dated as of February 1997 (incorporated by reference to Exhibit 10.1 of the Registration Statement). 10.2 Form of Registration Rights Agreement dated May 30, 1996 (incorporated by reference to Exhibit 10.2 of the Registration Statement). 10.3 Form of Registration Rights Agreement dated December 31, 1996, as amended (incorporated by reference to Exhibit 10.3 of the Registration Statement). 10.4 Letter Agreement for purchase and sale of 199,500 shares of Common Stock dated November 9, 1995 between the Registrant and Thomson-CSF (incorporated by reference to Exhibit 10.4 of the Registration Statement). 10.5 Investment Agreement dated February 12, 1996 by and between Shiron Satellite Communications (1996) Ltd. and the Registrant (incorporated by reference to Exhibit 10.5 of the Registration Statement). 10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the Registrant (incorporated by reference to Exhibit 10.6 of the Registration Statement). 10.7 Memorandum of Understanding dated December 18, 1996 by and between NetSat Express, Inc. and Applied Theory Communications, Inc. (incorporated by reference to Exhibit 10.7 of the Registration Statement). 10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by reference to Exhibit 10.8 of the Registration Statement). 10.9 Employment Agreement dated as of January 27, 1997 between the Registrant and David E. Hershberg (incorporated by reference to Exhibit 10.9 of the Registration Statement). 10.10 Employment Agreement dated as of January 27, 1997 between the Registrant and Kenneth A. Miller (incorporated by reference to Exhibit 10.10 of the Registration Statement). 10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between Eaton Corporation and the Registrant (incorporated by reference to Exhibit 10.13 of the Registration Statement). 10.12 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 of the Registration Statement). 10.13 Investment Agreement dated August 21, 1998 by and between McKibben Communications LLC and the Registrant (incorporated by reference to Exhibit 10.13 of the Registrant'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 S-8 of the S-8 Registration Statement). 10.15 Rights Agreement, dated as of December 3, 1998, between the Registrant and American Stock Transfer and Trust 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 Registrant'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 Registrant'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 Registrant'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 Registrant's Quarterly Report on Form 10-Q, for the quarter ended September 30, 1999). 10.19 Negotiable Promissory Note, dated April 1, 2001, between the Registrant and Donald Woodring (incorporated by reference to Exhibit 10.19 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.20 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.21 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001). 10.22 Employment Agreement, dated as of October 9, 2001, by and between Donald G. Woodring and the Registrant (incorporated by reference to Exhibit 10.22 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.23 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.24 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.25 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.26 of the Registrant'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 Registrant (incorporated by reference to Exhibit 10.27 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended December 31, 2001). 10.28* Settlement Agreement, dated as of October 1, 2002, by and between Loral Skynet(R), a division of Loral SpaceCom Corporation and the Registrant (incorporated by reference to Exhibit 10.28 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended September 30, 2002). 10.29 Separation Agreement and General Release, dated as of January 22, 2003, by and between G. Patrick Flemming and the Registrant (incorporated by reference to Exhibit 10.29 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended December 31, 2002). 10.30 Letter Agreement, dated as a January 31, 2003, by and between Donald G. Woodring and the Registrant (incorporated by reference to Exhibit 10.30 of the Registrant's Quarterly Report on Form 10-Q, for the quarter ended December 31, 2002). 10.31 Loan and Security Agreement, dated as of September 25, 2003, by and between Silicon Valley Bank and the Registrant (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23 Consent of Independent Auditors (filed herewith). 31.1 Chief Executive Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended (filed herewith). 31.2 Chief Financial Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended (filed herewith). 32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002 (filed herewith). EX-10.31 3 file002.txt LOAN AND SECURITY AGREEMENT EX 10.31 - -------------------------------------------------------------------------------- SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT BORROWER: GLOBECOMM SYSTEMS INC., A DELAWARE CORPORATION ADDRESS: 45 OSER AVENUE HAUPPAUGE, NEW YORK 11788 DATE: SEPTEMBER 25, 2003 THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462 ("Silicon") and the borrower named above (the "Borrower"), with offices located at the above address ("Borrower's Address"). The Schedule and Exhibits to this Agreement (the "Schedule" and the "Exhibits," respectively) shall for all purposes be deemed to be part of this Agreement, and the same are integral parts of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.) 1. LOANS. 1.1 LOANS. Silicon will make loans to Borrower (the "Loans") up to the amounts (the "Credit Limit") shown on the Schedule, provided no Default or Event of Default has occurred and is continuing, and subject to deduction of any Reserves for accrued interest and such other Reserves as Silicon deems proper from time to time. Amounts borrowed may be repaid and reborrowed during the term of this Agreement. 1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Silicon's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Silicon may, in its discretion, charge interest to Borrower's Deposit Accounts maintained with Silicon. In the event in any month the amount of interest payable hereunder together with the interest payable under the Exim Agreement is less than the Minimum Monthly Interest (as shown the Schedule), Borrower shall pay to Silicon, in lieu of the interest otherwise due hereunder or under the Exim Agreement, the Minimum Monthly Interest. 1.3 OVERADVANCES. If at any time or for any reason the total of all outstanding Loans and all other Obligations exceeds the Credit Limit (an "Overadvance"), Borrower shall promptly pay (but in no event later than within three (3) days) the amount of the excess to Silicon, without notice or demand. Without limiting Borrower's obligation to repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay Silicon interest on the outstanding amount of any Overadvance, on demand, at a rate equal to the interest rate which would otherwise be applicable to the Overadvance, plus an additional two percent (2%) per annum. 1.4 FEES. Borrower shall pay Silicon the fees shown on the Schedule, which are in addition to all interest and other sums payable to Silicon and are not refundable. 1.5 LETTERS OF CREDIT. At the request of Borrower, Silicon may, in its commercially reasonable discretion, issue or arrange for the issuance of letters of credit for the account of Borrower, in each case in form and substance satisfactory to Silicon in its commercially reasonable discretion (collectively, "Letters of Credit"). The aggregate face amount of all outstanding Letters of Credit from time to time (plus all Silicon exposure under any foreign exchange contracts and Cash Management Services) shall not exceed the amount shown on the Schedule (the SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- "Letter of Credit Sublimit"), and shall be reserved against Loans which would otherwise be available hereunder. Borrower shall pay all bank charges (including charges of Silicon) for the issuance of Letters of Credit, together with such additional fee as Silicon's letter of credit department shall charge in connection with the issuance of the Letters of Credit. Any payment by Silicon under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made. Each Letter of Credit shall have an expiry date no later than thirty days prior to the Maturity Date. Borrower hereby agrees to indemnify, save, and hold Silicon harmless from any loss, cost, expense, or liability, including payments made by Silicon, expenses, and reasonable attorneys' fees incurred by Silicon arising out of or in connection with any Letters of Credit. Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Silicon and opened for Borrower's account or by Silicon's interpretations of any Letter of Credit issued by Silicon for Borrower's account, and Borrower understands and agrees that Silicon shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto. Borrower understands that Letters of Credit may require Silicon to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Silicon harmless with respect to any loss, cost, expense, or liability incurred by Silicon under any Letter of Credit as a result of Silicon's indemnification of any such issuing bank. The provisions of this Loan Agreement, as it pertains to Letters of Credit, and any other present or future documents or agreements between Borrower and Silicon relating to Letters of Credit are cumulative. 1.6 CASH MANAGEMENT SERVICES SUBLIMIT. In addition to Section 1.5 above, Borrower may also use up to the amount set forth on the Schedule for Cash Management Services. Such aggregate amounts utilized under the Cash Management Services Sublimit shall at all times reduce the amount otherwise available for Loans, letters of credit, foreign exchange contracts or other credit accommodations hereunder. Any amounts Silicon pays on behalf of Borrower or any amounts that are not paid by Borrower for any Cash Management Services will be treated as Loans hereunder and will accrue interest at the interest rate applicable to Loans. 2. SECURITY INTEREST. 2.1 SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, and the performance of each of the Borrower's duties under this Agreement and all documents executed in connection herewith, Borrower hereby grants to Silicon a continuing security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located: All Inventory, Equipment, Payment Intangibles, Letter-of-Credit Rights, Supporting Obligations, Receivables, and General Intangibles, all of Borrower's Deposit Accounts, and all money, and all property now or at any time in the future in Silicon's possession (including claims and credit balances), and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Silicon may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the "Collateral"). The security interest granted herein shall be a first priority security interest in the Collateral. Upon the occurrence and continuation of an Event of Default, Silicon may place a "hold" on any Deposit Account pledged as collateral. Except as disclosed to Silicon in writing, Borrower is not a party to, nor is bound by, any material license or other agreement with respect to which the Borrower is the licensee that prohibits or otherwise restricts Borrower from granting a security interest in Borrower's interest in such license or agreement or any other property. Without prior consent from Silicon, Borrower shall not enter into, or become bound by, any such license or agreement which is reasonably likely to have a material impact on Silicon's business or financial condition. Borrower shall take such steps as Silicon reasonably requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for all such licenses or contract rights to be deemed "Collateral" and for Silicon to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement, whether now existing or entered into in the future. If Borrower shall at any time, acquire a commercial tort claim, Borrower shall promptly notify Silicon in a writing signed by Borrower of the brief details thereof and grant to Silicon in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Silicon. 2 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- Notwithstanding the foregoing, the Collateral does not include: any copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, now owned or later acquired; any patents, trademarks, service marks and applications therefor; any trade secret rights, including any rights to unpatented inventions, now owned or hereafter acquired. Notwithstanding the foregoing, the Collateral shall include all accounts, license and royalty fees and other revenues, proceeds, or income arising out of or relating to any of the foregoing intellectual property. Notwithstanding the foregoing, it is expressly acknowledged and agreed that the security interest created in this Agreement only with respect to Foreign Accounts and Foreign Inventory (as such terms are defined in the Exim Agreement) and the intangibles related thereto, is subject to and subordinate to the security interest granted to Silicon in the Exim Agreement with respect to such Foreign Accounts and Foreign Inventory. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to induce Silicon to enter into this Agreement and to make Loans, Borrower represents and warrants to Silicon as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a material adverse effect on Borrower. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), (iii) do not violate Borrower's articles or certificate of incorporation, Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give Silicon 30 days' prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Silicon at least 30 days prior written notice before opening any additional place of business, changing its chief executive office, changing its state of formation or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule. 3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Silicon now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Silicon and the Collateral against all claims of others. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as 3 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Silicon, use all reasonable efforts to cause such third party to execute and deliver to Silicon, in form reasonably acceptable to Silicon, such waivers and subordinations as Silicon shall specify, so as to ensure that Silicon's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. 3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good working condition, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise Silicon in writing of any material loss or damage to the Collateral. 3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with generally accepted accounting principles. 3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will completely and accurately reflect the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Silicon and the date hereof, there has been no material adverse change in the financial condition or business of Borrower. Borrower is now and will continue to be solvent. 3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Silicon in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and all environmental matters. 3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency which may result, either separately or in the aggregate, in any material adverse change in the financial condition or business of Borrower, or in any material impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of $200,000 or more, or involving $200,000 or more in the aggregate. 4 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for working capital purposes. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 4. RECEIVABLES. 4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants to Silicon as follows: Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, (i) represent an undisputed bona fide existing obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services in the ordinary course of Borrower's business, and (ii) meet the Minimum Eligibility Requirements set forth in Section 8 below. 4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower represents and warrants to Silicon as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be, and all signatories and endorsers have the capacity to contract. All sales and other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations. All signatures and endorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver to Silicon transaction reports and loan requests, schedules and assignments of all Receivables, and schedules of collections, all on Silicon's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Silicon's security interest and other rights in all of Borrower's Receivables, nor shall Silicon's failure to advance or lend against a specific Receivable affect or limit Silicon's security interest and other rights therein. In the event Borrower has elected to be on "non-borrowing reporting status" (see Section 6 of the Schedule), Borrower shall furnish Silicon with a Loan request at least thirty (30) days prior to the requested funding date. Otherwise, Loan requests received after 12:00 Noon will not be considered by Silicon until the next Business Day. Together with each such schedule and assignment, or later if requested by Silicon, Borrower shall furnish Silicon with copies (or, at Silicon's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Silicon an aged accounts receivable trial balance in such form and at such intervals as Silicon shall request. In addition, Borrower shall deliver to Silicon the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, immediately upon receipt thereof and in the same form as received, with all necessary indorsements, all of which shall be with recourse. Borrower shall also provide Silicon with copies of all credit memos within two days after the date issued. 4.4 COLLECTION OF RECEIVABLES. Borrower shall cause the Account Debtors to remit all Receivables to Silicon and Silicon shall hold all payments on, and proceeds of, Receivables in a lockbox account, or such other "blocked account" as Silicon may specify, pursuant to a blocked account agreement in such form as Silicon may specify. All such payments on, and proceeds of, Receivables shall be applied to the Obligations in such order as Silicon shall determine. Silicon or its designee may, at any time, notify Account Debtors that the Receivables have been assigned to Silicon. 4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to Silicon in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as Silicon shall determine; provided that, if no Default or Event of Default has occurred, Borrower shall not be obligated to remit to 5 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- Silicon the proceeds of the sale of worn out or obsolete equipment disposed of by Borrower in good faith in an arm's length transaction for an aggregate purchase price of $25,000 or less (for all such transactions in any fiscal year). Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Silicon. Nothing in this Section 4.5 limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or claims relating to Receivables. Borrower shall not forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to Silicon on the regular reports provided to Silicon; (ii) no Default or Event of Default has occurred and is continuing; and (iii) taking into account all such discounts settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit. Silicon may, at any time after the occurrence and during the continuation of an Event of Default, settle or adjust disputes or claims directly with Account Debtors for amounts and upon terms which Silicon considers advisable in its reasonable credit judgment and, in all cases, Silicon shall credit Borrower's Loan account with only the net amounts received by Silicon in payment of any Receivables. 4.7 RETURNS. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount (sending a copy to Silicon). In the event any attempted return occurs after the occurrence and during the continuation of any Event of Default, Borrower shall (i) hold the returned Inventory in trust for Silicon, (ii) segregate all returned Inventory from all of Borrower's other property, (iii) conspicuously label the returned Inventory as Silicon's property, and (iv) immediately notify Silicon of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on Silicon's request deliver such returned Inventory to Silicon. 4.8 VERIFICATION. Silicon may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Silicon or such other name as Silicon may choose. 4.9 NO LIABILITY. Silicon shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Silicon be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve Silicon from liability for its own gross negligence or willful misconduct. 5. ADDITIONAL DUTIES OF THE BORROWER. 5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule. 5.2 INSURANCE. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Silicon, in such form and amounts as Silicon may reasonably require, and Borrower shall provide evidence of such insurance to Silicon, so that Silicon is satisfied that such insurance is, at all times, in full force and effect. All such insurance policies shall name Silicon as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such insurance, Silicon shall apply such proceeds in reduction of the Obligations as Silicon shall determine in its sole discretion, except that, provided no Default or Event of Default has 6 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- occurred and is continuing, Silicon shall release to Borrower insurance proceeds with respect to Equipment totaling less than $500,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Silicon may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to Silicon copies of all reports made to insurance companies. 5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Silicon shall from time to time reasonably specify. 5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one Business Day's notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower's expense and the charge therefor shall be $750 per person per day (or such higher amount as shall represent Silicon's then current standard charge for the same), plus reasonable out of pocket expenses. Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first obtaining Silicon's written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give Silicon the same rights with respect to access to books and records and related rights as Silicon has under this Loan Agreement. 5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower shall not, without Silicon's prior written consent, do any of the following: (i) merge or consolidate with another corporation or entity; (ii) acquire any assets, except in the ordinary course of business; (iii) enter into any other transaction outside the ordinary course of business; (iv) sell or transfer any Collateral, except for (i) the sale of finished Inventory in the ordinary course of Borrower's business, (ii) non-exclusive licenses in the ordinary course of Borrower's business, and (iii) the sale of obsolete or unneeded Equipment in the ordinary course of business; (v) store any Inventory or other Collateral with any warehouseman or other third party outside the ordinary course of business (which locations of all such Collateral shall be made available to Silicon upon Silicon's request); (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii) make any loans of any money or other assets; (viii) incur any debts outside the ordinary course of business; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity; (x) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock; (xii) make any change in Borrower's capital structure which would have a material adverse effect on Borrower or on the prospect of repayment of the Obligations; or (xiii) dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section 5.5 are only permitted if no Default or Event of Default would occur as a result of such transaction. 5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Silicon with respect to any Collateral or in any manner relating to Borrower, Borrower shall, without expense to Silicon, make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by Silicon, to execute all documents and take all actions, as Silicon may deem reasonably necessary or useful in order to perfect and maintain Silicon's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 7 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 6. TERM. 6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the "Maturity Date"); provided that the Maturity Date may be extended upon written agreement of the parties hereto. 6.2 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit issued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to the face amount of all such Letters of Credit plus all interest, fees and cost due or to become due in connection therewith, to secure all of the Obligations relating to said Letters of Credit, pursuant to Silicon's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Silicon's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, Silicon may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination relieve Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and written termination of this Agreement by Silicon, Silicon shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Silicon's security interests. 7. EVENTS OF DEFAULT AND REMEDIES. 7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give Silicon immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Silicon by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit and shall not be timely repaid in accordance with Section 1.3; or (d) Borrower shall fail to comply with any of the financial covenants set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within 5 Business Days after the date due; or (f) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within 10 days after the occurrence of the same, or immediately upon the service of process upon Silicon seeking to attach by trustee, mesne or other process, any of Borrower's funds on deposit with, or assets of the Borrower in the possession of, Silicon; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a material adverse effect on Borrower's business or financial condition; or (i) Dissolution, termination of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within 30 days after the date commenced; or (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all 8 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower defaults under any agreement evidencing any indebtedness to any third party; or (n) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or a default occurs under any instrument evidencing such subordinated indebtedness, or the holder of any such subordinated indebtedness accelerates all or any portion of such subordinated indebtedness or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (o) there shall be a change in the record or beneficial ownership of an aggregate of more than 20% of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of Borrower in effect on the date hereof, without the prior written consent of Silicon; or (p) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (q) there shall be (i) a material impairment in the perfection or priority of Silicon's security interest in the Collateral or in the value of such Collateral; (ii) a material adverse change in the business, operations or condition (financial or otherwise) of the Borrower; (iii) a material impairment of the prospect of repayment of any portion of the Obligations; or (iv) Silicon determines, based upon information available to it and in its reasonable judgment, that there is reasonable likelihood that Borrower shall fail to comply with one or more of the financial covenants in Section 5.1 during the next succeeding financial reporting period; or (r) Silicon, acting in good faith and in a commercially reasonable manner, deems itself insecure because of the occurrence of an event prior to the effective date hereof of which Silicon had no knowledge on the effective date or because of the occurrence of an event on or subsequent to the effective date; or (s) Borrower shall breach any material term of the Negative Pledge Agreement or (t) an default or event of default shall occur and continue under the Exim Agreement. 7.2 REMEDIES. Upon the occurrence and continuation of any Event of Default, Silicon, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Silicon without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as is reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Silicon seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Silicon retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Silicon at places designated by Silicon which are reasonably convenient to Silicon and Borrower, and to remove the Collateral to such locations as Silicon may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Silicon shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Silicon obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Silicon shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as is reasonable, or on Silicon's premises, or elsewhere and the Collateral need not be located at the place of disposition. Silicon may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability 9 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Silicon to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Silicon's sole discretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; (h) Offset against any sums in any of Borrower's general, special or other Deposit Accounts with Silicon; and (i) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of Silicon's rights and remedies, from and after the occurrence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional four percent (4%) per annum. 7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Silicon agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Silicon, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash or by cashier's check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, Silicon may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Silicon shall be free to employ other methods of noticing and selling the Collateral, if they are commercially reasonable. 7.4 POWER OF ATTORNEY. Upon the occurrence and continuation of any Event of Default, without limiting Silicon's other rights and remedies, Borrower grants to Silicon an irrevocable power of attorney coupled with an interest, authorizing and permitting Silicon (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Silicon agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Silicon may reasonably deem advisable in order to perfect and maintain Silicon's security interest in the Collateral, or in order to exercise a right of Borrower or Silicon, or in order to fully consummate all the transactions contemplated under this Agreement; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Silicon's possession; (e) Endorse all checks and other forms of remittances received by Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Silicon the same rights of access and other rights with respect thereto as Silicon has under this Agreement; and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. 10 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Silicon's rights under the foregoing power of attorney or any of Silicon's other rights under this Agreement be deemed to indicate that Silicon is in control of the business, management or properties of Borrower. 7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of the Collateral shall be applied by Silicon first to the reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Silicon shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Silicon shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Silicon of the cash therefor. 7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies accorded a secured party under the Massachusetts Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Silicon and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 8. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Account Debtor" means the obligor on a Receivable. "Affiliate" means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Business Day" means a day on which Silicon is open for business. "Cash Management Services" means Silicon's cash management services, direct deposit of payroll, business credit card, and check cashing services as may be further identified in the various cash management services agreements related to such Cash Management Services. "Code" means the Uniform Commercial Code as adopted and in effect in the Commonwealth of Massachusetts from time to time. "Collateral" has the meaning set forth in Section 2.1 above. "Default" means any event which with notice or passage of time or both, would constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9-102 of the Code. 11 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- "Eligible Receivables" means Receivables arising in the ordinary course of Borrower's business from the sale of goods or rendition of services, which Silicon, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Silicon may from time to time deem appropriate. Without limiting the fact that the determination of which Receivables are eligible for borrowing is a matter of Silicon's discretion, the following (the "Minimum Eligibility Requirements") are the minimum requirements for a Receivable to be an Eligible Receivable: (i) the Receivable must not be outstanding for more than 90 days from its invoice date, (ii) intentionally omitted, (iii) the Receivable must not be subject to any contingencies (including Receivables arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be conditional, except as may otherwise be acceptable to Silicon in its discretion), (iv) the Receivable must not be owing from an Account Debtor with whom the Borrower has any dispute (whether or not relating to the particular Receivable), (v) the Receivable must not be owing from an Affiliate of Borrower, (vi) the Receivable must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not reasonably acceptable to Silicon, or which, fails or goes out of a material portion of its business, (vii) the Receivable must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to Silicon's satisfaction, with the United States Assignment of Claims Act), (viii) the Receivable must not be owing from an Account Debtor located outside the United States (unless pre-approved by Silicon in its discretion in writing, or backed by a letter of credit satisfactory to Silicon, or FCIA insured satisfactory to Silicon), and (ix) the Receivable must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise. Receivables owing from one Account Debtor will not be deemed Eligible Receivables to the extent they exceed 25% of the total Receivables outstanding. In addition, if more than 50% of the Receivables owing from an Account Debtor are outstanding more than 90 days from their invoice date (without regard to unapplied credits) or are otherwise not eligible Receivables, then all Receivables owing from that Account Debtor will be deemed ineligible for borrowing. Silicon may, from time to time, in its commercially reasonable discretion, revise the Minimum Eligibility Requirements, upon written notice to the Borrower. "Equipment" means all of Borrower's present and hereafter acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "Event of Default" means any of the events set forth in Section 7.1 of this Agreement. "Exim Agreement" means the Export-Import Bank Loan and Security Agreement of even date between Silicon and Borrower, along with all documents, instruments and agreements executed in connection therewith, as each may be amended, restated, extended or replaced from time to time. "General Intangibles" means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, rights to payment for credit extended, amounts due to Borrower, credit memoranda in favor of Borrower, warranty claims, causes of action, corporate or other business records, deposits, Deposit Accounts, goodwill, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Silicon, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Inventory" means all of Borrower's now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including 12 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- without limitation all raw materials, work in process, finished goods and goods in transit), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "Letter-of-Credit Rights" means all letter-of-credit rights including, without limitation, "letter-of-credit rights" as defined in the Code and also any right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. "Obligations" means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Silicon, whether evidenced by this Agreement, the Exim Agreement, the Borrower's obligations pursuant to the Negative Pledge Agreement, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, foreign exchange contracts, loan, Cash Management Services, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Silicon in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement. "Payment Intangibles" means all payment intangibles including, without limitation, "payment intangibles" as defined in the Code and also any general intangible under which the Account Debtor's primary obligation is a monetary obligation. "Permitted Liens" means the following: (i) purchase money security interests in specific items of Equipment in an amount not to exceed $1,000,000.00 in the aggregate at any time during the term of this Agreement; (ii) leases of specific items of Equipment in an amount not to exceed $1,000,000.00 in the aggregate at any time during the term of this Agreement; (iii) liens for taxes not yet payable or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if such liens have no priority over any of Silicon's security interests; (iv) additional security interests and liens against the Collateral consented to in writing by Silicon, which consent shall not be unreasonably withheld or delayed; (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; and (viii)Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Silicon will have the right to require, as a condition to its consent under subsection (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Silicon's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Silicon, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Receivables" means all of Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), accounts receivable, health-care insurance receivables, rights to payment, letters of credit, contract rights, chattel paper, instruments, securities, securities accounts, investment property, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to 13 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. "Reserves" means, as of any date of determination, such amounts as Silicon may from time to time reasonably establish and revise in good faith reducing the amount of Loans, Letters of Credit and other financial accommodations which would otherwise be available to Borrower under the lending formula(s) provided in the Schedule: (a) to reflect events, conditions, contingencies or risks which, as determined by Silicon in good faith, do or are reasonably likely to materially and adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Receivables), (ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the security interests and other rights of Silicon in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Silicon's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any guarantor to Silicon is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Silicon determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. "Supporting Obligations" means all supporting obligations including, without limitation, "supporting obligations" as defined in the Code and also any letter-of-credit right or secondary obligation which supports the payment or performance of an account, chattel paper, a document, a general intangible, an instrument, or investment property. Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 9. GENERAL PROVISIONS. 9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Silicon (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Silicon on account of the Obligations three Business Days after receipt by Silicon of immediately available funds, and, for purposes of the foregoing, any such funds received after 12:00 Noon on any day shall be deemed received on the next Business Day. Silicon shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Silicon in its sole discretion, and Silicon may charge Borrower's loan account for the amount of any item of payment which is returned to Silicon unpaid. 9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may be applied, and in Silicon's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Silicon shall determine in its sole discretion. 9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. Silicon may also, in its discretion, charge any monetary Obligations to Borrower's Deposit Accounts maintained with Silicon. 9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with a written account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Silicon), unless Borrower notifies Silicon in writing to the contrary within thirty days after each account is rendered, describing the nature of any alleged errors or admissions. 14 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 9.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt requested, addressed to Silicon or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Notices to Silicon shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private delivery service, or two Business Days following the deposit thereof in the United States mail, with postage prepaid. 9.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 9.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Silicon and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith. 9.8 WAIVERS. The failure of Silicon at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and Silicon shall not waive or diminish any right of Silicon later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Silicon shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an authorized officer of Silicon and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Silicon on which Borrower is or may in any way be liable, and notice of any action taken by Silicon, unless expressly required by this Agreement. 9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon, but nothing herein shall relieve Silicon from liability for its own gross negligence or willful misconduct. 9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Silicon. 9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the 15 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon's security interest in, the Collateral; and otherwise represent Silicon in any litigation relating to Borrower. In satisfying Borrower's obligation hereunder to reimburse Silicon for attorneys fees, Borrower may, for convenience, issue checks directly to Silicon's attorneys, Riemer & Braunstein, LLP, but Borrower acknowledges and agrees that Riemer & Braunstein, LLP is representing only Silicon and not Borrower in connection with this Agreement. If either Silicon or Borrower files any lawsuit against the other predicated on a breach of this Agreement, Silicon shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which Silicon may be entitled pursuant to this Section 9.12 shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Silicon; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Silicon, and any prohibited assignment shall be void. No consent by Silicon to any assignment shall release Borrower from its liability for the Obligations. 9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against Silicon, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other present or future document or agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within two years after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Silicon, or on any other person authorized to accept service on behalf of Silicon, within thirty (30) days thereafter. Borrower agrees that such two-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The two-year period provided herein shall not be waived, tolled, or extended except by the written consent of Silicon in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other present or future agreement. 9.16 RIGHT OF SET-OFF. Borrower and any guarantor hereby grant to Silicon a lien, security interest, and right of setoff as security for all Obligations to Silicon, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping, or control of Silicon or any entity under the control of Silicon Valley Bank or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Silicon may set off the same or any part thereof and apply the same to any liability or obligation of Borrower and any guarantor then due and regardless of the adequacy of any other collateral securing the loan. ANY AND ALL RIGHTS TO REQUIRE SILICON TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS, OR OTHER PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY, AND IRREVOCABLY WAIVED. 9.17 SECTION HEADINGS; CONSTRUCTION. Section headings are only used in this Agreement for convenience. Borrower and Silicon acknowledge that the headings may not describe completely the subject matter of the applicable 16 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- section, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or Borrower under any rule of construction or otherwise. 9.18 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and Borrower shall be governed by the laws of the Commonwealth of Massachusetts. As a material part of the consideration to Silicon to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Silicon's option, be litigated in state or federal courts located within Massachusetts; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding, provided, however, that if for any reason Silicon cannot avail itself of such courts in the Commonwealth of Massachusetts, Borrower accepts jurisdiction of the courts and venue in Santa Clara, California. 9.19 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. 9.20 CONFIDENTIALITY. In handling any confidential information, Silicon shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made: (i) to Silicon's subsidiaries or affiliates in connection with their present or prospective business relations with Borrower; (ii) to prospective transferees or purchasers of any interest in the Loans; (iii) as required by law, regulation, subpoena, or other order; (iv) as required in connection with Silicon's examination or audit; and (v) as Silicon considers appropriate in exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Silicon's possession when disclosed to Silicon, or becomes part of the public domain after disclosure to Silicon (through no act or omission of Silicon); or (b) is disclosed to Silicon by a third party, which third party is not under any non-disclosure obligation. 17 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first above written. BORROWER: GLOBECOMM SYSTEMS INC. BY: /S/ ANDREW C. MELFI - ------------------------------- NAME: ANDREW C. MELFI TITLE: CHIEF FINANCIAL OFFICER SILICON: SILICON VALLEY BANK, D/B/A SILICON VALLEY EAST BY: /S/ NANCY FUNKHOUSER - ------------------------------- TITLE: VICE PRESIDENT 18 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: GLOBECOMM SYSTEMS INC., A DELAWARE CORPORATION ADDRESS: 45 OSER AVENUE HAUPPAUGE, NEW YORK 11788 DATE: SEPTEMBER 25, 2003 This Schedule forms an integral part of the Loan and Security Agreement between Silicon Valley Bank and the above-borrower of even date. ================================================================================ - -------------------------------------------------------------------------------- 1. CREDIT LIMIT (Section 1.1): An amount not to exceed the lesser of (A) or (B), below: ================================================================================ (A) ============================================================== (i) $7,500,000.00 (the "Maximum Credit Limit"); minus ================================================================================ (ii) the aggregate amounts outstanding under the Exim Agreement; minus ============================================================== (iii) the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower. ================================================================================ (B) ============================================================== (i) 80.0% of the amount of the Borrower's Eligible Receivables (as defined in Section 8 above) (the "Receivables Loans"); minus ================================================================================ ============================================================== (ii) the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower. ================================================================================ Silicon may, from time to time, modify the advance rate(s) set forth herein in its good faith business judgment upon notice to Borrower based on changes in collection experience with respect to the Receivables or other issues or factors relating to the Receivables or the Collateral. LETTER OF CREDIT/FOREIGN EXCHANGE CONTRACT/CASH MANAGEMENT SERVICES SUBLIMIT (Section 1.5, 1.6): $3,750,000 2. INTEREST. INTEREST RATE (Section 1.2): A rate equal to the Prime Rate plus two percent (2.0%) per annum. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rate" means the greater of (i) four percent (4.0%) or (ii) the rate announced from time to time by Silicon as its "prime rate;" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. 1 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- ================================================================================ MINIMUM MONTHLY INTEREST (Section 1.2): $5,000.00 ================================================================================ 3. FEES (Section 1.4): Loan Fee: $63,875.00 payable concurrently herewith. Collateral Handling Fee: $1,000.00 ($500.00 when not borrowing and Borrower has advised Silicon that it has elected to be on "non-borrowing reporting status" pursuant to Section 6, below) per month, payable in arrears. Cancellation Fee: If the Obligations are voluntarily or involuntarily prepaid or if this Agreement is otherwise terminated prior to its maturity, the Borrower shall pay to Silicon a termination fee in the amount equal to $37,500.00, provided that no such termination fee shall be charged if the credit facility hereunder is replaced or transferred to another division of Silicon. The termination fee shall be due and payable upon prepayment by the Borrower in the case of voluntary prepayments or upon demand by Silicon in the event of involuntary prepayment, and if not paid immediately shall bear interest at a rate equal to the highest rate applicable to any of the Obligations. ================================================================================ 4. MATURITY DATE (Section 6.1): September 24, 2004 ================================================================================ 5. FINANCIAL COVENANTS (Section 5.1): Borrower shall comply with each of the following covenant(s). Compliance shall be determined as of the end of each month, except as otherwise specifically provided below: A. MINIMUM TANGIBLE NET WORTH: Borrower shall maintain a Tangible Net Worth of not less than the sum of (i) plus (ii) below: ========================================================================= (i) $35,000,000, from the date of this Agreement until the Maturity Date; ================================================================================ ========================================================================= (ii) 60% of all consideration received after the date hereof from proceeds from the issuance of any equity securities of the Borrower and/or subordinated debt incurred by the Borrower. ================================================================================ B. MINIMUM CASH OR EXCESS AVAILABILITY: ========================================================================= The Borrower shall at all times maintain $2,000,000 in (i) cash deposits maintained at Silicon, and/or (ii) excess "availability" under this Agreement (net of Loans, the face amount of all Letters of Credit or other indebtedness under this Agreement or the Exim Agreement), as determined by Silicon based upon the Credit Limit restrictions set forth in Section 1 above). ================================================================================ DEFINITIONS. For purposes of the foregoing financial covenants, the following term shall have the following meaning: 2 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- ================================================================================ "Liabilities" shall have the meaning ascribed thereto by generally accepted accounting principles. "Tangible Net Worth" shall mean the excess of total assets over total liabilities, determined in accordance with generally accepted accounting principles, with the following adjustments: (A) there shall be excluded from assets: (i) notes, accounts receivable and other obligations owing to the Borrower from its officers or other Affiliates, and (ii) all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises (B) there shall be excluded from liabilities: all indebtedness which is subordinated to the Obligations under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which is acceptable to Silicon in its discretion. ================================================================================ 6. REPORTING. (Section 5.3): Borrower shall provide Silicon with the following: 1. Weekly (monthly, if no amounts are outstanding under this Agreement and Borrower has advised Silicon in writing that it has elected to be on "non-borrowing reporting status"), and upon each loan request, borrowing base certificates and transaction reports. 2. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within fifteen days after the end of each month (for Borrower and its subsidiaries, including Net Sat and GSI Europe). 3. Monthly Receivable agings, aged by invoice date, and receivable reconciliations, within fifteen days after the end of each month (for Borrower and its subsidiaries, including Net Sat and GSI Europe). 4. Monthly unaudited consolidated and consolidating financial statements, as soon as available, and in any event within thirty days after the end of each month. 5. Monthly Compliance Certificates, within thirty days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks. 6. Annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower within thirty days prior to the end of each fiscal year of Borrower. 7. Annual audited financial statements, as soon as available, and in any event within 150 days following the end of Borrower's fiscal year, prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Silicon. 3 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 8. Such additional reports and information as Silicon may from time to time specify. ================================================================================ 7. BORROWER INFORMATION: PRIOR NAMES OF BORROWER (Section 3.2): See Perfection Certificate of even date herewith PRIOR TRADE NAMES OF BORROWER (Section 3.2): See Perfection Certificate of even date herewith EXISTING TRADE NAMES OF BORROWER (Section 3.2): See Perfection Certificate of even date herewith OTHER LOCATIONS AND ADDRESSES (Section 3.3): See Perfection Certificate of even date herewith MATERIAL ADVERSE LITIGATION (Section 3.10): None ================================================================================ 8. OTHER COVENANTS (Section 5.1): Borrower shall at all times comply with all of the following additional covenants: (1) BANKING RELATIONSHIP. In order for Silicon to properly monitor its loan arrangement with the Borrower, Borrower shall at all times during the term of this Agreement maintain all of its depository, operating and securities accounts with Silicon (or an affiliate of Silicon with respect to securities accounts); provided, however, Borrower may keep (i) up to $600,000 with Chase Manhattan Bank to secure its reimbursement obligations under issued letters of credit, (ii) up to $500,000 with Chase Manhattan Bank for Borrower's payroll accounts, and (iii) up to an additional $100,000 in the aggregate with other financial institutions, provided in all instances, upon Silicon's request, Borrower shall use its best efforts to cause Chase Manhattan Bank and each such other financial institution to execute a control agreement among such financial institution, Borrower and Silicon, which control agreement is reasonably acceptable to Silicon to perfect its lien in such account(s). (2) SUBORDINATION OF INSIDE DEBT. All present and future indebtedness of the Borrower to its officers, directors and shareholders ("Inside Debt") shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on Silicon's standard form. Borrower represents and warrants that there is no Inside Debt presently outstanding. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Silicon a subordination agreement on Silicon's standard form. (3) SUBORDINATION AGREEMENTS. Borrower warrants and represents that it is not presently indebted to any party for borrowed money. Prior to incurring any indebtedness from and after the date hereof, Borrower shall cause each creditor to execute and deliver to Silicon a subordination agreement on Silicon's standard form subordinating to the Obligations the indebtedness of Borrower to any such creditor. 4 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- (4) NEGATIVE PLEDGE AGREEMENT. As a condition precedent to the effectiveness of this Agreement, Borrower shall have executed and delivered to Silicon a Negative Pledge Agreement (the "Negative Pledge Agreement"), regarding Borrower's intellectual property, substantially in the form attached hereto as Exhibit B. 5 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- BORROWER: GLOBECOMM SYSTEMS INC. BY: /S/ ANDREW C. MELFI - ------------------------------- NAME: ANDREW C. MELFI TITLE: CHIEF FINANCIAL OFFICER SILICON: SILICON VALLEY BANK, D/B/A SILICON VALLEY EAST BY: /S/ NANCY FUNKHOUSER - ------------------------------- TITLE: VICE PRESIDENT EX-21 4 file003.txt SUBSIDIARIES OF REGISTRANT EXHIBIT 21 Subsidiaries of the Registrant NetSat Express, Inc...........................................Delaware Globecomm Systems Europe Limited..............................United Kingdom GSI Properties Corp...........................................New York EX-23 5 file004.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-70527) pertaining to the Globecomm Systems Inc. 1997 Stock Incentive Plan and the 1999 Employee Stock Purchase Plan and the Registration Statement (Form S-8 No. 333-102928) pertaining to the Globecomm Systems Inc. 1997 Stock Incentive Plan of our report dated September 4, 2003, with respect to the consolidated financial statements and schedule of Globecomm Systems Inc. included in the Annual Report (Form 10-K) for the year ended June 30, 2003. /s/ Ernst & Young LLP Melville, New York September 29, 2003 EX-31.1 6 file005.txt CHIEF EXECUTIVE OFFICER CERTIFICATION EXHIBIT 31.1 CHIEF EXECUTIVE OFFICER CERTIFICATION REQUIRED BY RULES 13A-14 AND 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, David E. Hershberg, certify that: 1. I have reviewed this annual report on Form 10-K; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; c) disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of Registrant's board of directors: a) all significant deficiencies in the design or operation of internal control over financial report which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: September 29, 2003 By: /s/ DAVID E. HERSHBERG -------------------------- David E. Hershberg Chairman of the Board and Chief Executive Officer EX-31.2 7 file006.txt CHIEF FINANCIAL OFFICER CERTIFICATION EXHIBIT 31.2 CHIEF FINANCIAL OFFICER CERTIFICATION REQUIRED BY RULES 13A-14 AND 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Andrew C. Melfi, certify that: 1. I have reviewed this annual report on Form 10-K of Globecomm Systems Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d- 14) for the Registrant, and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; c) disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors: a) all significant deficiencies in the design or operation of internal control over financial report which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: September 29, 2003 By: /s/ ANDREW C. MELFI ----------------------- Andrew C. Melfi Vice President, Chief Financial Officer and Treasurer EX-32 8 file007.txt SECTION 906 CERTIFICATION EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 David E. Hershberg, Chief Executive Officer of Globecomm Systems Inc., and Andrew C. Melfi, Chief Financial Officer of Globecomm Systems Inc., each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report of Globecomm Systems Inc. on Form 10-K for the fiscal year ended June 30, 2003 (the "Annual Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of Globecomm Systems Inc. Date: September 29, 2003 By: /s/ DAVID E. HERSHBERG -------------------------- David E. Hershberg Chairman of the Board and Chief Executive Officer By: /s/ ANDREW C. MELFI ------------------------ Andrew C. Melfi Vice President, Chief Financial Officer and Treasurer A signed original of this written statement required by Section 906 has been provided to Globecomm Systems Inc. and will be retained by Globecomm Systems Inc. and furnished to the Securities Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----