-----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, WB+324u2GZJaZm5KJrLTF+hHWTvKMegOvdQo5rTkGUDMsihIgvJR/wMM+d9cBPuz zfV9p/lkrp8m6ngQqWBoHw== 0000950136-99-001237.txt : 19991227 0000950136-99-001237.hdr.sgml : 19991227 ACCESSION NUMBER: 0000950136-99-001237 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: 99719139 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 000-22839 Globecomm Systems Inc. ------------------------ (Exact name of registrant as specified in its charter) Delaware 11-3225567 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 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] 1 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 24, 1999, based upon the average bid and asked prices of such Common Stock on the Nasdaq National Market on September 24, 1999 held by non-affiliates was approximately $74.8 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. As of September 24, 1999, there were outstanding 9,269,163 shares of the registrant's Common Stock, par value $.001. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement of Globecomm Systems Inc. relative to the 1999 Annual Meeting of Stockholders to be held on November 17, 1999, which is incorporated by reference into Part III of this Annual Report on Form 10-K. 2 PART I ITEM I. BUSINESS OVERVIEW Globecomm Systems Inc. (the "Company" or "GSI"), incorporated in Delaware on August 17, 1994, 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 postal, telephone and telegraph providers ("PTTs"), Internet Service Providers ("ISPs"), government entities, 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. 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. More recently, the Company, in concert with NetSat Express, has begun supplying end-to-end service solutions bundled with the facilities at both ends of the service provided. These end-to-end services are provided as part of our strategy to offer enterprise service solutions. The Company's enterprise service solutions typically are comprised of ground segment systems and networks in combination with terrestrial and space segment services to provide end-to-end service solutions. The combination of GSI as a ground segment systems and network provider, and NetSat Express as a satellite-delivered data communications services provider, allows us to provide end-to-end solutions and services to enterprises globally. Solutions include engineering and implementation of satellite communications and terrestrial communications technology. Services include provision of Internet connectivity, Intranet extension, media distribution and other network services on a global basis. 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. In this Annual Report on Form 10-K, the terms "GSI" and "the Company" refer to Globecomm Systems Inc. and its subsidiaries, except where it is clear such terms mean only Globecomm Systems Inc. For financial information about industry segments and foreign operations, see Note 13 and 14, 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, and enterprise network service solutions portion of the market and has recently expanded into the satellite-delivered data communications services market through NetSat Express. 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 under served 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 the Company for customers 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 GSI GROUND SEGMENT SYSTEMS AND NETWORKS, AND ENTERPRISE SERVICE SOLUTIONS 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. The Company also designs and implements end-to-end service solutions for enterprises globally. These solutions include all necessary terrestrial and satellite facilities required to implement the optimal solution as designed by the Company. Enterprise service solutions are operated and maintained by the Company, and we believe provide competitive service levels. Ground Segment Systems and Networks 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, China, Mexico, Taiwan 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 5 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 earth stations in India, Korea, Russia, Hong Kong, Vietnam, Malaysia, Spain, 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. 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. The Company typically sells these earth stations at prices ranging from approximately $20,000 to $45,000. 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 used by the U.S. Army. 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. The latest model, the Explorer Ku, incorporates technology from the Compact Earth Station product line to minimize cost, size and weight. All components are mounted in separate cases, which are small enough to be easily transported by commercial 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 flyaway earth stations as part of the enterprise service solution described below. The Company markets these earth stations at prices ranging from approximately $50,000 to $350,000 depending on configuration. Earth Station Management Systems (AxxSys(TM)). The Company's earth station systems typically employ monitor and control software for system maintenance developed by the Company using the Compass software product licensed from its strategic supplier, Newpoint Technologies, Inc. ("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. Mobile Products. This group of products serve the mobile satellite services market with mobile high speed data and voice terminals, and customizable mobile systems. The Company offers the 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. The Company integrates this product with ancillary equipment for the 6 broadcasting, oil exploration, and other industries which require Internet Protocol connectivity, video conferencing, store and forward video, secure communications and other applications. Ground Segment Systems and Networks Installations The following are examples of ground segment systems and networks sold by the Company, or in the process of being installed: Worldspace Processed Feeder Link Stations. The Company developed and began the supply of 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. During fiscal 1999, Worldspace launched the Afristar satellite, the first in the series of three satellites for global coverage. The Company installed the first two Processed Feeder Link Stations, and completed proof of performance testing with actual satellite receivers that will be sold to consumers in Africa. Telecom South Africa Intelsat Standard B Earth Station. The Company was awarded a contract to supply an Intelsat Standard B earth station in April 1999. The Company delivered this earth station and completed installation in South Africa in 45 days. This was an example of the responsiveness of the Company and the focus of its project team on meeting the customer's needs. Central Asian Air Traffic Control Network. The Company was awarded a contract by Thomson CSF to provide four ground segment systems in a star network configuration for use in providing communications between airports in Central Asia. This private network includes voice compression multiplex and a network monitor and control system for remote control and monitor of all facilities in the network. Enterprise Service Solutions The following are examples of enterprise service solutions currently being implemented: DS3 Internet Trunk for Telecommunications Service Provider. The Company is under contract to provide a bundled service of terrestrial and satellite high-speed connectivity for a major telecommunications service provider. The service will provide a one way DS3 (45 Mbps) link from Los Angeles to five points of presence in Australia to complement fiber optic connections currently being used by a major ISP in Australia. This is an example of the Company's capability to design, implement and operate end to end data communication services for Internet Access. Data Communications Service for Transportable Earth Stations. The Company is under contract to provide a bundled service that interfaces customer provided terrestrial facilities with Company provided uplink, satellite, network management and 24 hour a day by 7 day a week services. The Company is also providing transportable earth stations based on its product line of Customizable Earth Stations. The customer benefits from "one stop shopping" for all hardware and satellite services required to meet its needs. Sonangol Telecommunications Network. The Company is providing a satellite and cellular telecommunications network for Sonangol, U.E.E. ("Sonangol"), a large oil consortium with operations in remote areas of Africa. This project bundles the hardware, transponder capacity leases, international teleport services and operations support to insure that Sonangol has reliable telecommunications in previously unserved areas. In addition, the Company operates a billing system on behalf of Sonangol from its offices in Happauge. The network reaches 15 remote African cities by satellite and provides an international link to the companies offices in Houston. All cities are provided with switching systems for wired telephony services. Key locations are provided with Global Systems for Mobile Communications ("GSM") cellular systems. The Company innovated the use of satellite communications to link remote GSM base stations to the mobile subscriber switch allowing the network to serve several small locations from a single mobile subscriber switch. 7 NETSAT EXPRESS 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 Internet access services, which are referred to as Access Plus, through a one-way and two-way satellite uplink/downlink using satellite ground segment equipment and supported by the NetSat Express Network Operations Center. NetSat Express offers a range of options and equipment to permit value-added resellers to deliver reliable, cost-effective turnkey solutions to their customers. These options include Access Plus Enterprise, which allows customers to share a broadcast carrier, thereby providing the benefit of a committed information rate with burstability to the maximum data rate of the carrier. In addition, the traffic management option allows the customer to have control over the assignment of committed information rates to its points of presence within its own enterprise broadcast carrier. NetSat Express is currently providing its services in Europe on the Orion 1 satellite, in the Americas on the SatMex 5 satellite, in Africa and the Middle East on the New Skies 803 satellite, and in Asia on the Intelsat 701 satellite. STRATEGIC 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 making equity investments in suppliers, such as Shiron Satellite Communications (1996), Ltd. ("Shiron"), Newpoint Technologies, Armer Communications Engineering Services, Inc. ("Armer") and McKibben Communications, LLC ("McKibben Communications"). The strategic supplier relationships with Shiron and Newpoint Technologies 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. McKibben Communications provides a West Coast presence for the Company's satellite-delivered data communication services. In addition to being a strategic supplier, McKibben Communications is a strategic customer which provides the Company access to earth station projects for McKibben Communications and its customers in the television broadcast industry. For further information on the Company's equity investments see Note 5 of the Notes to Consolidated Financial Statements. SELLING AND MARKETING The Company markets its products and services to prime communications infrastructure contractors, PTTs, ISPs, government entities, other telecommunications carriers, producers and distributors of news and entertainment content and other corporations. The Company utilizes sales representatives in foreign countries and also has selling and marketing offices in Hauppauge, New York, Atlanta, Georgia, Hong Kong, and its recently opened office in the United Kingdom operated by its recently established Globecomm Systems Europe Limited subsidiary. As of June 30, 1999, the Company employed 39 persons with marketing responsibility, of which 16 were engaged in marketing on a full-time basis. Selling and marketing of ground segment systems and networks, and enterprise service solutions is accomplished through a "project team" approach which identifies, develops and maintains customer accounts by grouping sales representatives, marketing executives, business execution teams and account 8 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 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' satellite-delivered data communications services is 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. Certain members of the Company's senior management play a role in developing and maintaining relationships with local value added resellers and local partners. NetSat Express is seeking to expand its marketing capabilities and enter into new regions of operations. CUSTOMERS The Company's customers include prime communications infrastructure contractors, PTTs, ISPs, government entities, other telecommunications carriers, producers and distributors of news and entertainment content and other corporations. The Company typically relies upon a small number of customers for a large portion of its revenues. For example, approximately 24.2% of the Company's revenues in fiscal 1999 were derived from sales to three customers. 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, 1999, the Company's backlog was approximately $63.7 million (approximately 65% of which is expected to be delivered during fiscal 2000) compared with approximately $43.6 million at June 30, 1998. 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. 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. For example, at June 30, 1999, $8.0 million, or approximately 12.6% of the Company's backlog, was accounted for by a contract between the Company and Transworld Communications Services, Inc. The Company cannot assure that this contract or any other in its backlog will not be cancelled or revised. See "Risk Factors-Risk of Customer Concentration." 9 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 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. For the years ended June 30, 1999, 1998 and 1997, the Company has incurred approximately $1.3 million, $1.2 million and $0.6 million, respectively, in internal research and development expenses. 10 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 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 and ComSat RSI and (ii) system integrators such as IDB Systems, a division of MCI WorldCom Inc. In the satellite-delivered data communications 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 two patents in the United States, a patent pending in the United States and a Patent Cooperation Treaty ("PCT") application, corresponding to one of the United States patents, 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 various other countries, has received a trademark for NetSat Express, Inc. in the United States, and has filed applications for trademark registration of NetSat Express, Inc. in various other countries. The Company intends to seek registration of other trademarks in the future. See "Risk Factors-Proprietary Technology; Risk of Infringement." GOVERNMENT REGULATIONS The Company is subject to various federal laws and regulations, which may have negative effects on the Company. The Company operates earth stations in Hauppauge, New York, subject to FCC Rules and Regulations. The Company has obtained certain licenses from the FCC for both domestic and international operation of its earth stations and must operate the earth stations in compliance with FCC Rules and Regulations for the terms of the licenses. These licenses generally should be renewed by the FCC, so long as the Company is in compliance with the FCC Rules and Regulations. The Company cannot offer assurances that any 11 necessary additional licenses will be granted by the FCC. Generally, non-U.S. citizens or their representatives, foreign governments, or corporations otherwise subject to control by non-U.S. citizens may not directly own more than 20% of a licensee or may not indirectly own more than 25% of a licensee, through a parent corporation or other controlling entity, under the FCC Rules and Regulations. The FCC may grant waivers of its foreign ownership policy to allow for increased indirect investment in a licensee by an entity based in a World Trade Organization ("WTO") member country. For an entity based in a non-WTO member country, the FCC will allow increased indirect investment only if a licensee can show that the non-WTO member country allows "effective competitive opportunities" for U.S. based entities. Failure to comply with these policies may result in an order to divest the offending alien ownership, fines, denial of license renewal, and or license revocation proceedings against the licensee by the FCC. The Company has no knowledge of any present foreign ownership which would result in a violation of the FCC Rules and Regulations. The Company may, in the future, be required to seek a waiver of the FCC Rules and Regulations regarding foreign ownership, if such ownership exceeds the aforementioned benchmarks. 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 Child Online Protection Act, enacted in the United States in 1998, imposes civil and criminal penalties on Internet content providers who fail to restrict minor's access to material that is deemed "harmful" to them. However, this act is currently enjoined and its constitutionality is being adjudicated. It is anticipated 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 12 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, and enterprise service solutions outside the United States is subject to compliance with the regulations of the United States Export Administration Regulations. The absence of comparable restrictions on competitors in other countries may adversely affect the Company's competitive position. In addition, in order to ship the Company's products into certain other countries, the products must satisfy the technical requirements of that particular country. 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, 1999, the Company had 149 full-time employees, including 76 in engineering and program management, 31 in the manufacturing, manufacturing support group, and network operations, 16 in sales and marketing, and 26 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 The Company owns approximately 122,000 square feet of space in a facility on approximately seven acres located at 45 Oser Avenue, Hauppauge, New York. These premises house the principal offices and production facilities of the Company and NetSat Express. 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 $1,970, which rental amount increases in years two and three of the lease. In addition, the Company has recently entered into a five-year lease at a base monthly rent of $3,600 for office and operations facilities for its Globecomm Systems Europe Limited subsidiary which commenced operations subsequent to June 30, 1999 in the United Kingdom. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 13 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 1999 and 1998 high and low sales prices are as follows: High Low --------------------------- First Quarter Fiscal 1999 $ 9.25 $ 3.00 Second Quarter Fiscal 1999 6.75 3.625 Third Quarter Fiscal 1999 7.875 4.25 Fourth Quarter Fiscal 1999 12.00 5.125 First Quarter Fiscal 1998 (from August 13, 1997 through September 30, 1997) 19.875 11.75 Second Quarter Fiscal 1998 19.875 10.50 Third Quarter Fiscal 1998 16.00 8.75 Fourth Quarter Fiscal 1998 14.50 8.25 At September 24, 1999, 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 24, 1999, the Company's market price per share was $9.875. As of June 30, 1999, 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 was approximately $27,904,000. From the effective date of the Registration Statement to June 30, 1999, the net offering proceeds were used to fund $8.0 million in capital expenditures and investing activities and the remaining $19.9 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. 14 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 YEAR ENDED (INCEPTION) JUNE 30, JUNE 30, JUNE 30, JUNE 30, THROUGH JUNE 30, 1999 1998 1997 1996 1995 --------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues...................................... $ 49,058 $ 58,105 $ 36,220 $ 13,476 $ 72 Costs of revenues............................. 43,516 49,532 32,060 11,238 58 --------------------------------------------------------------------------------- Gross profit.................................. 5,542 8,573 4,160 2,238 14 --------------------------------------------------------------------------------- Operating expenses: Network operations.......................... 514 - - - - Selling and marketing....................... 5,183 4,187 3,282 1,915 346 Research and development.................... 1,325 1,188 649 712 - General and administrative.................. 6,040 5,010 3,449 1,945 772 Terminated acquisition costs................ 972 - - - - Write-down of investments................... 679 - - - - --------------------------------------------------------------------------------- Total operating expenses...................... 14,713 10,385 7,380 4,572 1,118 --------------------------------------------------------------------------------- Loss from operations.......................... (9,171) (1,812) (3,220) (2,334) (1,104) Interest income, net.......................... 979 1,266 276 89 39 --------------------------------------------------------------------------------- Loss before minority interests in operations of consolidated subsidiary................ (8,192) (546) (2,944) (2,245) (1,065) Minority interests in operations of consolidated subsidiary................... - - 275 - - --------------------------------------------------------------------------------- Net loss...................................... $ (8,192) $ (546) $ (2,669) $ (2,245) $(1,065) ================================================================================= Basic and diluted net loss per common share... $ (0.90) $ (0.06) ================================ Shares used in the calculation of basic and diluted net loss per common share......... 9,109 8,553 ================================ Pro forma basic and diluted net loss per common share (unaudited).................. $ (0.44) ================ Shares used in the calculation of pro forma basic and diluted net loss per common share (unaudited) (1) 6,086 ================ OTHER CONSOLIDATED OPERATING DATA: EBITDA (2).................................... $ (7,904) $ (1,096) $ (2,858) $ (2,141) $(1,036) Cash flows used in operating activities....... (4,408) (5,678) (1,958) (2,510) (454) Cash flows used in investing activities....... (4,435) (7,342) (8,221) (1,714) (593) Cash flows (used in) provided by financing activities................................ (555) 29,198 11,908 4,151 4,554 Capital expenditures ......................... 3,818 3,678 6,765 339 437 Backlog at end of period (3) ................. 63,746 43,572 40,807 11,588 7,716
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1999 1998 1997 1996 1995 ---------------------------------------------------------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........... $ 11,944 $ 21,342 $ 5,164 $ 3,435 $ 3,507 Working capital..................... 19,450 31,461 6,379 4,727 2,663 Total assets........................ 58,010 58,619 33,286 9,503 6,375 Long-term liabilities............... - - 18 74 109 Total Stockholders' equity... 36,257 44,014 15,996 5,730 3,207
15 (1) Computed on the basis described in Note 10 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 similarly 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 Annual Report on 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 Annual Report on Form 10-K. OVERVIEW Since the Company's inception, substantially all of the Company's revenue has been generated by its ground segment systems, and networks, and enterprise service solutions business. Contracts for these ground segment systems, and networks, and enterprise service solutions 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, and enterprise service solutions 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 satellite-delivered data communications 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. In addition, cost of revenues relating to Internet access service fees consists primarily of satellite space segment charges and Internet connectivity fees. Network operations expenses consist primarily of cost associated with the operation of NetSat Express' Network Operations Center on a twenty-four hour a day, seven day a week basis including costs of personnel and teleport service costs. 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. General and administrative expenses consist of expenses associated with the Company's management, accounting, contract and administrative functions. The Company anticipates that network operations, 16 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. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of total revenues for the years indicated:
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, JUNE 30, JUNE 30, 1999 1998 1997 -------------------------------------------------------- PERCENTAGE OF TOTAL REVENUES: Revenues.............................................. 100.0% 100.0% 100.0% Costs of revenues..................................... 88.7 85.2 88.5 -------------------------------------------------------- Gross profit.......................................... 11.3 14.8 11.5 Operating expenses: Network operations.................................. 1.0 - - Selling and marketing............................... 10.6 7.2 9.1 Research and development............................ 2.7 2.1 1.8 General and administrative.......................... 12.3 8.6 9.5 Terminated acquisition costs........................ 2.0 - - Write-down of investments........................... 1.4 - - -------------------------------------------------------- Total operating expenses.............................. 30.0 17.9 20.4 -------------------------------------------------------- Loss from operations.................................. (18.7) (3.1) (8.9) Interest income, net.................................. 2.0 2.2 0.8 -------------------------------------------------------- Loss before minority interests in operations of consolidated subsidiary.............................. (16.7) (0.9) (8.1) Minority interests in operations of consolidated subsidiary........................................... - - 0.7 -------------------------------------------------------- Net loss.............................................. (16.7)% (0.9)% (7.4)% ========================================================
FISCAL YEARS ENDED JUNE 30, 1999 AND 1998 Revenues. Revenues, which were primarily derived from sales of ground segment systems and networks, decreased by $9.0 million, or 15.6%, to $49.1 million for the fiscal year ended June 30, 1999 compared to $58.1 million for the fiscal year ended June 30, 1998. The decrease relates primarily to the decrease in the shipment and /or completion of ground segment systems and networks contracts as a result of a decline in the bookings of contract orders due to the continuing difficult economic conditions in the Pacific Rim, Russia and other international markets. The Company expects the trend in revenues that adversely affected its results of operations for the fiscal year ended June 30, 1999 to continue to adversely 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 decreased by $3.0 million, or 35.4%, to $5.5 million for the fiscal year ended June 30, 1999 from $8.6 million for the fiscal year ended June 30, 1998. The decrease was primarily due to the decrease in the shipment and/or completion of ground segment systems and networks contracts. Gross profit as a percentage of revenues decreased to 11.3% for the fiscal year ended June 30, 1999 from 14.8% for the fiscal year ended June 30, 1998. The decrease was due primarily to a significant negotiated contract in the second and third quarters of fiscal 1998, which resulted in a higher gross profit margin for the fiscal year ended June 30, 1998, as well as, pricing pressures in the marketplace. 17 Network Operations. Network operations expenses for the fiscal year ended June 30, 1999 were $0.5 million and related to the implementation of NetSat Express' Network Operations Center on a twenty-four hour a day, seven day a week basis during the current fiscal year. Selling and Marketing. Selling and marketing expenses increased by $1.0 million, or 23.8%, to $5.2 million for fiscal year ended June 30, 1999 from $4.2 million for the fiscal year ended June 30, 1998. The increase was primarily due to the increase in marketing and bid and proposal efforts in the Americas and Africa, as well as the related increase in sales and marketing personnel. Research and Development. Research and development expenses increased by $0.1 million, or 11.5%, to $1.3 million for the fiscal year ended June 30, 1999 from $1.2 million for the fiscal year ended June 30,1998. The increase was primarily due to the development of the Explorer-Ku Multimedia Portable Satellite Earth Station, offset by a decrease in costs associated with custom solutions. General and Administrative. General and administrative expenses increased by $1.0 million, or 20.6%, to $6.0 million for fiscal year ended June 30, 1999 from $5.0 million for the fiscal year ended June 30, 1998, and increased as a percentage of revenues to 12.3% for the fiscal year ended June 30, 1999 from 8.6% for the fiscal year ended June 30, 1998. The increase in general and administrative expenses resulted mainly from an increase in personnel and related expenses. Terminated Acquisition Costs. Terminated acquisition costs of approximately $1.0 million for fiscal year ended June 30, 1999, relate to certain legal, accounting and other expenses associated with the termination of a proposed acquisition of a mobile satellite communications business during the first quarter of the fiscal year ended June 30, 1999 due to the determination that such acquisition was not in the best interest of the Company's stockholders. Write-down of investments. Write-down of investments of approximately $0.7 million for fiscal year ended June 30, 1999, related to two investments which were written-down in the fourth quarter ended June 30, 1999. The Company's management's evaluated the investments and believed it would be appropriate to write-down the investments to zero. Interest Income Net of Interest Expense. Interest income decreased by $0.3 million to $1.0 million for the fiscal year ended June 30, 1999 from $1.3 million for the fiscal year ended June 30, 1998. This decrease was primarily due to the reduction of cash and cash equivalents from June 30, 1998 to June 30, 1999. NetSat Express. The Company's consolidated subsidiary, NetSat Express, experienced an increase in revenues of $2.0 million, or 287.9%, to $2.7 million for the year ended June 30, 1999 from $0.7 million for the fiscal year ended June 30, 1998. The increase resulted from the implementation of Access Plus services in January 1998, as well as an increase in the equipment sales and activations. The loss from operations associated with NetSat Express increased by $0.4 million, or 26.9%, to $2.1 million for the year ended June 30, 1999 from $1.7 million for the fiscal year ended June 30, 1998. The increase was primarily associated with an increase in general and administrative expenses relating to an increase in personnel to support the overall growth of NetSat Express and the implementation of operating NetSat Express' Network Operations Center on a twenty-four hour a day, seven day a week basis during the year. FISCAL YEARS ENDED JUNE 30, 1998 AND 1997 Revenues. Revenues, which were primarily derived from sales of ground segment systems and networks and enterprise service solutions, 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 18 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, and enterprise service solutions. Gross profit as a percentage of revenues were 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 percentage of revenues were 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 million 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 Net of Interest Expense. 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 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. YEAR 2000 The Company is in the process of assessing the anticipated costs, problems and uncertainties associated with Year 2000 issues. The Company has initiated a Year 2000 Compliance Plan which includes information technology ("IT") and non-IT systems requiring or which may require modification or conversion, and supplier, facilities and other operations (such as financial and banking systems) readiness. The Company has substantially completed reviews of 19 each of the above areas including identification and assessment of potential Year 2000 issues, identification and contact with key suppliers or institutions based on their relative risks associated with product integrity and continued product deliveries and service. Until such reviews are complete, the Company will not be able to completely evaluate whether its IT and non-IT systems will need to be modified or replaced. The Company has incurred only nominal costs to date and estimates at this time that the total Year 2000 costs will not be material. The Company is continuing its assessment which may necessitate refinement of its estimate over time. There can be no assurance, however, that costs associated with the Company's Year 2000 Compliance Plan will not be higher than anticipated which could have a material adverse effect on the Company's business, results of operations and financial condition. In association with the Company's Year 2000 Compliance Plan, the Company has developed contingency plans for certain critical applications. These contingency plans may include, among other actions, manual workarounds, increasing inventories and adjusting staffing strategies. There can be no assurance such contingency plans, once developed, will be adequate. Since the Company's Year 2000 Compliance Plan is ongoing, all potential Year 2000 issues have not yet been identified. Therefore the potential impact of these issues on the Company's financial condition and results of operations can not be determined at this time. If IT and non-IT systems used by the Company or its suppliers, the product integrity of products provided to the Company by its suppliers, or the software applications or hardware used in systems integrated and sold by the Company, fail or experience significant difficulties related to the Year 2000, the Company's results of operations and financial condition could be materially affected. 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, and enterprise service solutions and satellite-delivered data communication services 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. 20 QUARTERLY RESULTS The following tables set forth certain unaudited financial information for each of the eight fiscal quarters in the period ended June 30, 1999. The Company believes that this information has been presented on the same basis as the audited Consolidated Financial Statements appearing elsewhere in the Annual Report on Form 10-K and 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 of operations when read in conjunction with the audited Consolidated Financial Statements of the Company and related Notes thereto included elsewhere in this Annual Report on Form 10-K. The operating results for any quarter are not necessarily indicative of the operating results for any future period. Certain quarters in fiscal 1999 have been reclassed to conform to the current year presentation.
THREE MONTHS ENDED SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR.31, JUNE 30, 1997 1997 1998 1998 1998 1998 1999 1999 ------------------------------------------------------------------------------------------------- (IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................... $ 14,591 $ 16,269 $ 16,261 $ 10,984 $ 13,293 $ 11,882 $ 6,498 $ 17,385 Costs of revenues........... 12,919 13,902 13,294 9,417 11,673 10,246 5,714 15,883 ------------------------------------------------------------------------------------------------- Gross profit................ 1,672 2,367 2,967 1,567 1,620 1,636 784 1,502 Operating expenses: Network operations....... - - - - 98 106 113 197 Selling and marketing.... 831 966 1,167 1,223 1,031 1,293 1,315 1,544 Research and development. 280 304 287 317 291 259 412 363 General and administrative 1,088 1,153 1,235 1,534 1,290 1,366 1,474 1,910 Terminated acquisition costs ............ - - - - 972 - - - Write-down of investments - - - - - - - 679 ------------------------------------------------------------------------------------------------- Total operating expenses.... 2,199 2,423 2,689 3,074 3,682 3,024 3,314 4,693 ------------------------------------------------------------------------------------------------- (Loss) income from operations (527) (56) 278 (1,507) (2,062) (1,388) (2,530) (3,191) Interest income, net........ 264 379 291 332 338 272 204 165 ------------------------------------------------------------------------------------------------- Net (loss) income........... $ (263) $ 323 $ 569 $ (1,175) $ (1,724) $ (1,116) $(2,326) $ (3,026) ================================================================================================= PERCENTAGE OF TOTAL REVENUES: Revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs of revenues........... 88.5 85.5 81.8 85.7 87.8 86.2 87.9 91.4 -------------------------------------------------------------------------------------------------- Gross profit................ 11.5 14.5 18.2 14.3 12.2 13.8 12.1 8.6 Operating expenses: Network operations....... - - - - 0.7 0.9 1.7 1.1 Selling and marketing.... 5.7 5.9 7.2 11.1 7.8 10.9 20.2 8.9 Research and development. 1.9 1.8 1.7 2.9 2.2 2.2 6.3 2.1 General and administrative 7.5 7.1 7.6 14.0 9.7 11.5 22.8 11.0 Terminated acquisition costs................. - - - - 7.3 - - - Write-down of investments - - - - - - - 3.9 -------------------------------------------------------------------------------------------------- Total operating expenses.... 15.1 14.8 16.5 28.0 27.7 25.5 51.0 27 -------------------------------------------------------------------------------------------------- (Loss) income from operations (3.6) (0.3) 1.7 (13.7) (15.5) (11.7) (38.9) (18.4) Interest income, net........ 1.8 2.3 1.8 3.0 2.5 2.3 3.1 1.0 -------------------------------------------------------------------------------------------------- Net (loss) income........... (1.8)% 2.0% 3.5% (10.7)% 13.0% 9.4% 35.8% 17.4% ==================================================================================================
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 21 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 At June 30, 1999, the Company had working capital of $19.5 million, including cash and cash equivalents of $11.9 million, restricted cash of $3.5 million, accounts receivable of $18.1 million, inventories of $6.4 million and prepaid and other current assets of $1.2 million, offset by $18.7 million in accounts payable and $3.0 million in accrued expenses and other current liabilities. The Company has experienced negative cash flow from operations since its inception. Net cash used in operating activities for the fiscal years ended June 30, 1999, 1998, and 1997 was $4.4 million, $5.7 million, and $2.0 million , respectively. Several factors had a major effect on the Company's liquidity during the fiscal year ended June 30, 1999. First, the Company had a $4.4 million negative cash flow from operations, which primarily relates to the net loss of $8.2 million and increase in inventory of $4.8 million reflecting the timing of purchases to support future shipments and/or completion of ground segment systems and networks, offset by an increase in accounts payable and accrued expenses of $6.9 million. The second factor affecting liquidity during the fiscal year ended June 30, 1999 was the Company's investment activities. During the fiscal year ended June 30, 1999, the Company purchased $3.8 million in fixed assets and through its Stock Repurchase Program, repurchased $0.5 million or 114,200 shares of the Company's common stock. In addition, during the first quarter ended September 30, 1998, the Company purchased a $1.5 million equity interest in McKibben Communications, LLC. The Company has incurred losses since its inception and, therefore, has not been subject to federal income taxes. Through June 30, 1999, the Company, for income tax purposes, has generated net operating loss carryforwards of approximately $14.1 million which may be available to reduce future taxable income and future tax liabilities. These carryforwards expire through 2019. 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 $9.0 million credit facility consisting of a $5.0 million secured domestic line of credit and a $4.0 million secured export-import guaranteed line of credit. Each line of credit bears interest at the prime rate (7.75% as of June 30, 1999) plus 1.0% per annum and is collateralized by a first security interest on all the Company's assets. In August 1999, NetSat Express completed a private placement of common stock yielding gross proceeds of $10.0 million. These proceeds are to be used to fund NetSat Express' operations and expand marketing initiatives as well as expected engineering and facilities growth over the coming year. Management anticipates that NetSat Express will experience negative cash flow as a result of these additional capital investments required for continued development of its operations and losses from operations for at least the next 12 months. The Company expects that its cash and working capital requirements for its operating activities will continue to increase as the Company expands its operations. The Company's future capital requirements will depend upon many factors, including the success of the Company's marketing efforts in the ground segment systems, and networks, and enterprise 22 service solutions business, and the satellite-delivered data communications services business, the nature and timing of customer orders, the extent to which it is able to locate additional strategic suppliers in whose technology it wishes to invest, the extent to which it must conduct research and development efforts internally and potential acquisitions of complementary businesses, products or technologies. Based on current plans, the Company believes that its existing capital resources will be sufficient to meet its capital requirements through June 30, 2000. However, no assurance can be given that there will be no change that would consume available resources significantly before such time. Additional funds may not be available when needed and even if available, additional funds may be raised through financing arrangements and/or the issuance of preferred or common stock or convertible securities on terms and prices significantly more favorable than those of the currently outstanding common stock, which could have the effect of diluting or adversely affecting the holdings or rights of existing stockholders of the Company. If adequate funds are not available, the Company will be required to delay, scale back or eliminate certain of its operating activities, including without limitation, the timing and extent of its marketing programs, the extent and timing of hiring additional personnel and its research and development activities. No assurance can be given that additional financing will be available to the Company on acceptable terms, or at all. RISK FACTORS HISTORY OF NET LOSSES AND ACCUMULATED DEFICIT The Company has incurred significant net 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 has incurred net losses since inception and has incurred net losses of $8.2 million, $0.5 million and $2.7 million during the fiscal years ended June 30, 1999, 1998 and 1997, respectively (which amounts for fiscal years ended June 30, 1999, 1998 and 1997 include net losses of $2.1 million, $1.7 million and $1.5 million, respectively for NetSat Express' satellite-delivered data communication services business) and will incur further losses as it attempts to expand its businesses. The Company's ability to expand its ground segment systems, and networks, and enterprise service solutions business and satellite-delivered data communication services business and generate additional revenues and 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, 1999, the Company had an accumulated deficit of $14.7 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." INHERENT RISK OF INTERNATIONAL OPERATIONS For the fiscal year ended June 30, 1999, 44% 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 ground segment systems, and networks, and enterprise network service solutions business and satellite-delivered data communication services business by increasing the price of the Company's products and services in the currency of the countries in which they are sold. The 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 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, and enterprise network service solutions supplied by the Company and NetSat Express' satellite-delivered data communications services. 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 fiscal year ended June 30,1999 and the Company expects that these negative trends will continue to adversely impact it. Additional risks inherent to the Company's international 23 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, and enterprise network service solutions, 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. 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 ground segment systems, and networks, and enterprise network service solutions and NetSat Express' satellite-delivered data communications, the introduction of new or enhanced products and services by the Company or NetSat Express or their 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 enterprise network service solutions business and satellite-delivered data communication services business 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. The Company anticipates that its competitors may develop or acquire competing products or products that provide functionality that is similar to that provided by the Company's products and 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 24 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." ADDITIONAL FINANCING REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING The Company has incurred negative cash flows from operations in each year since its inception. The Company expects that its cash and working capital requirements for its operating activities will continue to increase as the Company expands its operations. The Company anticipates that its capital resources are adequate to satisfy its capital requirements through June 30, 2000 at its current level of operations. However, no assurance can be given that there will be no change that would consume available resources significantly before such time. Additional funds may not be available when needed and even if available, additional funds may be raised through financing arrangements and/or the issuance of preferred or common stock or convertible securities on terms and prices significantly more favorable than those of the currently outstanding common stock, which could have the effect of diluting or adversely affecting the holdings or rights of existing stockholders of the Company. If adequate funds are not available, the Company will be required to delay, scale back or eliminate certain of its operating activities, including without limitation, the timing and extent of its marketing programs, the extent and timing of hiring additional personnel and its research and development activities. No assurance can be given that additional financing will be available to the Company on acceptable terms, or at all. RELIANCE ON STRATEGIC RELATIONSHIPS The Company is dependent on certain customers and suppliers for the development and expansion of its ground segment systems, and networks, and enterprise network service solutions business and satellite-delivered data communication services 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." 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. RISK OF CUSTOMER CONCENTRATION The Company typically relies upon a small number of customers for a large portion of its revenues. For example, approximately 24% of the Company's revenues in fiscal 1999 were derived from sales to three customers. At June 30, 1999, $8.0 million, or approximately 12.6% of the Company's backlog was accounted for by a contract between the Company and Transworld Communications Services, Inc. The Company expects that in the near term a significant portion of its revenues will continue to be derived from 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. 25 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 systems, and networks, and enterprise network service solutions business and satellite-delivered data communication services business, 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, and 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, and enterprise network service solutions 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 enterprise network service solutions business and satellite-delivered data communication services business 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 satellite-delivered data communication services business, also 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 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 ground segment systems, and networks, and enterprise network service solutions business and satellite-delivered data communication services business, 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 and satellite-delivered data communications 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 26 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, 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. The Company is in the process of assessing the anticipated costs, problems and uncertainties associated with Year 2000 issues. The Company has initiated a Year 2000 Compliance Plan which includes information technology ("IT") and non-IT systems requiring or which may require modification or conversion, and supplier, facilities and other operations (such as financial and banking systems) readiness. The Company has substantially completed reviews of each of the above areas including identification and assessment of potential Year 2000 issues, identification and contact with key suppliers or institutions based on their relative risks associated with product integrity and continued product deliveries and service. Until such reviews are complete, the Company will not be able to completely evaluate whether its IT and non-IT systems will need to be modified or replaced. The Company has incurred only nominal costs to date and estimates at this time that the total Year 2000 costs will not be material. The Company is continuing its assessment which may necessitate refinement of its estimate over time. There can be no assurance, however, that costs associated with the Company's Year 2000 Compliance Plan will not be higher than anticipated which could have a material adverse effect on the Company's business, results of operations and financial condition. In association with the Company's Year 2000 Compliance Plan, the Company is currently developing contingency plans for certain critical applications. These contingency plans may include, among other actions, manual workarounds, increasing inventories and adjusting staffing strategies. There can be no assurance such contingency plans, once developed, will be adequate. Since the Company's Year 2000 Compliance Plan is ongoing, all potential Year 2000 issues have not yet been identified. Therefore the potential impact of these issues on the Company's financial condition and results of operations can not be determined at this time. If IT and non-IT systems used by the Company or its suppliers, the product integrity of products provided to the Company by its suppliers, or the software applications or hardware used in systems integrated and sold by the Company, fail or experience significant difficulties related to the Year 2000, the Company's results of operations and financial condition could be materially affected. 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, and enterprise network service solutions and satellite-delivered data communication services 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 27 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 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 earth stations in Hauppauge, New York, subject to FCC Rules and Regulations. The Company has obtained certain licenses from the FCC for both domestic and international operation of its earth stations and must operate it in compliance with FCC Rules and Regulations for the terms of the licenses. These licenses generally should be renewed by the FCC so long as the Company is in compliance with the FCC Rules and Regulations. The Company cannot offer assurances that any necessary additional licenses will be granted by the FCC. Generally, non-U.S. citizens or their representatives, foreign governments, or corporations otherwise subject to control by non-U.S. citizens may not directly own more than 20% of a licensee or may not indirectly own more than 25% of a licensee, through a parent corporation or other controlling entity, under the FCC Rules and Regulations. The FCC may grant waivers of its foreign ownership policy to allow for increased indirect investment in a licensee by an entity based in a World Trade Organization ("WTO") member country. For an entity based in a non-WTO member country, the FCC will allow increased indirect investment only if a licensee can show that the non-WTO member country allows "effective competitive opportunities" for U.S. based entities. Failure to comply with these policies may result in an order to divest the offending alien ownership, fines, denial of license renewal, and or license revocation proceedings against the licensee by the FCC. The Company has no knowledge of any present foreign ownership which would result in a violation of the FCC Rules and Regulations. The Company may, in the future, be required to seek a waiver of the FCC Rules and Regulations regarding foreign ownership, if such ownership exceeds the aforementioned benchmarks. 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 28 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 Child Online Protection Act, enacted in the United States in 1998, imposes civil and criminal penalties on Internet content providers who fail to restrict minor's access to material that is deemed "harmful" to them. However, this act is currently enjoined and its constitutionality is being adjudicated. It is anticipated 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, and enterprise network service solutions outside the United States is subject to compliance with the regulations of the United States Export Administration Regulations. The absence of comparable restrictions on competitors in other countries may adversely affect the Company's competitive position. In addition, in order to ship the Company's products into certain other countries, the products must satisfy the technical requirements of that particular country. 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, 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. 29 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 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 two patents in the United States, a patent pending in the United States and a PCT application, corresponding to one of the United States patents, 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 and various other countries, has received a trademark for NetSat Express in the United States, and has filed applications for trademark registration of NetSat Express in various other countries. The Company 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 24, 1999, the Company's officers and directors, and their affiliates beneficially own approximately 2.3 million shares, constituting approximately 23% 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. 30 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 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, 1999, the Company had no such foreign currency forward contracts. 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 None 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. 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 31 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) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.................................................................. F-1 Consolidated Balance Sheets as of June 30, 1999 and 1998........................................ F-2 Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997.......... F-3 Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 1999, 1998 and 1997........................................................................... F-4 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997.......... F-5 Notes to Consolidated Financial Statements...................................................... F-6 (2) INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation and Qualifying Accounts................................................. S-1 All other schedules for which provision is made in the applicable accounting regulation from the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(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")) 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). 32 10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the Registrant (incorporated by reference to exhibit 10.6 of the Registration Statement). 10.7 Memorandum of Understanding dated December 18, 1996 by and between NetSat Express, Inc. and Applied Theory Communications, Inc. (incorporated by reference to exhibit 10.7 of the Registration Statement). 10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by reference to exhibit 10.8 of the Registration Statement). 10.9 Employment Agreement dated as of January 27, 1997 between the Registrant and David E. Hershberg (incorporated by reference to exhibit 10.9 of the Registration Statement). 10.10 Employment Agreement dated as of January 27, 1997 between the Registrant and Kenneth A. Miller (incorporated by reference to exhibit 10.10 of the Registration Statement). 10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between Eaton Corporation and the Registrant (incorporated by reference to exhibit 10.13 of the Registration Statement). 10.12 1997 Stock Incentive Plan (incorporated by reference to exhibit 10.14 of the Registration Statement). 10.13 Investment Agreement dated August 21, 1998 by and between McKibben Communications LLC and the Registrant (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10K for the year ended June 30, 1998). 10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.8 of the S-8 of the S-8 Registration Statement) 10.15 Rights Agreement, dated as of December 3, 1998, between the Company and American Stock Transfer and Trust Company, which includes the form of Certificate of Designation for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4 of Company's Current Report on Form 8-K dated December 3, 1998) 10.16 Common Stock Purchase Agreement dated August 11, 1999 between NetSat Express, Inc. and Globix Corporation. 10.17 Series A Preferred Stock Purchase Agreement dated August 11, 1999 between NetSat Express, Inc. and George Soros. 21.1 Subsidiary of the Registrant (filed herewith). 23.1 Consent of Ernst & Young LLP (filed herewith). 27 Financial Data Schedule (filed herewith). * Confidential treatment granted for portions of this agreement. (B) REPORTS ON FORM 8-K None 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf of the undersigned, thereunto duly authorized. GLOBECOMM SYSTEMS INC.
Date ---- By: /s/ David E. Hershberg 9/28/99 ------------------------------------------------------- ------- David E. Hershberg, Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual 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 9/28/99 ------------------------------------------------------- ------- David E. Hershberg, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Andrew C. Melfi 9/28/99 ------------------------------------------------------- ------- Andrew C. Melfi, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) By: /s/ Kenneth A. Miller ------------------------------------------------------- ------- Kenneth A. Miller, President and Director 9/28/99 By: /s/ Donald G. Woodring 9/28/99 ------------------------------------------------------- ------- Donald G. Woodring, Vice President and Director By: /s/ Stephen C. Yablonski 9/28/99 ------------------------------------------------------- ------- Stephen C. Yablonski, Vice President and Director By: /s/ Herman Fialkov 9/28/99 ------------------------------------------------------- ------- Herman Fialkov, Director By: /s/ Shelley A. Harrison 9/28/99 ------------------------------------------------------- ------- Shelley A. Harrison, Director
34 By: /s/ Benjamin Duhov 9/28/99 ------------------------------------------------------- ------- Benjamin Duhov, Director By: /s/ C.J. Waylan 9/28/99 ------------------------------------------------------- ------- C.J. Waylan, Director By: /s/ A. Robert Towbin 9/28/99 ------------------------------------------------------- ------- A. Robert Towbin, Director 35 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, 1999 and 1998 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with 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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /S/ ERNST & YOUNG LLP Melville, New York August 24, 1999, except for the last paragraph of Note 16. Subsequent Events, as to which the date is September 14, 1999 F-1 GLOBECOMM SYSTEMS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 1999 JUNE 30, 1998 ------------- ------------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 11,944 $ 21,342 Restricted cash......................................................................... 3,486 4,416 Accounts receivable, net................................................................ 18,147 18,017 Inventories, net........................................................................ 6,419 1,656 Prepaid expenses and other current assets............................................... 1,207 635 ----------------------------- Total current assets...................................................................... 41,203 46,066 Fixed assets, net......................................................................... 12,684 10,165 Investments............................................................................... 2,961 2,093 Other assets, net of accumulated amortization of $197 in 1999 and $100 in 1998............ 1,162 295 ----------------------------- Total assets.............................................................................. $ 58,010 $ 58,619 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 18,749 $ 13,042 Deferred revenue........................................................................ 299 103 Accrued payroll and related fringe benefits............................................. 859 632 Accrued commissions..................................................................... 72 216 Other accrued expenses.................................................................. 1,774 594 Capital lease obligations............................................................... - 18 ----------------------------- Total current liabilities................................................................. 21,753 14,605 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value, 3,000,000 shares authorized: Class A Convertible, shares authorized, issued and outstanding: none in 1999 and 1998...................................................................... - - Class B Convertible, shares authorized, issued and outstanding: none in 1999 and 1998...................................................................... - - Series A Junior Participating, shares authorized, issued and outstanding: none in 1999 and 1998...................................................................... - - Common stock, $.001 par value, 22,000,000 shares authorized, shares issued: 9,365,489 in 1999 and 9,165,908 in 1998............................................................. 9 9 Additional paid-in capital.............................................................. 52,061 50,530 Accumulated deficit..................................................................... (14,717) (6,525) Deferred compensation................................................................... (293) - Treasury stock, at cost, 139,638 shares in 1999 and none in 1998........................ (803) - ------------------------------ Total stockholders' equity................................................................ 36,257 44,014 ------------------------------ Total liabilities and stockholders' equity................................................ $ 58,010 $ 58,619 ==============================
See accompanying notes. F-2 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED ---------------------------------------------------- JUNE 30, JUNE 30, JUNE 30, 1999 1998 1997 ---------------------------------------------------- Revenues.................................................................... $ 49,058 $ 58,105 $ 36,220 Costs of revenues........................................................... 43,516 49,532 32,060 ---------------------------------------------------- Gross profit................................................................ 5,542 8,573 4,160 ---------------------------------------------------- Operating expenses: Network operations........................................................ 514 - - Selling and marketing..................................................... 5,183 4,187 3,282 Research and development.................................................. 1,325 1,188 649 General and administrative................................................ 6,040 5,010 3,449 Terminated acquisition costs.............................................. 972 - - Write-down of investments................................................. 679 - - ---------------------------------------------------- Total operating expenses.................................................... 14,713 10,385 7,380 ---------------------------------------------------- Loss from operations........................................................ (9,171) (1,812) (3,220) Interest income, net of interest expense of $1, $5 and $22 in 1999, 1998 and 1997, respectively............................................... 979 1,266 276 ---------------------------------------------------- Loss before minority interests in operations of consolidated subsidiary............................................................... (8,192) (546) (2,944) Minority interests in operations of consolidated subsidiary................. - - 275 ---------------------------------------------------- Net loss.................................................................... $ (8,192) $ (546) $ (2,669) ==================================================== Basic and diluted net loss per common share................................. $ (0.90) $ (0.06) =================================== Shares used in the calculation of basic and diluted net loss per common share.................................................................... 9,109 8,553 =================================== Pro forma basic and diluted net loss per common share (unaudited)........... $ (0.44) ================= Shares used in the calculation of pro forma basic and diluted net loss per common share (unaudited)............................................. 6,086 =================
See accompanying notes. F-3 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1997, JUNE 30, 1998 AND JUNE 30, 1999 (IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK ----------------------------- CLASS A CLASS B COMMON STOCK ADDITIONAL ----------------------------- -------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ----------------------------------------------------------------------- Balance at June 30, 1996.... 156 $ - - $ - 3,769 $ 4 $ 9,036 $(3,310) 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 Sale of convertible preferred stock to investor......... 16 - 257 Exercise of warrants........ 107 - 563 Sale of convertible preferred stock to investor......... 30 - 824 Issuance of common stock in exchange for minority shares in subsidiary............. 30 - 243 Options granted to employees and directors............. 83 Net loss.................... (2,669) ----------------------------------------------------------------------- Balance at June 30, 1997.... 172 - 515 1 3,906 4 21,970 (5,979) 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 Proceeds from exercise of stock options............. 132 - 534 Proceeds from exercise of warrants.................. 7 - 55 Options granted to employees and directors............. 71 Net loss.................... (546) ----------------------------------------------------------------------- Balance at June 30, 1998.... - - - - 9,166 9 50,530 (6,525) Issuance of common stock in exchange for minority shares in subsidiary............. 43 - 250 Issuance of common stock in connection with acquisition ............. 50 - 406 Proceeds from exercise of stock options ............ 39 - 148 Exercise of stock options in exchange for shares of common stock.............. 49 - 258 Issuance of common stock in connection with employee stock purchase plan....... 18 - 94 Purchases of treasury stock. Options granted to employees and directors............. 75 Grant of employee stock options................... 300 Amortization of deferred compensation.............. Net loss.................... (8,192) ----------------------------------------------------------------------- Balance at June 30, 1999.... - $ - - $ - 9,365 $ 9 $ 52,061 $(14,717) ======================================================================= TREASURY STOCK TOTAL DEFERRED -------------- STOCKHOLDERS' COMPENSATION SHARES AMOUNT EQUITY ------------------------------------------ Balance at June 30, 1996.... $ - - $ - $ 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........ 10,965 Sale of convertible preferred stock to investor......... 257 Exercise of warrants........ 563 Sale of convertible preferred stock to investor......... 824 Issuance of common stock in exchange for minority shares in subsidiary............. 243 Options granted to employees and directors............. 83 Net loss.................... (2,669) ------------------------------------------ Balance at June 30, 1997.... - - - 15,996 Conversion of convertible preferred stock into common stock.................... - Proceeds from initial public offering, net of issuance costs of $3,721........... 27,904 Proceeds from exercise of stock options............. 534 Proceeds from exercise of warrants.................. 55 Options granted to employees and directors............. 71 Net loss.................... (546) ------------------------------------------ Balance at June 30, 1998.... - - - 44,014 Issuance of common stock in exchange for minority shares in subsidiary............. 250 Issuance of common stock in connection with acquisition ............. 406 Proceeds from exercise of stock options ............ 148 Exercise of stock options in exchange for shares of common stock.............. 26 (258) - Issuance of common stock in connection with employee stock purchase plan....... 94 Purchases of treasury stock. 114 (545) (545) Options granted to employees and directors............. 75 Grant of employee stock options................... (300) - Amortization of deferred compensation.............. 7 7 Net loss.................... (8,192) ------------------------------------------ Balance at June 30, 1999.... $(293) 140 $ (803) $36,257 ==========================================
See accompanying notes. F-4 GLOBECOMM SYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED ----------------------------------------------------------- JUNE 30, JUNE 30, JUNE 30, 1999 1998 1997 ----------------------------------------------------------- OPERATING ACTIVITIES: Net loss............................................................... $ (8,192) $ (546) $ (2,669) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................................ 1,267 716 362 Stock compensation expense........................................... 82 71 83 Provision for doubtful accounts..................................... 100 40 - Loss on disposal of fixed assets..................................... 129 - - Write-down of investments............................................ 679 - - Minority interests in operations of consolidated subsidiary.......... - - (275) Changes in operating assets and liabilities: Accounts receivable.............................................. (230) (3,707) (12,351) Inventories, net................................................. (4,763) 664 (943) Prepaid expenses and other current assets........................ (572) (328) (73) Other assets..................................................... (74) 68 (1) Accounts payable................................................. 5,707 (3,047) 13,322 Deferred revenue................................................. 196 76 27 Accrued payroll and related fringe benefits...................... 227 194 221 Accrued commissions and other accrued expenses................... 1,036 121 339 ----------------------------------------------------------- Net cash used in operating activities.................................. (4,408) (5,678) (1,958) ----------------------------------------------------------- INVESTING ACTIVITIES: Purchases of investments............................................... (1,547) (785) (1,069) Purchases of fixed assets.............................................. (3,818) (3,678) (6,765) Payment of organization costs.......................................... - - (81) Restricted cash........................................................ 930 (2,879) (306) ----------------------------------------------------------- Net cash used in investing activities.................................. (4,435) (7,342) (8,221) ----------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from sales of common stock, net............................... 94 28,665 - Proceeds from sales of preferred stock, net............................ - - 12,046 Proceeds from exercise of warrants..................................... - 55 563 Proceeds from exercise of stock options................................ 148 534 - Purchases of treasury stock............................................ (545) - - Investment from minority stockholders.................................. - - 275 Repayment of loan to stockholder....................................... - - 150 Repayment of loans payable to stockholder.............................. - - (315) Payment of deferred offering costs..................................... (234) - (761) Payments under capital leases.......................................... (18) (56) (50) ----------------------------------------------------------- Net cash (used in) provided by financing activities.................... (555) 29,198 11,908 ----------------------------------------------------------- Net (decrease) increase in cash and cash equivalents................... (9,398) 16,178 1,729 Cash and cash equivalents at beginning of year......................... 21,342 5,164 3,435 ----------------------------------------------------------- Cash and cash equivalents at end of year............................... $ 11,944 $ 21,342 $ 5,164 =========================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest................................................. $ 1 $ 5 $ 51 ===========================================================
See accompanying notes F-5 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 1. ORGANIZATION AND DESCRIPTION OF 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. 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 world wide. In addition, the Company offers enterprise service solutions which are typically comprised of ground segment systems and networks in combination with terrestrial and space segment services to provide end-to-end service solutions. 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 changed the par value of its common and preferred stock to $.001. All common stock, stock options 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, 1999 of approximately $14,717,000. 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 as the Company expands its operations. Management believes that its existing capital resources will be sufficient to meet its working capital needs through June 30, 2000 (see Note 16). 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary, 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 amounts reported in 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. NetSat Express revenues are derived primarily from Internet access service fees and sales of hardware and equipment. Service revenue from Internet access is recognized ratably over the period services are provided. Sales of hardware and equipment are recognized upon shipment. Payments received in advance of providing Internet access service are deferred until the period such services are provided and are presented as deferred revenue in the accompanying consolidated balance sheets. F-6 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COST OF REVENUES In addition to contract costs, cost of revenues relating to Internet access service fees consist primarily of satellite space segment charges and Internet connectivity fees. Cost of revenues associated with hardware and equipment sales consist primarily of the purchase of the related products. NETWORK OPERATIONS Network operations expense consist primarily of costs associated with the operation of the Network Operation Center (the "NOC"), including teleport services and maintaining a twenty-four hour a day, seven-day a week staff to monitor the operations of the NOC. RESEARCH AND DEVELOPMENT Research and development expenditures are expensed as incurred. INVENTORIES Inventories, which consist primarily of work-in-progress from costs incurred in connection with specific customer contracts, are stated at the lower of cost (using the first-in, first-out method of accounting) or market value, less customer progress payments. CASH EQUIVALENTS The Company classifies all highly liquid financial instruments with a maturity of three months or less when purchased as cash equivalents. FIXED ASSETS Fixed assets are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from three to twenty-five years. Amortization of assets held under capital leases is calculated using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the lease term or estimated useful lives of the improvement. INCOME TAXES Income taxes are provided using the liability method. Accordingly, deferred tax assets and liabilities are recognized for future tax consequences attributable to the difference between the carrying amount of the assets and liabilities for financial statement and income tax purposes, as determined under the enacted tax laws and rates that will be in effect when the differences are expected to reverse. F-7 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. STOCK-BASED COMPENSATION The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based-Compensation" ("Statement 123"). GOODWILL Goodwill represents excess of the purchase price over the fair value of net assets acquired. Amortization expense relating to goodwill is amortized on a straight-line basis over periods ranging from five to ten years. Such amounts are included in other assets in the accompanying consolidated balance sheets. LONG-LIVED ASSETS When impairment indicators are present, the Company reviews the carrying value of its assets in determining the ultimate recoverability of their unamortized values using future undiscounted cash flow analyses expected to be generated by the assets. If such assets are considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds the future discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. The Company evaluates the periods of amortization continually in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized cost will be allocated to the increased or decreased number of remaining periods in the revised lives. F-8 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SEGMENT DISCLOSURES Effective June 30, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement 131"). Statement 131 supersedes Statement of Financial Accounting 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 Company operates in two business segments, its Ground Segment Systems and Networks Segment, through Globecomm Systems Inc. and its Data Communications Services Segment, through NetSat Express (see Note 13). RECLASSIFICATIONS Certain balances in the prior years have been reclassified to conform to the current year presentation. 3. INVENTORY Inventory consists of the following: JUNE 30, 1999 JUNE 30, 1998 ----------------------------------------- (IN THOUSANDS) Raw materials and component parts.... $ 87 $ 78 Work-in-progress..................... 9,975 3,576 --------------------------------- 10,062 3,654 Less progress payments............... 3,643 1,998 --------------------------------- $ 6,419 $ 1,656 ================================= F-9 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. FIXED ASSETS Fixed assets consist of the following:
JUNE 30, 1999 JUNE 30, 1998 ------------------------------ (IN THOUSANDS) Land............................................... $ 1,750 $ 1,750 Building and improvements.......................... 5,309 5,261 Computer equipment................................. 1,410 1,437 Machinery and equipment............................ 2,469 844 Network Operations Center.......................... 749 565 Satellite earth station equipment.................. 630 148 Furniture and fixtures............................. 987 933 Leasehold improvements............................. 29 29 Equipment under capital leases..................... 159 159 Construction-in-progress........................... 1,481 158 ----------------------------- 14,973 11,284 Less accumulated depreciation and amortization..... 2,289 1,119 ----------------------------- $12,684 $10,165 =============================
5. INVESTMENTS Investments consist of the following:
JUNE 30, 1999 JUNE 30, 1998 ------------------------------ (IN THOUSANDS) Shiron Satellite Communications (1996), Ltd. ("Shiron") (a)................................ $ 285 $ 285 Euro Broadcasting Corporation ("Euro") (b).................................. - 440 Newpoint Technologies, Inc. ("Newpoint Technologies") (c)................. 950 950 Armer Communications Engineering Services, Inc. ("Armer") (d)................................. 200 200 Joint Communications Technology Corp. ("JCTC") (e).................................. - 214 McKibben Communications, LLC ("McKibben") (f).............................. 1,522 - Other.............................................. 4 4 ----------------------------- $ 2,961 $2,093 =============================
(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 20% interest of Shiron in accordance with the terms F-10 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENTS (CONTINUED) of the purchase agreement. As of June 30, 1999, the Company's interest in Shiron was diluted to 8.91%. (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 depending upon the exercise date. During August 1997, the Company exercised its option to purchase an additional 10% for $200,000. During December 1998, the Company purchased an additional 100,000 shares of Euro's common stock for $25,000. During June 1999, the Company's management evaluated this investment and believed it would be appropriate to write-down this investment to zero and recorded a charge to operations of approximately $465,000. (c) On August 30, 1996, the Company purchased 5% of the common stock of Newpoint Technologies, 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, 1999, the Company's interest in Newpoint Technologies has been diluted to 10.3%. (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. (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. During June 1999, the Company's management evaluated this investment and believed it would be appropriate to write-down this investment to zero and recorded a charge to operations of approximately $214,000. (f) On August 20, 1998, the Company purchased 18.75% of the future profits, losses and equity (subject to certain liquidation and income preferences) of McKibben, 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 and has an anti-dilution provision. Furthermore, the Company has an "Absolute Option", whereby it has the right to buy up to 20% of the equity of McKibben at any time prior to the sale of substantially all of the assets or an Initial Public offering of McKibben. The above investments have been accounted for at cost since the Company does not have the ability to exercise significant influence over operating and financial policies of the investees. F-11 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. TERMINATED ACQUISITION COSTS During the year ended June 30, 1999, the Company incurred certain costs in connection with an attempt to acquire another company. During the first quarter of fiscal 1999, the Company terminated this proposed acquisition and as a result incurred costs of approximately $972,000 representing legal, accounting and other acquisition related costs which have been charged to operations. 7. COMMON STOCK ISSUANCE OF COMMON STOCK IN CONNECTION WITH ACQUISITION On May 25, 1999, the Company acquired the business of Global-Net, Inc. ("Global-Net"), a wireless local loop telephone network solutions business, located in New York, in exchange for 50,000 shares of the Company's common stock with a fair market value of $8.125 per share on the date of acquisition. The purchase agreement provides for additional consideration to be paid by the Company if certain revenue goals are met during the fifteen months subsequent to the acquisition date. Had this acquisition been consummated as of July 1, 1997, the unaudited pro forma revenues and results of operations would not have been considered material for the years ended June 30, 1999 and 1998. The purchase price of approximately $406,000 has been allocated to goodwill and is being amortized over five-years. SALES OF COMMON STOCK During March 1999, a minority shareholder in NetSat Express agreed to exchange 840,000 shares of convertible preferred stock (representing approximately 14%) of NetSat Express for 42,553 shares in the Company. The shares in the Company were valued at $5.875 per share at the date of the agreement. Accordingly, the Company recorded goodwill of approximately $250,000 in connection with this transaction, which is being amortized over five-years. During May 1999, the Company exercised its right to convert its 840,000 shares of convertible preferred stock into 840,000 shares of common stock of NetSat Express. 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 NetSat Express agreed to exchange 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. Accordingly, the Company recorded goodwill of approximately $243,000, which is being amortized over ten-years. 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. F-12 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMON STOCK (CONTINUED) 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. No warrants were exercised during the year ended June 30, 1999. ISSUANCE OF COMMON STOCK AS COMMISSION In November 1995, the Company issued approximately 37,000 shares of its common stock to an 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. 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. TREASURY STOCK 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 are at the discretion of the Company's management subject to compliance with the applicable securities laws. During the year ended June 30, 1999, the Company repurchased approximately 114,000 shares of the Company's common stock under the repurchase program for an aggregate purchase price of approximately $545,000. During June 1999, an employee of the Company surrendered approximately 26,000 shares of the Company's common stock, with the fair market value at time of surrender of $10.125 per share, in exchange for the exercise of approximately 49,000 stock options with exercise prices ranging from $4.68 to $8.07. Accordingly, the Company recorded approximately 26,000 shares in treasury stock, which amounted to approximately $258,000, and issued approximately 49,000 shares of the Company's common stock to the employee. F-13 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. 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. 9. STOCK OPTION AND STOCK PURCHASE 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. On September 23, 1998, the Company's Board of Directors approved an increase of 181,335 shares to the 1997 Plan. At June 30, 1999, the remaining shares available for grant under the 1997 Plan was 234,248. On September 23, 1998, the Board of Directors adopted, and the stockholders subsequently approved, the 1999 Employee Stock Purchase Plan ("1999 Plan"). Pursuant to the 1999 Plan, 400,000 shares of the Company's common stock will be reserved for issuance. The 1999 Plan is intended to provide eligible employees of the Company, and its participating affiliates, the opportunity to acquire a propriety interest in the Company at 85% of fair market value at date of issuance through participation in the payroll-deduction based employee stock purchase plan. During the year ended June 30, 1999, the Company issued 18,529 shares of its common stock to participating employees in connection with the 1999 Plan. F-14 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED) EMPLOYEE PLAN The following table summarizes activity in employee stock options (in thousands, except per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997 ----------------------------------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE OPTION PRICE OPTION PRICE OPTION PRICE ----------------------------------------------------------------------------------------- Balance, beginning of year. 1,667 $ 7.22 1,546 $ 6.19 820 $ 4.46 Grants..................... 305 $ 7.54 206 $ 13.98 733 $ 8.15 Exercised.................. (60) $ 5.09 (75) $ 4.42 - $ - Canceled................... (6) $ 10.64 (10) $ 7.84 (7) $ 7.39 --------- ------- ------- -------- ------ ------- Balance, end of year....... 1,906 $ 7.32 1,667 $ 7.22 1,546 $ 6.19 ========= ======= ======= ======== ====== ======= Weighted-average fair value of options granted during the year. $ 3.94 $ 7.96 $ 3.56 ======= ======== =======
As a result of stock options granted during the years ended June 30, 1997, 1996 and 1995, the Company recorded compensation expense of approximately $75,000, $56,000 and $43,000 during the years ended June 30, 1999, 1998 and 1997, 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, 1999, remaining compensation expense to be recorded through the year ended June 30, 2001 was approximately $234,000. As of June 30, 1999, approximately 941,000 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 and 1997, of $15,000 and $40,000, 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. Approximately, 100,500 options were outstanding of which approximately 76,000 options were exercisable at June 30, 1999, and approximately 28,500 options were exercised during the year ended June 30, 1999. F-15 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED) NETSAT EXPRESS' STOCK OPTION PLAN In May 1999, NetSat Express' Board of Directors authorized, and the stockholders subsequently approved, the 1999 Stock Incentive Plan ("1999 Incentive Plan"), which provides for the granting of 1,980,000 options to purchase shares of NetSat Express' common stock. Options granted under the 1999 Incentive Plan may be issued to either employees, consultants or non-employee directors of NetSat Express or employees of the Company. Options granted to employees generally vest annually in equal installments over a four-year period commencing on the date of grant and expire ten years from the date of grant. Options granted to directors generally vest annually in equal installments over a three-year period commencing on the date of grant and expire the earlier of ten-years from the date of grant or one-year from concluding service as director of NetSat Express. In connection with the adoption of the 1999 Incentive Plan, NetSat Express granted options to purchase 847,506 shares of its common stock with exercise prices ranging from $3.00 to $5.00 per share to its employees and to employees of Globecomm Systems Inc., with a weighted-average exercise price of $4.66 per share, and granted options to purchase 30,000 shares of its common stock with an exercise price of $5.00 per share to its directors at fair market value at date of grant. As of June 30, 1999, options to purchase approximately 364,000 shares of NetSat Express' common stock were exercisable. In connection with options to purchase 150,000 shares of common stock granted during May 1999, NetSat Express recorded deferred compensation of approximately $300,000 based on the difference between the fair market value of the common stock and the exercise prices of the options at the date of grant. Deferred compensation is being amortized over the vesting period of the options. The amount recognized as expense during the year ended June 30, 1999 was approximately $7,000. FAIR VALUE DISCLOSURES 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 of the options granted under the Company's 1997 and 1999 Plans were estimated at date of grant using a Black-Scholes option pricing model with the following assumptions for the years ended June 30, 1999, 1998 and 1997: risk-free interest rate of 6.5%, volatility factor of the expected market price of the Company's common stock of .91 (1999), .51 (1998) and .40 (1997), a weighted-average expected life of the option of six-years and no dividend yields. The fair value of the options granted under the NetSat Express 1999 Incentive Plan was estimated at date of grant using the minimum value option pricing model with the following assumptions for the year ended June 30, 1999: no dividend yield, weighted-average expected life of the options of 4.25 years and a risk free interest rate of 6.0%. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options under the Black-Scholes option valuation model. F-16 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED) 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 YEAR ENDED JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997 --------------------------------------------------------- Pro forma net loss (in thousands)........................... $ (9,851) $ (1,868) $ (3,433) ========== ======== ========= Basic and diluted pro forma net loss per common share....... $ (1.08) $ (0.22) $ (0.56) ========== ======== =========
The following tables summarize information about employee and director stock options outstanding at June 30, 1999 (option amounts in thousands): WEIGHTED- AVERAGE RANGE OF REMAINING EXERCISE OPTIONS OPTIONS CONTRACTUAL PRICES OUTSTANDING EXERCISABLE LIFE (YEARS) - ----------------------------------------------------------------------------- $3.51 - $5.06 1,776 980 6.7 $5.50 - $8.09 633 284 7.6 $9.00 - $13.25 342 82 8.7 $14.13 - $18.38 134 35 8.3 ============================================================================= $3.51 - $18.38 2,885 1,381 7.4 ============================================================================= The Company and NetSat Express have reserved approximately 2,942,300 shares of its common stock for issuance upon exercise of all outstanding options and warrants at June 30, 1999. 10. BASIC AND DILUTED LOSS PER SHARE AND PRO FORMA BASIC AND DILUTED LOSS PER SHARE Basic loss per share for the years ended June 30, 1999 and 1998 is based on the weighted-average number of common shares outstanding during the period. Diluted loss per share for the years ended June 30, 1999 and 1998 excluded the effect of approximately 321,000 and 891,000 stock options, respectively, and approximately 23,000 warrants in 1999 and 1998, as the effect of inclusion would have been anti-dilutive as the Company reported net losses for the years ended June 30, 1999 and 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-17 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. 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, 1999, 1998 and 1997. The plan also provides for discretionary contributions by the Company. The Company contributed approximately $317,000, $242,000 and $117,000 to the 401(k) plan during the years ended June 30, 1999, 1998 and 1997, respectively. There were no discretionary contributions made by the Company during the years ended June 30, 1999, 1998 and 1997. 12. INCOME TAXES As a result of losses incurred from inception, the Company has available net operating loss carryforwards ("NOL's") of approximately $14.1 million ($8.6 million and $5.5 million for the Company and NetSat Express, respectively) for income tax purposes which expire through 2019. 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. F-18 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INCOME TAXES (CONTINUED) 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, JUNE 30, 1999 1998 (IN THOUSANDS) ------------------------------ Deferred tax liabilities: Projects in progress........................ $ - $ 157 Depreciation and amortization............... 192 153 ------------------------------ Total deferred tax liabilities 192 310 Deferred tax assets: Net operating loss carryforwards............ 5,660 3,294 Projects in progress........................ 270 - Accruals and reserves....................... 333 116 Write-down of investments................... 272 - Non-cash compensation charge................ 33 - ------------------------------ Total deferred tax assets..................... 6,568 3,410 Valuation allowance for deferred tax assets... 6,376 3,100 ------------------------------ Net deferred tax assets....................... 192 310 ------------------------------ Net deferred taxes............................ $ - $ - ============================== 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. For the years ended June 30, 1999, 1998 and 1997, the valuation allowance increased $3,276,000, $691,000 and $1,179,000, respectively. 13. 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. F-19 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. SEGMENT INFORMATION (CONTINUED) The following is business segment information as of and for the years ended June 30, 1999, 1998 and 1997:
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, JUNE 30, JUNE 30, 1999 1998 1997 ----------------------------------------------- (IN THOUSANDS) Revenues: Ground Segment Systems and Networks......................... $ 46,397 $ 57,419 $ 36,169 Data Communications Services................................ 2,661 686 51 ------------------------------------------- Total revenues................................................ $ 49,058 $ 58,105 $ 36,220 =============================================== Loss from operations: Ground Segment Systems and Networks......................... $ (7,070) $ (157) $ (1,766) Data Communications Services................................ (2,101) (1,655) (1,454) Interest income, net.......................................... 979 1,266 276 Minority interests in operations of consolidated subsidiary.................................................. - - 275 ---------------------------------------------- Net Loss...................................................... $ (8,192) $ (546) $ (2,669) =============================================== JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997 ----------------------------------------------- (IN THOUSANDS) Assets: Ground Segment Systems and Networks......................... $ 62,664 $ 60,894 $ 34,201 Data Communications Services................................ 3,200 1,279 152 Intercompany eliminations................................... (7,854) (3,554) (1,040) ----------------------------------------------- Total assets.................................................. $ 58,010 $ 58,619 $ 33,313 =============================================== Depreciation and amortization: Ground Segment Systems and Networks......................... $ 1,007 $ 628 $ 338 Data Communications Services................................ 260 88 24 ----------------------------------------------- Total depreciation and amortization........................... $ 1,267 $ 716 $ 362 =============================================== Expenditures for long-lived assets: Ground Segment Systems and Networks......................... $ 2,907 $ 2,879 $ 6,686 Data Communications Services................................ 911 799 79 ----------------------------------------------- Total expenditures for long-lived assets...................... $ 3,818 $ 3,678 $ 6,765 ===============================================
F-20 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK The Company designs, assembles and installs satellite ground segment systems and networks and provides data communications services for customers in diversified geographic locations. Concentration of credit risk with respect to accounts receivables is limited due to the limited number of customers and that a substantial portion of accounts receivables are related to balances owed by major satellite communication companies. The timing of cash realization is determined based upon the contract or service agreement with the customers. The Company performs ongoing credit evaluations of its customers' financial condition and in most cases requires a letter of credit or cash in advance for foreign customers. Allowances related to account receivable at June 30, 1999 and 1998, are approximately $107,000 and $40,000, respectively. Credit losses have been within management expectations. No one customer accounted for more than 10% of sales for the year ended June 30, 1999. Sales to one major customer accounted for approximately 29% and two major customers accounted for approximately 42% (29% and 13%) of the Company's net revenues for the years ended June 30, 1998 and 1997, respectively. Revenues from foreign sales as a percentage of total consolidated revenue: Year Ended Year Ended Year Ended June 30, June 30, June 30, 1999 1998 1997 ---------- ---------- ---------- Africa 14% 33% 1% South America 11% 1% - Asia 10% 17% 28% Europe 7% 9% 11% Middle East 2% 9% - ---- ---- ---- 44% 69% 40% 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, 1999 and 1998. Cash equivalents are comprised of short-term debt instruments, certificates of deposit of 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. 15. COMMITMENTS AND CONTINGENCIES LINE OF CREDIT The Company has a $9.0 million credit facility, as amended, consisting of (1) a $5.0 million secured domestic line of credit and (2) a $4.0 million secured export-import guaranteed line of credit. Each line of credit bears interest at the prime rate (7.75% at June 30, 1999) plus 1% per annum and is collateralized by a first security interest on all the Company's assets. Such line of credit expires in December 1999. The amended credit facility contains certain financial covenants, which the Company is in compliance with at June 30, 1999. As of June 30, 1999 and 1998, no amounts were outstanding under such credit facility. LETTERS OF CREDIT The Company utilizes standby letters of credit to secure certain bid proposals and performance guarantees, while NetSat Express utilizes standby letters of credit to secure certain service agreements with third party vendors in the normal course of business. As of June 30, 1999, NetSat Express had a standby letter of credit outstanding of approximately $185,000, which is secured by the Company's domestic credit facility. The Company provides cash collateral for a majority of these letters of credit. As of June 30, 1999 and 1998, cash collateral related to bid proposals amounted to $0 and $588,000, respectively, and cash collateral related to performance guarantees amounted to approximately $3,486,000, and $3,828,000, respectively. These amounts are F-21 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. COMMITMENTS AND CONTINGENCIES (CONTINUED) included in restricted cash in the accompanying consolidated balance sheets. LEASE COMMITMENTS The Company currently leases satellite space segment services, office space and other equipment under various operating leases which expire in various years through 2002. As leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements contain renewal options. Future minimum payments under non-cancelable operating leases for satellite space segment services, office space and other equipment with terms of one-year or more, consist of the following at June 30, 1999 (in thousands): 2000........................ $ 1,689 2001........................ 521 2002........................ 11 -------------- $ 2,221 ============== Rent expense for satellite space segment services, office space and other equipment was approximately $1,042,000, $279,000 and $315,000 for the years ended June 30, 1999, 1998 and 1997, respectively. Pursuant to several NetSat Express Internet access service agreements, NetSat Express is the lessor of satellite earth station equipment which leases are classified as operating leases and expire at various dates through 2004. Equipment under these operating leases are included in fixed assets in the accompanying consolidated balance sheets and have a net book value of approximately $524,000 and $136,000 at June 30, 1999 and 1998. At June 30, 1999, future minimum lease payments to be received form equipment under operating leases are approximately as follows: 2000........................ $ 243 2001........................ 227 2002........................ 114 2003........................ 21 2004........................ 18 -------------- $ 623 ============== 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. Effective November 1998, such employment agreements increased to an aggregate amount of $400,000 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. F-22 GLOBECOMM SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. SUBSEQUENT EVENTS On August 11, 1999, NetSat Express completed a private placement of 1,000,000 shares of its Series A Participating Preferred Stock and 1,000,000 shares of common stock yielding gross proceeds of $10,000,000. The preferred stock has preference in liquidation and each share of preferred stock is convertible into one share of common stock at the option of the holder at any time, or automatically following the third anniversary of the date of issuance, or following the period of sixty consecutive days on which the price per share of the common stock is equal to or greater than $7.50 per share. The holders of Preferred Stock shall be entitled to receive an annual dividend on the anniversary date of issuance equal to 0.166667 shares of common stock for each share of Preferred Stock until the third anniversary date of the Preferred Stock issuance provided that if the fair market value of the common stock issued as dividends is less than $2,500,000, the holders of the Preferred Stock will be entitled to receive a special dividend equal to the shortfall. Additionally, the holder of the Preferred Stock may purchase services from NetSat Express at cost and payment for such services, at the option of the holder, may be either in dollars or shares of the NetSat Express' common stock valued at fair market value. In connection with the sale of preferred stock and common stock, NetSat Express paid an investment advisor a fee of $500,000 and issued a warrant to purchase 100,000 shares of common stock at $6.00 per share which expires in five years. On August 11, 1999, the Company contributed $3,500,000 of the amount it was owed at June 30, 1999 from NetSat Express as additional paid-in capital and entered into a promissory note agreement with NetSat Express for the repayment of the balance which approximated $3,582,000. The promissory note is due and payable in seven-years and accrues interest (payable monthly) at a variable rate equal to the Company's cost of funds, which is currently at the prime rate plus 1%. Amounts owed by NetSat Express to the Company pursuant to the Master Operating Agreement and for any advances made subsequent to June 30, 1999 are payable currently. On September 14, 1999, NetSat Express signed a 15-year lease for satellite space segment on the SatMex 5 satellite. This satellite will provide NetSat Express the capability of providing its services to the Caribbean Islands and the North, South and Central America regions covered by the SatMex 5 satellite. The annual lease payments for this space segment is approximately $1,386,000 for a total commitment of approximately $20.8 million over the 15-year lease term. F-23 GLOBECOMM SYSTEMS INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS --------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BEGINNING OF COSTS AND OTHER ACCOUNTS- DEDUCTIONS- BALANCE AT END DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD - ----------------------------------------------------------------------------------------------------------------------------------- Year ended June 30, 1999: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts receivable................... $ 40,000 $ 100,000 $ - $ (33,000)(a) $ 107,000 Valuation allowance on deferred tax assets............................... 3,100,000 - 3,276,000(b) - 6,376,000 ================================================================================= $3,140,000 $ 100,000 $3,276,000 $ (33,000) $6,483,000 ================================================================================= Year ended June 30, 1998: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts receivable..................... $ - $ 40,000 $ - $ - $ 40,000 Valuation allowance on deferred tax assets................................ 2,409,000 - 691,000(b) - 3,100,000 ================================================================================= $2,409,000 $ 40,000 $ 691,000 $ - $3,140,000 ================================================================================= Year ended June 30, 1997: Reserves and allowance deducted from asset accounts: Valuation allowance on deferred tax assets................................ 1,230,000 - 1,179,000(b) - 2,409,000 ================================================================================= $1,230,000 $ - $1,179,000 $ - $2,409,000 =================================================================================
(a) Reduction in allowance due to write-off of accounts receivable balance. (b) Record a valuation allowance for deferred tax assets. S-1 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 (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10K for the year ended June 30, 1998). 10.14 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.8 of the S-8 of the S-8 Registration Statement) 10.15 Rights Agreement, dated as of December 3, 1998, between the Company and American Stock Transfer and Trust Company, which includes the form of Certificate of Designation for the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4 of Company's Current Report on Form 8-K dated December 3, 1998) 10.16 Common Stock Purchase Agreement dated August 11, 1999 between NetSat Express, Inc. and Globix Corporation. 10.17 Series A Preferred Stock Purchase Agreement dated August 11, 1999 between NetSat Express, Inc. and George Soros. 21.1 Subsidiary of the Registrant (filed herewith). 23.1 Consent of Ernst & Young LLP (filed herewith). 27 Financial Data Schedule (filed herewith). * Confidential treatment granted for portions of this agreement. EX-10.16 2 COMMON STOCK PURCHASE AGREEMENT NETSAT EXPRESS, INC. COMMON STOCK PURCHASE AGREEMENT AUGUST 11, 1999 TABLE OF CONTENTS
Page ---- 1. Purchase and Sale of Stock...................................................1 1.1. Sale and Issuance of Common Stock...................................1 1.2. Closing.............................................................1 2. Representations and Warranties of the Company................................1 2.1. Organization, Good Standing and Qualification.......................1 2.2. Capitalization and Voting Rights....................................1 2.3. Subsidiaries........................................................2 2.4. Authorization.......................................................2 2.5. Valid Issuance of Common Stock and Series A Preferred Stock.........3 2.6. Governmental Consents...............................................3 2.7. Offering............................................................3 2.8. Litigation..........................................................3 2.9. Compliance with Other Instruments...................................4 2.10. Agreements; Action..................................................4 2.11. Related-Party Transactions..........................................5 2.12. Financial Statements................................................5 2.13. Changes.............................................................5 2.14. Tax Returns.........................................................6 2.15. Permits.............................................................7 2.16. Environmental and Safety Laws.......................................7 2.17. Disclosure..........................................................7 2.18. Business Plan.......................................................7 2.19. Registration Rights.................................................8 2.20. Corporate Documents; Minute Books...................................8 2.21. Title to Property and Assets........................................8 2.22. Insurance...........................................................8 2.23. Employee Benefit Plans..............................................8 2.24. Labor Agreements and Actions........................................8 2.25. Status of Intellectual Property.....................................9 3. Representations and Warranties of Investor...................................9 3.1. Authorization.......................................................9 3.2. Purchase Entirely for Own Account..................................10 3.3. Disclosure of Information..........................................10 3.4. Investment Experience..............................................10 3.5. Accredited Investor................................................10 3.6. Restricted Securities..............................................10 3.7. Further Limitations on Disposition.................................10 3.8. Legends............................................................11 3.9. Tax Advisors.......................................................11 3.10. Investor Counsel...................................................11
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Page ---- 4. Conditions of Investor's Obligations at Closing.............................11 4.1. Representations and Warranties.....................................12 4.2. Performance........................................................12 4.3. Compliance Certificate.............................................12 4.4. Qualifications.....................................................12 4.5. Proceedings and Documents..........................................12 4.6. Opinion of Company Counsel.........................................12 4.7. Investors'Rights Agreement.........................................12 4.8. Technology Agreement...............................................12 4.9. Contribution Agreement.............................................12 4.10. Stockholders Agreement.............................................12 5. Conditions of the Company's Obligations at Closing..........................13 5.1. Representations and Warranties.....................................13 5.2. Payment of Purchase Price..........................................13 5.3. Qualifications.....................................................13 5.4. Investors'Rights Agreement.........................................13 5.5. Technology Agreement...............................................13 5.6. Stockholders Agreement.............................................13 6. Miscellaneous...............................................................13 6.1. Survival...........................................................13 6.2. Successors and Assigns.............................................13 6.3. Governing Law......................................................13 6.4. Titles and Subtitles...............................................13 6.5. Notices............................................................14 6.6. Finder's Fee.......................................................14 6.7. Expenses...........................................................14 6.8. Amendments and Waivers.............................................14 6.9. Severability.......................................................14 6.10. Entire Agreement...................................................15 6.11. Counterparts.......................................................15
SCHEDULE A Schedule of Exceptions EXHIBIT A Amended and Restated Certificate of Incorporation EXHIBIT B List of Stockholders EXHIBIT C Investors' Rights Agreement EXHIBIT D Opinion of Counsel for the Company EXHIBIT E Technology Agreement EXHIBIT F Stockholders Agreement ii COMMON STOCK PURCHASE AGREEMENT THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is made on the 11th day of August, 1999, by and between NetSat Express, Inc., a Delaware corporation (the "Company"), and Globix Corporation, a Delaware corporation ("Investor"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Stock. 1.1. Sale and Issuance of Common Stock. (a) The Company shall adopt and file with the Secretary of State of Delaware on or before the Closing (as defined below) the Amended and Restated Certificate of Incorporation in the form attached hereto as Exhibit A (the "Restated Certificate"). (b) Subject to the terms and conditions of this Agreement, Investor agrees to purchase at the Closing and the Company agrees to sell and issue to Investor at the Closing 1,000,000 shares of the Company's Common Stock for a purchase price of $5,000,000. 1.2. Closing. The purchase and sale of the Common Stock shall take place at the offices of Brobeck, Phleger & Harrison LLP, 1633 Broadway, New York, New York 10019 at 11:00 a.m., on August 11, 1999 or at such other time and place as the Company and Investor mutually agree upon orally or in writing (which time and place are designated as the "Closing"). At the Closing the Company shall deliver to Investor a certificate representing the Common Stock that Investor is purchasing against payment of the purchase price therefor by wire transfer. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to Investor that, except as set forth on a Schedule of Exceptions (the "Schedule of Exceptions") furnished Investor and counsel for Investor prior to execution hereof and attached hereto as Schedule A, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1. Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own its properties and assets and to carry on it business as now conducted and as presently proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 2.2. Capitalization and Voting Rights. The authorized capital of the Company consists of: (a) Preferred Stock. 4,000,000 shares of Preferred Stock, par value $.001 (the "Preferred Stock"), of which 1,000,000 shares have been designated Series A Participating Preferred Stock (the "Series A Preferred Stock") and all of which will be sold pursuant to the Series A Preferred Stock Purchase Agreement (the "Preferred Stock Agreement") by and among 1 the Company and the parties thereto (to be executed and closed simultaneously with the Closing). The rights, privileges and preferences of the Series A Preferred Stock are stated in the Restated Certificate. (b) Common Stock. 26,000,000 shares of common stock, par value $.001 ("Common Stock"), of which 6,000,000 shares are issued and outstanding. (c) The outstanding shares of Common Stock are owned by the stockholders and in the numbers specified in Exhibit B hereto. (d) The outstanding shares of Common Stock are all duly and validly authorized and issued, fully paid and nonassessable, and were issued in compliance with all applicable state and federal laws concerning the issuance of securities. (e) Except for (i) the conversion privileges of the Series A Preferred Stock to be issued under the Preferred Stock Agreement, (ii) dividends payable on the Series A Preferred Stock pursuant to the Restated Certificate, and (iii) currently outstanding options to purchase 877,536 shares of Common Stock granted to employees or consultants pursuant to the Company's 1999 Stock Incentive Plan (the "Option Plan"), there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. In addition to the aforementioned options, the Company has reserved an additional 1,102,464 shares of its Common Stock for purchase upon exercise of options to be granted in the future under the Option Plan. Except as set forth in the Investors' Rights Agreement (as defined below) and the Stockholders Agreement (as defined below), the Company is not a party or subject to any agreement or understanding, and, to the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. 2.3. Subsidiaries. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership, or similar arrangement. 2.4. Authorization. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement dated the date hereof, by and among the Company and the signatories thereto, the form of which is attached hereto as Exhibit C (the "Investors' Rights Agreement"), the Stockholders Agreement dated the date hereof, by and among the Company and the signatories thereto, the form of which is attached hereto as Exhibit F (the "Stockholders Agreement"), the Preferred Stock Agreement, and the Technology Agreement dated the date hereof, by and between the Company and the Investor, the form of which is attached hereto as Exhibit E, the performance of all obligations of the Company hereunder and thereunder, and the authorization (or reservation for issuance), sale and issuance of the Common Stock being sold hereunder, the Series A Preferred Stock being sold under the Preferred Stock Agreement and the Common Stock issuable upon conversion of the Series A Preferred Stock has been taken or will be taken prior to or simultaneously with the Closing. This Agreement and the Investors' Rights Agreement constitute valid and legally binding obligations of the Company, 2 enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5. Valid Issuance of Common Stock and Series A Preferred Stock. The Common Stock that is being purchased by Investor hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and will be free of restrictions on transfer, other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Series A Preferred Stock that is being purchased by parties under the Preferred Stock Agreement, when issued, sold and delivered in accordance with the terms of the Preferred Stock Agreement for the consideration expressed therein, will be duly and validly issued, fully paid and nonassessable and will be free of restrictions on transfer, other than restrictions on transfer under the Preferred Stock Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Common Stock issuable upon conversion of the Series A Preferred Stock purchased under the Preferred Stock Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Restated Certificate, will be validly issued, fully paid and nonassessable and will be free of restrictions on transfer under the Preferred Stock Agreement and the Investors' Rights Agreement and under applicable state and federal securities law. 2.6. Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement or the Preferred Stock Agreement, except for filings required pursuant to applicable federal and state securities laws and blue sky laws, which filings will be effected within the required statutory period. 2.7. Offering. Subject in part to the truth and accuracy of Investor's representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the Common Stock as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), and the qualification or registration requirements of the applicable blue sky laws. Neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemptions. 2.8. Litigation. There is no action, suit, proceeding or investigation pending, or to the Company's knowledge, currently threatened against the Company that questions the validity of this Agreement or the Preferred Stock Agreement or the right of the Company to enter into such agreements or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the business, assets or condition of the Company, financially or otherwise, or any change in the current equity ownership of the Company. There is no material action, suit, proceeding, claim, arbitration or investigation ("Action") pending (or, to the Company's knowledge, currently 3 threatened) against the Company, its activities, properties or assets or, to the Company's knowledge, against any officer, director or employee of the Company in connection with such officer's, director's or employee's relationship with, or actions taken on behalf of, the Company. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate. 2.9. Compliance with Other Instruments. The Company is not in violation of any provision of its Restated Certificate or Bylaws nor, to its knowledge, of any instrument, judgment, order, writ, decree or contract, statute, rule or regulation ("Instruments") to which the Company is subject, except for any violation of an Instrument that individually or in the aggregate would not have a material adverse effect on the condition, financial or otherwise, or operations of the Company. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not result in any violation, or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under the Restated Certificate, Bylaws or any Instrument or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any material permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 2.10. Agreements; Action. (a) Except for agreements explicitly contemplated hereby and except as set forth on the Schedule of Exceptions, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates or any affiliate thereof. (b) Except as set forth on the Schedule of Exceptions, there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to the Company, in excess of $50,000, other than obligations of, or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business, (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company, other than licenses arising from the purchase of "off the shelf" or other standard products, (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights, other than indemnification obligations arising from purchase or sale agreements entered into in the ordinary course of business. (c) Except as set forth on the Schedule of Exceptions, the Company has not (i) declared or paid any dividends or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $100,000 or, in the case of indebtedness and/or liabilities individually less than $100,000, in excess of $200,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than for the purpose of the sale of its services in the ordinary course of business. 4 (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. 2.11. Related-Party Transactions. No employee, officer or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. Except as set forth on the Schedule of Exceptions, to the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers or directors of the Company and members of their immediate families may own up to 5% of the stock in publicly traded companies that may compete with the Company. No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. 2.12. Financial Statements. The Company has delivered to Investor its audited financial statements (balance sheet and statement of operations, statement of stockholders' equity and statement of cash flows, including notes thereto) at June 30, 1999 and 1998, and for the fiscal years then ended (the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to June 30, 1999 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.13. Changes. Since June 30, 1999 there has not been: (a) except as set forth on the Schedule of Exceptions, any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results or business of the Company; 5 (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) except as set forth on the Schedule of Exceptions, any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the assets, properties, financial condition, operating results or business of the Company; (e) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject, except as set forth on the Schedule of Exceptions; (f) any material change in any compensation arrangement or agreement with any employee; or (g) any agreement or commitment by the Company to do any of the things described in this Section 2.13. 2.14. Tax Returns. (a) The Company has filed or caused to be filed, or has properly filed extensions for, all tax returns, reports, forms and other such documents ("Tax Returns") that are required to be filed and has paid or caused to be paid all Taxes as shown on said returns and on all material assessments received by it to the extent that such Taxes have become due, except Taxes the validity or amount of which is being contested in good faith by appropriate proceedings and with respect to which adequate reserves, in accordance with generally accepted accounting principles in effect from time to time ("GAAP"), have been set aside. Such Tax Returns are true and correct in all material respects. The Company has paid or caused to be paid, or has established reserves in accordance with GAAP for all Tax liabilities applicable to the Company for all fiscal years that have not been examined and reported on by the taxing authorities (or closed by applicable statutes). Except as disclosed in the Schedule of Exceptions, no additional Tax assessment against the Company has been heretofore proposed by any Governmental Authority and remains outstanding for which provision has not been made on its balance sheet. Except as set forth on the Schedule of Exceptions, no waivers of the statute of limitation or extension of time within which to assess any Tax have been affirmatively granted by the Company. The Schedule of Exceptions sets forth the tax year through which United States federal income tax returns of the Company have been examined and closed. (b) Except as set forth on the Schedule of Exceptions, with respect to all Tax Returns of the Company, (i) no audit is in progress and no extension of time is in force with respect to any date on which any Tax Return was or is to be filed and no waiver or agreement is in force for the extension of time for the assessment or payment of any Tax; and (ii) to our knowledge, there is no unassessed deficiency proposed or threatened against the Company. (c) Except as set forth on the Schedule of Exceptions, the Company has not agreed to make any adjustments under section 481 of the Code that would survive the Closing by reason of a change of accounting method or otherwise prior to Closing. 6 (d) None of the respective assets of the Company is required to be treated as being owned by any Person, other than the Company, pursuant to the "safe harbor" leasing provisions of Section 168(f)(8) of the Code. As used in this Agreement, "Tax" or "Taxes" means any federal, state, county, local, foreign and other taxes (including, without limitation, income, profits, premium, estimated, excise, sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital levy, production, transfer, withholding, employment, unemployment compensation, payroll and property taxes, import duties and other governmental charges and assessments), whether or not measured in whole or in part by net income, and including deficiencies, interest, additions to tax or interest, and penalties with respect thereto, and including expenses associated with contesting any proposed adjustments related to any of the foregoing. As used in this Agreement, "Governmental Authority" means the government of any nation, state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. 2.15. Permits. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the business, properties or financial condition of the Company. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.16. Environmental and Safety Laws. The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.17. Disclosure. The Company has fully provided Investor with all the information that Investor has requested for deciding whether to purchase the Common Stock. Neither this Agreement (including all the exhibits and schedules hereto) nor any other statements or certificates made or delivered in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading in light of the circumstances under which they were made. 2.18. Business Plan. The Business Plan dated July 1999, previously delivered to Investor has been prepared in good faith by the Company and does not contain any untrue statement of a material fact nor does it omit to state a material fact necessary to make the statements made therein not misleading, except that with respect to projections contained in the Business Plan, the Company represents only that such projections were prepared in good faith and that the Company reasonably believes there is a reasonable basis for such projections. There has been no material adverse change in the assets, business, properties or financial or other condition of the Company since July 1, 1999 that would cause the Business Plan to no longer be valid. 7 2.19. Registration Rights. Except as provided in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.20. Corporate Documents; Minute Books. Except for amendments necessary to satisfy representations and warranties or conditions contained herein (the forms of which amendments have been approved by Investor), the Restated Certificate and Bylaws of the Company are in the form previously provided to counsel for Investor. The minute books of the Company provided to Investor contain a complete summary of all meetings of directors and stockholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all material respects. 2.21. Title to Property and Assets. The property and assets the Company owns are owned by the Company free and clear of all mortgages, liens, loans and encumbrances, except (i) as reflected in the Financial Statements, (ii) for statutory liens for the payment of current taxes that are not yet delinquent, and (iii) for liens, encumbrances and security interests that arise in the ordinary course of business and minor defects in title, none of which, individually or in the aggregate, materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in material compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances, subject to clauses (i)-(iii). 2.22. Insurance. The Company has fire and casualty insurance policies with such coverages in amounts (subject to reasonable deductibles) customary for companies similarly situated. 2.23. Employee Benefit Plans. Except as set forth on the Schedule of Exceptions, the Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.24. Labor Agreements and Actions. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the Company's knowledge, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the Company's knowledge, threatened, that could have a material adverse effect on the assets, properties, financial condition, operating results or business of the Company, nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. The employment of each officer and employee of the Company is terminable at the will of the Company. The Company is not a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment. 8 2.25. Status of Intellectual Property. (a) To the Company's knowledge, the Company owns or has sufficient licenses to use all of the material patents, patent applications, registered trademarks, trademark applications, copyright registrations and applications therefor which are necessary for the conduct of the business. Except as set forth on the Schedule of Exceptions: (i) The patents owned by the Company and patent applications (collectively, "Patent Rights") are owned by the Company free and clear of all mortgages, liens, charges or encumbrances whatsoever. No licenses have been granted with respect to the Patent Rights and the Company has not received written notice from any third party claiming that its practice of the inventions covered by the Patent Rights or the patents or patents application licensed to the Company would infringe the patent rights of such third party. (ii) The copyright registrations and pending applications owned by the Company are owned by the Company free and clear of all mortgages, liens, charges or encumbrances whatsoever. Except for licenses granted to end users in accordance with the Company's standard terms, no licenses have been granted with respect to any of the Company's copyrighted material and the Company has not received written notice from any third party claiming that any of its activities in the conduct of its business as presently conducted infringe the copyrights of such third party. (iii) The trademark registrations and pending applications owned by the Company are owned by the Company free and clear of all mortgages, liens, charges or encumbrances whatsoever. No licenses have been granted with respect to any of such trademarks or applications and the Company has not received notice from any third party claiming that any of its activities in the conduct of its business as presently conducted infringe the trademarks, trade names or trade dress of such third party. (b) Except as set forth on the Schedule of Exceptions, all technical information and know-how in possession of the Company 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 the Company free and clear of all mortgages, liens, charges or encumbrances whatsoever. 3. Representations and Warranties of Investor. Investor hereby represents, warrants and covenants that: 3.1. Authorization. Investor has full power and authority to enter into this Agreement, the Investors' Rights Agreement and the Stockholders Agreement, and each such agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 9 3.2. Purchase Entirely for Own Account. This Agreement is made with Investor in reliance upon Investor's representation to the Company, which by Investor's execution of this Agreement Investor hereby confirms, that the Common Stock to be received by Investor will be acquired for investment for Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Investor has no present intention of selling, granting any participation in or otherwise distributing the same. By executing this Agreement, Investor further represents that Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any Common Stock. 3.3. Disclosure of Information. Investor has received all the information it has requested in deciding whether to purchase the Common Stock. Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Common Stock and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of Investor to rely thereon. 3.4. Investment Experience. Investor has invested in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Common Stock. Investor also represents it has not been organized for the purpose of acquiring the Common Stock. 3.5. Accredited Investor. Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 3.6. Restricted Securities. Investor understands that the Common Stock it is purchasing is characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such Common Stock may be resold without registration under the Act only in certain limited circumstances. In the absence of an effective registration statement covering the Common Stock or an available exemption from registration under the Act, the Common Stock must be held indefinitely. In this connection, Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act, including without limitation the Rule 144 condition that current information about the Company be available to the public. Such information is not now available and the Company has no present plans to make such information available. 3.7. Further Limitations on Disposition. Without in any way limiting the representations set forth above, Investor further agrees not to make any disposition of all or any portion of the Common Stock unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and the Investors' Rights Agreement, and: 10 (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if requested by the Company, Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (c) Notwithstanding the provisions of subsections (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by Investor that is a corporation to a wholly owned subsidiary of such corporation if the transferee agrees in writing to be subject to the terms hereof to the same extent as if it were an original Investor hereunder. 3.8. Legends. It is understood that the certificates evidencing the Common Stock may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." (b) Any legend required by the applicable blue sky laws. 3.9. Tax Advisors. Investor has reviewed with Investor's own tax advisors the federal, state and local tax consequences of this investment, where applicable, and the transactions contemplated by this Agreement. Investor is relying solely on such advisors and not on any statements or representations of the Company or any of its agents and understands that Investor (and not the Company) shall be responsible for Investor's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 3.10. Investor Counsel. Investor acknowledges that Investor has had the opportunity to review this Agreement, the exhibits and the schedules attached hereto and the transactions contemplated by this Agreement with Investor's own legal counsel. Investor is relying solely on Investor's legal counsel and not on any statements or representations of the Company or any of the Company's agents, including Brobeck, Phleger & Harrison LLP, for legal advice with respect to this investment or the transactions contemplated by this Agreement. 4. Conditions of Investor's Obligations at Closing. The obligations of Investor under subsection 1.1(b) of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent thereto: 11 4.1. Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 4.2. Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing, including, without limitation, adoption and filing with the Secretary of State of the State of Delaware of the Restated Certificate. 4.3. Compliance Certificate. The Chief Executive Officer of the Company shall deliver to Investor at the Closing a certificate stating that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. The Secretary of the Company shall deliver to Investor at the Closing a certificate as to the resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement and the Preferred Purchase Agreement and each exhibit hereto and thereto to which it is a signatory and the consummation of the transactions contemplated herein and therein. 4.4. Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Common Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing. 4.5. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Investor's counsel, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 4.6. Opinion of Company Counsel. Investor shall have received from Brobeck, Phleger & Harrison LLP, counsel for the Company, an opinion, dated as of the Closing, in the form attached hereto as Exhibit D. 4.7. Investors' Rights Agreement. The Company and Investor shall have entered into the Investors' Rights Agreement in the form attached as Exhibit C. 4.8. Technology Agreement. The Company and Investor shall have entered into a Technology Agreement in the form attached hereto as Exhibit E. 4.9. Contribution Agreement. The Company and Globecomm Systems Inc. shall have entered into the Contribution Agreement and such agreement shall be in full force and effect. 4.10. Stockholders Agreement. The Company and Investor shall have entered into a Stockholders Agreement in the form attached hereto as Exhibit F. 12 5. Conditions of the Company's Obligations at Closing. The obligations of the Company to Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by Investor: 5.1. Representations and Warranties. The representations and warranties of Investor contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2. Payment of Purchase Price. Investor shall have delivered the purchase price specified in Section 1.1(b). 5.3. Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Common Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing. 5.4. Investors' Rights Agreement. The Company and Investor shall have entered into the Investors' Rights Agreement in the form attached as Exhibit C. 5.5. Technology Agreement. The Company and Investor shall have entered into a Technology Agreement in the form attached hereto as Exhibit E. 5.6. Stockholders Agreement. The Company and Investor shall have entered into a Stockholders Agreement in the form attached hereto as Exhibit F. 6. Miscellaneous. 6.1. Survival. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing for a period of one year and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of Investor or the Company. 6.2. Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of the Common Stock). Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3. Governing Law. This Agreement shall be governed by and construed under the laws of the State of New York as applied to agreements among New York residents entered into and to be performed entirely within New York. 6.4. Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 13 6.5. Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (iii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the address as set forth on the signature page hereof or at such other address as such party may designate by ten days advance written notice to the other parties hereto. A copy of any notice sent to the Company shall be sent to Luci Staller Altman, Esq., Brobeck, Phleger & Harrison LLP, 1633 Broadway, 47th Floor, New York, New York 10019. A copy of any notice sent to the Investor shall be sent to Arnold N. Bressler, Esq., Milberg Weiss Bershad Hynes & Lerach LLP, One Pennsylvania Plaza, New York, New York 10119. 6.6. Finder's Fee. Except as set forth on the Schedule of Exceptions, each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which Investor or any of its officers, partners, employees or representatives is responsible. The Company agrees to indemnify and hold harmless Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.7. Expenses. Irrespective of whether the Closing is effected, the Company and Investor shall pay all costs and expenses that such party incurs with respect to the negotiation, execution, delivery and performance of this Agreement; provided that if the Closing is effected, the Company shall pay the reasonable fees and expenses of one special counsel to Investor, not to exceed $25,000.00. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Investors' Rights Agreement, the Stockholders Agreement or the Restated Certificate, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.8. Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investor. Any amendment or waiver effected in accordance with this paragraph shall be binding upon Investor, each future holder of all such Common Stock and the Company. 6.9. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 14 6.10. Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. 6.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. NetSat Express, Inc. By: /s/: Kenneth A. Miller ------------------------------ Kenneth A. Miller, Chief Executive Officer Address: 45 Oser Avenue Hauppauge, NY 11788 GLOBIX CORPORATION By: /s/ Mark Bell, President ------------------------------ Address: 295 Lafayette Street New York, NY 10012 EX-10.17 3 SERIES A PREFERRED STOCK NETSAT EXPRESS, INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT AUGUST 11, 1999 TABLE OF CONTENTS
Page ---- 1. Purchase and Sale of Stock...............................................................................1 -------------------------- 1.1. Sale and Issuance of Series A Preferred Stock...................................................1 --------------------------------------------- 1.2. Closing.........................................................................................1 ------- 2. Representations and Warranties of the Company............................................................1 --------------------------------------------- 2.1. Organization, Good Standing and Qualification...................................................1 --------------------------------------------- 2.2. Capitalization and Voting Rights................................................................1 -------------------------------- 2.3. Subsidiaries....................................................................................2 ------------ 2.4. Authorization...................................................................................2 ------------- 2.5. Valid Issuance of Preferred and Common Stock....................................................3 -------------------------------------------- 2.6. Governmental Consents...........................................................................3 --------------------- 2.7. Offering........................................................................................3 -------- 2.8. Litigation......................................................................................3 ---------- 2.9. Compliance with Other Instruments...............................................................4 --------------------------------- 2.10. Agreements; Action..............................................................................4 ------------------ 2.11. Related-Party Transactions......................................................................5 -------------------------- 2.12. Financial Statements............................................................................5 -------------------- 2.13. Changes.........................................................................................5 ------- 2.14. Tax Returns.....................................................................................6 ----------- 2.15. Permits.........................................................................................7 ------- 2.16. Environmental and Safety Laws...................................................................7 ----------------------------- 2.17. Disclosure......................................................................................7 ---------- 2.18. Business Plan...................................................................................7 ------------- 2.19. Registration Rights.............................................................................8 ------------------- 2.20. Corporate Documents; Minute Books...............................................................8 --------------------------------- 2.21. Title to Property and Assets....................................................................8 ---------------------------- 2.22. Insurance.......................................................................................8 --------- 2.23. Employee Benefit Plans..........................................................................8 ---------------------- 2.24. Labor Agreements and Actions....................................................................8 ---------------------------- 2.25. Status of Intellectual Property.................................................................9 ------------------------------- 3. Representations and Warranties of the Investors..........................................................9 ----------------------------------------------- 3.1. Authorization...................................................................................9 ------------- 3.2. Purchase Entirely for Own Account..............................................................10 --------------------------------- 3.3. Disclosure of Information......................................................................10 ------------------------- 3.4. Investment Experience..........................................................................10 --------------------- 3.5. Accredited Investor............................................................................10 ------------------- 3.6. Restricted Securities..........................................................................10 --------------------- 3.7. Further Limitations on Disposition.............................................................11 ---------------------------------- 3.8. Legends........................................................................................11 ------- 3.9. Tax Advisors...................................................................................11 ------------ 3.10. Investor Counsel...............................................................................11 ---------------- i 4. Conditions of Investor's Obligations at Closing.........................................................12 ----------------------------------------------- 4.1. Representations and Warranties.................................................................12 ------------------------------ 4.2. Performance....................................................................................12 ----------- 4.3. Compliance Certificates........................................................................12 ----------------------- 4.4. Qualifications.................................................................................12 -------------- 4.5. Proceedings and Documents......................................................................12 ------------------------- 4.6. Opinion of Company Counsel.....................................................................12 -------------------------- 4.7. Investors'Rights Agreement.....................................................................12 -------------------------- 4.8. Contribution Agreement.........................................................................13 ---------------------- 4.9. Stockholders Agreement.........................................................................13 ---------------------- 5. Conditions of the Company's Obligations at Closing......................................................13 -------------------------------------------------- 5.1. Representations and Warranties.................................................................13 ------------------------------ 5.2. Payment of Purchase Price......................................................................13 ------------------------- 5.3. Qualifications.................................................................................13 -------------- 5.4. Investors'Rights Agreement.....................................................................13 -------------------------- 5.5. Stockholders Agreement.........................................................................13 ---------------------- 6. Miscellaneous...........................................................................................13 ------------- 6.1. Survival.......................................................................................13 -------- 6.2. Successors and Assigns.........................................................................13 ---------------------- 6.3. Governing Law..................................................................................13 ------------- 6.4. Titles and Subtitles...........................................................................14 -------------------- 6.5. Notices........................................................................................14 ------- 6.6. Finder's Fee...................................................................................14 ------------ 6.7. Expenses.......................................................................................14 -------- 6.8. Amendments and Waivers.........................................................................14 ---------------------- 6.9. Severability...................................................................................15 ------------ 6.10. Entire Agreement...............................................................................15 ---------------- 6.11. Counterparts...................................................................................15 ------------
SCHEDULE A Schedule of Investors SCHEDULE B Schedule of Exceptions EXHIBIT A Amended and Restated Certificate of Incorporation EXHIBIT B List of Stockholders EXHIBIT C Investors' Rights Agreement EXHIBIT D Opinion of Counsel for the Company EXHIBIT E Stockholders Agreement ii SERIES A PREFERRED STOCK PURCHASE AGREEMENT ------------------------------------------- THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is made on the 11th day of August, 1999, by and between NetSat Express, Inc., a Delaware corporation (the "Company"), and the investors listed on Schedule A hereto (each, an "Investor" and collectively, the "Investors"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Stock. -------------------------- 1.1. Sale and Issuance of Series A Preferred Stock. --------------------------------------------- (a) The Company shall adopt and file with the Secretary of State of Delaware on or before the Closing (as defined below) the Amended and Restated Certificate of Incorporation in the form attached hereto as Exhibit A (the "Restated Certificate"). (b) Subject to the terms and conditions of this Agreement, each Investor agrees, severally, to purchase at the Closing and the Company agrees to sell and issue to each Investor at the Closing that number of shares of the Company's Series A Preferred Stock, 1,000,000 shares in the aggregate, set forth opposite each Investor's name on Schedule A hereto for the purchase price set forth thereon, for an aggregate purchase price of $5,000,000. 1.2. Closing. The purchase and sale of the Series A Preferred Stock shall take place at the offices of Brobeck, Phleger & Harrison LLP, 1633 Broadway, New York, New York 10019 at 11:00 a.m., on August 11, 1999 or at such other time and place as the Company and each Investor mutually agree upon orally or in writing (which time and place are designated as the "Closing"). At the Closing the Company shall deliver to each Investor a certificate representing the Series A Preferred Stock that such Investor is purchasing against payment of the purchase price therefor by wire transfer. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to each Investor that, except as set forth on a Schedule of Exceptions (the "Schedule of Exceptions") furnished each Investor and counsel for Investors prior to execution hereof and attached hereto as Schedule B, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1. Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own its properties and assets and to carry on it business as now conducted and as presently proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 2.2. Capitalization and Voting Rights. The authorized capital of the Company consists of: 1 (a) Preferred Stock. 4,000,000 shares of Preferred Stock, par value $.001 (the "Preferred Stock"), of which 1,000,000 shares have been designated Series A Participating Preferred Stock (the "Series A Preferred Stock") and all of which will be sold pursuant to this Agreement. The rights, privileges and preferences of the Series A Preferred Stock are stated in the Restated Certificate. (b) Common Stock. 26,000,000 shares of common stock, par value $.001 ("Common Stock"), of which 6,000,000 shares are issued and outstanding and of which 1,000,000 shares will be sold pursuant to the Common Stock Purchase Agreement (the "Common Stock Purchase Agreement") by and between the Company and Globix Corporation (to be executed and closed simultaneously with the Closing). (c) The outstanding shares of Common Stock are owned by the stockholders and in the numbers specified in Exhibit B hereto. (d) The outstanding shares of Common Stock are all duly and validly authorized and issued, fully paid and nonassessable, and were issued in compliance with all applicable state and federal laws concerning the issuance of securities. (e) Except for (i) the conversion privileges of the Series A Preferred Stock to be issued under this Agreement, (ii) dividends payable on the Series A Preferred Stock pursuant to the Restated Certificate, and (iii) currently outstanding options to purchase 877,536 shares of Common Stock granted to employees or consultants pursuant to the Company's 1999 Stock Incentive Plan (the "Option Plan"), there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. In addition to the aforementioned options, the Company has reserved an additional 1,102,464 shares of its Common Stock for purchase upon exercise of options to be granted in the future under the Option Plan. Except as set forth in the Investors' Rights Agreement (as defined below) and the Stockholders Agreement (as defined below), the Company is not a party or subject to any agreement or understanding, and, to the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. 2.3. Subsidiaries. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership, or similar arrangement. 2.4. Authorization. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement dated the date hereof, by and among the Company and the signatories thereto, the form of which is attached hereto as Exhibit C (the "Investors' Rights Agreement"), the Stockholders Agreement dated the date hereof, by and among the Company and the signatories thereto, the form of which is attached hereto as Exhibit E (the "Stockholders Agreement"), and the Common Stock Purchase Agreement, the performance of all obligations of the Company hereunder and thereunder, and the authorization (or reservation for issuance), sale and issuance of the Series A Preferred Stock being sold hereunder, the Common 2 Stock issuable upon conversion of the Series A Preferred Stock and the Common Stock being sold under the Common Stock Purchase Agreement has been taken or will be taken prior to or simultaneously with the Closing. This Agreement and the Investors' Rights Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5. Valid Issuance of Preferred and Common Stock. The Series A Preferred Stock that is being purchased by the Investors hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and will be free of restrictions on transfer, other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Common Stock issuable upon conversion of the Series A Preferred Stock purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Restated Certificate, will be duly and validly issued, fully paid and nonassessable and will be free of restrictions on transfer, other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Common Stock that is being purchased by Globix Corporation under the Common Stock Purchase Agreement, when issued, sold and delivered in accordance with the terms of the Common Stock Purchase Agreement for the consideration expressed therein, will be duly and validly issued, fully paid and nonassessable and will be free of restrictions on transfer, other than restrictions on transfer under the Common Stock Purchase Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. 2.6. Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement or the Common Stock Purchase Agreement, except for filings required pursuant to applicable federal and state securities laws and blue sky laws, which filings will be effected within the required statutory period. 2.7. Offering. Subject in part to the truth and accuracy of Investor's representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the Series A Preferred Stock as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), and the qualification or registration requirements of the applicable blue sky laws. Neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemptions. 2.8. Litigation. There is no action, suit, proceeding or investigation pending, or to the Company's knowledge, currently threatened against the Company that questions the validity of this Agreement or the Common Stock Purchase Agreement or the right of the 3 Company to enter into such agreements or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the business, assets or condition of the Company, financially or otherwise, or any change in the current equity ownership of the Company. There is no material action, suit, proceeding, claim, arbitration or investigation ("Action") pending (or, to the Company's knowledge, currently threatened) against the Company, its activities, properties or assets or, to the Company's knowledge, against any officer, director or employee of the Company in connection with such officer's, director's or employee's relationship with, or actions taken on behalf of, the Company. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate. 2.9. Compliance with Other Instruments. The Company is not in violation of any provision of its Restated Certificate or Bylaws nor, to its knowledge, of any instrument, judgment, order, writ, decree or contract, statute, rule or regulation ("Instruments") to which the Company is subject, except for any violation of an Instrument that individually or in the aggregate would not have a material adverse effect on the condition, financial or otherwise, or operations of the Company. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not result in any violation, or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under the Restated Certificate, Bylaws or any Instrument or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any material permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 2.10. Agreements; Action. (a) Except for agreements explicitly contemplated hereby and except as set forth on the Schedule of Exceptions, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates or any affiliate thereof. (b) Except as set forth on the Schedule of Exceptions, there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to the Company, in excess of $50,000, other than obligations of, or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business, (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company, other than licenses arising from the purchase of "off the shelf" or other standard products, (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights, other than indemnification obligations arising from purchase or sale agreements entered into in the ordinary course of business. (c) Except as set forth on the Schedule of Exceptions, the Company has not (i) declared or paid any dividends or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any 4 other liabilities individually in excess of $100,000 or, in the case of indebtedness and/or liabilities individually less than $100,000, in excess of $200,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than for the purpose of the sale of its services in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. 2.11. Related-Party Transactions. No employee, officer or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. Except as set forth on the Schedule of Exceptions, to the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers or directors of the Company and members of their immediate families may own up to 5% of the stock in publicly traded companies that may compete with the Company. No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. 2.12. Financial Statements. The Company has delivered to each Investor its audited financial statements (balance sheet and statement of operations, statement of stockholders' equity and statement of cash flows, including notes thereto) at June 30, 1999 and 1998, and for the fiscal years then ended (the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to June 30, 1999 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.13. Changes. Since June 30, 1999 there has not been: (a) except as set forth on the Schedule of Exceptions, any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in 5 the Financial Statements, except changes in the ordinary course of business that have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results or business of the Company; (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) except as set forth on the Schedule of Exceptions, any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the assets, properties, financial condition, operating results or business of the Company; (e) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject, except as set forth on the Schedule of Exceptions; (f) any material change in any compensation arrangement or agreement with any employee; or (g) any agreement or commitment by the Company to do any of the things described in this Section 2.13. 2.14. Tax Returns. (a) The Company has filed or caused to be filed, or has properly filed extensions for, all tax returns, reports, forms and other such documents ("Tax Returns") that are required to be filed and has paid or caused to be paid all Taxes as shown on said returns and on all material assessments received by it to the extent that such Taxes have become due, except Taxes the validity or amount of which is being contested in good faith by appropriate proceedings and with respect to which adequate reserves, in accordance with generally accepted accounting principles in effect from time to time ("GAAP"), have been set aside. Such Tax Returns are true and correct in all material respects. The Company has paid or caused to be paid, or has established reserves in accordance with GAAP for all Tax liabilities applicable to the Company for all fiscal years that have not been examined and reported on by the taxing authorities (or closed by applicable statutes). Except as disclosed in the Schedule of Exceptions, no additional Tax assessment against the Company has been heretofore proposed by any Governmental Authority and remains outstanding for which provision has not been made on its balance sheet. Except as set forth on the Schedule of Exceptions, no waivers of the statute of limitation or extension of time within which to assess any Tax have been affirmatively granted by the Company. The Schedule of Exceptions sets forth the tax year through which United States federal income tax returns of the Company have been examined and closed. (b) Except as set forth on the Schedule of Exceptions, with respect to all Tax Returns of the Company, (i) no audit is in progress and no extension of time is in force with respect to any date on which any Tax Return was or is to be filed and no waiver or agreement is in force for the extension of time for the assessment or payment of any Tax; and (ii) there is no unassessed deficiency proposed or to our knowledge threatened against the Company. 6 (c) Except as set forth on the Schedule of Exceptions, the Company has not agreed to make any adjustments under section 481 of the Code that would survive the Closing by reason of a change of accounting method or otherwise prior to Closing. (d) None of the respective assets of the Company is required to be treated as being owned by any Person, other than the Company, pursuant to the "safe harbor" leasing provisions of Section 168(f)(8) of the Code. As used in this Agreement, "Tax" or "Taxes" means any federal, state, county, local, foreign and other taxes (including, without limitation, income, profits, premium, estimated, excise, sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital levy, production, transfer, withholding, employment, unemployment compensation, payroll and property taxes, import duties and other governmental charges and assessments), whether or not measured in whole or in part by net income, and including deficiencies, interest, additions to tax or interest, and penalties with respect thereto, and including expenses associated with contesting any proposed adjustments related to any of the foregoing. As used in this Agreement, "Governmental Authority" means the government of any nation, state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. 2.15. Permits. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the business, properties or financial condition of the Company. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.16. Environmental and Safety Laws. The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.17. Disclosure. The Company has fully provided each Investor with all the information that such Investor has requested for deciding whether to purchase the Series A Preferred Stock. Neither this Agreement (including all the exhibits and schedules hereto) nor any other statements or certificates made or delivered in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading in light of the circumstances under which they were made. 2.18. Business Plan. The Business Plan dated July 1999, previously delivered to each Investor has been prepared in good faith by the Company and does not contain any untrue statement of a material fact nor does it omit to state a material fact necessary to make the statements made therein not misleading, except that with respect to projections contained in the Business Plan, the Company represents only that such projections were prepared in good faith and that the Company reasonably believes there is a reasonable basis for such projections. There 7 has been no material adverse change in the assets, business, properties or financial or other condition of the Company since July 1, 1999 that would cause the Business Plan to no longer be valid. 2.19. Registration Rights. Except as provided in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.20. Corporate Documents; Minute Books. Except for amendments necessary to satisfy representations and warranties or conditions contained herein (the forms of which amendments have been approved by the Investors), the Restated Certificate and Bylaws of the Company are in the form previously provided to counsel for the Investors. The minute books of the Company provided to the Investors contain a complete summary of all meetings of directors and stockholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all material respects. 2.21. Title to Property and Assets. The property and assets the Company owns are owned by the Company free and clear of all mortgages, liens, loans and encumbrances, except (i) as reflected in the Financial Statements, (ii) for statutory liens for the payment of current taxes that are not yet delinquent, and (iii) for liens, encumbrances and security interests that arise in the ordinary course of business and minor defects in title, none of which, individually or in the aggregate, materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in material compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances, subject to clauses (i)-(iii). 2.22. Insurance. The Company has fire and casualty insurance policies with such coverages in amounts (subject to reasonable deductibles) customary for companies similarly situated. 2.23. Employee Benefit Plans. Except as set forth on the Schedule of Exceptions, the Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.24. Labor Agreements and Actions. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the Company's knowledge, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the Company's knowledge, threatened, that could have a material adverse effect on the assets, properties, financial condition, operating results or business of the Company, nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. The employment of each officer and employee of the Company is terminable at the will of the Company. The Company is not a party to or bound by any currently effective employment contract, deferred compensation 8 agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment. 2.25. Status of Intellectual Property. (a) To the Company's knowledge, the Company owns or has sufficient licenses to use all of the material patents, patent applications, registered trademarks, trademark applications, copyright registrations and applications therefor which are necessary for the conduct of the business. Except as set forth on the Schedule of Exceptions: (i) The patents owned by the Company and patent applications (collectively, "Patent Rights") are owned by the Company free and clear of all mortgages, liens, charges or encumbrances whatsoever. No licenses have been granted with respect to the Patent Rights and the Company has not received written notice from any third party claiming that its practice of the inventions covered by the Patent Rights or the patents or patents application licensed to the Company would infringe the patent rights of such third party. (ii) The copyright registrations and pending applications owned by the Company are owned by the Company free and clear of all mortgages, liens, charges or encumbrances whatsoever. Except for licenses granted to end users in accordance with the Company's standard terms, no licenses have been granted with respect to any of the Company's copyrighted material and the Company has not received written notice from any third party claiming that any of its activities in the conduct of its business as presently conducted infringe the copyrights of such third party. (iii) The trademark registrations and pending applications owned by the Company are owned by the Company free and clear of all mortgages, liens, charges or encumbrances whatsoever. No licenses have been granted with respect to any of such trademarks or applications and the Company has not received notice from any third party claiming that any of its activities in the conduct of its business as presently conducted infringe the trademarks, trade names or trade dress of such third party. (b) Except as set forth on the Schedule of Exceptions, all technical information and know-how in possession of the Company 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 the Company free and clear of all mortgages, liens, charges or encumbrances whatsoever. 3. Representations and Warranties of the Investors. Each Investor hereby represents, warrants and covenants that: 3.1. Authorization. Such Investor has full power and authority to enter into this Agreement, the Investors' Rights Agreement and the Stockholders Agreement, and each such agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, 9 moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2. Purchase Entirely for Own Account. This Agreement is made with such Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement Investor hereby confirms, that the Series A Preferred Stock to be received by such Investor and the Common Stock issuable upon conversation thereof (collectively, the "Securities") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Investor has no present intention of selling, granting any participation in or otherwise distributing the same. By executing this Agreement, such Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any Securities. 3.3. Disclosure of Information. Such Investor has received all the information it has requested in deciding whether to purchase the Series A Preferred Stock. Such Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series A Preferred Stock and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of such Investor to rely thereon. 3.4. Investment Experience. Such Investor has invested in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Series A Preferred Stock. 3.5. Accredited Investor. Such Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 3.6. Restricted Securities. Such Investor understands that the Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such Securities may be resold without registration under the Act only in certain limited circumstances. In the absence of an effective registration statement covering the Securities (or the Common Stock issued on conversion thereof) or an available exemption from registration under the Act, the Series A Preferred Stock (and any Common Stock issued on conversation thereof) must be held indefinitely. In this connection, such Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act, including without limitation the Rule 144 condition that current information about the Company be available to the 10 public. Such information is not now available and the Company has no present plans to make such information available. 3.7. Further Limitations on Disposition. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Series A Preferred Stock unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and the Investors' Rights Agreement, and: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if requested by the Company, such Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (c) Notwithstanding the provisions of subsections (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by an Investor to his or her spouse or to the siblings, lineal descendants or ancestors of such partner or his or her spouse ("Family Members") or to a trust established for the benefit of such Investor or Family Member or to a charitable organization, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Investor hereunder. 3.8. Legends. It is understood that the certificates evidencing the Series A Preferred Stock may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." (b) Any legend required by the applicable blue sky laws. 3.9. Tax Advisors. Such Investor has reviewed with such Investor's own tax advisors the federal, state and local tax consequences of this investment, where applicable, and the transactions contemplated by this Agreement. Investor is relying solely on such advisors and not on any statements or representations of the Company or any of its agents and understands that Investor (and not the Company) shall be responsible for Investor's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 3.10. Investor Counsel. Such Investor acknowledges that Investor has had the opportunity to review this Agreement, the exhibits and the schedules attached hereto and the 11 transactions contemplated by this Agreement with Investor's own legal counsel. Investor is relying solely on Investor's legal counsel and not on any statements or representations of the Company or any of the Company's agents, including Brobeck, Phleger & Harrison LLP, for legal advice with respect to this investment or the transactions contemplated by this Agreement. 4. Conditions of Investor's Obligations at Closing. The obligations of each Investor under subsection 1.1(b) of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent thereto: 4.1. Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 4.2. Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing, including, without limitation, adoption and filing with the Secretary of State of the State of Delaware of the Restated Certificate. 4.3. Compliance Certificates. The Chief Executive Officer of the Company shall deliver to each Investor at the Closing a certificate stating that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. The Secretary of the Company shall deliver to each Investor at the Closing a certificate as to the resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement and the Common Stock Purchase Agreement and each exhibit hereto and thereto to which it is a signatory and the consummation of the transactions contemplated herein and therein. 4.4. Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be duly obtained and effective as of the Closing. 4.5. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Investors' counsel, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 4.6. Opinion of Company Counsel. Each Investor shall have received from Brobeck, Phleger & Harrison LLP, counsel for the Company, an opinion, dated as of the Closing, in the form attached hereto as Exhibit D. 4.7. Investors' Rights Agreement. The Company and each Investor shall have entered into the Investors' Rights Agreement in the form attached as Exhibit C. 12 4.8. Contribution Agreement. The Company and Globecomm Systems Inc. shall have entered into the Contribution Agreement and such agreement shall be in full force and effect. 4.9. Stockholders Agreement. The Company and each Investor shall have entered into a Stockholders Agreement in the form attached hereto as Exhibit E. 5. Conditions of the Company's Obligations at Closing. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor: 5.1. Representations and Warranties. The representations and warranties of the Investor contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2. Payment of Purchase Price. The Investor shall have delivered the purchase price specified in Section 1.1(b). 5.3. Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be duly obtained and effective as of the Closing. 5.4. Investors' Rights Agreement. The Company and each Investor shall have entered into the Investors' Rights Agreement in the form attached as Exhibit C. 5.5. Stockholders Agreement. The Company and each Investor shall have entered into a Stockholders Agreement in the form attached hereto as Exhibit E. 6. Miscellaneous. 6.1. Survival. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing for a period of one year and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company. 6.2. Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3. Governing Law. This Agreement shall be governed by and construed under the laws of the State of New York as applied to agreements among New York residents entered into and to be performed entirely within New York. 13 6.4. Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 6.5. Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (iii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the address as set forth on the signature page hereof or at such other address as such party may designate by ten days advance written notice to the other parties hereto. A copy of any notice sent to the Company shall be sent to Luci Staller Altman, Esq., Brobeck, Phleger & Harrison LLP, 1633 Broadway, 47th Floor, New York, New York 10019. A copy of any notice sent to the Investors shall be sent to Laura B. Sherman, Esq., Paul, Weiss, Rifkind, Wharton & Garrison, 1615 L Street, NW Suite 1300, Washington, District of Columbia 20036. 6.6. Finder's Fee. Except as set forth on the Schedule of Exceptions, each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which such Investor or any of its officers, partners, employees or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.7. Expenses. Irrespective of whether the Closing is effected, the Company and the Investors shall pay all costs and expenses that such party incurs with respect to the negotiation, execution, delivery and performance of this Agreement; provided that if the Closing is effected, the Company shall pay the reasonable fees and expenses of one special counsel to the Investors, not to exceed $25,000.00. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Investors' Rights Agreement, the Stockholders Agreement or the Restated Certificate, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.8. Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Common Stock not previously sold to the public that is issued or issuable upon conversion of the Series A Preferred Stock sold pursuant to this Agreement. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Investor, each future holder of all such Securities and the Company. 14 6.9. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 6.10. Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. 6.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. NETSAT EXPRESS, INC. By: /s/: Kenneth A. Miller -------------------------------------------- Kenneth A. Miller, Chief Executive Officer Address: 45 Oser Avenue Hauppauge, NY 11788 INVESTORS: /s/: Gary Gladstein -------------------------------------------- George Soros by Gary Gladstein attorney-in-fact Address: 888 Seventh Avenue New York, New York 10016 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 Subsidiaries of the Registrant NetSat Express, Inc. Delaware Globecomm Systems Europe Limited United Kingdom Note: Globecomm Systems Europe Limited commenced operations subsequent to June 30, 1999. EX-23.1 5 CONSENT OF ERNST & YOUNG LLP. EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-70527) pertaining to the Globecomm Systems Inc. 1997 Stock Incentive Plan and 1999 Employee Stock Purchase Plan of our report dated August 24, 1999, except for the last paragraph of Note 16. Subsequent Events, as to which the date is September 14, 1999, 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, 1999. /s/ Ernst & Young LLP Melville, New York September 28, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 EXHIBIT 27 - FINANCIAL DATA SCHEDULE This schedule contains summary consolidated financial information extracted from the Globecomm Systems Inc. Consolidated Financial Statements, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUN-30-1999 JUN-30-1999 11,944 0 18,147 107 6,419 41,203 14,973 2,289 58,010 21,753 0 0 0 9 36,248 58,010 49,058 49,058 43,516 14,713 0 0 1 (8,192) 0 (8,192) 0 0 0 (8,192) (0.90) (0.90)
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