<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1997
REGISTRATION NO. 333-22425
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
GLOBECOMM SYSTEMS INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3663 11-3225567
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code) Identification Number)
</TABLE>
------------------------
45 OSER AVENUE, HAUPPAUGE, NEW YORK 11788
(516) 231-9800
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
DAVID E. HERSHBERG
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
GLOBECOMM SYSTEMS INC.
45 OSER AVENUE
HAUPPAUGE, NEW YORK 11788
(516) 231-9800
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
RICHARD R. PLUMRIDGE, ESQ. DAVID J. BEVERIDGE, ESQ.
LUCI STALLER ALTMAN, ESQ. SHEARMAN & STERLING
BROBECK, PHLEGER & HARRISON LLP 599 LEXINGTON AVENUE
1633 BROADWAY NEW YORK, NEW YORK 10022
NEW YORK, NEW YORK 10019 (212) 848-4000
(212) 581-1600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 15, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,750,000 SHARES
[LOGO]
COMMON STOCK
-----------------
All of the shares of Common Stock offered hereby (the "Shares") are being
offered by Globecomm Systems Inc. ("GSI" or the "Company").
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company. It is currently anticipated that the initial
public offering price will be between $10.00 and $12.00 per share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. Application has been made to have the Common
Stock approved for quotation on The Nasdaq National Market, subject to official
notice of issuance, under the symbol "GCOM."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 7 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO
THE CONTRARY IS A
CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
Per Share......................... $ $ $
Total............................. $ $ $
Total Assuming Full Exercise of
Over-Allotment Option(3)........ $ $ $
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $1,200,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 412,500 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."
-------------------
The Shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the Shares of Common Stock will be made in New York City on or about
, 1997.
-------------------
PAINEWEBBER INCORPORATED UNTERBERG HARRIS
------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[LOGO]
SYSTEM AND NETWORK INSTALLATIONS
ARTWORK: MAP OF THE WORLD INDICATING LOCATIONS WHERE THE COMPANY HAS COMPLETED
INSTALLATIONS AND WHERE THE COMPANY HAS INSTALLATIONS IN PROGRESS.
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND AN OPINION THEREON
EXPRESSED BY AN INDEPENDENT PUBLIC ACCOUNTING FIRM AND WITH QUARTERLY REPORTS
FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR CONTAINING UNAUDITED INTERIM
CONSOLIDATED FINANCIAL INFORMATION.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE
INFORMATION IN THIS PROSPECTUS: (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION, (II) REFLECTS A 2.85-FOR-ONE STOCK SPLIT OF THE COMMON
STOCK OF THE COMPANY, $.001 PAR VALUE ("COMMON STOCK") PRIOR TO THE CLOSING OF
THIS OFFERING (THE "STOCK SPLIT"), (III) REFLECTS THE FILING, PRIOR TO THE
CLOSING OF THIS OFFERING, OF THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF THE COMPANY AND (IV) REFLECTS THE AUTOMATIC CONVERSION OF ALL
OUTSTANDING SHARES OF ALL SERIES OF THE COMPANY'S CONVERTIBLE CLASS A PREFERRED
STOCK AND CONVERTIBLE CLASS B PREFERRED STOCK (COLLECTIVELY, THE "CONVERTIBLE
PREFERRED STOCK") INTO AN AGGREGATE OF 1,958,001 SHARES OF COMMON STOCK UPON THE
CLOSING OF THIS OFFERING (THE "PREFERRED STOCK CONVERSION").
------------------------
THE COMPANY
Globecomm Systems Inc. ("GSI" or 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. The
Company's customers include prime communications infrastructure contractors,
government-owned postal, telephone and telegraph providers ("PTTs"), other
telecommunications carriers, producers and distributors of news and
entertainment content and other corporations. The Company's ground segment
systems typically consist of an earth station, which is an integrated system
designed to transmit and receive signals to and from satellites, together with
ancillary subsystems. The Company's ground segment networks are typically
comprised of two or more ground segment systems communicating with a satellite
and interconnected with a terrestrial network. Since the Company commenced
operations in August 1994, it has completed, or is in the process of completing,
the installation of 77 ground segment systems and networks in 31 countries.
The Company's revenue grew from $72,000 at the end of its first fiscal year
to $13.5 million for the fiscal year ended June 30, 1996, and to $21.5 million
for the nine months ended March 31, 1997. During the nine months ended March 31,
1997, the Company booked $37.5 million in contract orders and at March 31, 1997
had a backlog of $27.6 million of contract orders. Based on preliminary
unaudited year-end results, the Company estimates that revenue for the fiscal
year ended June 30, 1997 was approximately $36.2 million. During the fiscal year
ended June 30, 1997 the Company booked approximately $65.4 million in contract
orders, and at June 30, 1997 the Company had a backlog of approximately $40.8
million of contract orders. See "--Preliminary Financial Results." The Company
believes that its revenue growth and its ability to compete are based on its
unique combination of competitive advantages which include: (i) an experienced
management group with extensive technological and engineering expertise, (ii)
the proven ability to meet the complex satellite ground segment requirements of
its customers in diverse political, economic and regulatory environments in
various locations around the world and (iii) its ability to identify, develop
and maintain strategic relationships with developers and suppliers of
leading-edge technologies which enhance performance, reduce costs and broaden
applications of the Company's ground segment systems and networks. An industry
source has recently reported that the Company ranks among the world's seven
major manufacturers-suppliers of large ground segment systems for fixed
telecommunications and currently ranks second behind the industry leader, which
has 50% of this market.
The Company has recently established a subsidiary, NetSat Express, Inc.
("NetSat"), to develop service revenues by providing high-speed,
satellite-delivered data communications to developing markets worldwide. In
order to accomplish this objective, NetSat intends to leverage: (i) the
Company's expertise in satellite ground segment system and network
implementation, (ii) extensive management experience in providing
satellite-delivered communications services, (iii) the knowledge and
capabilities of local market strategic partners and (iv) DirecPC and Personal
Earth Station technology developed and owned by Hughes Network Systems, Inc., a
subsidiary of Hughes Electronics Corp. ("Hughes Network Systems" or "HNS"). Each
project for which NetSat uses HNS' DirecPC technology will require the grant of
a license from HNS to NetSat. NetSat currently is pursuing a joint venture with
local partners in Russia to market
3
<PAGE>
low-cost, high-speed satellite Internet access services, as well as intranet
services, to corporate, educational and government customers who have limited or
no access to terrestrial network infrastructure capable of supporting the
economical delivery of such services. To date, NetSat has generated only limited
revenues.
According to Federal Communications Commission (the "FCC") estimates,
providers of satellite-delivered communications services generated approximately
$13.8 billion in revenues in 1995, which amount is projected to grow at a
compound annual rate of 21% to approximately $37.0 billion in 2000. The Company
believes this expected growth in satellite communications services will require
significant investment in new ground segment system and network infrastructure.
Based on industry sources, the markets for ground segment systems and networks
in which the Company competes had aggregated revenues of approximately $1.6
billion in 1996 and are projected to grow at a compound annual rate of
approximately 11% to revenues of approximately $2.5 billion by the year 2000.
Although there are currently no reliable data available on the market for
satellite-delivered Internet and intranet applications in developing countries,
a market in which the Company participates through NetSat, the Company believes
such market has potential for rapid growth. The FCC has estimated that
satellite-delivered data communications services accounted for approximately
$1.3 billion of service revenues worldwide in 1995 and that this amount will
grow at a compound annual rate of approximately 26% to revenues of approximately
$4.2 billion in 2000.
The Company believes that the growth in demand for ground segment
infrastructure is principally a result of the following major factors: (i)
global deregulation and privatization of government-owned monopoly
telecommunications carriers and the emergence of competitive carriers, each of
which is driving capital investment, (ii) rapidly growing worldwide demand for
communications services generally, including data communications services over
the Internet and corporate intranets, (iii) relative cost-efficiency of
satellite communications for many applications and (iv) technological
advancements which reduce costs and increase capacity, thereby broadening
applications for both satellite and terrestrial networks.
The Company's business strategy is to expand its market share in its ground
segment systems and networks business, improve its profitability and create
opportunities to capture recurring service revenues. The Company intends to
execute this strategy by: (i) targeting communications infrastructure
development opportunities worldwide, (ii) focusing on high margin
engineering-intensive ground segment system and network projects, (iii)
developing strategic customer relationships, (iv) developing strategic supplier
relationships and (v) entering the satellite-delivered data communications
services business through NetSat.
The Company seeks to build close relationships with customers for whom it
can provide complementary engineering skills by working as part of their system
development teams. A key objective of this strategy is to obtain this business
on a negotiated basis, rather than through the competitive bidding process,
which is likely to carry a lower margin. To date, the Company has developed
strategic relationships with two of its customers: Hughes Network Systems and
Thomson-CSF ("Thomson"). The Company sought the establishment of these
relationships based on these customers' abilities to: (i) generate significant
potential revenues for the Company, (ii) provide access to a large number of
potential business opportunities as a result of their size and global operations
and (iii) provide access to complementary technologies and expertise that could
serve as competitive advantages for the Company. At June 30, 1997, Hughes
Network Systems and Thomson owned equity interests in the Company of 3.7% and
6.3%, respectively. In addition, Hughes Network Systems owns a 19.0% equity
stake in NetSat, with an option to increase this position to 29.0%.
In addition to its strategic customer relationships, the Company also seeks
to develop strategic relationships with suppliers, each of which it believes is
in a position to supply products, technologies or services which will improve
the Company's competitive position in one or more of the market segments it
serves. As of June 30, 1997, the Company has made equity investments aggregating
approximately $1.0 million in three such companies. These suppliers enable the
Company to outsource a significant portion of its research and development
efforts and gain access to advanced technology while the Company continues its
independence to select the most suitable products and technologies to deliver to
its customers from any suppliers.
4
<PAGE>
PRELIMINARY FINANCIAL RESULTS
The Company estimates, based on preliminary unaudited results which are
subject to revision by the Company, that revenue increased 168.8% to
approximately $36.2 million for the fiscal year ended June 30, 1997 from $13.5
million for the fiscal year ended June 30, 1996. The Company booked
approximately $65.4 million in contract orders during the fiscal year ended June
30, 1997 compared to $17.4 million in contract orders booked during the fiscal
year ended June 30, 1996 and at June 30, 1997, the Company had a backlog of
approximately $40.8 million of contract orders compared to a backlog of $11.6
million of contract orders at June 30, 1996. Net loss increased 18.9% to
approximately $2.7 million for the fiscal year ended June 30, 1997, with
approximately $1.4 million of this net loss attributable to NetSat expenses,
from $2.2 million for the fiscal year ended June 30, 1996. No assurance can be
given that the audited results for the fiscal year ended June 30, 1997 will be
the same as the preliminary estimated results presented above.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 2,750,000 shares
Common Stock to be outstanding after the
Offering(1)................................ 8,584,038 shares
Use of Proceeds.............................. Working capital, capital expenditures,
investments in strategic suppliers, start-up
expenses and investments associated with
NetSat, potential acquisitions and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... GCOM
</TABLE>
- ------------------------------
(1) Based on the number of shares outstanding as of March 31, 1997. Excludes
1,669,032 shares of Common Stock issuable upon the exercise of stock options
outstanding at March 31, 1997. Also excludes 64,125 shares of Common Stock
issuable upon exercise of warrants. See "Capitalization," "Management--1997
Stock Incentive Plan" and Notes 6 and 8 of Notes to Consolidated Financial
Statements.
------------------------------
The Company was incorporated in Delaware on August 17, 1994. The Company's
principal executive offices are located at 45 Oser Avenue, Hauppauge, New York
11788, and its telephone number is (516) 231-9800.
------------------------
THIS PROSPECTUS 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 PROSPECTUS. THE COMPANY HAS RECENTLY CHANGED ITS NAME FROM
WORLDCOMM SYSTEMS INC. TO GLOBECOMM SYSTEMS INC.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
AUGUST 17, 1994 ENDED
(INCEPTION) MARCH 31,
THROUGH JUNE 30, YEAR ENDED --------------------
1995 JUNE 30,1996 1996 1997
----------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
(unaudited)
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 72 $ 13,476 $ 10,518 $ 21,532
Costs of revenues........................................... 58 11,238 8,437 18,736
------- ------------- --------- ---------
Gross profit.......................................... 14 2,238 2,081 2,796
------- ------------- --------- ---------
Operating expenses:
Selling and marketing..................................... 346 1,915 1,253 2,216
Research and development.................................. -- 712 488 352
General and administrative................................ 772 1,945 1,432 2,534
------- ------------- --------- ---------
Total operating expenses.................................... 1,118 4,572 3,173 5,102
------- ------------- --------- ---------
Loss from operations.................................. (1,104) (2,334) (1,092) (2,306)
Interest income, net........................................ 39 89 81 187
------- ------------- --------- ---------
Loss before minority interests in operations of consolidated
subsidiary................................................ (1,065) (2,245) (1,011) (2,119)
Minority interests in operations of consolidated
subsidiary................................................ -- -- -- 275
------- ------------- --------- ---------
Net loss.............................................. $ (1,065) $ (2,245) $ (1,011) $ (1,844)
------- ------------- --------- ---------
------- ------------- --------- ---------
Pro forma net loss per share (unaudited)(1)................. $ (.41) $ (.30)
------------- ---------
------------- ---------
Shares used in computing pro forma net loss per share
(unaudited)(1)............................................ 5,542,135 6,052,910
------------- ---------
------------- ---------
OTHER OPERATING DATA:
EBITDA(2)................................................... $ (1,036) $ (2,142) $ (932) $ (2,041)
Cash flows used in operating activities..................... (454) (2,510) (2,643) (4,450)
Cash flows used in investing activities..................... (593) (1,714) (1,275) (5,203)
Cash flows provided by financing activities................. 4,554 4,151 1,675 12,527
Capital expenditures........................................ 437 339 287 3,965
Backlog at end of period(3)................................. 7,716 11,588 7,266 27,563
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED(4)
--------- ---------------
BALANCE SHEET DATA:
Cash and cash equivalents................................................................ $ 6,309 $ 33,242
Working capital.......................................................................... 10,820 37,753
Total assets............................................................................. 23,716 50,649
Long-term debt........................................................................... 33 33
Stockholders' equity..................................................................... 16,550 43,483
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
(2) EBITDA represents earnings before minority interests in operations of
consolidated subsidiary, interest income, net, income taxes, depreciation
and amortization expense. EBITDA does not represent cash flows as defined by
generally accepted accounting principles and does not necessarily indicate
that cash flows are sufficient to fund all the Company's cash needs. EBITDA
is a financial measure commonly used in the Company's industry and should
not be considered in isolation or as a substitute for net income, cash flows
from operating activities or other measures of liquidity determined in
accordance with generally accepted accounting principles. EBITDA may not be
comparable to other similarily titled measures of other companies.
(3) The Company records an order in backlog when it receives a firm contract or
purchase order which identifies product quantities, sales price and delivery
dates. Backlog represents the amount of unrecorded revenue on undelivered
orders and a percentage of revenues from sales of products that have been
shipped but have not been accepted by the customer. The Company's backlog at
any given time is not necessarily indicative of future period revenues. See
"Business--Backlog."
(4) Adjusted to reflect the sale of 2,750,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $11.00 per share,
after deducting underwriting discounts and commissions and estimated
Offering expenses payable by the Company.
------------------------------
Globecomm, GSI, NetSat Express and NetSat are trademarks of the Company.
This Prospectus also includes trademarks and trade names of Hughes Network
Systems and other companies.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED HEREBY.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company, which was formed in August 1994, has a limited operating
history upon which an evaluation of the Company and its prospects can be based
and has incurred significant operating losses since its inception. The Company
has financed its operations to date primarily from the sale of equity securities
and, to a lesser degree, from stockholder loans. The Company generated its first
revenue from its ground segment systems and networks business in June 1995 and
has generated only minimal revenues from its satellite-delivered data
communications services business, which commenced operations in July 1996. The
Company incurred operating losses of $1.1 million, $2.3 million and $2.3 million
during the fiscal years ended June 30, 1995 and 1996 and during the nine-month
period ended March 31, 1997, respectively, and currently anticipates that it
will incur further operating losses as it attempts to expand its business. The
Company's ability to expand its 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
positive operating or net income. As of March 31, 1997, the Company had an
accumulated deficit of $5.2 million. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview" and "--Liquidity and
Capital Resources."
INTENSE COMPETITION; LIMITED BARRIERS TO ENTRY
The markets for both ground segment systems and networks and
satellite-delivered data communications services are highly competitive. Many of
the Company's competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to the Company. As a result, such competitors may be able
to develop and expand their products and services more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products and services than
can the Company. In addition, there are limited barriers to entry in the
Company's markets and certain of the Company's strategic suppliers and customers
have technologies and capabilities in the Company's product areas and could
choose to compete with the Company or to replace the Company's products or
services with their own. The entry of new competitors, the decision by a
strategic ally to compete with the Company or the decision by a customer to
develop and employ in-house capability to satisfy its satellite communications
needs could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Competition."
There can be no assurance that the Company's competitors will not develop or
acquire competing products or that such products will not be offered at
significantly lower prices. In addition, current and potential competitors in
both markets in which the Company competes have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products and services to address the needs of the Company's
current and prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced gross profit margins and loss of market share, any of which
would have a material adverse effect on the Company's business, results of
operations and financial condition. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business-- Competition."
7
<PAGE>
The Company also is dependent on the continued success and development of
the satellite communications industry, which itself competes with other
technologies such as terrestrial microwave, copper wire
and fiber optic communications systems. Any failure of the satellite
communications industry to continue to develop, or any technological development
which significantly improves the capacity, cost or efficiency of such competing
systems relative to satellite systems, could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"--Rapid Industry Change; Technological Obsolescence."
RELIANCE ON STRATEGIC RELATIONSHIPS
The Company is dependent on certain customers and suppliers for the
development and expansion of its ground segment system and network business.
However, such relationships are not governed by any contract and accordingly
neither the Company nor such customers or suppliers are obligated to maintain
such strategic relationships. There can be no assurance that the Company will be
able to maintain such strategic relationships, that its strategic customers and
suppliers will continue to assist the Company by developing and expanding its
business and by providing research and development expertise, or that such
strategic customers and suppliers will not actually compete with the Company in
the future. See "--Intense Competition; Limited Barriers to Entry."
In addition, the Company relies on the Personal Earth Station and DirecPC
technologies provided by Hughes Network Systems in connection with the planned
operation of NetSat's satellite-delivered data communications services business.
Each project for which NetSat uses HNS' DirecPC technology will require the
grant of a license from HNS to NetSat. Hughes Network Systems is under no
obligation to grant such licenses and there can be no assurance that NetSat will
be able to negotiate such licensing arrangements with Hughes Network Systems on
acceptable terms, or at all. In addition, failure to maintain a business
relationship with Hughes Network Systems would have a material adverse effect on
the Company's business, financial condition and results of operations.
Because the Company intends to provide its satellite-delivered data
communications services almost entirely in developing markets where the Company
has little or no market experience, the Company will also be dependent on local
partners in such markets to provide marketing expertise and knowledge of the
local regulatory environment in order to facilitate the acquisition of necessary
licenses and access to existing customers. The Company has not yet formally
established an alliance with a local partner. The Company's failure to form and
maintain such alliances with local partners, or the preemption or disruption of
such alliances by the actions of the Company's competitors or otherwise, would
adversely affect the Company's ability to penetrate and compete successfully in
such emerging markets. There can be no assurance that the Company will be able
to compete successfully in the future in such markets or that competition will
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Strategic Relationships" and
"--Competition."
RISK OF CUSTOMER CONCENTRATION
The Company typically relies upon a small number of customers for a large
portion of its revenues. For example, based on preliminary year-end unaudited
results approximately 29% and 12% of the Company's revenues in fiscal 1997 were
derived from sales to American Sky Broadcasting LLC ("ASkyB") and Hughes Network
Systems. At June 30, 1997, based on preliminary year-end unaudited results $20.8
million, or approximately 51% of the Company's backlog, was accounted for by a
contract between the Company and Sonangol, U.E.E. and $5.0 million, or
approximately 12% of the Company's backlog, was accounted for by a contract
between the Company and ASkyB. 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. See "Business--Customers."
8
<PAGE>
RISK OF MANAGEMENT OF RAPID GROWTH
The Company has been significantly and rapidly expanding its operations
since its inception. In order to pursue successfully the opportunities presented
by the ground segment and emerging satellite-delivered communications and
Internet/intranet-infrastructure markets, the Company will be required to
continue to expand its operations. Such expansion has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management,
financial and other resources. In order to manage any future growth effectively,
the Company will, among other things, be required to attract, train, motivate
and manage a significantly larger number of employees successfully to conduct
product engineering and management, product implementation, sales activity and
customer support activities; manage higher working capital requirements; and
improve its operating and financial systems. Any failure to manage any future
growth in an efficient manner and at a pace consistent with the Company's
business could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview,"
"Business--Product Design, Assembly and Testing," "--Facilities" and
"--Employees."
RISK OF FIXED-PRICE CONTRACTS
Virtually all of the Company's contracts for installation of ground segment
systems and networks are on a fixed-price basis. Profitability of such contracts
is subject to inherent uncertainties as to the cost of performance. In addition
to possible errors or omissions in making initial estimates, cost overruns may
be incurred as a result of unforeseen obstacles, including both physical
conditions and unexpected problems encountered in engineering, design and
testing. Since the Company's business may at certain times be concentrated in a
limited number of large contracts, a significant cost overrun on any one
contract could have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Customer Concentration."
INHERENT RISK OF INTERNATIONAL OPERATIONS
Most of the Company's revenues are derived from sales to customers outside
the United States. Revenues from foreign sales accounted for 21.8% and 50.0% of
total revenues in fiscal 1996 and the nine-month period ended March 31, 1997,
respectively, and 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, a decrease in the value of foreign currencies relative to the U.S.
dollar may adversely affect demand for the Company's products and services by
increasing the price of the Company's products and services in the currency of
the countries in which they are sold. Additional risks inherent in the Company's
international business activities include various and changing regulatory
requirements, costs and risks of relying upon local subcontractors for the
installation of its ground segment systems and networks, increased sales and
marketing expenses, availability of export licenses, tariffs and other trade
barriers, political and economic instability, difficulties in staffing and
managing foreign operations, potentially adverse taxes, complex foreign laws and
treaties and the possibility of difficulty in accounts receivable collections.
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.
EMPHASIS ON DEVELOPING MARKETS; UNCERTAIN MARKET POTENTIAL
The Company believes a substantial portion of the growth in demand for its
ground segment systems and networks and its recently launched
satellite-delivered data communications services will come from customers in
developing countries. There can be no assurance that such increases in demand
will occur or that prospective customers will accept such products and services
in sufficient quantities or at all. The degree to which the Company is able to
penetrate potential markets in developing countries will be affected in major
part by the speed with which other competing elements of the communications
9
<PAGE>
infrastructure, such as telephone lines, other satellite-delivered solutions and
fiber optic cable and television cable, are installed in the developing
countries and with respect to the Company's data communications services, on the
effectiveness of the Company's local partners in such markets. The failure to
have its products and services accepted in developing countries would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "--Intense Competition; Limited Barriers to Entry"
and "--Reliance on Strategic Relationships."
RAPID INDUSTRY CHANGE; TECHNOLOGICAL OBSOLESCENCE
The telecommunications industry, including the satellite communications
ground segment systems and networks and data communication services businesses,
is characterized by rapid and continuous technological change. Future
technological advances in the telecommunications industry may result in the
availability of new products or services that could compete with the satellite
ground segment products and services provided by the Company or render the
Company's products and services obsolete. There can be no assurance that the
Company will be successful in developing and introducing new products and
services that meet changing customer needs or in responding to technological
changes or evolving industry standards in a timely manner, if at all, or that
services or technologies developed by others will not render the Company's
products or services noncompetitive. Any failure by the Company to respond to
changing market conditions, technological developments, evolving industry
standards or changing customer requirements, or the development of competing
technology or products that render the Company's products and services
noncompetitive or obsolete would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Research
and Development" and "-- Competition."
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company currently procures most of the critical components and services
for its products from single or limited sources in connection with specific
contracts and does not otherwise carry significant inventories or have long-term
or exclusive supply contracts with its source vendors. The Company has from time
to time experienced delays in receiving products from certain of its vendors due
to quality control or manufacturing problems, shortages of materials or
components or product design difficulties. There can be no assurance that
similar problems will not recur or that replacement products will be available
when needed at commercially reasonable rates, or at all. If the Company were to
change certain of its vendors, the Company would be 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," "--Quarterly Fluctuations" and "Business--Product Design, Assembly
and Testing."
QUARTERLY FLUCTUATIONS
The Company may in the future 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, the demand for the Company's products
and services, the introduction of new or enhanced products and services by the
Company or its competitors, market acceptance of new products and services, the
mix of revenues between custom-built satellite communications systems and
networks designed for its customers and standard installations provided to its
customers, the growth of demand for Internet infrastructure-based products and
services in developing countries, the timing of significant marketing programs,
the extent and timing of the hiring of additional personnel, competitive
conditions in the industry and general economic conditions. 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
10
<PAGE>
and investors. Such an event could have a material adverse effect on the price
of the Company's Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Quarterly Results."
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 intends to erect a teleport in
Hauppauge, New York, which will be subject to FCC Rules and Regulations. The
Company will be required to obtain a license from the FCC for both domestic and
international operation of the teleport and must operate it in compliance with
FCC Rules and Regulations for the term of the license. There can be no assurance
that the Company will be able to obtain or maintain the necessary license. See
"Business--Government Regulation."
Under the FCC Rules and Regulations, non-U.S. citizens or their
representatives, foreign governments, or corporations otherwise subject to
control by non-U.S. citizens, may not own more than 20% of a licensee directly,
or, if the FCC finds it consistent with the public interest, may not own more
than 25% of the parent of a licensee. Non-U.S. citizens may not serve as
officers of a licensee or as members of a licensee's board of directors,
although the FCC may waive this requirement in whole or in part. Failure to
comply with these requirements may result in the FCC issuing an order to the
entity requiring divestiture of alien ownership to bring the entity into
compliance with the FCC Rules and Regulations. In addition, fines, a denial of
renewal or revocation of the license are possible. The Company has no knowledge
of any present foreign ownership which would result in a violation of the FCC
Rules and Regulations, but there can be no assurance that foreign holders will
not in the future hold more than 20% or 25% of the Common Stock of the Company.
Regulatory schemes in countries in which the Company may seek to provide its
satellite-delivered data communications services may impose impediments on the
Company's operations. Certain countries in which the Company intends to operate
have telecommunications laws and regulations that do not currently contemplate
technical advances in broadcast technology such as Internet/intranet
transmission by satellite. There can be no assurance that the present regulatory
environment in any such country will not be changed in a manner which may have a
material adverse impact on the Company's business. The Company or its local
partners typically must obtain authorization for each country in which the
Company provides its satellite-delivered data communications services. Although
the Company believes that it or its local partners will be able to obtain the
requisite licenses and approvals from the countries in which the Company intends
to provide service, the regulatory schemes in each country are different and
thus there may be instances of noncompliance of which the Company is not aware.
Although the Company believes these regulatory schemes will not prevent the
Company from pursuing its business plan, there can be no assurance such licenses
and approvals are or will remain sufficient in the view of foreign regulatory
authorities, or that necessary licenses and approvals will be granted on a
timely basis in all jurisdictions in which the Company wishes to offer its
services or that restrictions applicable thereto will not be unduly burdensome.
See "Business--Government Regulation."
The sale of the Company's ground segment systems and networks outside the
United States is subject to compliance with the regulations of the United States
Export Administration Regulations. The absence of comparable restrictions on
competitors in other countries may adversely affect the Company's competitive
position. In addition, in order to ship its products into European Union
countries, the Company must satisfy certain technical requirements. If the
Company were unable to comply with such requirements with respect to a
significant quantity of the Company's products, the Company's sales in Europe
could be restricted, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Government Regulation."
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
11
<PAGE>
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
$500,000 for each of Messrs. Miller, DiCicco, Woodring, Yablonski and Melfi, all
of whom are officers of the Company. The Company believes that its future
success also will depend significantly upon its ability to attract, motivate and
retain additional highly skilled technical, managerial and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, assimilating and retaining the
personnel it requires to grow and operate profitably. See "Management--Directors
and Executive Officers and Other Key Employees" and "Business--Employees."
PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
The Company relies heavily on the technological and creative skills of its
personnel, new product developments, computer programs and designs, frequent
product enhancements, reliable product support and proprietary technological
expertise in maintaining its competitive position, and lacks patent protection
for its products and services. There can be no assurance that others will not
independently develop or acquire substantially equivalent techniques or
otherwise gain access to the Company's proprietary and confidential
technological expertise or disclose such technologies or that the Company can
ultimately protect its rights to such proprietary technological expertise.
The Company generally relies on confidentiality agreements with its
consultants, key employees and sales representatives to protect its proprietary
technological expertise, and generally controls access to and distribution of
its technology, software and other proprietary information. Despite these
precautions, there can be no assurance that such agreements will not be
breached, that the Company will have adequate remedies for any such breach or
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.
See "Business--Intellectual Property."
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 patent applications pending in the United
States and a Patent Cooperation Treaty ("PCT") application, corresponding to one
of the United States applications, is pending in a number of foreign
jurisdictions. The Company also intends to seek further patents on its
technology, if appropriate. 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
12
<PAGE>
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 of NetSat in the United States, Singapore,
the European Union, the Russian Federation and Brazil, and intends to seek
registration of other trademarks in the future. There can be no assurance that
registrations will be granted from any of the Company's pending or future
applications, or that any registrations that are granted to the Company will
prevent others from using similar trademarks in connection with related goods
and services.
RISK OF CONCENTRATED OWNERSHIP
Upon completion of this Offering, the Company's officers and directors, and
their affiliates, will beneficially own approximately 2,352,571 shares,
constituting approximately 26.7% 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. See "Management" and "Principal Stockholders."
RISK OF SALES OF COMMON STOCK UPON EXPIRATION OF RULE 144 HOLDING PERIOD AND
LOCK-UP AGREEMENTS
Sales of substantial numbers of shares of Common Stock in the public market
after this Offering could adversely affect the market price of the Common Stock.
Upon completion of this Offering, the Company will have outstanding 8,584,038
shares of Common Stock. In addition to the 2,750,000 shares of Common Stock
offered hereby, as of the effective date of the Registration Statement of which
this Prospectus forms a part (the "Effective Date"), there will be 5,834,038
shares of Common Stock outstanding, all of which are "restricted securities"
under the Securities Act. Certain stockholders of the Company are subject to
lock-up agreements providing generally that they will not offer to sell, sell,
contract to sell, grant any option to sell or otherwise dispose of any shares of
Common Stock or any securities convertible or exchangeable into Common Stock for
a period of 180 days after the date of this Prospectus (the "Lock-Up Period")
without the prior written consent of PaineWebber Incorporated which may be given
at any time, without notice, with respect to all or any portion of such shares.
Certain other stockholders of the Company are subject to lock-up agreements
providing generally that they will not offer to sell, sell, contract to sell,
grant any option to sell or otherwise dispose of any shares of Common Stock or
any securities convertible into or exchangeable for Common Stock for a period of
270 days after the date of this Prospectus (the "270-Day Lock-Up Period")
without the prior written consent of PaineWebber Incorporated which may be given
at any time, without notice, with respect to all or any portion of such shares.
Taking into account the lock-up agreements and notwithstanding possible earlier
eligibility for resale under the provisions of Rules 144 and 701, the numbers of
shares that will be available for sale in the public market will be as follows.
Beginning 90 days after the Effective Date, approximately 435,035 shares of
restricted securities will become eligible for resale in the public market
(including approximately 345,972 shares issuable upon exercise of vested
options). Upon the expiration of the Lock-Up Period, or earlier upon the consent
of PaineWebber Incorporated, approximately 4,420,367 additional shares of
restricted securities (including approximately 142,290 additional shares
issuable upon exercise of vested options) will be eligible for sale in the
public market and, as of that date, approximately 2,536,950 of such shares will
be subject to certain volume and other resale restrictions pursuant to Rule 144
and approximately 1,740,927 of such shares will be eligible for sale without
restriction under Rule 144(k). Upon the expiration of the 270-Day Lock-Up
Period, or earlier upon the consent of PaineWebber Incorporated, approximately
1,495,979 additional shares of restricted securities (including approximately
82,691 additional shares issuable upon exercise of vested options) will be
eligible for sale in the public market and, as of that date, approximately
1,413,288 of such shares will be subject to certain and other resale
restrictions pursuant to Rule 144 of which none of such shares will be eligible
for sale without restriction under Rule 144(k).
13
<PAGE>
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the Offering. The initial public
offering price will be determined by negotiations between the Company and the
representatives of the Underwriters based upon several factors and may not be
indicative of future market prices. 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" and "Underwriting."
MANAGEMENT'S DISCRETION OVER APPLICATION OF PROCEEDS OF THE OFFERING
The Company has no specific plan for the net proceeds of this Offering other
than to fund capital expenditures and investments, NetSat and for general
working capital purposes. As a consequence, the Company's management will have
broad discretion over the allocation of the proceeds for the foreseeable future.
Pending any such uses, the Company plans to invest the net proceeds in
investment-grade, interest-bearing securities. See "Use of Proceeds."
POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, up to 1,000,000 shares of Preferred Stock with
voting, conversion and other rights and preferences that could adversely affect
the voting power or other rights of the holders of Common Stock. In addition,
the Company will be subject to the provisions of Section 203 of the Delaware
General Corporation Law, which will generally prohibit the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The foregoing and other provisions of the Certificate of
Incorporation and the Company's By-laws, as amended (the "By-laws") and the
application of Section 203 of the Delaware General Corporation Law could have
the effect of deterring certain takeovers or delaying or preventing certain
changes in control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices. See "Description of Capital Stock--Preferred Stock" and
"--Delaware Anti-takeover Statute."
SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
investment from the initial public offering price. Additional dilution will
occur upon exercise of outstanding options, warrants and preemptive rights. In
addition, Thomson is entitled to receive shares of Common Stock equal to 1% of
the Company's Common Stock outstanding upon the acceptance by the Company of
each of the next four $3.0 million of orders placed by Thomson with the Company
through May 1998. See "Dilution" and "Business--Strategic Relationships--
Thomson-CSF."
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on the Common Stock and does
not anticipate paying any cash dividends in the foreseeable future, but instead
intends to retain earnings, if any, for use in the Company's operations and in
the expansion of its business. See "Dividend Policy."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
approximately $26.9 million ($31.2 million if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$11.00 per share and after deducting underwriting discounts and commissions and
estimated Offering expenses.
The Company anticipates that approximately $6.0 million of the net proceeds
from this Offering will be used to fund capital expenditures and investments in
strategic suppliers, including the exercise of certain stock purchase options.
Approximately $3.0 million of the net proceeds will be used to fund start-up
expenses and investments in potential international joint ventures associated
with NetSat. The remainder of the net proceeds will be used to fund working
capital requirements, increased selling and marketing efforts, increased
internal research and development expenses, potential acquisitions of
complementary businesses, products or technologies, although there are no
current agreements or negotiations with respect to any such transactions, and
for general corporate purposes.
Pending such uses, the net proceeds will be invested in short-term debt
instruments, certificates of deposit or direct or guaranteed obligations of the
United States.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital stock
since inception and does not expect to pay dividends in the foreseeable future.
The Company presently intends to retain future earnings, if any, to finance the
expansion of its business. The payment of any cash dividends in the future will
depend on the Company's earnings, financial condition, results of operations,
capital needs, and other factors deemed pertinent by the Company's Board of
Directors, subject to laws and regulations then in effect.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997: (i) on a pro forma basis to give effect to the Stock Split, the
Preferred Stock Conversion and the authorization of additional shares of Common
Stock and Preferred Stock, $.001 par value and (ii) on a pro forma as adjusted
basis to give effect to the sale by the Company of 2,750,000 shares of Common
Stock at an assumed initial public offering price of $11.00 per share, after
deducting underwriting discounts and commissions and estimated Offering
expenses, and the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents, including restricted cash of $1.5 million.............. $ 7,800 $ 34,733
----------- -----------
----------- -----------
Long-term debt, including current portion......................................... $ 83 $ 83
Stockholders' equity:
Preferred Stock, $.001 par value, 3,000,000 shares authorized; none issued and
outstanding on a pro forma or pro forma as adjusted basis..................... -- --
Common Stock, $.001 par value, 22,000,000 shares authorized; 5,834,038 shares
issued and outstanding on a pro forma basis; and 8,584,038 shares issued and
outstanding on a pro forma as adjusted basis(1)............................... 6 9
Additional paid-in capital........................................................ 21,698 48,628
Accumulated deficit............................................................... (5,154) (5,154)
----------- -----------
Total stockholders' equity.................................................... 16,550 43,483
----------- -----------
Total capitalization........................................................ $ 16,633 $ 43,566
----------- -----------
----------- -----------
</TABLE>
- ------------------------------
(1) Based on the number of shares outstanding as of March 31, 1997. Excludes
1,669,032 shares of Common Stock issuable upon the exercise of stock options
outstanding at March 31, 1997 with a weighted average exercise price of
$5.89 per share. At March 31, 1997, 610,968 shares of Common Stock were
available for issuance under the Company's stock option plans. Also excludes
64,125 shares of Common Stock issuable upon exercise of warrants, all with
an exercise price of $8.07 per share. See "Capitalization,"
"Management--1997 Stock Incentive Plan" and Notes 6 and 8 of Notes to
Consolidated Financial Statements.
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997
was approximately $16.4 million or $2.82 per share of Common Stock. "Pro forma
net tangible book value per share" is equal to the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding and gives effect to the Stock Split and the Preferred Stock
Conversion. After giving effect to the sale by the Company of 2,750,000 shares
of Common Stock in this Offering (at an assumed initial public offering price of
$11.00 per share) and after deducting the estimated underwriting discounts and
Offering expenses, the pro forma net tangible book value of the Company as of
March 31, 1997 would have been $43.4 million or $5.05 per share of Common Stock.
This represents an immediate increase in pro forma net tangible book value per
share of $2.23 to existing holders and immediate dilution in pro forma net
tangible book value of $5.95 per share to new investors. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $ 11.00
Pro forma net tangible book value before the
Offering............................................. $ 2.82
Increase attributable to new investors................. 2.23
---------
Pro forma net tangible book value after the Offering..... 5.05
---------
Dilution per share to new investors...................... $ 5.95
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by investors purchasing shares offered by the Company hereby (at an assumed
initial public offering price of $11.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. 5,834,038 68.0% $ 25,497,513 45.7% $ 4.37
New investors...................................... 2,750,000 32.0 30,250,000 54.3 $ 11.00
------------ ----- ------------- -----
Total.......................................... 8,584,038 100.0% $ 55,747,513 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The foregoing is based on the number of shares outstanding as of March 31,
1997 and assumes no exercise of any outstanding options or warrants. At March
31, 1997, there were outstanding options to purchase an aggregate of 1,669,032
shares at a weighted average exercise price of $5.89 per share. Additionally, on
March 31, 1997 there were outstanding warrants which may be exercised for up to
64,125 shares of Common Stock at a price of $8.07 per share. Additional dilution
will occur upon exercise of the outstanding warrants or options. See
"Management--1997 Stock Incentive Plan" and Notes 6 and 8 of Notes to
Consolidated Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus. The consolidated statement
of operations data for the period from the Company's inception on August 17,
1994 through June 30, 1995 and for the fiscal year ended June 30, 1996, and the
balance sheet data at June 30, 1995 and 1996 have been derived from consolidated
financial statements audited by Price Waterhouse LLP, independent accountants.
The audited Consolidated Financial Statements and the Notes thereto are included
elsewhere in this Prospectus. The selected consolidated financial data for the
nine months ended March 31, 1996 and March 31, 1997 are derived from unaudited
consolidated financial statements of the Company, which are included elsewhere
in this Prospectus. The unaudited consolidated financial data includes all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation. The results of operations for the
nine months ended March 31, 1997 are not necessarily indicative of the results
for any future period or for the full fiscal year ending June 30, 1997.
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 17, 1994
(INCEPTION) NINE MONTHS ENDED
THROUGH JUNE YEAR ENDED MARCH 31,
30, JUNE 30, -------------------------
1995 1996 1996 1997
--------------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 72 $ 13,476 $ 10,518 $ 21,532
Costs of revenues...................................... 58 11,238 8,437 18,736
------- ------------ ----------- ------------
Gross profit..................................... 14 2,238 2,081 2,796
------- ------------ ----------- ------------
Operating expenses:
Selling and marketing................................ 346 1,915 1,253 2,216
Research and development............................. -- 712 488 352
General and administrative........................... 772 1,945 1,432 2,534
------- ------------ ----------- ------------
Total operating expenses............................... 1,118 4,572 3,173 5,102
------- ------------ ----------- ------------
Loss from operations............................. (1,104) (2,334) (1,092) (2,306)
Interest income, net................................... 39 89 81 187
------- ------------ ----------- ------------
Loss before minority interests in operations of
consolidated subsidiary.............................. (1,065) (2,245) (1,011) (2,119)
Minority interests in operations of consolidated
subsidiary........................................... -- -- -- 275
------- ------------ ----------- ------------
Net loss......................................... $ (1,065) $ (2,245) $ (1,011) $ (1,844)
------- ------------ ----------- ------------
------- ------------ ----------- ------------
Pro forma net loss per share (unaudited)(1)............ $ (.41) $ (.30)
------------ ------------
------------ ------------
Shares used in computing pro forma net loss per share
(unaudited)(1)....................................... 5,542,135 6,052,910
------------ ------------
------------ ------------
OTHER OPERATING DATA:
EBITDA(2).............................................. $ (1,036) $ (2,142) $ (932) $ (2,041)
Cash flows used in operating activities................ (454) (2,510) (2,643) (4,450)
Cash flows used in investing activities................ (593) (1,714) (1,275) (5,203)
Cash flows provided by financing activities............ 4,554 4,151 1,675 12,527
Capital expenditures................................... 437 339 287 3,965
Backlog at end of period(3)............................ 7,716 11,588 7,266 27,563
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------------- -----------
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................... $ 3,507 $ 3,435 $ 6,309
Working capital.................................................................... 2,663 4,727 10,820
Total assets....................................................................... 6,375 9,503 23,716
Long-term debt..................................................................... 109 74 33
Stockholders' equity............................................................... 3,207 5,730 16,550
</TABLE>
- ------------------------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
(2) EBITDA represents earnings before minority interests in operations of
consolidated subsidiary, interest income, net, income taxes, depreciation
and amortization expense. EBITDA does not represent cash flows as defined by
generally accepted accounting principles and does not necessarily indicate
that cash flows are sufficient to fund all the Company's cash needs. EBITDA
is a financial measure commonly used in the Company's industry and should
not be considered in isolation or as a substitute for net income, cash flows
from operating activities or other measures of liquidity determined in
accordance with generally accepted accounting principles. EBITDA may not be
comparable to other 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."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS 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 PROSPECTUS.
OVERVIEW
The Company designs, assembles and installs satellite ground segment systems
and networks. In addition, it is currently in the early stages of expanding its
business to provide high-speed, satellite-delivered data communications
services, including Internet access, to areas of the world which lack the
terrestrial communication network infrastructure required to provide such
services on a cost-effective basis.
The Company was founded in August 1994 and was a development-stage
enterprise for the period from its inception through June 30, 1995. During this
period it was involved in various start-up activities, including raising
capital, acquiring equipment, leasing office space, recruiting and training
personnel and developing its initial marketing efforts. The Company began
generating revenue during June 1995, and has grown rapidly since that date.
Since the Company's inception, substantially all of the Company's revenue
has been generated by its satellite ground segment-related operations. Contracts
for these ground segment systems and networks have been in virtually all cases
fixed-price contracts. Profitability of such contracts is subject to inherent
uncertainties as to the cost of performance. In addition to possible errors or
omission in making initial estimates, cost overruns may be incurred as a result
of unforeseen obstacles including both physical conditions and unexpected
problems encountered in engineering design and testing. Since the Company's
business may at certain times be concentrated in a limited number of large
contracts, a significant cost overrun on any contract could have a material
adverse effect on the Company's business, financial condition and results of
operations. The period from contract award through installation of ground
segment systems and networks supplied by the Company generally requires from
three to 12 months. The Company uses the percentage of completion method of
accounting for contract revenues, upon the achievement of certain milestones.
Accordingly, most of the revenue from sales of products is typically recognized
when the product is shipped, with the balance recognized at the time of
acceptance by the customer. Revenues from providing services are recognized at
the time the service is performed. Costs of revenues are generally recorded
based on the relationship of the amount of projected final costs to the
percentage of revenue recorded for the specific contract. See Note 2 of Notes to
Consolidated Financial Statements.
The Company's role in supplying a particular system or network may range
from designing systems and acquiring and installing the components required to
meet a customer's specific design specifications to the complete design and
engineering of the ground segment of a satellite communications network. The
profitability of any particular contract is affected significantly by: (i) the
extent to which the Company is called upon to perform relatively high
value-added design activities, (ii) whether the contract is awarded on a
negotiated basis or by competitive bid, (iii) the extent to which the system or
network can be implemented by replicating previously engineered products and
(iv) competitive factors. Generally, the lowest margins are experienced for
ground segment systems and networks built to customer-engineered specifications,
installed under a contract awarded through a competitive bidding process and
requiring a minimum of engineering by the Company. The highest margins generally
are experienced for engineering-intensive, value-added ground segment systems
and networks designed by the Company.
The Company typically relies upon a small number of customers for a large
portion of its revenues. For example, based on preliminary year-end unaudited
results approximately 29% and 12% of the Company's revenues in fiscal 1997 were
derived from sales to ASkyB and Hughes Network Systems. At
20
<PAGE>
June 30, 1997, based on preliminary year-end unaudited results $20.8 million, or
approximately 51% of the Company's backlog, was accounted for by a contract
between the Company and Sonangol, U.E.E. and 5.0 million, or approximately 12%
of the Company's backlog, was accounted for by a contract between the Company
and ASkyB. 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. See "Risk Factors--Customer Concentration" and
"Business--Customers."
Costs of revenues consist primarily of the costs of purchased material,
direct labor and related overhead expenses, project-related travel, living costs
and subcontractor salaries. Selling and marketing expenses consist primarily of
salaries and travel and living costs for sales and marketing personnel. Research
and development expenses consist primarily of salaries and related overhead
expenses paid to engineers. The Company also benefits from research and
development conducted by its strategic suppliers. See "Business--Research and
Development." General and administrative expenses consist of expenses associated
with the Company's management, accounting, contract and administrative
functions. The Company anticipates that selling and marketing, research and
development and general and administrative expenses will continue to increase
during the next several years due to expected increases in personnel and
expenses related to supporting the Company's expanding customer base.
The Company and Thomson entered into an agreement in November 1995 under
which Thomson purchased 199,500 shares of Common Stock of the Company at $4.68
per share. Pursuant to this agreement, the Company is obligated to issue up to
an additional 5% of its Common Stock under the following conditions: 1% of the
then outstanding Common Stock upon acceptance of sales orders from Thomson
totalling $1.5 million, and 1% of the then outstanding Common Stock upon the
acceptance of each of four subsequent increments of $3.0 million of sales orders
from Thomson. This obligation to provide shares based on orders placed by
Thomson remains in effect until May 1998. Upon the issuance of shares under this
agreement, the Company currently recognizes sales and marketing expense based on
a price of $4.68 per share, the fair market value of the shares at the date of
issuance, which was also the date of the agreement. Such amounts are recorded
initially in the balance sheet as prepaid expenses until the related orders are
recorded as revenue, at which time such amounts are recorded in the statement of
operations. Due to potential changes in the accounting treatment of such share
issuances, there can be no assurance that the Company, if it accepts such sales
orders, will not have to recognize sales and marketing expense based on the fair
market value at the date of purchase rather than at the date of the agreement.
The Company is negotiating with Thomson alternatives to the current agreement in
the event the potential changes in accounting treatment are put into effect. No
assurance can be given that an acceptable arrangement will be reached. In
November 1995, the Company issued 37,147 shares of Common Stock to Thomson under
this arrangement after receipt of sales orders totaling $1.5 million, resulting
in the recognition of $173,743 of selling and marketing expense during the nine
months ended March 31, 1997. Thomson has expressed its intention to purchase
71,538 shares in this Offering. See "Dilution," "Business--Strategic
Relationships--Thomson-CSF" and Note 6 of Notes to Consolidated Financial
Statements.
The Company consolidates the operating results of NetSat subject to the
minority interests relating to Hughes Network Systems' 19% investment in NetSat.
For the nine months ended March 31, 1997, the minority interests in the
operations of consolidated subsidiary recorded was $275,000, the total amount of
HNS' and PolyVentures' capital contributions to NetSat. In the future (unless a
party other than the Company makes an additional capital contribution to
NetSat), the Company will consolidate 100% of NetSat's operating losses. If
NetSat's operations achieve profitability in the future, the Company would
continue to consolidate 100% of NetSat's operating results until such time as
the amount of profits otherwise attributable to Hughes Network Systems would
have fully offset their proportionate share of
21
<PAGE>
NetSat's losses previously recorded by the Company. In addition, Hughes Network
Systems has the right, until August 2001, to increase its equity interest in
NetSat to 29% at nominal cost.
The Company currently accounts for its interests in its strategic supplier
partners and other investees using the cost method of accounting. To the extent
that the Company exercises any of its options to increase its equity interest in
such investee to greater than 20% and has the ability to exercise significant
influence over the operating and financial policies of the investee, the
Company's equity in the net income or loss of such investee would be accounted
for using the equity method of accounting. In the event that the Company
increases its interest in any of its investees such that it would be required to
convert to accounting for such interest using the equity method, generally
accepted accounting principles require that the Company's historical financial
statements be adjusted retroactively in a manner consistent with the accounting
for a step-by-step acquisition with respect to the results of any such investee
for the periods prior to using the equity method. See "Business--Strategic
Relationships."
Due to the Company's development stage status prior to June 30, 1995, and
its rapid growth since that date, the comparison of its financial position and
results of operations from one period to another, as set forth below, is of
limited utility in predicting future results, and should be viewed with
considerable caution.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 17, 1994 NINE MONTHS ENDED
(INCEPTION)
THROUGH JUNE YEAR ENDED MARCH 31,
30, JUNE 30, --------------------
1995 1996 1996 1997
--------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES:
Revenues........................................................... 100.0% 100.0% 100.0% 100.0%
Costs of revenues.................................................. 81.0 83.4 80.2 87.0
------- ----- --------- ---------
Gross profit................................................. 19.0 16.6 19.8 13.0
------- ----- --------- ---------
Operating expenses:
Selling and marketing............................................ 482.4 14.2 11.9 10.3
Research and development......................................... -- 5.3 4.6 1.6
General and administrative....................................... 1,075.8 14.4 13.7 11.8
------- ----- --------- ---------
Total operating expenses........................................... 1,558.2 33.9 30.2 23.7
------- ----- --------- ---------
Loss from operations........................................... (1,539.2) (17.3) (10.4) (10.7)
Interest income, net............................................... 54.7 .7 .8 .9
------- ----- --------- ---------
Loss before minority interests in operations of consolidated
subsidiary....................................................... (1,484.5) (16.6) (9.6) (9.8)
Minority interests in operations of consolidated subsidiary........ -- -- -- 1.2
------- ----- --------- ---------
Net loss..................................................... (1,484.5)% (16.6 )% (9.6)% (8.6)%
------- ----- --------- ---------
------- ----- --------- ---------
</TABLE>
PRELIMINARY FINANCIAL RESULTS
The Company estimates, based on preliminary unaudited results which are
subject to revision by the Company, that revenue increased 168.8% to
approximately $36.2 million for the fiscal year ended June 30, 1997 from $13.5
million for the fiscal year ended June 30, 1996. The Company booked
approximately $65.4 million in contract orders during the fiscal year ended June
30, 1997 compared to $17.4 million in contract orders booked during the fiscal
year ended June 30, 1996 and at June 30, 1997, the Company had a backlog of
approximately $40.8 million of contract orders compared to a backlog of $11.6
million of contract orders at June 30, 1996. Net loss increased 18.9% to
approximately $2.7 million for the fiscal year ended June 30, 1997, with
approximately $1.4 million of this net loss attributable to NetSat expenses,
from $2.2 million for the fiscal year ended June 30, 1996. No assurance can be
given that the audited results for the fiscal year ended June 30, 1997 will be
the same as the preliminary estimated results presented above.
22
<PAGE>
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
REVENUES. Revenues, which were derived from sales of ground segment systems
and networks, increased by $11.0 million, or 104.7%, to $21.5 million for the
nine months ended March 31, 1997 from $10.5 million for the nine months ended
March 31, 1996. The increase was primarily the result of an increase in the
number of shipments and/or completion of contracts from 14 for the nine months
ended March 31, 1996 to 37 for the nine months ended March 31, 1997.
COSTS OF REVENUES. Costs of revenues increased by $10.3 million, or 122.1%,
to $18.7 million for the nine months ended March 31, 1997 from $8.4 million for
the nine months ended March 31, 1996. The increase was primarily due to the
increase in the shipment and/or completion of ground segment systems and
networks contracts. Costs of revenues as a percentage of revenues was 87.0% for
the nine months ended March 31, 1997 compared to 80.2% for the nine months ended
March 31, 1996.
GROSS PROFIT. Gross profit increased by $715,000 to $2.8 million for the
nine months ended March 31, 1997 from $2.1 million for the nine months ended
March 31, 1996. The increase was primarily due to the increase in the shipment
of ground segment systems and networks. Gross profit as a percentage of revenues
was 13.0% for the nine months ended March 31, 1997 compared to 19.8% for the
nine months ended March 31, 1996. Such decrease was due primarily to an increase
in orders awarded through a competitive bidding process, which typically result
in lower gross profit margins than negotiated contracts and a contract awarded
in the previous period with an unusually high profit margin.
SELLING AND MARKETING. Selling and marketing expenses increased by
$963,000, or 76.9%, to $2.2 million for the nine months ended March 31, 1997
from $1.3 million for the nine months ended March 31, 1996. The increase was
primarily due to the opening of marketing offices in Hong Kong and in Atlanta,
Georgia, the hiring of selling and marketing personnel for NetSat, which
accounted for approximately $359,000, or 16.2%, of the selling and marketing
expenses for the period, commission expense recorded in connection with the
issuance of 37,147 shares of Common Stock to Thomson as described above, and the
increase in the number of bids and proposals prepared by the Company. Selling
and marketing expenses as a percentage of revenues was 10.3% for the nine months
ended March 31, 1997 compared to 11.9% for the nine months ended March 31, 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
$137,000, or 28.0%, to $351,000 for the nine months ended March 31, 1997 from
$488,000 for the nine months ended March 31, 1996 due to a decline in
development costs associated with customizable systems. Research and development
expenses as a percentage of revenues decreased to 1.6% for the nine months ended
March 31, 1997 from 4.6% for the nine months ended March 31, 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $1.1 million, or 77.0%, to $2.5 million for the nine months ended March 31,
1997 from $1.4 million for the nine months ended March 31, 1996, but decreased
as a percentage of revenues to 11.8% for the nine months ended March 31, 1997
from 13.7% for the nine months ended March 31, 1996. The increase in general and
administrative expenses resulted from personnel increases to service the
increasing customer base for the Company's ground segment business as well as
the hiring of NetSat administrative personnel, which accounted for approximately
$585,000, or 23.1%, of the general and administrative expenses for the period.
FISCAL YEARS ENDED JUNE 30, 1996 AND 1995
REVENUES. Revenues increased to $13.5 million for the fiscal year ended
June 30, 1996 from $72,000 for the year ended June 30, 1995 as a result of the
commencement of commercial operations.
COSTS OF REVENUES. Costs of revenues increased to $11.2 million for the
fiscal year ended June 30, 1996 from $58,000 for the fiscal year ended June 30,
1995 as a result of the commencement of commercial operations.
23
<PAGE>
GROSS PROFIT. Gross profit increased to $2.2 million for the fiscal year
ended June 30, 1996 from $14,000 for the fiscal year ended June 30, 1995. The
increase was primarily due to the commencement of commercial operations and the
shipment of ground segment systems and networks.
SELLING AND MARKETING. Selling and marketing expenses increased to $1.9
million for the fiscal year ended June 30, 1996 from $346,000 for the fiscal
year ended June 30, 1995 as a result of the first full year of commercial
operations.
RESEARCH AND DEVELOPMENT. Research and development expenses were $712,000
for the fiscal year ended June 30, 1996. There were no research and development
expenses for the fiscal year ended June 30, 1995. Research and development
expenses in fiscal 1996 were related primarily to development of the Company's
customizable systems.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $1.9 million for the fiscal year ended June 30, 1996 from $772,000 for the
fiscal year ended June 30, 1995. This increase was primarily attributable to
increases in costs of hiring additional personnel to support the Company's
expanding customer base.
24
<PAGE>
QUARTERLY RESULTS
The following tables set forth certain unaudited financial information for
each of the seven fiscal quarters in the period ended March 31, 1997. The
Company believes that this information has been presented on the same basis as
the audited Consolidated Financial Statements appearing elsewhere in the
Prospectus and in the opinion of management all necessary adjustments
(consisting only of normal recurring adjustments) have been included in the
amounts stated below to present fairly the unaudited quarterly results when read
in conjunction with the audited Consolidated Financial Statements of the Company
and related Notes thereto included elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1996 1996 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $3,009 $4,306 $3,203 $ 2,958 $4,155 $9,151 $8,226
Costs of revenues............................ 2,156 3,819 2,463 2,799 3,591 7,906 7,239
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................... 853 487 740 159 564 1,245 987
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Selling and marketing...................... 337 458 458 661 554 847 815
Research and development................... 175 76 237 224 92 137 122
General and administrative................. 383 481 568 515 661 755 1,118
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses..................... 895 1,015 1,263 1,400 1,307 1,739 2,055
--------- --------- --------- --------- --------- --------- ---------
Loss from operations..................... (42) (528) (523) (1,241) (743) (494) (1,068)
Interest income, net......................... 40 14 28 7 14 56 117
--------- --------- --------- --------- --------- --------- ---------
Loss before minority interests in operations
of consolidated subsidiary.................. (2) (514) (495) (1,234) (729) (438) (951)
Minority interests in operations of
consolidated subsidiary..................... -- -- -- -- 175 100 --
--------- --------- --------- --------- --------- --------- ---------
Net loss................................. $ (2) $ (514) $ (495) $(1,234) $ (554) $ (338) $ (951)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PERCENTAGE OF TOTAL REVENUES:
Revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of revenues............................ 71.7 88.7 76.9 94.6 86.4 86.4 88.0
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................. 28.3 11.3 23.1 5.4 13.6 13.6 12.0
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Selling and marketing...................... 11.2 10.6 14.3 22.3 13.3 9.3 10.0
Research and development................... 5.8 1.8 7.4 7.6 2.2 1.5 1.5
General and administrative................. 12.7 11.2 17.8 17.4 15.9 8.2 13.6
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses..................... 29.7 23.6 39.5 47.3 31.4 19.0 25.1
--------- --------- --------- --------- --------- --------- ---------
Loss from operations..................... (1.4) (12.3) (16.4) (41.9) (17.8) (5.4) (13.1)
Interest income, net......................... 1.3 .4 .9 .2 .3 .6 1.4
--------- --------- --------- --------- --------- --------- ---------
Loss before minority interests in operations
of consolidated subsidiary.................. (.1) (11.9) (15.5) (41.7) (17.5) (4.8) (11.7)
Minority interests in operations of
consolidated subsidiary..................... -- -- -- -- 4.2 1.1 --
--------- --------- --------- --------- --------- --------- ---------
Net loss................................. (.1)% (11.9)% (15.5)% (41.7)% (13.3)% (3.7)% (11.7)%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
25
<PAGE>
The Company may in the future 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, the demand for the Company's products
and services, the introduction of new or enhanced products and services by the
Company or its competitors, market acceptance of new products and services, the
mix of revenues between custom-built satellite communications systems and
networks designed for its customers and standard installations provided to its
customers, the growth of demand for Internet infrastructure-based products and
services in developing countries, the timing of significant marketing programs,
the extent and timing of the hiring of additional personnel, competitive
conditions in the industry and general economic conditions. Due to the foregoing
factors, it is likely that in one or more future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. Such an event could have a material adverse effect on the price of
the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily from the sale of
equity securities and, to a lesser degree, from stockholder loans. Through March
31, 1997, the Company raised approximately $20.6 million of net proceeds through
private offerings of its Common Stock and Convertible Preferred Stock. The
Company received net proceeds of $4.2 million from sales of Common Stock in
private offerings during the period from August 17, 1994 (inception) to June 30,
1995, $4.4 million from sales of Common Stock and Convertible Preferred Stock in
private offerings during the fiscal year ended June 30, 1996 and $12.6 million
from the sale of Convertible Preferred Stock in private offerings and the
exercise of warrants during the nine months ended March 31, 1997. In addition,
the Company's chief executive officer lent the Company $315,000 in October 1994,
which was repaid in full in January 1997, and $80,700 during fiscal 1995, of
which $60,000 was repaid during fiscal 1995 and $20,700 was repaid during fiscal
1996. See "Certain Transactions."
At March 31, 1997, the Company had working capital of $10.8 million,
including cash and cash equivalents of $6.3 million, restricted cash of $1.5
million, accounts receivable of $8.2 million and inventories of $1.2 million,
offset by $6.2 million in accounts payable and $883,000 million in accrued
expenses.
With the net proceeds from this Offering, the Company intends to use
approximately $6.0 million to fund capital expenditures and investments in
strategic suppliers, approximately $3.0 million to fund start-up expenses and
investments in potential international joint ventures associated with NetSat,
and approximately $17.9 million to fund working capital requirements, increased
selling and marketing efforts, increased internal research and development
expenses, potential acquisitions of complementary businesses, products or
technologies and for general corporate purposes.
The Company has experienced negative cash flow from operations since its
inception. Net cash used in operating activities for the periods from inception
to June 30, 1995 and the fiscal year ended June 30, 1996 was $454,000 and $2.5
million, respectively. The principal factor contributing to the negative
operating cash flow during the period from inception to June 30, 1995 was the
net loss from operations for this period of $1.1 million. This loss was offset
in part by an excess of approximately $387,000 of accounts payable over the
value of inventory at the end of the period. This excess reflects the fact that
the Company normally acquires inventory only against specific customer
contracts. As a result, a portion of such inventory is delivered and revenue
accrued more quickly than payment for such inventory is required by normal
commercial terms. For the fiscal year ended June 30, 1996, the principal
contributor to the negative cash flow, in addition to the net loss of $2.2
million, was an increase in accounts receivable of approximately $1.9 million as
deliveries were made against the underlying contracts. This negative cash flow
was offset in part by reductions in inventory of approximately $664,000,
increases in operating liabilities (reflecting a continued expansion of
operations) and the use of stock to pay certain compensation expenses.
Management anticipates that NetSat will experience negative cash flow for at
least the next several years as a result of capital investment required for
construction of its hub facility in Hauppauge, New York, development of its
planned initial operations in Russia and Eastern Europe and initial losses from
26
<PAGE>
operations. In order to limit the capital requirements for startup of operations
in Eastern Europe, NetSat uses the services of a hub facility located in Germany
and owned by Hughes Olivetti Telecom Limited, an affiliate of Hughes Network
Systems.
Several factors had a major effect on the Company's liquidity during the
nine months ended March 31, 1997. First, revenues increased substantially as a
result of a significant increase in contract deliveries, particularly during
December. Revenues for the nine-month period exceeded those of the entire fiscal
year ended June 30, 1996. The higher revenues increased the Company's working
capital needs, as accounts receivable increased by approximately $6.2 million
during the nine-month period. Offsetting the increased accounts receivable were
an increase in accounts payable of approximately $3.4 million and accrued
expenses of approximately $315,000 reflecting costs incurred in performing the
contracts. Because the Company records progress payments as an offset to
inventory, the approximately $127,000 decrease in net inventory during the
nine-month period is lower than might be expected based on the increased level
of activity and receipt of substantial progress payments against contracts not
yet completed of approximately $2.6 million. Inventory levels may be expected to
increase as work proceeds on these contracts.
The second factor affecting liquidity during the nine-month period was the
Company's investment activities. The Company increased its investment in its
strategic suppliers by approximately $885,000 during the period and purchased
approximately $700,000 in additional computer and test equipment. In addition,
the Company purchased a new office and assembly facility for approximately $2.6
million in cash and has spent an additional $700,000 on improvements. The
Company expects the office and assembly-facility will require an additional
expenditure of $1.8 million for improvements before it is ready for occupancy.
The Company intends to seek financing for the facility and improvements through
third parties.
The third major factor affecting liquidity was the completion of a private
offering of Convertible Preferred Stock and the exercise of warrants during the
nine-month period. Net proceeds of these transactions were approximately $12.6
million leaving the Company with cash and cash equivalents at the end of the
period of approximately $6.3 million.
The Company has incurred losses since its inception and therefore has not
been subject to federal income taxes. Through December 31, 1996, the Company,
for income tax purposes, has generated net operating loss carryforwards of
approximately $3.1 million which may be available to reduce future taxable
income and future tax liabilities. These carryforwards begin to expire in the
years 2010 through 2012. 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. Upon the completion of this Offering, the exercise
of the over-allotment option or the subsequent exercise of option or warrants or
in connection with other future sales of equity, the Company's ability to
utilize the aforementioned carryforwards to reduce future taxable income and tax
liabilities may be limited. 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 $5.0 million credit facility consisting of (1) a $2.5
million secured domestic line of credit and (2) a $2.5 million secured
export-import guaranteed line of credit. Each line of credit bears interest at
the prime rate plus 1/2% per annum and is collateralized by a first security
interest on all assets.
The Company's future capital requirements will depend upon many factors,
including the extent to which it is able to locate additional strategic
suppliers in whose technology it wishes to invest, the success of the Company's
marketing efforts in both the satellite ground segment and Internet services
fields, the nature and timing of customer orders and the extent to which it must
conduct research and development efforts internally. Based on current plans, the
Company believes that its existing capital resources together with the net
proceeds of this Offering will be sufficient to meet its capital requirements
for at least the next 12 to 18 months.
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BUSINESS
OVERVIEW
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. The Company's customers include prime
communications infrastructure contractors, government-owned PTTs, other
telecommunications carriers, producers and distributors of news and
entertainment content and other corporations. The Company's ground segment
systems typically consist of an earth station, which is an integrated system
designed to transmit and receive signals to and from satellites, together with
ancillary subsystems. The Company's ground segment networks are typically
comprised of two or more ground segment systems communicating with a satellite
and interconnected with a terrestrial network. Since the Company commenced
operations in August 1994, it has completed, or is in the process of completing,
the installation of 77 ground segment systems and networks in 31 countries.
The Company's revenue grew from $72,000 at the end of its first fiscal year
to $13.5 million for the fiscal year ended June 30, 1996 and to $21.5 million
for the nine months ended March 31, 1997. During the nine months ended March 31,
1997, the Company booked $37.5 million in contract orders and at March 31, 1997
had a backlog of $27.6 million of contract orders. Based on preliminary
unaudited year-end results, the Company estimates that revenue for the fiscal
year ended June 30, 1997 was approximately $36.2 million. During the fiscal year
ended June 30, 1997 the Company booked approximately $65.4 million in contract
orders, and at June 30, 1997 the Company had a backlog of approximately $40.8
million of contract orders. See "Prospectus Summary--Preliminary Financial
Results." The Company believes that its revenue growth and its ability to
compete are based on its unique combination of competitive advantages which
include: (i) an experienced management group with extensive technological and
engineering expertise, (ii) the proven ability to meet the complex satellite
ground segment requirements of its customers in diverse political, economic and
regulatory environments in various locations around the world and (iii) its
ability to identify, develop and maintain strategic relationships with
developers and suppliers of leading-edge technologies which enhance performance,
reduce costs and broaden the applications of the Company's ground segment
systems and networks. An industry source has recently reported that the Company
ranks among the world's seven major manufacturers-suppliers of large ground
segment systems for fixed telecommunications and currently ranks second behind
the industry leader, which has 50% of this market.
The Company has recently established a subsidiary, NetSat, to develop
service revenues by providing high-speed, satellite-delivered data
communications to developing markets worldwide. In order to accomplish this
objective, NetSat intends to leverage: (i) the Company's expertise in satellite
ground segment system and network implementation, (ii) extensive management
experience in providing satellite-delivered communications services, (iii) the
knowledge and capabilities of local market strategic partners and (iv) DirecPC
and Personal Earth Station technology developed and owned by Hughes Network
Systems. Each project for which NetSat uses HNS' DirecPC technology will require
the grant of a license from HNS to NetSat. NetSat currently is pursuing a joint
venture with local partners in Russia to market low-cost, high-speed satellite
Internet access services, as well as intranet services, to corporate,
educational and government customers who have limited or no access to
terrestrial network infrastructure capable of supporting the economical delivery
of such services. To date, NetSat has generated only limited revenues.
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
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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.
Satellite communications industry participants include: (i) designers,
manufacturers and integrators of ground segment products, systems and networks,
(ii) communications service providers, which may or may not own the actual
satellites used for transmission and (iii) designers, manufacturers and
operators of satellites. The Company has participated principally in the ground
segment systems and networks portion of the market and has recently expanded
into the satellite-delivered data communications services market through its
NetSat subsidiary.
MARKET SIZE
According to FCC estimates, providers of commercial satellite-delivered
communications services generated approximately $13.8 billion in revenues in
1995 and this amount is expected to grow at a compound annual rate of
approximately 21% through the year 2000 to approximately $37.0 billion. The
Company believes that the historic and expected growth in its addressable ground
segment markets has been and will continue to be driven by, among other things,
the growth of satellite-delivered communications services.
SATELLITE GROUND SEGMENT. Based on industry sources, the markets for ground
segment systems and networks in which the Company competes had aggregated
revenues of approximately $1.6 billion in 1996 and are projected to grow at a
compound annual rate of approximately 11% to revenues of approximately $2.5
billion by the year 2000. These data do not include estimates for revenues of
military-tactical systems, custom networks, ground segment management systems
and dedicated Internet access products, each of which is a market to which the
Company targets its ground segment systems and networks.
SATELLITE-DELIVERED DATA COMMUNICATIONS SERVICES. Through NetSat, the
Company participates in the satellite-delivered data communications segment of
the overall satellite-delivered communications services market. Although there
are currently no reliable data available on the market for satellite-delivered
Internet and intranet applications in developing countries, the Company believes
such market has potential for rapid growth. The Company bases this belief on the
increasing use of Internet and intranet applications in developing markets,
together with the relatively undeveloped terrestrial infrastructure in such
markets. The FCC has estimated that the worldwide satellite-delivered data
communications market (including Internet and intranet applications) accounted
for revenues of approximately $1.3 billion in 1995 and projects that such
worldwide market will grow at a compound annual growth rate of 26% to revenues
of approximately $4.2 billion in the year 2000.
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.
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FIXED SATELLITE SERVICES. Fixed satellite services provide point-to-point
and point-to-multipoint satellite communication of voice, data and video between
fixed land-based earth stations. The introduction of high-power satellites has
created additional growth within the fixed satellite services segment by
enabling the use of smaller, less costly earth stations, such as very small
aperture terminals ("VSATs"), for applications such as corporate data networks,
Internet access and rural telephony. The Company believes that the fixed
satellite services segment will continue to experience rapid growth due to the
expansion of VSAT applications and the planned implementation of new
high-capacity, high-power Ka-band (20-30 GHz) systems within the next several
years. The future Ka-band services are expected to expand the number of
applications provided directly to the home and are expected to reduce
significantly the cost of such services. These systems offer the additional
bandwidth needed for emerging multimedia services that combine voice and video
transmissions, as well as Internet access, expanded telephony services, and
computer networking.
MOBILE SATELLITE SERVICES. Mobile satellite services, which operate between
fixed gateway earth stations and mobile user earth stations (terminals), provide
mobile voice and data transmission capability on land, sea and air. New mobile
satellite services are being developed using low, medium and geostationary
orbiting satellite systems that are designed to bring more extensive coverage
and circuit reliability for mobile telephone and data services to underserved
populations throughout the world.
DIRECT BROADCAST SERVICES. Direct broadcast satellite services provide a
direct transmission link from high-power satellites to customers over a wide
geographic area. Technology which has been successfully deployed by Thomson,
Hughes Network Systems and others for direct-to-home television services is now
being applied to direct broadcast data services, including Internet and intranet
access.
DATA COMMUNICATIONS AND THE INTERNET
The data communications services market is comprised currently of common
carrier data network services, corporate business networks and emerging
applications such as Internet and intranet services. The Company believes that
Internet and intranet services will comprise a significant portion of data
communications services used in developing countries, and that the growth of
data communications services in these regions will rely on satellite
communications to a significant extent.
THE INTERNET
The Internet is a global network of millions of interconnected computers and
computer networks that allow businesses, other organizations and individuals to
communicate electronically, distribute and receive information and conduct
commerce. Advances in technology, low-cost Internet access and an increasing
corporate reliance on distributed information environments has fueled the rapid
growth of the Internet. Much of the recent growth in Internet use by businesses
and individuals has been driven by the emergence of the World Wide Web (the
"Web"), a network of servers and information available on the Internet. The Web
enables users to find and retrieve vast and diverse quantities of information on
the Internet in a consistent, easy-to-use manner that makes the underlying
complexities transparent to the user.
The utility of the Internet as a global communications network enabling
millions of users worldwide to access information in real-time is dependent upon
the existence of a communications infrastructure which can accommodate the rapid
and reliable transmission of such information. Today, much of the world lacks
not only the sophisticated optical fiber and digital switching infrastructure
required for the high-speed transmission of data over the Internet, but also the
basic telephone networks to accommodate low-speed data communication over
traditional analog facilities. Due to the high costs associated with the
installation of wireline infrastructures capable of the reliable transmission of
data at higher speeds and with better quality, the Company believes that the
development of a communications infrastructure in much of the world, and the use
of the Internet both by individuals and as a viable commercial tool, will in
large part depend upon the rapid installation of wireless and satellite
communications systems.
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CORPORATE INTRANETS
The low-cost client/server tools which have been developed for the Internet
offer compelling support for the creation of corporate "intranets," which are
private data networks that provide employees with easy access to corporate
databases. The benefits of applying Internet technology to private corporate
data networks include the lower cost of implementation, standardized user
interfaces, lower training and support costs, platform independence, and the
ease of interfacing to "legacy" mainframe databases. The benefits associated
with corporate migration to these Internet tools have created a rapidly growing
market in the United States and other developed markets where relatively
inexpensive data communications have been available. An industry source
estimates that revenues from the corporate intranet market will exceed the
revenues attained from the Internet market by a ratio of 2:1 by the year 1999.
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.
GROWTH DRIVERS
The Company believes that the growth projected by third parties in the
satellite communications industry will be driven principally by the following
major factors: (i) global deregulation and privatization of government-owned
monopoly telecommunications carriers, (ii) rapidly growing worldwide demand for
communications services in general, including data communications services over
the Internet and corporate intranets, (iii) the relative cost-effectiveness of
satellite communications for many applications and (iv) technological
advancements which broaden applications for and increase the capacity in both
satellite and terrestrial networks. The Company believes that growth in its
addressable ground segment markets has been and will continue to be driven by,
among other things, the growth of satellite-delivered communications services.
DEREGULATION AND PRIVATIZATION. Rapid deregulation and privatization, and
the implementation of governmental policies aimed at developing modern
telecommunications infrastructure, are occurring globally, as countries seek the
economic benefits of enhanced and expanded telecommunications services. Through
deregulation and privatization, governments are stimulating the development of
competitive telecommunications services in the private sector. These actions
have placed communications carriers under increasing pressure to achieve greater
efficiencies and to offer their services to broader customer bases at more
competitive prices, leading to an increase in capital investment. In addition,
the Company believes that the recent World Trade Organization proposal which
will provide U.S. and foreign companies with market access to a variety of
telecommunications services and allow foreign ownership of telecommunication
companies will lead to additional increased capital investment in the worldwide
telecommunications market.
GROWING WORLDWIDE DEMAND FOR COMMUNICATIONS SERVICES. Factors contributing
to the growing demand for communications services include worldwide economic
development, governmental policies aimed at improving the telecommunications
infrastructure in developing countries and the increasing globalization of
commerce. In addition to the growth in developing markets, the terrestrial
infrastructure in developed countries is evolving to support the growing demand
for higher bandwidth services in response to the needs of businesses to
communicate with customers and employees located around the world and to the
growing acceptance of the Internet and multimedia applications as both
productivity-enhancing tools and consumer products. The Company expects demand
for these kinds of higher bandwidth services to grow in developing countries as
well. The International Telecommunications Union forecasts that the number of
telephone lines in developing countries will grow at a compound annual growth
rate of 17% per year through the year 2000, compared to 5% per year in the same
period for developed nations. The Company believes that global network
infrastructure development will require
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significant reliance upon satellite communications because satellite-delivered
communications services can be implemented quickly and deliver flexible
high-speed transmission capacity at relatively low cost over large geographic
areas.
RELATIVE COST-EFFECTIVENESS OF SATELLITE COMMUNICATIONS. The relative
cost-effectiveness of satellite communications compared to terrestrial solutions
for many applications is a major factor driving the growth of satellite
communications in areas with rapidly growing telecommunications infrastructures
such as the Asia-Pacific region and the former Soviet Union. The vast geographic
areas to be covered, where population concentrations are separated by large
distances, require a technology whose cost and speed of implementation is
relatively insensitive to distance. Unlike the cost of terrestrial networks, the
cost to provide services via satellite does not increase with the distance
between sending and receiving stations. A single satellite can be configured to
deliver both broad beams that cover entire regions and narrow spot beams that
cover only areas of high population or traffic density.
TECHNOLOGICAL ADVANCES. Technological advances which increase the capacity
of a single satellite and/ or increase the number of potential applications of
its available bandwidth reduce the overall cost of a system or the service it
delivers. This increases the number of potential end users for the services and
expands the available market. Recent technological developments which make
satellite solutions increasingly competitive in cost and performance with
terrestrial-based networks, or as a viable alternative solution where
terrestrial services are not feasible, include:
- BANDWIDTH ON DEMAND -- allows the satellite transponder bandwidth to be
allocated dynamically as user needs require. Excess bandwidth capacity is
returned to a "pool" of bandwidth that can then be accessed by other
users.
- DIGITAL TECHNOLOGY -- allows compression of data to communicate more
information at lower costs using less bandwidth. Digital compression
technology, when applied to international voice, data and video
transmission by satellite, increases several fold the capacity of
satellite transponders.
- HIGH-POWER SATELLITES -- provide a signal powerful enough to deliver
reception over a large geographic area and reduce the size, and
consequently cost, of the ground-based receiving and transmitting
antennas. High-power satellites, coupled with advanced digital processing
receivers, allow transmission of high-quality television programming and
high-speed data to the home with antennas of less than 21 inches in
diameter.
- SPOT-BEAM TECHNOLOGY -- narrowly focuses a satellite-delivered signal on
the receiving antenna and reduces the total power requirements in the
satellite, enabling an increase in a satellite's circuit capacity without
a corresponding increase in weight, associated equipment and launch costs.
Spot-beam technology, combined with an antenna for wide area coverage, may
be used to provide local and national television programming
simultaneously from a single geostationary satellite.
- ONBOARD PROCESSING -- provides the ability to switch circuits on the
satellite rather than on the ground. By building a "switch in the sky,"
the cost of implementing telecommunications infrastructure may be reduced,
facilitating the implementation of applications such as mobile telephony
via satellite and future direct-to-home data, video and voice services.
GSI COMPETITIVE ADVANTAGES
The Company believes that it is well positioned to capitalize on the
increasing demand for satellite ground segment systems and networks and
satellite-delivered data communications services and that its future success in
these markets will be based upon its ability to leverage its unique combination
of competitive advantages that have led to its historical achievements and its
favorable industry reputation. These competitive advantages include: (i) an
experienced management group with extensive technological and engineering
expertise, (ii) the proven ability to meet the complex satellite ground segment
requirements of its customers in diverse political, economic and regulatory
environments in various
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locations around the world and (iii) the ability to identify, develop and
maintain strategic relationships with developers and suppliers of leading-edge
technologies which enhance the performance, reduce costs and broaden the
applications of the Company's ground segment systems and networks.
GSI BUSINESS STRATEGY
The Company's business strategy is to expand its market share in its ground
segment systems and networks business, improve its profitability, and create
opportunities to capture recurring service revenues. The Company intends to
execute this strategy by: (i) targeting communication infrastructure development
opportunities worldwide, (ii) focusing on high margin engineering-intensive
system and network projects, (iii) developing strategic customer relationships,
(iv) developing strategic supplier relationships and (v) entering the data
communications services business through NetSat.
TARGET INFRASTRUCTURE DEVELOPMENT OPPORTUNITIES
The Company primarily targets developing markets which it believes will
account for a significant portion of the growing demand for ground segment
systems and networks because these markets typically lack terrestrial
infrastructure adequate to support increasing demand for domestic and
international communications services. In addition, in developed countries the
Company targets ground segment infrastructure development projects for emerging
satellite communications applications such as direct broadcast and future
Ka-band systems. The Company has developed an international sales and marketing
organization focused on identifying opportunities for the Company and on
developing key sourcing relationships. In order to increase its access to
project opportunities and limit its exposure to the political and commercial
complexities of doing business in foreign countries, the Company intends to
continue to pursue international opportunities primarily in partnership with
strong local companies or as a subcontractor to larger communications services
and infrastructure providers. Most of the Company's revenues are derived from
sales to customers outside the United States. Revenues from foreign sales
accounted for 21.8% and 50.0% of total revenues in fiscal year 1996 and the
nine-month period ended March 31, 1997, respectively.
FOCUS ON ENGINEERING-INTENSIVE SYSTEM AND NETWORK PROJECTS
The Company seeks to focus its technological expertise on high value-added
system and network projects which require engineering-intensive design and
implementation. This emphasis positions the Company to earn higher gross margins
through the delivery of innovative, cost-effective solutions to customer
performance requirements that are typically priced on a negotiated basis, as
opposed to typically lower-margin competitive bid projects. In addition, the
Company often benefits from the research and design phase of its more complex
projects through the development of proprietary products, systems and
technologies that can be applied cost-effectively to future projects and which
provide the Company with a competitive advantage.
DEVELOP STRATEGIC CUSTOMER RELATIONSHIPS
The Company seeks to build close relationships with customers for whom it
can provide complementary engineering skills by working as part of their system
development teams. A key objective of this strategy is to obtain this business
on a negotiated basis, rather than through the competitive bidding process,
which is likely to carry a lower margin. To date, the Company has developed
strategic relationships with two of its customers: Hughes Network Systems and
Thomson. The Company sought the establishment of these relationships based on
these customers' abilities to: (i) generate significant potential revenues for
the Company, (ii) provide access to a large number of potential business
opportunities as a result of their size and global operations and (iii) provide
access to complementary technologies and expertise that could serve as
competitive advantages for the Company. At June 30, 1997, Hughes Network Systems
and Thomson owned equity interests in the Company of 3.7% and 6.3%,
respectively. In addition, Hughes Network Systems owns a 19.0% equity stake in
NetSat, with an option to increase this position to 29.0%.
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DEVELOP STRATEGIC SUPPLIER RELATIONSHIPS
The Company seeks to establish strategic relationships with suppliers that
it believes are in a unique position to supply products or services which will
improve the Company's competitive position in one or more of the markets which
it serves. In certain cases, the Company seeks to strengthen such relationships
by investing in such suppliers, and has, through June 30, 1997, made equity
investments of an aggregate of approximately $1.0 million for minority equity
stakes of approximately 19.0%, 6.6% and 17.0% in Shiron Satellite Communications
(1996) Ltd. ("Shiron"), C-Grams Unlimited, Inc. ("C-Grams") and Armer
Communications Engineering Services, Inc. ("Armer"), respectively. The strategic
supplier relationships with Shiron and C-Grams 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. The Company intends to continue to
pursue additional strategic supplier relationships on a selective basis.
CREATE RECURRING SERVICE REVENUE OPPORTUNITIES
The Company seeks to capture recurring revenues by providing data
communications services. The initial application of this strategy is the
Company's NetSat subsidiary, formed in alliance with Hughes Network Systems, to
provide satellite-delivered data communications services such as Internet
access, intranet applications and business data applications in developing
countries, using HNS' low-cost, high-speed Personal Earth Station and DirecPC
Terminal technology. The Company's strategy for implementing this objective
through NetSat includes the following major elements:
MARKET THROUGH JOINT VENTURES AND STRATEGIC RELATIONSHIPS. NetSat intends
to form joint ventures with strategic partners located in local markets around
the world which are expected typically to handle marketing, distribution and
support of the NetSat Direct and DirecPC products and would typically provide
transmission, content delivery, billing and customer service functions. The
Company anticipates selecting local market partners based upon their in-region
marketing experience, knowledge of the local regulatory environment, operating
licenses, existing customers, established business organizations and other
important elements that the Company believes will help support the success of
the venture. The Company is currently providing services in certain Eastern
European countries pursuant to a value-added reseller agreement with Hughes
Olivetti Telecom Limited ("HOT"), a joint venture between Ing. C. Olivetti & C.,
S.p.A. and an affiliate of Hughes Network Systems, and is pursuing a joint
venture with local partners in Russia.
SEEK MULTIPLE REVENUE SOURCES. Through NetSat and its potential joint
venture affiliates, the Company intends to generate revenue from multiple
sources, including the sales of terminal equipment to potential subscribers, the
transmission of data via satellite, the provision of Internet connections and
incidental services such as domain name service, and the development and
delivery of custom content for specific customer groups.
TARGET MULTINATIONAL CUSTOMER BASE. NetSat intends to establish a diverse,
multinational customer base by designing innovative Internet, intranet and
business data service solutions for corporations, governments and educational
institutions in countries with rapidly growing telecommunications infrastructure
requirements. NetSat plans to apply the same satellite-delivered technology
which it uses for Internet access to meet the communication needs of corporate
users in such countries in support of their intranet requirements.
GSI GROUND SEGMENT SYSTEMS AND NETWORKS
The Company designs, assembles and installs ground segment system and
network solutions for the complex and changing communications requirements of
its customers. The Company's ground segment systems typically consist of an
earth station and ancillary subsystems such as microwave links for back-haul
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of traffic to a central office or generators for emergency power restoral. An
earth station is an integrated system consisting of antennas, transmitting and
receiving equipment, modulation/demodulation equipment, monitor and control
systems and voice, data and video network interface equipment. The Company's
ground segment networks are typically comprised of two or more ground segment
systems interconnected with a satellite and/or terrestrial communications
network. The Company's customizable systems may be sold separately as
stand-alone ground segment systems or may be used as modular building blocks to
be integrated into a complete ground segment system or network. The Company
believes that this modular approach allows it to engineer its ground segment
systems and networks to serve client-specific traffic and service requirements
rapidly, cost-effectively and efficiently.
CUSTOMIZABLE SYSTEMS
CURRENTLY AVAILABLE CUSTOMIZABLE SYSTEMS
FAMILY OF STANDARD INTELSAT EARTH STATIONS. This family of earth stations,
which is used primarily for international voice, data and video circuit trunking
and as gateways for domestic networks using the International Telecommunications
Satellite Organization ("Intelsat") system, is targeted principally at PTTs and
other common carriers. The family consists of earth stations of varying sizes
and capacities, all of which conform to Intelsat specifications. The Intelsat
Standard A earth stations, which have the highest capacity, feature antennas
ranging from 13 to 21 meters in diameter, high-power amplifiers from 700 to
3,000 watts, radio frequency converters and related electronics, modems and a
UNIX or Microsoft Windows NT based monitoring and control system. Available
options include power monitor systems, de-icing equipment, uninterruptible power
system/backup generators and equipment shelters. The Company has designed and
installed Intelsat Standard A earth stations in China, Korea, Kuwait, Malaysia,
the United Kingdom and the United States. The Company typically sells these
Intelsat Standard A earth stations at prices ranging from approximately $1.0
million (13-meter antenna) to approximately $2.0 million (21-meter antenna). The
Company is able to provide smaller, lower capacity earth stations that conform
to Intelsat specifications by customizing its modular building block or
commercial terminal families of earth stations described below.
MODULAR BUILDING BLOCK (MBB) EARTH STATION. These earth stations are
incorporated in point-to-point data links and hubs for VSAT and Demand Assigned
Multiple Access ("DAMA") networks, and are typically used as gateways for
corporate, common carrier and government networks. These earth stations can also
be configured to conform to the applicable standards of Intelsat and other
satellite systems. Earth stations constructed using MBBs require minimal site
preparation and can be installed rapidly and cost-effectively due to their
modular construction. Antenna sizes range from 4.5 to 9 meters, with high-power
amplifiers ranging from 50 to 700 watts. Generally, all electronics are housed
in a single building mounted rack. Available options include de-icing equipment,
tracking equipment, uninterruptible power system/ backup generators and
equipment shelters. To date, the Company has designed and installed MBB earth
stations in Brazil, India, Indonesia, Pakistan, Russia, Thailand and the United
States. The Company typically sells these earth stations at prices ranging from
approximately $250,000 to $600,000.
COMMERCIAL TERMINAL FAMILY (CTF). This family of earth stations, which
encompasses a range of general purpose, low-cost antenna-mounted earth stations,
is used primarily for data, voice or video transmissions from commercial or
government premises, and are principally targeted at corporate, common carrier
and government networks. These earth stations can also be configured to conform
to the applicable standards of Intelsat and other satellite systems. Antenna
sizes range from 1.2 to 9.3 meters, with high-power amplifiers ranging from 16
to 400 watts. Generally, all radio frequency electronics are housed in
weatherproof enclosures mounted on the antenna. To date, the Company has
designed and installed CTF earth stations in India, Korea, Russia and the United
States. The Company typically sells these earth stations at prices ranging from
approximately $100,000 to $300,000.
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<PAGE>
MILITARIZED TRIBAND FLY-AWAY EARTH STATION FAMILY. This family of triband
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 meter antenna, 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). The Company has sold one of each configuration of this earth station to
Thomson to be used as demonstration models incorporated into military
communications systems currently marketed by Thomson. Prices for these systems
range from approximately $250,000 to $1.0 million, depending on the
configuration.
DIGITAL FLY-AWAY EARTH STATIONS. This group of earth stations is primarily
used for emergency communications and news gathering and is comprised of highly
transportable, modular earth stations designed to be quickly deployed and
installed anywhere in the world. Antenna sizes range from 1.2 to 2.4 meters,
with high-power amplifiers up to 350 watts. All components are mounted in
separate cases which are small enough to be easily transported by commercial
carrier. Additional system availability can be achieved through the addition of
redundant modules for critical components. Since these units may be operated in
a variety of harsh environments, the Company conducts environmental stress
screening tests on these components for enhanced reliability. To date, the
Company has sold one digital fly-away earth station to a customer in Portugal.
The Company markets these earth stations at prices ranging from approximately
$150,000 to $600,000.
EARTH STATION MANAGEMENT SYSTEMS. The Company's earth station systems
typically employ monitor and control software for system maintenance developed
either by the Company or by its strategic supplier, C-Grams. 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.
CUSTOMIZABLE SYSTEMS UNDER DEVELOPMENT
COMPACT DIGITAL EARTH STATION FAMILY. 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
with Shiron which can support a series of modems for a range of applications,
including rural telephony and digital video. These earth stations may be
operated on either preassigned channels or channels assigned on demand, allowing
efficient transponder utilization. Antenna sizes range from 1.2 to 3.7 meters.
These earth stations are expected to be marketed for less than $20,000.
MOBILE SATELLITE SYSTEM RADIO FREQUENCY TERMINALS. These terminals are a
component of the mobile satellite system gateways expected to be used to
interface between terrestrial telephone networks and satellites that communicate
with mobile land-, air- and sea-based terminals. The Company has designed one
version of this terminal in concert with Hughes Network Systems and another
version in concert with Thomson. Both versions incorporate innovative
proprietary designs which provide L-band interfaces between an earth station's
radio frequency equipment and baseband equipment. Antenna sizes range from 4.5
to 16 meters. These terminals are expected to be marketed primarily to prime
contractors at prices ranging from approximately $500,000 to $2.0 million.
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<PAGE>
GROUND SEGMENT SYSTEM INSTALLATIONS
The following are examples of ground segment systems sold or currently being
installed by the Company:
BRITISH TELECOMMUNICATIONS PLC ("BT") INTELSAT STANDARD A SYSTEM
UPGRADE. The Company has designed and installed an Intelsat Standard A ground
segment system upgrade for BT in the United Kingdom for international voice and
digital video transmission. The implementation of this system required the
supply of a new tracking system for an existing BT antenna, an electronics
shelter built to stringent standards, high-power amplifiers, radio frequency
high-power multiplex equipment, up and down converters, and advanced monitor and
control software.
VSAT HUB SYSTEMS. The Company has designed and installed a 9-meter C-band
hub earth station for Hughes Network Systems as part of a VSAT network in
Brazil. The Company utilized its modular building block (MBB) family of
customizable products to meet an accelerated delivery schedule. The Company has
also entered into a contract to provide a 9-meter C-band hub earth station for
AT&T Corporation as part of a VSAT network in Russia, where the Company is
utilizing its commercial terminal family (CTF) of customizable products to
provide a low-cost solution and meet an accelerated delivery schedule.
TELEPORT TP EUROPEAN TELECOMMUNICATIONS SATELLITE ORGANIZATION ("EUTELSAT")
TDMA EARTH STATION SYSTEM. The Company has provided Hughes Network Systems with
an earth station for use in the Eutelsat telephony/data network. This earth
station required sophisticated engineering and implementation due to the high
data rates used by Eutelsat's network. The Company incorporated the C-Grams
earth station management systems into its design to simplify operation of the
earth station by the end user, Teleport TP in Moscow.
ASKYB DIRECT-TO-HOME TRANSMIT SYSTEMS. The Company has entered into a
contract to supply uplink facilities for ASkyB consisting of four 13-meter
antennas with transmit/receive capabilities in the broadcast satellite services
band. The transmit facilities will include eight operational and two backup
uplinks for each of the four antennas. This configuration will provide extremely
high availability of service as well as ease of operation. The Company is
developing customizable designs for future application in other direct broadcast
system uplinks.
GROUND SEGMENT NETWORK INSTALLATIONS
The following are examples of ground segment networks sold or currently
being installed by the Company:
SONANGOL TELECOMMUNICATIONS NETWORK. The Company was awarded a contract to
provide a satellite and cellular telecommunications network comprised of a hub
earth station and 15 remote earth stations for Sonangol, U.E.E., a large oil
supply consortium with operations in remote areas in Africa not served by
terrestrial communications services. The network will also provide
cost-effective cellular coverage at some of the remote oil company locations by
linking those sites back to the central office mobile subscriber switch via
satellite, as well as trunks from remote areas to the company headquarters and
interconnectivity to the local telephone company at the capital city.
THAILAND MINISTRY OF HEALTH TELEMEDICINE NETWORK. The Company has been
awarded a subcontract by Loxley Public Company Limited ("Loxley"), a
telecommunications infrastructure provider in Thailand, to design, assemble and
install, together with Loxley, a telemedicine network comprised of 20 earth
stations in Thailand for the Ministry of Health. This network will provide video
conferencing and bandwidth on demand for transferring images and data from
diverse types of electronic medical diagnostic tools such as X-ray, CAT scan,
and electrocardiogram machines to and from medical personnel situated in remote
locations.
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<PAGE>
HYUNDAI NETWORKS. The Company was recently awarded a contract to provide a
corporate network for restoral of terrestrial circuits and for video
broadcasting for Hyundai Electronics Industries Co. Ltd. ("Hyundai") in Korea.
This proposed network is to be comprised of a hub earth station and 12 remote
earth stations with high-speed data capability and an additional 60 locations
with digital video receive-only capability. In addition, the Company and Hyundai
recently designed, assembled and installed, on an accelerated schedule, a
demonstration private corporate network comprised of five earth stations in
Korea. This network provides interconnection between up to five Hyundai
locations for a broad range of purposes, including voice, data and video
conferencing. The Company is working with Hyundai to market similar networks to
other customers in Korea.
NETSAT DATA COMMUNICATIONS SERVICES
The Company's NetSat 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 provides data
communications services through either a one-way satellite downlink using HNS'
DirecPC Terminal linked to existing terrestrial communications infrastructure,
or through a two-way satellite uplink/downlink using a NetSat Direct Terminal,
which consists of an HNS DirecPC Terminal integrated with an HNS Personal Earth
Station. Each project for which NetSat uses HNS's DirecPC technology will
require the grant of a license from HNS to NetSat. HNS is under no obligation to
grant such licenses and no assurance can be given that NetSat will be able to
obtain licenses from HNS on acceptable terms, or at all. See "Risk
Factors--Reliance on Strategic Relationships." NetSat currently has entered into
a value-added reseller agreement with HOT for sales of DirecPC and Personal
Earth Station 5000 products in certain Eastern European countries. The
value-added reseller arrangement is not contingent upon the grant of any license
from HNS to NetSat.
In the future, NetSat intends to offer a range of options and accessories to
permit value-added resellers to deliver reliable, cost-effective turnkey
solutions to their customers. These options are expected to include multimedia
PCs, alternative antenna configurations, local area network ("LAN") servers and
custom system configurations. NetSat's Network Operations Center ("NOC"), when
functional, will provide 24-hour technical support, as well as a customer and
billing database and certain other functions such as a domain name service, a
mail server and a Web server. NetSat also expects to offer its customers the
ability to access customized interactive multimedia program content developed
for specific user groups.
NETSAT INFRASTRUCTURE
The DirecPC Terminal is a two-way Internet access terminal with a satellite
downlink of 400 Kbps from the Internet, approximately three times as fast as a
terrestrial ISDN line, and a standard dial-up modem to access and send requests
to the Internet. This Internet connection can be routed through either a local
Internet service provider or one of the proposed regional NetSat satellite
gateways. In locations where terrestrial connections do not exist or are not
economically or practically feasible, the DirecPC Terminal downlink can be
integrated with an HNS Personal Earth Station uplink to form the NetSat Direct
Terminal, a small satellite earth station system that can provide the user with
two-way direct satellite access to the Internet and other data communications
services. With a NetSat Direct Terminal, the customer request channel is
uplinked at 19.2 Kbps and is designed to be connected via the NetSat regional
satellite gateway to NetSat's planned NOC in Hauppauge, New York, and then into
the Internet. Responses from the Internet to either a DirecPC unit or a NetSat
Direct Terminal will pass through NetSat's NOC to the regional gateway, and will
be transmitted to the terminal units via satellite link at 400 Kbps.
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<PAGE>
The following diagram illustrates how information will flow through the
NetSat system once the NOC is operational.
Artwork: Two graphics each depicting the flow of information through the NetSat
system. One such graphic represents the NetSat DirectPC Terminal (One-Way). The
second such graphic represents the NetSat Direct Terminal (Two-Way).
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<PAGE>
STRATEGIC RELATIONSHIPS
A key element of the Company's strategy is to establish strategic customer
and supplier relationships. The Company selects its strategic customers and
suppliers based on many factors, including technical capability, geographic
location and market presence. The Company has found that making an equity
investment in a supplier, or allowing a customer to acquire an equity interest
in it, strengthens the relationship and results in greater awareness of the
Company's capabilities by potential customers as well as referrals of potential
projects to the Company by its strategic customers.
The following table sets forth certain information regarding the Company's
strategic relationships as of June 30, 1997:
<TABLE>
<CAPTION>
PRO FORMA
OWNERSHIP OWNERSHIP %
COMPANY % OF GSI(1) HELD BY GSI(2) STATUS RELEVANT BUSINESS
- --------------------------------- --------------- ----------------- -------------- ---------------------------------
<S> <C> <C> <C> <C>
Hughes Network Systems 2.5% -- Customer Satellite networks
Thomson 5.1%(3) -- Customer Military communications systems
Shiron -- 19.0% Supplier Low-cost satellite modems
C-Grams -- 6.6% Supplier Earth station management systems
Armer -- 17.0% Supplier Site engineering services
Applied Theory -- -- Customer/ Commercial Internet service
Supplier
</TABLE>
- ------------------------------
(1) Pro forma for the sale of 2,750,000 shares in this Offering.
(2) Does not include the Company's options and warrants to purchase additional
capital stock of such companies.
(3) Does not include Thomson's right to receive 1% of the Company's then
outstanding share capital (measured at the time of issuance) for each of its
next four consummated orders with the Company of at least $3.0 million
through May 1998.
HUGHES NETWORK SYSTEMS
Hughes Network Systems is a division of Hughes Electronics Corp., a leading
supplier of satellites and satellite-delivered communications infrastructure
solutions and a subsidiary of General Motors Corporation. Hughes Network Systems
provides the Company with opportunities to act as a subcontractor, supplying
earth stations to complement HNS' system and network offerings. After giving pro
forma effect to the issuance of the shares in this Offering, Hughes Network
Systems will own approximately 2.5% of the Company's Common Stock, which
interest was acquired in August 1994 in exchange for a commitment by Hughes
Network Systems to purchase certain systems from the Company. Hughes purchased
such systems and has no current contractual commitment to purchase any
additional systems from the Company.
In August 1996, Hughes Network Systems invested $250,800 in convertible
preferred stock of NetSat, convertible into 19.0% of NetSat's Common Stock and
received a five-year option to purchase up to an additional 10.0% of NetSat's
Common Stock under specified circumstances. NetSat uses the HNS DirecPC Terminal
and Personal Earth Station products in its data communications systems. Each
project for which NetSat uses HNS' DirecPC technology will require the grant of
a license from HNS to NetSat. Hughes Network Systems is under no obligation to
grant such licenses, and no assurance can be given that NetSat will be able to
obtain licenses from Hughes Network Systems on acceptable terms, or at all. See
"Risk Factors--Reliance on Strategic Relationships."
NetSat entered into an agreement in January 1997 with HOT pursuant to which
NetSat will act as a nonexclusive value-added reseller of HOT satellite
telecommunications services and sales of HOT's DirecPC and Personal Earth
Station 5000 products in certain European countries.
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<PAGE>
THOMSON-CSF
Thomson is a leading supplier of professional electronics for civil and
military markets. In connection with its purchase in 1995 of 199,500 shares of
Common Stock for $933,100, Thomson agreed to provide the Company with business
and marketing assistance in the satellite communications field and the Company
agreed to provide Thomson with satellite communications systems to complement
its radar and communication switching technology. Through March 31, 1997, the
Company had issued 37,147 shares of Common Stock to Thomson in exchange for
receipt of the first $1.5 million of purchase orders placed by Thomson. In
addition, under the agreement with Thomson, upon acceptance by the Company of
each of the next four $3.0 million of orders placed by Thomson through May 1998,
Thomson will receive shares of Common Stock equal to 1.0% of the Company's
Common Stock outstanding at such time. Upon the issuance of shares under this
agreement, the Company currently recognizes sales and marketing expense based on
a price of $4.68 per share, the fair market value of the shares at the date of
issuance, which was also the date of the agreement. Such amounts are recorded
initially in the balance sheet as prepaid expenses until the related orders are
recorded as revenue, at which time such amounts are recorded in the statement of
operations. Due to potential changes in the accounting treatment of such share
issuances, there can be no assurance that the Company, if it accepts such sales
orders, will not have to recognize sales and marketing expense based on the fair
market value at the date of purchase rather than at the date of the agreement.
The Company is negotiating with Thomson alternatives to the current agreement in
the event the potential changes in accounting treatment are put into effect. No
assurance can be given that an acceptable arrangement will be reached. Thomson
also has expressed its intention to purchase 71,538 shares in this Offering.
Thomson is currently marketing two versions of the Company's militarized triband
fly-away earth station products. See "Certain Transactions" for further
information regarding certain rights granted by the Company to Thomson including
preemptive rights, rights of first refusal and the right to appoint a member to
the Company's Board of Directors, all of which rights survive for so long as
Thomson's stock ownership does not fall below 5% of the outstanding share
capital of the Company as a result of Thomson selling or otherwise disposing of
a portion of its Shares.
SHIRON ADVANCED COMMUNICATIONS LTD.
In January 1996, the Company and Shiron Advanced Communications Ltd. formed
Shiron to develop a low-cost satellite modem to be incorporated into earth
station products targeted at bringing communications infrastructure to rural or
remote regions of developing countries. The Company plans to use the modem in
its digital earth station product line and in connection with the data
communications services, including Internet access, it will offer through
NetSat. The modem is being developed under a grant from the Israel-United States
Binational Industrial Research and Development Foundation (the "BIRD
Foundation") and the BIRD Foundation will receive a royalty from the proceeds of
sales of the modem. The Company holds 19.0% of Shiron's capital stock and has
options to purchase additional shares if the Company purchases certain
quantities of products from Shiron.
C-GRAMS UNLIMITED INC.
In August 1996, pursuant to agreements with C-Grams, a supplier of advanced
network and earth station management software, the Company purchased a 5.0%
equity interest in C-Grams for $400,278 and agreed to use C-Gram's earth station
monitor and control systems when appropriate. In May 1997, the Company purchased
an additional 1.6% interest in C-Grams for $150,000. The Company retains an
option to purchase up to an additional 13.4% in C-Grams. The Company believes
its investment in C-Grams will provide it with research and development in new
software products aimed at the Company's needs and access to customers who need
to develop optimized solutions for their network management requirements. See
"--GSI Ground Segment Systems and Networks" and "--Research and Development."
41
<PAGE>
ARMER COMMUNICATIONS ENGINEERING SERVICES, INC.
In November 1996, the Company purchased for $150,000 a 15.0% interest in
Armer, a field engineering company focused on the satellite communications
business. In March 1997, the Company purchased for $50,000 an additional 2.0%
interest in Armer. The Company retains an option to purchase up to an additional
8.0% interest in Armer. Armer complements the Company's satellite communications
engineering capability by providing qualified field installation/test personnel
for the implementation and test phase of turnkey projects.
APPLIED THEORY COMMUNICATIONS, INC.
In December 1996, NetSat and Applied Theory Communications, Inc. ("Applied
Theory"), a successor to a portion of a business conducted by NYSERNet, Inc., a
New York-based Internet and intranet service provider, entered into a Memorandum
of Understanding pursuant to which the companies agreed to work together to form
a joint venture in which Applied Theory would provide its Internet engineering
and operations capabilities to support the development and operation of the
planned NetSat NOC. The parties have agreed to jointly market their capabilities
to their existing and potential customers and to submit joint bids for
contracts, where appropriate. Further, the parties have agreed to form a joint
development team which will develop processes to help ensure the compatibility
of the partners and the success of the proposed venture. The parties have
reserved the right to independently pursue projects within the scope of their
individual expertise.
SALES AND MARKETING
The Company markets its products and services to prime communications
infrastructure contractors, PTTs, other telecommunications carriers, producers
and distributors of news and entertainment content and other corporations
through sales representatives in foreign countries as well as its sales and
marketing offices in Hauppauge, New York, Atlanta, Georgia, and Hong Kong. The
Company presently employs 25 persons with marketing responsibility, of which 13
are engaged in marketing on a full-time basis.
The Company applies a "project team" approach to identifying, obtaining and
maintaining customer accounts by grouping sales representatives, marketing
executives, business execution teams and account managers together to develop
close and continuing relationships with its customers. The Company's sales
representatives in foreign countries provide local presence and identify
prospective customers for the Company's marketing executives. The marketing
executives and associated business execution teams work together to develop
relationships with these customers, and ultimately obtain orders for the
Company's products or services. The business execution teams manage the accounts
on a day-to-day basis and long-term customers are assigned to an 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's Internet access and data
communications services is at an early stage of development. The Company
anticipates that such strategy will be carried out primarily through local joint
ventures and value added resellers in each of the countries in which it markets
its
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<PAGE>
services, depending on the capabilities of such partners and resellers, the
nature and location of prospective customers in such countries and the
particular communications infrastructure requirements and regulatory structure
of each potential market. The Company expects that members of senior management
will play a role in developing and maintaining relationships with local value
added resellers, joint venture partners and local partners.
CUSTOMERS
The Company's customers include prime communications infrastructure
contractors, PTTs and other telecommunications carriers, producers and
distributors of news and entertainment content and corporations. A partial list
of customers for whom the Company has designed ground segment system or network
solutions, the types of solutions, and the geographic location of the projects
are set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
CUSTOMER SOLUTION LOCATION
<CAPTION>
<S> <C> <C>
Hughes Network Systems, Inc. VSAT Hubs/MBB Various
Intelsat Standard A Kuwait
TDMA Earth Station Moscow
AT&T Corporation CTF Russia
EDS Corp. MBB Thailand
AO Rustel MBB Russia
CTF Russia
British Telecommunications plc Digital Video Broadcast Uplink Germany
Digital Video Broadcast Uplink United Kingdom
Orion Electronics Corp. of America Intelsat Standard A United States
Ministry of Posts and Telecommunications Intelsat Standard A China
(China)
Bezeq The Israel Telecommunication Corp. Digital Video Broadcast Uplink and Israel
Ltd. Receive-Only Earth Station
Satellite Technology Management, Inc. Intelsat Standard A Malaysia
C.P.R.M. (Marconi) of Portugal Digital Fly-Away Earth Station Portugal
CTF and Overall Network Africa
United Nations Digital Transportable Earth Station Croatia
Thomson-CSF Tactical Military Terminals France
Thailand Ministry of Health CTF and Overall Network Thailand
Hyundai Corp. CTF and Overall Network Korea
Transworld Communications, Inc. MBB Russia
American Sky Broadcasting LLC Direct Broadcast Uplinks/Video Reception United States
Systems/ TT&C
Tele-TV Video Reception System United States
Bell Atlantic Corp. Video Reception System United States
Sonangol, U.E.E. Cellular/Satellite Network Africa
Nilesat Direct Broadcast Uplinks/Video Egypt
Hong Kong Tel C-Band Earth Station Hong Kong
C.S. Communications Direct Broadcast Uplinks/Video Thailand
Plessey Telecommunications Ltd. Intelsat Standard C South Africa
Soros Foundation Affiliates in Eastern Internet access through NetSat Serbia, Bulgaria,
Europe Slovenia
</TABLE>
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<PAGE>
The Company typically relies upon a small number of customers for a large
portion of its revenues. For example, based on preliminary year-end unaudited
results approximately 29% and 12% of the Company's revenues in fiscal 1997 were
derived from sales to ASkyB and Hughes Network Systems. At June 30, 1997, based
on preliminary year-end unaudited results $20.8 million, or approximately 51% of
the Company's backlog, was accounted for by a contract between the Company and
Sonangol, U.E.E. and $5.0 million, or approximately 12% of the Company's
backlog, was accounted for by a contract between the Company and ASkyB. 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
Based on preliminary year-end unaudited results, at June 30, 1997, the
Company's backlog was approximately $40.8 million (approximately 69% of which is
expected to be delivered during fiscal 1998) compared with approximately $11.6
million at June 30, 1996. The Company records an order in backlog when it
receives a firm contract or purchase order which identifies product quantities,
sales price and delivery dates. Backlog represents the amount of unrecorded
revenue on undelivered orders and a percentage of revenues from sales of
products that have been shipped but have not been accepted by the customer. The
Company's backlog at any given time is not necessarily indicative of future
period revenues. While from time to time a substantial portion of the Company's
backlog has been comprised of large orders, the cancellation of any of which
could have a material adverse effect on the Company's operating results, the
Company to date has not experienced significant changes in its backlog from
cancellations or revisions of orders. See "Risk Factors--Customer
Concentration."
PRODUCT DESIGN, ASSEMBLY AND TESTING
The Company assigns a project team to each contract into which it enters.
The project team is led by a project engineer who is responsible for execution
of the project process, which includes engineering and 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 entered 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 has designed its processes and procedures
based on ISO 9001 requirements and believes, although there can be no
assurances, that certification will be completed in a timely manner.
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
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<PAGE>
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--Risks of
Fixed-Price Contracts," "--Quarterly Fluctuations" 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 a compact digital earth station and
other customizable systems. Through March 31, 1997, the Company has incurred
$1.1 million in internal research and development expenses.
COMPETITION
The markets for both ground segment systems and networks and
satellite-delivered data communications services are highly competitive. Many of
the Company's competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to the Company. As a result, such competitors may be able
to develop and expand their products and services more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products and services than
can the Company. In addition, there are limited barriers to entry in the
Company's markets and certain of the Company's strategic suppliers and customers
have technologies and capabilities in the Company's product areas and could
choose to compete with the Company or to replace the Company's products or
services with their own. The entry of new competitors, the decision by a
strategic ally to compete with the Company or the decision by a customer to
develop and employ in-house capability to satisfy its satellite communications
needs could have a material adverse effect on the Company's business, financial
condition and results of operations.
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 ("NEC"), California
Microwave, Inc. ("CMI"), Scientific-Atlanta, Inc. and ComSat RSI and (ii) system
45
<PAGE>
integrators such as Engineering & Technical Services and IDB Systems, a division
of LDDS Worldcom Inc. In the satellite-delivered data communications (including
Internet) services market, while the Company expects to cooperate with many
local providers, the Company may compete with other satellite communication
companies as they develop technology in this area as well as conventional
Internet services providers, such as Uunet Technology, Inc., NETCOM On-Line
Communication Services, Inc. and PSINet Inc. 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 a significantly lower price or
bundled with other products. In addition, current and potential competitors in
both markets 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 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, results of operations and
financial condition.
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. There can be no assurance that others will not
independently develop or acquire substantially equivalent techniques or
otherwise gain access to the Company's proprietary and confidential
technological expertise or disclose such technologies or that the Company can
ultimately protect its rights to such proprietary technological expertise.
The Company generally relies on confidentiality agreements with its
consultants, key employees and sales representatives to protect its proprietary
technological expertise, and generally controls access to and distribution of
its technology, software and other proprietary information. Despite these
precautions, there can be no assurance that such agreements will not be
breached, that the Company will have adequate remedies for any such breach or
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.
See "Risk Factors--Proprietary Technology; Risk of Infringement."
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
46
<PAGE>
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company currently has two patent applications pending in the United
States and a PCT application, corresponding to one of the United States
applications, is pending in a number of foreign jurisdictions. The Company also
intends to seek further patents on its technology, if appropriate. There can be
no assurance that patents will issue from any of the Company's pending or any
future applications or that any claims allowed from such applications will be of
sufficient scope or strength, or be issued in all countries where the Company's
products can be sold, to provide meaningful protection or any commercial
advantage to the Company. Also, competitors of the Company may be able to design
around the Company's patents. The laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold may not protect
the Company's products or intellectual property rights to the same extent as do
the laws of the United States and thus make the possibility of piracy of the
Company's technology and products more likely.
The Company has filed applications for trademark registration of Globecomm
Systems Inc. in the United States and of NetSat in the United States, Singapore,
the European Union, the Russian Federation and Brazil, and intends to seek
registration of other trademarks in the future. There can be no assurance that
registrations will be granted from any of the Company's pending or future
applications, or that any registrations that are granted to the Company will
prevent others from using similar trademarks in connection with related goods
and services.
GOVERNMENT REGULATION
The Company is subject to various federal laws and regulations which may
have negative effects on the Company. The operation of the teleport (a group of
transmit earth stations) that the Company intends to construct in Hauppauge, New
York, will be subject to regulation by the FCC for domestic and international
carriage and by government agencies in other countries. The Company's
transmission of voice and data for its data communications business through the
teleport must be licensed by the FCC for domestic and international service.
Additionally, a Certificate of Public Convenience and Necessity ("CPCN") must be
obtained and a tariff filed for the provision of international service.
To receive the license for domestic service, the Company must submit an
application which contains technical information about the proposed teleport and
a demonstration of the public interest aspects of the teleport, including a
shareholder list and a statement that the Company's ownership complies with the
FCC's foreign ownership restrictions for licensees. Under the FCC Rules and
Regulations, non-U.S. citizens or their representatives, foreign governments, or
corporations otherwise subject to control by non-U.S. citizens, may not own more
than 20% of a licensee directly, or, if the FCC finds it consistent with the
public interest, may not own more than 25% of the parent of a licensee. Non-U.S.
citizens may not serve as officers of a licensee or as members of a licensee's
board of directors, although the FCC may waive this requirement in whole or in
part. Failure to comply with these requirements may result in the FCC issuing an
order to the entity requiring divestiture of alien ownership to bring the entity
into compliance with the FCC Rules and Regulations. In addition, fines, a denial
of renewal or revocation of the license are possible. The Company has no
knowledge of any present foreign ownership which would result in a violation of
the FCC Rules and Regulations, but there can be no assurance that foreign
holders will not in the future hold more than 20% or 25% of the Common Stock of
the Company.
The application, if accepted for filing, is placed on public notice for 30
days. After the notice period, the FCC determines whether the application should
be granted. If the license is granted, the teleport must be constructed and made
operational within twelve months from the date of the license grant. The Company
will have to file annual reports with the FCC indicating modifications, project
status and changes in foreign ownership. The Company is in the process of
preparing the application and there can be no assurance that the FCC will grant
a license for the teleport.
47
<PAGE>
With respect to international service, the Company must submit an
application to the FCC for a CPCN which is placed on public notice and, if no
comments are received, automatically granted on the 36th day following
publication. The Company will also be required to file and maintain tariffs
containing the specific rates, terms and conditions applicable to its services.
The tariffs can become effective one day after public notice of grant of the
CPCN. No assurance can be given that the Company will receive a CPCN or
successfully file and maintain its tariff.
Regulatory schemes in countries in which the Company may seek to provide its
satellite-delivered data communications services may impose impediments on the
Company's operations. Certain countries in which the Company intends to operate
have telecommunications laws and regulations that do not currently contemplate
technical advances in broadcast technology such as Internet/intranet
transmission by satellite. There can be no assurance that the present regulatory
environment in any such country will not be changed in a manner which may have a
material adverse impact on the Company's business. The Company or its local
partners typically must obtain authorization for each country in which the
Company provides its satellite-delivered data communications services. Although
the Company believes that it or its local partners will be able to obtain the
requisite licenses and approvals from the countries in which the Company intends
to provide service, the regulatory schemes in each country are different and
thus there may be instances of noncompliance of which the Company is not aware.
Although the Company believes these regulatory schemes will not prevent the
Company from pursuing its business plan, there can be no assurance such licenses
and approvals are or will remain sufficient in the view of foreign regulatory
authorities, or that necessary licenses and approvals will be granted on a
timely basis in all jurisdictions in which the Company wishes to offer its
services or that restrictions applicable thereto will not be unduly burdensome.
The Company's Internet operations (other than the operation of a teleport)
are not currently subject to direct government regulation in most countries, and
there are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is likely that a number of laws and regulations may be adopted
at the local, national or international levels with respect to the Internet,
covering issues such as user privacy and expression, pricing of products and
services, taxation, advertising, intellectual property rights, information
security or the convergence of traditional communication services with Internet
communications. For example, the Telecommunications Act of 1996 (the
constitutionality of certain portions of which is currently under challenge) was
recently enacted in the United States, and imposes criminal penalties via the
Communications Decency Act (or "CDA") on anyone who distributes obscene,
lascivious or indecent communications over the Internet. 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.
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<PAGE>
The sale of the Company's ground segment systems and networks outside the
United States is subject to compliance with the regulations of the United States
Export Administration Regulations. The absence of comparable restrictions on
competitors in other countries may adversely affect the Company's competitive
position. In addition, in order to ship its products into European Union
countries, the Company must satisfy certain technical requirements. If the
Company were unable to comply with such requirements with respect to a
significant quantity of the Company's products, the Company's sales in Europe
could be restricted, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1997, the Company had 88 full-time employees, including 45 in
engineering and program management, 15 in the manufacturing and manufacturing
support group, 13 in sales and marketing, and 15 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.
FACILITIES
The Company's principal offices and production facilities currently are
located in approximately 20,000 square feet of space in an industrial facility
located at 375 Oser Avenue, Hauppauge, New York. The Company leases the space
under an agreement which terminates on November 30, 1998 with a base rent of
$105,000 per year. In December 1996, the Company purchased 121,830 square feet
of space in a facility on 7.2 acres located at 45 Oser Avenue, Hauppauge, New
York, where the Company intends to move its and NetSat's principal offices and
production facilities in July 1997. The Company has a one-year lease on office
space in Hong Kong at a monthly rental fee (including maintenance fees) of
approximately $3,000. The Company also leases office space in the Atlanta,
Georgia, area under a three-year lease at an initial base monthly rent of
$1,750, which rental amount increases in years two and three of the lease and is
currently $1,820 per month. NetSat's principal offices currently are located in
approximately 3,000 square feet of space located at 400 Oser Avenue, Hauppauge,
New York, which NetSat leases on a month-to-month basis, at a monthly rent of
$2,500.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The directors, executive officers and other key employees of the Company are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
David E. Hershberg................................... 60 Chief Executive Officer and Chairman of the Board of
Directors
Kenneth A. Miller.................................... 52 President and Director
Thomas A. DiCicco.................................... 46 Vice President--Government Systems, Corporate
Secretary and Director
Donald G. Woodring................................... 50 Vice President--Network and Systems Analysis and
Director
Stephen C. Yablonski................................. 50 Vice President--Commercial Systems and Director
Ray Stuart........................................... 59 Vice President--International Marketing
Paul J. Johnson...................................... 41 Vice President--Contracts
Andrew C. Melfi...................................... 44 Chief Financial Officer
Gerald A. Gutman..................................... 54 President--NetSat Express
Gary C. Gomes........................................ 52 Executive Vice President--NetSat Express
Herman Fialkov(1).................................... 75 Director
Shelley A. Harrison.................................. 54 Director
Benjamin Duhov....................................... 69 Director
C.J. Waylan(1)....................................... 55 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee and the Compensation Committee.
DAVID E. HERSHBERG founded the Company in 1994 and has served as Chief
Executive Officer and Chairman of the Board of Directors since its inception.
From 1976 to 1994, Mr. Hershberg was the President of Satellite Transmission
Systems, Inc. ("STS"), a provider of satellite ground segment systems and
networks, which he founded and which became a subsidiary of CMI. From 1990 to
1994, Mr. Hershberg also served as Group President of the Satellite
Communications Group of CMI, where he also had responsibility for EFData, Inc.,
a manufacturer of satellite communications modems and for Viasat Technology
Corp. ("Viasat"), a manufacturer of communications systems which specialized in
portable and mobile satellite communications equipment. Mr. Hershberg headed the
Space Communications division of ITT Corporation from 1968 to 1972, and the
Systems Division of Comtech Systems, Inc. ("Comtech") from 1972 to 1976. Mr.
Hershberg is a Director of Primus Telecommunications Group, Incorporated
("Primus"), a telecommunications company providing long distance services. He
holds a B.S.E.E. from Rensselaer Polytechnic Institute, an M.S.E.E. from
Columbia University and an M.S. in Management Science from Stevens Institute of
Technology.
KENNETH A. MILLER has served as President and a Director since joining the
Company in November 1994. From 1978 to 1994, he held various positions with STS,
and succeeded Mr. Hershberg as President of that company in 1994. During his
tenure at STS, Mr. Miller developed and implemented satellite communications
systems and networks for customers in the United States and overseas. Prior to
his employment at
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STS, Mr. Miller was Manager of Satellite Systems at Comtech and a Satellite
Communications Staff Officer with the United States Army. Mr. Miller holds an
M.B.A. from Hofstra University and a B.S.E.E. from the University of Michigan.
THOMAS A. DICICCO has served as Vice President--Government Systems,
Corporate Secretary and a Director since joining the Company in October 1994.
From 1988 to 1994, he was employed by STS, most recently as Senior Director. He
was Vice President of Engineering at Comtech from 1979 to 1988 and was employed
by the AIL Division of Cutler Hammer from 1970 to 1979. Mr. DiCicco holds a
B.S.E.E. from Hofstra University and an A.S. in Engineering Science from SUNY at
Farmingdale.
DONALD G. WOODRING has served as Vice President--Network and Systems
Analysis and a Director since joining the Company in October 1994. From 1982 to
1994, he was Assistant Vice President for System Analysis at STS. From 1980 to
1982, he was employed by the SHAPE Technical Center and from 1972 to 1980 was
employed by the U.S. Department of Defense. Mr. Woodring holds a B.S. from Penn
State University and an M.S.E.E. from Catholic University.
STEPHEN C. YABLONSKI has served as Vice President--Commercial Systems and a
Director since joining the Company in April 1995. From 1988 to 1995, he was
employed by STS, most recently as Vice President and General Manager of the
Commercial Systems and Networks Division. Prior to that he was Vice President of
Engineering at Argo Communications, a telecommunications services provider. Mr.
Yablonski holds a B.S.E.E. from Brown University and an M.S.E.E. from the
University of Pennsylvania.
RAY STUART has served as Vice President--International Marketing since
joining the Company in July 1995. From 1989 to 1995, he was employed by Comsat
RSI, a satellite communications equipment supplier, most recently as Vice
President of Business Development. Mr. Stuart holds a B.S.E.E. from Mississippi
State University.
PAUL J. JOHNSON has served as Vice President--Contracts since joining the
Company in October 1996. From 1991 to 1996, he was Director of Contracts for
STS. He holds a B.B.A. from St. Bonaventure University.
ANDREW C. MELFI has served as Chief Financial Officer since joining the
Company in January 1996. From 1982 to 1995 he was the Controller of STS. From
1980 to 1982, he was the Assistant Controller of Dorne and Margolin, Inc., a
designer and manufacturer of antennas. Mr. Melfi holds an M.B.A. and a B.B.A. in
accounting from Dowling College.
GERALD A. GUTMAN has served as President of NetSat since July 1996. From
February 1996 to June 1996, he served as a consultant to the Company. In 1987,
he founded Viasat, where he served as Chief Executive Officer from 1987 to 1995.
From 1977 to 1987, Mr. Gutman served as President and Chief Executive Officer of
Nav-Com Incorporated, a satellite communications company providing
communications services to the maritime industry. Mr. Gutman has served as
Chairman of the COMSAT Manufacturer's Advisory Committee to Inmarsat, Vice
Chairman of the Mobile Satellite User's Association and as President of the
National Marine Electronics Association. He holds a B.B.A. in Marketing from
Hofstra University.
GARY C. GOMES has served as Executive Vice President of NetSat since January
1997 and he served as Vice President of the Company from September 1995 to
December 1996. From October 1994 to September 1995, Mr. Gomes served as a
consultant to the Company. Prior to that, he was Senior Vice President of
Marketing at STS, where he was employed from March 1983 to September 1995. From
1971 to 1981, he was employed by Fairchild Industries, Inc., a provider of
services to the aerospace industry. Mr. Gomes holds a B.A. in Mathematics and
Economics from California Western University, an M.S.I.A. from Carnegie Mellon's
Graduate School of Industrial Administration and a J.D. from the Law School of
the University of Pennsylvania.
HERMAN FIALKOV has served as a Director of the Company since January 1995.
In 1968, Mr. Fialkov started the venture capital firm of Geiger & Fialkov and
has been involved in venture investments since
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<PAGE>
that time. He has been a General Partner of PolyVentures Associates I, L.P., a
high technology venture capital fund since 1987. From 1972 to 1983, he was
President and later Chairman of Standard Microsystems Corporation, a
manufacturer and provider of large-scale integrated circuits and local area
network products, and is currently a Director of that company. He also is a
Director of Primus and a Trustee of Polytechnic University. Mr. Fialkov holds a
B.Ad.E. from New York University.
SHELLEY A. HARRISON has been a Director of the Company since July 1995.
Since 1987, Dr. Harrison has been a Managing General Partner of PolyVentures
Associates II, L.P. ("PolyVentures"). He currently serves as Chairman and Chief
Executive Officer of Spacehab, Inc., which develops, owns and operates habitable
modules that provide space-based laboratory research facilities and logistics
aboard the United States space shuttle fleet. In 1973, Dr. Harrison co-founded
Symbol Technologies Inc., a leading provider of bar code laser scanners and
portable terminals, where he served as Chairman and Chief Executive Officer
until 1982. As President of Harrison Enterprise, from 1982 to 1986, he managed
venture financing and technology start-ups. Dr. Harrison also is a Director of
NetManage, Inc., a software company specializing in personal information
management and Internet applications, and several privately held high technology
portfolio companies in the information, software, and telecommunications
industries. He is Chairman of the Board of Trustees of the New York State Center
for Advanced Technology in Telecommunications and a Trustee of Polytechnic
University. He holds a B.S.E.E. from New York University and an M.S. and a Ph.D.
in Electrophysics from Polytechnic University.
BENJAMIN DUHOV has been a Director of the Company since January 1996. He is
a Consultant and the President of Stamford Consulting Group which provides
consulting services to the aerospace industry. He worked for Thomson-CSF S.A.
from June 1975 to October 1993, and for CBS Laboratories, which was devoted to
technical developments in the television and defense industries, from 1972 to
1975. Mr. Duhov holds a B.S.E.E. from Washington University.
C. J. WAYLAN has been a Director of the Company since January 1997. He
currently serves as Executive Vice President of NextWave Telecom Inc.
("NextWave"), a provider of wireless personal telecommunications services. Prior
to joining NextWave in 1996, Dr. Waylan worked for GTE Corporation from February
1981 to April 1996, where he served as Executive Vice President for GTE Mobilnet
and President of GTE Spacenet Corporation. Dr. Waylan also is a Director of
Stanford Telecommunications, Inc., a communications technology company. Dr.
Waylan holds a B.S. from the University of Kansas and an M.S.E.E. and a Ph.D.
from the Naval Post Graduate School.
Messrs. Hershberg, DiCicco and Woodring were elected to the Board of
Directors pursuant to a voting agreement among certain stockholders of the
Company. This agreement will terminate upon the consummation of this Offering.
Mr. Duhov was elected to the Board of Directors pursuant to an agreement
between Thomson and the Company which grants Thomson the right to designate one
nominee for election to the Company's Board of Directors. This right terminates
if Thomson's stock ownership falls below 5% of the outstanding share capital of
the Company as a result of Thomson selling or otherwise disposing of a portion
of its shares.
Dr. Harrison was elected to the Board of Directors pursuant to an agreement
between PolyVentures and the Company. This agreement will terminate upon the
consummation of this Offering.
All directors hold office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified. All officers of the
Company are elected to serve in such capacities at the pleasure of the Board of
Directors. There are no family relationships among any of the directors and
executive officers of the Company.
The Audit Committee of the Board of Directors reviews, acts on and reports
to the Board of Directors with respect to various auditing and accounting
matters, including the selection of the Company's auditors,
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<PAGE>
the scope of the annual audits, fees to be paid to the auditors, the performance
of the Company's independent auditors and the accounting practices of the
Company.
The Compensation Committee of the Board of Directors determines the salaries
and incentive compensation of the officers of the Company and provides
recommendations for the salaries and incentive compensation of the other
employees and the consultants of the Company. The Compensation Committee also
administers various incentive compensation, stock and benefit plans.
DIRECTORS' COMPENSATION
Each of Messrs. Fialkov and Waylan receives a director's fee of $500 per
month. Other directors do not receive any cash compensation for their service as
members of the Board of Directors, although they are reimbursed for certain
expenses incurred in connection with attendance at Board and Committee meetings.
Currently, PolyVentures, with whom Dr. Harrison is affiliated, and Mr. Fialkov
have each been granted options to purchase 42,750 shares of Common Stock at an
exercise price of $3.51 per share. Mr. Waylan has been granted an option to
purchase 42,750 shares of Common Stock at an exercise price of $8.07 per share.
In addition, in February 1997, the Company adopted the 1997 Stock Incentive Plan
pursuant to which options will be granted to new non-employee directors of the
Company. See "1997 Stock Incentive Plan."
53
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company for services rendered during the fiscal year ended June 30, 1997
to: (i) the Company's Chief Executive Officer and (ii) all of the other
executive officers whose base salary during fiscal 1997 was at least $100,000
(together, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL -------------
COMPENSATION SECURITIES
------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY OPTIONS COMPENSATION(2)
- ------------------------------------------------------------------ ------------- ------------- -----------------
<S> <C> <C> <C>
David E. Hershberg,
Chairman and Chief Executive Officer............................ $ 165,000 -- $ 6,000
Kenneth A. Miller,
President....................................................... 160,000 85,500 6,000
Stephen A. Yablonski,
Vice President--Commercial Systems.............................. 120,000 149,250 --
Ray Stuart,
Vice President--International Marketing......................... 126,000 69,469 5,040
Thomas A. DiCicco,
Vice President--Government Systems.............................. 100,000 71,250 4,000
Donal G. Woodring,
Vice President--Network and Systems Analysis.................... 100,000 71,250 4,000
Gerald A. Gutman,
President--NetSat Express....................................... 100,000 114,000 2,769
</TABLE>
- ------------------------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted as the aggregate amount of such perquisites and other
personal benefits constituted the lesser of $50,000 or 10% of the total
annual salary and bonus of the Named Executive Officer for such year. The
Company did not award a bonus to any of its executive officers during fiscal
1997.
(2) Includes annual registrant contributions to the Company's 401(k) plan.
STOCK OPTION GRANTS
The following table sets forth certain information regarding the option
grants made pursuant to the Company's Incentive Stock Option Plan during fiscal
1997 to each of the Named Executive Officers. The Company has never granted any
stock appreciation rights.
54
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
NUMBER OF APPRECIATION FOR
SECURITIES PERCENTAGE OF OPTION TERM(3)
UNDERLYING OPTIONS TOTAL OPTIONS EXERCISE EXPIRATION ------------------------
NAME GRANTED GRANTED(2) PRICE DATE 5% 10%
- ------------------------ ------------------ --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
David E. Hershberg...... -- -- -- -- -- --
Kenneth A. Miller....... 17,100 2.3% $ 8.07 11/21/06 $ 86,786 $ 219,932
Stephen A. Yablonski.... 8,550 1.2 8.07 11/21/06 43,393 109,966
Ray Stuart.............. 14,250 1.9 8.07 11/21/06 72,321 183,276
Thomas A. DiCicco....... 14,250 1.9 8.07 11/21/06 72,321 183,276
Donald G. Woodring...... 14,250 1.9 8.07 11/21/06 72,321 183,276
Gerald A. Gutman........ 114,000 15.5 8.07 11/21/06 578,573 1,466,211
</TABLE>
- ------------------------
(1) All option grants to employees of the Company vest in four equal annual
installments commencing one year after the date of the option grant.
(2) Based on an aggregate of 733,448 options granted to employees in fiscal
1997, including options granted to the Named Executive Officers.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options at the end of the ten-year option term. The assumed 5%
and 10% rates of stock appreciation are mandated by rules of the Securities
and Exchange Commission and do not represent the Company's estimate of the
future market price of the Common Stock.
No options were exercised by the Named Executive Officers in 1997. The
following table sets forth, for each of the Named Executive Officers, certain
information concerning the value of unexercised options at the end of fiscal
1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED NET VALUES OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS(1)
-------------------------- --------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ----------- ------------- ----------- -------------
David E. Hershberg..................................... -- -- -- --
Kenneth A. Miller...................................... 17,100 68,400 $ 108,072 $ 374,319
Stephen A. Yablonski................................... 64,696 84,644 408,879 505,966
Ray Stuart............................................. 13,805 55,664 87,254 303,490
Thomas A. DiCicco...................................... 14,250 57,000 90,060 311,933
Donald G. Woodring..................................... 14,250 57,000 90,060 311,933
Gerald A. Gutman....................................... -- 114,000 0 334,020
</TABLE>
- ------------------------
(1) Based on the estimated fair value of the Company's Common Stock at the end
of fiscal year 1997 valued at $11.00 per share (the assumed initial offering
price) less the exercise price payable for such shares.
1997 STOCK INCENTIVE PLAN
The Company's 1997 Stock Incentive Plan (the "1997 Plan") is intended to
serve as the successor equity incentive program to the Company's Incentive Stock
Option Plan and Director Stock Option Plan (the "Predecessor Plans"). The 1997
Plan was adopted by the Board of Directors on February 26, 1997 and subsequently
approved by the stockholders. 2,280,000 shares of Common Stock have been
initially authorized for issuance under the 1997 Plan. This share reserve is
comprised of (i) the shares which remained available for issuance under the
Predecessor Plans, including the shares subject to outstanding options
thereunder, plus (ii) an additional increase of 285,000 shares. This initial
share reserve will increase on the first trading day of each calendar year
beginning with the 1998 calendar year by one
55
<PAGE>
percent (1%) of the aggregate shares of Common Stock outstanding on the last
business day of the preceding calendar year. However, in no event may any one
participant in the 1997 Plan receive option grants or direct stock issuances for
more than 1,425,000 shares in the aggregate per calendar year.
Outstanding options under the Predecessor Plans will be incorporated into
the 1997 Plan upon the date of this Offering, and no further option grants will
be made under the Predecessor Plans. The incorporated options will continue to
be governed by their existing terms, unless the Plan Administrator elects to
extend one or more features of the 1997 Plan to those options. However, except
as otherwise noted below, the outstanding options under the Predecessor Plans
contain substantially the same terms and conditions summarized below for the
Discretionary Option Grant Program in effect under the 1997 Plan.
The 1997 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program, (ii) the Salary Investment Option Grant
Program, (iii) the Stock Issuance Program, (iv) the Automatic Option Grant
Program and (v) the Director Fee Option Grant Program.
The Discretionary Option Grant, Salary Investment Option Grant and Stock
Issuance Programs will be administered by the Compensation Committee. The
Compensation Committee as Plan Administrator will have complete discretion to
determine which eligible individuals are to receive option grants or stock
issuances, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the status
of any granted option as either an incentive stock option or a non-statutory
stock option under the Federal tax laws, the vesting schedule to be in effect
for the option grant or stock issuance and the maximum term for which any
granted option is to remain outstanding.
Under the Discretionary Option Grant Program, eligible individuals may, at
the discretion of the Plan Administrator, be granted options to purchase shares
of Common Stock at an exercise price not less than 85% of their fair market
value on the grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plans) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
Under the Stock Issuance Program, eligible individuals may, in the Plan
Administrator's discretion, be issued shares of Common Stock directly, through
the purchase of such shares at a price not less than 85% of their fair market
value at the time of issuance or as a bonus tied to the performance of services.
In the event that there is a change in control of the Company (including the
acquisition of more than 35% of the outstanding voting stock), each outstanding
option under the Discretionary Option Grant Program will automatically
accelerate in full, and all unvested shares under the Stock Issuance Program
will immediately vest. Options currently outstanding under the Incentive Stock
Option Plan will accelerate upon an acquisition of the Company by merger or
asset sale, but such options are not subject to acceleration upon a hostile
change in control of the Company. Options currently outstanding under the
Director Stock Option Plan accelerate upon the optionee's retirement, disability
or death, or if the Company executes an agreement pursuant to which the Company
is acquired by merger or asset sale or an acquisition (or increase in ownership)
by any person to more than 20% of the outstanding voting stock.
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<PAGE>
Under the Salary Investment Option Grant Program, selected executive
officers and other highly compensated employees may elect to have a portion of
their base salary invested each year in special option grants. The Plan
Administrator will have the discretion to determine the calendar years for which
the program is to be in effect and to select the individuals eligible to
participate in the program. For each year the Plan Administrator elects to
activate the Salary Investment Option Grant Program, each individual selected
for participation may elect, prior to the start of the calendar year, to reduce
his base salary for that calendar year by a specified dollar amount not less
than $5,000 nor more than $50,000. In return, the officer will automatically be
granted, on or before the last trading day in January of the calendar year for
which the salary reduction is to be in effect, a non-statutory option to
purchase that number of shares of Common Stock determined by dividing the salary
reduction amount by two-thirds of the fair market value per share of Common
Stock on the grant date. The option will be exercisable at a price per share
equal to one-third of the fair market value of the option shares on the grant
date. As a result, the built-in gain on the option at the time of grant will be
equal to the salary reduction amount. The option will vest in a series of 12
equal monthly installments over the calendar year for which the salary reduction
is in effect and will be subject to full and immediate vesting upon certain
changes in the ownership or control of the Company.
Under the Automatic Option Grant Program, each individual who first becomes
a nonemployee Board member on or after the date the Underwriting Agreement for
this Offering is executed will receive an option grant on such date for 15,000
shares of Common Stock, provided such individual has not otherwise been in the
prior employ of the Company and provided he is not serving as a member of the
Board pursuant to contractual rights granted to certain groups of stockholders
in connection with their purchase of stock in the Company.
Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of Board service. Each option
will be exercisable for those option shares which have vested. During the period
of service as a member of the Board, each 15,000-share grant will vest to the
extent of one-third of the number of shares granted thereby (5,000 shares), on
the first anniversary of the date of grant, and cumulatively to the extent of an
additional one-third, on each of the next two succeeding anniversaries, so that
on the third anniversary of the date of grant (provided service as a Board
member has continued throughout the period), the options granted to any Eligible
Director will be fully vested. However, each outstanding option will immediately
vest upon: (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.
Under the Director Fee Option Grant Program, nonemployee Board members may
elect to have all or any portion of any annual retainer fee otherwise payable in
cash applied to a special option grant. Each member who elects, prior to the
start of a calendar year, to apply all or any portion of his retainer fee for
that calendar year to the acquisition of an option will automatically be
granted, on the first trading day in the calendar year for which the salary
reduction is to be in effect, a non-statutory option to purchase that number of
shares of Common Stock determined by dividing the amount of the retainer fee
subject to the election by two-thirds of the fair market value per share of
Common Stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the built-in gain on the option at the time of grant
will be equal to the amount of the retainer fee subject to the election. The
option becomes exercisable for 50% of the option shares upon completion of six
(6) months of Board service in the calendar year for which the election is in
effect and the balance of the shares will become exercisable in a series of six
(6) equal monthly installments upon completion of each additional month of Board
service during that calendar year. The option will be subject to full and
immediate vesting upon certain changes in the ownership or control of the
Company.
The Board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate on February 25, 2007, unless sooner terminated by the Board.
57
<PAGE>
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company has entered into three-year employment agreements with each of
Messrs. Hershberg and Miller as of January 27, 1997 (the "Executive
Agreements"). Messrs. Hershberg and Miller are required to devote their
full-time efforts to the Company as Chairman of the Board and Chief Executive
Officer, and as President, respectively. The Company is required to compensate
Messrs. Hershberg and Miller at annual rates of $165,000 and $160,000,
respectively (which amounts are reviewed annually by the Board of Directors and
are subject to increase at their discretion). Messrs. Hershberg and Miller are
entitled to all employee benefits generally made available to executive
officers. If the Company terminates the Executive Agreements other than for
disability or cause, the Company will have the following obligations: (i) if the
termination is after the end of the initial three-year term, the Company must
pay the terminated executive one-twelfth of his then applicable base salary as
severance pay and (ii) if the termination is before the end of the initial
three-year term, the Company must pay to the terminated executive, as they
become due, all amounts otherwise payable if he had remained employed by the
Company until the end of the third year of the Executive Agreements. If their
employment is terminated other than for cause following a change of control of
the Company, each of Messrs. Hershberg and Miller will be entitled to receive:
(i) a cash payment equal to three times his respective annual base salary plus
fringe benefits and bonus, (ii) a cash payment equal to three times the
Company's 401(k) contribution for such executive and (iii) medical benefits for
one year for the executive and his dependents. In addition, all stock options
will become immediately exercisable upon a change of control. The definition of
"change in control" in the Executive Agreements is the same as in the 1997 Plan.
The Compensation Committee as Plan Administrator of the 1997 Plan will have
the authority to provide for the accelerated vesting of the shares of Common
Stock subject to outstanding options held by any executive officer or the shares
of Common Stock subject to direct issuances held by any such individual, in
connection with certain changes in control of the Company or the subsequent
termination of the executive officer's employment following the change in
control.
401(k) PLAN
The Company participates in a tax-qualified employee savings and retirement
plan (the "401(k) Plan") which covers all of the Company's employees with one
(1) month of service before the end of the preceding quarter who are at least 21
years of age. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by up to 20% and have the amount of such reduction
contributed to the 401(k) Plan. The Company matches 100% of the first 4% of such
contributions. In addition, the 401(k) Plan provides for discretionary
profit-sharing contributions in an amount determined each year by the Board of
Directors. The Company has not made any such discretionary profit-sharing
contributions under the Plan to date. The 401(k) Plan further provides for
additional voluntary contributions (which are made on an after-tax basis) by
Plan participants. The 401(k) Plan is intended to qualify under Section 401 of
the Internal Revenue Code of 1996, as amended, so that salary reduction
contributions by employees, matching or profit-sharing contributions by the
Company, and income earned on plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions by the Company
will be deductible by the Company when made. The Trustees under the 401(k) Plan,
at the direction of each participant, invest the assets of the 401(k) Plan in
one or more of several investment options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of the date of this Prospectus, the Company's Compensation Committee
consists of Mr. Fialkov and Dr. Waylan. Prior to this time, effective September
19, 1996, the Board elected a Compensation Committee consisting of Messrs.
Hershberg and Fialkov and Dr. Harrison. From February 21, 1995 to September 18,
1996, the Compensation Committee consisted of Mr. Fialkov and Mr. Andrew B.
Krieger (who is no longer a Director of the Company). Prior to that time,
decisions concerning the compensation
58
<PAGE>
of executive officers were made by the entire Board of Directors. Certain
members of the Company's Board of Directors are parties to transactions with the
Company. See "Certain Transactions."
KEY-PERSON LIFE INSURANCE
The Company maintains key-person life insurance policies on the life of Mr.
Hershberg in the amount of $1.0 million and on the lives of Messrs. Miller,
DiCicco, Woodring, Yablonski and Melfi in the amount of $500,000 for each.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that, except to the
extent prohibited by the Delaware General Corporation Law (the "Delaware Law"),
its directors shall not be personally liable to the Company or its stockholders
for monetary damages for any breach of fiduciary duty as directors of the
Company. Under Delaware law, the directors have a fiduciary duty to the Company
which is not eliminated by this provision of the Certificate of Incorporation
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of nonmonetary relief will remain available. In addition, each
director will continue to be subject to liability under Delaware law for breach
of the director's duty of loyalty to the Company, for acts or omissions which
are found by a court of competent jurisdiction to be not in good faith or
involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited by
Delaware law. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. The Company has obtained liability
insurance for its officers and directors.
Section 145 of the Delaware Law empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of their capacity or status as directors and officers, provided that
this provision shall not eliminate or limit the liability of a director: (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the Delaware Law or (iv) for any transaction from which the
director derived an improper personal benefit. The Delaware Law provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, vote of stockholders or otherwise. The
Company's Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by Section 102(b)(7) of the Delaware
Law and provides that to the fullest extent permitted by law, the Corporation
shall fully indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the fact
that such person is or was a director or officer of the Corporation, or is or
was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate of Incorporation. The Company is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
59
<PAGE>
CERTAIN TRANSACTIONS
In October 1994, the Company's Chief Executive Officer lent the Company
$315,000, evidenced by a note bearing interest at 6% per annum. The principal
plus accrued interest in the aggregate amount of $354,423 was repaid in January
1997. During fiscal year 1995, the Chief Executive Officer lent the Company
$80,700 in noninterest-bearing working capital advances of which $60,000 was
repaid during fiscal 1995 and the remaining $20,700 balance was repaid during
fiscal 1996.
In December 1995, the Company lent Donald Woodring, an executive officer of
the Company, $150,000 to cover relocation expenses, repayable June 30, 1997 with
an annual interest rate of 5% per annum. Mr. Woodring paid all interest on the
loan as it came due. Mr. Woodring repaid the principal plus any accrued interest
in the aggregate amount of $153,437 on June 13, 1997.
In June 1995, the Company issued an aggregate of 1,218,982 shares of Common
Stock to various investors at a purchase price of $4.68 per share, including
106,901 shares to PolyVentures, a venture capital firm affiliated with Shelley
A. Harrison, a Director of the Company. In connection with the June 1995
offering, the Company sold to PolyVentures for a purchase price of $3,751 a
five-year warrant to purchase an additional 106,901 shares of the Company's
Common Stock at an exercise price of $5.26 per share. In January 1997,
PolyVentures exercised its warrant and the Company issued to PolyVentures
106,901 shares of its Common Stock.
In May 1996, the Company issued an aggregate of 156,250 shares of Class A
Convertible Preferred Stock (the "Class A Stock") at an aggregate purchase price
of $2.5 million to three investors, including 31,250 shares to PolyVentures,
convertible automatically upon the closing of this Offering into an aggregate of
445,313 shares of Common Stock.
In December 1996, the Company issued an aggregate of 432,142 shares of Class
B Convertible Preferred Stock (the "Class B Stock") at an aggregate purchase
price of $12.1 million to 77 investors, convertible automatically upon the
closing of this Offering into an aggregate of 1,231,605 shares of Common Stock.
In connection with the June 1995 and December 1996 private placements, the
Company engaged Northeast Securities, Inc. ("NSI") to serve as the placement
agent. Mr. Andrew B. Krieger, a former director of the Company, served as a
broker-dealer in the private placements through an affiliation with NSI. In
connection with these offerings, the Company paid Krieger Associates, of which
Mr. Krieger is the President and Chief Executive Officer, cash commissions
totaling an aggregate of $1,330,428. In addition, in connection with these
transactions, the Company has agreed to pay Krieger Associates further cash
commissions totaling an aggregate of $432,000, to be paid in monthly
installments over a 36-month period, of which the Company has paid $72,000 to
date. The Company also has retained Krieger Associates to perform certain
financial and other consulting services and to date has paid a total of
approximately $151,000 for the performance of such services since February 1995.
In addition, in connection with these private placements, the Company issued an
aggregate of 156,488 shares of Common Stock and 52,438 shares of Class B Stock,
convertible automatically upon the closing of this Offering into an aggregate of
149,448 shares of Common Stock, to Mr. Krieger, Krieger Associates, NSI and
certain individuals and entities designated by NSI or Mr. Krieger.
The shares of Common Stock issued in the June 1995 private placement and the
shares of Common Stock issued upon conversion of the Class A and Class B
Convertible Preferred Stock are entitled to certain registration rights. See
"Registration Rights of Certain Holders" and "Shares Eligible for Future Sale."
In November 1995, Thomson purchased 199,500 shares of the Company's Common
Stock at a price of $4.68 per share. Under the agreement with Thomson, Thomson
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
60
<PAGE>
(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 Thomson's stock ownership does not fall below 5% of the outstanding share
capital of the Company as a result of Thomson selling or otherwise disposing of
a portion of its shares. In connection with its preemptive right, Thomson has
expressed its intention to purchase 71,538 shares being offered in this Offering
which will enable it to maintain its percentage ownership of the Company.
Additionally, until May 1998, Thomson is to receive additional shares of Common
Stock based on orders placed with the Company. Pursuant to this agreement, in
November 1995, for its first $1.5 million of orders, the Company issued Thomson
37,147 shares of the Company's Common Stock which was equal to 1% of the
Company's Common Stock then outstanding. For each of its next four orders of at
least $3.0 million, Thomson is to receive an additional 1% of the Company's then
outstanding share capital (measured at the time of issuance). In August 1996,
the Company issued Thomson 16,054 shares of the Company's Class A Preferred
Stock, at a purchase price of $16.00 per share, convertible automatically upon
the closing of this Offering into an aggregate of 45,754 shares of Common Stock,
pursuant to its preemptive right granted by the Company to Thomson. In March
1997, the Company issued Thomson 29,420 shares of the Company's Class B
Preferred Stock at a purchase price of $28.00 per share, convertible
automatically upon the closing of this Offering into an aggregate of 83,847
shares of Common Stock, pursuant to the preemptive rights granted by the Company
to Thomson.
On July 1, 1996, the Company hired Donald Gutman, the brother of an
executive officer of the Company, as the Company's Director of Engineering at an
annual salary of $80,000 plus a standard benefit package.
In October 1996, PolyVentures purchased 18,939 shares of NetSat's Class A
Preferred Stock which in April 1997 the Company converted to 30,083 shares of
the Company's Common Stock.
From August 17, 1994 through March 31, 1997, the Company granted executive
officers and directors of the Company and employees, some of whom are immediate
family members of the Company's executive officers, a total of 909,079 stock
options for the purchase of the Company's Common Stock with exercise prices
ranging from $4.68 to $8.07 per share. See "Management--1997 Stock Incentive
Plan."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 1997, certain information
with respect to the beneficial ownership of shares of Common Stock of: (i) all
stockholders known by the Company to be the beneficial owners of more than 5% of
its outstanding Common Stock, (ii) each director of the Company and each Named
Executive Officer and (iii) all directors and executive officers of the Company
as a group. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and includes voting and investment power
with respect to shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED
PRIOR TO OFFERING(2) AFTER OFFERING(2)
NAME AND ADDRESS OF -------------------------- ------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
----------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
David E. Hershberg........................................... 1,282,500(3) 21.9% 1,282,500 14.9%
Kenneth A. Miller............................................ 273,600(4) 4.7 273,600 3.2
Stephen C. Yablonski......................................... 66,121(5) 1.1 66,121 *
Ray Stuart................................................... 24,048(6) * 24,048 *
Thomas A. DiCicco............................................ 142,500(7) 2.4 142,500 1.7
Donald G. Woodring........................................... 141,078(8) 2.4 141,078 1.6
Gerald A. Gutman............................................. -- -- -- --
Herman Fialkov............................................... 28,500(9) * 28,500 *
Shelley A. Harrison.......................................... 361,446 (10 6.1 361,446 4.2
Benjamin Duhov............................................... 5,700 * 5,700 *
C.J. Waylan.................................................. -- -- -- --
Thomson Corp. of America..................................... 366,248 (11 6.3 437,786 5.1
99 Canal Center Plaza
Suite 450
Alexandria, VA 22314
Vertex Investment (II) Ltd................................... 356,250 (12 6.1 356,250 4.1
c/o Vertex Management (II) Pte Ltd.
77 Science Park Drive
#02-15 Cintech III
Singapore Science Park
Singapore U511
PolyVentures II, Limited Partnership......................... 332,946 5.7 332,946 3.9
c/o Polytechnic University
901 Route 110
Farmingdale, NY 11735
All current directors and executive officers as a group (14
persons)................................................... 2,352,571 (13 38.8 2,352,571 26.7
</TABLE>
- ------------------------
* Represents less than 1%.
(1) Except as otherwise indicated, (i) the stockholders named in the table have
sole voting and investment power with respect to all shares beneficially
owned by them and (ii) the address of all stockholders listed in the table
is: c/o GSI, 45 Oser Avenue, Hauppauge, New York 11788.
(2) The number of shares of Common Stock deemed outstanding prior to this
Offering includes (i) 3,906,120 shares of Common Stock and (ii) 1,958,001
shares of Common Stock issuable upon the conversion of all outstanding
shares of Convertible Preferred Stock. Amounts shown for each stockholder
include (i) all shares of Common Stock issuable upon conversion of Preferred
Stock at the closing of this Offering and (ii) shares of Common Stock
underlying options, warrants and rights of first refusal exercisable within
60 days of June 30, 1997.
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<PAGE>
(3) Includes 342,000 shares of Common Stock held by certain members of Mr.
Hershberg's family. Mr. Hershberg has power of attorney to dispose of and
invest such shares and 171,000 shares of Common Stock held by Deerhill
Associates, a family partnership of which Mr. Hershberg is General Managing
Partner. Mr. Hershberg disclaims beneficial ownership of the shares held by
his family members and those held by Deerhill Associates except to the
extent of his proportionate pecuniary interest therein.
(4) Includes 54,150 shares of Common Stock held by certain members of Mr.
Miller's family of which Mr. Miller disclaims beneficial ownership and
17,100 shares of Common Stock issuable upon exercise of stock options.
(5) Consists of 1,425 shares of Common Stock held by Mr. Yablonski's wife and
64,696 shares of Common Stock issuable upon exercise of stock options.
(6) Consists of 24,048 shares of Common Stock issuable upon exercise of stock
options.
(7) Includes 14,250 shares of Common Stock issuable upon exercise of stock
options.
(8) Includes 19,950 shares of Common Stock held by certain members of Mr.
Woodring's family of which Mr. Woodring disclaims beneficial ownership and
14,250 shares of Common Stock issuable upon exercise of stock options.
(9) Consists of 28,500 shares of Common Stock issuable upon exercise of stock
options.
(10) Consists of 332,946 shares of Common Stock held by PolyVentures of which
Dr. Harrison is the Managing General Partner, and 28,500 shares of Common
Stock issuable upon exercise of stock options. Dr. Harrison disclaims
beneficial ownership of the shares held by PolyVentures except to the extent
of his proportionate pecuniary interest therein.
(11) Does not include Thomson's right to receive 1% of the Company's outstanding
share capital (measured at the time of issuance) for each of its next four
consummated orders with the Company of at least $3.0 million.
(12) Consists of 285,000 shares of Common Stock held by Vertex Investment (II)
Ltd. ("Vertex") and 71,250 shares of Common Stock held by HWH Investment
Pte. Ltd. ("HWH"). Vertex manages HWH, which is an investment fund owned by
an entity affiliated with the Government of Singapore. Vertex disclaims
beneficial ownership of the shares held by HWH.
(13) See Notes (3) through (10) above.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of this Offering, the authorized capital stock of the
Company will consist of 22,000,000 shares of Common Stock, $0.001 par value, and
3,000,000 shares of Preferred Stock, $0.001 par value.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
Following this Offering, the holders of Common Stock, voting as a single class,
will be entitled to elect all of the directors of the Company. In all matters
other than the election of directors, when a quorum is present at any
stockholders' meeting, the affirmative vote of the majority of shares present in
person or represented by proxy shall decide any question before such meeting.
Directors are elected by a plurality of the votes of the shares present in
person or represented by proxy at a stockholders' meeting. The holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
would be entitled to share in the Company's assets remaining after the payment
of liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of Preferred Stock. A stockholder, holding in
the aggregate 282,401 shares of Common Stock, has the right to participate in
any private offering of the Company to the extent required to maintain its
percentage ownership in the Company. No other holders of Common Stock have any
preemptive or other subscription rights. The shares of Common Stock are not
convertible into any other security. The outstanding shares of Common Stock are,
and the shares being offered hereby will be, upon issuance and sale, fully paid
and nonassessable.
At March 31, 1997, there were 5,834,038 shares of Common Stock outstanding
(after giving effect to the Preferred Stock Conversion and the Stock Split) and
held of record by 295 stockholders, and options to purchase an aggregate of
1,669,032 shares of Common Stock were also outstanding. See "Management-- 1997
Stock Incentive Plan."
PREFERRED STOCK
Upon the consummation of this Offering, the Company will be authorized to
issue 3,000,000 shares of Preferred Stock with such voting rights, designations,
preferences and rights and such qualifications, limitations or restrictions
thereof, as may be determined by the Board of Directors providing for such
series. Although the Company has no current plans to issue any shares of
Preferred Stock, the issuance of Preferred Stock or of rights to purchase
Preferred Stock could be used to discourage an unsolicited acquisition proposal.
In addition, the possible issuance of Preferred Stock could discourage a proxy
contest, make more difficult the acquisition of a substantial block of the
Company's Common Stock or limit the price that investors might be willing to pay
in the future for shares of the Company's Common Stock.
The Company believes that the Preferred Stock will provide the Company with
increased flexibility in structuring possible future financing and acquisitions,
and in meeting other corporate needs that might arise. Having such authorized
shares available for issuance will allow the Company to issue shares of
Preferred Stock without the expense and delay of a special stockholders'
meeting. The authorized shares of Preferred Stock, as well as shares of Common
Stock, will be available for issuance without further action by stockholders,
unless such action is required by applicable law or the rules of any stock
exchange on which the Company's securities may be listed.
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<PAGE>
COMMON STOCK WARRANTS
As of March 31, 1997, warrants to purchase an aggregate of 64,125 shares of
the Company's Common Stock, all of which will expire on November 21, 2006 and
have an exercise price of $8.07 per share, were outstanding.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this Offering, the holders of 2,316,446 shares of Common Stock (the
"Registrable Securities") will be entitled to certain demand rights with respect
to the registration of the Registrable Securities under the Securities Act.
Under the terms of the agreement between the Company and the holders of the
Registrable Securities, subject to certain restrictions, at any time twelve (12)
months after this Offering is complete, holders holding more than 25% of the
Registrable Securities are entitled to demand that the Company register not less
than 25% of the Registrable Securities under the Securities Act in an
underwritten public offering, the expected aggregate price to the public of
which exceeds $3,000,000 (net of underwriting discounts and commissions).
Additionally, the Company shall not, subject to certain provisions, be obligated
to effect a registration pursuant to such a demand right during the period
starting with the date sixty (60) days prior to the Company's estimated date of
filing of, and ending on a date four (4) months following the effective date of,
a registration statement pertaining to an underwritten public offering of
securities for the account of the Company. The Company is not required to effect
more than one such registration pursuant to such demand registration rights.
Additionally, after this Offering, the holders of 2,507,769 shares of Common
Stock (the "Additional Registrable Securities"), pursuant to the terms of the
July 1995 private placement, will be permitted by the Company to undertake one
demand registration right. Thereafter, the holders of the Additional Registrable
Securities will have piggyback registration rights. Such demand and piggyback
rights are subject to certain restrictions.
Under an additional agreement with respect to the holders of 45,754 shares
of Common Stock (the "Class A Registrable Securities"), the holders of the Class
A Registrable Securities will be entitled to certain demand rights with respect
to the registration of the Class A Registrable Securities under the Securities
Act. Under the terms of the agreement between the Company and the holders of the
Class A Registrable Securities, subject to certain restrictions, at any time
after this Offering is complete, holders holding more than 25% of the Class A
Registrable Securities are entitled to demand that the Company register not less
than 25% of the Class A Registrable Securities under the Securities Act in an
underwritten public offering, the expected aggregate price to the public of
which exceeds $3,000,000 (net of underwriting discounts and commissions). The
Company is not required to effect more than one such registration pursuant to
such demand registration rights.
In addition, under an additional agreement with respect to the holders of
678,833 shares of Common Stock (the "Class B Registrable Securities"), after
this Offering, if the Company proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, subject to certain
restrictions, the holders of the Registrable Securities, the Class A Registrable
Securities and the Class B Registrable Securities are entitled to notice of such
registration and are entitled to request inclusion of their Registrable
Securities, Class A Registrable Securities and Class B Registrable Securities
therein. The Company is required to include any Registrable Securities and Class
A Registrable Securities in an unlimited number of such registrations, and any
Class B Registrable Securities in not more than two such registrations. In
addition, at any time fifty-four (54) weeks after the Offering is complete, the
holders of the Class B Registrable Securities, subject to certain restrictions,
are entitled to demand that the Company register the Class B Registrable
Securities under the Securities Act in an underwritten public offering. The
Company is generally required to bear the expenses of any registrations pursuant
to the exercise of the registration rights described herein.
65
<PAGE>
Registration of the Registrable Securities, the Additional Registrable
Securities, the Class A Registrable Securities or Class B Registrable Securities
pursuant to such rights would result in such shares becoming freely tradable
without restriction under the Securities Act immediately upon the effectiveness
of such registration.
DELAWARE ANTI-TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer or (iii) on or subsequent to
such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company will act as transfer agent and
registrar for the Company's Common Stock.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this Offering, the Company will have 8,584,038 shares of
Common Stock outstanding, assuming no exercise of the over-allotment option or
of warrants and options to acquire an aggregate of 1,733,157 shares outstanding
at March 31, 1997. Of these shares, the 2,750,000 shares registered in this
Offering will be freely tradable without restriction under the Securities Act,
unless they are purchased by "affiliates" of the Company, as that term is used
under the Securities Act. The remaining 5,834,038 shares will be "restricted
securities," as defined in Rule 144 under the Securities Act (the "Restricted
Shares").
Beginning 90 days after the Effective Date, 435,035 Restricted Shares not
subject to lock-up agreements (including approximately 345,972 shares issuable
upon exercise of vested options) and not being sold in this Offering will be
eligible for sale in the public market without restriction in reliance on Rule
144(k) under the Securities Act. All officers and directors of the Company and
certain other stockholders, holding an aggregate of 4,307,959 shares of Common
Stock, have agreed with PaineWebber Incorporated not to offer to sell, sell,
contract to sell, grant any option to sell or otherwise dispose of any shares of
Common Stock convertible into or exchangeable for Common Stock owned by them for
a period ending 180 days after the date of this Prospectus (the "Lock-Up
Period") without the prior written consent of PaineWebber Incorporated. Certain
other stockholders, holding an aggregate of 1,233,320 shares of Common Stock,
have agreed with PaineWebber Incorporated not to offer to sell, sell, contract
to sell, grant any option to sell or otherwise dispose of any shares of Common
Stock convertible into or exchangeable for Common Stock owned by them for a
period ending 270 days after the date of this Prospectus (the "270-Day Lock-Up
Period") without the prior written consent of PaineWebber Incorporated. Upon the
expiration of the Lock-Up Period, or earlier upon the consent of PaineWebber
Incorporated, approximately 4,420,367 additional shares of restricted securities
(including approximately 142,290 additional shares issuable upon exercise of
vested options) will be eligible for sale in the public market and, as of that
date, approximately 2,536,950 of such shares will be subject to certain volume
and other resale restrictions pursuant to Rule 144 and approximately 1,740,927
of such shares will be eligible for sale without restriction under Rule 144(k).
Upon the expiration of the 270 day Lock-Up Period, or earlier upon the consent
of PaineWebber Incorporated, approximately 1,495,979 additional shares of
restricted securities (including approximately 82,691 additional shares issuable
upon exercise of vested options) will be eligible for sale in the public market
and, as of that date, approximately 1,413,288 of such shares will be subject to
certain and other resale restrictions pursuant to Rule 144 of which none of such
shares will be eligible for sale without restriction under Rule 144(k).
In general, under Rule 144, any person (or persons whose shares are
aggregated) who has beneficially owned his or her restricted securities (as that
term is defined in Rule 144) for at least one year is entitled to sell, within
any three-month period, a number of such securities that does not exceed the
greater of 1% of the then outstanding shares of the Company's Common Stock
(approximately 85,840 shares immediately after this Offering) or the average
weekly trading volume during the four calendar weeks preceding the date on which
notice of such sale was filed under Rule 144, provided certain requirements
concerning availability of public information, manner of sale and notice of sale
are satisfied. A person who is not an affiliate, has not been an affiliate
within three months prior to the sale and has beneficially owned the restricted
securities for at least two years is entitled to sell such shares under Rule
144(k) without regard to any of the limitations described above. In meeting the
one- and two-year holding periods described above, a holder of Restricted Shares
may include under certain circumstances the holding period of a prior owner.
Any employee or director of or consultant to the Company who has been
granted options to purchase shares or who has purchased shares pursuant to a
written compensatory plan or written contract prior to the effective date of
this Offering pursuant to Rule 701 will be entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding-period,
volume-limitation or notice provisions of Rule 144 and permits affiliates to
67
<PAGE>
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus.
The Company intends to file, on or about the date of the Prospectus, a
registration statement on Form S-8 under the Securities Act to register shares
of Common Stock reserved for issuance under the Predecessor Plans and the 1997
Plan, including, in some cases, shares for which an exemption under Rule 144 or
Rule 701 would also be available, thus permitting the resale of shares issued
under those plans, options or warrants by nonaffiliates in the public market
without restriction under the Securities Act. Such registration statement will
become effective immediately upon filing. An aggregate of 1,669,032 shares of
Common Stock are issuable pursuant to outstanding options and options under the
1997 Plan. An additional 610,968 shares of Common Stock are available for future
grants under the Company's 1997 Plan.
Following this Offering, the holders of 5,548,802 Restricted Shares will
have the right to cause the Company to register the sale of such shares under
the Securities Act. If such registration rights are exercised, the shares can be
sold without any holding period or sales volume limitation. See "Description of
Capital Stock--Registration Rights of Certain Holders."
Prior to this Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely effect the market price of the Common Stock.
68
<PAGE>
UNDERWRITING
The Underwriters named below, acting through PaineWebber Incorporated and
Unterberg Harris (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement by and among the
Company and the Representatives (the "Underwriting Agreement"), to purchase from
the Company, and the Company has agreed to sell to the Underwriters, the number
of shares of Common Stock set forth opposite the name of such Underwriters
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------------------------------------------------------------------------- ----------
<S> <C>
PaineWebber Incorporated.....................................................
Unterberg Harris.............................................................
----------
Total................................................................. 2,750,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the Shares listed above are subject to certain conditions. The
Underwriting Agreement also provides that the Underwriters are committed to
purchase, and the Company is obligated to sell, all of the Shares offered by
this Prospectus, if any of the Shares being sold pursuant to the Underwriting
Agreement are purchased (without consideration of any shares that may be
purchased through the exercise of the Underwriters' over-allotment option).
The Representatives have advised the Company that the Underwriters propose
to offer the Shares to the public initially at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession to other dealers not in excess
of $ per share. After the initial public offering of the Shares, the
public offering price, the concessions to selected dealers and the reallowance
to other dealers may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 412,500 shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise such option only to cover
over-allotments, if any, incurred in the sale of Shares. To the extent the
Underwriters exercise such option, each of the Underwriters will become
obligated, subject to certain conditions, to purchase such percentage of such
additional shares of Common Stock as is approximately equal to the percentage of
Shares that it is obligated to purchase as shown in the table set forth above.
Pursuant to Thomson's preemptive right to purchase up to 15% of the total
number of shares of Common Stock offered in this Offering, Thomson has expressed
an intention to purchase 71,538 shares being offered in this Offering which will
enable it to maintain its percentage ownership of the Company. There can be no
assurance that Thomson will make such purchase.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Certain officers of Unterberg Harris own in the aggregate 10,177 shares of
Common Stock of the Company.
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
The Company and each of its executive officers, directors and certain other
stockholders holding an aggregate of 4,307,959 shares of Common Stock, for a
period ending 180 days from the date of this Prospectus, and certain other
stockholders holding in the aggregate 1,149,473 shares of Common Stock, for a
period ending 270 days from the date of this Prospectus, have agreed not to
offer to sell, sell, contract to
69
<PAGE>
sell, or grant any option to purchase or otherwise dispose of, directly or
indirectly, any shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for any capital stock or
warrants or other rights to purchase shares of capital stock of the Company
owned by any of them prior to the expiration of 180 days or 270 days from the
date of this Prospectus, as the case may be, except: (i) for the Shares offered
hereby, (ii) with the prior written consent of PaineWebber Incorporated and
(iii) in the case of the Company, for the issuance of shares of Common Stock
upon the exercise of options, or the grant of options to purchase shares of
Common Stock or restricted stock awards under the Stock Plans.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 137,500 shares of Common Stock,
representing 5% of the shares of Common Stock to be sold in the Offering, for
sale to officers, employees, business associates, and related persons of the
Company. The number of shares of Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined pursuant to
negotiations between the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price, in addition to
prevailing market conditions, will be certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. The initial public offering price
set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price is
subject to change as a result of market conditions and other factors. There can
be no assurance that an active trading market will develop for the Common Stock
or that the Common Stock will trade in the public market subsequent to the
Offering at or above the initial public offering price.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 412,500 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, PaineWebber Incorporated, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or dealer participating in the Offering) for
the account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the Offering but subsequently purchased for
the account of the Underwriters in the open market. Any transactions described
in this paragraph may result in the maintenance of the price of the Common Stock
at a level above that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, New York, New York, and for the
Underwriters by Shearman & Sterling, New York, New York.
70
<PAGE>
EXPERTS
The Consolidated Financial Statements of the Company at December 31, 1996,
and for the six months then ended, appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, and at
June 30, 1996 and 1995, and for the year ended June 30, 1996 and the period from
August 17, 1994 (inception) through June 30, 1995, by Price Waterhouse LLP,
independent accountants, as set forth in their respective reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firms as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the Consolidated Financial Statements and related Notes filed as a
part thereof. Statements made in this Prospectus concerning the contents of any
document referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved.
As a result of this Offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended. As long as the Company is subject to such
periodic reporting and informational requirements, it will file with the
Commission all reports, proxy statements and other information required thereby.
The Registration Statement, as well as such reports and other information filed
by the Company with the Commission, may be inspected at the public reference
facilities maintained by the Commission at its principal office located at 450
Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World
Trade Center, 13th Floor, New York New York 10048. Copies of such material may
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains material
regarding issuers that file electronically with the Commission. The Registration
Statement, of which the Prospectus forms a part, has been so filed and may be
obtained at such site.
CHANGE IN INDEPENDENT ACCOUNTANTS
On November 27, 1996, the Company dismissed Price Waterhouse LLP as its
independent accountants. The reports of Price Waterhouse LLP on the Company's
financial statements for the past two fiscal years contained no adverse opinion
or disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles. In connection with its audits for the year
ended June 30, 1996 and for the period from August 17, 1994 (inception) through
June 30, 1995, and through November 27, 1996, there have been no disagreements
with Price Waterhouse LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Price Waterhouse LLP would
have caused them to make reference thereto in their report on the financial
statements for such years. The decision to change firms was approved by the
Company's Board of Directors. The Company has requested that Price Waterhouse
LLP furnish it with a letter addressed to the Commission stating whether or not
it agrees with the above statements. A copy of such letter, dated February 27,
1997, is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
The Company engaged Ernst & Young LLP as its new independent auditors as of
November 27, 1996.
During the two most recent fiscal years and through November 27, 1996, the
Company did not consult with Ernst & Young LLP on items which (i) were or should
have been subject to Statement on Auditing Standards No. 50 or (ii) concerned
the subject matter of a disagreement or reportable event with Price Waterhouse
LLP.
71
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors--Ernst & Young LLP..................................... F-2
Report of Independent Accountants--Price Waterhouse LLP............................... F-3
Consolidated Balance Sheets as of June 30, 1995 and 1996, December 31, 1996 and March
31, 1997 (unaudited)................................................................ F-4
Consolidated Statements of Operations for the period from August 17, 1994 (inception)
through June 30, 1995, the year ended June 30, 1996, the six months ended December
31, 1995 (unaudited) and 1996, and the nine months ended March 31, 1996 (unaudited)
and 1997 (unaudited)................................................................ F-5
Consolidated Statements of Changes in Stockholders' Equity for the period from August
17, 1994 (inception) through June 30, 1995, the year ended June 30, 1996, the six
months ended December 31, 1996, and the three months ended March 31, 1997
(unaudited)......................................................................... F-6
Consolidated Statements of Cash Flows for the period from August 17, 1994 (inception)
through June 30, 1995, the year ended June 30, 1996, the six months ended December
31, 1995 (unaudited) and 1996, and the nine months ended March 31, 1996 (unaudited)
and 1997 (unaudited)................................................................ F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Globecomm Systems Inc.
We have audited the accompanying consolidated balance sheet of Globecomm
Systems Inc. at December 31, 1996 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the six months
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 audit provides 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 December 31, 1996, and the consolidated results of its
operations and its cash flows for the six months then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Melville, New York
January 24, 1997, except for
Note 1 as to which the date
is , 1997
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of the
split of outstanding shares of common stock and amendment to the certificate of
incorporation as described in Note 1 to the consolidated financial statements.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Melville, New York
July 15, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Globecomm Systems Inc.
The stock split described in Note 1 to the financial statements has not been
consummated at July 14, 1997. When it has been consummated, we will be in a
position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Globecomm Systems Inc. and its subsidiary at June 30,
1995 and 1996, and the results of their operations and their cash flows for
the period from August 17, 1994 (inception) through June 30, 1995 and the
year ended June 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above."
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
August 23, 1996, except as to Note 1,
which is as of , 1997
F-3
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 3,507,108 $ 3,434,910 $ 9,618,382 $ 6,308,536
Restricted cash.............................................. 96,000 1,231,850 1,615,486 1,491,850
Accounts receivable.......................................... 68,515 1,998,846 7,838,033 8,157,109
Inventories, net............................................. 2,041,303 1,377,083 88,642 1,249,702
Note receivable from stockholder............................. -- 150,000 150,000 150,000
Prepaid expenses and other current assets.................... 9,875 233,612 222,654 596,326
------------- ------------- ----------------- -----------------
Total current assets........................................... 5,722,801 8,426,301 19,533,197 17,953,523
Fixed assets, net.............................................. 560,881 719,657 3,605,832 4,440,210
Investments.................................................... -- 238,418 1,078,678 1,136,018
Other assets................................................... 91,658 118,419 193,194 186,126
------------- ------------- ----------------- -----------------
Total assets................................................... $ 6,375,340 $ 9,502,795 $ 24,410,901 $ 23,715,877
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 2,428,596 $ 2,766,790 $ 6,275,817 $ 6,200,253
Accrued payroll and related fringe benefits.................. 102,720 217,000 319,750 242,497
Accrued commissions.......................................... -- -- 432,000 396,000
Other accrued expenses....................................... 143,015 350,213 875,772 244,198
Note payable to stockholder.................................. 315,000 315,000 315,000 --
Loan payable to stockholder.................................. 20,700 -- -- --
Capital lease obligations.................................... 49,678 50,083 53,036 50,370
------------- ------------- ----------------- -----------------
Total current liabilities...................................... 3,059,709 3,699,086 8,271,375 7,133,318
Capital lease obligations...................................... 108,852 73,945 46,664 32,590
------------- ------------- ----------------- -----------------
Total liabilities.............................................. 3,168,561 3,773,031 8,318,039 7,165,908
------------- ------------- ----------------- -----------------
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares
authorized:
Class A Convertible--shares authorized, issued and
outstanding: none at June 30, 1995, 156,250 at June 30,
1996 and 172,304 at December 31, 1996 and March 31, 1997
(liquidation preference $2,756,864)...................... -- 156 172 172
Class B Convertible--shares authorized, issued and
outstanding: none at June 30, 1995 and 1996, 485,294 at
December 31, 1996 and 514,714 at March 31, 1997
(liquidation preference $14,411,992)..................... -- -- 485 514
Common stock, $.001 par value; 11,000,000 shares authorized,
shares issued and outstanding: 3,506,275 at June 30, 1995,
3,769,136 at June 30, 1996 and December 31, 1996 and
3,876,037 at March 31, 1997 (5,834,038 after giving effect
to the conversion of preferred stock into common stock).... 3,506 3,769 3,769 3,876
Additional paid-in capital................................... 5,168,100 9,036,298 20,291,057 21,699,443
Accumulated deficit.......................................... (1,065,183) (3,310,459) (4,202,621) (5,154,036)
------------- ------------- ----------------- -----------------
4,106,423 5,729,764 16,092,862 16,549,969
Less stock subscriptions receivable.......................... (899,644) -- -- --
------------- ------------- ----------------- -----------------
Total stockholders' equity..................................... 3,206,779 5,729,764 16,092,862 16,549,969
------------- ------------- ----------------- -----------------
Total liabilities and stockholders' equity..................... $ 6,375,340 $ 9,502,795 $ 24,410,901 $ 23,715,877
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 17,
1994
(INCEPTION) SIX MONTHS ENDED NINE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31 MARCH 31
JUNE 30, JUNE 30, --------------------------- ----------------------------
1995 1996 1995 1996 1996 1997
------------- ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues........................... $ 71,756 $ 13,476,276 $ 7,315,340 $ 13,306,482 $ 10,518,203 $ 21,532,212
Costs of revenues.................. 58,089 11,237,977 5,976,034 11,497,100 8,437,518 18,736,399
------------- ------------- ------------ ------------- ------------- -------------
Gross profit....................... 13,667 2,238,299 1,339,306 1,809,382 2,080,685 2,795,813
------------- ------------- ------------ ------------- ------------- -------------
Operating expenses:
Selling and marketing............ 346,141 1,915,037 796,421 1,401,071 1,252,831 2,215,882
Research and development......... -- 711,906 250,528 229,593 488,010 351,455
General and administrative....... 771,974 1,945,623 862,491 1,416,294 1,431,881 2,534,214
------------- ------------- ------------ ------------- ------------- -------------
Total operating expenses........... 1,118,115 4,572,566 1,909,440 3,046,958 3,172,722 5,101,551
------------- ------------- ------------ ------------- ------------- -------------
Loss from operations............... (1,104,448) (2,334,267) (570,134) (1,237,576) (1,092,037) (2,305,738)
Interest income, net of interest
expense of $14,797, $32,293,
$14,880 (unaudited), $15,898,
$21,483 (unaudited) and $20,248
(unaudited) in June 1995, June
1996, December 1995, December
1996, March 1996 and March 1997,
respectively..................... 39,265 88,991 53,965 70,414 81,179 187,161
------------- ------------- ------------ ------------- ------------- -------------
Loss before minority interests in
operations of consolidated
subsidiary....................... (1,065,183) (2,245,276) (516,169) (1,167,162) (1,010,858) (2,118,577)
Minority interests in operations of
consolidated subsidiary.......... -- -- -- 275,000 -- 275,000
------------- ------------- ------------ ------------- ------------- -------------
Net loss........................... $ (1,065,183) $ (2,245,276) $ (516,169) $ (892,162) $ (1,010,858) $ (1,843,577)
------------- ------------- ------------ ------------- ------------- -------------
------------- ------------- ------------ ------------- ------------- -------------
Pro forma net loss per share
(unaudited)...................... $ (.41) $ (.15) $ (.30)
------------- ------------- -------------
------------- ------------- -------------
Shares used in computing pro forma
net loss per share (unaudited)... 5,542,135 6,052,910 6,052,910
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------
CLASS A CLASS B COMMON STOCK ADDITIONAL STOCK
---------------------- ---------------------- ---------------------- PAID-IN SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
--------- ----------- --------- ----------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exchange of loan payable and
payment of cash for common
stock to chief executive
officer..................... 1,305,158 $ 1,305 $ 47,818
Issuance of common stock to
customer.................... 213,750 214 8,036
Issuance of common stock to
consultants................. 59,710 60 2,245
Sale of common stock to
employees................... 541,500 541 20,359
Sale of common stock to
investors................... 10,687 11 38,982 $ (34,493)
Issuance of common stock under
private placement offering
to investors, net of
issuance costs of
$1,401,606; paid in cash of
$669,682 and 156,488 shares
of stock.................... 1,375,470 1,375 5,034,342 (865,151)
Options granted to employees
and directors............... -- -- 16,318 --
Net loss...................... -- -- -- --
--------- ----------- ---------- ------------
Balance at June 30, 1995...... 3,506,275 3,506 5,168,100 (899,644)
Proceeds from stock
subscriptions receivable.... -- -- -- 899,644
Sale of common stock to
investor, net of issuance
costs of $17,495............ 199,500 199 915,406 --
Issuance of common stock as
sales commissions........... 37,147 37 173,706 --
Sale of common stock to
investors................... 10,687 11 49,977 --
Issuance of common stock to
consultants................. 15,527 16 52,250 --
Sale of convertible preferred
stock to investors, net of
issuance costs of $15,000... 156,250 $ 156 -- -- 2,484,844 --
Options granted to employees
and directors............... -- -- -- -- 192,015 --
Net loss...................... -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- ------------
Balance at June 30, 1996...... 156,250 156 3,769,136 3,769 9,036,298 --
Sale of convertible preferred
stock to investors, net of
issuance costs of
$2,623,264; paid in cash of
$1,135,000 and 53,152 shares
of stock.................... -- -- 485,294 $ 485 -- -- 10,964,515 --
Sale of convertible preferred
stock to investor........... 16,054 16 -- -- -- -- 256,847 --
Options granted to employees
and directors............... -- -- -- -- -- -- 33,397 --
Net loss...................... -- -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ----------- ---------- ------------
Balance at December 31,
1996........................ 172,304 172 485,294 485 3,769,136 3,769 20,291,057 --
Unaudited:
Options granted to employees
and directors............. -- -- -- -- -- 22,127 --
Exercise of warrants........ -- -- -- 106,901 107 562,528 --
Sale of convertible
preferred stock to
investor.................. -- 29,420 29 -- -- 823,731 --
Net loss.................... -- -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ----------- ---------- ------------
Balance at March 31, 1997
(unaudited)................. 172,304 $ 172 514,714 $ 514 3,876,037 $ 3,876 $21,699,443 $ --
--------- ----------- --------- ----------- --------- ----------- ---------- ------------
--------- ----------- --------- ----------- --------- ----------- ---------- ------------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ ------------
<S> <C> <C>
Exchange of loan payable and
payment of cash for common
stock to chief executive
officer..................... $ 49,123
Issuance of common stock to
customer.................... 8,250
Issuance of common stock to
consultants................. 2,305
Sale of common stock to
employees................... 20,900
Sale of common stock to
investors................... 4,500
Issuance of common stock under
private placement offering
to investors, net of
issuance costs of
$1,401,606; paid in cash of
$669,682 and 156,488 shares
of stock.................... 4,170,566
Options granted to employees
and directors............... 16,318
Net loss...................... $(1,065,183) (1,065,183)
------------ ------------
Balance at June 30, 1995...... (1,065,183) 3,206,779
Proceeds from stock
subscriptions receivable.... -- 899,644
Sale of common stock to
investor, net of issuance
costs of $17,495............ -- 915,605
Issuance of common stock as
sales commissions........... -- 173,743
Sale of common stock to
investors................... -- 49,988
Issuance of common stock to
consultants................. -- 52,266
Sale of convertible preferred
stock to investors, net of
issuance costs of $15,000... -- 2,485,000
Options granted to employees
and directors............... -- 192,015
Net loss...................... (2,245,276) (2,245,276)
------------ ------------
Balance at June 30, 1996...... (3,310,459) 5,729,764
Sale of convertible preferred
stock to investors, net of
issuance costs of
$2,623,264; paid in cash of
$1,135,000 and 53,152 shares
of stock.................... -- 10,965,000
Sale of convertible preferred
stock to investor........... -- 256,863
Options granted to employees
and directors............... -- 33,397
Net loss...................... (892,162) (892,162)
------------ ------------
Balance at December 31,
1996........................ (4,202,621) 16,092,862
Unaudited:
Options granted to employees
and directors............. -- 22,127
Exercise of warrants........ -- 562,635
Sale of convertible
preferred stock to
investor.................. -- 823,760
Net loss.................... (951,415) (951,415)
------------ ------------
Balance at March 31, 1997
(unaudited)................. $5,154,036 $16,549,969
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 17,
1994 SIX MONTHS ENDED NINE MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31 MARCH 31
THROUGH JUNE JUNE 30, ----------------------- ------------------------
30, 1995 1996 1995 1996 1996 1997
------------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net loss........................ $(1,065,183) $(2,245,276) $(516,169) $ (892,162) ($1,010,858) $(1,843,577)
Adjustments to reconcile net
loss to cash used in operating
activities:
Stock issued to investor as
commission................ -- 173,743 -- -- -- --
Stock issued to customer.... 8,250 -- -- -- -- --
Stock issued to consultants
for services.............. 2,305 46,270 22,079 -- 34,704 --
Depreciation and
amortization.............. 61,163 180,634 65,000 124,587 155,002 243,957
Amortization of organization
costs..................... 7,020 12,034 3,510 14,134 5,265 21,202
Stock compensation
expense................... 16,318 192,015 96,008 33,397 135,147 55,524
Minority interests in
operations of consolidated
subsidiary................ -- -- -- (275,000) -- (275,000)
Changes in operating assets
and liabilities:
Accounts receivable....... (68,515) (1,930,331) (1,723,595) (5,839,187) (2,894,713) (6,158,263)
Inventories............... (2,041,303) 664,220 1,858,446 1,288,441 987,278 127,381
Prepaid expenses and other
current assets.......... (9,875) (223,737) (31,668) 10,958 (44,581) (362,714)
Other assets.............. (38,505) (38,795) (39,332) (7,751) (22,753) (7,751)
Accounts payable.......... 2,428,596 338,194 (1,417,185) 3,509,027 (30,033) 3,433,463
Accrued payroll and
related fringe
benefits................ 102,720 114,280 (13,702) 102,750 (27,463) 25,497
Accrued commissions and
other accrued
expenses................ 143,015 207,198 (7,687) 957,559 70,131 289,985
------------- ---------- ----------- ---------- ----------- -----------
Net cash used in operating
activities.................... (453,994) (2,509,551) (1,704,295) (973,247) (2,642,874) (4,450,296)
------------- ---------- ----------- ---------- ----------- -----------
INVESTING ACTIVITIES
Purchases of investments........ -- (238,418) (3,400) (840,260) (159,304) (897,600)
Purchases of fixed assets....... (437,210) (339,410) (100,111) (3,010,762) (287,397) (3,964,510)
Payment of organization costs... (60,173) -- -- (81,158) -- (81,158)
Restricted cash................. (96,000) (1,135,850) (328,000) (383,636) (828,000) (260,000)
------------- ---------- ----------- ---------- ----------- -----------
Net cash used in investing
activities.................... (593,383) (1,713,678) (431,511) (4,315,816) (1,274,701) (5,203,268)
------------- ---------- ----------- ---------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from sales of common
stock, net.................... 4,195,966 1,871,233 1,865,240 -- 1,865,240 --
Proceeds from sales of preferred
stock, net.................... -- 2,485,000 -- 11,221,863 -- 12,045,623
Proceeds from exercise of
warrants...................... -- -- -- -- -- 562,635
Proceeds from stockholder
loans......................... 444,823 -- -- -- --
Investment from minority
stockholders.................. -- -- -- 275,000 -- 275,000
Loan to stockholder............. -- (150,000) (150,000) -- (150,000) --
Repayment of loans payable to
stockholder................... (60,000) (20,700) (13,301) -- (13,301) (315,000)
Payments under capital leases... (26,304) (34,502) (22,033) (24,328) (26,763) (41,068)
------------- ---------- ----------- ---------- ----------- -----------
Net cash provided by financing
activities.................... 4,554,485 4,151,031 1,679,906 11,472,535 1,675,176 12,527,190
------------- ---------- ----------- ---------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents.......... 3,507,108 (72,198) (455,900) 6,183,472 (2,242,399) 2,873,626
Cash and cash equivalents at
beginning of period........... -- 3,507,108 3,507,108 3,434,910 3,507,108 3,434,910
------------- ---------- ----------- ---------- ----------- -----------
Cash and cash equivalents at end
of period..................... $ 3,507,108 $3,434,910 $3,051,208 $9,618,382 $1,264,709 $6,308,536
------------- ---------- ----------- ---------- ----------- -----------
------------- ---------- ----------- ---------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest.......... $ 1,882 $ 13,341 $ 6,874 $ 6,424 $ 9,245 $ 49,514
------------- ---------- ----------- ---------- ----------- -----------
------------- ---------- ----------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
1. ORGANIZATION AND BUSINESS
Globecomm Systems Inc., formerly known as Worldcomm 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. The Company was a development stage enterprise for the
period from August 17, 1994 (inception) through June 30, 1995.
On February 26, 1997, the Board of Directors authorized and, on ,
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
11,000,000, and changing the par value of its common and preferred stock to
$.001, to be effective prior to the closing of the planned initial public
offering ("IPO"). Effect has been given to this stock split as if it occurred on
August 17, 1994 (inception). All common share, option and warrant data has been
restated to reflect the stock split. In addition, on February 26, 1997, the
Board of Directors authorized, and the stockholders subsequently approved, the
1997 Stock Incentive Plan ("1997 Plan"), which will serve as a successor plan to
the stock option plans discussed in Note 8. The 1997 Plan provides for an
increase of 285,000 shares to the previously existing stock option plans, among
other matters.
The Company has incurred operating losses since its inception and had an
accumulated deficit at December 31, 1996 and March 31, 1997 of $4,202,621 and
$5,154,036, respectively. Such losses have resulted principally from general and
administrative and selling and marketing expenses associated with the Company's
operations. The Company expects that its cash and working capital requirements
will continue to increase in connection with the Company's plans to continue to
expand operations. In order to fund these efforts, the Company completed a
private placement of preferred stock in December 1996, whereby it received net
proceeds of $10,965,000. Management believes that sufficient funding has been
obtained to enable the Company to meet its working capital needs through March
31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its majority-owned subsidiary, NetSat Express, Inc. ("NetSat").
All significant intercompany balances and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL STATEMENTS
The consolidated balance sheet at March 31, 1997 and statement of changes in
stockholders' equity for the three months ended March 31, 1997 and the
consolidated statements of operations and cash flows for the six months ended
December 31, 1995 and the nine months ended March 31, 1996 and 1997 have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position at March 31, 1997 and the results of
operations and cash flows for the six months ended December 31, 1995 and the
nine months ended March 31, 1996 and 1997 have been made. Certain information
and footnote
F-8
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the financial statements and accompanying notes. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company uses the percentage-of-completion method of accounting for
contract revenues, upon the achievement of certain milestones. Accordingly,
revenue from long-term, fixed-price contracts, are generally recorded based on
the relationship of total costs incurred to date to total projected final costs.
Contract costs generally include purchased material, direct labor, overhead and
other indirect costs. Anticipated contracted losses are recognized as they
become known.
Revenues from sales of products and services are generally recognized when
the product is shipped or the service is performed.
INVENTORIES
Inventories, which consists primarily of costs incurred in connection with
specific customer contracts, are stated at the lower of cost or market value.
CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid instruments
with a maturity of three months or less at the time of purchase.
FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation. Depreciation
of fixed assets is provided on a straight-line basis over their estimated useful
lives of three to five years. Certain leased office equipment has been
capitalized. These amounts are included in fixed assets within the accompanying
consolidated balance sheet and are being amortized over the estimated useful
lives of the equipment.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
INCOME TAXES
The financial statements have been prepared in conformity with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement requires recognition of deferred income taxes under the liability
method.
F-9
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA LOSS PER SHARE (UNAUDITED)
Pro forma loss per share is based on the weighted average number of shares
of common stock outstanding assuming the conversion of the Class A and Class B
Convertible Preferred Stock into common stock, which will occur upon the
consummation of the Company's planned IPO. However, in accordance with Staff
Accounting Bulletin 83 of the Securities and Exchange Commission, common stock
and common stock equivalents that were issued during the 12 months preceding the
planned IPO at prices below the estimated IPO price (assumed to be $11.00 per
share) have been included in the Company's pro forma loss per share computation
using the treasury stock method and the estimated IPO price, and treated as if
they had been issued at the Company's inception even though they were
antidilutive. 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 will occur in connection with the planned IPO.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash and cash equivalents, accounts receivable, note
receivable from stockholder, accounts payable, and accrued liabilities
approximate their fair values principally because of the short-term maturities
of these instruments. The fair value of the Company's note payable to
stockholder is estimated based on the current rates offered to the Company for
debt of similar terms and maturities. Under this method, the Company's fair
value of note payable to stockholder was not significantly different than the
stated value at June 30, 1995 and 1996, December 31, 1996 and March 31, 1997.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement
121"), which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company has adopted Statement
121 during the six months ended December 31, 1996, and there was no effect on
the financial statements related to the adoption.
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
------------- ------------- ----------------- --------------
<S> <C> <C> <C> <C>
Raw materials............... $ 7,516 $ 32,850 $ 60,930 $ 53,063
Work-in-progress............ 3,631,720 3,106,125 4,715,435 5,557,895
------------- ------------- ----------------- --------------
3,639,236 3,138,975 4,776,365 5,610,958
Less progress payments...... 1,597,933 1,761,892 4,687,723 4,361,256
------------- ------------- ----------------- --------------
$ 2,041,303 $ 1,377,083 $ 88,642 $ 1,249,702
------------- ------------- ----------------- --------------
------------- ------------- ----------------- --------------
</TABLE>
F-10
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, MARCH 31,
1995 1996 1996 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Construction in progress....................... $ -- $ -- $2,613,619 $ 3,301,549
Computer equipment............................. 188,810 408,586 671,333 819,294
Leasehold improvements......................... 95,843 119,822 149,055 149,055
Machinery and equipment........................ 83,738 135,485 258,960 355,145
Furniture and fixtures......................... 68,819 112,727 120,115 141,787
Equipment under capital leases................. 184,834 184,834 159,134 159,134
---------- ---------- ------------ ------------
622,044 961,454 3,972,216 4,925,964
Less accumulated depreciation and
amortization................................. 61,163 241,797 366,384 485,754
---------- ---------- ------------ ------------
$ 560,881 $ 719,657 $3,605,832 $ 4,440,210
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
5. INVESTMENTS
Investments consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
------------- ----------------- --------------
<S> <C> <C> <C>
Shiron Satellite Communications (1996), Ltd. ("Shiron") (a).... $ 150,000 $ 285,000 $ 285,000
Euro Broadcasting Corporation ("Euro") (b)..................... -- 240,000 240,000
C-Grams Unlimited Inc. ("C-Grams")(c).......................... -- 400,278 400,278
Armer Communications Engineering Services, Inc. ("Armer")
(d).......................................................... -- 150,000 200,000
Other.......................................................... 88,418 3,400 10,740
------------- ----------------- --------------
$ 238,418 $ 1,078,678 $ 1,136,018
------------- ----------------- --------------
------------- ----------------- --------------
</TABLE>
- ------------------------
(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 an additional 11% of Shiron in accordance with the
terms of the purchase agreement.
(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.
(c) On August 30, 1996, the Company purchased 5% of the common stock of C-Grams,
a New Hampshire corporation, for $400,278 and has an option to purchase an
additional 15% at a price in accordance with the terms of the agreement.
F-11
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
5. INVESTMENTS (CONTINUED)
(d) On November 18, 1996, the Company purchased 15% of the common stock of
Armer, an Arizona corporation, for $150,000 and in March 1997 purchased an
additional 2% for $50,000. The Company has an option to purchase up to an
additional 8% at a price of $25,000 for each additional 1% through December
31, 1997.
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 investee.
The Company did not hold any investments at June 30, 1995.
6. COMMON STOCK
SALES OF COMMON STOCK
In June 1995, the Company completed a private placement offering in which
the Company issued 1,218,982 shares of common stock to various investors.
Proceeds from the issuance of these shares totaled $5,031,966, including
$861,400 of stock subscriptions received in July 1995, and net of related
expenses of $1,401,606. In satisfaction of these related expenses, the Company
paid $669,682 in cash and issued 156,488 shares of its common stock valued at
$731,924. Additionally, in connection with this offering, the Company sold to
one of its investors for $3,751, a five-year warrant to purchase 106,901 shares
of the Company's common stock at a price of $5.26 per share. The warrant
contains certain antidilution provisions as specified in the warrant agreement.
On January 24, 1997, the investor exercised the outstanding warrant.
During the year ended June 30, 1996, the Company sold 210,187 shares of its
common stock to various investors. Proceeds from the sale of these shares
totaled $965,593, net of related expenses of $17,495.
STOCK ISSUED TO CONSULTANTS
During the year ended June 30, 1996, the Company issued 9,975 shares of its
common stock to a consultant in payment for his efforts in assisting in various
Company matters. These shares were purchased by the consultant at a price of
$.04 per share. Consulting expense recorded as a result of this transaction
amounted to $46,270, which represents the difference between the fair market
value of the shares at the date of issuance and the purchase price.
During November 1996, the Company issued a ten-year warrant to five
consultants for future services to purchase an aggregate of 64,125 shares of
common stock at a price per share of $8.07, equal to the fair market value of
the shares at the date of issuance.
ISSUANCE OF COMMON STOCK AS COMMISSION
On November 9, 1995, and in connection with the Company's sale of 199,500
shares of its common stock to an investor also during the year ended June 30,
1996, the Company entered into a commitment to issue up to 5% of its share
capital as follows: (i) 1% of the then outstanding share capital of the Company
upon receipt of sales orders from this stockholder totalling $1,500,000 and (ii)
an additional 1% of the then
F-12
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
6. COMMON STOCK (CONTINUED)
outstanding share capital of the Company upon the receipt of each of four
subsequent increments of $3,000,000 in sales orders from this stockholder. This
agreement is in effect for two and a half years.
In November 1995, the Company issued 37,147 shares of its common stock to
this investor, or 1% of the then outstanding share capital. This issuance
resulted in $173,743 of commission expense based on the fair market value of the
shares at the date of issuance, which was also the date of the agreement. As of
June 30, 1996, this entire amount is included in prepaid expenses within the
accompanying consolidated balance sheet as the related orders were not recorded
as revenue during the year ended June 30, 1996. Such amount was included in
selling and marketing expense in the accompanying consolidated statement of
operations for the six months ended December 31, 1996, 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.
7. CONVERTIBLE PREFERRED STOCK
In December 1996, the Company issued 485,294 shares (including 53,152 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 antidilution provisions related to a sale
of common stock to an investor during the year ended June 30, 1996, the Company
issued 29,420 shares of Class B Convertible at $28.00 per share.
On May 30, 1996, the Company issued 156,250 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
16,054 shares of Class A Convertible at $16.00 per share to an investor.
The principal terms of the Class A Convertible and Class B Convertible
(collectively, the "Preferred Stock") are as follows:
- - LIQUIDATION PREFERENCE
In the event of a liquidation of the Company and before any distribution of
assets is made to holders of common stock, the holders of the Preferred
Stock are entitled to receive: Class A Convertible, $16.00 per share, or
$2,756,864, and Class B Convertible, $28.00 per share or $14,411,992.
F-13
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
7. CONVERTIBLE PREFERRED STOCK (CONTINUED)
- - CONVERSION
The holders of the Preferred Stock have the right, at any time, to convert
such shares into common stock on a 2.85-for-1 basis, subject to certain
anti-dilution provisions as described in the agreement. The Preferred Stock
shall automatically convert into 1,958,001 shares of common stock upon
notice of and prior to the consummation of a public offering of the
Company's common stock, where gross proceeds from the offering are at least
$7,500,000, subject to certain adjustment provisions as described in the
Company's Certificate of Incorporation, as amended.
The Company has reserved 1,958,001 shares of common stock for issuance upon
conversion of the Preferred Stock at March 31, 1997.
- - DIVIDENDS
The holders of the Preferred Stock shall be entitled to receive dividends
when and as declared by the Company's Board of Directors. If the Company
declares dividends on the common stock, the holders of the Preferred Stock
shall be entitled to receive the same dividend based on the number of shares
of common stock into which the Preferred Stock would convert at that time.
No dividends have been declared on the Preferred Stock or the common stock
as of March 31, 1997.
- - VOTING RIGHTS
The holders of the Preferred Stock shall be entitled to vote at any election
of directors or any other matter upon which holders of common stock have the
right to vote.
8. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based-Compensation" ("Statement 123"),
requires the use of option valuation models that were not developed for use in
valuing employee and director stock options.
EMPLOYEE PLAN
In February 1995, the Company adopted a stock option plan (the "Employee
Stock Option Plan"), which provides that the Company may grant employees options
to acquire up to an aggregate of 285,000 shares of the Company's common stock.
During the six months ended December 31, 1996, the Company increased the number
of shares it may grant to 1,710,000 and during February 1997 increased such
shares to 1,995,000. The options generally vest in equal installments over a
four-year period and expire on the tenth anniversary of the date of grant.
F-14
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
8. STOCK OPTION PLANS (CONTINUED)
The following table summarizes activity in employee stock options:
<TABLE>
<CAPTION>
PERIOD FROM AUGUST
17, 1994
(INCEPTION)
THROUGH YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996
------------------ -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period.............. 209,475 $3.51 820,159 $4.45
Grants.................................... 209,475 $3.51 730,384 $4.57 608,618 $7.71
Canceled.................................. -- -- (119,700) $3.51 -- --
------- --------- ---------
Balance, end of period.................... 209,475 $3.51 820,159 $4.45 1,428,777 $5.84
------- --------- ---------
------- --------- ---------
Weighted-average fair value of options
granted during the period............... $2.26 $3.28
<CAPTION>
NINE MONTHS ENDED
MARCH 31, 1997
--------------------
WEIGHTED-
SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE
--------- ---------
<S> <C> <C>
Balance, beginning of period.............. 820,159 $4.45
Grants.................................... 684,998 $7.95
Canceled.................................. (7,125) $7.39
---------
Balance, end of period.................... 1,498,032 $6.04
---------
---------
Weighted-average fair value of options
granted during the period............... $3.56
</TABLE>
As a result of stock options granted during the years ended June 30, 1995
and 1996, the Company recorded compensation expense of $14,237, $99,053,
$49,527, $13,625, $74,289 and $25,866 during the years ended June 30, 1995 and
1996, the six months ended December 31, 1995 and 1996, and the nine months ended
March 31, 1996 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 December 31, 1996 and March 31, 1997, remaining compensation expense to be
recorded through the year ended June 30, 1999 was approximately $63,000 and
$51,000, respectively.
DIRECTOR PLAN
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.
Pursuant to the Director Stock Option Plan, in June 1995, the Company
granted certain outside directors options to purchase 128,250 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, 1995 and
1996, the six months ended December 31, 1995 and 1996, and the nine months ended
March 31, 1996 and 1997 of $2,081, $92,962, $46,481, $19,772, $69,722 and
$29,658, respectively, based on the fair market value of the shares at the date
of grant. As of December 31, 1996 and March 31, 1997, remaining compensation
expense to be recorded through the year ended June 30, 1998 was approximately
$35,000, and $25,000, respectively. During January 1997, an additional outside
director was granted 42,750 options at $8.07 per share, the estimated fair value
of such shares on the date of grant. As of December 31, 1996 and March 31, 1997,
42,750 options were exercisable and none were exercised.
F-15
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
8. STOCK OPTION PLANS (CONTINUED)
STATEMENT 123
Pro forma information regarding net loss and net loss per share is required
by Statement 123, which also requires that the information be determined as if
the Company has accounted for its stock options granted subsequent to July 1,
1995 under the fair value method of that Statement. The fair value for these
options was estimated using a Black-Scholes option pricing model with the
following weighted-average assumptions for the year ended June 30, 1996, the six
months ended December 31, 1996 and the nine months ended March 31, 1997:
risk-free interest rate of 6.5%, volatility factor of the expected market price
of the Company's common stock of .40, a weighted-average expected life of the
option of six years and no dividend yields.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31 NINE MONTHS ENDED MARCH 31
YEAR ENDED -------------------------- ----------------------------
JUNE 30, 1996 1995 1996 1996 1997
------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Pro forma net
loss.............. $ (2,426,617) $ (563,766) $ (1,148,128) $ (1,108,233) $ (2,333,075)
Pro forma net loss
per share......... $ (.44) $ (.19) $ (.39)
</TABLE>
Because Statement 123 is applicable to options granted subsequent to July 1,
1995, its pro forma effect will not be fully reflected until the year ending
June 30, 1998.
F-16
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
8. STOCK OPTION PLANS (CONTINUED)
The following tables summarize information about employee stock options
outstanding at December 31, 1996 and March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
- ----------------------------------------------------- -----------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
REMAINING REMAINING
EXERCISE OPTIONS OPTIONS CONTRACTUAL EXERCISE OPTIONS OPTIONS CONTRACTUAL
PRICES OUTSTANDING EXERCISABLE LIFE PRICES OUTSTANDING EXERCISABLE LIFE
- -------------- ----------- ----------- ----------- -------------- ----------- ----------- -----------
$3.51 151,050 40,000 8.4 years $3.51 151,050 53,000 8.2 years
$4.67 734,659 80,000 9.0 $4.67 733,234 161,000 8.8
$8.07 543,068 -- 9.9 $8.07 537,368 -- 9.7
$9.82 76,380 -- 10.0
----------- ----------- ----------- ----------- ----------- -----------
1,428,777 120,000 9.3 1,498,032 214,000 9.1
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The Company has reserved 2,451,026 and 2,344,125 shares of common stock for
issuance upon exercise of all outstanding options and warrants at December 31,
1996 and March 31, 1997, respectively.
9. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE FROM STOCKHOLDER
On December 8, 1995, the Company loaned $150,000 to an employee, who is also
a stockholder of the Company. The note was due on June 30, 1996 and was extended
until June 30, 1997. Interest is receivable at an annual rate of 5%.
NOTE AND LOAN PAYABLE TO STOCKHOLDER
On October 28, 1994, the Company received $315,000 in exchange for a note
payable to the Company's chief executive officer, who is also a stockholder of
the Company. Interest is payable at an annual rate of 6%. Principal and any
unpaid interest are payable in full upon demand at any time on or after October
28, 1995. Interest expense related to this note was $12,915, $18,952, $9,450,
$9,450, and $14,175 during the years ended June 30, 1995 and 1996, the six
months ended December 31, 1995 and 1996 and the nine months ended March 31,
1996, respectively.
As of June 30, 1995 and 1996 and December 31, 1996, $12,915, $29,266 and
$38,740, respectively, of accrued interest was included in accrued expenses in
the accompanying consolidated balance sheet. The note payable and accrued
interest was paid in full on January 14, 1997.
During the period ended June 30, 1995, the Company also received noninterest
bearing working capital loan advances of $80,700 from the Company's chief
executive officer, of which $60,000 was repaid during the year ended June 30,
1995 and $20,700 was repaid during the year ended June 30, 1996.
F-17
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
10. PENSION PLAN
During the period ended June 30, 1995, the Company established 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, 1995 and 1996 and the six months ended December
31, 1995 and 1996. The plan also provides for discretionary contributions by the
Company. The Company contributed $8,967, $41,883, $11,896, $42,994, $15,473 and
$80,056, to the plan during the years ended June 30, 1995 and 1996, the six
months ended December 31, 1995 and 1996 and the nine months ended March 31, 1996
and 1997, respectively. There were no discretionary contributions made by the
Company during the years ended June 30, 1995 and 1996, the six months ended
December 31, 1995 and 1996 and the nine months ended March 31, 1996 and 1997.
11. INCOME TAXES
As a result of losses incurred from inception, and if the Company filed an
income tax return at December 31, 1996, it would have available net operating
loss carryforwards of approximately $3,100,000 for income tax purposes which
expire through 2012.
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:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996
------------- ------------- -----------------
<S> <C> <C> <C>
Deferred tax liability:
Depreciation and amortization.................................. $ 13,000 $ 16,000 $ 19,000
------------- ------------- -----------------
Total deferred tax liability................................. 13,000 16,000 19,000
Deferred tax assets:
Net operating loss carryforwards............................... 378,000 891,000 1,240,000
Projects in progress........................................... -- 312,000 312,000
Accruals....................................................... -- 43,000 43,000
------------- ------------- -----------------
Total deferred tax........................................... 378,000 1,246,000 1,595,000
Valuation allowance for deferred tax assets.................... (365,000) (1,230,000) (1,576,000)
------------- ------------- -----------------
Net deferred tax assets........................................ 13,000 16,000 19,000
------------- ------------- -----------------
Net deferred taxes............................................. $ -- $ -- $ --
------------- ------------- -----------------
------------- ------------- -----------------
</TABLE>
Net deferred taxes at March 31, 1997 are not significantly different from the
December 31, 1996 amounts above.
12. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
The Company designs, assembles and installs satellite ground segment systems
and networks for customers in diversified geographic locations. The Company
performs ongoing credit evaluations of its
F-18
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
12. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
customers' financial condition and in most cases requires a letter of credit or
cash in advance for foreign customers. Historically, the Company has not
incurred significant losses from trade receivables.
Sales to two major customers accounted for approximately 61% (43% and 18%)
of the Company's net revenues for the year ended June 30, 1996, and 86% (53% and
33%) and 33% (17% and 16%) of net revenues for the six months ended December 31,
1995 and 1996, respectively, and 65% (42% and 23%) and 28% (15% and 13%) of net
revenues for the nine months ended March 31, 1996 and 1997, respectively.
Revenues from foreign sales accounted for 22% (13% Europe, 5% Africa and 4%
Asia), 5% (Asia), 59% (43% Asia, 13% Europe and 3% Africa), 14% (2% Asia, 12%
Europe) and 50% (42% Asia, 1% Africa and 7% Europe) of total revenues for the
year ended June 30, 1996, the six months ended December 31, 1995 and 1996, and
the nine months ended March 31, 1996 and 1997, respectively.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and trade receivables.
The Company places its cash and cash equivalents with high quality financial
institutions and, by policy, limits the amount of credit exposure to any one
institution. Cash equivalents are comprised of short-term debt instruments,
certificates of deposit or direct or guaranteed obligations of the United
States, which are held to maturity and approximate cost. At times, cash may be
in excess of FDIC insurance limits.
13. COMMITMENTS
LINE OF CREDIT
As of December 31, 1996, the Company maintained a secured line of credit of
$1,500,000, which expired on January 31, 1997. Borrowings under this line bear
interest at the then prime rate and were secured by certain assets of the
Company in addition to a personal guarantee by the Company's chief executive
officer, who is also a stockholder of the Company. Through December 31, 1996,
there were no borrowings made under this line.
During January 1997, the Company received a one year, $5,000,000 proposed
credit facility from a bank. The proposed facility is to support the working
capital requirements of the Company and for the issuance of letters of credit.
The proposed facility will provide for interest at the prime rate plus 1/2% per
annum and will be collateralized by a first security interest on all assets.
Prior to closing of the proposed facility, the bank will complete its due
diligence inquiry of the Company, including an accounts receivable review, as
defined. Through March 31, 1997, there were no borrowings made under this
facility.
LETTERS OF CREDIT
The Company utilizes standby letters of credit to secure certain bid
proposals and performance guarantees in the normal course of business. The
Company provides cash collateral for all of these letters of credit. As of June
30, 1995 and 1996, December 31, 1996 and March 31, 1997, cash collateral related
to bid proposals amounted to $96,000, $1,043,000, $1,270,625, $1,303,000,
respectively, and cash collateral
F-19
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995,
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 AND AT MARCH 31, 1997 IS UNAUDITED
13. COMMITMENTS (CONTINUED)
related to performance guarantees amounted to zero, $188,850, $344,861,
$188,850, respectively. These amounts are included in restricted cash in the
accompanying consolidated balance sheets.
LEASE COMMITMENTS
Future minimum payments under noncancelable leases for office space and
equipment with terms of one year or more, consist of the following at December
31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
January 1, 1997 to June 30, 1997....................................... $ 31,116 $ 127,000
Year ending June 30, 1998.............................................. 62,232 150,000
Year ending June 30, 1999.............................................. 18,366 53,000
--------- ----------
Total minimum lease payments........................................... 111,714 $ 330,000
----------
----------
Less amounts representing interest..................................... 12,014
---------
Present value of net minimum lease payments............................ $ 99,700
---------
---------
</TABLE>
Lease commitments at March 31, 1997 are not significantly different from the
above.
EMPLOYMENT AGREEMENTS
During January 1997, the Company entered into three-year employment
agreements with two of its officers for an aggregate amount of $325,000 per
year. The Company will have certain obligations to the two officers if they are
terminated for disability, cause or following a change in control.
F-20
<PAGE>
- -------------------------------------------------------------
- -------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.................................... 3
Risk Factors.......................................... 7
Use of Proceeds....................................... 15
Dividend Policy....................................... 15
Capitalization........................................ 16
Dilution.............................................. 17
Selected and Consolidated Financial Data.............. 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 20
Business.............................................. 28
Management............................................ 50
Certain Transactions.................................. 60
Principal Stockholders................................ 62
Description of Capital Stock.......................... 64
Shares Eligible for Future Sale....................... 67
Underwriting.......................................... 69
Legal Matters......................................... 70
Experts............................................... 70
Additional Information................................ 71
Change in Independent Accountants..................... 71
Index to Financial Statements......................... F-1
</TABLE>
-------------------
UNTIL , 1997 ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,750,000 SHARES
[LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-------------------
PAINEWEBBER INCORPORATED
UNTERBERG HARRIS
------------
, 1997
- -------------------------------------------------------------
- -------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fees and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------------
<S> <C>
SEC registration fee......................................................... $ 13,417.00
NASD filing fee.............................................................. 4,927.50
Nasdaq National Market listing fee........................................... 42,168.61
Printing and engraving....................................................... 150,000.00
Legal fees and expenses...................................................... 625,000.00
Accounting fees and expenses................................................. 300,000.00
Blue sky fees and expenses................................................... 15,000.00
Transfer agent fees.......................................................... 5,000.00
Miscellaneous................................................................ 44,486.89
---------------
Total.................................................................. $ 1,200,000.00
---------------
---------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Act"). Article 7 of the Registrant's Amended and Restated
Certificate of Incorporation provides for indemnification of its directors and
officers and permissible indemnification of employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. Reference is
also made to Section 6 of the Underwriting Agreement contained in Exhibit 1.1
hereto, which sets forth certain indemnification provisions. The Registrant has
obtained liability insurance for its officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities during the past
three years:
In June 1995, the Company entered into a Securities Purchase Agreement for
the sale of an aggregate of 1,218,982 shares of Common Stock to various
investors at a purchase price of $4.68 per share. In connection with such
offering, the Company issued, as commission fees, 156,488 shares of Common
Stock.
In November 1995, the Company entered into an agreement with an investor
pursuant to which it issued 199,500 shares of Common Stock at a price of $4.68
per share. Pursuant to the terms of this agreement, in connection with certain
rights granted to this investor for its first $1.5 million of orders with the
Company, in November 1995 the Company issued this investor 37,147 shares of
Common Stock.
In May 1996, the Company issued an aggregate of 156,250 shares of Class A
Convertible Preferred Stock at a purchase price of $2.5 million to three
investors, convertible automatically upon the consummation of this Offering into
an aggregate of 445,313 shares of Common Stock.
II-1
<PAGE>
In August 1996, the Company issued an aggregate of 16,054 shares of Class A
Convertible Preferred Stock at a purchase price of $256,863 convertible
automatically upon the consummation of this Offering into an aggregate of 45,754
shares of Common Stock.
In October 1996, the Company's wholly-owned subsidiary, NetSat Express,
Inc., issued 18,939 shares of its Class A Preferred Stock to PolyVentures, which
the Company in April 1997 converted to 30,082 shares of its Common Stock.
In December 1996, the Company issued an aggregate of 432,142 shares of Class
B Convertible Preferred Stock at a purchase price of $28.00 per share to 77
investors, convertible automatically upon the consummation of this Offering into
an aggregate of 1,231,605 shares of Common Stock. In connection with such
offering, the Company issued, as commission fees, 53,152 shares of Class B
Convertible Preferred Stock, convertible automatically upon the closing of this
Offering into an aggregate of 151,483 shares of Common Stock.
In March 1997, the Company issued 29,420 shares of Class B Convertible Stock
at a purchase price of $28.00 per share to one investor, convertible
automatically upon consummation of this Offering into an aggregate of 83,847
shares of Common Stock.
The Registrant from time to time has granted stock options to employees,
directors and consultants. The following table sets forth certain information
regarding such grants:
<TABLE>
<CAPTION>
RANGE OF
NO. OF EXERCISE
SHARES PRICES
------------ ----------------
<S> <C> <C>
August 17, 1994 to June 30, 1995............................. 337,725 $3.51
July 1, 1995 to June 30, 1996................................ 730,384 $3.51-$4.68
July 1, 1996 to June 30, 1997................................ 776,198 $3.51-$12.98
</TABLE>
The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering or (ii) Rule
701 under the Securities Act. No underwriters were involved in connection with
the sales of securities referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1## Certificate of Incorporation.
3.2# Form of Amended and Restated Certificate of Incorporation to be in effect upon the consummation of the
public offering.
3.3# Bylaws of the Registrant.
3.4# Form of Amended and Restated By-Laws of the Registrant to be in effect upon the consummation of the
public offering.
4.1## Specimen Common Stock Certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and Bylaws of the
Registrant defining rights of holders of Common Stock of the Registrant.
5.1## Opinion of Brobeck, Phleger & Harrison LLP.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.1* Form of Registration Rights Agreement dated as of February 1997.
10.2# Form of Registration Rights Agreement dated May 30, 1996.
10.3# Form of Registration Rights Agreement dated December 31, 1996, as amended.
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.
10.5# Investment Agreement dated February 12, 1996 by and between Shiron Satellite Communications (1996) Ltd.
and the Registrant.
10.6+## Stock Purchase Agreement dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and the
Registrant.
10.7# Memorandum of Understanding dated December 18, 1996 by and between NetSat Express, Inc. and Applied
Theory Communications, Inc.
10.8# Stock Purchase Agreement dated as of August 23, 1996 by and between NetSat Express Inc. and Hughes
Network Systems, Inc.
10.9# Employment Agreement dated as of January 27, 1997 between the Registrant and David E. Hershberg.
10.10# Employment Agreement dated as of January 27, 1997 between the Registrant and Kenneth A. Miller.
10.11# Lease Agreement dated November 15, 1995 by and between RReef USA Fund-I, a California group trust, and
the Registrant.
10.12# Lease Agreement dated July 15, 1996 by and between NetSat Express, Inc. and RReef USA Fund-I.
10.13# Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and between
Eaton Corporation and the Registrant.
10.14# 1997 Stock Incentive Plan.
11.1## Statement re: Computation of Pro Forma Net Loss Per Share
16.1# Letter from Price Waterhouse LLP.
23.1## Consent of Ernst & Young LLP.
23.2## Consent of Price Waterhouse LLP.
23.3## Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24# Powers of Attorney.
27## Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
# Previously filed.
## Filed herewith.
+ Confidential treatment has been requested for certain portions of this
Exhibit.
(b) Financial Statement Schedules
Financial Statement Schedules have been omitted because the information
required to be set forth therein is not applicable or is shown in Financial
Statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation of the Registrant, the Underwriting Agreement, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424 (b) (1) or (4), or 497
(h) under the Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) That for the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HAUPPAUGE, STATE OF NEW
YORK, ON THIS 15TH DAY OF JULY, 1997.
GLOBECOMM SYSTEMS INC.
By: /s/ KENNETH A. MILLER
-----------------------------------------
Kenneth A. Miller
PRESIDENT AND DIRECTOR
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON JULY 15, 1997:
SIGNATURE TITLE
- --------------------------------------- ---------------------------
By: * Chairman and Chief
------------------------------ Executive Officer and
David E. Hershberg Director (Principal
Executive Officer)
By: /s/ KENNETH A. MILLER President and Director
------------------------------
Kenneth A. Miller
By: * Chief Financial Officer
------------------------------ (Principal Financial and
Andrew C. Melfi Accounting Officer)
By: * Vice President and Director
------------------------------
Thomas A. DiCicco
By: * Vice President and Director
------------------------------
Stephen C. Yablonski
By: * Vice President and Director
------------------------------
Donald G. Woodring
By: * Director
------------------------------
Herman Fialkov
By: * Director
------------------------------
Shelley A. Harrison
By: Director
------------------------------
Benjamin Duhov
By: * Director
------------------------------
Cecil J. Waylan
*By: /s/ KENNETH A. MILLER
------------------------------
Kenneth A. Miller
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1* Form of Underwriting Agreement.
3.1## Certificate of Incorporation.
3.2# Form of Amended and Restated Certificate of Incorporation to be in effect upon the consummation
of the public offering.
3.3# Bylaws of the Registrant.
3.4# Form of Amended and Restated By-Laws of the Registrant to be in effect upon the consummation of
the public offering.
4.1## Specimen Common Stock Certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and Bylaws
of the Registrant defining rights of holders of Common Stock of the Registrant.
5.1## Opinion of Brobeck, Phleger & Harrison LLP.
10.1# Form of Registration Rights Agreement dated as of February 1997.
10.2# Form of Registration Rights Agreement dated May 30, 1996.
10.3# Form of Registration Rights Agreement dated December 31, 1996, as amended.
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.
10.5# Investment Agreement dated February 12, 1996 by and between Shiron Satellite Communications
(1996) Ltd. and the Registrant.
10.6+## Stock Purchase Agreement dated as of August 30, 1996 by and between C-Grams Unlimited Inc. and
the Registrant.
10.7# Memorandum of Understanding dated December 18, 1996 by and between NetSat Express, Inc. and
Applied Theory Communications, Inc.
10.8# Stock Purchase Agreement dated as of August 23, 1996 by and between NetSat Express Inc. and
Hughes Network Systems, Inc.
10.9# Employment Agreement dated as of January 27, 1997 between the Registrant and David E. Hershberg.
10.10# Employment Agreement dated as of January 27, 1997 between the Registrant and Kenneth A. Miller.
10.11# Lease Agreement dated November 15, 1995 by and between RReef USA Fund-I, a California group
trust, and the Registrant.
10.12# Lease Agreement dated July 15, 1996 by and between NetSat Express, Inc. and RReef USA Fund-I.
10.13# Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York, dated December 12, 1996 by and
between Eaton Corporation and the Registrant.
10.14# 1997 Stock Incentive Plan.
11.1## Statement re: Computation of Pro Forma Net Loss Per Share
16.1# Letter from Price Waterhouse LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<S> <C> <C>
23.1## Consent of Ernst & Young LLP.
23.2## Consent of Price Waterhouse LLP.
23.3## Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24# Powers of Attorney.
27## Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
# Previously filed.
## Filed herewith.
+ Confidential treatment has been requested for certain portions of this
Exhibit.
<PAGE>
Exhibit 3.1
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 08/17/1994
944154259 - 2427656
CERTIFICATE OF INCORPORATION
A Stock Corporation
FIRST: The corporation name is WORLDCOMM SYSTEMS INC.
SECOND: Its registered office in the State of Delaware is to be located at 3422
Old Capitol Trail, Suite 700, in the city of Wilmington, county of New Castle,
19808-6192. The registered agent in charge thereof is Delaware Business
Incorporators, Inc., located at same address, as above.
THIRD: The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
FOURTH: The amount of the total authorized capital stock of this corporation is
2000000 shares of .01 par value.
FIFTH: The name and mailing address of the incorporator is Delaware Business
Incorporators, Inc., 3422 Old Capitol Trail, Suite 700, Wilmington, DE
19808-6192.
SIXTH: The powers of the incorporator are to terminate upon the filing of the
certificate of incorporation. The name and mailing address of the person who is
to serve as director until the first annual meeting of the shareholders or until
their successors are duly elected and qualify is as follows:
David E. Hershberg
15 Waterview Drive
Port Jefferson, NY 11777
I, THE UNDERSIGNED, for the purpose of forming a corporation under the laws of
the State of Delaware, do make, file and record this Certificate, and do certify
that the facts herein stated are true, and I have accordingly hereunto set my
hand this date August 17, 1994.
Incorporator:
Delaware Business Incorporators, Inc.
By: /s/ Russell D. Murray
-------------------------------------
Russell D. Murray, V.P.
<PAGE>
CERTIFICATION OF AMENDMENT
OF CERTIFICATE OF INCORPORATION OF
WORLDCOMM SYSTEMS INC.
The undersigned, being the President of Worldcomm Systems Inc., a Delaware
Corporation (the "Corporation"), hereby certifies and sets forth:
1. Article FOURTH of the Certificate of Incorporation, which sets forth the
number of shares which the Corporation is authorized to issue is amended to read
as follows:
FOURTH: The total number of shares of capital stock which the Corporation shall
have authority to issue is 3,000,000 shares, of which 2,000,000 shares shall be
Common Stock, $.01 par value and 1,000,000 shares shall be Preferred Stock, par
value $.01 per share.
(a) Common stock.
(i) Voting Rights. The holders of shares of Common Stock shall be
entitled to one vote for each share so held with respect to all matters voted on
by the stockholders of the Corporation.
(ii) Liquidation Rights. Subject to the prior and superior rights of
the Preferred Stock, upon any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation, or the merger or consolidation
of the Corporation into another corporation, the remaining assets of the
Corporation available for distribution to stockholders shall be distributed
among the holders of Common Stock pro rata based upon the number of shares of
Common Stock held by each.
(iii) Dividends. Subject to the rights of the Preferred Stock,
dividends may be paid on the Common Stock out of any assets legally available
therefor, as and when declared by the Board of Directors.
(iv) Relative Rights of Preferred Stock and Common Stock. All
relative, participating, optional or other special rights of the Common Stock
are expressly made subject and subordinate to those that may be fixed with
respect to any shares of the Preferred Stock.
(b) Preferred Stock. The Board of Directors is empowered to authorize the
issuance of one or more classes of the Corporation's Preferred Stock, or one or
more series of any such class, and to fix the preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof for each such class or series, specifying for each such
class or series:
(i) the designation thereof in such manner as shall distinguish
shares thereof from all other series of Preferred Stock then or theretofore
authorized;
(ii) the number of shares which shall initially constitute such
class or series;
(iii) whether or not the shares of such class or series shall have
voting rights in addition to the voting rights affirmatively required by law;
(iv) the rate or rates and the time or times at which dividends and
other distributions on the shares of such class or series shall be paid, and
whether or not any such dividends shall be cumulative;
(v) the amount payable on the shares of such class or series in the
event of the voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation;
(vi) whether or not shares of such class or series are to be
redeemable, and the terms and conditions upon which the Corporation or a holder
may exercise its or his right to redeem, or require redemption of, shares of
such class or series;
(vii) whether or not a sinking fund shall be created for the
redemption of the shares of such class or series, and the terms and conditions
of any such fund; and
(viii) any other preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions thereof
which shall be applicable to such class or series.
<PAGE>
2. The following additional Articles are inserted for the management of the
business and for the conduct of the affairs of the corporation, and for further
definition, limitation and regulation of the powers of the corporation and of
its directors and stockholders:
SEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
EIGHTH: A director of the corporation shall not be liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision shall not eliminate or limit the
liability of a director (i) for any breach of his duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
NINTH: The Board of Directors shall have power without the assent or vote of the
stockholders to make, alter, amend, change, add to or repeal the By-Laws of the
corporation.
3. This amendment has been duly adopted in accordance with Section 242 of the
General Corporation Law.
IN WITNESS of the foregoing I have executed this certificate this 13 day of
October, 1995.
/s/ David E. Hershberg
-------------------------------------
David E. Hershberg, CEO
Attest:
/s/ Thomas A. DiCicco
- ----------------------------------
Thomas A. DiCicco, Secretary
<PAGE>
WORLDCOMM SYSTEMS INC.
CERTIFICATE OF DESIGNATION OF RELATIVE RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS
The undersigned, President of Worldcomm Systems, Inc., a Delaware
corporation (the "Corporation"), hereby certifies and sets forth the following.
Pursuant to the authority contained in Article FOURTH of the Certificate of
Incorporation, the Board of Directors has adopted the following resolution to
authorize the issuance of a class of the Corporation's Preferred Stock, par
value $.01 per share, and to fix the preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof.
RESOLVED, that pursuant to the authority granted by Article FOURTH of
the Certificate of Incorporation, the Board of Directors authorizes
issuance of a new class of the Corporation's Preferred Stock, par value
$.01 per share, having the following designation and preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof.
This class is designated Class A Preferred Stock.
The number of shares which shall initially constitute the Class A
Preferred Stock is 156,250 shares.
At the option of the holder thereof, each share of Class A Preferred
Stock shall be convertible, at any time or from time to time, into the
number of fully paid and nonassessable share of Common Stock which results
from dividing $16.00 by the conversion price which is in effect at the time
of conversion (the "Conversion Price"). The Conversion Price shall be
subject to adjustment from time to time as provided below.
If the Corporation shall (i) issue additional shares of Common Stock
as a dividend or other distribution on outstanding Common Stock, (ii)
subdivide the outstanding shares of Common Stock into a greater number of
shares of Common Stock or (iii) combine the outstanding shares of Common
Stock into a smaller number of shares of Common Stock, then upon the
happening of such event, the Conversion Price of the Class A Preferred
Stock shall be adjusted by multiplying the Conversion Price in effect
immediately prior to such event by a fraction, the numerator of which is
the number of shares of Common Stock issued and outstanding immediately
prior to such event, and the denominator of which is the number of shares
of Common Stock issued and outstanding immediately after such event. The
product so obtained shall thereafter be the Conversion Price for the Class
A Preferred Stock.
If at any time or from time to time the Corporation shall pay a
dividend or make another distribution to holders of the Common Stock
payable in securities of the Corporation other than shares of Common
<PAGE>
Stock, then in each such event the Corporation shall make provision so that
holders of the Class A Preferred Stock shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable
upon conversion thereof, the amount of securities of the Corporation which
they would have received had their Class A Preferred Stock been converted
into Common Stock on the date of such event and had they thereafter, during
the period from the date of such event to and including the conversion
date, retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period
under this Section (c) with respect to rights of the holders of the Class A
Preferred Stock or with respect to such other securities by their terms.
Each holder of Class A Preferred Stock who elects to convert the
same into shares of Common Stock shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or
any transfer agent for the Class A Preferred Stock or Common Stock, and
shall give written notice to the Corporation at such office that such
holder elects to convert the same and shall state therein the number of
shares of Class A Preferred Stock being converted. Thereupon, the
Corporation shall promptly issue and deliver at such office to such holder
a certificate or certificates for the number of shares of Common Stock to
which such holder is entitled upon such conversion. Such conversion shall
be deemed to have been made immediately prior to the close of business on
the date of such surrender of the certificate or certificates representing
the shares of Class A Preferred Stock to be converted, and the person
entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such
shares of Common Stock on such date.
No fractional shares of Common Stock shall be issued upon any
conversion of Class A Preferred Stock. In lieu of any fractional share to
which the holder would otherwise be entitled, the Corporation shall pay the
holder cash equal to be product of such fraction multiplied by the Common
Stock's fair market value as determined in good faith by the Corporation's
Board of Directors as of the date of conversion.
The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock, solely for the
purpose of effecting the conversion of the shares of Class A Preferred
Stock, such number of its shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of Class A
Preferred Stock; and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of
all been outstanding shares of Class A Preferred Stock, the Corporation
will take such corporate action as may, in the opinion of its
<PAGE>
counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such
purpose.
The Corporation shall not avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by
the Corporation, but shall at all times in good faith assist in carrying
out all such actions as may be reasonably necessary or appropriate in order
to protect the conversion price of the holders of the Class A Preferred
Stock against impairment.
Each share of Class A Preferred Stock shall automatically be converted
into fully paid and nonassessable shares of Common Stock, as provided
herein immediately prior to the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common
Stock for the account of the Corporation in which the aggregate public
offering price (before deduction of underwriters' discounts and
commissions) equals or exceeds $7,500,000. Such conversion shall occur
whether or no the certificates evidencing the shares so converted are
surrendered to the Corporation or its transfer agent. However, the
Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Class A Preferred Stock are either
delivered to the Corporation or its transfer agent as provided below, or
the holder notifies the Corporation or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates. Upon the occurrence of
such automatic conversion of Class A Preferred Stock, the holders of such
Preferred Stock shall surrender the certificates evidencing such shares at
the office of the Corporation or any transfer agent for the Class A
Preferred Stock or Common Stock. Thereupon, there shall be issued and
delivered to such holder promptly at such office and in its name as shown
on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares
of Class A Preferred Stock so surrendered were convertible on the date on
which such automatic conversion occurred.
Except as otherwise required by law, each holder of the Class A
Preferred Stock shall be entitled to one vote for each share of Common
Stock into which the Preferred Stock held by such holder is at the time
reference convertible. Holders of the Class A Preferred Stock shall vote as
a single class with holders of the Common Stock on all matters upon which a
vote of stockholders is authorized or required by law or by the Certificate
of Incorporation.
<PAGE>
Holders of the Class A Preferred Stock shall be entitled to
participate ratably, based on the number of shares of Common Stock into
which the such holder's shares of Class A Preferred Stock are then
convertible, with holders of the Common Stock in any dividends or other
distributions which may be declared upon or paid to holders of the Common
Stock.
In the event of the dissolution, liquidation or winding up of the
Corporation, or a sale of all of its assets, whether voluntary or
involuntary, or in the event of its insolvency, there shall be paid to the
holders of the Preferred Stock the sum of $16.00 per share, before any sums
shall be paid or any assets distributed among holders of the Common Stock.
If the assets of the Corporation shall be insufficient to permit the
payment in full to the holders of the Preferred Stock of the amount thus
distributable, then the entire assets of the Corporation shall be
distributed ratably among the holders of the Preferred Stock. After the
foregoing up to the holders of the Preferred Stock, the remaining assets
and funds of the Corporation shall be distributed among and paid to the
holders of the Common Stock and the Preferred Stock, share and share alike,
in proportion to their stockholdings.
If the Corporation proposes at any time to issue additional voting
securities for payment in cash, the Corporation shall give holders of the
Class A Preferred Stock prompt written notice of such proposal, including
information regarding (i) the number and class or series of the securities
proposed to be sold (the "Offered Securities"), and, if such securities
will be of a new class, the rights, preferences and restrictions applicable
to such new class, (ii) if known, the identity of any proposed third party
acquiror or acquirors of the proposed Offered Securities, (iii) the price
per security at which the Corporation proposes to sell the Offered
Securities (the "Offer Price") and (iv) the proposed terms of payment and
other material terms and conditions of the proposed sale. Subject to the
provisions set forth below, each holder of the Class A Preferred Stock held
have a preemptive right to purchase such holder's Pro Rata Part (as
hereinafter defined) of the Offered Securities at the Offer Price and on
the other terms and conditions set forth in the notice. "Pro Rata Part"
shall mean the proportion which the number of votes which the holder is
entitled to cast by reason of his ownership of Class A Preferred Stock
bears to the number of votes which holders of all voting securities
(including such holder) are entitled to cast immediately prior to the date
subscriptions are opened for such offering. In order to exercise such
preemptive rights, such holder must notify the Corporation in writing not
later than fifteen (15) days after receipt by the holder of the
Corporation's notice. Such notice from the holder shall state the number of
<PAGE>
securities which the holder desires to purchase, and shall be deemed an
irrevocable commitment on the part of such holder to purchase the number of
securities set forth therein for the Offer Price and upon the other terms
and conditions set forth in the Corporation's notice. The preemptive right
set forth above shall not apply to:
shares of the Corporation's Common Stock (or options or
warrants therefor) issued to employees, officers or directors of or
consultants to, the Corporation pursuant to incentive agreements or plans
approved by the Board of Directors of the Corporation;
any securities issuable upon conversion of or with respect
to any then outstanding shares of Class A Preferred Stock of the
Corporation or Common Stock or other securities issuable upon conversion
thereof;
any securities issuable upon exercise of any options,
warrants or rights to purchase any securities of the Corporation
outstanding on the date of issuance of such Class A Preferred Stock
("Warrant Securities") and any securities issuable upon the conversion of
any Warrant Securities;
shares the Corporation's Common Stock or Preferred Stock
issued in connection with any stock split or stock dividend;
securities offered by the Corporation to the public pursuant
to a registration statement filed under the Securities Act of 1933;
securities issued pursuant to the acquisition of another
corporation or entity by the Corporation by consolidation, merger, purchase
of all or substantially all of the assets, or other transaction in which
the Corporation acquires in a single transaction or series of related
transactions, all or substantially all of the assets of such a corporation
or entity of fifty percent (50%) or more of the voting power of such other
corporation or entity or fifty percent (50%) or more of the equity
ownership of such other entity; or
any offering of securities by the Corporation exclusively to
a single industrial entity as part of a Strategic Business Alliance (as
hereinafter defined) with such entity. "Statistics Business Alliance" shall
mean an alliance with an industrial entity where (i) the Board of Directors
of the Corporation has been given a written report outlining in reasonable
detail the business objectives and commercial advantages to be obtained by
the Corporation and providing a business plan demonstrating the commercial
advantages to be obtained by the Corporation in connection with such
alliance and (ii) such strategic has been approved by a majority vote of
the Board of Directors of the Corporation after full consideration of any
strongly and well reasoned objection thereto by any member of such Board or
any stockholder owning shares entitling such stockholder to cast at least
5% of the total number of votes which may be cast by all stockholders upon
the election
<PAGE>
of directors. The term "industrial entity" shall include designees of an
industrial entity who are elated to such entity by virtue of substantial
stock ownership or by virtue of such designee's being an officer or
director of such entity.
The Class A Preferred Stock shall not be redeemable.
There shall not be any sinking fund for the redemption of the Class A
Preferred Stock.
The approval, by vote or written consent, of the holders of a majority
of the outstanding shares of Class A Preferred Stock shall be required to:
take any action which would alter or change any of the rights,
preferences, privileges or restrictions of such Class or increase the total
number of authorized shares of such Class:
reclassify any outstanding shares or securities of the
corporation into shares having rights, preferences or privileges senior to
such Class; or
authorize or issue any other stock having rights or preferences
senior to such Class.
Except as expressly provided above, or as required by law, the
preferences and relative participating, optional or other special rights,
and qualifications, limitations or restrictions thereof granted to or
imposed upon the Common Stock and the Class A Preferred Stock, or the
holders thereof, shall be in all respects identical.
The foregoing resolution was duly adopted at a meeting of the Board of Directors
held on May 23, 1996.
IN WITNESS of the foregoing I have executed this certificate this 29th day
of May, 1996.
/s/ David E. Hershberg
----------------------------------
David E. Hershberg, CEO & Chairman
Attest:
/s/ Thomas A. DiCiccio
- -----------------------------------
Thomas A. DiCiccio, Secretary
<PAGE>
CERTIFICATION OF AMENDMENT
OF CERTIFICATE OF INCORPORATION OF
WORLDCOMM SYSTEMS INC.
The undersigned, being the Chairman of the Board of Directors of Worldcomm
System Inc., a Delaware Corporation (the "Corporation"), hereby certifies and
sets forth:
1. The first sentence of Article FOURTH of the Certificate of Incorporation,
which sets forth the number of shares which the Corporation is authorized to
issue, is amended to read as follows:
FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is 4,000,000 million
shares, of which 3,000,000 shares shall be Common Stock, $.01 par
value and 1,000,000 shares shall be Preferred Stock, $.01 par value.
2. This amendment has been duly adopted in accordance with Section 242 of the
General Corporation Law.
IN WITNESS of the foregoing I have executed this certificate this 1 day
of October, 1996.
/s/ David E. Hershberg
-------------------------------------
David E. Hershberg
Chairman of the Board
Attest:
/s/ Thomas A. DiCicco
- ----------------------------------
Thomas A. DiCicco, Secretary
<PAGE>
WORLDCOMM SYTEMS INC.
CERTIFICATION OF DESIGNATION OF RELATIVE RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS
The undersigned, President of Worldcomm Systems, Inc., a Delaware
corporation (the "Corporation"), hereby certifies and sets forth the following.
1. Pursuant to the authority contained in Article FOURTH of the Certificate of
Incorporation, the Board of Directors has adopted the following resolution
to authorize the issuance of a class of the Corporation's Preferred Stock,
par value $.01 per share, and to fix the preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof.
RESOLVED, that pursuant to the authority granted by Article FOURTH of the
Certificate of Incorporation, the Board of Directors authorizes issuance of a
new class of the Corporation's Preferred Stock, par value $.01 per share, having
the following designation and preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions
thereof.
(a) This class is designated Class B Preferred Stock.
(b) The number of shares which shall initially constitute the Class B
Preferred Stock is 714,400 shares.
(c) At the option of the holder thereof, each share of Class B Preferred
Stock shall be convertible, at any time or from time to time, into the
number of fully paid and nonassessable shares of Common Stock which
results from dividing $28.00 by the conversion price which is in
effect at the time of conversion (the "Conversion Price"). The
Conversion Price shall be subject to adjustment from time to time as
provided below.
(i) If the Corporation shall (1) issue additional shares of
Common Stock as a dividend or other distribution on outstanding
Common Stock, (2) subdivide the outstanding shares of Common
Stock into greater number of Common Stock, or (3) combine the
outstanding shares of Common Stock into a smaller number of
shares of Common Stock, then upon the happening of such event,
the Conversion Price of the Class B Preferred Stock shall be
adjusted by multiplying the Conversion Price in effect
immediately prior to such event by a fraction, the numerator of
which is the number of shares of Common Stock issued and
outstanding immediately prior to such event, and the denominator
of which is the number of shares of Common Stock issued and
outstanding immediately after such event. The product so obtained
shall thereafter be the Conversion Price for the Class B
Preferred Stock.
(ii) If at any time or from time to time the Corporation
shall pay a dividend or make another distribution to holders of
the Common Stock payable in securities of the Corporation other
than shares of Common Stock, then in each such event the
Corporation shall make provision so that holders of the Class B
Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable upon
conversion thereof, the amount of securities of the Corporation
which they would have received had their Class B
<PAGE>
Preferred Stock been converted into Common Stock on the date of
such event and had they thereafter, during the period from the
date of such event to and including the conversion date, retained
such securities receivable by them as aforesaid during such
period, subject to all other adjustment called for during such
period under this Section (c) with respect to rights of the
holders of the Class B Preferred Stock or with respect to such
other securities by their terms.
(iii) Each holder of Class B Preferred Stock who elects to
convert the same into shares of Common Stock shall surrender the
certificate or certificates therefor, duly endorsed, at the
office of the Corporation or any transfer agent for the Class B
Preferred Stock or Common Stock and shall give written notice to
the Corporation at such office that such holder elects to convert
the same and shall state therein the number of shares of Class B
Preferred Stock being converted. Thereupon, the Corporation shall
promptly issue and deliver at such office to such holder a
certificate or certificates for the number of shares of Common
Stock to which such holder is entitled upon conversion. Such
conversion shall be deemed to have been made immediately prior to
the close of business on the date of such surrender of the
certificate or certificates representing the shares of Class B
Preferred Stock to be converted, and the person entitled to
receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder of such
shares of Common Stock on such date.
(iv) No fractional shares of Common Stock shall be issued
upon any conversion of Class B Preferred Stock. In lieu of any
fractional share to which the holder would otherwise be entitled,
the Corporation shall pay the holder cash equal to be product of
such fraction multiplied by the Common Stock's fair market value
as determined in good faith by the Corporation's Board of
Directors as of the date of conversion.
(v) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the
shares of Class B Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of Class B Preferred
Stock, and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of Class B Preferred
Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(vi) The corporation shall not avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but shall at all times in
good faith assist in carrying out all such actions as may be
reasonably necessary or appropriate in order to protect the
conversion price of the holders of
<PAGE>
the Class B Preferred Stock against impairment.
(d) Each share of Class B Preferred Stock shall automatically be converted
into fully paid and nonassessable shares of Common Stock, as provided
herein immediately prior to the closing of a firm commitment
underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the
offer and sale of Common Stock for the account of the Corporation in
which the aggregate public offering price (before deduction of
underwriters' discounts and commissions) equals or exceeds $7,500,000.
Such conversion shall occur whether or not certificates evidencing the
shares so converted are surrendered to the Corporation or its transfer
agent. However, the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion unless the certificates evidencing such shares of Class B
Preferred Stock are either delivered to the Corporation or its
transfer agent as provided below, or the holder notifies the
Corporation or its transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss by it in
connection with such certificates. Upon the occurrence of such
automatic conversion of Class B Preferred Stock, the holder of such
Preferred Stock, shall surrender the certificates evidencing such
shares at the office of the Corporation or any transfer agent for the
Class B Preferred Stock or Common Stock. Thereupon, there shall be
issued and delivered to such holder promptly at such office and in its
name as shown on such surrendered certificate or certificates, a
certificate or certificates for the number of shares of Common Stock
into which the shares of Class B Preferred Stock so surrendered were
convertible on the date on which such automatic conversion occurred.
(e) Except as otherwise required by law, each holder of the Class B
Preferred Stock shall be entitled to one vote for each share of Common
Stock into which the Preferred Stock held by such holder is at the
time of reference convertible. Holders of the Class B Preferred Stock
shall vote as a single class with holders of the Common Stock on all
mattters upon which a vote of stockholders is authorized or required
by law by the Certificate of Incorporation.
(f) Holders of the Class B Preferred Stock shall be entitled to
participate ratably, based on the number of shares of Common Stock
into which some holder's shares of Class B Preferred Stock are then
convertible, with holders of the Common Stock in any dividends or
other distributions which may be declared upon or paid to holders of
the Common Stock.
(g) In the event of the dissolution, liquidation or winding up of the
Corporation, or a sale of all its assets, whether voluntary or
involuntary, or in the event of its insolvency, there shall be paid to
the holders of the Preferred Stock the sum of $28.00 per share, before
any sums shall be paid or any assets distributed among holders of the
Common Stock. If the assets of the Corporation shall be insufficient
to permit the payment in full to the holders of the Preferred Stock of
the amount thus distributable, then the entire assets of the
Corporation shall be distributed ratably among the holders of the
Preferred Stock. After the foregoing payment to the holders of the
Preferred Stock, the remaining assets and funds of the Corporation
shall be distributed among and paid to the holders of the Common Stock
and the Preferred Stock, share and share alike, in proportion to their
stockholdings.
(h) The Class B Preferred Stock shall not be redeemable.
(i) There shall not be any sinking fund for the redemption of the Class B
Preferred Stock.
(j) The approval, by vote or written consent, of the holders of a majority
of the outstanding shares of Class B Preferred Stock shall be required
to:
(1) take any action which would alter or change any of the
rights, preferences, privileges or restrictions of such
Class or increase
<PAGE>
the total number of authorized shares of such Class;
(2) reclassify any outstanding shares or securities of the
corporation into shares having rights, preferences or
privileges senior to such Class; or
(3) authorize or issue any other stock having rights or
preferences senior to such Class.
(k) Except as expressly provided above, or above, or as required by law,
the preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof
granted to or imposed upon the Common Stock and the Class B Preferred
Stock, or the holders thereof, shall be in all respects identical.
2. The foregoing resolution was duly adopted at a meeting of the Board of
Directors held on Sept. 19, 1996.
IN WITNESS of the foregoing I have executed this certificate this 17
day of November, 1996.
/s/ Kenneth A. Miller
------------------------------
Kenneth A. Miller, President.
Attest:
/s/ Thomas A. DiCicco
- ------------------------------
Thomas A. DiCicco, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION OF
WORLDCOMM SYSTEMS INC.
Worldcomm Systems Inc. a Delaware Corporation (the "Corporation"), hereby
certifies and sets forth:
1. Article FIRST of the Certificate of Incorporation, which sets forth the
name of the corporation, is amended to read as follows:
FIRST: The name of the corporation is Globecomm Systems Inc.
2. This amendment has been duly adopted in accordance with Section 242 of
the General Corporation Law
IN WITNESS of the foregoing I have executed this certificate this 4th day
of March, 1997.
/s/ David E. Hershberg
------------------------
David E. Hershberg
Chairman of the Board
Attest:
/s/ Thomas A DiCicco, Secretary
- -------------------------------
Thomas A DiCicco, Secretary
<PAGE>
Exhibit 4.1
<TABLE>
<S> <C> <C>
NUMBER GLOBECOMM SYSTEMS INC. SHARES
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 37956X 10 3
</TABLE>
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
GLOBECOMM SYSTEMS INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate property
endorsed or assigned. This certificate and the shares represented hereby are
issued and shall be held subject to all of the provisions of the Amended and
Restated Certificate of Incorporation and all amendments thereto, to all of
which the holder by acceptance hereof assents.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
<TABLE>
<S> <C>
WITNESS the facsimile seal of the Corporation and the signatures of its duly authorized officers.
Dated:
/s/ Thomas A. DiCicco /s/ Kenneth A. Miller
SECRETARY PRESIDENT
[GLOBECOMM SYSTEMS INC.
DELAWARE CORPORATE SEAL 1994]
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY.
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
</TABLE>
<PAGE>
Globecomm Systems Inc. will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation or the
Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- .........Custodian..................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act.........................
in common (State)
UNIF TRF MIN ACT -- .........(Custodian (until age.......)
(Cust)
...........under Uniform Transfers
(Minor)
to Minors Act.........................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
______________________________________________________________________________
______________________________________________________________________________
_______________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated__________________________________
X_______________________________
X_______________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT
NOTICE: MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By______________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
July 15, 1997
Globecomm Systems Inc.
45 Oser Avenue
Hauppauge, NY 11788
Ladies and Gentlemen:
We have assisted in the preparation and filing by Globecomm Systems Inc.
(the "Company") of a Registration Statement on Form S-1, as amended through July
15, 1997 (the "Registration Statement"), with the Securities and Exchange
Commission, relating to the sale of up to 2,750,000 shares (the "Shares") of
Common Stock, $.001 par value (the "Common Stock"), of the Company. A form of
underwriting agreement (the "Underwriting Agreement") is filed as an exhibit to
the Registration Statement.
We have examined such records and documents and have made such examination
of laws as we considered necessary to form a basis for the opinion set forth
herein. In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity with the originals of all documents submitted to us as copies
thereof.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized and, when sold and paid for in accordance with
the terms of the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the use of our name in the Registration Statement under
the caption "Legal Matters" in the related Prospectus and consent to the filing
of this opinion as an exhibit thereto.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
_____________________________________
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
Exhibit 10.6*
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of August 30, 1996 by and between C-Grams Unlimited Inc., a New Hampshire
corporation, with offices at 68 State Route 125, Kingston, New Hampshire 03848
(the "Company") and Worldcomm Systems Inc., a Delaware corporation, with offices
at 375 Oser Avenue, Hauppauge, New York 11788 ("Investor").
WITNESSETH:
WHEREAS, the authorized capital stock of the Company consists of Four
Million (4,000,000) shares of common stock, no par value per share (the "Common
Stock");
WHEREAS, there are Two Million Ten Thousand (2,010,000) shares of Common
Stock issued and outstanding as of the date hereof prior to giving effect to the
transactions contemplated hereby; and
WHEREAS, the Company desires to issue and sell to Investor One Hundred
Thirty-Two Thousand One Hundred Five (132,105) shares of the authorized but
unissued Common Stock of the Company, which share constitute exactly Five
Percent (5.0%) of the outstanding shares of the Company on an after acquired
basis (after giving effect to the issuance of all shares reserved for issuance
pursuant to the Equity Incentive Plan of the Company), and Investor desires to
purchase said shares upon the terms and conditions set forth herein;
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. AGREEMENT TO PURCHASE AND SELL STOCK.
1.1 Authorization. As of the Closing (as defined below) the Company
will have authorized the issuance of, pursuant to the terms and conditions of
this Agreement, One Hundred Thirty-Two Thousand One Hundred Five (132,105)
shares of the Company's Common Stock, no par value per share, having the rights,
preferences, privileges and restrictions set forth in the Articles of
Incorporation of the Company attached to this Agreement as Exhibit A (the
"Articles of Incorporation").
1.2 Agreement to Purchase and Sell. The Company agrees to sell to the
Investor at the Closing, and the Investor agrees to purchase from the Company at
the Closing, One Hundred Thirty-Two Thousand One Hundred Five (132,105) shares
of Common Stock, at a price of Three and 03/100 Dollars ($3.03) per share for an
aggregate purchase price of Four Hundred Thousand Two Hundred Seventy-Eight and
15/100 Dollars ($400,278.15). The shares of Common Stock purchased and sold
pursuant to this Agreement will be collectively hereinafter referred to as the
"Purchased Shares".
2. CLOSING.
2.1 The Closing. The purchase and sale of the Purchased Shares will
take place at the offices of Hale and Dorr at 10:00 a.m. on August 30, 1996 or
such other time, place and date as the Company and Investor mutually agree upon,
such date to be no later than thirty
* Confidential treatment is requested for certain portions of Exhibit 10.6
pursuant to Rule 406 under the Securities Act of 1933, as amended ("Rule
406"). The portions of Exhibit 10.6 which have been omitted pursuant to Rule
406 are denoted by an asterisk [*]. The omitted portions have been filed
separately with the Securities and Exchange Commission pursuant to Rule 406.
1
<PAGE>
(30) days after the date of this Agreement (which time, place and date are
referred to in this Agreement as the "Closing"). At the Closing and thereafter
as provided below, the Company will deliver to the Investor certificates
representing the number of Purchased Shares and the Investor will deliver to the
Company the Purchase Price therefore, paid by wire transfer of funds to the
Company, pursuant to the following schedule. The Company and Investor will also
deliver to each other a copy of their respective Board of Director resolutions
authorizing this Agreement and the transactions contemplated hereby in the form
annexed hereto as Exhibit B.
Payment Amount Date Shares
-------------- ----
$150,000.00 August 30, 1996 48,879
$100,000.00 September 13, 1996 33,026
$100,000.00 September 27, 1996 33,026
$ 50,278.15 October 11, 1996 17,174
----------- ---------------- -------
$400,278.15 TOTALS 132,105
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Investor that, except as set forth in the
Schedule of Exceptions ("Schedule of Exceptions") attached to this Agreement as
Exhibit C (which Schedule of Exceptions shall be deemed to be representations
and warranties to the Investor by the Company under this Section 3), the
statements in the following paragraphs of this Section 3 are all true, complete
and correct:
3.1 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 New Hampshire and has all requisite corporate power and
authority to own its properties and assets and to carry on its business as now
conducted and as presently proposed to be conducted. The Company is qualified to
do business as a foreign corporation in each jurisdiction where failure to be so
qualified would have a material adverse effect on its financial condition,
business, prospects or operations.
3.2 Capitalization. Immediately prior to the Closing the
capitalization of the Company will consist of the following:
(a) Outstanding Capital Stock and Ownership Thereof. Prior to the
Closing of the transactions contemplated hereby, a total of 4,000,000 shares of
Common Stock are authorized, of which 2,010,000 shares are issued and
outstanding and 500,000 shares are reserved for issuance pursuant to the Equity
Incentive Plan of the Company (of such 500,000 shares, options for 248,000
shares are currently outstanding). There are no other classes of stock
authorized or issued. The Purchased Shares will constitute exactly Five Percent
(5.0%) of the outstanding shares of the Company on an after acquired basis
(after giving effect to the issuance of all shares reserved for issuance
pursuant to the Equity Incentive Plan of the Company).
2
<PAGE>
(b) Options, Warrants Reserved Shares. Except for options to
purchase 248,000 shares of Common Stock, 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
or any securities convertible into or ultimately exchangeable or exercisable for
any shares of the Company's capital stock. No shares of the Company's
outstanding capital stock, or stock issuable upon exercise or exchange of any
outstanding options, warrants or rights, or other stock issuable by the Company,
are subject to any rights of first refusal or other rights to purchase such
stock (whether in favor of the Company or any other person), pursuant to any
agreement or commitment of the Company.
3.3 Due Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution, delivery, and the performance of all obligations of
the Company under this Agreement, and the authorization, issuance, reservation
for issuance and delivery of all of the Purchased Shares being sold under this
Agreement have been taken or will be taken prior to the Closing, and this
Agreement constitutes a valid and legally binding obligation of the Company,
enforceable in accordance with its terms, except as may be limited by (i)
applicable bankruptcy, insolvency, reorganization or others laws of general
application relating to or affecting the enforcement of creditors' rights
generally and (ii) the effect of rules of law governing the availability of
equitable remedies.
3.4 Valid Issuance of Stock. The Purchased Shares, when issued, sold
and delivered in accordance with the terms of this Agreement for the
consideration provided for herein, will be duly and validly issued, fully paid
and nonassessable.
3.5 Governmental Consents. No consent approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
U.S. 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.
3.6 Litigation. There is no material action. suit, proceeding, claim,
arbitration or investigation ("Action") pending (or, to the best of the
Company's knowledge, currently threatened) against the Company, its activities,
properties or assets or, to the best of 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. To the best of the Company's knowledge, there is no factual or legal
basis for any such Action that might result, individually or in the aggregate,
in any material adverse change in the business, properties, assets, financial
condition, affairs or prospects of the Company. The Company is not a party to or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality and there is no Action by the
Company currently pending or which the Company intends to initiate.
3.7 Status of Intellectual Property. Attached hereto as Exhibit D is a
true and correct schedule which describes all of the patents, patent
applications, registered trademarks, trademark applications, copyright
registrations and applications therefor and all licenses, franchises, permits,
authorizations, agreements and arrangements that concern any of the foregoing or
that concern like items owned by others and used by the Company. Except as
indicated on such Exhibit:
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(a) The patents and patent applications (collectively, "Patent
Rights") shown on Exhibit D are owned by the Company free and clear of all
mortgages, liens, charges or encumbrances whatsoever. No licenses have been
granted with respect to such Patent Rights (except for product licenses to
customers) and the Company has not received notice of any claim, nor is the
Company aware of any basis for such a claim, by a third party suggesting that
its practice of the inventions covered by such Patents Rights would infringe
upon the patent rights of any third party.
(b) The copyright registrations and pending applications shown on
Exhibit D 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 notice of any claim, nor is the Company aware of any basis for such a
claim, by a third party suggesting that any of its activities in the conduct of
its business as presently conducted infringe upon the copyrights of any third
party.
(c) The trademark registrations and pending applications shown on
Exhibit D 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 of any claim, nor is the Company aware of any basis for such a claim, by
a third party suggesting that any of its activities in the conduct of its
business as presently conducted infringe upon the trademarks, trade names or
trade dress of any third party.
(d) 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. The Company has no obligation to pay any royalty to any
third party with respect to such information. The Company has not granted any
license or other permission with respect to the use of such information and has
not received notice of any claim, nor is the Company aware of any basis for such
a claim, by a third party suggesting that the Company's use of such information
would infringe upon or misappropriate the rights of any third party.
3.8 Compliance with Law and Charter Documents. The Company is not in
violation or default of any provision of its Articles of Incorporation or
By-laws, both as amended, and to the best of the Company's knowledge, except for
any violations that individually and in the aggregate would have no material
adverse impact on the Company's business, properties, financial condition,
results of operations, affairs or prospects, the Company is in compliance with
all applicable statutes, laws (including tax laws), regulations and executive
orders of the United States of America and all states, foreign countries or
other governmental bodies and agencies having jurisdiction over the Company's
business or properties. The Company has not received any notice of any violation
of such statutes, laws, regulations or orders which has not been remedied prior
to the date hereof. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby
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or thereby will not result in any such violation or default, or be in conflict
with or constitute, with or without the passage of time or the giving of notice
or both, either a default under the Company's Articles of Incorporation or
By-laws, or any agreement or contract of the Company, or, to the best of the
Company's knowledge, a violation of any statutes, laws, regulations or orders,
or an event which results in the creation of any material lien, charge or
encumbrance upon any asset of the Company.
3.9 Material Agreements. The Company has not breached, nor does the
Company have any knowledge of any claim or threat that the Company has breached,
any term or condition of any agreement that, individually or in the aggregate,
would have a material adverse effect on the business, properties, financial
condition, results of operations, affairs or prospects of the Company. Annexed
hereto as Exhibit E is a list of all material agreements to which the Company is
a party.
3.10 Registration Rights. Except as provided for herein, the Company
has not granted or agreed to grant to any person or entity any rights (including
piggyback registration rights) to have any securities of the Company registered
with the United States Securities and Exchange Commission ("SEC") or any other
governmental authority.
3.11 Articles: By-laws. The Articles of Incorporation and the By-laws
of the Company are currently in the form provided to the Investor.
3.12 Title to Property and Assets. The Company owns its properties and
assets free and clear of all mortgages, deeds of trust, liens, encumbrances,
security interests and claims except for statutory liens for the payment of
current taxes that are not yet delinquent and liens, encumbrances and security
interests which arise in the ordinary course of business and which do not affect
material properties and assets of the Company. With respect to the property and
assets it leases, the Company is in compliance with such leases and, to the best
of the Company's knowledge, the Company holds valid leasehold interests in such
assets free of any liens, encumbrances, security interests or claims of any
party other than the lessors of such property and assets.
3.13 Financial Statements. Attached to this Agreement as Exhibit F is
an unaudited balance sheet of the Company as of May 31, 1995 and 1996 and
unaudited statements of operations and cash flows for the years ended May 31,
1994, 1995 and 1996 (all such financial statements being collectively referred
to herein as the "Financial Statements"). Financial statements for period ending
May 31, 1996 will be provided to Investor upon receipt from Ernst and Young.
Investor acknowledges that statements may be provided subsequent to the August
30, 1996 Closing. Such Financial Statements (i) are in accordance with the books
and records of the Company, (ii) present fairly in all material respects the
financial condition of the Company at the date or dates therein indicated and
the results of operations for the period or periods therein specified, and (iii)
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except that the unaudited Financial Statements do
not include footnotes and are subject to year-end audit adjustments). The
Company has good and marketable title to all assets set forth on the balance
sheet of the Financial Statements, except for such assets as have been spent,
sold or transferred in the ordinary course of business since their respective
dates.
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3.14 Disclosure. This Agreement and the Exhibits hereto (when read
together) do not contain any untrue statement of a material fact and do not omit
to state a material fact necessary to make the statements therein or herein not
misleading.
4. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF INVESTORS. The
Investor hereby represents and warrants to, and agrees with, the Company,
severally and not jointly, that:
4.1 Authorization. This Agreement constitutes Investor's valid and
legally binding obligation, enforceable in accordance with its terms except as
may be limited by (i) applicable bankruptcy, insolvency, reorganization or other
laws of general application relating to or affecting the enforcement of
creditors' rights generally, and (ii) the effect of rules of law governing the
availability of equitable remedies. Investor represents that Investor has full
corporate power and authority to enter into this Agreement.
4.2 Due Authorization. All corporate action on the part of the
Investor, its officers, directors and shareholders necessary for the
authorization, execution, delivery, and the performance of their obligations
under, this Agreement have been taken or will be taken prior to the Closing, and
this Agreement constitutes a valid and legally binding obligation of the
Investor enforceable in accordance with its terms, except as may be limited by
(i) applicable bankruptcy, insolvency, reorganization or others laws of general
application relating to or affecting the enforcement of creditors' rights
generally, and (ii) the effect of rules of law governing the availability of
equitable remedies.
4.3 Purchase for Own Account. The Purchased Shares to be purchased by
the Investor hereunder will be acquired for investment for the Investor's own
account, not as a nominee or agent, and not with a view to the public resale or
distribution thereof within the meaning of the Securities Act of 1933, as
amended (the "Act"), and the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same. Investor also
represents that Investor has not been formed for the specific purpose of
acquiring Purchased Shares.
4.4 Disclosure of Information. Investor has received or has had full
access to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the Purchased Shares to be
purchased by Investor under this Agreement. Investor further has had an
opportunity to ask questions and receive answers from the Company regarding the
terms and conditions of the purchase and sale of the Purchased Shares and to
obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify any information furnished to Investor or to which Investor
had access. The foregoing, however, does not in any way limit or modify the
representations and warranties made by the Company in Section 3.
4.5 Investment Experience. Investor understands that the purchase of
the Purchased Shares involves substantial risk. Investor: (i) has experience as
an investor in securities of companies in the development stage and acknowledges
that Investor is able to fend for itself, can bear the economic risk of
Investor's investment in the Purchased Shares and has such knowledge and
experience in financial or business matters that Investor is capable of
evaluating the merits and risks of this investment in the Purchased Shares and
protecting its own
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interests in connection with this investment and/or (ii) has a preexisting
personal or business relationship with the Company and certain of its officers,
directors or controlling persons of a nature and duration that enables Investor
to be aware of the character, business acumen and financial circumstances of
such persons.
4.6 Accredited Investor Status. Unless otherwise expressly indicated
on this Agreement, Investor is an "accredited investor" within the meaning of
Regulation D promulgated under the Act.
4.7 Restricted Securities. Investor understands that the Purchased
Shares are characterized as "restricted securities" under the Act inasmuch as
they are being acquired from the Company in a transaction not involving a public
offering and that, under the Act and applicable regulations thereunder, such
securities may be resold without registration under the Act only in certain
limited circumstances. In this connection, Investor represents that Investor is
familiar with Rule 144 of the SEC, as presently in effect, and understands the
resale limitations imposed thereby and by the Act. Investor understands that the
Company is under no obligation to register any of the securities sold hereunder
except as provided herein. Investor understands that no public market now exists
for any of the Purchased Shares and that it is uncertain whether a public market
will ever exist for the Purchased Shares.
4.8 Legends. It is understood that the certificates evidencing the
Purchased Shares will bear the legends set forth below and any others as may be
required by law:
(a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED
OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
The legend set forth above shall be removed by the Company from any certificate
evidencing Purchased Shares upon delivery to the Company of an opinion by
counsel, reasonably satisfactory to the Company, that a registration statement
under the Act is at that time in effect with respect to the legended security or
that such security can be freely transferred in a public sale without such a
registration statement being in effect and that such transfer will not
jeopardize the exemption or exemptions from registration pursuant to which the
Company issued the Purchased Shares.
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5. CONDITIONS TO INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of the
Investor under Section 1 and Section 2 of this Agreement are subject to the
fulfillment or waiver, on or before the Closing, of each of the following
conditions precedent or concurrent, the waiver of which shall not be effective
against Investor, unless given by written communication to the Company:
5.1 Representations and Warranties True. Each of the representations
and warranties of the Company contained in Section 3 shall be true, complete and
correct in all material respects 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 the Closing.
5.2 Approval of Agreement. This Agreement shall have been duly adopted
by the Company by all necessary corporate action of its Board of Directors and
shareholders.
5.3 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 the
Investor and to the Investor's legal counsel, and they shall have received all
such counterpart originals and certified or other copies of such documents as
they may reasonably request including but not limited to documents demonstrating
the payment of past due taxes.
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of
the Company to the Investor under this Agreement are subject to the fulfillment
or waiver on or before the Closing of each of the following conditions:
6.1 Representations and Warranties. The representations and warranties
of Investor contained in Section 4 shall be true and correct in all material
respects on the date of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing.
6.2 Payment of Purchase Price. The Investor shall have delivered to
the Company the purchase price specified in accordance with the provisions of
Section 2.
6.3 Securities Exemptions. The offer and sale of the Purchased Shares
to the Investor pursuant to this Agreement shall be exempt from the registration
requirements of the Act and the registration and/or qualification requirements
of all applicable state securities laws.
7. OPTION TO PURCHASE SHARES
7.1 Grant of Option. The Company does hereby grant to Investor an
irrevocable option (the "Option") to purchase an additional Fifteen Percent
(15%) of the then issued and outstanding shares of the Company's Common Stock,
on an after acquired basis (the "Option Shares"), pursuant to the terms and
conditions of this Agreement. It being the intention of the parties that
investor shall have the right to acquire and maintain, should Investor so elect,
a Twenty Percent (20%) ownership interest in the Company.
7.2 Option Term. The Option term shall commence on the date hereof and
shall continue for a period of two (2) years from the date hereof (the "Option
Term").
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7.3 Option Exercise. (a) Investor may exercise the Option at any time
during the Option Term by giving written notice (the "Option Notice") of its
intention to do so to the Company. The date notice is given shall be referred to
as the "Exercise Date".
(b) Within thirty (30) days after the Option Notice has been
delivered by Investor to the Company, the Company shall issue, transfer and
deliver to Investor certificates representing Fifteen Percent (15%) of the then
issued and outstanding shares of Common Stock of the Company, on an after
acquired basis. The Option Shares shall be free and clear of all liens, security
interests and other encumbrances, and upon payment as provided in Section 7.4
below, such Option Shares shall be duly and validly issued, fully paid and
nonassessable. Such Option Shares shall be recorded on the books of the Company
in the name of Investor.
7.4 Purchase Price. (a) The purchase price for the Option shares shall
be based upon the Company's projected Fiscal Year 1998 net income of Three
Hundred Eighty Three Thousand Nine Hundred Ninety-Eight Dollars ($383,998) as
illustrated in Exhibit G. Such projected net income shall then be multiplied by
a price to earnings multiplier of twenty (20) times, which product shall be
multiplied by the percentage of the Company being acquired by Investor pursuant
to the Option, and which product will then be subject to a twenty percent (20%)
discount (the "Purchase Price"). This aforementioned purchase term applies to
shares purchased on or prior to August 30, 1997. The Purchase Price shall be
paid by Investor to the Company at the closing in cash or by certified check.
(b) Option shares acquired after August 30, 1997, but no later
than August 30, 1998, will be based upon the Company's then most recent
projected Fiscal Year 1999 net income, which in no case shall be less than the
Purchase Price set forth in Section 7.4(a) above or greater than One Million
Thirty Three Thousand Five Hundred Thirty Eight Dollars ($1,033,538), as
illustrated in Exhibit G. The net income projected in Exhibit G will serve as
the basis for the maximum possible purchase price. Such projected net income
shall then be multiplied by a price to earnings multiplier of twenty (20) times,
which product shall be multiplied by the percentage of the Company being
acquired by Investor pursuant to the Option, and which product will then be
subject to a twenty percent (20%) discount (the "Secondary Purchase Price"). The
Secondary Purchase Price shall be paid by Investor to the Company at the closing
in cash or by certified check.
7.5 Closing. The Option Notice shall specify a date (the "Closing
Date") not less than thirty (30) and not more than forty-five (45) days
subsequent to the date of the Option Notice for the closing (the "Closing");
provided that, if no Closing Date is specified in the Option Notice, the Closing
Date shall be the first business day that is at least forty-five (45) days after
the Exercise Date. The Closing shall occur at the offices of the Company at
10:00 a.m. or at such other time, place and date as may be agreed upon by the
Company and Investor.
7.6 Cooperation. At the Closing and thereafter, each party shall
execute and deliver to the other party such instruments and documents as are
reasonably required to accomplish and conclude the transactions contemplated
under this Section 7; and the Company shall also provide copies of any corporate
books and records reasonably requested by Investor on or prior to Closing.
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7.7 Conditions to Closing. Investor's obligation to close following
the exercise of the Option shall be subject to there having been no material
adverse change in the condition, value or prospects of the Company between the
Exercise Date and the Closing Date.
8. RIGHT OF FIRST REFUSAL.
8.1 General. Investor shall have the right of first refusal to
purchase its "Pro Rata Share" (as defined below), of all (or any part) of any
"New Securities" (as defined in Section 8.2) that the Company may from time to
time issue after the date of this Agreement. Investor's "Pro Rata Share" for
purposes of this right of first refusal is the ratio of (a) the number of shares
of Common Stock held by Investor to (b) the total number of shares of Common
Stock of the Company then outstanding prior to the issuance of the subject New
Securities.
8.2 New Securities. (a) "New Securities" shall mean any Common Stock
or preferred stock of the Company, whether now authorized or not and rights,
options or warrants to purchase such Common Stock or preferred stock, and
securities of any type whatsoever that are, or may become, convertible or
exchangeable into such Common Stock or preferred stock; provided however, that
the term "New Securities" does not include:
(i) shares of the Company's Common Stock issued in
connection with any stock split or stock dividend;
(ii) securities offered by the Company to the public
pursuant to a registration statement filed under the Act;
(iii) shares of common stock, or options exercisable
therefor, issuable to officers, directors, consultants and employees of the
Company or any subsidiary pursuant to any plan, agreement or arrangement
approved by a vote of not less than a majority of the Board of Directors of the
Company; and
(iv) securities issued solely in consideration for the
acquisition (whether by merger or otherwise) by the Company or any of its
subsidiaries of all or substantially all of the stock or assets of any other
entity.
(b) In the event securities of the Company are issued in the
manner contemplated by Section 8.2(a)(iii) (in excess of the 500,000 shares
reserved for issuance under the Equity Incentive Plan) or Section 8.2(a)(iv),
then in such event Investor shall have the right of first refusal to purchase
unissued shares of the Company's securities sufficient for Investor to maintain
its Pro Rata Share.
8.3 Procedures. In the event that the Company proposes to undertake an
issuance of New Securities or an issuance pursuant to Section 8.2(a)(iii) (in
excess of the 500,000 shares reserved for issuance under the Equity Incentive
Plan) or Section 8.2(a)(iv), it shall give to Investor written notice of its
intention to issue such securities (the "Notice"), describing the type of such
securities and the price and the general terms upon which the Company proposes
to issue such securities. Investor shall have thirty (30) days from the date of
mailing of any such Notice to agree in writing to purchase Investor's Pro Rata
Share of such securities for the price and upon the general terms specified in
the Notice (which shall be the
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same price and terms as are offered to third parties) by giving written notice
to the Company and stating therein the quantity of such securities to be
purchased (not to exceed Investor's Pro Rata Share). If Investor fails to so
agree in writing within such thirty (30) day period to purchase Investor's full
or partial Pro Rata Share of an offering of such securities, then Investor shall
forfeit the right hereunder to purchase that part of its Pro Rata Share of such
securities that it did not so agree to purchase.
8.4 Failure of Exercise. In the event that Investor fails to exercise
in full the right of first refusal within such thirty (30) day period, then the
Company shall have one hundred twenty (120) days thereafter to sell the New
Securities or the securities described in Section 8.2(a)(iii) or Section
8.2(a)(iv) with respect to which the Investor's rights of first refusal
hereunder were not exercised, at a price and upon general terms not more
favorable to the purchasers thereof than specified in the Company's Notice to
Investor. In the event that the Company has not issued and sold the New
Securities or the securities described in Section 8.2(a)(iii) or Section
8.2(a)(iv) within such one hundred twenty (120) day period, then the Company
shall not thereafter issue or sell any such securities without again first
offering such securities to Investor pursuant to this Section 8.
9. CERTAIN COVENANTS AND AGREEMENTS
9.1 Indemnification by the Company. The Company agrees to indemnify,
defend and hold Investor harmless, at any time after the Closing, from and
against all losses, costs, damages, liabilities, interest, penalties,
settlements, judgments or expenses, including, but not limited to, reasonable
attorney's fees and expenses, asserted against, resulting from, imposed upon or
incurred by Investor directly or indirectly, arising out of or in connection
with (i) the breach or inaccuracy of any of the representations or warranties of
the Company made in or pursuant to this Agreement; and/or (ii) any breach or
non-fulfillment of any covenant or agreement of the Company contained in this
Agreement.
9.2 Registration Rights. The Company has agreed that, in the event of
the Company's undertaking an initial public offering, it will permit Investor to
include in the registration statement filed by the Company in connection with
such initial public offering all of the Common Stock of the Company that
Investor holds and has requested be registered, subject to the right of the
Company to limit the number of such shares to be included in such registration
statement if the managing underwriter of such initial public offering reasonably
determines that the inclusion of such shares in such offering would materially
adversely affect the marketability of such offering by the Company.
10. MISCELLANEOUS.
10.1 Board Rights. Upon the written request of Investor, the Board of
Directors of the Company shall at all times thereafter include as a director
such person as Investor may from time to time designate, provide (i) for the
period from such written request to the date of the next annual shareholders'
meeting of the Company, Investor's nominee shall be appointed to the Board of
Directors by action of the Board of Directors, and (ii) thereafter, at each
annual shareholders' meeting, the Board of Directors of the Company shall
nominate the Investor's nominee and shall recommend the election of such nominee
to the shareholders of the
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Company. The Company shall provide such representative with the same notice of
Board meetings and materials provided to members of the Company's Board of
Directors. This provision shall terminate upon the closing of the Company's
initial public offering of stock registered under the Act.
10.2 Survival of Warranties. The representations, warranties and
covenants of the Company and the Investor contained in, or made pursuant to,
this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of Investor, its counsel or the Company, as
the case may be.
10.3 Successors and Assigns. 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.
10.4 Governing Law. This Agreement shall be governed by and construed
under the internal laws of the State of New York without reference to principles
of conflict of laws or choice of laws.
10.5 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.
10.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party or at such other address as any party or the Company
may designate by giving ten (10) days advance written notice to all other
parties.
10.7 No Finder's Fees. Each party represents that it neither is nor
will be obligated for any finder's or broker's fee or commission in connection
with this transaction. The Investor agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature of a
finders' or broker's fee (and any asserted liability) for which the Investor or
any of its officers, directors, employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless the Investor from any
liability for any commission or compensation in the nature of a finder's or
broker's fee (and any asserted liability) for which the Company or any of its
officers, directors, employees or representatives is responsible.
10.8 Attorneys' Fees. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
10.9 Costs Expenses. The Company shall pay in connection with the
preparation, execution and delivery of this Agreement and the issuance of the
Purchased Shares, the reasonable fees and out-of-pocket expenses of legal
counsel to the Investor, not to exceed Two Thousand Dollars ($2,000.00).
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10.10 Amendments and Waivers. Except as specified in Section 2.2, 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 Section
shall be binding upon the holder of any Purchased Shares at the time
outstanding, each future holder of such securities, and the Company.
10.11 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision(s) shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
10.12 Entire Agreement. This Agreement, together with all exhibits and
schedules hereto, constitutes the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties with respect to the subject matter hereof.
10.13 Further Assurances. From and after the date of this Agreement,
upon the request of the Investor or the Company, the Company and the Investor
shall execute and deliver such instruments, documents or other writings as may
be reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.
10.14 Representation. This Agreement has been drafted on the basis of
mutual contribution of language, the parties each having been represented by
independent counsel of their own choosing, and is not to be construed against
any party as being the drafter or causing the same to be drafted.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THE COMPANY: THE INVESTOR:
C-GRAM UNLIMITED, INC. WORLDCOMM SYSTEMS, INC.
By: /s/ Daniel Ostrouch By: /s/ Kenneth A. Miller
------------------------------- ----------------------------------
Daniel Ostrouch, Vice President Kenneth A. Miller, President
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EXHIBIT A
State of New Hampshire
Department of State
CERTIFICATE OF AMENDMENT OF
C-GRAMS UNLIMITED, INC.
The undersigned, as Deputy Secretary of State of the State of New Hampshire,
hereby certifies that Articles of Amendment to the Articles of Incorporation of
C-GRAMS UNLIMITED, INC., duly signed pursuant to the provisions of the New
Hampshire Business Corporation Act, have been received in this office.
ACCORDINGLY, the undersigned, as such Deputy Secretary of State, and by virtue
of the authority vested in him by law, hereby issues this Certificate of
Amendment to the Articles of Incorporation of C-GRAMS UNLIMITED, INC. and
attaches hereto a copy of the Articles of Amendment.
IN TESTIMONY WHEREOF, I hereto set my
hand and cause to be affixed the Seal
of the State of New Hampshire, this
4th day of April A.D. 1995
[SEAL] /s/ Robert P. Ambrose
Robert P. Ambrose
Deputy Secretary of State
<PAGE>
STATE OF NEW HAMPSHIRE
Filing fee: $35.00 Form No. 14
Use black print or type. RSA 293-A:10.06
Leave 1" margins both sides
FILED
APR 04 1995
ARTICLES OF AMENDMENT WILLIAM M. GARDNER
to the NEW HAMPSHIRE
ARTICLES OF INCORPORATION SECRETARY OF STATE
PURSUANT TO THE PROVISIONS OF THE NEW HAMPSHIRE BUSINESS CORPORATION ACT, THE
UNDERSIGNED CORPORATION ADOPTS THE FOLLOWING ARTICLES OF AMENDMENT TO ITS
ARTICLES OF INCORPORATION:
FIRST: The name of the corporation is C-GRAMS UNLIMITED INC.
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SECOND: The text of each amendment adopted is:
THAT THE ARTICLES OF INCORPORATION OF THE CORPORATION, AS AMENDED, BE
FURTHER AMENDED BY INCREASING THE NUMBER OF SHARES OF COMMON STOCK WHICH THE
CORPORATION SHALL HAVE AUTHORITY TO ISSUE TO 4,000,000 SHARES.
THIRD: If the amendment provides for an exchange, reclassification, or
cancellation of issued shares the provisions for implementing the amendment(s)
if not contained in the above amendment are:
FOURTH: The amendment(s) were adopted on (date) 2/28/95
[if more space is needed, attach additional sheet(s)].
page 1 of 3
<PAGE>
MINUTES
AND
BY LAWS
OF
C-GRAMS UNLIMITED, INC.
INCORPORATED UNDER THE LAWS OF
STATE OF NEW HAMPSHIRE
<PAGE>
BY-LAWS
OF
C-GRAMS UNLIMITED, INC.
ARTICLE I - OFFICES
The principal office of the corporation in the State of New Hampshire shall
be located in the Town of Sandown, County of Rockingham. The corporation may
have such other offices, either within or without the State of incorporation, as
the board of directors may designate or as the business of the corporation may
from time to time require.
ARTICLE II - STOCKHOLDERS
1. ANNUAL MEETING.
The annual meeting of the stockholders shall be held on the 1st Fri. of May
in each year, beginning with the year 1986 at the hour ten o'clock A.M., for the
purpose of electing directors and for the transaction of such other business as
may come before the meeting. If the day fixed for the annual meeting shall be a
legal holiday such meeting shall be held on the next succeeding business day.
2. SPECIAL MEETINGS.
Special meetings of the stockholders, for any purpose or purposes, unless
otherwise prescribed by statute, may be called by the president or by the
directors, and shall be called by the president at the request of the holders of
not less than two per cent of all the outstanding shares of the corporation
entitled to vote at the meeting.
3. PLACE OF MEETING.
The directors may designate any place, either within or without the State
unless otherwise prescribed by statute, as the place of meeting for any annual
meeting or for any special meeting called by the directors. A waiver of notice
signed by all stockholders entitled to vote at a meeting may designate
By-Laws 1
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any place, either within or without the state unless otherwise prescribed by
statute, as the place for holding such meeting. If no designation is made, or if
a special meeting be otherwise called, the place of meeting shall be the
principal office of the corporation.
4. NOTICE OF MEETING.
Written or printed notice stating the place, day and hour of the meeting
and, in case of a special meeting, the purpose or purposes for which the meeting
is called, shall be delivered not less than seven nor more than thirty days
before the date of the meeting, either personally or by mail, by or at the
direction of the president, or the secretary, or the officer or persons calling
the meeting, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail, addressed to the stockholder at his address as it appears on the
stock transfer books of the corporation, with postage thereon prepaid.
5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE.
For the purpose of determining stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or stockholders
entitled to receive payment of any dividend, or in order to make a determination
of stockholders for any other proper purpose, the directors of the corporation
may provide that the stock transfer books shall be closed for a stated period
but not to exceed, in any case, thirty days. If the stock transfer books shall
be closed for the purpose of determining stockholders entitled to notice of or
to vote at a meeting of stockholders, such books shall be closed for at least
thirty days immediately preceding such meeting. In lieu of closing the stock
transfer books, the directors may fix in advance a date as the record date for
any such determination of stockholders, such date in any case to be not more
than thirty days and, in case of a meeting of stockholders, not less than thirty
days prior to the date on which the particular action requiring such
determination of stockholders is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of stockholders
entitled to notice of or to vote at a meeting of stockholders, or stockholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the directors declaring
such dividend is adopted, as the case may be, shall be the record date for such
determination of stockholders. When a determination of stockholders entitled to
vote at any meeting of stockholders
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has been made as provided in this section, such determination shall apply to any
adjournment thereof.
6. VOTING LISTS.
The officer or agent having charge of the stock transfer books for shares
of the corporation shall make, at least two days before each meeting of
stockholders, a complete list of the stockholders entitled to vote at such
meeting or any adjournment thereof, arranged in alphabetical order, with the
address of and the number of shares held by each, which list, for a period of
two days prior to such meeting, shall be kept on file at the principal office of
the corporation and shall be subject to inspection by any stockholder at any
time during usual business hours. Such list shall also be produced and kept open
at the time and place of the meeting and shall be subject to the inspection of
any stockholder during the whole time of the meeting. The original stock
transfer book shall be prima facie evidence as to who are the stockholders
entitled to examine such list or transfer books or to vote at the meeting of
stockholders.
7. QUORUM.
At any meeting of stockholders, 25% of the outstanding shares of the
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than said number of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
8. PROXIES.
At all meetings of stockholders, a stockholder may vote by proxy executed
in writing by the stockholder or by his duly authorized attorney in fact. Such
proxy shall be filed with the secretary of the corporation before or at the time
of the meeting.
9. VOTING.
Each stockholder entitled to vote in accordance with the terms and
provisions of the certificate of incorporation and these by-laws shall be
entitled to one vote, in person or by
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proxy, for each share of stock entitled to vote held by such stockholders. Upon
the demand of any stockholder, the vote for directors and upon any question
before the meeting shall be by ballot. All elections for directors shall be
decided by plurality vote; all other questions shall be decided by majority vote
except as otherwise provided by the Certificate of Incorporation or the laws of
this State.
10. ORDER OF BUSINESS.
The order of business at all meetings of the stockholders, shall be as
follows:
1. Roll Call.
2. Proof of notice of meeting or waiver of notice.
3. Reading of minutes of preceding meeting.
4. Reports of Officers.
5. Reports of Committees.
6. Election of Directors.
7. Unfinished Business.
8. New Business.
11. INFORMAL ACTION BY STOCKHOLDERS.
Unless otherwise provided by law, any action required to be taken at a
meeting of the shareholders, or any other action which may be taken at a meeting
of the shareholders, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the shareholders
entitled to vote with respect to the subject matter thereof.
By-Laws 4
<PAGE>
ARTICLE III - BOARD OF DIRECTORS
1. GENERAL POWERS.
The business and affairs of the corporation shall be managed by its board
of directors. The directors shall in all cases act as a board, and they may
adopt such rules and regulations for the conduct of their meetings and the
management of the corporation, as they may deem proper, not inconsistent with
these by-laws and the laws of this State.
2. NUMBER, TENURE AND QUALIFICATIONS.
The number of directors of the corporation shall be one __________________.
Each director shall hold office until the next annual meeting of stockholders
and until his successor shall have been elected and qualified.
3. REGULAR MEETINGS.
A regular meeting of the directors, shall be held without other notice than
this by-law immediately after, and at the same place as, the annual meeting of
stockholders. The directors may provide, by resolution, the time and place for
the holding of additional regular meetings without other notice than such
resolution.
4. SPECIAL MEETINGS.
Special meetings of the directors may be called by or at the request of the
president or any two directors. The person or persons authorized to call special
meetings of the directors may fix the place for holding any special meeting of
the directors called by them.
5. NOTICE.
Notice of any special meeting shall be given at least two days previously
thereto by written notice delivered personally, or by telegram or mailed to each
director at his business address. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail so addressed, with postage
thereon prepaid. If notice be given by telegram, such notice shall be deemed to
be delivered when the telegram is delivered to the telegraph company. The
attendance of a director at a meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened.
By-Laws 5
<PAGE>
6. QUORUM.
At any meeting of the directors one shall constitute a quorum for the
transaction of business, but if less than said number is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice.
7. MANNER OF ACTING.
The act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the directors.
8. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Newly created directorships resulting from an increase in the number of
directors and vacancies occurring in the board for any reason except the removal
of directors without cause may be filled by a vote of a majority of the
directors then in office, although less than a quorum exists. Vacancies
occurring by reason of the removal of the directors without cause shall be
filled by vote of the stockholders. A director elected to fill a vacancy caused
by resignation, death or removal shall be elected to hold office for the
unexpired term of his predecessor.
9. REMOVAL OF DIRECTORS.
Any or all of the directors may be removed for cause by vote of the
stockholders or by action of the board. Directors may be removed without cause
only by vote of the stockholders.
10. RESIGNATION.
A director may resign at any time by giving written notice to the board,
the president or the secretary of the corporation. Unless otherwise specified in
the notice, the resignation shall take effect upon receipt thereof by the board
or such officer, and the acceptance of the resignation shall not be necessary to
make it effective.
11. COMPENSATION.
No compensation shall be paid to directors, as such, for their services,
but by resolution of the board a fixed sum and expenses for actual attendance at
each regular or special meeting of the board may be authorized. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
By-Laws 6
<PAGE>
12. PRESUMPTION OF ASSENT.
A director of the corporation who is present at a meeting of the directors
at which action on any corporate matter is taken shall be presumed to have
assented to the action taken unless his dissent shall be entered in the minutes
of the meeting or unless he shall file his written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
13. EXECUTIVE AND OTHER COMMITTEES.
The board, by resolution, may designate from among its members an executive
committee and other committees, each consisting of three or more directors. Each
such committee shall serve at the pleasure of the board.
By-Laws 7
<PAGE>
ARTICLE IV - OFFICERS
1. NUMBER.
The officers of the corporation shall be a president, a vice-president, a
secretary and a treasurer, each of whom shall be elected by the directors. Such
other officers and assistant officers as may be deemed necessary may be elected
or appointed by the directors.
2. ELECTION AND TERM OF OFFICE.
The officers of the corporation to be elected by the directors shall be
elected annually at the first meeting of the directors held after each annual
meeting of the stockholders. Each officer shall hold office until his successor
shall have been duly elected and shall have qualified or until his death or
until he shall resign or shall have been removed in the manner hereinafter
provided.
3. REMOVAL.
Any officer or agent elected or appointed by the directors may be removed
by the directors whenever in their judgment the best interests of the
corporation would be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed.
4. VACANCIES.
A vacancy in any office because of death, resignation, removal,
disqualification or otherwise, may be filled by the directors for the unexpired
portion of the term.
5. PRESIDENT.
The president shall be the principal executive officer of the corporation
and, subject to the control of the directors, shall in general supervise and
control all of the business and affairs of the corporation. He shall, when
present, preside at all meetings of the stockholders and of the directors. He
may sign, with the secretary or any other proper officer of the corporation
thereunto authorized by the directors, certificates for shares of the
corporation, any deeds, mortgages, bonds, contracts, or other instruments which
the directors have authorized to be executed, except in cases where the signing
and execution thereof shall be expressly delegated by the directors or by these
by-laws to some other officer or agent of the corporation, or shall be required
by law to be otherwise signed or executed; and in general shall
By-Laws 8
<PAGE>
perform all duties incident to the office of president and such other duties as
may be prescribed by the directors from time to time.
6. VICE-PRESIDENT.
In the absence of the president or in event of his death, inability or
refusal to act, the vice-president shall perform the duties of the president,
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the president. The vice-president shall perform such other
duties as from time to time may be assigned to him by the President or by the
directors.
7. SECRETARY.
The secretary shall keep the minutes of the stockholders' and of the
directors' meetings in one or more books provided for that purpose, see that all
notices are duly given in accordance with the provisions of these by-laws or as
required, be custodian of the corporate records and of the seal of the
corporation and keep a register of the post office address of each stockholder
which shall be furnished to the secretary by such stockholder, have general
charge of the stock transfer books of the corporation and in general perform all
duties incident to the office of secretary and such other duties as from time to
time may be assigned to him by the president or by the directors.
8. TREASURER.
If required by the directors, the treasurer shall give a bond for the
faithful discharge of his duties in such sum and with such surety or sureties as
the directors shall determine. He shall have charge and custody of and be
responsible for all funds and securities of the corporation; receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these by-laws and in general perform all of the duties incident to the
office of treasurer and such other duties as from time to time may be assigned
to him by the president or by the directors.
9. SALARIES.
The salaries of the officers shall be fixed from time to time by the
directors and no officer shall be prevented from receiving such salary by reason
of the fact that he is also a director of the corporation.
By-Laws 9
<PAGE>
ARTICLE V - CONTRACTS, LOANS, CHECKS AND DEPOSITS
1. CONTRACTS.
The directors may authorize any officer or officers, agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation, and any such authority may be general or confined
to specific instances.
2. LOANS.
No loans shall be contracted on behalf of the corporation and no evidences
of indebtedness shall be issued in its name unless authorized by a resolution of
the directors. Such authority may be general or confined to specific instances.
3. CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the corporation, shall be signed
by such officer or officers, agent or agents of the corporation and in such
manner as shall from time to time be determined by resolution of the directors.
4. DEPOSITS.
All funds of the corporation not otherwise employed shall be deposited from
time to time to the credit of the corporation in such banks, trust companies or
other depositaries as the directors may select.
ARTICLE VI - CERTIFICATES FOR SHARES AND THEIR TRANSFER
1. CERTIFICATES FOR SHARES.
Certificates representing shares of the corporation shall be in such form
as shall be determined by the directors. Such certificates shall be signed by
the president and by the secretary or by such other officers authorized by law
and by the directors. All certificates for shares shall be consecutively
numbered or otherwise identified. The name and address of the stockholders, the
number of shares and date of issue, shall be entered on the stock transfer books
of the corporation. All certificates surrendered to the corporation for transfer
shall be canceled and no new certificate shall be issued until the
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former certificate for a like number of shares shall have been surrendered and
canceled, except that in case of a lost, destroyed or mutilated certificate a
new one may be issued therefor upon such terms and indemnity to the corporation
as the directors may prescribe.
2. TRANSFERS OF SHARES.
(a) Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, and cancel the old certificate; every such transfer shall be entered on
the transfer book of the corporation which shall be kept at its principal
office.
(b) The corporation shall be entitled to treat the holder of record of any
share as the holder in fact thereof, and, accordingly, shall not be bound to
recognize any equipment or other claim to or interest in such share on the part
of any other person whether or not it shall have express or other notice
thereof, except as expressly provided by the laws of this state.
ARTICLE VII - FISCAL YEAR
The fiscal year of the corporation shall begin on the first day of April __
in each year.
ARTICLE VIII - DIVIDENDS
The directors may from time to time declare, and the corporation may pay,
dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law.
ARTICLE IX - SEAL
The directors shall provide a corporate seal which shall be circular in
form and shall have inscribed thereon the name of the corporation, the state of
incorporation, year of incorporation and the words, "Corporate Seal".
By-Laws 11
<PAGE>
ARTICLE X - WAIVER OF NOTICE
Unless otherwise provided by law, whenever any notice is required to be
given to any stockholder or director of the corporation under the provisions of
these by-laws or under the provisions of the articles of incorporation, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice.
ARTICLE XI - AMENDMENTS
These by-laws may be altered, amended or repealed and new by-laws may be
adopted by a vote of the stockholders representing a majority of all the shares
issued and outstanding, at any annual stockholders' meeting or at any special
stockholders' meeting when the proposed amendment has been set out in the notice
of such meeting.
By-Laws 12
<PAGE>
[LETTERHEAD OF C/GRAMS]
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Exhibit B
C-GRAMS UNLIMITED, INC.
Written Action of Directors
The undersigned, being all of the directors of C-Grams Unlimited, Inc., a
New Hampshire corporation (the "Company"), and acting pursuant to Section 8.21
of the New Hampshire Business Corporation Act, hereby consent to the following
resolutions:
RESOLVED: That the Company is hereby authorized to issue and sell
135,105 shares of its authorized, but unissued, common stock
to WorldComm Systems Inc., for a purchase price of $3.03 per
share; that, in connection therewith, the Company is hereby
authorized to enter into a Stock Purchase Agreement with
WorldComm Systems Inc. providing for such issuance and sale
and such other terms as the President of any Vice President of
the Company may approve (such approval to be conclusively
evidenced by his execution thereof); and that the President
and any Vice President of the Company is hereby authorized to
execute and deliver such Stock Purchase Agreement on behalf of
the Company.
FURTHER
RESOLVED: That the President and any Vice President of the Company are
each hereby authorized to execute and deliver any all
instruments, and to take any and all actions, as any of them
deem necessary of appropriate in connection with the
transaction contemplated by the foregoing resolution.
Executed as of this 27 day of August, 1996.
/s/ Robert Hill
----------------------------------
Robert Hill
/s/ Daniel Ostrouch
----------------------------------
Daniel Ostrouch
<PAGE>
MEETING
OF THE BOARD OF DIRECTORS
OF
WORLDCOMM SYSTEMS, INC.
----------------------------
July 11, 1996
----------------------------
A regular meeting of the Board of Directors of Worldcomm Systems, Inc. (the
"Corporation") was held at 10:00 A.M. on Thursday, July 11, 1996, at the
Corporation's offices at 375 Oser Avenue, Hauppauge, New York. The following
Directors of the Corporation, constituting all of the Directors of the
Corporation, were present at the meeting:
Messrs: David E. Hershberg
Kenneth A. Miller
Stephen E. Yablonski
Thomas A. DiCicco
Donald G. Woodring
Herman Fialkov
Andrew B. Krieger
Benjamin Duhov
Shelly Harrison
Mr. Hershberg, Chairman of the Board of Directors of the Corporation, acted
as Chairman of the meeting and called the meeting to order at 10:10 A.M. Mr.
DiCicco, Secretary of the Corporation, acted as Secretary of the meeting and
recorded the minutes.
Mr. Hershberg noted that an agenda for this meeting and the minutes of the
meeting held on May 23, 1996, had been distributed to the Directors prior to the
meeting.
A motion was made to accept the minutes of the meeting held on May 23,
1996, as amended, and to waive the reading of such minutes, which motion was
unanimously carried.
The Board then turned to a discussion of the Corporation's joint venture
opportunities. Mr. Miller gave a report on the proposed investment in C-Grams
Unlimited, Inc. ("C-Grams") and the preliminary investment agreement reached.
After discussion, Mr. Fialkov recommended that the Board approve the
Corporation's investment in C-Grams, and, upon motion duly made and seconded,
the following resolutions were unanimously adopted:
<PAGE>
RESOLVED, that the terms and provisions of that certain letter agreement by
and between this Corporation and C-Grams (the "Investment Letter"), dated July
10, 1996, be, and the same hereby is, in all respects approved; and be it
further
RESOLVED, that the CEO and President of the Corporation be, and they hereby
are, authorized, empowered and directed to negotiate, execute and deliver any
and all other documents and certificates required or desirable in connection
therewith, in the name and on behalf of this Corporation, as the CEO and
President of this Corporation deem necessary or advisable, for purposes of
formalizing and finalizing the Corporations Investment in C-Grams as
contemplated by the Investment Letter; and be it further
RESOLVED, that each of the Officers of the Corporation be, and each of them
acting along hereby is, authorized and directed to take all such further action
in the name and on behalf of the Corporation as shall be necessary or
appropriate to carry out the intent and purposes of the foregoing resolutions.
There being no further business to come before the meeting, it was, upon
motion duly made and seconded, unanimously adjourned.
-------------------------------------
Thomas A. DiCicco, Secretary
<PAGE>
C-Grams Unlimited/WorldComm Systems
Rules of Engagement
Agreement
Exhibit C
* Rights of first refusal agreement between C-Grams Principals, Mr. Daniel
Ostrouch and Mr. Robert Hill (individually a "Founder" and collectively the
"Founders", will take precedence for right of first refusal.
<PAGE>
RIGHT OF FIRST REFUSAL AGREEMENT
Agreement dated as of February 28, 1995, by and among Robert Hill and
Daniel Oustrouch (individually, a "Founder" and collectively, the "Founders").
Recitals
A. As used in this Agreement, the term "Shares" shall include all shares of
capital stock of C-Grams Unlimited, Inc., a New Hampshire corporation (the
"Company") held by the Founders, whether now owned or hereafter acquired.
B. The purpose of this Agreement is to provide for certain rights and
procedures upon sales of the Company's securities and to protect the management
and control of the Company from influence by any person not acceptable to the
Founders.
NOW, THEREFORE, for valuable consideration, it is agreed as follows:
1. Restrictions on Transfer.
1.1 Any sale or other disposition of any of the Shares by a Founder,
other than according to the terms of this Agreement, shall be void and transfer
no right, title, or interest in or to any of such Shares to the purported
transferee.
1.2 Each Founder agrees to present the certificates representing the
Shares presently owned or hereafter acquired by him to the Secretary of the
Company and cause the Secretary to stamp on the certificate in a prominent
manner the following legend:
"The sale or other disposition of any of the shares represented by this
certificate is restricted by a Right of First Refusal Agreement, dated as
of February 28, 1995, among certain of the shareholders of this
corporation."
<PAGE>
2. Transfers Not Subject to Restrictions.
Subject to Section 7 of this Agreement, any Founder may sell, assign
or transfer Shares to his spouse or children or to a trust established for the
benefit of his spouse, children or himself, or dispose of them under his will,
without compliance with Sections 3 through 5 hereof.
3. Offer of Sale; Notice of Proposed Sale.
If any Founder desires to sell, transfer or otherwise dispose of any
of his Shares, or of any interest in such Shares, whether voluntarily or by
operation of law, in any transaction other than pursuant to Section 2 of this
Agreement, such Founder (the "Selling Founder") shall first deliver written
notice of his desire to do so (the "Notice") to the other Founder (the
"Purchaser"), in the manner prescribed in Section 8.3 of this Agreement. The
Notice must specify: (i) the number of Shares the Selling Founder proposes to
sell or otherwise dispose of (the "Offered Shares"), (ii) the consideration per
Share to be delivered to the Selling Founder for the proposed sale, transfer or
disposition, and (iii) all other material terms and conditions of the proposed
transaction.
4. Founder's Option to Purchase.
4.1 Subject to Section 5, the Purchaser shall have the first option to
purchase all or any part of the Offered Shares for the consideration per share
and on the terms and conditions specified in the Notice. The Purchaser must
exercise such option, no later than 45 days after such Notice is deemed under
Section 8.4 hereof to have been delivered to it, by written notice to the
Selling Founder.
4.2 In the event the Purchaser duly exercises his option to purchase
all or part of the Offered Shares, the closing of such purchase shall take place
at the offices of the Company on the date five days after the expiration of such
45-day period.
4.3 To the extend that the consideration proposed to be paid by the
Purchaser for the Offered Shares consists of property other than cash or a
promissory note, the consideration required to be paid by the Purchaser
exercising his option under Section 4 hereof may consist of cash equal to the
value of such property, as determined in good faith by agreement of the Selling
Founder and the Purchaser.
-2-
<PAGE>
5. Failure to Fully Exercise Options.
If the Purchaser does not exercise his option to purchase all of the
Offered Shares within the period described in this Agreement (the "Option
Period"), then the option of the Purchaser to purchase the Offered Shares,
whether exercised or not, shall terminate.
6. Termination of Agreement.
6.1 This Agreement shall terminate upon the earliest of the following
events:
(a) The written agreement of both Founders to terminate the
Agreement;
(b) The sale of all or substantially all of the assets or
business of the Company, by merger, sale of assets or otherwise; or
(c) The closing of the Company's initial public offering of
shares of Common Stock pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Act"), resulting in at
least $7,500,000 of gross proceeds to the Company.
6.2 The provisions of Sections 3 and 4 hereof shall not apply to any
sale of Shares pursuant to a transaction referred to in Sections 6.1(b) or
6.1(c) above.
7. Transfers of Rights.
This Agreement, and the rights and obligations of each Founder
hereunder, shall be assigned by such Founder to any person or entity to which
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<PAGE>
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-----------------------------------
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-----------------------------------
Daniel Ostrouch
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<PAGE>
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Interpretive Math and Logic with Reports and Recipes (RRIML)
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Early Warning System Alarm (EWSA)
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|_| No OR Domiciled in USA Pseudonymous? |_| Yes |X| No "Yes", see detailed
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Primary author of computer programming code.
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CimPiX
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CIM-PIX
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a C-Grams Unlimited, Inc. 1985
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work a "work made for hire"? Name of Country TO THE WORK If the answer to either
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|_| No OR Domiciled in USA Pseudonymous? |_| Yes |X| No "Yes", see detailed
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CERTIFICATE OF REGISTRATION FORM TX
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1. TITLE OF THIS WORK
SQLACS
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a C-Grams Unlimited, Inc. 1985
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work a "work made for hire"? Name of Country TO THE WORK If the answer to either
* |X| Yes Citizen of USA Anonymous? |_| Yes |X| No of these questions is
|_| No OR Domiciled in USA Pseudonymous? |_| Yes |X| No "Yes", see detailed
instructions.
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NATURE OF AUTHORSHIP Briefly describe nature of material created by this author in which copyright is claimed.
Primary author of computer programming code.
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NOTE Under the law the "author" of a "work made for hire is generally the
employer, not the employee (see instructions). For any part of this work
that was" made for hire" check "Yes" in the space provided, give the
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b * C-Grams Unlimited, Inc. employer of Eric Holter 1969
---------------------------------------------------------------------------------------------------------------------
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c
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WORK WAS COMPLETED. This information b Complete this information Month 12 Day 01 Year 1991**
a 1991 Year must be given ONLY if this work
in all cases. has been published. USA Nation
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is the same as the author given in space 2.
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Interpretive Math and Logic (IML)
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If published in a periodical or serial give: Volume Number Issue Date On Pages
============================================================================================================================
2. NAME OF AUTHOR DATES OF BIRTH AND DEATH
Year Born Year Died
a C-Grams Unlimited, Inc. 1985
---------------------------------------------------------------------------------------------------------------------
Was this contribution to the AUTHOR'S NATIONALITY OR DOMICILE WAS THE AUTHOR'S CONTRIBUTION
work a "work made for hire"? Name of Country TO THE WORK If the answer to either
|_| Yes Citizen of USA Anonymous? |_| Yes |X| No of these questions is
|X| No OR Domiciled in USA Pseudonymous? |_| Yes |X| No "Yes", see detailed
instructions.
---------------------------------------------------------------------------------------------------------------------
NATURE OF AUTHORSHIP Briefly describe nature of material created by this author in which copyright is claimed.
Primary author of computer programming code.
=====================================================================================================================
NOTE Under the law the "author" of a "work made for hire is generally the
employer, not the employee (see instructions). For any part of this work
that was" made for hire" check "Yes" in the space provided, give the
employer or other person for whom the work was prepared) as "Author" of
that part, and save the space for dates of birth and death blank.
=====================================================================================================================
NAME OF AUTHOR DATES OF BIRTH AND DEATH
Year Born Year Died
b Eric Holter 1969
---------------------------------------------------------------------------------------------------------------------
Was this contribution to the AUTHOR'S NATIONALITY OR DOMICILE WAS THE AUTHOR'S CONTRIBUTION
work a "work made for hire"? Name of Country TO THE WORK If the answer to either
|X| Yes Citizen of USA Anonymous? |_| Yes |X| No of these questions is
|_| No OR Domiciled in USA Pseudonymous? |_| Yes |X| No "Yes", see detailed
instructions.
---------------------------------------------------------------------------------------------------------------------
NATURE OF AUTHORSHIP Briefly describe nature of material created by this author in which copyright is claimed.
Co-author of computer programming code.
=====================================================================================================================
NAME OF AUTHOR DATES OF BIRTH AND DEATH
Year Born Year Died
c
---------------------------------------------------------------------------------------------------------------------
Was this contribution to the AUTHOR'S NATIONALITY OR DOMICILE WAS THE AUTHOR'S CONTRIBUTION
work a "work made for hire"? Name of Country TO THE WORK If the answer to either
|_| Yes Citizen of _____ Anonymous? |_| Yes |_| No of these questions is
|_| No OR Domiciled in _____ Pseudonymous? |_| Yes |_| No "Yes", see detailed
instructions.
---------------------------------------------------------------------------------------------------------------------
NATURE OF AUTHORSHIP Briefly describe nature of material created by this author in which copyright is claimed.
=====================================================================================================================
3. YEAR IN WHICH CREATION OF THIS DATE AND NATION OF FIRST PUBLICATION OF THIS PARTICULAR WORK
WORK WAS COMPLETED. This information b Complete this information Month 12 Day 01 Year 1991
a 1991 Year must be given ONLY if this work
in all cases. has been published. USA Nation
=====================================================================================================================
4. COPYRIGHT CLAIMANT(S) Name and address must be given even if the claimant DO NOT WRITE HERE OFFICE USE ONLY
is the same as the author given in space 2.
See instructions APPLICATION RECEIVED
before completing C-Grams Unlimited, Inc.
this space 68B Route 125 -------------------------
Kingston, NH 03848 ONE DEPOSIT RECEIVED
-----------------------------------------------------------
TRANSFER If the claimant(s) named here in space 4 is (are) -------------------------
different from the author(s) named in space 2, give a brief TWO DEPOSITS RECEIVED
statement of how the claimant(s) obtained ownership of the
copyright. -------------------------
FUNDS RECEIVED
=====================================================================================================================
MORE ON BACK - Complete all applicable spaces (numbers 5-11) on the reverse side of this page. DO NOT WRITE HERE
- See detailed instructions. - Sign the form at line 10. PAGE 1 OF 2 PAGES
</TABLE>
<PAGE>
C-Grams Unlimited/WorldComm Systems
Rules of Engagement
Agreement
Exhibit E
List of Material Agreements
Alliance Agreement, Rules of Engagement between WorldComm Systems and
C-Grams Unlimited, Inc. dated, 8/31/95
<PAGE>
C-Grams Unlimited/WorldComm Systems
Rules Of Engagement
Agreement
This Agreement is entered into this 31st day of August, 1995 between C-Grams
Unlimited Inc., 68 Highway 125, Kingston, N.H. 03842 and WorldComm Systems Inc.,
375 Oser Avenue, Hauppauge, N.Y. 11788-3607.
The following practices will serve as the basis for conducting business in the
Earth Station market and operating guidelines which will ensure a consistent
message to customers and prospective customers as well as to our respective
organizations and employees. These rules will serve as the reference point, and
decision maker in any matters which may create or be perceived to create market
channel conflicts in conducting business either independently or jointly.
1. WorldComm will be the prime contractor for any proposal activity which
results from WorldComm's introduction of C-Grams into the preparation of
specifications, and or proposals for any project. Further, WorldComm will
be the primary contractor for any resultant contract. C-Grams will act in
behalf of WorldComm Systems whether or not WorldComm Systems is present for
meetings, or other interactions with WorldComm's customers.
2. WorldComm will assign C-Gram's as it's sole source supplier under the
following conditions:
o C-Grams offers a competitive technical and price solution.
o The C-Grams' system is appropriate to the application
o The customer has not yet specified another system
3. WorldComm maintains the right to be prime contractor for all market
opportunities with it's customers who require only M&C systems or any
C-Gram's capability which WorldComm's may not possess an internaal
capability. WorldComm will assess market price and provide appropriate
mark-up or
4. WorldComm will elect C-Gram's to be the prime contractor based upon several
considerations outlined in Attachment 'A'. C-Grams may provide compensation
in the form of a pre-established commission structure if desired.
5. *
6. Based upon the results of either 3, 4, or 5 above, a Memorandum of
Understanding will be signed establishing prime contractors.
7. C-Grams reserves the right to (1) maintain its existent customers and (2)
solicit additional customers engaged in Earth Station Management Systems
who require M&C Systems.
* Confidential treatment is requested for the omitted portion pursuant to
rule 406. The omitted portion has been filed separately with the
Securities and Exchange Commission pursuant to rule 406.
<PAGE>
8. Conflicts which may arise inadverently as a result of marketing activity
will be communicated immediatly between both companies. Resolutions will be
governed by the specific market condition, customer requirement/content and
the agreement here-in.
9. C-Grams reserves the right to also submit any solicited bid for M&C
capability which WorldComm may also be quoting. C-Gram's will submit the
exact price for the requirements at all times and in no way will attempt to
influence it's pricing. (This should not be an issue in light of the
'material' content of M&C to the total Earth Station.)
10. C-Grams and WorldComm will be responsible for their respective cost and
expenses associated with attaining market opportunities unless otherwise
agreed to share or apportion.
11. WorldComm will private label C-Grams M&C products sold to WorldComm
Systems.
12. WorldComm and C-Grams will establish it's individual sales channels
including distributors, sales representatives and other independent sales
units. In cases where their is an inadvertent conflict with the
representatives, both company's will exercise it's best effort to ensure
the respective representatives are compensated. These potential conditions
will be addressed as required.
13. C-Gram's and WorldComm will maintain in full force and effect it's
individual corporate existence, rights and franchises and all licenses and
other rights to use patents, processes, licenses, trademarks, tradenames or
copyrights owned by or by it and deemed by WorldComm and C-Grams to be
significant to the conduct of it's business. 14. Term of Agreement: The
term of this agreement will be two years from the first date shown above
with options to renew for an additional two years. Any changes to this
agreement will be mutually agreed to by both companies and be revised and
signed by a company officer.
IN WITNESS WHEREOF, the parties hereto execute this Agreement, effective as of
the date first shown above.
WorldComm Systems C-Grams Unlimited
By: Kenneth A. Miller By: P. M. Howle
- ---------------------------- -------------------------------
/s/ Kenneth A. Miller /s/ Paul M. Howle
- ---------------------------- -------------------------------
Name: Name:
President V.P.CFO.
- ---------------------------- -------------------------------
Title Title
<PAGE>
Prime & Sub-Contractor Determination
Considerations
The following is an outline of considerations when establishing prime &
sub-contractor roles. It's intent is that of a checklist in the decision
process, and does not attempt to substitute for good business practices,
relations and each company's mission statements.
o Technical expertise to satisfy the customer's requirements
o Largest content and value to the opportunity
o Market price sensitivity
o Purchase Order Agreements providing volume purchases discounts
o Equipment and Product Staging Facilities
o Company Financial Statements (Going Concern/Performance)
o Borrowing Capacity
o Influence in market place, and specifically personal relations established
(creditability)
o Customer's preference
o Resource Capacity
o Geography
o Investment & Capability
o Resources
<PAGE>
C-Grams Unlimited/WorldComm Systems
Rules of Engagement
Agreement
Exhibit E
List of Material Agreements
Alliance Agreement, Rules of Engagement between WorldComm Systems and
C-Grams Unlimited, Inc. dated, 8/31/95
<PAGE>
C-Grams Unlimited/WorldComm Systems
Rules Of Engagement
Agreement
This Agreement is entered into this 31st day of August, 1995 between C-Grams
Unlimited Inc., 68 Highway 125, Kingston, N.H. 03842 and WorldComm Systems Inc.,
375 Oser Avenue, Hauppauge, N.Y. 11788-3607.
The following practices will serve as the basis for conducting business in the
Earth Station market and operating guidelines which will ensure a consistent
message to customers and prospective customers as well as to our respective
organizations and employees. These rules will serve as the reference point, and
decision maker in any matters which may create or be perceived to create market
channel conflicts in conducting business either independently or jointly.
1. WorldComm will be the prime contractor for any proposal activity which
results from WorldComm's introduction of C-Grams into the preparation of
specifications, and or proposals for any project. Further, WorldComm will
be the primary contractor for any resultant contract. C-Grams will act in
behalf of WorldComm Systems whether or not WorldComm Systems is present for
meetings, or other interactions with WorldComm's customers.
2. WorldComm will assign C-Gram's as it's sole source supplier under the
following conditions:
o C-Grams offers a competitive technical and price solution.
o The C-Grams' system is appropriate to the application
o The customer has not yet specified another system
3. WorldComm maintains the right to be prime contractor for all market
opportunities with it's customers who require only M&C systems or any
C-Gram's capability which WorldComm's may not possess an internaal
capability. WorldComm will assess market price and provide appropriate
mark-up or
4. WorldComm will elect C-Gram's to be the prime contractor based upon several
considerations outlined in Attachment 'A'. C-Grams may provide compensation
in the form of a pre-established commission structure if desired.
5. *
6. Based upon the results of either 3, 4, or 5 above, a Memorandum of
Understanding will be signed establishing prime contractors.
7. C-Grams reserves the right to (1) maintain its existent customers and (2)
solicit additional customers engaged in Earth Station Management Systems
who require M&C Systems.
* Confidential treatment is requested for the omitted portion pursuant to
Rule 406. The omitted portion has been filed separately with the
Securities and Exchange Commission pursuant to Rule 406.
<PAGE>
8. Conflicts which may arise inadverently as a result of marketing activity
will be communicated immediatly between both companies. Resolutions will be
governed by the specific market condition, customer requirement/content and
the agreement here-in.
9. C-Grams reserves the right to also submit any solicited bid for M&C
capability which WorldComm may also be quoting. C-Gram's will submit the
exact price for the requirements at all times and in no way will attempt to
influence it's pricing. (This should not be an issue in light of the
'material' content of M&C to the total Earth Station.)
10. C-Grams and WorldComm will be responsible for their respective cost and
expenses associated with attaining market opportunities unless otherwise
agreed to share or apportion.
11. WorldComm will private label C-Grams M&C products sold to WorldComm
Systems.
12. WorldComm and C-Grams will establish it's individual sales channels
including distributors, sales representatives and other independent sales
units. In cases where their is an inadvertent conflict with the
representatives, both company's will exercise it's best effort to ensure
the respective representatives are compensated. These potential conditions
will be addressed as required.
13. C-Gram's and WorldComm will maintain in full force and effect it's
individual corporate existence, rights and franchises and all licenses and
other rights to use patents, processes, licenses, trademarks, tradenames or
copyrights owned by or by it and deemed by WorldComm and C-Grams to be
significant to the conduct of it's business. 14. Term of Agreement: The
term of this agreement will be two years from the first date shown above
with options to renew for an additional two years. Any changes to this
agreement will be mutually agreed to by both companies and be revised and
signed by a company officer.
IN WITNESS WHEREOF, the parties hereto execute this Agreement, effective as of
the date first shown above.
WorldComm Systems C-Grams Unlimited
By: Kenneth A. Miller By: P. M. Howle
- ---------------------------- -------------------------------
/s/ Kenneth A. Miller /s/ Paul M. Howle
- ---------------------------- -------------------------------
Name: Name:
President V.P.CFO.
- ---------------------------- -------------------------------
Title Title
<PAGE>
Prime & Sub-Contractor Determination
Considerations
The following is an outline of considerations when establishing prime &
sub-contractor roles. It's intent is that of a checklist in the decision
process, and does not attempt to substitute for good business practices,
relations and each company's mission statements.
o Technical expertise to satisfy the customer's requirements
o Largest content and value to the opportunity
o Market price sensitivity
o Purchase Order Agreements providing volume purchases discounts
o Equipment and Product Staging Facilities
o Company Financial Statements (Going Concern/Performance)
o Borrowing Capacity
o Influence in market place, and specifically personal relations established
(creditability)
o Customer's preference
o Resource Capacity
o Geography
o Investment & Capability
o Resources
<PAGE>
C-Grams Unlimited/WorldComm Systems
Rules of Engagement
Agreement
Exhibit F
Financial Statements
o Period ending 5/31/94 including balance sheet, income statement, and
statement of cash flows. Independent review prepared by A.R. Pappalardo and
company.
o Period ending 5/31/95 including balance sheet, income statement, and
statement of cash flows. Independent review prepared by A.R. Pappalardo and
company.
o Period ending 5/31/96 including balance sheet, income statement, and
statement of cash flows. Prepared by Ernst and Young.
<PAGE>
C-GRAMS REVIEW 94-95
FINANCIAL STATEMENTS
FOR THE PERIOD: 06/01/94 TO 05/31/95
*
* Confidential treatment is requested for the next 13 pages pursuant
to Rule 406. The omitted pages have been filed separately with the
Securities and Exchange Commission pursuant to Rule 406.
<PAGE>
C-GRAMS UNLIMITED INC.
FINANCIAL STATEMENTS
FOR THE PERIOD 6/01/93-5/31/94
** UNAUDITED **
for internal purposes only
*
* Confidential treatment is requested for the next 10 pages pursuant to Rule
406. The omitted pages have been filed separately with the Securities and
Exchange Commission pursuant to Rule 406.
<PAGE>
C-GRAMS UNLIMITED INC.
PROJECTED NET INCOME STATEMENT
EXHIBIT G
*
* Confidential treatment is requested for the omitted portion pursuant to
Rule 406. The omitted portion has been filed separately with the Securities
and Exchange Commission pursuant to Rule 406.
<PAGE>
EXHIBIT 11.1--COMPUTATION OF PRO FORMA NET LOSS PER SHARE (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
------------- ----------------- ------------------
<S> <C> <C> <C>
Weighted average common shares outstanding.................. 3,667,074 4,214,448 4,321,350
Additional shares assuming conversion of preferred stock
into common stock.......................................... 36,600 1,428,842 1,512,688
Additional shares based on application of SAB 83............ 1,838,461 409,620 218,872
------------- ----------------- ------------------
Shares used in computing pro forma net loss per share....... 5,542,135 6,052,910 6,052,910
------------- ----------------- ------------------
------------- ----------------- ------------------
Net loss.................................................... $ (2,245,276) $ (892,162) $ (1,843,577)
------------- ----------------- ------------------
------------- ----------------- ------------------
Pro forma net loss per share (unaudited).................... $ (0.41) $ (0.15) $ (0.30)
------------- ----------------- ------------------
------------- ----------------- ------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Change in Independent Accountants" and to the use of our report dated January
24, 1997 (except for Note 1 as to which the date is , 1997), in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-22425) and
related Prospectus of Globecomm Systems Inc. for the registration of 2,750,000
shares of its common stock.
Ernst & Young LLP
Melville, New York
------------------------
The foregoing consent is in the form that will be signed upon completion of
the split of outstanding shares of common stock and amendment to the certificate
of incorporation as described in Note 1 to the consolidated financial
statements.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Melville, New York
July 15, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 23, 1996, except
as to the stock split described in Note 1 which is as of , 1997,
relating to the financial statements of Globecomm Systems Inc., which appears in
such Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Consolidated Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Consolidated Financial Data".
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
July 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 6,308,536
<SECURITIES> 0
<RECEIVABLES> 8,307,109
<ALLOWANCES> 0
<INVENTORY> 1,249,702
<CURRENT-ASSETS> 17,953,523
<PP&E> 4,925,964
<DEPRECIATION> 485,754
<TOTAL-ASSETS> 23,715,877
<CURRENT-LIABILITIES> 7,133,318
<BONDS> 0
0
686
<COMMON> 3,876
<OTHER-SE> 21,699,443
<TOTAL-LIABILITY-AND-EQUITY> 23,715,877
<SALES> 21,532,212
<TOTAL-REVENUES> 21,532,212
<CGS> 18,736,399
<TOTAL-COSTS> 18,736,399
<OTHER-EXPENSES> 5,101,551
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,248
<INCOME-PRETAX> (1,843,577)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,843,577)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,843,577)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
