-----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, VYzYWDkycBzgSPrwEJxMf8fnhK/NtzR27GAd1jFZudgH04UMt/maRfLFwcCJJOSl eFTIP5Swa2md/X7+A6mLjg== 0000950136-98-001755.txt : 19980929 0000950136-98-001755.hdr.sgml : 19980929 ACCESSION NUMBER: 0000950136-98-001755 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD 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: SEC FILE NUMBER: 000-22839 FILM NUMBER: 98716299 BUSINESS ADDRESS: STREET 1: 375 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162319800 MAIL ADDRESS: STREET 1: 375 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: WSI COMMUNICATIONS INC DATE OF NAME CHANGE: 19970121 10-K 1 FORM 10-K 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ------- Commission file number 000-22839 Globecomm Systems Inc. (Exact name of registrant as specified in its charter) Delaware 11-3225567 - ------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of 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 (516) 231-9800 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value - -------------------------------------------------------------------------------- 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] While it is difficult to determine the number of shares owned by non-affiliates, the registrant estimates that the aggregate market value of outstanding Common Stock on September 25, 1998, based upon the average bid and asked prices of such Common Stock on the Nasdaq National Market on September 25, 1998 held by non-affiliates was approximately $9.8 million. For this computation, the registrant has excluded the market value of all shares of its Common Stock reported as beneficially owned by officers, directors and certain significant stockholders. Such exclusion shall not be deemed to constitute an admission that any such stockholder is an affiliate of the registrant. 1 As of September 25, 1998, there were outstanding 9,125,908 shares of the registrant's Common Stock, par value $.001. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement of Globecomm Systems Inc. relative to the Annual Meeting of Stockholders to be held on November 19, 1998, which is incorporated by reference into Part III of this Form 10-K. 2 PART I ITEM I. BUSINESS -------- OVERVIEW Globecomm Systems Inc. (the "Company" or "GSI") designs, assembles and installs satellite ground segment systems and networks which support a wide range of satellite communications applications, including fixed, mobile and direct broadcast services as well as certain military applications. The Company's customers include prime communications infrastructure contractors, government-owned PTTs, other telecommunications carriers, producers and distributors of news and entertainment content and other corporations. The Company's ground segment systems typically consist of an earth station, which is an integrated system designed to transmit and receive signals to and from satellites, together with ancillary subsystems. The Company's ground segment networks are typically comprised of two or more ground segment systems communicating with a satellite and interconnected with a terrestrial network. The Company's revenue grew 60.4% to $58.1 million for the fiscal year ended June 30, 1998 from $36.2 million for the fiscal year ended June 30, 1997. During the fiscal year ended June 30, 1998, the Company booked $60.9 million in contract orders and, at June 30, 1998, had a backlog of $43.6 million of contract orders. The Company believes that its revenue growth and its ability to compete are based on its unique combination of competitive advantages which include: (i) an experienced management group with extensive technological and engineering expertise, (ii) the proven ability to meet the complex satellite ground segment requirements of its customers in diverse political, economic and regulatory environments in various locations around the world and (iii) its ability to identify, develop and maintain strategic relationships with developers and suppliers of leading-edge technologies which enhance performance, reduce costs and broaden the applications of the Company's ground segment systems and networks. During fiscal 1997, the Company established a subsidiary, NetSat Express, Inc. ("NetSat Express"), to develop service revenues by providing high-speed, satellite-delivered data communications to developing markets worldwide. NetSat Express is currently providing Internet access to customers who have limited or no access to terrestrial network infrastructure capable of supporting the economical delivery of such services. To date, NetSat Express has generated only limited revenues. The Company was incorporated in Delaware on August 17, 1994. For financial information about industry segments and foreign operations, see Note 12 and 13, respectively of the Notes to the Consolidated Financial Statements. INDUSTRY BACKGROUND SATELLITE COMMUNICATIONS Market Structure Satellite communications systems are comprised of satellites (the "space segment") and ground-based transmission and reception systems (the "ground segment"). The space segment consists of one or more satellites in earth orbit which typically provide continuous communications coverage over a wide geographic area. Satellites typically contain multiple transponders, each capable of independently receiving and transmitting one or more signals to or from multiple users simultaneously. The ground segment consists principally of one or more earth stations, which provide a communications link to the end user either directly or through a terrestrial network. 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. 3 Satellite communications industry participants include: (i) designers, manufacturers and integrators of ground segment products, systems and networks, (ii) communications service providers, which may or may not own the actual satellites used for transmission and (iii) designers, manufacturers and operators of satellites. The Company has participated principally in the ground segment systems and networks portion of the market and has recently expanded into the satellite-delivered data communications services market through its NetSat Express subsidiary. Satellite Service Applications Satellites provide a number of advantages over terrestrial facilities for many high-speed communications service applications. First, satellites enable high-speed communications service where there is no suitable terrestrial alternative available or where the terrestrial alternative is inadequate. Second, unlike the cost of terrestrial networks, the cost to provide services via satellite does not increase with the distance between sending and receiving stations. Finally, in contrast to the installation of fiber optic cable which is expensive, time consuming and requires obtaining rights-of-way, satellite networks can be rapidly installed, upgraded and reconfigured. The three principal categories of satellite communications service applications are: (i) fixed satellite services, (ii) mobile satellite services and (iii) direct broadcast services. Fixed Satellite Services. Fixed satellite services provide point-to-point and point-to-multipoint satellite communication of voice, data and video between fixed land-based earth stations. The introduction of high-power satellites has created additional growth within the fixed satellite services segment by enabling the use of smaller, less costly earth stations, such as very small aperture terminals ("VSATs"), for applications such as corporate data networks, Internet access and rural telephony. The Company believes that the fixed satellite services segment will continue to experience rapid growth due to the expansion of VSAT applications and the planned implementation of new high-capacity, high-power Ka-band (20-30 GHz) systems within the next several years. The future Ka-band services are expected to expand the number of applications provided directly to the home and are expected to reduce significantly the cost of such services. These systems offer the additional bandwidth needed for emerging multimedia services that combine voice and video transmissions, as well as Internet access, expanded telephony services, and computer networking. Mobile Satellite Services. Mobile satellite services, which operate between fixed gateway earth stations and mobile user earth stations (terminals), provide mobile voice and data transmission capability on land, sea and air. New mobile satellite services are being developed using low, medium and geostationary orbiting satellite systems that are designed to bring more extensive coverage and circuit reliability for mobile telephone and data services to underserved populations throughout the world. Direct Broadcast Services. Direct broadcast satellite services provide a direct transmission link from high-power satellites to customers over a wide geographic area. Technology which has been successfully deployed by Thomson, Hughes Network Systems and others for direct-to-home television services is now being applied to direct broadcast data services, including Internet and intranet access. DATA COMMUNICATIONS AND THE INTERNET The data communications services market is comprised currently of common carrier data network services, corporate business networks and emerging applications such as Internet and intranet services. The Company believes that Internet and intranet services will comprise a significant portion of data communications services used in developing countries, and that the growth of data communications services in these regions will rely on satellite communications to a significant extent. The Company believes that the use of satellite communications technology which may be used to bring both the Internet and corporate intranets to nations that are developing their telecommunications infrastructure will help those nations rapidly improve their education, access to medical information, commerce and overall communications. 4 GROWTH DRIVERS The Company believes that the growth projected by third parties in the satellite communications industry will be driven principally by the following major factors: (i) global deregulation and privatization of government-owned monopoly telecommunications carriers, (ii) rapidly growing worldwide demand for communications services in general, including data communications services over the Internet and corporate intranets, (iii) the relative cost-effectiveness of satellite communications for many applications and (iv) technological advancements which broaden applications for and increase the capacity in both satellite and terrestrial networks. The Company believes that growth in its addressable ground segment markets has been and will continue to be driven by, among other things, the growth of satellite-delivered communications services. Deregulation and Privatization. Rapid deregulation and privatization, and the implementation of governmental policies aimed at developing modern telecommunications infrastructure, are occurring globally, as countries seek the economic benefits of enhanced and expanded telecommunications services. Through deregulation and privatization, governments are stimulating the development of competitive telecommunications services in the private sector. These actions have placed communications carriers under increasing pressure to achieve greater efficiencies and to offer their services to broader customer bases at more competitive prices, leading to an increase in capital investment. In addition, the Company believes that the World Trade Organization proposal which will provide U.S. and foreign companies with market access to a variety of telecommunications services and allow foreign ownership of telecommunication companies will lead to additional increased capital investment in the worldwide telecommunications market. Growing Worldwide Demand for Communications Services. Factors contributing to the growing demand for communications services include worldwide economic development, governmental policies aimed at improving the telecommunications infrastructure in developing countries and the increasing globalization of commerce. In addition to the growth in developing markets, the terrestrial infrastructure in developed countries is evolving to support the growing demand for higher bandwidth services in response to the needs of businesses to communicate with customers and employees located around the world and to the growing acceptance of the Internet and multimedia applications as both productivity-enhancing tools and consumer products. The Company expects demand for these kinds of higher bandwidth services to grow in developing countries as well. The Company believes that global network infrastructure development will require significant reliance upon satellite communications because satellite-delivered communications services can be implemented quickly and deliver flexible high-speed transmission capacity at relatively low cost over large geographic areas. Relative Cost-Effectiveness of Satellite Communications. The relative cost-effectiveness of satellite communications compared to terrestrial solutions for many applications is a major factor driving the growth of satellite communications in areas with rapidly growing telecommunications infrastructures. The vast geographic areas to be covered, where population concentrations are separated by large distances, require a technology whose cost and speed of implementation is relatively insensitive to distance. Unlike the cost of terrestrial networks, the cost to provide services via satellite does not increase with the distance between sending and receiving stations. A single satellite can be configured to deliver both broad beams that cover entire regions and narrow spot beams that cover only areas of high population or traffic density. Technological Advances. Technological advances which increase the capacity of a single satellite and/or increase the number of potential applications of its available bandwidth reduce the overall cost of a system or the service it delivers. This increases the number of potential end users for the services and expands the available market. Recent technological developments which make satellite solutions increasingly competitive in cost and performance with terrestrial-based networks, or as a viable alternative solution where terrestrial services are not feasible, include bandwith on demand, digital compression technology, high-power satellites, spot-beam technology, and onboard processing. 5 GSI COMPETITIVE ADVANTAGES The Company believes that it is well positioned to capitalize on the demand for satellite ground segment systems and networks and satellite-delivered data communications services and that its future success in these markets will be based upon its ability to leverage its unique combination of competitive advantages which include: (i) an experienced management group with extensive technological and engineering expertise, (ii) the proven ability to meet the complex satellite ground segment requirements of its customers in diverse political, economic and regulatory environments in various locations around the world and (iii) the ability to identify, develop and maintain strategic relationships with developers and suppliers of leading-edge technologies which enhance the performance, reduce costs and broaden the applications of the Company's ground segment systems and networks. GSI BUSINESS STRATEGY The Company's business strategy is to expand its market share in its ground segment systems and networks business, improve its profitability, and create opportunities to capture recurring service revenues. The Company intends to execute this strategy by: (i) targeting communication infrastructure development opportunities worldwide, (ii) focusing on high margin engineering-intensive system and network projects, (iii) developing strategic customer relationships, (iv) developing strategic supplier relationships and (v) entering the data communications services business through NetSat Express. TARGET INFRASTRUCTURE DEVELOPMENT OPPORTUNITIES The Company primarily targets developing markets which it believes will account for a significant portion of the growing demand for ground segment systems and networks because these markets typically lack terrestrial infrastructure adequate to support increasing demand for domestic and international communications services. In addition, in developed countries the Company targets ground segment infrastructure development projects for emerging satellite communications applications such as direct broadcast and future Ka-band systems. The Company has developed an international sales and marketing organization focused on identifying opportunities for the Company and on developing key sourcing relationships. In order to increase its access to project opportunities and limit its exposure to the political and commercial complexities of doing business in foreign countries, the Company intends to continue to pursue international opportunities primarily in partnership with strong local companies or as a subcontractor to larger communications services and infrastructure providers. Most of the Company's revenues are derived from sales to customers outside the United States. Revenues from foreign sales accounted for 69%, 40% and 22% of total revenues in fiscal years 1998, 1997 and 1996, respectively. FOCUS ON ENGINEERING-INTENSIVE SYSTEM AND NETWORK PROJECTS The Company seeks to focus its technological expertise on high value-added system and network projects which require engineering-intensive design and implementation. This emphasis positions the Company to earn higher gross margins through the delivery of innovative, cost-effective solutions to customer performance requirements that are typically priced on a negotiated basis, as opposed to typically lower-margin competitive bid projects. In addition, the Company often benefits from the research and design phase of its more complex projects through the development of proprietary products, systems and technologies that can be applied cost-effectively to future projects and which provide the Company with a competitive advantage. DEVELOP STRATEGIC CUSTOMER RELATIONSHIPS The Company seeks to build close relationships with customers for whom it can provide complementary engineering skills by working as part of their system development teams. A key objective of this strategy is to obtain this business on a negotiated basis, rather than through the competitive bidding 6 process, which is likely to carry a lower margin. To date, the Company has developed strategic relationships with a number of customers through either alliance agreements, buying agreements, or investment by the strategic customer in GSI, or investment by GSI in a strategic customer. For example, the Company has recently acquired an approximately 18.75% equity interest in McKibben Communications, LLC ("McKibben Communications"). The investment in McKibben Communications provides the Company access to earth station projects for McKibben Communications and its customers in the television broadcast industry. See "-Strategic Relationships." DEVELOP STRATEGIC SUPPLIER RELATIONSHIPS The Company seeks to establish strategic relationships with suppliers that it believes are in a unique position to supply products or services which will improve the Company's competitive position in one or more of the markets which it serves. In certain cases, the Company seeks to strengthen such relationships by investing in such suppliers, and has, through June 30, 1998, made equity investments of an aggregate of approximately $1.6 million for minority equity stakes of approximately 11.6%, 10.3%, 17.0% and 6.7% in Shiron Satellite Communications (1996), Ltd. ("Shiron"), Newpoint Technologies, Inc. (formerly C-Grams Unlimited, Inc.) ("Newpoint Technologies"), Armer Communications Engineering Services, Inc. ("Armer") and Joint Communications Technology Corp. ("JCTC"), respectively. The strategic supplier relationships with Shiron, Newpoint Technologies and JCTC enable the Company to outsource a significant portion of its research and development costs and gain access to advanced technology while preserving the independence to select the best products and technologies to deliver to its customers on any particular project. The relationship with Armer allows the Company preferred access to quality field engineering and installation resources. CREATE RECURRING SERVICE REVENUE OPPORTUNITIES The Company seeks to capture recurring revenues by providing data communications services. The initial application of this strategy is the Company's NetSat Express subsidiary, formed in alliance with Hughes Network Systems ("HNS"), to provide satellite-delivered data communications services such as Internet access, intranet applications and business data applications in developing countries, using either HNS' low-cost, high-speed DirecPC Terminal technology or the Company's own satellite network equipment. The Company's strategy for implementing this objective through NetSat Express includes the following major elements: Market Through Strategic Relationships. NetSat Express is working with strategic partners located in local markets in Eastern Europe who are expected typically to handle marketing, distribution and support of the NetSat Express service offerings and would typically provide billing and customer service functions. The Company selects local market partners based upon, among other criteria, their in-region marketing experience, knowledge of the local regulatory environment, operating licenses, existing customers and established business organizations. The Company is currently providing services in certain Eastern European countries pursuant to a value-added reseller agreement with Hughes Olivetti Telecom Limited ("HOT"), an affiliate of HNS, and is selling Internet access services in Eastern Europe. Seek Multiple Revenue Sources. Through NetSat Express the Company generates revenue from multiple sources, including the sales of terminal equipment to potential subscribers, the transmission of data via satellite, and the provision of Internet connections. Target Multinational Customer Base. The Company intends to establish a diverse, multinational customer base by designing innovative Internet, intranet and business data service solutions for corporations, governments and educational institutions in countries with rapidly growing telecommunications infrastructure requirements based on Internet protocol technology developed by NetSat Express. 7 GSI GROUND SEGMENT SYSTEMS AND NETWORKS The Company designs, assembles and installs ground segment system and network solutions for the complex and changing communications requirements of its customers. The Company's ground segment systems typically consist of an earth station and ancillary subsystems such as microwave links for back-haul of traffic to a central office or generators for emergency power restoral. An earth station is an integrated system consisting of antennas, transmitting and receiving equipment, modulation/demodulation equipment, monitor and control systems and voice, data and video network interface equipment. The Company's ground segment networks are typically comprised of two or more ground segment systems interconnected with a satellite and/or terrestrial communications network. The Company's Customizable Systems may be sold separately as stand-alone ground segment systems or may be used as modular building blocks to be integrated into a complete ground segment system or network. The Company believes that this modular approach allows it to engineer its ground segment systems and networks to serve client-specific traffic and service requirements rapidly, cost-effectively and efficiently. Customizable Systems Family of Standard Intelsat Earth Stations. This family of earth stations, which is used primarily for international voice, data and video circuit trunking and as gateways for domestic networks using the International Telecommunications Satellite Organization ("Intelsat") system, is targeted principally at PTTs and other common carriers. The family consists of earth stations of varying sizes and capacities, all of which conform to Intelsat specifications. The Intelsat Standard A earth stations, which have the highest capacity, feature antennas ranging from 13 to 21 meters in diameter, high-power amplifiers from 700 to 3,000 watts, radio frequency converters and related electronics, modems and a UNIX or Microsoft Windows NT based monitoring and control system. Available options include power monitor systems, de-icing equipment, uninterruptible power system/backup generators and equipment shelters. The Company has designed and installed Intelsat Standard A earth stations in China, Korea, Kuwait, Malaysia, the United Kingdom and the United States. The Company typically sells these Intelsat Standard A earth stations at prices ranging from approximately $1.0 million (13-meter antenna) to approximately $2.0 million (21-meter antenna). The Company is able to provide smaller, lower capacity earth stations that conform to Intelsat specifications by customizing its modular building block or commercial terminal families of earth stations described below. Modular Building Block ("MBB") Earth Station (MBB2001(TM)). These earth stations are incorporated in point-to-point data links and hubs for VSAT and Demand Assigned Multiple Access ("DAMA") networks, and are typically used as gateways for corporate, common carrier and government networks. These earth stations can also be configured to conform to the applicable standards of Intelsat and other satellite systems. Earth stations constructed using MBBs require minimal site preparation and can be installed rapidly and cost-effectively due to their modular construction. Antenna sizes range from 4.5 to 9 meters, with high-power amplifiers ranging from 50 to 700 watts. Generally, all electronics are housed in a single building mounted rack. Available options include de-icing equipment, tracking equipment, uninterruptible power system/backup generators and equipment shelters. To date, the Company has designed and installed MBB earth stations in Brazil, India, Indonesia, Pakistan, Russia, Thailand and the United States. The Company typically sells these earth stations at prices ranging from approximately $250,000 to $600,000. Commercial Terminal Family ("CTF")(CTF2001(TM)). This family of earth stations, which encompasses a range of general purpose, low-cost antenna-mounted earth stations, is used primarily for data, voice or video transmissions from commercial or government premises, and are principally targeted at corporate, common carrier and government networks. These earth stations can also be configured to conform to the applicable standards of Intelsat and other satellite systems. Antenna sizes range from 1.2 to 9.3 meters, with high-power amplifiers ranging from 16 to 400 watts. Generally, all radio frequency electronics are housed in weatherproof enclosures mounted on the antenna. To date, the Company has designed and installed CTF 8 earth stations in India, Korea, Russia, numerous countries in Africa and the United States. The Company typically sells these earth stations at prices ranging from approximately $100,000 to $300,000. Militarized Tactical Earth Station Family. This family of tactical earth stations is used for military communications applications and is targeted principally at major defense contractors. These earth stations typically use a 2.4 to 3 meter antennas, are highly transportable, and are designed to be mounted on a pallet on military vehicles or air-dropped into a combat environment. The pallet-mounted earth station features an automatic antenna pointing and multichannel capability. These militarized earth stations are able to perform under extreme conditions in the military tactical environment and offer multiband capability: C-band (4-6 GHz), X-band (7-8 GHz) or K-band (12-17 GHz). Prices for these systems range from approximately $250,000 to $1.0 million, depending on the configuration. This technology is now being applied to a 3 meter X-band antenna for use by the U.S. Army. Certification by the Army is in progress. Digital Fly-Away Earth Stations. This group of earth stations is primarily used for emergency communications and news gathering and is comprised of highly transportable, modular earth stations designed to be quickly deployed and installed anywhere in the world. Antenna sizes range from 1.2 to 2.4 meters, with high-power amplifiers up to 350 watts. All components are mounted in separate cases which are small enough to be easily transported by commercial carrier. Additional system availability can be achieved through the addition of redundant modules for critical components. Since these units may be operated in a variety of harsh environments, the Company conducts environmental stress screening tests on these components for enhanced reliability. The Company has sold a number of digital fly-away earth stations to a customer in Portugal and to Intelsat. The Company markets these earth stations at prices ranging from approximately $150,000 to $600,000. Earth Station Management Systems (AxxSys(TM)). The Company's earth station systems typically employ monitor and control software for system maintenance developed either by the Company or by its strategic supplier, Newpoint Technologies. This software permits the station operator to monitor and control the status of each electronic equipment component at the station from a remote location and to receive immediate failure reports and analysis. The Company also offers database applications to integrate maintenance and operational functions, thereby reducing operating costs. The price of this software varies substantially and is typically included in the price of the system or network provided by the Company. Compact Earth Station Family (CES2001(TM)). This family of earth stations is designed to be used principally to provide limited capacity (up to T1/E1 data rates) to areas with limited or no telecommunications infrastructure. These digital earth stations will integrate radio frequency and baseband components into one antenna-mounted package. These earth stations feature a multiband capability and a proprietary L-band (1 to 1.5 GHz) interface being developed to support a series of modems for a range of applications, including rural telephony and digital video. These earth stations may be operated on either preassigned channels or channels assigned on demand, allowing efficient transponder utilization. Antenna sizes range from 1.2 to 3.7 meters. These earth stations are expected to be marketed for less than $20,000. Mobile Products Family. GSI Mobile Division ("GSI Mobile") was formed during the fiscal year ended June 30, 1998 to serve the Mobile Satellite Services market with mobile high speed data and voice terminals, and customizable mobile systems. GSI Mobile has recently introduced Explorer II an Inmarsat high speed data terminal for use in news gathering, emergency communications, data gathering, and other applications requiring mobility and high speed data at 64 Kbps. GSI Mobile also has developed Explorer K, a small aperture K-band satellite news gathering terminal for data rates up to 2Mbps. GSI Mobile integrates these products with ancillary equipment for the broadcasting, oil exploration, and other industries which require Internet Protocol connectivity, video conferencing, store and forward video, secure communications and other applications. 9 Ground Segment System Installations The following are examples of ground segment systems sold by the Company: British Telecommunications plc ("BT") Intelsat Standard A System Upgrade. The Company has designed and installed an Intelsat Standard A ground segment system upgrade for BT in the United Kingdom for international voice and digital video transmission. The implementation of this system required the supply of a new tracking system for an existing BT antenna, an electronics shelter built to stringent standards, high-power amplifiers, radio frequency high-power multiplex equipment, up and down converters, and advanced monitor and control software. VSAT Hub Systems. The Company has designed and installed a 9-meter C-band hub earth station for HNS as part of a VSAT network in Brazil. The Company utilized its MBB family of customizable products to meet an accelerated delivery schedule. The Company has also entered into a contract to provide a 9-meter C-band hub earth station for AT&T Corporation as part of a VSAT network in Russia, where the Company is utilizing its CTF of customizable products to provide a low-cost solution and meet an accelerated delivery schedule. Teleport TP European Telecommunications Satellite Organization ("Eutelsat") TDMA Earth Station System. The Company has provided HNS with an earth station for use in the Eutelsat telephony/data network. This earth station required sophisticated engineering and implementation due to the high data rates used by Eutelsat's network. The Company incorporated the Newpoint Technologies earth station management systems into its design to simplify operation of the earth station by the end user, Teleport TP in Moscow. ASkyB Direct-to-Home Transmit Systems. The Company has completed a contract to supply uplink and program acquisition facilities for ASkyB consisting of four 13-meter transmit antennas with transmit/receive capabilities in the broadcast satellite services band, seven 6.1 meter receive only antennas and one Torus (multi-receive) antenna. The transmit facilities includes eight operational and two backup uplinks for each of the four antennas. This configuration provides extremely high availability of service as well as ease of operation. The Company applied its customizable designs in other direct broadcast system uplinks including Nilesat in Eygpt Worldspace Processed Feeder Link Stations. The Company was awarded a contract to develop and supply uplink stations for the new Digital Audio Radio Satellite System to start service in 1999. This system will distribute broadcast radio to low cost satellite receivers for customers in Africa, Asia and Latin America. GROUND SEGMENT NETWORK INSTALLATIONS The following are examples of ground segment networks sold or currently being installed by the Company: Sonangol Telecommunications Network. The Company was awarded a contract to provide a satellite and cellular telecommunications network comprised of a hub earth station and 15 remote earth stations for Sonangol, U.E.E., a large oil supply consortium with operations in remote areas in Africa not served by terrestrial communications services. The network will also provide cost-effective cellular coverage at some of the remote oil company locations by linking those sites back to the central office mobile subscriber switch via satellite, as well as trunks from remote areas to the company headquarters and interconnectivity to the local telephone company at the capital city. Thailand Ministry of Health Telemedicine Network. The Company has completed a subcontract by Loxley Public Company Limited ("Loxley"), a telecommunications infrastructure provider in Thailand, to design, assemble 10 and install, together with Loxley, a telemedicine network comprised of 20 earth stations in Thailand for the Ministry of Health. This network provides video conferencing and bandwidth on demand for transferring images and data from diverse types of electronic medical diagnostic tools such as X-ray, CAT scan, and electrocardiogram machines to and from medical personnel situated in remote locations. Hyundai Networks. The Company completed a contract to provide a corporate network for restoral of terrestrial circuits and for video broadcasting for Hyundai Electronics Industries Co. Ltd. ("Hyundai") in Korea. This network is comprised of a hub earth station and 12 remote earth stations with high-speed data capability and an additional 60 locations with digital video receive- only capability. In addition, the Company and Hyundai designed, assembled and installed, on an accelerated schedule, a demonstration private corporate network comprised of five earth stations in Korea. This network provides interconnection between up to five Hyundai locations for a broad range of purposes, including voice, data and video conferencing. The Company is working with Hyundai to market similar networks to other customers in Korea. Transworld Communications Services. The company was awarded a contract to develop and supply trunking earth stations for a network in Russia. These stations form the backbone of a modern digital telecommunications network for voice and data services. NETSAT EXPRESS DATA COMMUNICATIONS SERVICES The Company's NetSat Express services are designed to provide broadband access to data communications media such as the Internet, corporate intranet applications and business data applications by integrating end-user terminals, satellite communications equipment and international networks. NetSat Express provides its PC Vector services through a one-way satellite downlink using an HNS' DirecPC Terminal linked to existing terrestrial communications infrastructure, and its Access Plus services through a two-way satellite uplink/downlink using NetSat Express provided satellite networking equipment. NetSat Express has entered into a value-added reseller agreement with HOT (a Hughes Network Systems company) for sales of the PC Vector product in certain Eastern European countries. The value-added reseller arrangement is not contingent upon the grant of any license from HNS to NetSat Express. NetSat Express offers a range of options and accessories to permit value-added resellers to deliver reliable, cost-effective turnkey solutions to their customers. These options include multimedia PCs, alternative antenna configurations, local area network servers and custom system configurations. NetSat Express's Network Operations Center provides 24-hour technical support. NetSat Express also offers its customers specialized services such as Committed Information Rate or higher quality of service and economical asymmetrical access. STRATEGIC RELATIONSHIPS A key element of the Company's strategy is to establish strategic customer and supplier relationships. The Company selects its strategic suppliers based on many factors, including technical capability and potential for growth. The Company outsources certain of its research and development through equity investments in select suppliers. The following sets forth certain information regarding the Company's strategic relationships where GSI has made an equity investment. For further information on the Company's equity investments see Note 5 of the Notes to Consolidated Financial Statements. Shiron Satellite Communications (1996), Ltd. In January 1996, the Company and Shiron Advanced Communications Ltd. formed Shiron to develop a low-cost satellite modem to be incorporated into earth station products targeted at bringing communications infrastructure to rural or remote regions of developing countries. The Company plans to 11 use the modem in its Compact Earth Station (CES2001) product line and in connection with the data communications services, including Internet access, it offers through NetSat Express. The modem has been developed under a grant from the Israel-United States Binational Industrial Research and Development Foundation (the "BIRD Foundation") and the BIRD Foundation will receive a royalty from the proceeds of sales of the modem. The Company and Shiron have received a second grant from the BIRD Foundation for the development of a return link via satellite for Internet access applications. Newpoint Technologies, Inc. (formerly C-Grams Unlimited Inc.) Newpoint Technologies is a supplier of advanced network and earth station management software. The Company believes its investment in Newpoint Technologies will provide it with research and development in new software products aimed at the Company's needs and access to customers who need to develop optimized solutions for their network management requirements. See "-GSI Ground Segment Systems and Networks" and "-Research and Development." Armer Communications Engineering Services, Inc. Armer is a field engineering company focused on the satellite communications business. Armer complements the Company's satellite communications engineering capability by providing qualified field installation/test personnel for the implementation and test phase of turnkey projects. Joint Communications Technology Corp. JCTC is a product development company with proprietary technology in low bit rate voice encoding. JCTC produces products for encoding voice, multiplexing voice and data, and encrypting voice and data for security. The Company believes its investment in JCTC will provide it with the opportunity to address optimized solutions for customers. McKibben Communications, LLC McKibben Communications provides conditional access and uplink services to the television industry in Los Angeles. McKibben Communications also originates sports broadcasts from Los Angeles to Japan for distribution in Japan by a local satellite provider. GSI and McKibben Communications complement each other and intend to offer a turnkey solution to broadcasters including design, installation, and operation of uplink facilities. SALES AND MARKETING The Company markets its products and services to prime communications infrastructure contractors, PTTs, other telecommunications carriers, producers and distributors of news and entertainment content and other corporations through sales representatives in foreign countries as well as its sales and marketing offices in Hauppauge, New York, Atlanta, Georgia, and Hong Kong. The Company presently employs 35 persons with marketing responsibility, of which 16 are engaged in marketing on a full-time basis. The Company applies a "project team" approach to identifying, obtaining and maintaining customer accounts by grouping sales representatives, marketing executives, business execution teams and account managers together to develop close and continuing relationships with its customers. The Company's sales representatives in foreign countries provide local presence and identify prospective customers for the Company's marketing executives. The marketing executives and associated business execution teams work together to develop relationships with these customers, and ultimately obtain orders for the Company's products or services. The business execution teams manage the accounts on a day-to-day basis and long-term customers are assigned to an 12 account manager who usually also functions as a project engineer for that account. The Company believes that this account management focus provides continuity and loyalty between the Company and its customers and fosters long-term relationships that lead to follow-up work and referrals to new customers. In addition to obtaining business through its project team approach, the Company obtains sales leads for new customers through referrals from existing customers, industry suppliers, and other sources such as participation in trade shows. The Company also directs its marketing efforts to its strategic allies, primarily through the Company's senior management. In some cases a strategic ally may be the prime contractor for a system or network installation and will subcontract the ground segment of the project to the Company. In other cases, the strategic ally may recommend the Company as prime contractor for the design and supply of a system. The Company's marketing strategy for NetSat Express's Internet access and data communications services is at an early stage of development. The Company anticipates that such strategy will be carried out primarily through value added resellers in each of the countries in which it markets its services, depending on the capabilities of such partners and resellers, the nature and location of prospective customers in such countries and the particular communications infrastructure requirements and regulatory structure of each potential market. The Company expects that members of senior management will play a role in developing and maintaining relationships with local value added resellers and local partners. CUSTOMERS The Company's customers include prime communications infrastructure contractors, PTTs, other telecommunications carriers, producers and distributors of news and entertainment content and corporations. The Company typically relies upon a small number of customers for a large portion of its revenues. For example, approximately 29% of the Company's revenues in fiscal 1998 were derived from sales to Sonangol, U.E.E. At June 30, 1998, $12.2 million, or approximately 28% of the Company's backlog, was accounted for by a contract between the Company and Transworld Communications Services, Inc. and $7.1 million, or approximately 16% of the Company's backlog, was accounted for by a contract between the Company and Sonangol, U.E.E. The Company expects that in the near term a significant portion of its revenues will continue to be derived from one or a limited number of customers (the identity of whom may vary from year to year) as the Company seeks to expand its business and its customer base. The reduction, delay, or cancellation of orders from one or more of such significant customers would have a material adverse effect on the Company's business, financial condition and results of operations. BACKLOG At June 30, 1998, the Company's backlog was approximately $43.6 million (approximately 89% of which is expected to be delivered during fiscal 1999) compared with approximately $40.8 million at June 30, 1997. The Company records an order in backlog when it receives a firm contract or purchase order which identifies product quantities, sales price and delivery dates. Backlog represents the amount of unrecorded revenue on undelivered orders and a percentage of revenues from sales of products that have been shipped but have not been accepted by the customer. The Company's backlog at any given time is not necessarily indicative of future period revenues. While from time to time a substantial portion of the Company's backlog has been comprised of large orders, the cancellation of any of which could have a material adverse effect on the Company's operating results, the Company to date has not experienced significant changes in its backlog from cancellations or revisions of orders. See "Risk Factors-Risk of Customer Concentration." PRODUCT DESIGN, ASSEMBLY AND TESTING The Company assigns a project team to each contract into which it enters. The project team is led by a project engineer who is responsible for execution of the project process, which includes engineering and 13 design, assembly and testing, installation and customer acceptance. Project teams generally consist of between two and 10 employees and include engineers, integration specialists, buyer-planners and an operations team. The Company's proprietary products and system designs are utilized in the engineering and design phases of a project. Once a 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 integration of purchased equipment, components and subsystems into a complete functioning system. Assembly, integration and test operations are conducted on both an automated and manual basis, depending primarily on production volume. The Company provides facilities for complete in-plant testing of all its systems before delivery in order to assure all performance specifications will be met during installation at the customer's site. The Company employs formal Total Quality Management programs and other training programs, and has been certified by the International Organization of Standards quality certification process for ISO 9001, a standard sometimes imposed by foreign buyers, that enumerates certain requirements an organization must follow in order to assure consistent quality in the supply of products and services. The certification process qualifies the Company for access to virtually all international projects, and the Company believes that this represents a competitive advantage. The Company currently procures most of the critical components and services for its products from single or limited sources in connection with specific contracts and does not otherwise carry significant inventories or have long-term or exclusive supply contracts with its source vendors. The Company has from time to time experienced delays in receiving products from certain of its vendors due to quality control or manufacturing problems, shortages of materials or components or product design difficulties. There can be no assurance that similar problems will not recur or that replacement products will be available when needed at commercially reasonable rates, or at all. If the Company were to change certain of its vendors, the Company would be required to perform additional testing procedures upon the components supplied by such new vendors, which could prevent or delay product shipments. Additionally, prices could increase significantly in connection with changes of vendors. Any inability of the Company to obtain timely deliveries of materials of acceptable quality or timely services, or any significant increase in the prices of materials or services, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors-Quarterly Fluctuations," "-Risk of Fixed-Price Contracts " and "-Dependence upon Suppliers; Sole and Limited Sources of Supply." RESEARCH AND DEVELOPMENT The Company outsources much of its research and development by making strategic investments in certain suppliers who perform research and development for the Company. This provides the Company with a cost-effective way to develop new technology, while minimizing its direct expenditures. The Company believes that outsourcing research and development, where the costs are funded partially by the investments made in its strategic suppliers, allows the Company to retain its flexibility in developing solutions for its customers, while at the same time leaving open the opportunity to develop proprietary products through its strategic supplier relationships. The Company's internal research and development efforts generally focus on the development of products not available from other suppliers to the industry. Current efforts are focused on developing Customizable Systems. Through June 30, 1998, the Company has incurred approximately $2.5 million in internal research and development expenses. COMPETITION The Company believes that its ability to compete successfully in the satellite ground segment market is based primarily on its ability to provide a solution which fits the customer's requirements, as well as on price, performance, reputation of its management, on-time delivery, reliability and customer support. The Company believes its success in the satellite-delivered data communications services market will depend primarily on its ability to 14 provide prompt delivery and installation, competitive pricing, consistent and reliable connections, and customer support. The Company's primary competitors in the satellite ground segment market generally fall into the following groups: (i) vertically integrated satellite systems providers such as Nippon Electric Corporation, L3 Communications, Scientific-Atlanta, Inc. and ComSat RSI and (ii) system integrators such as Engineering & Technical Services and IDB Systems, a division of LDDS Worldcom Inc. In the satellite-delivered data communications (including Internet) services market, while the Company expects to cooperate with many local providers, the Company may compete with other satellite communication companies as they develop technology in this area as well as conventional Internet services providers. In addition, the Company may compete with local governmental PTTs and other local access providers which often have monopoly rights for certain services including telephony. The Company anticipates that its competitors may develop or acquire products that provide functionality that is similar to that provided by the Company's products and that such products may be offered at significantly lower prices or bundled with other products. In addition, current and potential competitors in both markets in which the Company competes have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products and services to address the needs of the Company's current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. 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 the Company's business, results of operations and financial condition. See "Risk Factors-Intense Competition; Limited Barriers to Entry." INTELLECTUAL PROPERTY The Company relies heavily on the technological and creative skills of its personnel, new product developments, computer programs and designs, frequent product enhancements, reliable product support and proprietary technological expertise in maintaining its competitive position, and lacks patent protection for its products and services. The Company currently has three patent applications pending in the United States and a Patent Cooperation Treaty ("PCT") application, corresponding to one of the United States applications, is pending in a number of foreign jurisdictions. The Company also intends to seek further patents on its technology, if appropriate. The Company has filed applications for trademark registration of Globecomm Systems Inc. in the United States and of NetSat Express in the United States, Singapore, the European Union, the Russian Federation and Brazil, and intends to seek registration of other trademarks in the future. See "Risk Factors-Proprietary Technology; Risk of Infringement." GOVERNMENT REGULATION The Company is subject to various federal laws and regulations which govern the operation of the teleport (a group of transmit earth stations) that the Company has in operation in Hauppauge, New York. This includes regulation by the FCC for domestic and international carriage and by government agencies in other countries. The Company's transmission of voice and data for its data communications business through the teleport has been licensed by the FCC for domestic and international service. The Company has received the license for domestic service, which required the Company to submit an application which contains technical information about the teleport and a demonstration of the public interest aspects of the teleport, including a shareholder list and a statement that the Company's ownership complies with the FCC's foreign ownership restrictions for licensees. 15 The Company has filed applications for both C Band and Ku Band licenses which have been granted. Presently, the Company is operating Ku Band international and C Band domestic service at the Teleport. With respect to international service, the Company has submitted an application to the FCC for a Certificate of Public Convenience and Necessity ("CPCN") which has been granted. The Company may also be required to file and maintain tariffs containing the specific rates, terms and conditions applicable to services. The tariffs can become effective one day after public notice of grant of the CPCN. No assurance can be given that the Company will receive a CPCN or successfully file and maintain its tariff. The Company or its local partners typically must obtain authorization for each country in which the Company provides its satellite-delivered data communications services. Although the Company believes that it or its local partners will be able to obtain the requisite licenses and approvals from the countries in which the Company intends to provide service, the regulatory schemes in each country are different and thus there may be instances of noncompliance of which the Company is not aware. Although the Company believes these regulatory schemes will not prevent the Company from pursuing its business plan, there can be no assurance such 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 the Company wishes to offer its services or that restrictions applicable thereto will not be unduly burdensome. The sale of the Company's ground segment systems and networks 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 the Company's competitive position. In addition, in order to ship its products into European Union countries, the Company must satisfy certain technical requirements. If the Company were unable to comply with such requirements with respect to a significant quantity of the Company's products, the Company's sales in Europe could be restricted, which could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of June 30, 1998, the Company had 117 full-time employees, including 55 in engineering and program management, 26 in the manufacturing and manufacturing support group, 16 in sales and marketing, and 20 in management and administration. The Company's employees are not covered by any collective-bargaining agreements. The Company believes that its relations with its employees are good. ITEM 2. PROPERTIES During the fiscal year ended June 30, 1998, the Company completed the renovation of approximately 122,000 square feet of space in a facility on approximately 7 acres located at 45 Oser Avenue, Hauppauge, New York. These premises house the principal offices and production facilities of the Company and NetSat Express. Prior to the completion of the renovation of these facilities, the Company leased 20,000 square feet of space in an industrial facility located at 375 Oser Avenue, Hauppauge, New York under an agreement which terminated on July 31, 1997. The Company has a lease on office space in Hong Kong at a monthly rental fee (including maintenance fees) of approximately $3,000. The Company also leases office space in the Atlanta, Georgia, area under a three-year lease at an initial base monthly rent of $1,750, which rental amount increases in years two and three of the lease and is currently approximately $1,900 per month. ITEM 3. LEGAL PROCEEDINGS None 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "GCOM". The fiscal 1998 high and low closing prices are as follows: High Low ------------------------- First Quarter (from August 13, 1997 through September 30, 1997) $ 19.63 $ 11.88 Second Quarter 19.25 10.50 Third Quarter 15.25 9.00 Fourth Quarter 14.25 8.50 At September 25, 1998, there were approximately 2,700 stockholders of record of the Company's Common Stock, as shown in the records of the Company's transfer agent. At the close of the Nasdaq National Market on September 25, 1998, the Company's market price per share was $5.50. As of June 30, 1998, the Company had not declared or paid dividends on its Common Stock since inception and does not expect to pay dividends in the foreseeable future. The effective date of the Company's first registration statement (the "Registration Statement") filed on Form S-1 (Registration No. 333-22425) under the Securities Act of 1933, as amended, was August 7, 1997. The class of securities registered was Common Stock. The offering commenced on August 8, 1997 and all securities were sold in the offering. The managing underwriters for the offering were PaineWebber Incorporated and C.E. Unterberg, Towbin. Pursuant to the Registration Statement, the Company registered and sold 3,162,500 shares of Common Stock for an aggregate offering price of $31,625,000. The Company incurred total expenses in the offering of approximately $3,721,000 of which approximately $2,214,000 represented underwriting discounts and commissions and approximately $1,507,000 represented other expenses. All such payments were direct or indirect payments to others. The net offering proceeds to the Company after deducting the total expenses were approximately $27,904,000. From the effective date of the Registration Statement to June 30, 1998, the approximate amount of the net offering proceeds used were $3.4 million to fund capital expenditures and investing activities and $12.1 million for working capital purposes, increased selling and marketing efforts, and increased internal research and development expenses. All such payments were direct or indirect payments to others. 18 ITEM 6. SELECTED FINANCIAL DATA SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM AUGUST 17, 1994 YEAR ENDED YEAR ENDED YEAR ENDED (INCEPTION) JUNE 30, JUNE 30, JUNE 30, THROUGH JUNE 30, 1998 1997 1996 1995 ------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Revenues...................................... $ 58,105 $ 36,220 $ 13,476 $ 72 Costs of revenues............................. 49,532 32,060 11,238 58 ------------------------------------------------------------------- Gross profit.................................. 8,573 4,160 2,238 14 ------------------------------------------------------------------- Operating expenses: Selling and marketing....................... 4,187 3,282 1,915 346 Research and development.................... 1,188 649 712 - General and administrative.................. 5,010 3,449 1,945 772 ------------------------------------------------------------------- Total operating expenses...................... 10,385 7,380 4,572 1,118 ------------------------------------------------------------------- Loss from operations.......................... (1,812) (3,220) (2,334) (1,104) Interest income, net.......................... 1,266 276 89 39 ------------------------------------------------------------------- Loss before minority interests in operations of consolidated subsidiary.................. (546) (2,944) (2,245) (1,065) Minority interests in operations of consolidated subsidiary..................... - 275 - - ------------------------------------------------------------------- Net loss...................................... $ (546) $ (2,669) $ (2,245) $ (1,065) =================================================================== Basic and diluted loss per share.............. $ (0.06) ================ Basic and diluted weighted average Shares................................... 8,553 ================ Pro forma net loss per share (unaudited)...... $ (0.44) ================= Shares used in computing pro forma basic and diluted net loss per share (unaudited)(1) 6,086 ================= OTHER OPERATING DATA: EBITDA(2)..................................... $ (1,110) $ (2,858) $ (2,141) $ (1,036) Cash flows used in operating activities....... (5,894) (1,958) (2,510) (454) Cash flows used in investing activities....... (7,126) (8,221) (1,714) (593) Cash flows provided by financing activities............................... 29,198 11,908 4,151 4,554 Capital expenditures ......................... 3,462 6,765 339 437 Backlog at end of period(3) .................. 43,572 40,807 11,588 7,716 JUNE 30, JUNE 30, JUNE 30, 1998 1997 1996 -------------------------------------------------- BALANCE SHEET DATA: Cash and cash equivalents....................................... $ 21,342 $ 5,164 $ 3,435 Working capital................................................. 31,663 6,379 4,727 Total assets.................................................... 58,344 33,286 9,503 Long-term debt.................................................. - 18 74 Stockholders' equity............................................ 44,014 15,996 5,730
19 (1) Computed on the basis described in Note 2 of Notes to Consolidated Financial Statements. (2) EBITDA represents earnings before minority interests in operations of consolidated subsidiary, interest income, net, income taxes, depreciation and amortization expense. EBITDA does not represent cash flows as defined by generally accepted accounting principles and does not necessarily indicate that cash flows are sufficient to fund all the Company's cash needs. EBITDA is a financial measure commonly used in the Company's industry and should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other measures of liquidity determined in accordance with generally accepted accounting principles. EBITDA may not be comparable to other similarily titled measures of other companies. (3) The Company records an order in backlog when it receives a firm contract or purchase order which identifies product quantities, sales price and delivery dates. Backlog represents the amount of unrecorded revenue on undelivered orders and a percentage of revenues from sales of products that have been shipped but have not been accepted by the customer. The Company's backlog at any given time is not necessarily indicative of future period revenues. See "Business-Backlog." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed in "Risk Factors" as well as those discussed elsewhere in this Form 10-K. OVERVIEW Since the Company's inception, substantially all of the Company's revenue has been generated by its satellite ground segment-related operations. Contracts for these ground segment systems and networks have been in virtually all cases fixed-price contracts. Profitability of such contracts is subject to inherent uncertainties as to the cost of performance. In addition to possible errors or omission 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 the Company's business may at certain times be concentrated in a limited number of large contracts, a significant cost overrun on any contract could have a material adverse effect on the Company's business, financial condition and results of operations. The period from contract award through installation of ground segment systems and networks supplied by the Company generally requires from three to 12 months. The Company uses the percentage of completion method of accounting for contract revenues, upon the achievement of certain milestones. Accordingly, most of the revenue from sales of products is typically recognized when the product is shipped, with the balance recognized at the time of acceptance by the customer. Revenues from providing services are recognized at the time the service is performed. Costs of revenues are generally recorded based on the relationship of the amount of projected final costs to the percentage of revenue recorded for the specific contract. See Note 2 of Notes to Consolidated Financial Statements. Costs of revenues consist primarily of the costs of purchased material, direct labor and related overhead expenses, project-related travel, living costs and subcontractor salaries. Selling and marketing expenses consist primarily of salaries and travel and living costs for sales and marketing personnel. Research and development expenses consist primarily of salaries and related overhead expenses paid to engineers. The Company also benefits from research and development conducted by its strategic suppliers. See "Business-Research and Development." General and administrative expenses consist of expenses associated with the Company's management, accounting, contract and administrative functions. The Company anticipates that selling and marketing, research and development and general and administrative expenses will continue to increase during the next several years due to expected increases in personnel and expenses related to supporting the Company's expanding customer base. 20 RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of total revenues for the periods indicated:
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, JUNE 30, JUNE 30, 1998 1997 1996 --------------------------------------------------------- PERCENTAGE OF TOTAL REVENUES: Revenues.............................................. 100.0% 100.0% 100.0% Costs of revenues..................................... 85.2 88.5 83.4 --------------------------------------------------------- Gross profit........................................ 14.8 11.5 16.6 Operating expenses: Selling and marketing............................... 7.2 9.1 14.2 Research and development............................ 2.1 1.8 5.3 General and administrative.......................... 8.6 9.5 14.4 --------------------------------------------------------- Total operating expenses.............................. 17.9 20.4 33.9 --------------------------------------------------------- Loss from operations.................................. (3.1) (8.9) (17.3) Interest income, net.................................. 2.2 0.8 0.7 --------------------------------------------------------- Loss before minority interests in operations of consolidated subsidiary.............................. (0.9) (8.1) (16.6) Minority interests in operations of consolidated subsidiary........................................... - 0.7 - Net loss............................................... (0.9)% (7.4)% (16.6)%
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997 Revenues. Revenues, which were primarily derived from sales of ground segment systems and networks, increased by $21.9 million, or 60.4%, to $58.1 million for the fiscal year ended June 30, 1998 from $36.2 million for the fiscal year ended June 30, 1997. The increase was primarily the result of a negotiated contract with Sonangol, U.E.E. as well as an overall increase in the number of shipments and/or completion of contracts as the Company continued to expand its businesses. Revenues for the three month period ended June 30, 1998 decreased by 25.2% to $11.0 million from $14.7 million for the same period in the previous year as a result of the decline in bookings in previous quarters as a result of the economic conditions in the Pacific Rim region, Russia and other international markets. The Company expects the trend in revenues that adversely affected its results of operations for the three month period ended June 30, 1998 to continue to impact the Company. These trends include the difficult economic conditions in the Pacific Rim region, Russia and other international markets and the decrease in bookings received by the Company from these regions. Gross Profit. Gross profit increased by $4.4 million to $8.6 million for the fiscal year ended June 30, 1998 from $4.2 million for the fiscal year ended June 30, 1997. The increase was primarily due to the increase in the shipment of ground segment systems and networks. Gross profit as a percentage of revenues was 14.8% for the fiscal year ended June 30, 1998 compared to 11.5% for the fiscal year ended June 30, 1997. The increase was due primarily to a significant negotiated contract with Sonangol, U.E.E., which resulted in higher gross profit margin offset in part by an increase in orders awarded through a competitive bidding process, which typically result in lower gross profit margins than negotiated contracts. Selling and Marketing. Selling and marketing expenses increased by $0.9 million, or 27.6%, to $4.2 million for the fiscal year ended June 30, 1998 from $3.3 million for the fiscal year ended June 30, 1997. The increase was primarily due to the increase in the number of bids and proposals prepared by the Company, as well as an increase in marketing personnel from 25 at June 30, 1997 to 35 at June 30, 1998. Selling and marketing expenses as a 21 percentage of revenues was 7.2% for the fiscal year ended June 30, 1998 compared to 9.1% for the fiscal year ended June 30, 1997. Research and Development. Research and development expenses increased by $0.5 million, or 83.1%, to $1.2 for the fiscal year ended June 30, 1998 from $0.6 million for the fiscal year ended June 30, 1997 due to an increase in development costs associated with custom solutions. Research and development expenses as a percentage of revenues increased to 2.1% for the fiscal year ended June 30, 1998 from 1.8% for the fiscal year ended June 30, 1997. General and Administrative. General and administrative expenses increased by $1.6 million, or 45.3%, to $5.0 million for the fiscal year ended June 30, 1998 from $3.4 million for the fiscal year ended June 30, 1997, but decreased as a percentage of revenues to 8.6% for the fiscal year ended June 30, 1998 from 9.5% for the fiscal year ended June 30, 1997. The increase in general and administrative expenses resulted primarily from an increase of approximately $0.7 million in legal and other costs associated with operating a public company, and an increase of approximately $0.5 million in personnel and related expenses to support the continued growth of the Company's business. Interest Income. Interest income increased by $1.0 million to $1.3 million for the fiscal year ended June 30, 1998 from $0.3 million for the fiscal year ended June 30, 1997. The increase was primarily the result of the investment of remaining net proceeds from the Company's initial public offering. NetSat Express. During the fiscal year ended June 30, 1998, the Company's consolidated consolidated subsidiary NetSat Express experienced an increase in revenues of approximately $0.6 million to approximately $0.7 million from approximately $0.1 million for the year ended June 30, 1997. The increase resulted from the implementation of Access Plus services in January 1998, an increase in the number of PC Vector equipment sales and related activations. The increase in loss from operations associated with NetSat Express of approximately $0.2 million to $1.7 million for the fiscal year ended June 30, 1998 from $1.5 million for the year ended June 30, 1997 was mainly attributable to initial start up costs associated with providing Access Plus and PC Vector services. FISCAL YEARS ENDED JUNE 30, 1997 AND 1996 Revenues. Revenues, which were derived from sales of ground segment systems and networks, increased by $22.7 million, or 168.8%, to $36.2 million for the fiscal year ended June 30, 1997 from $13.5 million for the fiscal year ended June 30, 1996. The increase was primarily the result of an increase in the number of shipments and/or completion of contracts from 22 for the fiscal year ended June 30, 1996 to 47 for the fiscal year ended June 30, 1997. Gross Profit. Gross profit increased by $1.9 million to $4.2 million for the fiscal year ended June 30, 1997 from $2.2 million for the fiscal year ended June 30, 1996. The increase was primarily due to the increase in the shipment of ground segment systems and networks. Gross profit as a percentage of revenues was 11.5% for the fiscal year ended June 30, 1997 compared to 16.6% for the fiscal year ended June 30, 1996. Such decrease was due primarily to an increase in orders awarded through a competitive bidding process, which typically result in lower gross profit margins than negotiated contracts and a contract awarded in the previous year with an unusually high profit margin. Selling and Marketing. Selling and marketing expenses increased by $1.4 million, or 71.4%, to $3.3 million for the fiscal year ended June 30, 1997 from $1.9 million for the fiscal year ended June 30, 1996. The increase was primarily due to the opening of marketing offices in Hong Kong and in Atlanta, Georgia, the hiring of selling and marketing personnel for NetSat Express, which accounted for approximately $0.6 million, or 17.5%, of the selling and marketing expenses for the year and the increase in the number of bids and proposals prepared by the Company. Selling and marketing expenses as a percentage of revenues was 9.1% for the fiscal year ended June 30, 1997 compared to 14.2% for the fiscal year ended June 30, 1996. 22 Research and Development. Research and development expenses decreased by $0.1 million, or 8.9%, to $0.6 million for the fiscal year ended June 30, 1997 from $0.7 million for the fiscal year ended June 30, 1996 due to a decline in development costs associated with customizable systems. Research and development expenses as a percentage of revenues decreased to 1.8% for the fiscal year ended June 30, 1997 from 5.3% for the fiscal year ended June 30, 1996. General and Administrative. General and administrative expenses increased by $1.5 million, or 77.3%, to $3.4 million for the fiscal year ended June 30, 1997 from $1.9 million for the fiscal year ended June 30, 1996, but decreased as a percentage of revenues to 9.5% for the fiscal year ended June 30, 1997 from 14.4% for the fiscal year ended June 30, 1996. The increase in general and administrative expenses resulted from personnel increases to service the increasing customer base for the Company's ground segment business as well as the hiring of NetSat Express administrative personnel, which accounted for approximately $0.6 million, or 17.6%, of the general and administrative expenses for the year. 23 QUARTERLY RESULTS The following tables set forth certain unaudited financial information for each of the eight fiscal quarters in the period ended June 30, 1998. The Company believes that this information has been presented on the same basis as the audited Consolidated Financial Statements appearing elsewhere in the Prospectus and in the opinion of management all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the audited Consolidated Financial Statements of the Company and related Notes thereto included elsewhere in this Form 10-K. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
THREE MONTHS ENDED ------------------ SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1996 1996 1997 1997 1997 1997 1998 1998 --------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Revenues.................... $ 4,155 $ 9,151 $ 8,226 $ 14,688 $ 14,591 $ 16,269 $ 16,261 $ 10,984 Costs of revenues........... 3,591 7,906 7,239 13,324 12,919 13,902 13,294 9,417 --------------------------------------------------------------------------------------------- Gross profit............... 564 1,245 987 1,364 1,672 2,367 2,967 1,567 Operating expenses: Selling and marketing.... 554 847 815 1,066 831 966 1,167 1,223 Research and development. 92 137 122 298 280 304 287 317 General and administrative 661 755 1,118 915 1,088 1,153 1,235 1,534 --------------------------------------------------------------------------------------------- Total operating expenses.... 1,307 1,739 2,055 2,279 2,199 2,423 2,689 3,074 --------------------------------------------------------------------------------------------- (Loss) income from operations (743) (494) (1,068) (915) (527) (56) 278 (1,507) Interest income, net........ 14 56 117 89 264 379 291 332 --------------------------------------------------------------------------------------------- (Loss) income before minority interests in operations of consolidated subsidiary................. (729) (438) (951) (826) (263) 323 569 (1,175) Minority interests in operations of consolidated subsidiary................. 175 100 - - - - - - --------------------------------------------------------------------------------------------- Net (loss) income......... $ (554) $ (338) $ (951) $ (826) $ (263) $ 323 $ 569 $ (1,175) ============================================================================================= PERCENTAGE OF TOTAL REVENUES: Revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs of revenues........... 86.4 86.4 88.0 90.7 88.5 85.5 81.8 85.7 --------------------------------------------------------------------------------------------- Gross profit............... 13.6 13.6 12.0 9.3 11.5 14.5 18.2 14.3 Operating expenses: Selling and marketing.... 13.3 9.3 10.0 7.3 5.7 5.9 7.2 11.1 Research and development. 2.2 1.5 1.5 2.0 1.9 1.8 1.7 2.9 General and administrative 15.9 8.2 13.6 6.2 7.5 7.1 7.6 14.0 --------------------------------------------------------------------------------------------- Total operating expenses.... 31.4 19.0 25.1 15.5 15.1 14.8 16.5 28.0 --------------------------------------------------------------------------------------------- (Loss) income from operations (17.8) (5.4) (13.1) (6.2) (3.6) (0.3) 1.7 (13.7) Interest income, net........ 0.3 0.6 1.4 0.6 1.8 2.3 1.8 3.0 --------------------------------------------------------------------------------------------- (Loss) income before minority interests in operations of consolidated subsidiary................. (17.5) (4.8) (11.7) (5.6) 1.8 2.0 3.5 (10.7) Minority interests in operations of consolidated subsidiary................. 4.2 1.1 - - - - - - --------------------------------------------------------------------------------------------- Net (loss) income......... (13.3)% (3.7)% (11.7)% (5.6)% (1.8)% 2.0% 3.5% (10.7)% =============================================================================================
The Company may continue to experience significant quarter to quarter fluctuations in its results of operations, which may result in volatility in the price of the Company's Common Stock. Quarterly results of operations may fluctuate as a result of a variety of factors, including the timing of the initiation and completion of contracts, delays in the booking of new contracts, the demand for the Company's products and services, the introduction of new or enhanced products and services by the Company or its competitors, market acceptance of new products and services, the mix of revenues between custom-built satellite communications systems and networks designed for its 24 customers and standard installations provided to its customers, the growth of demand for Internet infrastructure-based products and services in developing countries, the timing of significant marketing programs, the extent and timing of the hiring of additional personnel, competitive conditions in the industry and general economic conditions in the U.S. and abroad, such as the difficult economic conditions and currency devaluations in the Pacific Rim region, Russia and other international markets which have adversely impacted and may continue to adversely impact the Company's quarterly results. Due to the foregoing factors, it is likely that in one or more future quarters the Company's operating results will be below the expectations of public market analysts and investors. Such an event could have a material adverse effect on the price of the Company's Common Stock. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations to date primarily from the sale of equity securities and, to a lesser degree, from stockholder loans. Through June 30, 1998, the Company raised approximately $49.1 million of net proceeds through a public offering of its Common Stock and private offerings of its Common Stock and Convertible Preferred Stock. During the fiscal year ended June 30, 1998, the Company received net proceeds of approximately $28.7 million from sales of Common Stock through the Company's Initial Public Offering. In addition, the Company received approximately $0.6 million in proceeds from the exercise of stock options and warrants during the fiscal year ended June 30, 1998. At June 30, 1998, the Company had working capital of $31.7 million, including cash and cash equivalents of $21.3 million, restricted cash of $4.4 million, accounts receivable of $18.0 million, inventories of $1.6 million and prepaid and other current assets of $0.6 million, offset by $13.0 million in accounts payable and $1.2 million in accrued expenses. The Company has experienced negative cash flow from operations since its inception. Such negative cash flows were due to the net losses, increases in accounts receivable and decreases in accounts payable during the respective periods. Net cash used in operating activities for the fiscal years ended June 30, 1998, 1997 and 1996 was $5.9 million, $2.0 million and $2.5 million, respectively. Management anticipates that NetSat Express will experience negative cash flow for at least the next 12 months as a result of additional capital investments required for continued development of its operations in Eastern Europe and losses from operations. Several factors had a major effect on the Company's liquidity during the fiscal year ended June 30, 1998. First, revenues increased substantially as a result of a significant increase in contract deliveries and completed installations. The higher revenues increased the Company's working capital needs, as accounts receivable increased by approximately $3.7 million and accounts payable decreased by approximately $3.0 million during the fiscal year ended June 30, 1998. Offsetting this increase was an increase in accrued expenses of approximately $0.1 million. Because the Company records progress payments as an offset to inventory, the approximately $0.7 million decrease in net inventory during the fiscal year is lower than might be expected based on the increased level of activity and shipments against progress payments for contracts completed (a decrease of approximately $3.4 million from June 30, 1997 to June 30, 1998). Inventory levels may be expected to increase as work proceeds on newly acquired and existing contracts. The second factor affecting liquidity during the fiscal year ended June 30, 1998 was the Company's investment activities. The Company increased its investment in its strategic suppliers by approximately $0.8 million during the fiscal year and purchased approximately $1.6 million in additional computer, machinery and test equipment. In addition, the Company completed renovation of its new office and assembly facility for which it spent approximately $1.0 million in cash on improvements and has spent an additional $0.8 million on furniture and fixtures. The third major factor affecting liquidity was the completion of an initial public offering of Common Stock and the exercise of options and warrants during the fiscal year ended June 30, 1998. Net proceeds of these 25 transactions were approximately $29.3 million leaving the Company with cash and cash equivalents at the end of the fiscal year of approximately $21.3 million, which does not include $4.4 million of restricted cash. The Company has incurred losses since its inception and therefore has not been subject to federal income taxes. Through June 30, 1998, the Company, for income tax purposes, has generated net operating loss carryforwards of approximately $8.2 million which may be available to reduce future taxable income and future tax liabilities. These carryforwards expire through 2013. The Tax Reform Act of 1986 provides for an annual limitation on the use of net operating loss carryforwards (following certain ownership changes) that could significantly limit the Company's ability to utilize these carryforwards. The exercise of options or warrants or in connection with future sales of equity could limit the Company's ability to utilize the aforementioned carryforwards to reduce future taxable income and tax liabilities. Additionally, because the United States tax laws limit the time during which these carryforwards may be applied against future taxes, the Company may not be able to take full advantage of these attributes for federal income tax purposes. The Company has a $7.5 million credit facility consisting of (1) a $5.0 million secured domestic line of credit and (2) a $2.5 million secured export-import guaranteed line of credit. Each line of credit bears interest at the prime rate plus 1/2% per annum and is collateralized by a first security interest on all assets. The Company's future capital requirements will depend upon many factors, including the extent to which it is able to locate additional strategic suppliers in whose technology it wishes to invest, the success of the Company's marketing efforts in both the satellite ground segment and Internet services fields, the demand, nature and timing of customer orders and the extent to which it must conduct research and development efforts internally. Based on current plans, the Company believes that its existing capital resources will be sufficient to meet its capital requirements for at least the next 12 months. RISK FACTORS LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT The Company, which was formed in August 1994, has a limited operating history upon which an evaluation of the Company can be based and has incurred significant operating losses since its inception. The Company has financed its operations to date primarily from the sale of equity securities and, to a lesser degree, from stockholder loans. The Company generated its first revenue from its ground segment systems and networks business in June 1995 and has generated only minimal revenues from its satellite-delivered data communications services business, which commenced operations in July 1996. The Company incurred operating losses of $1.1 million, $2.3 million, $2.7 million and $0.5 million during the fiscal years ended June 30, 1995, 1996, 1997 and 1998, respectively and may incur further operating losses as it attempts to expand its business. The Company's ability to expand its business and generate additional revenues and future positive operating and net income is dependent, in large part, on its ability to obtain new contracts and the profitability of such contracts, and there can be no assurance that the Company will generate significant additional revenues or report quarterly or annual positive operating or net income. As of June 30, 1998, the Company had an accumulated deficit of $6.5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." INHERENT RISK OF INTERNATIONAL OPERATIONS Most of the Company's revenues are derived from sales to customers outside the United States. The Company anticipates that foreign sales will continue to account for a significant portion of total revenues in the foreseeable future. The Company's foreign sales are generally denominated in U.S. dollars. Consequently, the decrease in the value of foreign currencies relative to the U.S. dollar, such as the currency devaluations in the Pacific Rim region, Russia and other international currencies, has adversely affected and may continue to adversely affect the demand for the Company's products and services by increasing the price of the Company's products and services in the 26 currency of the countries in which they are sold. Additional risks inherent in the Company's international business activities include various and changing regulatory requirements, costs and risks of relying upon local subcontractors for the installation of its ground segment systems and networks, increased sales and marketing expenses, availability of export licenses, tariffs and other trade barriers, political and economic instability, difficulties in staffing and managing foreign operations, potentially adverse taxes, complex foreign laws and treaties and the possibility of difficulty in accounts receivable collections. The recent economic and monetary crisis in the Pacific Rim countries, including Korea, Malaysia, Thailand, Philippines, Indonesia and other countries in the region, as well as the recent economic and monetary declines in Russia, has resulted in a decreased demand in such countries and other foreign regions for capital equipment such as the ground segment systems and networks supplied by the Company. The difficult economic conditions in the Pacific Rim region, Russia and other international markets and the decrease in bookings received by the Company from these and other foreign regions have adversely effected the Company's results of operations for the fourth quarter of 1998 and the Company expects that these negative trends will continue to adversely impact it. In addition, the Company is subject to the Foreign Corrupt Practices Act (the "FCPA") which may place the Company at a competitive disadvantage to foreign companies, which are not subject to the FCPA. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. QUARTERLY FLUCTUATIONS The Company may continue to experience significant quarter to quarter fluctuations in its results of operations, which may result in volatility in the price of the Company's Common Stock. Quarterly results of operations may fluctuate as a result of a variety of factors, including the timing of the initiation and completion of contracts, delays in the booking of new contracts, the demand for the Company's products and services, the introduction of new or enhanced products and services by the Company or its competitors, market acceptance of new products and services, the mix of revenues between custom-built satellite communications systems and networks designed for its customers and standard installations provided to its customers, the growth of demand for Internet infrastructure-based products and services in developing countries, the timing of significant marketing programs, the extent and timing of the hiring of additional personnel, competitive conditions in the industry and general economic conditions in the U.S. and abroad, such as the difficult economic conditions and currency devaluations in the Pacific Rim region, Russia and other international markets which have adversely impacted, and may continue to, adversely impact the Company's quarterly results. See "Inherent Risk of International Operations". Due to the foregoing factors, it is likely that in one or more future quarters the Company's operating results will be below the expectations of public market analysts and investors. Such an event could have a material adverse effect on the price of the Company's Common Stock. INTENSE COMPETITION; LIMITED BARRIERS TO ENTRY The markets for both ground segment systems and networks and satellite-delivered data communications services are highly competitive. Many of the Company's competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than those available to the Company. As a result, such competitors may be able to develop and expand their products and services more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products and services than can the Company. In addition, there are limited barriers to entry in the Company's markets and certain of the Company's strategic suppliers and customers have technologies and capabilities in the Company's product areas and could choose to compete with the Company or to replace the Company's products or services with their own. The entry of new competitors, the decision by a strategic ally to compete with the Company or the decision by a customer to develop and employ in-house capability to satisfy its satellite communications needs could have a material adverse effect on the Company's business, financial condition and results of operations. 27 The Company anticipates that its competitors may develop or acquire competing products or that provide functionality that is similar to that provided by the Company's products and that such products may be offered at significantly lower prices or bundled with other products. In addition, current and potential competitors in both markets in which the Company competes have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products and services to address the needs of the Company's current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. 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 the Company's business, results of operations and financial condition. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company also is dependent on the continued success and development of the satellite communications industry, which itself competes with other technologies such as terrestrial microwave, copper wire and fiber optic communications systems. Any failure of the satellite communications industry to continue to develop, or any technological development which significantly improves the capacity, cost or efficiency of such competing systems relative to satellite systems, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Rapid Industry Change; Technological Obsolescence." RELIANCE ON STRATEGIC RELATIONSHIPS The Company is dependent on certain customers and suppliers for the development and expansion of its ground segment system and network business. However, such relationships are not governed by any contract and accordingly neither the Company nor such customers or suppliers are obligated to maintain such strategic relationships. There can be no assurance that the Company will be able to maintain such strategic relationships, that its strategic customers and suppliers will continue to assist the Company by developing and expanding its business and by providing research and development expertise, or that such strategic customers and suppliers will not actually compete with the Company in the future. See "Intense Competition; Limited Barriers to Entry." In addition, the Company relies on the Personal Earth Station and DirecPC technologies provided by HNS, a subsidiary of Hughes Electronics Corp. in connection with the operation of NetSat Express's satellite-delivered data communications services business. Each project for which NetSat Express uses HNS' DirecPC technology will require the grant of a license from HNS to NetSat Express. HNS is under no obligation to grant such licenses and there can be no assurance that NetSat Express will be able to negotiate such licensing arrangements with HNS on acceptable terms, or at all. In addition, failure to maintain a business relationship with HNS would have a material adverse effect on the Company's business, financial condition and results of operations. Because the Company intends to provide its satellite-delivered data communications services almost entirely in developing markets where the Company has little or no market experience, the Company will also be dependent on local partners in such markets to provide marketing expertise and knowledge of the local regulatory environment in order to facilitate the acquisition of necessary licenses and access to existing customers. The Company has not yet formally established an alliance with a local partner. The Company's failure to form and maintain such alliances with local partners, or the preemption or disruption of such alliances by the actions of the Company's competitors or otherwise, would adversely affect the Company's ability to penetrate and compete successfully in such emerging markets. There can be no assurance that the Company will be able to compete successfully in the future in such markets or that competition will not have a material adverse effect on the Company's business, financial condition and results of operations. 28 RISK OF CUSTOMER CONCENTRATION The Company typically relies upon a small number of customers for a large portion of its revenues. For example, approximately 29% of the Company's revenues in fiscal 1998 were derived from sales to Sonangol, U.E.E. At June 30, 1998, $12.2 million, or approximately 28% of the Company's backlog, was accounted for by a contract between the Company and Transworld Communications Services, Inc. and $7.1 million, or approximately 16% of the Company's backlog, was accounted for by a contract between the Company and Sonangol, U.E.E. The Company expects that in the near term a significant portion of its revenues will continue to be derived from one or a limited number of customers (the identity of whom may vary from period to period) as the Company seeks to expand its business and its customer base. The reduction, delay, or cancellation of orders from one or more of such significant customers would have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF MANAGEMENT OF RAPID GROWTH The Company has been significantly and rapidly expanding its operations since its inception. In order to pursue successfully the opportunities presented by the ground segment and emerging satellite-delivered communications and Internet/intranet-infrastructure markets, the Company will be required to continue to expand its operations. Such expansion has placed, and is expected to continue to place, a significant strain on the Company's personnel, management, financial and other resources. In order to manage any future growth effectively, the Company will, among other things, be required to attract, train, motivate and manage a significantly larger number of employees successfully to conduct product engineering and management, product implementation, sales activity and customer support activities; manage higher working capital requirements; and improve its operating and financial systems. Any failure to manage any future growth in an efficient manner and at a pace consistent with the Company's business could have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF FIXED-PRICE CONTRACTS Virtually all of the Company's contracts for installation of ground segment systems and networks are on a fixed-price basis. 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 the Company's business may at certain times be concentrated in a limited number of large contracts, a significant cost overrun on any one contract could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk of Customer Concentration." EMPHASIS ON DEVELOPING MARKETS; UNCERTAIN MARKET POTENTIAL The Company believes a substantial portion of the growth in demand for its ground segment systems and networks and its recently launched satellite-delivered data communications services will come from customers in developing countries. There can be no assurance that such increases in demand will occur or that prospective customers will accept such products and services in sufficient quantities or at all. The degree to which the Company is able to penetrate potential markets in developing countries will be affected in major part by the speed with which other competing elements of the communications infrastructure, such as telephone lines, other satellite-delivered solutions and fiber optic cable and television cable, are installed in the developing countries and with respect to the Company's data communications services, on the effectiveness of the Company's local partners in such markets. The failure to have its products and services accepted in developing countries would have a material adverse effect on the Company's business, financial condition and 29 results of operations. See "Intense Competition; Limited Barriers to Entry" and "Reliance on Strategic Relationships." RAPID INDUSTRY CHANGE; TECHNOLOGICAL OBSOLESCENCE The telecommunications industry, including the satellite communications ground segment systems and networks and data communication services businesses, is characterized by rapid and continuous technological change. Future technological advances in the telecommunications industry may result in the availability of new products or services that could compete with the satellite ground segment products and services provided by the Company or render the Company's products and services obsolete. There can be no assurance that the Company will be successful in developing and introducing new products and services that meet changing customer needs or in responding to technological changes or evolving industry standards in a timely manner, if at all, or that services or technologies developed by others will not render the Company's products or services noncompetitive. Any failure by the Company to respond to changing market conditions, technological developments, evolving industry standards or changing customer requirements, or the development of competing technology or products that render the Company's products and services noncompetitive or obsolete would have a material adverse effect on the Company's business, financial condition and results of operations. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the data code field. These data code fields will need to accept four digit entries to distinguish 21st century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Although the Company's internal systems as well as the software it installs in its satellite ground segment systems and networks are designed to be Year 2000 compliant, there can be no assurance that such systems and software contain all necessary date code changes. The Company and its customers may be affected by Year 2000 issues. Compliance with Year 2000 requirements may disrupt the Company's ability to continue designing, assembling and installing its satellite ground segment systems and networks. The Company may also incur certain expenditures in connection with Year 2000 compliance. Additionally, even if the Company's internal systems and the software it installs in its ground segment systems and networks are Year 2000 compliant, there can be no assurance that the equipment the Company obtains from third-party vendors and incorporates into its ground segment systems and networks is Year 2000 compliant. If such equipment is not Year 2000 compliant, it could disrupt the ability of the Company's customers to use the Company's ground segment systems and networks. In addition, there can be no assurance that equipment operated by third parties that interface with or contain the Company's products will timely achieve Year 2000 compliance. Furthermore, if the Company's ground segment systems and networks were unable to be used by the Company's customers because of Year 2000 compliance problems, there can be no assurance that the Company's customers will not commence litigation against the Company for such systems and networks failure. Any of the foregoing could result in a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY The Company currently procures most of the critical components and services for its products from single or limited sources in connection with specific contracts and does not otherwise carry significant inventories or have long-term or exclusive supply contracts with its source vendors. The Company has from time to time experienced delays in receiving products from certain of its vendors due to quality control or manufacturing problems, shortages of materials or components or product design difficulties. There can be no assurance that similar problems will not recur or that replacement products will be available when needed at commercially reasonable rates, or at all. If the Company were to change certain of its vendors, the Company would be 30 required to perform additional testing procedures upon the components supplied by such new vendors, which could prevent or delay product shipments. Additionally, prices could increase significantly in connection with changes of vendors. Any inability of the Company to obtain timely deliveries of materials of acceptable quality or timely services, or any significant increase in the prices of materials or services, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk of Fixed-Price Contracts" and "Quarterly Fluctuations". RISK OF FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS The Company is subject to various federal laws and regulations which may have negative effects on the Company. The Company operates a teleport in Hauppauge, New York, which is subject to FCC Rules and Regulations. The Company has obtained certain licenses from the FCC for both domestic and international operation of the teleport and must operate it in compliance with FCC Rules and Regulations for the term of the license. There can be no assurance that the Company will be able to obtain additional licenses that may be required or maintain the necessary licenses. Under the FCC Rules and Regulations, non-U.S. citizens or their representatives, foreign governments, or corporations otherwise subject to control by non-U.S. citizens, may not own more than 20% of a licensee directly, or, if the FCC finds it consistent with the public interest, may not own more than 25% of the parent of a licensee. Non-U.S. citizens may not serve as officers of a licensee or as members of a licensee's board of directors, although the FCC may waive this requirement in whole or in part. Failure to comply with these requirements may result in the FCC issuing an order to the entity requiring divestiture of alien ownership to bring the entity into compliance with the FCC Rules and Regulations. In addition, fines, a denial of renewal or revocation of the license are possible. The Company has no knowledge of any present foreign ownership which would result in a violation of the FCC Rules and Regulations, but there can be no assurance that foreign holders will not in the future hold more than 20% or 25% of the Common Stock of the Company. Regulatory schemes in countries in which the Company may seek to provide its satellite-delivered data communications services may impose impediments on the Company's operations. Certain countries in which the Company intends to operate have telecommunications laws and regulations that do not currently contemplate technical advances in broadcast technology such as Internet/intranet transmission by satellite. There can be no assurance that the present regulatory environment in any such country will not be changed in a manner which may have a material adverse impact on the Company's business. The Company or its local partners typically must obtain authorization for each country in which the Company provides its satellite-delivered data communications services. Although the Company believes that it or its local partners will be able to obtain the requisite licenses and approvals from the countries in which the Company intends to provide service, the regulatory schemes in each country are different and thus there may be instances of noncompliance of which the Company is not aware. Although the Company believes these regulatory schemes will not prevent the Company from pursuing its business plan, there can be no assurance such 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 the Company wishes to offer its services or that restrictions applicable thereto will not be unduly burdensome. The Company's Internet operations (other than the operation of a teleport) are not currently subject to direct government regulation in most 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 likely that a number of laws and regulations may be adopted at the local, national or international levels with respect to the Internet, covering issues such as 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. For example, the Telecommunications Act of 1996 (the constitutionality of certain portions of which is currently under challenge) was recently enacted in the United States, and imposes criminal penalties via the Communications Decency Act on anyone who distributes obscene, lascivious or indecent communications over the Internet. It is anticipated 31 that a substantial portion of the Company's Internet operations will be carried out in countries which may impose greater regulation of the content of information coming into the country than that which is generally applicable in the United States. To the extent that the Company provides content as a part of its Internet services, it will be subject to any such laws regulating content. Moreover, the adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for the Company's Internet services or increase the Company's cost of doing business or in some other manner have a material adverse effect on the Company's business, operating results and financial condition. In addition, the applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel and personal privacy is uncertain. The vast majority of such 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 such laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace which could reduce demand for the Company's services, could increase the Company's 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 the Company's business, financial condition and results of operations. The sale of the Company's ground segment systems and networks 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 the Company's competitive position. In addition, in order to ship its products into European Union countries, the Company must satisfy certain technical requirements. If the Company were unable to comply with such requirements with respect to a significant quantity of the Company's products, the Company's sales in Europe could be restricted, which could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company's future success depends to a significant extent on its executive officers and certain technical, managerial and marketing personnel. The loss of the services of any of these individuals or group of individuals could have a material adverse effect on the Company's business, financial condition and results of operations. The Company maintains term life insurance in the amount of $1.0 million on David E. Hershberg, the Chairman and Chief Executive Officer of the Company and term life insurance in the amount of $0.5 million for each of Messrs. Miller, DiCicco, Woodring, Yablonski and Melfi, all of whom are officers of the Company. The Company believes that its future success also will depend significantly upon its ability to attract, motivate and retain additional highly skilled technical, managerial and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, assimilating and retaining the personnel it requires to grow and operate profitably. PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT The Company relies heavily on the technological and creative skills of its personnel, new product developments, computer programs and designs, frequent product enhancements, reliable product support and proprietary technological expertise in maintaining its competitive position, and lacks patent protection for its products and services. There can be no assurance that others will not independently develop or acquire substantially equivalent techniques or otherwise gain access to the Company's proprietary and confidential technological expertise or disclose such technologies or that the Company can ultimately protect its rights to such proprietary technological expertise. The Company generally relies on confidentiality agreements with its consultants, key employees and sales representatives to protect its proprietary technological expertise, and generally controls access to and distribution of its technology, software and other proprietary information. Despite these precautions, there can be no assurance that such agreements will not be breached, that the Company will have adequate remedies for any such breach or 32 that a third party will not copy or otherwise obtain and use the Company's products or technology without authorization or develop similar products or technology independently. Failure by the Company to maintain protection of its proprietary technological expertise for any reason could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is subject to the risk of alleged infringement of intellectual property rights of others. Most of the Company's officers and employees were formerly officers or employees of other companies in the industry. The Company believes that neither it nor its officers or employees have violated any agreements with, or obligations to, prior employers. Although the Company is not aware of any pending or threatened infringement claims with respect to the Company's current or future products, there can be no assurance that third parties, including previous employers, will not assert such claims or that any such claims will not require the Company to enter into license arrangements or result in protracted and costly litigation, regardless of the merits of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Furthermore, litigation may be necessary to enforce or protect the Company's intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company currently has three patent applications pending in the United States and a PCT application, corresponding to one of the United States applications, is pending in a number of foreign jurisdictions. The Company also intends to seek further patents on its technology, if appropriate. There can be no assurance that patents will issue from any of the Company's pending or any future applications or that any claims allowed from such applications will be of sufficient scope or strength, or be issued in all countries where the Company's products can be sold, to provide meaningful protection or any commercial advantage to the Company. Also, competitors of the Company may be able to design around the Company's patents. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. The Company has filed applications for trademark registration of Globecomm Systems Inc. in the United States, China, the European Union and the Russian Federation and of NetSat Express in the United States, Singapore, the European Union, the Russian Federation and Brazil, and intends to seek registration of other trademarks in the future. There can be no assurance that registrations will be granted from any of the Company's pending or future applications, or that any registrations that are granted to the Company will prevent others from using similar trademarks in connection with related goods and services. RISK OF CONCENTRATED OWNERSHIP As of September 25, 1998, the Company's officers and directors, and their affiliates beneficially own approximately 2,236,985 shares, constituting approximately 23.2% of the Company's outstanding Common Stock. These stockholders, if acting together, may be able to exert significant influence over the election of directors and other corporate actions requiring stockholder approval. POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, acceptance of satellite communication services in developing countries, and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations, which have affected the market price of securities of many companies in the telecommunications and 33 high technology industries. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. See "Quarterly Fluctuations." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- The Company is 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, the Company assesses these risks and has established policies and procedures to manage its exposure to fluctuations in foreign currency values. The Company's objective to managing its 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, the Company utilizes foreign currency forward contracts to hedge its exposure on firm commitments denominated in foreign currency. As of June 30, 1998, the Company has only one such foreign currency forward contract to hedge its exposure relating to a commitment to purchase approximately U.S. $3.2 million of equipment from a vendor in Swedish Krona. The Company's hedge with respect to this transaction reduces, but does not eliminate, the impact of foreign currency exchange rate movements. If there were an adverse change in the exchange rate of Swedish Krona of 10%, the expected effect on net income would be immaterial. 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 14(a) of Part IV of the Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ---------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- On November 27, 1996, the Company dismissed PricewaterhouseCoopers LLP as its independent accountants. The reports of PricewaterhouseCoopers LLP on the Company's financial statements for the two fiscal years prior to such dismissal contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with its audits for the year ended June 30, 1996 and for the period from August 17, 1994 (inception) through June 30, 1995, and through November 27, 1996, there have been no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for such years. The decision to change firms was approved by the Company's Board of Directors. The Company had requested that PricewaterhouseCoopers LLP furnish it with a letter addressed to the Commission stating whether or not it agrees with the above statements. A copy of such letter was filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 333-22425). 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 "Compliance with Reporting Requirements" in the Registrant's Proxy Statement to be filed with the SEC. 34 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------------------------------------- (A) (1) FINANCIAL STATEMENTS CONTENTS
Report of Independent Auditors-Ernst & Young LLP......................................... F-1 Report of Independent Accountants-PricewaterhouseCoopers LLP............................. F-2 Consolidated Balance Sheets as of June 30, 1998 and 1997................................. F-3 Consolidated Statements of Operations for the years ended June 30, 1998, 1997 and 1996... F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 1998, 1997 and 1996.................................................................... F-5 Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996... F-6 Notes to Consolidated Financial Statements............................................... F-7
(2) FINANCIAL STATEMENT SCHEDULES None Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in Financial Statements or notes thereto. (3)EXHIBITS Exhibit No. - ----------- 3.1 Amended and Restated Certificate of Incorporation (filed herewith) 3.3 Amended and Restated By-Laws of the Registrant (filed herewith) 4.2 See Exhibits 3.1 and 3.3 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")) 35 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 (filed herewith). 16.1 Letter from PricewaterhouseCoopers LLP (incorporated by reference to exhibit 16.1 of the Registration Statement). 21.1 Subsidiary of the Registrant (filed herewith). 23.1 Consent of Ernst & Young LLP (filed herewith). 23.2 Consent of PricewaterhouseCoopers LLP (filed herewith). 27 Financial Data Schedule (filed herewith). * Confidential treatment granted for portions of this agreement. (B) REPORTS ON FORM 8-K None 36 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 of the undersigned, thereunto duly authorized. GLOBECOMM SYSTEMS INC.
Date By: /s/ David E. Hershberg 9/28/98 ------------------------------------------------------------------------------------- ------- 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. Date By: /s/ David E. Hershberg 9/28/98 ------------------------------------------------------------------------------------- ------- David E. Hershberg, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Andrew C. Melfi 9/28/98 ------------------------------------------------------------------------------------- ------- Andrew C. Melfi, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) By: /s/ Kenneth A. Miller 9/28/98 ------------------------------------------------------------------------------------- ------- Kenneth A. Miller, President and Director By: /s/ Thomas A. DiCicco 9/28/98 ------------------------------------------------------------------------------------- ------- Thomas A. DiCicco, Vice President and Director By: /s/ Donald G. Woodring 9/28/98 ------------------------------------------------------------------------------------- ------- Donald G. Woodring, Vice President and Director By: /s/ Stephen C. Yablonski 9/28/98 ------------------------------------------------------------------------------------- ------- Stephen C. Yablonski, Vice President and Director 37 By: /s/ Herman Fialkov 9/28/98 ------------------------------------------------------------------------------------- ------- Herman Fialkov, Director By: /s/ Shelly A. Harrison 9/28/98 ------------------------------------------------------------------------------------- ------- Shelley A. Harrison, Director By: /s/ Benjamin Duhov 9/28/98 ------------------------------------------------------------------------------------- ------- Benjamin Duhov, Director By: : /s/ C.J. Waylan 9/28/98 ------------------------------------------------------------------------------------- ------- C.J. Waylan, Director By: : /s/ A. Robert Towbin 9/28/98 ------------------------------------------------------------------------------------- ------- A. Robert Towbin, Director 38
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. at June 30, 1998 and 1997 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Melville, New York August 7, 1998 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Globecomm Systems Inc. In our opinion, the accompanying consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the results of operations and cash flows of Globecomm Systems Inc. and its subsidiary for the year ended June 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP New York, New York August 23, 1996, except as to Note 1, which is as of August 5, 1997 F-2 GLOBECOMM SYSTEMS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 21,342 $ 5,164 Restricted cash......................................................................... 4,416 1,537 Accounts receivable..................................................................... 18,017 14,350 Inventories, net........................................................................ 1,583 2,293 Prepaid expenses and other current assets............................................... 635 307 ----------------------------------- Total current assets...................................................................... 45,993 23,651 Fixed assets, net......................................................................... 9,963 7,151 Investments............................................................................... 2,093 1,308 Other assets.............................................................................. 295 1,176 ----------------------------------- Total assets.............................................................................. $ 58,344 $ 33,286 =================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 13,042 $ 16,089 Accrued payroll and related fringe benefits............................................. 632 438 Accrued commissions..................................................................... 216 360 Other accrued expenses.................................................................. 422 329 Capital lease obligations............................................................... 18 56 ----------------------------------- Total current liabilities................................................................. 14,330 17,272 Capital lease obligations................................................................. - 18 ----------------------------------- Total liabilities......................................................................... 14,330 17,290 ----------------------------------- Commitments Stockholders' equity: Preferred stock, $.001 par value; 3,000,000 shares authorized: Class A Convertible - shares authorized, issued and outstanding: none at June 30, 1998 and 172,304 at June 30, 1997........................................ - - Class B Convertible - shares authorized, issued and outstanding: none at June 30, 1998 and 514,714 at June 30, 1997........................................ - 1 Common stock, $.001 par value; 22,000,000 shares authorized, shares issued and outstanding: 9,165,908 at June 30, 1998 and 3,906,119 at June 30, 1997................. 9 4 Additional paid-in capital.............................................................. 50,530 21,970 Accumulated deficit..................................................................... (6,525) (5,979) ----------------------------------- Total stockholders' equity................................................................ 44,014 15,996 ----------------------------------- Total liabilities and stockholders' equity................................................ $ 58,344 $ 33,286 =================================== See accompanying notes. F-3 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA) YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, JUNE 30, JUNE 30, 1998 1997 1996 ----------------------------------------------------- Revenues.................................................................... $ 58,105 $ 36,220 $ 13,476 Costs of revenues........................................................... 49,532 32,060 11,238 ----------------------------------------------------- Gross profit................................................................ 8,573 4,160 2,238 ----------------------------------------------------- Operating expenses: Selling and marketing..................................................... 4,187 3,282 1,915 Research and development.................................................. 1,188 649 712 General and administrative................................................ 5,010 3,449 1,945 ----------------------------------------------------- Total operating expenses.................................................... 10,385 7,380 4,572 ----------------------------------------------------- Loss from operations........................................................ (1,812) (3,220) (2,334) Interest income, net of interest expense of $5, $22 and $32 in 1998, 1997 and 1996, respectively.................................................... 1,266 276 89 ----------------------------------------------------- Loss before minority interests in operations of consolidated subsidiary............................................................... (546) (2,944) (2,245) Minority interests in operations of consolidated subsidiary................. - 275 - ----------------------------------------------------- Net loss.................................................................... $ (546) $ (2,669) $ (2,245) ===================================================== Basic and diluted loss per share............................................ $ (0.06) =================== Basic and diluted weighted average shares................................... 8,553 =================== Pro forma basic and diluted net loss per share (unaudited).................. $ (0.44) ================= Shares used in computing pro forma basic and diluted net loss per share (unaudited)........................................................ 6,086 ================= See accompanying notes. F-4 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS) PREFERRED STOCK ---------------------------------- ADDITIONAL STOCK TOTAL CLASS A CLASS B COMMON STOCK PAID-IN SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS' --------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY ----------------------------------------------------------------------------------------------------- Balance at June 30, 1995................ - $ - - $ - 3,506 $ 4 $ 5,168 $ (900) $ (1,065) $ 3,207 Proceeds from stock subscriptions receivable.......... 900 900 Sale of common stock to investor, net of issuance costs of $17................. 200 - 915 915 Issuance of common stock as sales commissions......... 37 - 174 174 Sale of common stock to investors........ 11 - 50 50 Issuance of common stock to consultants 15 - 52 52 Sale of convertible preferred stock to investors, net of issuance costs of $15................. 156 - 2,485 2,485 Options granted to employees and directors........... 192 192 Net loss.............. (2,245) (2,245) ----------------------------------------------------------------------------------------------------- Balance at June 30, 1996................ 156 - - - 3,769 4 9,036 - (3,310) 5,730 Sale of convertible preferred stock to investors, net of issuance costs of $2,623; paid in cash of $1,135 and 53 shares of stock.. 485 1 10,964 10,965 Sale of convertible preferred stock to investor............ 16 - 257 257 Exercise of warrants.. 107 - 563 563 Sale of convertible preferred stock to investor............ 30 - 824 824 Issuance of common stock in exchange for minority shares in subsidiary....... 30 - 243 243 Options granted to employees and directors........... 83 83 Net loss.............. (2,669) (2,669) ----------------------------------------------------------------------------------------------------- Balance at June 30, 1997................ 172 - 515 1 3,906 4 21,970 - (5,979) 15,996 Conversion of convertible preferred stock into common stock.............. (172) - (515) (1) 1,958 2 (1) - Proceeds from initial public offering, net of issuance costs of $3,721..... 3,163 3 27,901 27,904 Proceeds from exercise of stock options............. 132 - 534 534 Proceeds from exercise of warrants 7 - 55 55 Options granted to employees and directors........... 71 71 Net loss.............. (546) (546) ----------------------------------------------------------------------------------------------------- Balance at June 30, 1998................ - $ - - $ - 9,166 $ 9 $50,530 $ - $ (6,525) $ 44,014 ===================================================================================================== See accompanying notes. F-5 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ----------------------------------------------------------- OPERATING ACTIVITIES Net loss............................................................... $ (546) $ (2,669) $ (2,245) Adjustments to reconcile net loss to net cash used in operating activities: Stock issued to investor as commission............................... - - 174 Stock issued to consultants for services............................. - - 46 Depreciation and amortization........................................ 650 334 181 Amortization of organization costs................................... 52 28 12 Stock compensation expense........................................... 71 83 192 Minority interests in operations of consolidated subsidiary.......... - (275) - Changes in operating assets and liabilities: Accounts receivable.............................................. (3,667) (12,351) (1,930) Inventories, net................................................. 710 (916) 664 Prepaid expenses and other current assets........................ (328) (73) (224) Other assets..................................................... 68 (1) (39) Accounts payable................................................. (3,047) 13,322 338 Accrued payroll and related fringe benefits...................... 194 221 114 Accrued commissions and other accrued expenses................... (51) 339 207 ----------------------------------------------------------- Net cash used in operating activities.................................. (5,894) (1,958) (2,510) ----------------------------------------------------------- INVESTING ACTIVITIES Purchases of investments............................................... (785) (1,069) (238) Purchases of fixed assets.............................................. (3,462) (6,765) (339) Payment of organization costs.......................................... - (81) - Restricted cash........................................................ (2,879) (306) (1,136) ----------------------------------------------------------- Net cash used in investing activities.................................. (7,126) (8,221) (1,713) ----------------------------------------------------------- FINANCING ACTIVITIES Proceeds from sales of common stock, net............................... 28,665 - 1,871 Proceeds from sales of preferred stock, net............................ - 12,046 2,485 Proceeds from exercise of warrants..................................... 55 563 - Proceeds from exercise of stock options................................ 534 - - Investment from minority stockholders.................................. - 275 - Loan to stockholder.................................................... - - (150) Repayment of loan to stockholder....................................... - 150 - Repayment of loans payable to stockholder.............................. - (315) (21) Payment of deferred offering costs..................................... - (761) - Payments under capital leases.......................................... (56) (50) (34) ----------------------------------------------------------- Net cash provided by financing activities.............................. 29,198 11,908 4,151 ----------------------------------------------------------- Net increase (decrease) in cash and cash equivalents................... 16,178 1,729 (72) Cash and cash equivalents at beginning of year......................... 5,164 3,435 3,507 ----------------------------------------------------------- Cash and cash equivalents at end of year............................... $ 21,342 $ 5,164 $ $3,435 =========================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest................................................. $ 5 $ 51 $ 13 =========================================================== See accompanying notes.
F-6 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Globecomm Systems Inc. (the "Company") was incorporated in the State of Delaware on August 17, 1994. The Company designs, assembles and installs satellite ground segment systems and networks which support a wide range of satellite communications applications including fixed, mobile and direct broadcast services as well as certain military applications. On July 18, 1997, the Board of Directors authorized and, on August 5, 1997 the stockholders approved a 2.85-for-one stock split of the outstanding shares of common stock, and amended and restated the Company's certificate of incorporation increasing the number of authorized shares of common stock to 22,000,000 and preferred stock to 3,000,000, and changing the par value of its common and preferred stock to $.001. All common stock, stock option and warrant data has been restated to reflect the stock split. The Company has incurred operating losses since its inception and had an accumulated deficit at June 30, 1998 of $6,525,000. Such losses have resulted principally from general and administrative and selling and marketing expenses associated with the Company's operations. The Company expects that its cash and working capital requirements will continue to increase in connection with the Company's plans to continue to expand operations. Management believes that its existing capital resources will be sufficient to meet its working capital needs through June 30, 1999. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and its majority-owned subsidiary, NetSat Express, Inc. ("NetSat Express"). All significant intercompany balances and transactions have been eliminated in consolidation. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION The Company uses the percentage-of-completion method of accounting for contract revenues, upon the achievement of certain milestones. Accordingly, revenue from long-term, fixed-price contracts, are generally recorded based on the relationship of total costs incurred to date to total projected final costs. Contract costs generally include purchased material, direct labor, overhead and other indirect costs. Anticipated contracted losses are recognized as they become known. Revenues from sales of products and services are generally recognized when the product is shipped or the service is performed. INVENTORIES Inventories, which consist primarily of costs incurred in connection with specific customer contracts, are stated at the lower of cost or market value. F-7 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CASH EQUIVALENTS The Company classifies as cash equivalents all highly liquid instruments with a maturity of three months or less at the time of purchase. FIXED ASSETS Fixed assets are stated at cost less accumulated depreciation and amortization. Depreciation of fixed assets is provided on a straight-line basis over their estimated useful lives of three to twenty-five years. Certain leased office equipment has been capitalized. These amounts are included in fixed assets within the accompanying consolidated balance sheets and are being amortized over the estimated useful lives of the equipment. RESEARCH AND DEVELOPMENT Research and development expenditures are expensed as incurred. INCOME TAXES The financial statements have been prepared in conformity with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". This statement requires recognition of deferred income taxes under the liability method. BASIC AND DILUTED LOSS PER SHARE AND PRO FORMA BASIC AND DILUTED LOSS PER SHARE During the year ended June 30, 1998, Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 128 ("Statement 128"), "Earnings Per Share" became effective. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Basic loss per share for the year ended June 30, 1998 is based on the weighted average number of common shares outstanding during the period. Diluted loss per share for the year ended June 30, 1998 excluded the effect of approximately 891,000 stock options and approximately 23,000 warrants as the effect of inclusion would have been anti-dilutive as the Company reported a net loss for the year ended June 30, 1998. Pro forma basic loss per share for the year ended June 30, 1997 is based on the weighted average number of shares of common stock outstanding including the conversion of the Class A and Class B Convertible Preferred Stock into common stock, which occurred upon the consummation of the Company's initial public offering. However, in accordance with Staff Accounting Bulletin 98 of the Securities and Exchange Commission, options to purchase common stock for nominal consideration have been reflected in diluted loss per share for all periods presented in a manner similar to a stock split, even if anti-dilutive. Historical losses per share have not been presented because such amounts are not deemed meaningful due to the significant change in the Company's capital structure which occurred in connection with the initial public offering. F-8 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The book values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term maturities of these instruments. STOCK BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock options because, as discussed below in Note 8, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based-Compensation" ("Statement 123"), requires the use of option valuation models that were not developed for use in valuing employee and director stock options. LONG-LIVED ASSETS When impairment indicators are present, the Company reviews the carrying value of its long-lived assets to determine the ultimate recoverability of their unamortized values using future undiscounted cash flow analyses. SEGMENT DISCLOSURES As of June 30, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement 131"). Statement 131 supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise". Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement 131 did not affect results of operations or financial position, but did affect the disclosure of segment information (see Note 12). 3. INVENTORY Inventory consists of the following: JUNE 30, 1998 JUNE 30, 1997 ------------------------------ (IN THOUSANDS) Raw materials ........ $ 78 $ 51 Work-in-progress ..... 3,778 7,877 ----------------------- 3,856 7,928 Less progress payments 2,273 5,635 ----------------------- $1,583 $2,293 ======================= F-9 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FIXED ASSETS Fixed assets consist of the following: JUNE 30, 1998 JUNE 30, 1997 ----------------------------------------- (IN THOUSANDS) Land.............................................................. $ 1,750 $ - Building and improvements......................................... 5,261 - Computer equipment................................................ 1,437 881 Machinery and equipment........................................... 1,409 398 Furniture and fixtures............................................ 933 144 Leasehold improvements............................................ 29 149 Equipment under capital leases.................................... 159 159 Construction in progress.......................................... 91 5,995 ----------------------------------------- 11,069 7,726 Less accumulated depreciation and amortization.................... 1,106 575 ----------------------------------------- $ 9,963 $ 7,151 ========================================= 5. INVESTMENTS Investments consists of the following: JUNE 30, 1998 JUNE 30, 1997 ------------------------------------------ (IN THOUSANDS) Shiron Satellite Communications (1996), Ltd. ("Shiron") (a)............................................... $ 285 $ 285 Euro Broadcasting Corporation ("Euro") (b)................................................. 440 240 Newpoint Technologies, Inc. ("Newpoint Technologies") (c)................................ 950 550 Armer Communications Engineering Services, Inc. ("Armer") (d)................................................ 200 200 Joint Communications Technology Corp. ("JCTC") (e) ................................................ 214 - Other............................................................. 4 33 ------------------------------------------ $ 2,093 $ 1,308 ==========================================
(a) On February 12, 1996, the Company purchased 10% of the common stock of Shiron, an Israeli company, for $150,000 and, during October 1996, exercised an option to purchase an additional 9% for $135,000. The Company has an option to purchase up to a total of a 30% interest of Shiron in accordance with the terms of the purchase agreement. As of June 30, 1998, the Company's interest in Shiron was diluted to 11.6%. (b) During August 1996, the Company purchased 19% of the common stock of Euro, a Delaware corporation, for $240,000 with a one year option to purchase an additional 10% at a price ranging from $125,000 to $200,000 F-10 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) depending upon the exercise date. In August 1997, the Company exercised its option to purchase an additional 10% for $200,000. As of June 30, 1998, the Company's interest in Euro was diluted to 22.9%. The financial position and results of operations of Euro at June 30, 1998 were not material. (c) On August 30, 1996, the Company purchased 5% of the common stock of Newpoint Technologies (formerly C-Grams Unlimited Inc.), a New Hampshire corporation, for approximately $400,000. In May 1997, the Company purchased an additional 1.6% for $150,000. In August and September 1997, the Company purchased additional common stock of Newpoint Technologies for $400,000. As of June 30, 1998, the Company's interest in Newpoint Technologies has been diluted to 10.3%. The Company has an option to purchase an additional 9.7% at a price in accordance with the terms of the agreement. (d) On November 18, 1996, the Company purchased 15% of the common stock of Armer, an Arizona corporation, for $150,000 and in March 1997 purchased an additional 2% for $50,000. The Company has an option to purchase up to an additional 8% at a price of $25,000 for each additional 1% through December 31, 1997. (e) On January 13, 1998, the Company purchased 6.7% of the common stock of JCTC, a New Jersey corporation, for approximately $214,000. The Company has a two-year option to purchase an additional 6.7% for $200,000. In addition, the Company has an additional option to purchase up to a total of 20% interest in JCTC provided the Company has purchased the first option. The price of the second option will be the then current market price or the last price for which JCTC's common stock has been sold. The above investments have been accounted for at cost, except for Euro which has been accounted for under the equity method, since the Company does not have the ability to exercise significant influence over operating and financial policies of the investees. 6. COMMON STOCK SALES OF COMMON STOCK In August 1997, the Company completed an initial public offering of 3,162,500 shares of common stock for an aggregate offering price of $31,625,000. The Company incurred total expenses in the offering of approximately $3,721,000 of which approximately $2,214,000 represented underwriting discounts and commissions and approximately $1,507,000 represented other related expenses. The net offering proceeds to the Company after deducting the total expenses were approximately $27,904,000. During November 1996, a minority shareholder in the Company's subsidiary, NetSat Express, agreed to exchange its 19,000 shares (representing approximately 2%) of NetSat Express for approximately 30,000 shares in the Company. The shares in the Company were valued at $8.07 per share at the date of the agreement. The transaction was completed during April 1997 and, accordingly, the Company recorded goodwill of approximately $243,000. During the year ended June 30, 1996, the Company sold approximately 210,000 shares of its common stock to various investors. Proceeds from the sale of these shares totaled approximately $966,000, net of related expenses of approximately $17,000. F-11 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In June 1995, the Company completed a private placement offering in which the Company issued approximately 1,219,000 shares of common stock to various investors. Proceeds from the issuance of these shares totaled approximately $5,032,000, including approximately $861,000 of stock subscriptions received in July 1995, and net of related expenses of approximately $1,402,000. In satisfaction of these related expenses, the Company paid approximately $670,000 in cash and issued approximately 156,000 shares of its common stock valued at approximately $732,000. Additionally, in connection with this offering, the Company sold to one of its investors for approximately $4,000, a five-year warrant to purchase approximately 107,000 shares of the Company's common stock at a price of $5.26 per share. The warrant contains certain anti-dilution provisions as specified in the warrant agreement. On January 24, 1997, the investor exercised the outstanding warrant. STOCK ISSUED TO CONSULTANTS During November 1996, the Company issued a ten-year warrant to five consultants for future services to purchase an aggregate of approximately 64,000 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. During the year ended June 30, 1998, warrants to purchase 6,700 shares of common stock were exercised. During the year ended June 30, 1996, the Company issued approximately 10,000 shares of its common stock to a consultant in payment for his efforts in assisting in various Company matters. These shares were purchased by the consultant at a price of $.04 per share. Consulting expense recorded as a result of this transaction amounted to approximately $46,000, which represents the difference between the fair market value of the shares at the date of issuance and the purchase price. ISSUANCE OF COMMON STOCK AS COMMISSION On November 9, 1995, and in connection with the Company's sale of approximately 200,000 shares of its common stock to an investor also during the year ended June 30, 1996, the Company entered into a commitment to issue up to 5% of its share capital as follows: (i) 1% of the then outstanding share capital of the Company upon receipt of sales orders from this stockholder totaling $1,500,000 and (ii) an additional 1% of the then outstanding share capital of the Company upon the receipt of each of four subsequent increments of $3,000,000 in sales orders from this stockholder. This commitment expired in May 1998. In November 1995, the Company issued approximately 37,000 shares of its common stock to this investor, or 1% of the then outstanding share capital. This issuance resulted in approximately $174,000 of commission expense based on the fair market value of the shares at the date of issuance, which was also the date of the agreement. As of June 30, 1996, this entire amount was included in prepaid expenses within the consolidated balance sheet as the related orders were not recorded as revenue during the year ended June 30, 1996. Such amount was included in selling and marketing expense in the accompanying consolidated statement of operations during the year ended June 30, 1997, the period in which the related revenue was recognized. In addition, the investor was granted certain preemptive and other rights regarding future issuances of securities of the Company including (i) a preemptive right to purchase up to 15% of the total number of securities offered in any public offering undertaken by the Company and (ii) the right to participate in any private offering to the extent required to maintain its percentage ownership in the Company as well as the right to nominate a director to the Board of Directors. These rights survive for so long as the investor's stock ownership does not fall below 5% of the outstanding share capital of the Company as a result of the investor selling or otherwise disposing of a portion of its shares. F-12 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. CONVERTIBLE PREFERRED STOCK In December 1996, the Company issued approximately 485,000 shares (including approximately 53,000 shares issued as commission) of its Class B convertible preferred stock ("Class B Convertible") at $28.00 per share to investors. Proceeds from the sales of these shares totaled $10,965,000, net of related cash expenses of $1,135,000. In March 1997, and in connection with certain anti-dilution provisions related to a sale of common stock to an investor during the year ended June 30, 1996, the Company issued approximately 29,000 shares of Class B Convertible at $28.00 per share. On May 30, 1996, the Company issued approximately 156,000 shares of its Class A convertible preferred stock ("Class A Convertible") at $16.00 per share to investors. Proceeds from the sale of these shares totaled $2,485,000, net of related expenses of $15,000. In addition, during August 1996, the Company issued approximately 16,000 shares of Class A Convertible at $16.00 per share to an investor. The Class A Convertible and Class B Convertible outstanding at the time of the Company's initial public offering in August 1997 was converted into approximately 1,958,000 shares of common stock. 8. STOCK OPTION PLANS In February 1995, the Company adopted a stock option plan (the "Employee Stock Option Plan"), which provided that the Company may grant employees options to acquire up to an aggregate of 285,000 shares of the Company's common stock. During December 1996, the Company increased the number of shares it may grant to 1,710,000. The options generally vest in equal installments over a four-year period and expire on the tenth anniversary of the date of grant. In June 1995, the Company adopted a stock option plan (the "Director Stock Option Plan"), which provides that the Company may grant outside directors options to acquire up to an aggregate of 285,000 shares of the Company's common stock. The options vest annually in equal installments over a three-year period commencing on the date of grant. The options expire the earlier of five years from the date of grant or three years from concluding service as director of the Company. On February 26, 1997, the Company's Board of Directors authorized, and the stockholders subsequently approved, the 1997 Stock Incentive Plan ("1997 Plan"), which serves as a successor plan to the Employee Stock Option Plan and Director Stock Option Plan. The 1997 Plan provides for an increase of 285,000 shares to previously existing stock option plans, among other matters. F-13 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EMPLOYEE PLAN The following table summarizes activity in employee stock options (in thousands except for per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ---------------------------------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE UNDER OPTION EXERCISE PRICE UNDER OPTION EXERCISE PRICE UNDER OPTION EXERCISE PRICE ---------------------------------------------------------------------------------------- Balance, beginning of year 1,546 $ 6.19 820 $ 4.46 209 $ 3.51 Grants.................... 206 $13.98 733 $ 8.15 730 $ 4.57 Exercised................. (75) $ 4.42 - $ - - $ - Canceled.................. (10) $ 7.84 (7) $ 7.39 (119) $ 3.51 -------------- --------------- -------------- Balance, end of year...... 1,667 $ 7.22 1,546 $ 6.19 820 $ 4.46 ============== =============== ============== Weighted-average fair value of options granted during the year $ 7.96 $ 3.56 $ 2.26
As a result of stock options granted during the years ended June 30, 1997, 1996 and 1995, the Company recorded compensation expense of approximately $56,000, $43,000 and $99,000 during the years ended June 30, 1998, 1997 and 1996, respectively, based on the difference between the fair market value of the shares and the option exercise prices at the dates of grant. As of June 30, 1998, remaining compensation expense to be recorded through the year ended June 30, 2001 was approximately $309,000. As of June 30, 1998, approximately 567,000 employee stock options were exercisable. DIRECTOR PLAN Pursuant to the Director Stock Option Plan, in June 1995, the Company granted certain outside directors options to purchase approximately 128,000 shares of the Company's common stock at $3.51 per share. As a result of these grants, the Company recorded compensation expense during the years ended June 30, 1998, 1997 and 1996, of $15,000, $40,000 and $93,000, respectively, based on the fair market value of the shares at the date of grant. As of June 30, 1998, there was no additional compensation expense to be recorded relating to these grants. During January 1997, an additional outside director was granted approximately 43,000 options at $8.07 per share, the estimated fair value of such shares on the date of grant. During November 1997, an additional outside director was granted 15,000 options at $15.75 per share, the fair value of such shares on the date of grant. As of June 30, 1998, approximately 86,000 options were exercisable and 57,000 were exercised during the year ended June 30, 1998. STATEMENT 123 Pro forma information regarding net loss and net loss per share is required by Statement 123, 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 for these options was estimated using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended F-14 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1998, 1997 and 1996: risk-free interest rate of 6.5%, volatility factor of the expected market price of the Company's common stock of .51 (1998) and .40 (1997 and 1996), a weighted-average expected life of the option of six years and no dividend yields. 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. 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: YEAR ENDED YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 -------------------------------------- Pro forma net loss (in thousands)....... $ (1,868) $ (3,433) Pro forma net loss per share............ $ (0.22) $ (0.56) The following tables summarize information about employee and director stock options outstanding at June 30, 1998 (option amounts in thousands): WEIGHTED- AVERAGE RANGE OF REMAINING EXERCISE OPTIONS OPTIONS CONTRACTUAL PRICES OUTSTANDING EXERCISABLE LIFE (YEARS) - ------------------------------------------------------------------------- $3.51 - $4.68 879 477 7.3 $7.02 - $10.50 695 171 8.5 $11.38 - $15.75 204 5 9.3 $17.13 - $18.38 18 0 9.3 ========================================================================= $3.51 - $18.38 1,796 653 8.0 ========================================================================= The Company has reserved approximately 2,205,000 shares of common stock for issuance upon exercise of all outstanding options and warrants at June 30, 1998. 9. RELATED PARTY TRANSACTIONS NOTE RECEIVABLE FROM STOCKHOLDER On December 8, 1995, the Company loaned $150,000 to an employee, who is also a stockholder of the Company. Interest was receivable at an annual rate of 5%. The note was due on June 30, 1996 and was extended until June 30, 1997. On June 13, 1997, the full amount of principal plus accrued interest in the aggregate amount of approximately $153,000 was repaid. F-15 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE AND LOAN PAYABLE TO STOCKHOLDER On October 28, 1994, the Company received $315,000 in exchange for a note payable to the Company's chief executive officer, who is also a stockholder of the Company. Interest is payable at an annual rate of 6%. Principal and any unpaid interest are payable in full upon demand at any time on or after October 28, 1995. Interest expense related to this note was approximately $9,000 and $19,000, during the years ended June 30, 1997 and 1996, respectively. The note payable and accrued interest was paid on January 14, 1997. During the period ended June 30, 1995, the Company also received non-interest bearing working capital loan advances of approximately $81,000 from the Company's chief executive officer, of which $60,000 was repaid during the period ended June 30, 1995 and approximately $21,000 was repaid during the year ended June 30, 1996. 10. 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 20% of their pre-tax compensation. Participant contributions up to 4% of pre-tax compensation were fully matched by the Company during the years ended June 30, 1998, 1997 and 1996. The plan also provides for discretionary contributions by the Company. The Company contributed approximately $242,000, $117,000 and $42,000 to the plan during the years ended June 30, 1998, 1997 and 1996, respectively. There were no discretionary contributions made by the Company during the years ended June 30, 1998, 1997 and 1996. 11. INCOME TAXES As a result of losses incurred from inception, the Company has available net operating loss carryforwards ("NOL's") of approximately $8.2 million ($5.1 million and $3.1 million for Globecomm Systems Inc. and NetSat Express, respectively) for income tax purposes which expire through 2013. However, as a result of significant ownership changes and separate company limitations it is anticipated that an annual limitation will be applied to the Company's utilization of the NOL's. As the Company has had cumulative losses and there is no assurance of future taxable income, a valuation allowance has been established to offset deferred tax assets. The components of the Company's net deferred tax assets are as follows:
JUNE 30, 1998 JUNE 30, 1997 (IN THOUSANDS) ----------------------------------------- Deferred tax liabilities: Projects in progress............................................... $ 157 $ - Depreciation and amortization...................................... 153 16 ----------------------------------------- Total deferred tax liabilities....................................... 310 16 Deferred tax assets: Net operating loss carryforwards................................... 3,294 2,045 Projects in progress............................................... - 307 Accruals........................................................... 116 73 ----------------------------------------- Total deferred tax assets........................................... 3,410 2,425 Valuation allowance for deferred tax assets.......................... 3,100 (2,409) ----------------------------------------- Net deferred tax assets.............................................. 310 16 ----------------------------------------- Net deferred taxes................................................... $ - $ - =========================================
F-16 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At June 30, 1996, the Company had a valuation allowance for deferred tax assets of $1,230,000. In addition, approximately $455,000 of the valuation allowance, if recognized, will be allocated directly to stockholders' equity relating to non-qualified dispositions of stock option exercises. 12. SEGMENT INFORMATION The Company operates through two business segments. Its Ground Segment Systems and Networks Segment, through Globecomm Systems Inc., is engaged in the design, assembly and installation of ground segment systems and network solutions for the complex and changing communications requirements of its customers. The Company's ground segment systems typically consist of an earth station and ancillary subsystems such as microwave links for back-haul of traffic to a central office or generators for emergency power restoral. An earth station is an integrated system consisting of antennas, transmitting and receiving equipment, modulation/demodulation equipment, monitor and control systems and voice, data and video network interface equipment. Its Data Communications Services Segment, through the NetSat Express subsidiary, is engaged in providing high-speed, satellite-delivered data communications to developing markets worldwide. NetSat Express is currently providing Internet access to customers who have limited or no access to terrestrial network infrastructure capable of supporting the economical delivery of such services. The Company's reportable segments are business units that offer different products and services. The reportable segments are each managed separately because they provide distinct products and services. The following is business segment information as of and for the years ended June 30, 1998 and 1997, as NetSat Express commenced operations during July 1996:
YEAR ENDED YEAR ENDED JUNE 30, JUNE 30, 1998 1997 ------------------------------------ (IN THOUSANDS) Revenues: Ground Segment Systems and Networks........................$ 57,419 $ 36,169 Data Communications Services............................... 686 51 ------------------------------------ Total revenues...............................................$ 58,105 $ 36,220 ==================================== Loss from operations: Ground Segment Systems and Networks........................$ (157) $ (1,766) Data Communications Services............................... (1,655) (1,454) Interest income, net......................................... 1,266 276 Minority interests in operations of consolidated subsidiary................................................ - 275 ------------------------------------ Net Loss.....................................................$ (546) $ (2,669) ====================================
F-17 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SEGMENT INFORMATION (CONTINUED) JUNE 30, 1998 JUNE 30, 1997 ------------------------------------- (IN THOUSANDS) Assets: Ground Segment Systems and Networks.. $ 60,894 $ 34,201 Data Communications Services......... 1,169 125 Intercompany eliminations............ (3,719) (1,040) ------------------------------------- Total assets........................... $ 58,344 $ 33,286 ===================================== Depreciation and amortization: Ground Segment Systems and Networks.. $ 592 $ 326 Data Communications Services......... 58 8 ------------------------------------- Total depreciation and amortization.... $ 650 $ 334 ===================================== Expenditures for long-lived assets: Ground Segment Systems and Networks.. $ 2,878 $ 6,686 Data Communications Services......... 584 79 ------------------------------------- Total expenditures for long-lived assets............................... $ 3,462 $ 6,765 ===================================== 13. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK The Company designs, assembles and installs satellite ground segment systems and networks for customers in diversified geographic locations. 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. Historically, the Company has not incurred significant losses from trade receivables. Sales to one major customer accounted for approximately 29% and two major customers accounted for approximately 42% (29% and 13%) and 61% (43% and 18%) of the Company's net revenues for the years ended June 30, 1998, 1997 and 1996, respectively. Revenues from foreign sales accounted for 69% (33% Africa, 17% Asia, 9% Middle East, 9% Europe and 1% South America), 40% (28% Asia, 11% Europe and 1% Africa) and 22% (13% Europe, 5% Africa and 4% Asia) of total revenues for the years ended June 30, 1998, 1997 and 1996, respectively. 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 two financial institutions at June 30, 1998. Cash equivalents are comprised of short-term debt instruments, certificates of deposit or direct or guaranteed obligations of the United States, which are held to maturity and approximate cost. At times, cash may be in excess of FDIC insurance limits. 14. FINANCIAL INSTRUMENTS The Company has entered into a foreign currency forward contract designed to minimize the exposure to exchange rate fluctuations on a purchase commitment denominated in Swedish Krona. At June 30, 1998, this contract, which matures on December 18, 1998, was for the purchase of Swedish Krona for a F-18 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) total of approximately $3.2 million. Gains or losses which relate to such contracts are recognized upon payment of the purchase commitment as an adjustment to the carrying value of the related inventory. 15. COMMITMENTS LINE OF CREDIT The Company has a $7.5 million credit facility consisting of (1) a $5.0 million secured domestic line of credit and (2) a $2.5 million secured export-import guaranteed line of credit. Each line of credit bears interest at the prime rate plus 1/2% per annum and is collateralized by a first security interest on all assets. Such line of credit expires in October 1998. LETTERS OF CREDIT The Company utilizes standby letters of credit to secure certain bid proposals and performance guarantees in the normal course of business. The Company provides cash collateral for a majority of these letters of credit. As of June 30, 1998 and 1997, cash collateral related to bid proposals amounted to approximately $588,000 and $1,257,000, respectively, and cash collateral related to performance guarantees amounted to approximately $3,828,000, and $280,000, respectively. These amounts are included in restricted cash in the accompanying consolidated balance sheets. LEASE COMMITMENTS Future minimum payments under non-cancelable leases for office space and equipment with terms of one year or more, consist of the following at June 30, 1998 (in thousands): CAPITAL OPERATING LEASES LEASES -------------------------------- Year ending June 30, 1999...................... $ 19 $ 107 Year ending June 30, 2000...................... - 6 Year ending June 30, 2001...................... - 1 -------------------------------- Total minimum lease payments................... 19 $ 114 ================ Less amounts representing interest............. 1 -------------- Present value of net minimum lease payments.... $ 18 ============== EMPLOYMENT AGREEMENTS During January 1997, the Company entered into three-year employment agreements with two of its officers for an aggregate amount of $325,000 per year. The Company will have certain obligations to the two officers if they are terminated for disability, cause or following a change in control. 16. SUBSEQUENT EVENTS (UNAUDITED) On August 20, 1998, the Company purchased 18.75% of the future profits, losses and equity (subject to certain liquidation and income preference) of McKibben Communications, LLC, a California limited liability corporation, for $1.5 million. The Company has a two-year option to purchase up to an additional 11.25% for $1.5 million. F-19 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On September 1, 1998, the Company's Board of Directors authorized the repurchase of up to $2.0 million of the Company's outstanding common stock. The repurchase program allows for purchases to be made intermittently, through open market and privately negotiated transactions. Timing, price, quantity and the manner of purchase will be at the discretion of the Company's management subject to compliance with the applicable securities laws. Any repurchased shares under the repurchase program will be used for general corporate purposes. F-20 INDEX TO EXHIBITS: - ------------------ Exhibit No. - ----------- 3.1 Amended and Restated Certificate of Incorporation (filed herewith) 3.3 Amended and Restated By-Laws of the Registrant (filed herewith) 4.2 See Exhibits 3.1 and 3.3 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 (filed herewith). 16.2 Letter from PricewaterhouseCoopers LLP (incorporated by reference to exhibit 16.1 of the Registration Statement). 21.1 Subsidiary of the Registrant (filed herewith). 23.1 Consent of Ernst & Young LLP (filed herewith). 23.2 Consent of PricewaterhouseCoopers LLP (filed herewith). 27 Financial Data Schedule (filed herewith). * Confidential treatment granted for portions of this agreement. EX-3.1 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF GLOBECOMM SYSTEMS INC. (Pursuant to Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware) Globecomm Systems Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law"), DOES HEREBY CERTIFY: FIRST: That the name of this corporation is Globecomm Systems Inc., and that this corporation was originally incorporated in Delaware under the name Worldcomm Systems Inc., on August 17, 1994, pursuant to the General Corporation Law. SECOND: That the Board of Directors duly adopted resolutions proposing to amend and restate the Certificate of Incorporation of this corporation, declaring said amendment and restatement to be advisable and in the best interests of this corporation and its stockholders, and authorizing the appropriate officers of this corporation to solicit the consent of the stockholders therefore, which resolution setting forth the proposed amendment and restatement is as follows: "RESOLVED, that the Certificate of Incorporation of this corporation be amended and restated in its entirety as follows: ARTICLE I. The name of this corporation is Globecomm Systems Inc. ARTICLE II. The address of the registered office of this corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law. ARTICLE IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which this corporation is authorized to issue is 25,000,000 shares. 22,000,000 shares, par value $.001 per share, shall be Common Stock and 3,000,000 shares, par value $.001 per share, shall be Preferred Stock. B. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of this corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware. ARTICLE V. A. Common Stock. (a) General. All shares of Common Stock will be identical and will entitle the holders thereof to the same rights, powers and privileges. The rights, powers and privileges of the holders of the Common Stock are subject to and qualified by the rights of holders of the Preferred Stock. (b) Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. (c) Dissolution, Liquidation or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of this corporation, whether voluntary or involuntary, each issued and outstanding share of Common Stock shall entitle the holder thereof to receive an equal portion of the net assets of this corporation available for distribution to the holders of Common Stock, subject to any preferential rights of any then outstanding Preferred Stock. (d) Voting Rights. Except as otherwise required by law or this Amended and Restated Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held of record by such holder on the books of this corporation for the election of directors and on all matters submitted to a vote of stockholders of this corporation. Except as otherwise required by law or provided herein, holders of Common -2- Stock shall vote together with holders of Common Stock as a single class, subject to any special or preferential voting rights of any then outstanding Preferred Stock. There shall be no cumulative voting. (e) Redemption. The Common Stock is not redeemable. (f) Stock Split. Upon the effectiveness of this Amended and Restated Certificate of Incorporation, each outstanding share of Common Stock, par value $.01 per share, shall be changed into 2.85 shares of Common Stock, par value $.001. Each holder of record of a certificate for one or more shares of Common Stock of the corporation as of the close of business on the date this Amended and Restated Certificate of Incorporation becomes effective shall be entitled to receive as soon as practicable, and without surrender of such certificate, a certificate or certificates representing 1.85 additional shares of Common Stock, par value $.001, for each one share of Common Stock represented by the certificate of such holder. B. Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of ARTICLE IV, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; -3- (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of this corporation, and the relative rights or priority, if any, of payment of shares of that series; and (h) Any other relative rights, preferences and limitations of that series. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the Common Stock with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of this corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. C. This Amended and Restated Certificate of Incorporation is being filed in connection with this corporation's initial public offering of its securities. Upon the closing of such initial public offering, each share of Class A Preferred Stock, and each share of Class B Preferred Stock, previously outstanding, will be automatically converted, pursuant to the terms of the respective Certificates of Designation with respect to such classes, into 2.85 shares of Common Stock, par value $.001. Following such conversion, each certificate evidencing shares of either of such classes shall be deemed to evidence the same number of shares of Common Stock, par value $.001, and each holder of record of a certificate for one or more shares of such class shall be entitled to receive as soon as practicable, and without surrender of such certificate, a certificate or certificates representing 1.85 additional shares of Common Stock, par value $.001 for each one share of Preferred Stock of such class representative by the certificate of such holder. ARTICLE VI. In furtherance of and not in limitation of powers conferred by statute, it is further provided: 1. Election of directors need not be by written ballot. 2. The Board of Directors is expressly authorized to adopt, amend or repeal the Bylaws of this corporation. -4- ARTICLE VII. Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. ARTICLE VIII. A director of this corporation shall not be personally liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to this corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of this corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of this corporation shall not adversely affect any right or protection of a director of this corporation existing at the time of such repeal or modification. -5- ARTICLE IX. This corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of this corporation, or is or was serving, or has agreed to serve, at the request of this corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. Indemnification may include payment by this corporation of expenses in defending an action or proceeding in advance of the final disposition of such action or proceeding upon receipt of an undertaking by the person indemnified to repay such payment if it is ultimately determined that such person is not entitled to indemnification under this Article, which undertaking may be accepted without reference to the financial ability of such person to make such repayment. This corporation shall not indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person unless the initiation thereof was approved by the Board of Directors of this corporation. The indemnification rights provided in this Article (i) shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, agreement or vote of stockholders or disinterested directors or otherwise, and (ii) shall inure to the benefit of the heirs, executors and administrators of such persons. This corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of this corporation or other persons serving this corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. ARTICLE X. This corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Amended and Restated Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. -6- ARTICLE XI. The number of directors of this corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders. ARTICLE XII. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of this corporation may provide. The books of this corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of this corporation. The Stockholders of this corporation may not take any action by written consent in lieu of a meeting." * * * THIRD: The foregoing amendment was approved by the holders of the requisite number of shares of said corporation in accordance with Section 228 of the General Corporation Law. FOURTH: That said amendments were duly adopted in accordance with the provisions of Section 242 and 245 of the General Corporation Law. -7- IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation has been signed by the Chief Financial Officer of this corporation this 5th day of August, 1997. /s/ Andrew C. Melfi -------------------------- Andrew C. Melfi Chief Financial Officer -8- EX-3.3 3 AMENDED AND RESTATED BY-LAWS EXHIBIT 3.3 AMENDED AND RESTATED BY-LAWS OF GLOBECOMM SYSTEMS INC. Article 1. OFFICES Section 1.01 The registered office shall be in the city of Wilmington, County of New Castle, State of Delaware. Section 1.02 The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. Article 2. MEETINGS OF STOCKHOLDERS Section 2.01 All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2.02 Annual meetings of stockholders shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. Section 2.03 Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not fewer than ten (10) nor more than sixty (60) days before the date of the meeting. Section 2.04 The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.05 Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the Chairman of the Board or the Chief Executive Officer and shall be called by the Chairman of the Board, the Chief Executive Officer or Secretary at the request in writing of a majority of the Board of Directors. Section 2.06 Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 2.07 Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 2.08 The holders of fifty percent (50%) of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 2.09 When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 2.10 Unless otherwise provided in the certificate of incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three (3) years from its date, unless the proxy provides for a longer period. Section 2.11 [Section Heading] (a) Annual Meetings of Stockholders (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in this Section 11, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 11. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 11, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the one hundred twentieth (120th) day nor earlier than the close of business on the one hundred fiftieth (150th) day prior to the first anniversary of the date of the proxy statement delivered to stockholders in connection with the preceding year's annual meeting; provided, however, that if either (i) the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such an anniversary date or (ii) no proxy statement was delivered to stockholders in connection with the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person' written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner and (ii) the class and number of shares of capital stock of the corporation that are owned beneficially and held of record by such stockholder and such beneficial owner. (iii) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 11 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement by the corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting (or, if the annual meeting is held more than thirty (30) days before or seventy (70) days after such anniversary date, at least sixty (60) days prior to such annual meeting), a stockholder's notice required by this Section 11 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive office of the corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the corporation. (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 11. If the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Section 11 shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the ninetieth (90th) day prior to such special meeting not later than the later of (x) the close of business of the sixtieth (60th) day prior to such special meeting or (y) the close of business of the tenth (10th) day following the day on which public announcement is first made of the date of such special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) General. (i) Only such persons who are nominated in accordance with the procedures set forth in this Section 11 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 11. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 11 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded. (ii) For purposes of this Section 11, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 and 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 11 shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. Notwithstanding any other provision of law, the Certificate of Incorporation or these By-Laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Section 11. Article 3. DIRECTORS Section 3.01 The number of directors which shall constitute the whole Board shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until said director's successor is elected and qualified. Directors need not be stockholders. Section 3.02 Vacancies and new created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3.03 The business of the corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these by-laws directed or required to be exercised or done by the stockholders. Section 3.04 The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 3.05 The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 3.06 Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Section 3.07 Special meetings of the Board may be called by the Chairman of the Board or the Chief Executive Officer on two (2) days' notice to each director by mail or forty-eight (48) hours notice to each director either personally or by facsimile or electronic mail; special meetings shall be called by the Chairman of the Board, the Chief Executive Officer or the Secretary in like manner and on like notice on the written request of two directors unless the Board consists of only one director, in which case special meetings shall be called by the Chairman of the Board, the Chief Executive Officer or the Secretary in like manner and on like notice on the written request of the sole director. Section 3.08 At all meetings of the Board a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.09 Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 3.10 Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 3.11 Committees of Directors. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not the member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 3.12 Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 3.13 Compensation of Directors. Unless otherwise restricted by the certificate of incorporation or these by-laws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director or receive shares of stock or options to purchase shares of stock in lieu of cash payments. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 3.14 Removal of Directors. Unless otherwise restricted by the certificate of incorporation or bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. Article 4. NOTICES Section 4.01 Whenever, under the provisions of the statutes or of the certificate of incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at such director's or stockholder's address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile or electronic mail. Section 4.02 Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Article 5. OFFICERS Section 5.01 The officers of the corporation shall be chosen by the Board of Directors and shall be a chairman of the Board, chief executive officer, president, chief financial officer, treasurer and a secretary. The Board of Directors may elect from among its members a chairman of the Board and a vice chairman of the Board. The Board of Directors may also choose one or more senior vice-president, vice-presidents, assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these by-laws otherwise provide. Section 5.02 The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president, a treasurer, and a secretary and may choose vice presidents. Section 5.03 The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 5.04 The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 5.05 The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. Section 5.06 The Chairman of the Board. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which the Chairman shall be present. The Chairman shall have and may exercise such powers as are, from time to time, assigned to the Chairman by the Board and as may be provided by law. Section 5.07 In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which the Vice Chairman shall be present. The Vice Chairman shall have and may exercise such powers as are, from time to time, assigned to the Vice Chairman by the Board and as may be provided by law. Section 5.08 The Chief Executive Officer. The Chief Executive Officer shall be the chief executive officer of the Corporation and shall have general supervision over the business of the Corporaiton. The Chief Executive Officer shall have all powers and duties usually incident to the office of Chief Executive Officer. The Chief Executive Officer shall have such other powers and perform such other duties as may be assigned to the Chief Executive Officer from time to time by the Board of Directors. Section 5.09 The President and Vice-President. The President shall be the Chief Operating Officer of the corporation; and in the absence of the Chairman and Vice Chairman of the Board the President shall preside at all meetings of the stockholders and the Board of Directors; the President shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 5.10 The President shall execute bonds, mortgages and other contracts, requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. Section 5.11 In the absence of the President or in the event of the President's inability or refusal to act, a senior vice-president, if any, (or in the event there be more than one senior vice-president, the senior vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Senior Vice-President and the Vice-Presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 5.12 The Secretary and Assistant Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the President or the Chairman of the Board, under whose supervision the secretary shall be. The Secretary shall have custody of the corporate seal of the corporation and the Secretary, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the secretary or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by said officer's signature. Section 5.13 The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 5.14 The Treasurer and Assistant Treasurers. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. Section 5.15 The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all the Treasurer's transactions as treasurer and of the financial condition of the corporation. Section 5.16 If required by the Board of Directors, the Treasurer shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of the Treasurer and for the restoration to the corporation, in case of the Treasurer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Treasurer's possession or under the Treasurer's control belonging to the corporation. Section 5.17 The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Treasurer or in the event of the treasurer's inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Article 6. CERTIFICATE OF STOCK Section 6.01 Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the President or a vice-president and the Treasurer or an assistant treasurer, or the Secretary or an assistant secretary of the corporation, certifying the number of shares owned by such holder in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificate issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions or such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 6.02 Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if the former officer, transfer agent or registrar were such officer, transfer agent or registrar at the date of issue Section 6.03 Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the legal representative of the owner of such lost, stolen or destroyed certificate or certificates, to advertise the same in such manner as it shall require and/or give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 6.04 Transfer of Stock. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 6.05 Fixing Record Date. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 6.06 Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. Article 7. GENERAL PROVISIONS DIVIDENDS Section 7.01 Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 7.02 Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 7.03 Checks. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 7.04 Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. Section 7.05 Seal. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 7.06 Indemnification. The corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was, or has agreed to become, a director or officer of the corporation, or is or was serving, or has agreed to serve, at the request of the corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person or on such person's behalf in connection with such action, suit or proceeding and any appeal therefrom. Indemnification may include payment by the corporation of expenses in defending an action or proceeding in advance of the final disposition of such action or proceeding upon receipt of an undertaking by the person indemnified to repay such payment if it is ultimately determined that such person is not entitled to indemnification under this Section, which undertaking may be accepted without reference to the financial ability of such person to make such repayment. The corporation shall not indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person unless the initiation thereof was approved by the Board of Directors of the corporation. The indemnification rights provided in this Section (i) shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, agreement or vote of stockholders or disinterested directors or otherwise, and (ii) shall inure to the benefit of the heirs, executors and administrators of such persons. The corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the corporation or other persons serving the corporation and such rights may be equivalent to, or greater or less than, those set forth in this Section. Section 7.07 Transaction with Interested Parties. No contract or transaction between the corporation and one or more of the directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because such director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his, her or their votes are counted for such purpose, if: (a) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (b) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Article 8. AMENDMENTS These by-laws may be altered, amended or repealed or new by-laws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the certificate of incorporation at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new by-laws be contained in the notice of such special meeting. If the power to adopt, amend or repeal by-laws is conferred upon the Board of Directors by the certificate or incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal by-laws. EX-10.13 4 INVESTMENT AGREEMENT DATED AUGUST 21, 1998 BY AND BETWEEN MCKIBBEN COMMUNICATIONS, LLC AND THE REGISTRANT INVESTMENT AGREEMENT BY AND BETWEEN GLOBECOMM SYSTEMS INC., AS PURCHASER, AND MCKIBBEN COMMUNICATIONS, AS SELLER ARTICLE I PURCHASE AND SALE 1.01. Purchase and Sale.......................................-2- 1.02. Encumbrance of Acquired Equity..........................-2- 1.03. Purchase Price..........................................-2- 1.04. Payment of Purchase Price...............................-2- ARTICLE II CLOSING 2.01. Closing Date............................................-2- 2.02. Purchaser's Deliveries at Closing.......................-2- 2.03. Seller's Deliveries at Closing..........................-3- ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER 3.01. Corporate Organization..................................-4- 3.02. Authorization...........................................-4- 3.03. Enforceability..........................................-4- 3.04. Accuracy of Representations and Warranties..............-4- 3.05. Requirements for Notification or Approval...............-4- 3.06. Brokers and Finders.....................................-5- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MCKIBBEN 4.01. Corporate Organization and Good Standing................-5- 4.02. Authorized and Issued Acquired Equity...................-5- 4.03. Authority to Sell.......................................-5- 4.04. Enforceability..........................................-6- 4.05. No Violation............................................-6- 4.06. Records and Books; Accounting...........................-6- 4.07. Statement of Operations.................................-6- 4.08. Distinct Entity.........................................-6- 4.09. Status of Intellectual Property.........................-7- 4.10. Taxes...................................................-8- 4.11. Contracts and Commitments...............................-8- 4.12. Litigation, Judgments and Decrees.......................-8- 4.13. ERISA; Employee Benefit Plans...........................-9- 4.14. Brokers and Finders.....................................-9- 4.15. Compliance with Law; Necessary Authorizations...........-9- 4.16. Requirements for Notification or Approval...............-9- 4.17. Business Restrictions...................................-9- 4.18. Nature and Conduct of Business.........................-10- 4.19. Binding Obligations....................................-10- 4.20. Accuracy of Representations and Warranties.............-10- ARTICLE V 5.01. Registration of Securities.............................-10- 5.02. Governmental Consents..................................-10- ARTICLE VI CERTAIN COVENANTS AND AGREEMENTS 6.01. Right of First Refusal.................................-11- 6.02. Option To Purchase Acquired Equity.....................-12- 6.03. Absolute Option........................................-13- 6.04. Dilution...............................................-13- 6.06. Board Rights...........................................-15- ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 7.01. Survival of Representations............................-15- 7.02. Indemnification by Purchaser...........................-15- 7.03. Indemnification by Seller and Parent...................-15- 7.04. Remedies Cumulative....................................-16- ARTICLE VIII MISCELLANEOUS PROVISIONS 8.01. Modification or Waiver.................................-16- 8.02. Expenses...............................................-16- 8.03. Notices................................................-16- 8.04. Binding Effect; Assignment.............................-18- 8.05. Governing Law..........................................-18- 8.06. Entire Agreement.......................................-18- 8.07. Severability...........................................-19- 8.08. Acknowledgment of Representation.......................-19- 8.09. Headings...............................................-19- 8.10. Counterparts...........................................-19- INVESTMENT AGREEMENT AGREEMENT, made this 21st day of August, 1998, by and between Globecomm Systems Inc., a Delaware corporation, with offices at 45 Oser Avenue, Hauppauge, New York 11788 (hereinafter referred to as "Purchaser"), McKibben Communications, a California corporation, with offices at 20640 Bahama Street, Chatsworth, California 91311 (hereinafter referred to as "Parent") and McKibben Communications, LLC, a limited liability corporation, with offices at 20640 Bahama Street, Chatsworth, California 91311 (hereinafter referred to as "Seller"; Parent and Seller are hereinafter collectively, jointly and severally referred to as "McKibben"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, Parent has recently formed Seller in anticipation of the investment by Purchaser as contemplated by this Agreement (the "Investment"), in addition to another planned investment; WHEREAS, the Investment is subject to, and it is the intention of the parties that all of the assets (as set forth on SCHEDULE A annexed hereto) and operations of Parent, subject to the liabilities set forth on SCHEDULE B annexed hereto (collectively, the "Assets") have been transferred to Seller solely in consideration of Parent's ownership interest in Seller; and WHEREAS, Seller desires to issue and sell to Purchaser an interest in the equity of Seller, such interest constituting exactly 2083.3 Class B Units which constitute approximately eighteen and three quarters percent (18.75%) of the profits, losses and equity of Seller on an after acquired basis, which shall be subject to a liquidation and income preference granted to the Class A Unit holders (hereinafter referred to as the "Acquired Equity") as at the date of this Agreement, and Purchaser desires to purchase the Acquired Equity upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual premises and of the representations, warranties, covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which each of the parties hereto hereby acknowledge, the parties hereto hereby agree as follows: ARTICLE I PURCHASE AND SALE ----------------- 1.01. PURCHASE AND SALE. Upon the terms and conditions hereinafter set forth, Seller hereby sells, assigns, conveys, transfers and delivers to Purchaser and Purchaser's successors and assigns forever, and Purchaser hereby purchases and acquires, for the consideration hereinafter set forth, all right, title and interest in, to, relating to or arising from the Acquired Equity. -1- 1.02. ENCUMBRANCE OF ACQUIRED EQUITY. (a) Seller hereby sells the Acquired Equity free and clear of any and all mortgages, liens, pledges, charges, security interests, claims, equities, encumbrances, exceptions, restrictions, reservations, conditions, limitations or interests of any kind, type or nature whatsoever, except such restrictions as are expressly set forth in the Operating Agreement (as hereinafter defined) or imposed by applicable law, or any similar right of any third party in respect of the Acquired Equity being transferred by such party (hereinafter collectively referred to as "Liens"). (b) Purchaser shall not assume or be responsible for any liability, obligation, debt or commitment of either Seller or Parent of any kind or nature whatsoever pursuant to this Agreement or otherwise. 1.03. PURCHASE PRICE. In consideration of the purchase of the Acquired Equity by Purchaser pursuant to this Agreement and the covenants and provisions to be performed by Seller, Purchaser shall pay to Seller an aggregate purchase price of One Million Five Hundred Thousand Dollars ($1,500,000.00) (the "Purchase Price"). 1.04. PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid in full by Purchaser to Seller simultaneously with the Closing (as hereinafter defined) by certified check or wire transfer. ARTICLE II CLOSING ------- 2.01. CLOSING DATE. The closing shall take place at the offices of Goldman & Associates, LLP, 666 Old Country Road, Suite 304, Garden City, New York 11530 on the date hereof, or at such other time, place and date as the parties may agree upon in writing (such closing being herein called the "Closing" and the time and date of the Closing being herein called the "Closing Date"). 2.02. PURCHASER'S DELIVERIES AT CLOSING. At or prior to the Closing, Purchaser shall take such actions as are provided for herein or contemplated hereby and shall deliver or cause the following to be delivered to Seller: (a) an executed copy of this Agreement; (b) the Purchase Price in the manner set forth in Section 1.04 above; (c) an executed copy of the operating agreement in the form annexed hereto as EXHIBIT A (the "Operating Agreement"); (d) an executed copy of the registration rights agreement in the form annexed hereto as EXHIBIT B (the "Registration Rights Agreement"); -2- (e) resolutions of the Board of Directors of Purchaser approving the Agreement, the Operating Agreement the Registration Rights Agreement (collectively referred to herein as the "Operative Documents"), and all of the transactions contemplated thereby, in the form annexed hereto as EXHIBIT C; (f) an executed copy of the Mutual Co-Operation Agreement in the form annexed hereto as EXHIBIT D; and (g) Purchaser shall deliver such other documents, if any, to Seller or Seller's representative in form and substance reasonably satisfactory to Seller's counsel, and shall take such other action, if any, and execute such additional documents as may be provided for or contemplated hereby. 2.03. MCKIBBEN'S DELIVERIES AT CLOSING. At or prior to the Closing, McKibben shall take such actions as are provided for herein or contemplated hereby and shall deliver or cause the following to be delivered to Purchaser: (a) an executed copy of this Agreement; (b) a certificate issued in the name of the Purchaser representing the Acquired Equity or exactly 2,083.3 Class B Units or approximately eighteen and three quarters percent (18.75%) of the equity of Seller on an after acquired basis, which shall be subject to a liquidation and income preference granted to the Class A Unit holders (the "Preference"); (c) an executed copy of the Operating Agreement; (d) an executed copy of the Registration Rights Agreement; (e) an executed copy of the Mutual Co-Operation Agreement in the form annexed hereto as EXHIBIT D; (f) an executed copy of the employment agreement between Seller and Mark McKibben, in the form annexed hereto as EXHIBIT E; (g) a Certificate issued by the Secretary of State of the State of California, as of recent date, with respect to the good standing of both Seller and Parent, and good standing certificates from each jurisdiction where either Seller or Parent is qualified to do business; (h) resolutions of the members of Seller approving the Operative Documents, and all of the transactions contemplated thereby in the form annexed hereto as EXHIBIT F; -3- (i) resolution of the shareholders and Board of Directors of Parent approving the Operative Documents, and all of the transactions contemplated thereby in the form annexed hereto on EXHIBIT G; (j) an opinion of counsel for Seller and Parent, dated the date hereof, in the form annexed hereto as EXHIBIT H; and (k) Seller shall deliver such other documents, if any, to Purchaser or Purchaser's representative in form and substance reasonably satisfactory to Purchaser's counsel, and shall take such other action, if any, and execute such additional documents as may be provided for or contemplated hereby, including, but not limited to, the transfer of the Assets from Parent to Seller. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER ------------------------------------------- Purchaser hereby makes the following representations and warranties to Seller and Seller's successors and assigns, and acknowledges and confirms that Seller is relying upon such representations and warranties in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby, notwithstanding any investigation made by Seller or on Seller's behalf: 3.01. CORPORATE ORGANIZATION. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Purchaser has full corporate power and authority to carry on its business as is now being conducted and to own, lease and operate its properties and assets as and in the places where such business is now conducted and where such properties and assets are now owned, leased or operated. 3.02. AUTHORIZATION. Purchaser has full corporate power and authority to execute, deliver and perform its obligations under this Agreement and to carry out the transactions contemplated hereby. Purchaser has taken all action required by law or otherwise to be taken by Purchaser to authorize Purchaser's execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes a valid and binding agreement of and upon Purchaser, enforceable against Purchaser in accordance with its terms. 3.03. ENFORCEABILITY. Purchaser represents, with respect to each of the Operative Documents that (i) each of the Operative Documents constitute legally valid and binding agreements, enforceable against Purchaser in accordance with their terms; and (ii) the execution and delivery by Purchaser of the Operative Documents does not, and the performance by Purchaser of the transactions contemplated hereby and thereby will not, violate any of the provisions of any contract -4- or agreement to which Purchaser is a party or by which Purchaser is bound, or any order, writ, injunction, or decree applicable to Purchaser. 3.04. REQUIREMENTS FOR NOTIFICATION OR APPROVAL. To the best knowledge of Purchaser, the execution and delivery of the Operative Documents by Purchaser, the consummation of the transactions contemplated hereby and thereby by Purchaser, and the performance of any obligation hereunder or thereunder by Purchaser, does not, and will not, require notice, registration, report or other filing or qualification with or consent, waiver, approval, license or authority of any third party or public authority, except for such as have been duly and validly obtained at or prior to the Closing. 3.05. BROKERS AND FINDERS. No person has been authorized by Purchaser, or by anyone acting on behalf of Purchaser or its officers, directors, employees, agents or trustees, to act as a broker, finder or in any other similar capacity in connection with the transactions contemplated by this Agreement in such a manner as to give rise to any valid claim against Seller or Purchaser for any broker's or finder's fee or commission or similar type of compensation. 3.06. ACCURACY OF REPRESENTATIONS AND WARRANTIES. No representation or warranty of Purchaser contained herein, or information with respect to Purchaser contained herein or in any statement, certificate, exhibit or other document furnished or to be furnished to Seller by Purchaser or Purchaser's representatives pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary to make the statements herein or therein not false or misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MCKIBBEN ------------------------------------------ Seller and Parent, jointly and severally, hereby make the following representations and warranties to Purchaser, Purchaser's successors and assigns, and acknowledges and confirms that Purchaser is relying upon such representations and warranties in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby, notwithstanding any investigation made by Purchaser or on Purchaser's behalf: 4.01. ORGANIZATION AND GOOD STANDING. Seller and Parent are, and will be at the Closing, a limited liability company and a corporation, respectively, duly organized, validly existing and in good standing under the laws of the State of California, duly authorized to carry on the business presently conducted by them, and are qualified to do business and are in good standing in any other jurisdiction in which, by reason of their respective ownership of property or the manner in which it conducts business, such qualification is necessary. 4.02. AUTHORIZED AND ISSUED ACQUIRED EQUITY. Prior to giving effect to the transactions contemplated hereby, the Members listed on SCHEDULE 4.02 annexed hereto collectively own one hundred Percent (100%) of the equity Seller. The shareholders listed on Schedule 4.02(a) annexed hereto collectively own one -5- hundred percent (100%) of the equity of Parent. All equity of each of Seller and Parent has been properly issued and is fully paid and non-assessable. There are no outstanding subscriptions, warrants, options, agreements, convertible securities or other commitments or contractual rights pursuant to which either Seller or Parent is or may become obligated to issue any of their respective equity or other securities, except for that certain Limited Liability Company Interest Purchase Agreement, to be dated August 1998 between Seller and Richard Wolfe, in the form annexed hereto as EXHIBIT H. 4.03. AUTHORITY TO SELL. Seller has, and at the Closing will have, the full right, power and authority to sell, transfer, convey and deliver to Purchaser the Acquired Equity agreed to be sold, transferred, conveyed and delivered by Seller hereunder, free and clear of any statutory, contractual or other limitation of any kind, type or nature whatsoever, and the Acquired Equity is not, nor will it be at the Closing, subject to any lien, pledge, hypothecation or any encumbrance or interest of any third party whatsoever, except as may be expressly provided herein. The sale provided for herein will vest in Purchaser all right, title and interest in and to the Acquired Equity, free and clear of any and all liens, encumbrances, restrictions, options, agreements and conditions, except those expressly provided for herein, in the Operating Agreement or applicable securities law. Similarly, Parent has the full right, power and authority to transfer to Seller the Assets. Parent's transfer of the Assets will vest in Seller all right, title and interest in all to the Assets, free and clear of any and all Liens, except those set forth on SCHEDULE 4.03 annexed hereto. 4.04. ENFORCEABILITY. Seller and Parent each represent, with respect to each of the Operative Documents that (i) each of the Operative Documents constitute legally valid and binding agreements, enforceable against Seller and, as applicable, Parent in accordance with their terms; and (ii) the execution and delivery by Seller and, as applicable, Parent of each of the Operative Documents does not, and the performance by Seller and Parent of the transactions contemplated hereby will not, violate any of the provisions of any contract or agreement to which either Seller or Parent is a party or by which Seller or Parent is bound, or any order, writ, injunction, or decree applicable to Seller or Parent. 4.05. NO VIOLATION. (a) Except for obtaining consents to the assignment of certain leases, vendor contracts and customer contracts from Parent to Seller as set forth on SCHEDULE 4.05 (collectively, the "Consents"), neither the transfer of the Assets by Parent to Seller, the execution and delivery of each of the Operative Documents by McKibben nor the consummation by McKibben of the transactions contemplated hereby will violate any provision or be in conflict with, or constitute a default (or an event which, with or without notice, lapse of time or both, would constitute a default) under, or result in the termination or invalidity of, or accelerate the performance required by, or cause the acceleration of the maturity of any debt or obligation of McKibben, or result in the creation or imposition of any security interest, lien or other encumbrance upon any of the Acquired Equity or the Assets under, any agreement or commitment to which McKibben is a party or by which McKibben is bound or to which any of the Acquired Equity or the Assets is subject, or violate any -6- statute or law or any judgment, decree, order, writ, injunction, regulation or rule of any domestic or foreign court or government authority applicable to McKibben, the Acquired Equity or the Assets. (b) Seller and Parent shall undertake to obtain the Consents and transfer all of the Assets of Parent to Seller in a timely fashion. Seller and Parent represent and warrant that all of the assets of Parent, of every kind, type and nature whatsoever, are being transferred to Seller in connection with the transactions contemplated by this Agreement, and that from the date hereof until such time as all of the Consents have been obtained, Parent shall hold the assets which are subject to the Consents for the sole and exclusive use and benefit of Seller, including, but not limited to, any and all profits and proceeds thereof. Notwithstanding the provisions of Section 7.01 hereof, the representations, warranties and undertakings contained in this Section 4.05(b) shall survive the Closing indefinately. 4.06. RECORDS AND BOOKS; ACCOUNTING. The records and books of account of Seller and Parent have been regularly kept and maintained in conformity with the past accounting principles and practices on a consistent basis during the past three (3) years, if applicable. The minute books of Seller and Parent are correct, complete and current in all respects and fairly reflect all corporate actions of the board of representatives and/or board of directors as the case may be, including, but not limited to, all committees, and the members and/or shareholders, as the case may be. 4.07. STATEMENT OF OPERATIONS. (a) The financial statements of Seller and Parent previously delivered to Purchaser and annexed hereto as SCHEDULE 4.07 (the "Financial Statements") are true, complete and accurate for what they purport to be, have been prepared in accordance with generally accepted accounting principles and fairly present the financial condition and results of operations of Seller and Parent for the periods indicated therein, exclusive of normal year end adjustments and accruals, in each case in accordance with the past accounting practices and principles consistently applied by Seller and Parent in the preparation of their respective tax returns and unaudited financial statements. (b) To the best knowledge of Seller and Parent, neither Seller nor Parent has any material liabilities or obligations of any nature, absolute, accrued, contingent or otherwise and whether due or to become due, arising out of or relating primarily to the business of either Seller or Parent, except (a) as and to the extent disclosed or reserved against in the Financial Statements (including the notes thereto) and (b) liabilities that under GAAP are not required to be disclosed in the Financial Statements. 4.08. DISTINCT ENTITY. Except for Parent's ownership of Seller, neither Seller nor Parent (i) own, directly or indirectly, any equity securities of, or interest in, any entity or enterprise, (ii) conduct any of its business through any subsidiary or other entity or enterprise, or (iii) share any facilities, personnel or assets with any related or unrelated third party. 4.09. STATUS OF INTELLECTUAL PROPERTY. Attached hereto as SCHEDULE 4.09 is a true and correct schedule which describes all of the patents (including, but not limited to, all reissues, -7- divisions, continuations and extensions thereof), applications for patents, patent disclosures docketed, inventions, improvements, trade secrets, trademarks, trademark applications, trade natures, copyright registrations or applications therefor and proprietary computer software or similar property owned by either Seller or Parent within the last three (3) years and all licenses, franchises, permits, authorizations, agreements and arrangements that concern any of the foregoing or that concern like items owned by others and used by either Seller or Parent within the last three (3) years. Except as indicated on SCHEDULE 4.09: (i) The patents shown on SCHEDULE 4.09 are owned by Seller free and clear of all mortgages, liens, charges or encumbrances of every kind, type or nature whatsoever. No licenses have been granted with respect to such patents and neither Seller nor Parent has received notice of any claim by a third party suggesting that its practice of the inventions covered by such patents, or any other inventions practiced by Seller or Parent would infringe the patent rights of any third party, nor are there grounds for any such claim. (ii) The copyright registrations shown on SCHEDULE 4.09 are owned by Seller free and clear of all mortgages, liens, charges or encumbrances of every kind, type or nature whatsoever. Except for licenses granted to end users in accordance with Seller's standard terms, no licenses have been granted with respect to any of Seller's copyrighted material and neither Seller nor Parent has received notice of any claim by a third party suggesting that any of its activities in the conduct of its business as presently conducted infringe the copyrights of any third party, nor are there grounds for any such claim. (iii) The trademark registrations shown on SCHEDULE 4.09 are owned by Seller free and clear of all mortgages, liens, charges or encumbrances of every kind, type or nature whatsoever. No licenses have been granted with respect to any of Seller's trademarks and neither Seller nor Parent has received notice of any claim by a third party suggesting that any of its activities in the conduct of its business as presently conducted infringe the trademarks, trade names or trade dress of any third party, nor are there grounds for any such claim. (iv) All proprietary information, technical information and know-how in possession of either Seller or Parent relating to the design or manufacture of products sold, and services performed, by it, including, without limitation, methods of manufacture, lab journals, manufacturing, engineering and other drawings, design and engineering specifications and similar items recording or evidencing such information, is owned by Seller free and clear of all mortgages, liens, charges or encumbrances of every kind, type or nature whatsoever. Seller has not granted any license or other permission with respect to the use of such information and neither Seller nor Parent has received notice of any claim by a third party suggesting that its use of such information would infringe or misappropriate the rights of any third party, nor are there grounds for any such claim. 4.10. TAXES. All taxes and other assessments and levies required to be withheld by either Seller or Parent from customers with respect to the sale of goods, or from or on behalf of employees for income, social security, unemployment insurance and any other taxes or similar charges have -8- been collected or withheld and either paid to the appropriate government agency or set aside and held in accounts for such purpose. All Federal, state and local tax returns and reports required to be filed by either Seller or Parent on or prior to the Closing Date with respect to taxable periods ending on or prior to the Closing Date have been or will be filed with the appropriate governmental authorities on or prior to the Closing Date. 4.11. CONTRACTS AND COMMITMENTS. (a) Except those set forth on SCHEDULE 4.11(A) of this Agreement, neither Seller nor Parent is bound by any written or binding oral (i) employment agreements, (ii) non-competition agreements or restrictive covenants, (iii) collective bargaining or union contracts or agreements, (iv) any agreements that contain any express severance or termination pay liabilities or obligations or (v) any agreements of any kind or nature that are not terminable at the will of Seller or Parent, as the case may be. (b) SCHEDULE 4.11(B) to this Agreement sets forth all of Seller and Purchaser's executory purchase or sale contracts or written or oral binding bids or commitments as of the Closing Date, all of which have been assigned to Seller. (c) SCHEDULE 4.11(C) to this Agreement sets forth a complete and accurate list of all insurance policies, including, but not limited to, policies of fire, liability, malpractice, medical insurance, workers' compensation and other forms of insurance owned or held by either Seller or Parent. The insurance policies listed on SCHEDULE 4.11(C), taken together, are of the kind that are, and are in amounts no less than is, customarily obtained by corporations of established reputations engaged in the same or similar business and similarly situated as Seller and Parent. (d) Except as set forth on SCHEDULE 4.11(D), Neither Seller nor Parent is in default, nor, to the best knowledge of Seller or Parent, is there any basis for any valid claim of default, under any contract, agreement, commitment or restriction, pertaining to the Acquired Equity being purchased pursuant to the terms of this Agreement or the Assets being transferred in contemplation of this Agreement, and no event of default on the part of either Seller or Parent has occurred which (whether with or without the giving of notice, lapse of time, or both, or the happening or occurrence of any other event) would constitute a default thereunder. 4.12. LITIGATION, JUDGMENTS AND DECREES. (a) Except as set forth on SCHEDULE 4.12(A), there has not been, nor is there currently, any action, suit or proceeding or any claim or investigation of any nature whatsoever, at law or in equity or both, by or before any domestic or foreign court or government or other regulatory or administrative agency, arbitration tribunal, board, bureau, authority or commission pending or threatened against or involving either Seller or Parent, or any of their respective assets, or which would question or challenge the validity of this Agreement or any action taken or to be taken by Seller or Parent pursuant to this Agreement or in connection with the transactions contemplated hereby. (b) Except as set forth on SCHEDULE 4.12(B), Neither Seller nor Parent is subject to any judgment, order, award or decree of any domestic or foreign court or government or other -9- bureau, authority or commission orders, awards or decrees which may have an adverse effect on either Seller or Parent's business, operations, financial condition, business practices or prospects, or on its ability to acquire any property or conduct its business in any area. 4.13. ERISA; EMPLOYEE BENEFIT PLANS. Except as set forth on SCHEDULE 4.13, neither Seller nor Parent has any bonus, deferred compensation, pension, profit-sharing, retirement, equity purchase, equity option, phantom equity, medical or any similar or other employee benefit plan, or general arrangement or practice, whether written or unwritten (an "Employee Benefit Plan"). Neither Seller nor Parent has any legally binding commitment, whether formal or informal, to create any such plan or arrangement. 4.14. BROKERS AND FINDERS. No person has been authorized by either Seller or Parent, or by anyone acting on behalf of Seller or Parent or any of their respective officers, directors, employees, agents or trustees, to act as broker, finder or in any other similar capacity in connection with the transactions contemplated by this Agreement in such a manner as to give rise to any valid claim against Purchaser, Seller or Parent for any broker's or finder's fee or commission or similar type of compensation. 4.15. COMPLIANCE WITH LAW; NECESSARY AUTHORIZATIONS. In conducting their respective business, operations and properties, Seller and Parent have, in all respects, duly complied and are presently in all respects duly complying with all material laws (whether statutory or otherwise), rules, regulations, orders, zoning and other ordinances, permits, licenses, authorizations, judgments and decrees of all Federal, state, local, foreign or other governmental authorities, to the extent applicable. 4.16. REQUIREMENTS FOR NOTIFICATION OR APPROVAL. To the best knowledge of Parent and Seller, the execution and delivery of this Agreement by Parent, the execution and delivery of the Operative Documents by Seller, the consummation of the transaction contemplated hereby, the transfer of the Assets from Parent to Seller and the performance of any obligations hereunder does not require notice, registration, report or other filing or qualification with, or consent, waiver, approval, license or authority of any third party or public authority except for such as have been duly and validly obtained and assigned, if necessary, to Purchaser at or prior to the Closing. 4.17. BUSINESS RESTRICTIONS. Except as set forth on SCHEDULE 4.17, neither Seller nor Parent is under any restriction under any agreement to which either Seller or Parent is a party or under which Seller, Parent or any of their respective assets may be bound, or under any order or other process issued by any court or governmental authority, which restricts either Parent or Seller from carrying on any type of business anywhere in the world, and neither Seller nor Parent will be so restricted in any such manner upon or as a result of the consummation of the transactions contemplated by this Agreement. 4.18. NATURE AND CONDUCT OF BUSINESS. Since March 31, 1998, Parent's business has been conducted in all material respects in the ordinary course consistent with past practices in that no event has occurred which would materially adversely affect (i) existing relations between Parent or -10- Seller and their lessors, suppliers, customers or employees or (ii) the business, operation, financial condition or prospects of the business of either Seller or Parent or in the condition of any of their respective assets. There are no events with respect to any of the foregoing that threaten to disrupt, prevent or impair the conduct of such business in any material adverse manner whatsoever. 4.19. BINDING OBLIGATIONS. Except as disclosed to Purchaser in writing prior to the date hereof and as set forth on SCHEDULE 4.19, neither Seller nor Parent has entered into any arrangement or agreement, nor has Seller or Parent taken, or agreed to take, any action which would bind or commit Seller or Parent to expend any amount, or which would constitute a debt or obligation of Seller or Parent or their respective equity holders outside of the ordinary course of business. 4.20. ACCURACY OF REPRESENTATIONS AND WARRANTIES. No representation or warranty of Seller or Parent contained herein, or information with respect to Seller or Parent contained herein or in any statement, certificate, exhibit or other document furnished or to be furnished to Purchaser by Seller or Parent or their representatives pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of fact or omits or will omit to state any material fact necessary to make the statements herein or therein not false or misleading. ARTICLE V SECURITIES MATTERS ------------------ 5.01. REGISTRATION OF SECURITIES. No portion of the Acquired Equity to be delivered in accordance with this Agreement will be registered with the Securities and Exchange Commission and will be sold and transferred to the Purchaser pursuant to an exemption from registration under the Securities Act of 1933, as amended. All certificates representing the Acquired Equity shall be imprinted with a legend restricting the transfer of such Shares unless the same is registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or an exemption from registration therefor is available. Purchaser hereby represents and warrants that it will acquire the Acquired Equity for investment and without a view to the sale or distribution thereof. 5.02. GOVERNMENTAL CONSENTS. The transfer of the Acquired Equity has not been qualified with any state securities regulatory agency. Purchaser shall be entitled to rely upon any exemption or exemptions available under applicable state law for the issuance of securities hereunder. -11- ARTICLE VI CERTAIN COVENANTS AND AGREEMENTS -------------------------------- 6.01. RIGHT OF FIRST REFUSAL. (a) Purchaser and any party to whom Purchaser's rights under this Section 6.01 have been duly assigned (each such holder or assignee being hereinafter referred to as a "Rights Holder") has the right of first refusal to purchase such Rights Holder's Pro Rata Share (as defined below), of all or any part of any "New Securities" (as defined in Section 6.01(b)) that Seller may from time to time issue after the date of this Agreement. A Rights Holder's "Pro Rata Share" for purposes of this right of first refusal only is such Rights Holder's share of residual net income (it being the intention of the parties hereto that, after giving effect the transactions contemplated hereby and the anticipated sale of Class A Units to Richard Wolfe, Purchaser is entitled to an eighteen and three quarter percent (18.75%) share of residual net income). (b) "New Securities" shall mean any equity interest of Seller of any nature whatsoever whether now authorized or not, and rights, options or warrants to purchase such equity interest, and securities of any type whatsoever that are, or may become, convertible or exchangeable into equity of Seller or other equity interest in Seller whatsoever; provided, however, that the term "New Securities" does not include: (i) any securities issuable upon exercise of any options, warrants or rights to purchase any securities of Seller outstanding on the date of this Agreement ("Warrant Securities") and any securities issuable upon the conversion of any Warrant Securities; (ii) any equity interest in Seller of any nature whatsoever issued in connection with any stock split or stock dividend; (iii) securities offered by Seller to the public pursuant to a registration statement filed under the Securities Act; (iv) any Class A Units issuable to Richard Wolfe pursuant to the Subscription Agreement annexed hereto as EXHIBIT I; (v) any securities authorized under a duly authorized employee equity plan; or (vi) any securities issued pursuant to a strategic alliance, including but not limited to a merger or other business combination. (c) In the event that Seller proposes to undertake an issuance of New Securities, it shall give to each Rights Holder written notice of its intention to issue New Securities (the "Notice"), describing the type of New Securities, the price and the general terms upon which Seller proposes to issue such New Securities. Each Rights Holder shall have twenty (20) days from the date of -12- mailing of any such Notice to agree in writing to purchase such Rights Holder's Pro Rata Share of such New Securities for the price and upon the general terms specified in the Notice by giving written notice to Seller and stating therein the quantity of New Securities to be purchased (not to exceed such Rights Holder's Pro Rata Share). If any Rights Holder fails to so agree in writing within such twenty (20) day period to purchase all or a portion of such Rights Holder's Pro Rata Share of an offering of New Securities (a "Nonpurchasing Holder"), then such Nonpurchasing Holder shall forfeit the right hereunder to purchase that part of its Pro Rata Share of such New Securities that it did not so agree to purchase. (d) In the event that the Rights Holders fail to execute in full the right of first refusal within such twenty (20) day period, then Seller shall have one hundred twenty (120) days thereafter to sell the New Securities with respect to which the Rights Holders' rights of first refusal hereunder were not exercised, at a price and upon terms no more favorable to the purchasers thereof than specified in Seller's Notice to the Rights Holders. In the event that Seller has not issued and sold the New Securities within such one hundred twenty (120) day period, then Seller shall not thereafter issue or sell any New Securities without again first offering such New Securities to the Right Holders pursuant to this Section 6. (e) This right of first refusal shall terminate (i) immediately before the closing of the first underwritten sale of Seller's securities to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act, covering the offer and sale of Seller's securities to the public of at least $7.5 million, or (ii) upon (a) the acquisition of all or substantially all the assets of Seller or (b) an acquisition of Seller by another corporation or entity by consolidation, merger or other reorganization in which the holders of Seller's outstanding voting equity immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) or more of the voting power of the corporation or other entity surviving such transaction pursuant to this Section 6.01. 6.02. OPTION TO PURCHASE ADDITIONAL EQUITY. (a) Seller does hereby grant to Purchaser an irrevocable option (the "Option") to purchase additional Class B Units which represent eleven and one quarter percent (11.25%) of the then issued and outstanding equity, and the profits and losses of Seller, on an after acquired basis, which shall be subject to the Preference (the "Option Equity"), pursuant to the terms and conditions of this Agreement. It being the intention of the parties that Purchaser shall have the right to acquire and maintain, should Purchaser so elect, the Option Equity, which when added to the Acquired Equity would represent a thirty percent (30%) ownership interest in Seller, subject to the Preference. (b) The Option term shall commence on the date hereof and shall continue for a period ending the earlier of (i) two (2) years from the date hereof, or (ii) upon the occurrence of either of the event described in Section 6.01(e)(i) or Section 6.01(e)(ii) (the "Option Term"). (c) Purchaser may exercise the Option at any time and from time to time during the Option Term by giving written notice (the "Option Notice") of its intention to do so to Seller. The -13- date notice is given shall be referred to as the "Exercise Date". Purchaser shall have the right to exercise the Option in increments, at Purchaser's discretion, at any time and from time to time during the Option Term. (d) Within thirty (30) days after each Option Notice has been delivered by Purchaser to Seller, Seller shall issue, transfer and deliver to Purchaser certificates representing the percent of the then issued and outstanding equity, on an after acquired basis, as was exercised by Purchaser. All Option Equity, as and when exercised, shall be free and clear of all liens, security interests and other encumbrances, other than as set forth in the Operating Agreement and applicable securities laws, and upon payment as provided in Section 6.02(e) below, such Option Equity shall be duly and validly issued, fully paid and nonassessable. Such Option Equity shall be recorded on the books of Seller in the name of Purchaser. (e) The purchase price for the entire Option Equity shall be One Million Five Hundred Thousand Dollars ($1,500,000.00) (the "Option Price"). Lesser portions of the Option Equity exercised by Purchaser, from time to time, shall be proportionately priced. The Option Price, or appropriate portion thereof, shall be paid by Purchaser to Seller at each Option Closing (as hereinafter defined) by certified check or wire transfer. (f) Each Option Notice shall specify a date (the "Option Closing Date") not less than thirty (30) and not more than forty-five (45) days subsequent to the date of such Option Notice for the closing (the "Option Closing"); provided that, if no Option Closing Date is specified in the Option Notice, the Option Closing Date shall be the first business day that is at least forty-five (45) days after the Exercise Date. The Option Closing shall occur at the offices of Goldman & Associates, LLP, 666 Old Country Road, Suite 304, Garden City, New York 11530 at 10:00 a.m. or at such other time, place and date as may be agreed upon by Seller and Purchaser. (g) At each Option Closing and thereafter, each party shall execute and deliver to the other party such instruments and documents as are reasonably required to accomplish and conclude the transactions contemplated under this Section 6.02; Seller shall also provide copies of any books and records reasonably requested by Purchaser on or prior to each Option Closing. (h) Purchaser's obligation to close following each exercise of the Option shall be subject to there having been no material adverse change in the condition, value or prospects of Seller between each Exercise Date and the related Option Closing Date. 6.03. ABSOLUTE OPTION. After the expiration of the Option Term, notwithstanding any other provision contained herein, Purchaser shall have an absolute right and option to purchase such additional Class B Units which when added to the Acquired Equity and the Option Equity, if any is purchased, would equal twenty percent (20%) of the profits, losses and equity of Seller, which shall be subject to the Preference, free and clear of all liens, charges, claims, encumbrances, security interests or third party rights, subject to the restrictions contained in the Operating Agreement and applicable securities laws (the "Additional Equity"). The purchase price for Additional Equity shall -14- be the then current market price or the last price for which Seller's Units have been sold, whichever is higher. It being the intention and the understanding of the parties hereto, that Purchaser be permitted to, and that Purchaser's purpose in pursuing the transactions set forth in, and contemplated by, this Agreement is to be able in the future, upon the exercise of its options, to own at least twenty percent (20%) of the profits, losses and equity of Seller, subject to the Preference. This option shall expire upon the happening of either of the event described in Section 6.01(e)(i) or Section 6.01(e)(ii) 6.04. DILUTION. Upon the execution and effectiveness of this Agreement and for a period of twenty-four (24) months thereafter, Purchaser's investment in Seller and the percentage of issued and outstanding equity owned by Purchaser hereunder, shall not be subject to dilution, on a current or deferred basis, as a result of any issuance of equity or security, exercise of options or otherwise, for any reason whatsoever (including, but not limited to, any investment by Richard Wolfe). 6.05. TAG-ALONG SALES. (a) In the event any of the parties to the Operating Agreement (the "Founding Members") acting individually or in concert in connection with one transaction or series of transactions, agree to sell all or any portion of their equity interest and/or rights in Seller (such Founding Members are referred to herein as "Selling Founders"), including, but not limited to, a sale of equity to a third party (a "Founders' Sale"), then Purchaser or Parent, as the case may be (a "Tag-Along Right Holder"), shall have the right, but not the obligation, to participate in such Founders' Sale on a pari passu basis (the "Tag-Along Right"). (b) The Selling Founders' shall not agree, enter into nor consummate a Founders' Sale unless the terms of such Founders' Sale shall include an offer to the Tag-Along Right Holder to participate, on a pari passu basis, in such Founders' Sale, at the same price and on the same terms and conditions offered to, and accepted by, the Selling Founders. It being the intention of the parties hereto that the Tag-Along Right Holder be, at all times that such the Tag-Along Right Holder is a member of Seller, treated in the same fashion and entitled to receive and participate in all of the benefits, opportunities, advantages and privileges that are afforded to the Founding Members. (c) Promptly upon receiving, or in advance of extending, an offer for a proposed Founders' Sale, such Selling Founders shall notify, or cause to be notified, the Tag-Along Right Holder of such proposed transfer in writing. Such written notice shall set forth: (i) the name and address of the third party and the equity or rights proposed to be transferred, (ii) the proposed amount and form of consideration, the terms and conditions of payment and all other material terms and conditions offered by, or to be offered to, the third party (collectively, the "Terms"), and (iii) that the third party has been or, in the case of an offer from the Founding Members, will be informed of the Tag-Along Right provided herein. (d) The Tag-Along Right may be exercised by the Tag-Along Right Holder by delivery of a written notice to the Selling Founders or the Founding Members, as the case may be (the "Tag-Along Notice"), within thirty (30) days following receipt of the notice specified in Section 6.06(c) above. The Tag-Along Notice shall state the equity or rights that the Tag-Along Right Holder wishes to include in such Founders' Sale. After expiration of the thirty (30) day period referred to in this Section 6.06(d) above, provided, however, that all of the provisions of this Section 6.06 have been compiled with in all respects, the Selling Founders shall have the right for a sixty (60) day period to close on such Founders' -15- Sale on the Terms without further notice to the Tag-Along Right Holder if the Tag-Along Right Holder has either elected not to participate in the Founders' Sale or has not given a Tag-Along Notice. Notwithstanding the foregoing, after such sixty (60) day period, no such Founders' Sale may be made without again giving notice to the Tag-Along Right Holder of the proposed transfer and complying with the requirements of this Section 6.06. 6.06. BOARD RIGHTS. Immediately upon the Closing, Purchaser shall be entitled to appoint, from time to time, one (1) representative of its choosing to the Board of Representatives of Seller. If Purchaser chooses not to appoint a representative at such time, it shall be entitled to have a representative attend Board of Representatives' meetings as an observer until such time as it chooses to appoint a representative. 6.07. REPORTS AND ACCOUNTING. (a) Seller shall send Purchaser quarterly technical progress reports reviewing its progress with the development of all products and services and any relevant changes or advances. Purchaser shall be entitled to give its input to the product development plans. (b) Seller shall provide Purchaser with unaudited quarterly financial reports within sixty (60) days of the end of each fiscal quarter. Seller shall provide Purchaser with audited annual financial reports within one hundred twenty (120) days of the end of each fiscal year. (c) Purchaser shall have the right at all reasonable times during usual business hours with at least one (1) days' advanced written notice to Seller to examine and make copies of or extracts from the books of account of Seller; such examination shall not materially interfere with Seller's business. Such right may be exercised through any agent or employee of Purchaser. (d) Seller shall provide Purchaser with Seller's annual business plan by the 15th day of June (or its equivalent in the event of a change in Seller's year end) of each fiscal year. 6.08. PUBLIC ANNOUNCEMENTS. Neither Seller nor Parent shall make any public announcement in respect of this Agreement or the transactions contemplated hereby without the prior written consent of Purchaser. 6.09. FURTHER ASSURANCES. Following the Closing, each of the parties hereto shall, from time to time, execute and deliver any further instruments, certificates and documents, and take such other actions, as shall be necessary or otherwise reasonably requested by an other party, to confirm and assure the rights and obligations provided for in this Agreement and render effective the consummation of the transactions contemplated hereby. -16- ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION ----------------------------------------------------------- 7.01. SURVIVAL OF REPRESENTATIONS. All representations and warranties contained in this Agreement shall survive the Closing for a period of two (2) years after the Closing Date (the "Survival Period"). Each of Purchaser's, Seller's and Parent's covenants and agreements which are contained in, or contemplated by, this Agreement or any of the instruments delivered at Closing, including, but not limited to, the provisions of Section 4.05(b) hereof, shall survive beyond the Survival Date and shall remain in full force and effect until they expire by their respective terms. 7.02. INDEMNIFICATION BY PURCHASER. Purchaser agrees to indemnify, defend and hold Seller harmless, at any time after the Closing, from and against all losses, costs, damages, liabilities, interest, penalties, settlements, judgments or expenses, including, but not limited to, reasonable attorneys' fees and expenses, asserted against, resulting from, imposed upon or incurred by Seller, directly or indirectly, arising out of or in connection with (i) the breach or inaccuracy of any of the representations or warranties of Purchaser made in or pursuant to this Agreement; (ii) any breach or non-fulfillment of any covenant or agreement of Purchaser contained in this Agreement; and (iii) Purchaser's ownership of the Acquired Equity after the Closing. 7.03. INDEMNIFICATION BY SELLER AND PARENT. (a) Seller and Parent, jointly and severally, agree to indemnify, defend and hold Purchaser harmless, at any time after the Closing, from and against all losses, costs, damages, liabilities, interest, penalties, settlements, judgments or expenses, including, but not limited to, reasonable attorneys' fees and expenses, asserted against, resulting from, imposed upon or incurred by Purchaser, directly or indirectly, arising out of or in connection with (i) the breach or inaccuracy of any of the representations or warranties of Seller and/or Parent made in or pursuant to this Agreement; (ii) any breach or non-fulfillment of any covenant or agreement of Seller and/or Parent contained in this Agreement; and (iii) Seller's ownership of the Acquired Equity on and prior to the Closing. (b) Notwithstanding the foregoing, neither Seller nor Parent shall be required to pay any amount under this Section 7.03 unless and until the aggregate of all claims for indemnification pursuant to this Section 7.03 shall equal or exceed Fifty Thousand Dollars ($50,000.00) (the "Basket"), in which event Seller and/or Parent shall pay to Purchaser all such amounts, including, but not limited to, the Basket and all amounts in excess thereof. (c) Seller's and Parent's indemnification obligations under Section 7.03 shall be limited to a maximum of one hundred fifty percent (150%) of Purchaser's investment in Seller, including, but not limited to, amounts paid for the Acquired Equity, and any New Securities, Option Equity and/or Additional Equity acquired. -17- 7.04. CLAIMS PROCEDURE. (a) A party agreeing to indemnify another party against any matter pursuant to this Agreement is referred to herein as the "Indemnifying Party" and the other party claiming indemnity is referred to herein as the "Indemnified Party". (b) Whenever any claim shall arise for indemnification hereunder, the Indemnified Party shall notify the Indemnifying Party in writing promptly after the Indemnified Party has actual knowledge of the acts constituting the basis for such claim (the "Notice of Claim"), provided, however, that the omission to so notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which the Indemnifying Party may have to the Indemnified Partyotherwise than under Section 7.03 or to the extent the Indemnifying Party is not materially prejudiced as a proximate result of the failure to give such notice promptly. The Notice of Claim shall specify all material facts known to the Indemnified Party giving rise to such indemnification claim and the amount or a non-binding estimate of the amount of the liability arising therefrom. (c) If the facts giving rise to any such indemnification shall involve any actual, threatened or possible claim or demand by any person against the Indemnified Party, the Indemnifying Party shall be entitled (without prejudice to the right of the Indemnified Party to participate at its expense through counsel of its own choosing) to contest, defend, compromise or settle (without imposing any liability, obligation or detriment on the Indemnified Party) such claim at its expense and through counsel of its own choosing, so long as it gives written notice to the Indemnified Party within thirty (30) days after receipt of the Notice of Claim (i) of its intention to do so, and (ii) subject to the liability limits contained in Section 7.03(c), of its agreeing to indemnify the Indemnified Party for such claim hereunder. The Indemnified Party shall provide such cooperation and such access to its books, records and properties as the Indemnifying Party shall reasonably request with respect to such matter and the parties hereto agree to cooperate with each other in order to ensure the proper and adequate defense thereof. (d) The Indemnified Party shall not make any settlement of any claim which would give rise to liability on the part of the Indemnifying Party under the indemnity contained in Section 7.03 without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. If a firm offer is made to settle a claim or litigation defended by the Indemnified Party and the Indemnifying Party refuses to accept such offer within twenty (20) days after written notice from the Indemnified Party of the terms of such offer, then, in such event, the Indemnified Party may, in its sole discretion, continue to contest or defend such claim and shall be indemnified pursuant to the terms of Section 7.03 hereof. (e) In the event of any action or proceeding brought by any party hereto to seek indemnity under this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and expenses upon final judgment. (f) In the event of full and complete payment by an Indemnifying Party to an Indemnified Party as contemplated by Section 7.03, the Indemnifying Party shall be subrogated to and shall stand in the place of the Indemnified Party as to any events or circumstances in respect of -18- which the Indemnified Party has any right or claim against any third party relating to such event giving rise to the claim for which the Indemnifying Party shall have made payment to the Indemnified Party. The Indemnified Party shall cooperate with the Indemnifying Party in a reasonable manner in prosecuting any such subrogated right or claim. 7.05. REMEDIES CUMULATIVE. The remedies provided for herein shall be cumulative and shall not preclude assertion by any party of any other rights or the seeking of any other remedies against any other party in connection with this Agreement, subject to the liability limits contained in Section 7.03(c) and the time periods contained in Section 7.01. Nothing contained in this Section 7.04 shall be construed in any way to limit, impair or modify the provisions of this Agreement or otherwise impose any liability or obligation on any party at any time for any liability, obligation, debt or commitment of the other party or the corporate obligations of Seller or Parent pursuant to this Agreement arising or relating to periods either prior to or after the Closing. In connection with this Agreement, neither Seller nor Parent (or any representative thereof) has made any representations or warranties other than for those set forth in Article 4 hereof. 7.06. SUCCESSORS. The merger, sale of all or substantially all of the assets or voting securities, consolidation, liquidation, dissolution, or winding up of, or any similar transaction with respect to, any party herein shall not affect in any manner the obligations of the Indemnifying Party pursuant to Section 7.03 hereof, or any other term or provision of this Agreement, and the Indemnifying Party covenants and agrees to make adequate provision for its liabilities and obligations hereunder in the event of any such transaction. ARTICLE VIII MISCELLANEOUS PROVISIONS ------------------------ 8.01. MODIFICATION OR WAIVER. (a) This Agreement may not be changed, modified or rescinded orally. Any change, modification or rescission need be in writing, signed by the party against whom enforcement of any change, modification or rescission is sought. (b) Any waiver of any of the provisions of this Agreement, or of any inaccuracy in or non-fulfillment of any of the representations, warranties or obligations hereunder or contemplated hereby, shall not be effective unless made in a writing signed by the party against whom the enforcement of any such waiver is sought. A waiver given in any case shall only apply with respect to that particular act or omission, and shall not be effective as to any further acts or omissions, regardless of whether they be of the same or similar nature. 8.02. EXPENSES. Whether or not the transactions contemplated by this Agreement are consummated, each of the parties hereto shall pay the fees and expenses of their respective counsel, accountants and other experts, and shall pay all other expenses incurred by such party incident to the negotiation, preparation, execution and consummation of this Agreement. -19- 8.03. NOTICES. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, express, certified or registered mail, return receipt requested, with postage prepaid, or sent by a nationally recognized overnight courier service that regularly maintains records of items picked up and delivered to the parties as follows: If to Seller or Parent: McKibben Communications 20640 Bahama Street Chatsworth, California 91311 Attention: Mr. Mark McKibben with a copy to: Weinstein, Boldt, Racine, Halfhide & Camel, P.C. 1801 Century Park East, Suite 2200 Los Angeles, California 90067-2336 Attention: Scott H. Racine, Esq. If to Purchaser: Globecomm Systems Inc. 45 Oser Avenue Hauppauge, New York 11788 Attention: Mr. David E. Hershberg with a copy to: Goldman & Associates, LLP 666 Old Country Road, Suite 304 Garden City, New York 11530 Attention: Ronald G. Goldman, Esq. or to such other person or address as any party shall furnish to all other parties in writing. Notices delivered personally or by such courier service shall be deemed communicated as of the date of actual receipt, mailed notices shall be deemed communicated as of the date two (2) days after mailing. 8.04. BINDING EFFECT; ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, administrators, successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned or assignable by any of the parties hereto without the prior written consent of the other party. 8.05. GOVERNING LAW. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts or choice of law provisions thereof. Notwithstanding the foregoing, the Company's issuance of securities under this Agreement shall be -20- governed by California law and shall be pursuant an exemption from registration under California law. 8.06. ENTIRE AGREEMENT. (a) This Agreement sets forth the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein, and supersedes all prior agreements, promises, understandings, letters of intent, covenants, arrangements, communications, representations or warranties, whether oral or written, by any party hereto or by any related or unrelated third party. (b) All exhibits and schedules attached hereto, and all certificates, documents and other instruments delivered or to be delivered pursuant to the terms hereof are hereby expressly made a part of this Agreement as fully as though set forth herein, and all references herein to the terms "this Agreement", "hereunder", "herein", "hereby" or "hereto" shall be deemed to refer to this Agreement and to all such writings. 8.07. SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. 8.08. ACKNOWLEDGMENT OF REPRESENTATION. This Agreement has been drafted on the basis of mutual contribution of language, the parties each having been represented by independent counsel of their own choosing, and is not to be construed against any party as being the drafter or causing the same to be drafted. 8.09. HEADINGS. The headings of the sections of this Agreement are inserted for convenience only and shall not constitute a part or affect in any way the meaning or interpretation of this Agreement. 8.10. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute the same instrument. -21- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. SELLER: MCKIBBEN COMMUNICATIONS, LLC BY MCKIBBEN COMMUNICATIONS, A CALIFORNIA CORPORATION, AS MANAGER By: /s/ Carol McKibben ---------------------------------------- Carol McKibben, President PARENT: MCKIBBEN COMMUNICATIONS A CALIFORNIA CORPORATION [ Corporate Seal ] By: /s/ Mark McKibben ---------------------------------------- Mark McKibben, President PURCHASER: GLOBECOMM SYSTEMS INC. A DELAWARE CORPORATION [ Corporate Seal ] By: /s/ David E. Hershberg ---------------------------------------- David E. Hershberg, CEO -22- EX-21.2 5 SUBSIDIARY OF THE REGISTRANT EXHIBIT 21.2 SUBSIDIARY OF THE REGISTRANT NETSAT EXPRESS, INC. DELAWARE EX-23.1 6 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 - Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-33137) pertaining to the Globecomm Systems Inc. 1997 Stock Incentive Plan of our report dated August 7, 1998, with respect to the consolidated financial statements of Globecomm Systems Inc. included in the Annual Report (Form 10-K) for the year ended June 30, 1998. Ernst & Young LLP Melville, New York September 28, 1998 EX-23.2 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (333-33137) of our report dated August 23, 1996, except as to the stock split described in Note 1 which is as of August 5, 1997, relating to the financial statements of Globecomm Systems Inc., which appears on page F-2 of this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP New York, New York September 28, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Globecomm Systems Inc. Financial Statements, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUN-30-1998 JUN-30-1998 21,342 0 18,017 0 1,583 45,993 11,069 1,106 58,344 14,330 0 0 0 9 50,530 58,344 58,105 58,105 49,532 10,385 0 0 5 (546) 0 (546) 0 0 0 (546) (0.06) (0.06)
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