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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-22839
Globecomm Systems Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-3225567
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
45 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 231-9800
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by a check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
While it is difficult to determine the number of shares owned by
non-affiliates, the registrant estimates that the aggregate market value of
outstanding Common Stock on September 25, 1998, based upon the average bid and
asked prices of such Common Stock on the Nasdaq National Market on September
25, 1998 held by non-affiliates was approximately $9.8 million. For this
computation, the registrant has excluded the market value of all shares of its
Common Stock reported as beneficially owned by officers, directors and certain
significant stockholders. Such exclusion shall not be deemed to constitute an
admission that any such stockholder is an affiliate of the registrant.
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As of September 25, 1998, there were outstanding 9,125,908 shares of
the registrant's Common Stock, par value $.001.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement of Globecomm Systems Inc. relative to the Annual
Meeting of Stockholders to be held on November 19, 1998, which is incorporated
by reference into Part III of this Form 10-K.
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PART I
ITEM I. BUSINESS
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OVERVIEW
Globecomm Systems Inc. (the "Company" or "GSI") designs, assembles and
installs satellite ground segment systems and networks which support a wide
range of satellite communications applications, including fixed, mobile and
direct broadcast services as well as certain military applications. The
Company's customers include prime communications infrastructure contractors,
government-owned PTTs, other telecommunications carriers, producers and
distributors of news and entertainment content and other corporations. The
Company's ground segment systems typically consist of an earth station, which
is an integrated system designed to transmit and receive signals to and from
satellites, together with ancillary subsystems. The Company's ground segment
networks are typically comprised of two or more ground segment systems
communicating with a satellite and interconnected with a terrestrial network.
The Company's revenue grew 60.4% to $58.1 million for the fiscal year
ended June 30, 1998 from $36.2 million for the fiscal year ended June 30, 1997.
During the fiscal year ended June 30, 1998, the Company booked $60.9 million in
contract orders and, at June 30, 1998, had a backlog of $43.6 million of
contract orders. The Company believes that its revenue growth and its ability
to compete are based on its unique combination of competitive advantages which
include: (i) an experienced management group with extensive technological and
engineering expertise, (ii) the proven ability to meet the complex satellite
ground segment requirements of its customers in diverse political, economic and
regulatory environments in various locations around the world and (iii) its
ability to identify, develop and maintain strategic relationships with
developers and suppliers of leading-edge technologies which enhance
performance, reduce costs and broaden the applications of the Company's ground
segment systems and networks.
During fiscal 1997, the Company established a subsidiary, NetSat
Express, Inc. ("NetSat Express"), to develop service revenues by providing
high-speed, satellite-delivered data communications to developing markets
worldwide. NetSat Express is currently providing Internet access to customers
who have limited or no access to terrestrial network infrastructure capable of
supporting the economical delivery of such services. To date, NetSat Express
has generated only limited revenues.
The Company was incorporated in Delaware on August 17, 1994. For
financial information about industry segments and foreign operations, see Note
12 and 13, respectively of the Notes to the Consolidated Financial Statements.
INDUSTRY BACKGROUND
SATELLITE COMMUNICATIONS
Market Structure
Satellite communications systems are comprised of satellites (the
"space segment") and ground-based transmission and reception systems (the
"ground segment"). The space segment consists of one or more satellites in
earth orbit which typically provide continuous communications coverage over a
wide geographic area. Satellites typically contain multiple transponders, each
capable of independently receiving and transmitting one or more signals to or
from multiple users simultaneously. The ground segment consists principally of
one or more earth stations, which provide a communications link to the end user
either directly or through a terrestrial network. An earth station is an
integrated system consisting of antennas, radio signal transmitting and
receiving equipment, modulation/demodulation equipment, monitor and control
systems and voice, data and video network interface equipment.
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Satellite communications industry participants include: (i) designers,
manufacturers and integrators of ground segment products, systems and networks,
(ii) communications service providers, which may or may not own the actual
satellites used for transmission and (iii) designers, manufacturers and
operators of satellites. The Company has participated principally in the ground
segment systems and networks portion of the market and has recently expanded
into the satellite-delivered data communications services market through its
NetSat Express subsidiary.
Satellite Service Applications
Satellites provide a number of advantages over terrestrial facilities
for many high-speed communications service applications. First, satellites
enable high-speed communications service where there is no suitable terrestrial
alternative available or where the terrestrial alternative is inadequate.
Second, unlike the cost of terrestrial networks, the cost to provide services
via satellite does not increase with the distance between sending and receiving
stations. Finally, in contrast to the installation of fiber optic cable which
is expensive, time consuming and requires obtaining rights-of-way, satellite
networks can be rapidly installed, upgraded and reconfigured. The three
principal categories of satellite communications service applications are: (i)
fixed satellite services, (ii) mobile satellite services and (iii) direct
broadcast services.
Fixed Satellite Services. Fixed satellite services provide
point-to-point and point-to-multipoint satellite communication of voice, data
and video between fixed land-based earth stations. The introduction of
high-power satellites has created additional growth within the fixed satellite
services segment by enabling the use of smaller, less costly earth stations,
such as very small aperture terminals ("VSATs"), for applications such as
corporate data networks, Internet access and rural telephony. The Company
believes that the fixed satellite services segment will continue to experience
rapid growth due to the expansion of VSAT applications and the planned
implementation of new high-capacity, high-power Ka-band (20-30 GHz) systems
within the next several years. The future Ka-band services are expected to
expand the number of applications provided directly to the home and are
expected to reduce significantly the cost of such services. These systems offer
the additional bandwidth needed for emerging multimedia services that combine
voice and video transmissions, as well as Internet access, expanded telephony
services, and computer networking.
Mobile Satellite Services. Mobile satellite services, which operate
between fixed gateway earth stations and mobile user earth stations
(terminals), provide mobile voice and data transmission capability on land, sea
and air. New mobile satellite services are being developed using low, medium
and geostationary orbiting satellite systems that are designed to bring more
extensive coverage and circuit reliability for mobile telephone and data
services to underserved populations throughout the world.
Direct Broadcast Services. Direct broadcast satellite services provide
a direct transmission link from high-power satellites to customers over a wide
geographic area. Technology which has been successfully deployed by Thomson,
Hughes Network Systems and others for direct-to-home television services is now
being applied to direct broadcast data services, including Internet and
intranet access.
DATA COMMUNICATIONS AND THE INTERNET
The data communications services market is comprised currently of
common carrier data network services, corporate business networks and emerging
applications such as Internet and intranet services. The Company believes that
Internet and intranet services will comprise a significant portion of data
communications services used in developing countries, and that the growth of
data communications services in these regions will rely on satellite
communications to a significant extent.
The Company believes that the use of satellite communications
technology which may be used to bring both the Internet and corporate intranets
to nations that are developing their telecommunications infrastructure will
help those nations rapidly improve their education, access to medical
information, commerce and overall communications.
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GROWTH DRIVERS
The Company believes that the growth projected by third parties in the
satellite communications industry will be driven principally by the following
major factors: (i) global deregulation and privatization of government-owned
monopoly telecommunications carriers, (ii) rapidly growing worldwide demand for
communications services in general, including data communications services over
the Internet and corporate intranets, (iii) the relative cost-effectiveness of
satellite communications for many applications and (iv) technological
advancements which broaden applications for and increase the capacity in both
satellite and terrestrial networks. The Company believes that growth in its
addressable ground segment markets has been and will continue to be driven by,
among other things, the growth of satellite-delivered communications services.
Deregulation and Privatization. Rapid deregulation and privatization,
and the implementation of governmental policies aimed at developing modern
telecommunications infrastructure, are occurring globally, as countries seek
the economic benefits of enhanced and expanded telecommunications services.
Through deregulation and privatization, governments are stimulating the
development of competitive telecommunications services in the private sector.
These actions have placed communications carriers under increasing pressure to
achieve greater efficiencies and to offer their services to broader customer
bases at more competitive prices, leading to an increase in capital investment.
In addition, the Company believes that the World Trade Organization proposal
which will provide U.S. and foreign companies with market access to a variety
of telecommunications services and allow foreign ownership of telecommunication
companies will lead to additional increased capital investment in the worldwide
telecommunications market.
Growing Worldwide Demand for Communications Services. Factors
contributing to the growing demand for communications services include
worldwide economic development, governmental policies aimed at improving the
telecommunications infrastructure in developing countries and the increasing
globalization of commerce. In addition to the growth in developing markets, the
terrestrial infrastructure in developed countries is evolving to support the
growing demand for higher bandwidth services in response to the needs of
businesses to communicate with customers and employees located around the world
and to the growing acceptance of the Internet and multimedia applications as
both productivity-enhancing tools and consumer products. The Company expects
demand for these kinds of higher bandwidth services to grow in developing
countries as well. The Company believes that global network infrastructure
development will require significant reliance upon satellite communications
because satellite-delivered communications services can be implemented quickly
and deliver flexible high-speed transmission capacity at relatively low cost
over large geographic areas.
Relative Cost-Effectiveness of Satellite Communications. The relative
cost-effectiveness of satellite communications compared to terrestrial
solutions for many applications is a major factor driving the growth of
satellite communications in areas with rapidly growing telecommunications
infrastructures. The vast geographic areas to be covered, where population
concentrations are separated by large distances, require a technology whose
cost and speed of implementation is relatively insensitive to distance. Unlike
the cost of terrestrial networks, the cost to provide services via satellite
does not increase with the distance between sending and receiving stations. A
single satellite can be configured to deliver both broad beams that cover
entire regions and narrow spot beams that cover only areas of high population
or traffic density.
Technological Advances. Technological advances which increase the
capacity of a single satellite and/or increase the number of potential
applications of its available bandwidth reduce the overall cost of a system or
the service it delivers. This increases the number of potential end users for
the services and expands the available market. Recent technological
developments which make satellite solutions increasingly competitive in cost
and performance with terrestrial-based networks, or as a viable alternative
solution where terrestrial services are not feasible, include bandwith on
demand, digital compression technology, high-power satellites, spot-beam
technology, and onboard processing.
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GSI COMPETITIVE ADVANTAGES
The Company believes that it is well positioned to capitalize on the
demand for satellite ground segment systems and networks and satellite-delivered
data communications services and that its future success in these markets will
be based upon its ability to leverage its unique combination of competitive
advantages which include: (i) an experienced management group with extensive
technological and engineering expertise, (ii) the proven ability to meet the
complex satellite ground segment requirements of its customers in diverse
political, economic and regulatory environments in various locations around the
world and (iii) the ability to identify, develop and maintain strategic
relationships with developers and suppliers of leading-edge technologies which
enhance the performance, reduce costs and broaden the applications of the
Company's ground segment systems and networks.
GSI BUSINESS STRATEGY
The Company's business strategy is to expand its market share in its
ground segment systems and networks business, improve its profitability, and
create opportunities to capture recurring service revenues. The Company intends
to execute this strategy by: (i) targeting communication infrastructure
development opportunities worldwide, (ii) focusing on high margin
engineering-intensive system and network projects, (iii) developing strategic
customer relationships, (iv) developing strategic supplier relationships and
(v) entering the data communications services business through NetSat Express.
TARGET INFRASTRUCTURE DEVELOPMENT OPPORTUNITIES
The Company primarily targets developing markets which it believes
will account for a significant portion of the growing demand for ground segment
systems and networks because these markets typically lack terrestrial
infrastructure adequate to support increasing demand for domestic and
international communications services. In addition, in developed countries the
Company targets ground segment infrastructure development projects for emerging
satellite communications applications such as direct broadcast and future
Ka-band systems. The Company has developed an international sales and marketing
organization focused on identifying opportunities for the Company and on
developing key sourcing relationships. In order to increase its access to
project opportunities and limit its exposure to the political and commercial
complexities of doing business in foreign countries, the Company intends to
continue to pursue international opportunities primarily in partnership with
strong local companies or as a subcontractor to larger communications services
and infrastructure providers. Most of the Company's revenues are derived from
sales to customers outside the United States. Revenues from foreign sales
accounted for 69%, 40% and 22% of total revenues in fiscal years 1998, 1997 and
1996, respectively.
FOCUS ON ENGINEERING-INTENSIVE SYSTEM AND NETWORK PROJECTS
The Company seeks to focus its technological expertise on high
value-added system and network projects which require engineering-intensive
design and implementation. This emphasis positions the Company to earn higher
gross margins through the delivery of innovative, cost-effective solutions to
customer performance requirements that are typically priced on a negotiated
basis, as opposed to typically lower-margin competitive bid projects. In
addition, the Company often benefits from the research and design phase of its
more complex projects through the development of proprietary products, systems
and technologies that can be applied cost-effectively to future projects and
which provide the Company with a competitive advantage.
DEVELOP STRATEGIC CUSTOMER RELATIONSHIPS
The Company seeks to build close relationships with customers for whom
it can provide complementary engineering skills by working as part of their
system development teams. A key objective of this strategy is to obtain this
business on a negotiated basis, rather than through the competitive bidding
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process, which is likely to carry a lower margin. To date, the Company has
developed strategic relationships with a number of customers through either
alliance agreements, buying agreements, or investment by the strategic customer
in GSI, or investment by GSI in a strategic customer. For example, the Company
has recently acquired an approximately 18.75% equity interest in McKibben
Communications, LLC ("McKibben Communications"). The investment in McKibben
Communications provides the Company access to earth station projects for
McKibben Communications and its customers in the television broadcast industry.
See "-Strategic Relationships."
DEVELOP STRATEGIC SUPPLIER RELATIONSHIPS
The Company seeks to establish strategic relationships with suppliers
that it believes are in a unique position to supply products or services which
will improve the Company's competitive position in one or more of the markets
which it serves. In certain cases, the Company seeks to strengthen such
relationships by investing in such suppliers, and has, through June 30, 1998,
made equity investments of an aggregate of approximately $1.6 million for
minority equity stakes of approximately 11.6%, 10.3%, 17.0% and 6.7% in Shiron
Satellite Communications (1996), Ltd. ("Shiron"), Newpoint Technologies, Inc.
(formerly C-Grams Unlimited, Inc.) ("Newpoint Technologies"), Armer
Communications Engineering Services, Inc. ("Armer") and Joint Communications
Technology Corp. ("JCTC"), respectively. The strategic supplier relationships
with Shiron, Newpoint Technologies and JCTC enable the Company to outsource a
significant portion of its research and development costs and gain access to
advanced technology while preserving the independence to select the best
products and technologies to deliver to its customers on any particular
project. The relationship with Armer allows the Company preferred access to
quality field engineering and installation resources.
CREATE RECURRING SERVICE REVENUE OPPORTUNITIES
The Company seeks to capture recurring revenues by providing data
communications services. The initial application of this strategy is the
Company's NetSat Express subsidiary, formed in alliance with Hughes Network
Systems ("HNS"), to provide satellite-delivered data communications services
such as Internet access, intranet applications and business data applications in
developing countries, using either HNS' low-cost, high-speed DirecPC Terminal
technology or the Company's own satellite network equipment. The Company's
strategy for implementing this objective through NetSat Express includes the
following major elements:
Market Through Strategic Relationships. NetSat Express is working with
strategic partners located in local markets in Eastern Europe who are expected
typically to handle marketing, distribution and support of the NetSat Express
service offerings and would typically provide billing and customer service
functions. The Company selects local market partners based upon, among other
criteria, their in-region marketing experience, knowledge of the local
regulatory environment, operating licenses, existing customers and established
business organizations. The Company is currently providing services in certain
Eastern European countries pursuant to a value-added reseller agreement with
Hughes Olivetti Telecom Limited ("HOT"), an affiliate of HNS, and is selling
Internet access services in Eastern Europe.
Seek Multiple Revenue Sources. Through NetSat Express the Company
generates revenue from multiple sources, including the sales of terminal
equipment to potential subscribers, the transmission of data via satellite, and
the provision of Internet connections.
Target Multinational Customer Base. The Company intends to establish a
diverse, multinational customer base by designing innovative Internet, intranet
and business data service solutions for corporations, governments and
educational institutions in countries with rapidly growing telecommunications
infrastructure requirements based on Internet protocol technology developed by
NetSat Express.
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GSI GROUND SEGMENT SYSTEMS AND NETWORKS
The Company designs, assembles and installs ground segment system and
network solutions for the complex and changing communications requirements of
its customers. The Company's ground segment systems typically consist of an
earth station and ancillary subsystems such as microwave links for back-haul of
traffic to a central office or generators for emergency power restoral. An
earth station is an integrated system consisting of antennas, transmitting and
receiving equipment, modulation/demodulation equipment, monitor and control
systems and voice, data and video network interface equipment. The Company's
ground segment networks are typically comprised of two or more ground segment
systems interconnected with a satellite and/or terrestrial communications
network. The Company's Customizable Systems may be sold separately as
stand-alone ground segment systems or may be used as modular building blocks to
be integrated into a complete ground segment system or network. The Company
believes that this modular approach allows it to engineer its ground segment
systems and networks to serve client-specific traffic and service requirements
rapidly, cost-effectively and efficiently.
Customizable Systems
Family of Standard Intelsat Earth Stations. This family of earth
stations, which is used primarily for international voice, data and video
circuit trunking and as gateways for domestic networks using the International
Telecommunications Satellite Organization ("Intelsat") system, is targeted
principally at PTTs and other common carriers. The family consists of earth
stations of varying sizes and capacities, all of which conform to Intelsat
specifications. The Intelsat Standard A earth stations, which have the highest
capacity, feature antennas ranging from 13 to 21 meters in diameter, high-power
amplifiers from 700 to 3,000 watts, radio frequency converters and related
electronics, modems and a UNIX or Microsoft Windows NT based monitoring and
control system. Available options include power monitor systems, de-icing
equipment, uninterruptible power system/backup generators and equipment
shelters. The Company has designed and installed Intelsat Standard A earth
stations in China, Korea, Kuwait, Malaysia, the United Kingdom and the United
States. The Company typically sells these Intelsat Standard A earth stations at
prices ranging from approximately $1.0 million (13-meter antenna) to
approximately $2.0 million (21-meter antenna). The Company is able to provide
smaller, lower capacity earth stations that conform to Intelsat specifications
by customizing its modular building block or commercial terminal families of
earth stations described below.
Modular Building Block ("MBB") Earth Station (MBB2001(TM)). These earth
stations are incorporated in point-to-point data links and hubs for VSAT and
Demand Assigned Multiple Access ("DAMA") networks, and are typically used as
gateways for corporate, common carrier and government networks. These earth
stations can also be configured to conform to the applicable standards of
Intelsat and other satellite systems. Earth stations constructed using MBBs
require minimal site preparation and can be installed rapidly and
cost-effectively due to their modular construction. Antenna sizes range from 4.5
to 9 meters, with high-power amplifiers ranging from 50 to 700 watts. Generally,
all electronics are housed in a single building mounted rack. Available options
include de-icing equipment, tracking equipment, uninterruptible power
system/backup generators and equipment shelters. To date, the Company has
designed and installed MBB earth stations in Brazil, India, Indonesia, Pakistan,
Russia, Thailand and the United States. The Company typically sells these earth
stations at prices ranging from approximately $250,000 to $600,000.
Commercial Terminal Family ("CTF")(CTF2001(TM)). This family of earth
stations, which encompasses a range of general purpose, low-cost
antenna-mounted earth stations, is used primarily for data, voice or video
transmissions from commercial or government premises, and are principally
targeted at corporate, common carrier and government networks. These earth
stations can also be configured to conform to the applicable standards of
Intelsat and other satellite systems. Antenna sizes range from 1.2 to 9.3
meters, with high-power amplifiers ranging from 16 to 400 watts. Generally, all
radio frequency electronics are housed in weatherproof enclosures mounted on
the antenna. To date, the Company has designed and installed CTF
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earth stations in India, Korea, Russia, numerous countries in Africa and the
United States. The Company typically sells these earth stations at prices
ranging from approximately $100,000 to $300,000.
Militarized Tactical Earth Station Family. This family of tactical
earth stations is used for military communications applications and is targeted
principally at major defense contractors. These earth stations typically use a
2.4 to 3 meter antennas, are highly transportable, and are designed to be
mounted on a pallet on military vehicles or air-dropped into a combat
environment. The pallet-mounted earth station features an automatic antenna
pointing and multichannel capability. These militarized earth stations are able
to perform under extreme conditions in the military tactical environment and
offer multiband capability: C-band (4-6 GHz), X-band (7-8 GHz) or K-band (12-17
GHz). Prices for these systems range from approximately $250,000 to $1.0
million, depending on the configuration. This technology is now being applied
to a 3 meter X-band antenna for use by the U.S. Army. Certification by the Army
is in progress.
Digital Fly-Away Earth Stations. This group of earth stations is
primarily used for emergency communications and news gathering and is comprised
of highly transportable, modular earth stations designed to be quickly deployed
and installed anywhere in the world. Antenna sizes range from 1.2 to 2.4
meters, with high-power amplifiers up to 350 watts. All components are mounted
in separate cases which are small enough to be easily transported by commercial
carrier. Additional system availability can be achieved through the addition of
redundant modules for critical components. Since these units may be operated in
a variety of harsh environments, the Company conducts environmental stress
screening tests on these components for enhanced reliability. The Company has
sold a number of digital fly-away earth stations to a customer in Portugal and
to Intelsat. The Company markets these earth stations at prices ranging from
approximately $150,000 to $600,000.
Earth Station Management Systems (AxxSys(TM)). The Company's earth
station systems typically employ monitor and control software for system
maintenance developed either by the Company or by its strategic supplier,
Newpoint Technologies. This software permits the station operator to monitor and
control the status of each electronic equipment component at the station from a
remote location and to receive immediate failure reports and analysis. The
Company also offers database applications to integrate maintenance and
operational functions, thereby reducing operating costs. The price of this
software varies substantially and is typically included in the price of the
system or network provided by the Company.
Compact Earth Station Family (CES2001(TM)). This family of earth
stations is designed to be used principally to provide limited capacity (up to
T1/E1 data rates) to areas with limited or no telecommunications
infrastructure. These digital earth stations will integrate radio frequency and
baseband components into one antenna-mounted package. These earth stations
feature a multiband capability and a proprietary L-band (1 to 1.5 GHz)
interface being developed to support a series of modems for a range of
applications, including rural telephony and digital video. These earth stations
may be operated on either preassigned channels or channels assigned on demand,
allowing efficient transponder utilization. Antenna sizes range from 1.2 to 3.7
meters. These earth stations are expected to be marketed for less than $20,000.
Mobile Products Family. GSI Mobile Division ("GSI Mobile") was formed
during the fiscal year ended June 30, 1998 to serve the Mobile Satellite
Services market with mobile high speed data and voice terminals, and
customizable mobile systems. GSI Mobile has recently introduced Explorer II an
Inmarsat high speed data terminal for use in news gathering, emergency
communications, data gathering, and other applications requiring mobility and
high speed data at 64 Kbps. GSI Mobile also has developed Explorer K, a small
aperture K-band satellite news gathering terminal for data rates up to 2Mbps.
GSI Mobile integrates these products with ancillary equipment for the
broadcasting, oil exploration, and other industries which require Internet
Protocol connectivity, video conferencing, store and forward video, secure
communications and other applications.
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Ground Segment System Installations
The following are examples of ground segment systems sold by the
Company:
British Telecommunications plc ("BT") Intelsat Standard A System
Upgrade. The Company has designed and installed an Intelsat Standard A ground
segment system upgrade for BT in the United Kingdom for international voice and
digital video transmission. The implementation of this system required the
supply of a new tracking system for an existing BT antenna, an electronics
shelter built to stringent standards, high-power amplifiers, radio frequency
high-power multiplex equipment, up and down converters, and advanced monitor
and control software.
VSAT Hub Systems. The Company has designed and installed a 9-meter
C-band hub earth station for HNS as part of a VSAT network in Brazil. The
Company utilized its MBB family of customizable products to meet an accelerated
delivery schedule. The Company has also entered into a contract to provide a
9-meter C-band hub earth station for AT&T Corporation as part of a VSAT network
in Russia, where the Company is utilizing its CTF of customizable products to
provide a low-cost solution and meet an accelerated delivery schedule.
Teleport TP European Telecommunications Satellite Organization
("Eutelsat") TDMA Earth Station System. The Company has provided HNS with an
earth station for use in the Eutelsat telephony/data network. This earth station
required sophisticated engineering and implementation due to the high data rates
used by Eutelsat's network. The Company incorporated the Newpoint Technologies
earth station management systems into its design to simplify operation of the
earth station by the end user, Teleport TP in Moscow.
ASkyB Direct-to-Home Transmit Systems. The Company has completed a
contract to supply uplink and program acquisition facilities for ASkyB
consisting of four 13-meter transmit antennas with transmit/receive
capabilities in the broadcast satellite services band, seven 6.1 meter receive
only antennas and one Torus (multi-receive) antenna. The transmit facilities
includes eight operational and two backup uplinks for each of the four
antennas. This configuration provides extremely high availability of service as
well as ease of operation. The Company applied its customizable designs in
other direct broadcast system uplinks including Nilesat in Eygpt
Worldspace Processed Feeder Link Stations. The Company was awarded a
contract to develop and supply uplink stations for the new Digital Audio Radio
Satellite System to start service in 1999. This system will distribute broadcast
radio to low cost satellite receivers for customers in Africa, Asia and Latin
America.
GROUND SEGMENT NETWORK INSTALLATIONS
The following are examples of ground segment networks sold or
currently being installed by the Company:
Sonangol Telecommunications Network. The Company was awarded a
contract to provide a satellite and cellular telecommunications network
comprised of a hub earth station and 15 remote earth stations for Sonangol,
U.E.E., a large oil supply consortium with operations in remote areas in Africa
not served by terrestrial communications services. The network will also
provide cost-effective cellular coverage at some of the remote oil company
locations by linking those sites back to the central office mobile subscriber
switch via satellite, as well as trunks from remote areas to the company
headquarters and interconnectivity to the local telephone company at the
capital city.
Thailand Ministry of Health Telemedicine Network. The Company has
completed a subcontract by Loxley Public Company Limited ("Loxley"), a
telecommunications infrastructure provider in Thailand, to design, assemble
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and install, together with Loxley, a telemedicine network comprised of 20 earth
stations in Thailand for the Ministry of Health. This network provides video
conferencing and bandwidth on demand for transferring images and data from
diverse types of electronic medical diagnostic tools such as X-ray, CAT scan,
and electrocardiogram machines to and from medical personnel situated in remote
locations.
Hyundai Networks. The Company completed a contract to provide a
corporate network for restoral of terrestrial circuits and for video
broadcasting for Hyundai Electronics Industries Co. Ltd. ("Hyundai") in Korea.
This network is comprised of a hub earth station and 12 remote earth stations
with high-speed data capability and an additional 60 locations with digital
video receive- only capability. In addition, the Company and Hyundai designed,
assembled and installed, on an accelerated schedule, a demonstration private
corporate network comprised of five earth stations in Korea. This network
provides interconnection between up to five Hyundai locations for a broad range
of purposes, including voice, data and video conferencing. The Company is
working with Hyundai to market similar networks to other customers in Korea.
Transworld Communications Services. The company was awarded a contract
to develop and supply trunking earth stations for a network in Russia. These
stations form the backbone of a modern digital telecommunications network for
voice and data services.
NETSAT EXPRESS DATA COMMUNICATIONS SERVICES
The Company's NetSat Express services are designed to provide
broadband access to data communications media such as the Internet, corporate
intranet applications and business data applications by integrating end-user
terminals, satellite communications equipment and international networks.
NetSat Express provides its PC Vector services through a one-way satellite
downlink using an HNS' DirecPC Terminal linked to existing terrestrial
communications infrastructure, and its Access Plus services through a two-way
satellite uplink/downlink using NetSat Express provided satellite networking
equipment. NetSat Express has entered into a value-added reseller agreement
with HOT (a Hughes Network Systems company) for sales of the PC Vector product
in certain Eastern European countries. The value-added reseller arrangement is
not contingent upon the grant of any license from HNS to NetSat Express.
NetSat Express offers a range of options and accessories to permit
value-added resellers to deliver reliable, cost-effective turnkey solutions to
their customers. These options include multimedia PCs, alternative antenna
configurations, local area network servers and custom system configurations.
NetSat Express's Network Operations Center provides 24-hour technical support.
NetSat Express also offers its customers specialized services such as Committed
Information Rate or higher quality of service and economical asymmetrical
access.
STRATEGIC RELATIONSHIPS
A key element of the Company's strategy is to establish strategic
customer and supplier relationships. The Company selects its strategic
suppliers based on many factors, including technical capability and potential
for growth. The Company outsources certain of its research and development
through equity investments in select suppliers.
The following sets forth certain information regarding the Company's
strategic relationships where GSI has made an equity investment. For further
information on the Company's equity investments see Note 5 of the Notes to
Consolidated Financial Statements.
Shiron Satellite Communications (1996), Ltd.
In January 1996, the Company and Shiron Advanced Communications Ltd.
formed Shiron to develop a low-cost satellite modem to be incorporated into
earth station products targeted at bringing communications infrastructure to
rural or remote regions of developing countries. The Company plans to
11
<PAGE>
use the modem in its Compact Earth Station (CES2001) product line and in
connection with the data communications services, including Internet access, it
offers through NetSat Express. The modem has been developed under a grant from
the Israel-United States Binational Industrial Research and Development
Foundation (the "BIRD Foundation") and the BIRD Foundation will receive a
royalty from the proceeds of sales of the modem. The Company and Shiron have
received a second grant from the BIRD Foundation for the development of a
return link via satellite for Internet access applications.
Newpoint Technologies, Inc. (formerly C-Grams Unlimited Inc.)
Newpoint Technologies is a supplier of advanced network and earth
station management software. The Company believes its investment in Newpoint
Technologies will provide it with research and development in new software
products aimed at the Company's needs and access to customers who need to
develop optimized solutions for their network management requirements. See "-GSI
Ground Segment Systems and Networks" and "-Research and Development."
Armer Communications Engineering Services, Inc.
Armer is a field engineering company focused on the satellite
communications business. Armer complements the Company's satellite
communications engineering capability by providing qualified field
installation/test personnel for the implementation and test phase of turnkey
projects.
Joint Communications Technology Corp.
JCTC is a product development company with proprietary technology in
low bit rate voice encoding. JCTC produces products for encoding voice,
multiplexing voice and data, and encrypting voice and data for security. The
Company believes its investment in JCTC will provide it with the opportunity to
address optimized solutions for customers.
McKibben Communications, LLC
McKibben Communications provides conditional access and uplink services
to the television industry in Los Angeles. McKibben Communications also
originates sports broadcasts from Los Angeles to Japan for distribution in Japan
by a local satellite provider. GSI and McKibben Communications complement each
other and intend to offer a turnkey solution to broadcasters including design,
installation, and operation of uplink facilities.
SALES AND MARKETING
The Company markets its products and services to prime communications
infrastructure contractors, PTTs, other telecommunications carriers, producers
and distributors of news and entertainment content and other corporations
through sales representatives in foreign countries as well as its sales and
marketing offices in Hauppauge, New York, Atlanta, Georgia, and Hong Kong. The
Company presently employs 35 persons with marketing responsibility, of which 16
are engaged in marketing on a full-time basis.
The Company applies a "project team" approach to identifying,
obtaining and maintaining customer accounts by grouping sales representatives,
marketing executives, business execution teams and account managers together to
develop close and continuing relationships with its customers. The Company's
sales representatives in foreign countries provide local presence and identify
prospective customers for the Company's marketing executives. The marketing
executives and associated business execution teams work together to develop
relationships with these customers, and ultimately obtain orders for the
Company's products or services. The business execution teams manage the
accounts on a day-to-day basis and long-term customers are assigned to an
12
<PAGE>
account manager who usually also functions as a project engineer for that
account. The Company believes that this account management focus provides
continuity and loyalty between the Company and its customers and fosters
long-term relationships that lead to follow-up work and referrals to new
customers.
In addition to obtaining business through its project team approach,
the Company obtains sales leads for new customers through referrals from
existing customers, industry suppliers, and other sources such as participation
in trade shows. The Company also directs its marketing efforts to its strategic
allies, primarily through the Company's senior management. In some cases a
strategic ally may be the prime contractor for a system or network installation
and will subcontract the ground segment of the project to the Company. In other
cases, the strategic ally may recommend the Company as prime contractor for the
design and supply of a system.
The Company's marketing strategy for NetSat Express's Internet access
and data communications services is at an early stage of development. The
Company anticipates that such strategy will be carried out primarily through
value added resellers in each of the countries in which it markets its
services, depending on the capabilities of such partners and resellers, the
nature and location of prospective customers in such countries and the
particular communications infrastructure requirements and regulatory structure
of each potential market. The Company expects that members of senior management
will play a role in developing and maintaining relationships with local value
added resellers and local partners.
CUSTOMERS
The Company's customers include prime communications infrastructure
contractors, PTTs, other telecommunications carriers, producers and distributors
of news and entertainment content and corporations. The Company typically relies
upon a small number of customers for a large portion of its revenues. For
example, approximately 29% of the Company's revenues in fiscal 1998 were derived
from sales to Sonangol, U.E.E. At June 30, 1998, $12.2 million, or approximately
28% of the Company's backlog, was accounted for by a contract between the
Company and Transworld Communications Services, Inc. and $7.1 million, or
approximately 16% of the Company's backlog, was accounted for by a contract
between the Company and Sonangol, U.E.E. The Company expects that in the near
term a significant portion of its revenues will continue to be derived from one
or a limited number of customers (the identity of whom may vary from year to
year) as the Company seeks to expand its business and its customer base. The
reduction, delay, or cancellation of orders from one or more of such significant
customers would have a material adverse effect on the Company's business,
financial condition and results of operations.
BACKLOG
At June 30, 1998, the Company's backlog was approximately $43.6
million (approximately 89% of which is expected to be delivered during fiscal
1999) compared with approximately $40.8 million at June 30, 1997. The Company
records an order in backlog when it receives a firm contract or purchase order
which identifies product quantities, sales price and delivery dates. Backlog
represents the amount of unrecorded revenue on undelivered orders and a
percentage of revenues from sales of products that have been shipped but have
not been accepted by the customer. The Company's backlog at any given time is
not necessarily indicative of future period revenues. While from time to time a
substantial portion of the Company's backlog has been comprised of large
orders, the cancellation of any of which could have a material adverse effect
on the Company's operating results, the Company to date has not experienced
significant changes in its backlog from cancellations or revisions of orders.
See "Risk Factors-Risk of Customer Concentration."
PRODUCT DESIGN, ASSEMBLY AND TESTING
The Company assigns a project team to each contract into which it
enters. The project team is led by a project engineer who is responsible for
execution of the project process, which includes engineering and
13
<PAGE>
design, assembly and testing, installation and customer acceptance. Project
teams generally consist of between two and 10 employees and include engineers,
integration specialists, buyer-planners and an operations team. The Company's
proprietary products and system designs are utilized in the engineering and
design phases of a project. Once a system is designed, the integration
specialist works with the buyer-planner and the operations team to assure a
smooth transfer from the engineering phase to the integration phase. The
integration phase consists mainly of integration of purchased equipment,
components and subsystems into a complete functioning system. Assembly,
integration and test operations are conducted on both an automated and manual
basis, depending primarily on production volume. The Company provides
facilities for complete in-plant testing of all its systems before delivery in
order to assure all performance specifications will be met during installation
at the customer's site.
The Company employs formal Total Quality Management programs and other
training programs, and has been certified by the International Organization of
Standards quality certification process for ISO 9001, a standard sometimes
imposed by foreign buyers, that enumerates certain requirements an organization
must follow in order to assure consistent quality in the supply of products and
services. The certification process qualifies the Company for access to
virtually all international projects, and the Company believes that this
represents a competitive advantage.
The Company currently procures most of the critical components and
services for its products from single or limited sources in connection with
specific contracts and does not otherwise carry significant inventories or have
long-term or exclusive supply contracts with its source vendors. The Company
has from time to time experienced delays in receiving products from certain of
its vendors due to quality control or manufacturing problems, shortages of
materials or components or product design difficulties. There can be no
assurance that similar problems will not recur or that replacement products
will be available when needed at commercially reasonable rates, or at all. If
the Company were to change certain of its vendors, the Company would be
required to perform additional testing procedures upon the components supplied
by such new vendors, which could prevent or delay product shipments.
Additionally, prices could increase significantly in connection with changes of
vendors. Any inability of the Company to obtain timely deliveries of materials
of acceptable quality or timely services, or any significant increase in the
prices of materials or services, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors-Quarterly Fluctuations," "-Risk of Fixed-Price Contracts " and
"-Dependence upon Suppliers; Sole and Limited Sources of Supply."
RESEARCH AND DEVELOPMENT
The Company outsources much of its research and development by making
strategic investments in certain suppliers who perform research and development
for the Company. This provides the Company with a cost-effective way to develop
new technology, while minimizing its direct expenditures. The Company believes
that outsourcing research and development, where the costs are funded partially
by the investments made in its strategic suppliers, allows the Company to
retain its flexibility in developing solutions for its customers, while at the
same time leaving open the opportunity to develop proprietary products through
its strategic supplier relationships.
The Company's internal research and development efforts generally
focus on the development of products not available from other suppliers to the
industry. Current efforts are focused on developing Customizable Systems.
Through June 30, 1998, the Company has incurred approximately $2.5 million in
internal research and development expenses.
COMPETITION
The Company believes that its ability to compete successfully in the
satellite ground segment market is based primarily on its ability to provide a
solution which fits the customer's requirements, as well as on price,
performance, reputation of its management, on-time delivery, reliability and
customer support. The Company believes its success in the satellite-delivered
data communications services market will depend primarily on its ability to
14
<PAGE>
provide prompt delivery and installation, competitive pricing, consistent and
reliable connections, and customer support.
The Company's primary competitors in the satellite ground segment
market generally fall into the following groups: (i) vertically integrated
satellite systems providers such as Nippon Electric Corporation, L3
Communications, Scientific-Atlanta, Inc. and ComSat RSI and (ii) system
integrators such as Engineering & Technical Services and IDB Systems, a
division of LDDS Worldcom Inc. In the satellite-delivered data communications
(including Internet) services market, while the Company expects to cooperate
with many local providers, the Company may compete with other satellite
communication companies as they develop technology in this area as well as
conventional Internet services providers. In addition, the Company may compete
with local governmental PTTs and other local access providers which often have
monopoly rights for certain services including telephony.
The Company anticipates that its competitors may develop or acquire
products that provide functionality that is similar to that provided by the
Company's products and that such products may be offered at significantly
lower prices or bundled with other products. In addition, current and potential
competitors in both markets in which the Company competes have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products and services to address the needs of
the Company's current and prospective customers. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. Increased competition is likely to result in
price reductions, reduced gross profit margins and loss of market share, any of
which would have a material adverse effect on the Company's business, results
of operations and financial condition. See "Risk Factors-Intense Competition;
Limited Barriers to Entry."
INTELLECTUAL PROPERTY
The Company relies heavily on the technological and creative skills of
its personnel, new product developments, computer programs and designs,
frequent product enhancements, reliable product support and proprietary
technological expertise in maintaining its competitive position, and lacks
patent protection for its products and services.
The Company currently has three patent applications pending in the
United States and a Patent Cooperation Treaty ("PCT") application, corresponding
to one of the United States applications, is pending in a number of foreign
jurisdictions. The Company also intends to seek further patents on its
technology, if appropriate. The Company has filed applications for trademark
registration of Globecomm Systems Inc. in the United States and of NetSat
Express in the United States, Singapore, the European Union, the Russian
Federation and Brazil, and intends to seek registration of other trademarks in
the future. See "Risk Factors-Proprietary Technology; Risk of Infringement."
GOVERNMENT REGULATION
The Company is subject to various federal laws and regulations which
govern the operation of the teleport (a group of transmit earth stations) that
the Company has in operation in Hauppauge, New York. This includes regulation
by the FCC for domestic and international carriage and by government agencies
in other countries. The Company's transmission of voice and data for its data
communications business through the teleport has been licensed by the FCC for
domestic and international service.
The Company has received the license for domestic service, which
required the Company to submit an application which contains technical
information about the teleport and a demonstration of the public interest
aspects of the teleport, including a shareholder list and a statement that the
Company's ownership complies with the FCC's foreign ownership restrictions for
licensees.
15
<PAGE>
The Company has filed applications for both C Band and Ku Band
licenses which have been granted. Presently, the Company is operating Ku Band
international and C Band domestic service at the Teleport.
With respect to international service, the Company has submitted an
application to the FCC for a Certificate of Public Convenience and Necessity
("CPCN") which has been granted. The Company may also be required to file and
maintain tariffs containing the specific rates, terms and conditions applicable
to services. The tariffs can become effective one day after public notice of
grant of the CPCN. No assurance can be given that the Company will receive a
CPCN or successfully file and maintain its tariff.
The Company or its local partners typically must obtain authorization
for each country in which the Company provides its satellite-delivered data
communications services. Although the Company believes that it or its local
partners will be able to obtain the requisite licenses and approvals from the
countries in which the Company intends to provide service, the regulatory
schemes in each country are different and thus there may be instances of
noncompliance of which the Company is not aware. Although the Company believes
these regulatory schemes will not prevent the Company from pursuing its
business plan, there can be no assurance such licenses and approvals are or
will remain sufficient in the view of foreign regulatory authorities, or that
necessary licenses and approvals will be granted on a timely basis in all
jurisdictions in which the Company wishes to offer its services or that
restrictions applicable thereto will not be unduly burdensome.
The sale of the Company's ground segment systems and networks outside
the United States is subject to compliance with the regulations of the United
States Export Administration Regulations. The absence of comparable
restrictions on competitors in other countries may adversely affect the
Company's competitive position. In addition, in order to ship its products into
European Union countries, the Company must satisfy certain technical
requirements. If the Company were unable to comply with such requirements with
respect to a significant quantity of the Company's products, the Company's
sales in Europe could be restricted, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1998, the Company had 117 full-time employees, including
55 in engineering and program management, 26 in the manufacturing and
manufacturing support group, 16 in sales and marketing, and 20 in management and
administration. The Company's employees are not covered by any
collective-bargaining agreements. The Company believes that its relations with
its employees are good.
ITEM 2. PROPERTIES
During the fiscal year ended June 30, 1998, the Company completed the
renovation of approximately 122,000 square feet of space in a facility on
approximately 7 acres located at 45 Oser Avenue, Hauppauge, New York. These
premises house the principal offices and production facilities of the Company
and NetSat Express. Prior to the completion of the renovation of these
facilities, the Company leased 20,000 square feet of space in an industrial
facility located at 375 Oser Avenue, Hauppauge, New York under an agreement
which terminated on July 31, 1997. The Company has a lease on office space in
Hong Kong at a monthly rental fee (including maintenance fees) of approximately
$3,000. The Company also leases office space in the Atlanta, Georgia, area
under a three-year lease at an initial base monthly rent of $1,750, which
rental amount increases in years two and three of the lease and is currently
approximately $1,900 per month.
ITEM 3. LEGAL PROCEEDINGS
None
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "GCOM". The fiscal 1998 high and low closing prices are as
follows:
High Low
-------------------------
First Quarter (from August 13, 1997 through
September 30, 1997) $ 19.63 $ 11.88
Second Quarter 19.25 10.50
Third Quarter 15.25 9.00
Fourth Quarter 14.25 8.50
At September 25, 1998, there were approximately 2,700 stockholders of
record of the Company's Common Stock, as shown in the records of the Company's
transfer agent.
At the close of the Nasdaq National Market on September 25, 1998, the
Company's market price per share was $5.50.
As of June 30, 1998, the Company had not declared or paid dividends on
its Common Stock since inception and does not expect to pay dividends in the
foreseeable future.
The effective date of the Company's first registration statement (the
"Registration Statement") filed on Form S-1 (Registration No. 333-22425) under
the Securities Act of 1933, as amended, was August 7, 1997. The class of
securities registered was Common Stock. The offering commenced on August 8,
1997 and all securities were sold in the offering. The managing underwriters
for the offering were PaineWebber Incorporated and C.E. Unterberg, Towbin.
Pursuant to the Registration Statement, the Company registered and sold
3,162,500 shares of Common Stock for an aggregate offering price of $31,625,000.
The Company incurred total expenses in the offering of approximately $3,721,000
of which approximately $2,214,000 represented underwriting discounts and
commissions and approximately $1,507,000 represented other expenses. All such
payments were direct or indirect payments to others. The net offering proceeds
to the Company after deducting the total expenses were approximately
$27,904,000.
From the effective date of the Registration Statement to June 30,
1998, the approximate amount of the net offering proceeds used were $3.4
million to fund capital expenditures and investing activities and $12.1 million
for working capital purposes, increased selling and marketing efforts, and
increased internal research and development expenses. All such payments were
direct or indirect payments to others.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 17, 1994
YEAR ENDED YEAR ENDED YEAR ENDED (INCEPTION)
JUNE 30, JUNE 30, JUNE 30, THROUGH JUNE 30,
1998 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 58,105 $ 36,220 $ 13,476 $ 72
Costs of revenues............................. 49,532 32,060 11,238 58
-------------------------------------------------------------------
Gross profit.................................. 8,573 4,160 2,238 14
-------------------------------------------------------------------
Operating expenses:
Selling and marketing....................... 4,187 3,282 1,915 346
Research and development.................... 1,188 649 712 -
General and administrative.................. 5,010 3,449 1,945 772
-------------------------------------------------------------------
Total operating expenses...................... 10,385 7,380 4,572 1,118
-------------------------------------------------------------------
Loss from operations.......................... (1,812) (3,220) (2,334) (1,104)
Interest income, net.......................... 1,266 276 89 39
-------------------------------------------------------------------
Loss before minority interests in operations
of consolidated subsidiary.................. (546) (2,944) (2,245) (1,065)
Minority interests in operations of
consolidated subsidiary..................... - 275 - -
-------------------------------------------------------------------
Net loss...................................... $ (546) $ (2,669) $ (2,245) $ (1,065)
===================================================================
Basic and diluted loss per share.............. $ (0.06)
================
Basic and diluted weighted average
Shares................................... 8,553
================
Pro forma net loss per share (unaudited)...... $ (0.44)
=================
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)(1) 6,086
=================
OTHER OPERATING DATA:
EBITDA(2)..................................... $ (1,110) $ (2,858) $ (2,141) $ (1,036)
Cash flows used in operating activities....... (5,894) (1,958) (2,510) (454)
Cash flows used in investing activities....... (7,126) (8,221) (1,714) (593)
Cash flows provided by financing
activities............................... 29,198 11,908 4,151 4,554
Capital expenditures ......................... 3,462 6,765 339 437
Backlog at end of period(3) .................. 43,572 40,807 11,588 7,716
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 21,342 $ 5,164 $ 3,435
Working capital................................................. 31,663 6,379 4,727
Total assets.................................................... 58,344 33,286 9,503
Long-term debt.................................................. - 18 74
Stockholders' equity............................................ 44,014 15,996 5,730
</TABLE>
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<PAGE>
(1) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
(2) EBITDA represents earnings before minority interests in operations of
consolidated subsidiary, interest income, net, income taxes, depreciation
and amortization expense. EBITDA does not represent cash flows as defined
by generally accepted accounting principles and does not necessarily
indicate that cash flows are sufficient to fund all the Company's cash
needs. EBITDA is a financial measure commonly used in the Company's
industry and should not be considered in isolation or as a substitute for
net income, cash flows from operating activities or other measures of
liquidity determined in accordance with generally accepted accounting
principles. EBITDA may not be comparable to other similarily titled
measures of other companies.
(3) The Company records an order in backlog when it receives a firm contract
or purchase order which identifies product quantities, sales price and
delivery dates. Backlog represents the amount of unrecorded revenue on
undelivered orders and a percentage of revenues from sales of products
that have been shipped but have not been accepted by the customer. The
Company's backlog at any given time is not necessarily indicative of
future period revenues. See "Business-Backlog."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors" as well as those
discussed elsewhere in this Form 10-K.
OVERVIEW
Since the Company's inception, substantially all of the Company's
revenue has been generated by its satellite ground segment-related operations.
Contracts for these ground segment systems and networks have been in virtually
all cases fixed-price contracts. Profitability of such contracts is subject to
inherent uncertainties as to the cost of performance. In addition to possible
errors or omission in making initial estimates, cost overruns may be incurred
as a result of unforeseen obstacles including both physical conditions and
unexpected problems encountered in engineering design and testing. Since the
Company's business may at certain times be concentrated in a limited number of
large contracts, a significant cost overrun on any contract could have a
material adverse effect on the Company's business, financial condition and
results of operations. The period from contract award through installation of
ground segment systems and networks supplied by the Company generally requires
from three to 12 months. The Company uses the percentage of completion method
of accounting for contract revenues, upon the achievement of certain
milestones. Accordingly, most of the revenue from sales of products is
typically recognized when the product is shipped, with the balance recognized
at the time of acceptance by the customer. Revenues from providing services are
recognized at the time the service is performed. Costs of revenues are
generally recorded based on the relationship of the amount of projected final
costs to the percentage of revenue recorded for the specific contract. See Note
2 of Notes to Consolidated Financial Statements.
Costs of revenues consist primarily of the costs of purchased
material, direct labor and related overhead expenses, project-related travel,
living costs and subcontractor salaries. Selling and marketing expenses consist
primarily of salaries and travel and living costs for sales and marketing
personnel. Research and development expenses consist primarily of salaries and
related overhead expenses paid to engineers. The Company also benefits from
research and development conducted by its strategic suppliers. See
"Business-Research and Development." General and administrative expenses
consist of expenses associated with the Company's management, accounting,
contract and administrative functions. The Company anticipates that selling and
marketing, research and development and general and administrative expenses
will continue to increase during the next several years due to expected
increases in personnel and expenses related to supporting the Company's
expanding customer base.
20
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RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES:
Revenues.............................................. 100.0% 100.0% 100.0%
Costs of revenues..................................... 85.2 88.5 83.4
---------------------------------------------------------
Gross profit........................................ 14.8 11.5 16.6
Operating expenses:
Selling and marketing............................... 7.2 9.1 14.2
Research and development............................ 2.1 1.8 5.3
General and administrative.......................... 8.6 9.5 14.4
---------------------------------------------------------
Total operating expenses.............................. 17.9 20.4 33.9
---------------------------------------------------------
Loss from operations.................................. (3.1) (8.9) (17.3)
Interest income, net.................................. 2.2 0.8 0.7
---------------------------------------------------------
Loss before minority interests in operations of
consolidated subsidiary.............................. (0.9) (8.1) (16.6)
Minority interests in operations of consolidated
subsidiary........................................... - 0.7 -
Net loss............................................... (0.9)% (7.4)% (16.6)%
</TABLE>
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
Revenues. Revenues, which were primarily derived from sales of ground
segment systems and networks, increased by $21.9 million, or 60.4%, to $58.1
million for the fiscal year ended June 30, 1998 from $36.2 million for the
fiscal year ended June 30, 1997. The increase was primarily the result of a
negotiated contract with Sonangol, U.E.E. as well as an overall increase in the
number of shipments and/or completion of contracts as the Company continued to
expand its businesses. Revenues for the three month period ended June 30, 1998
decreased by 25.2% to $11.0 million from $14.7 million for the same period in
the previous year as a result of the decline in bookings in previous quarters as
a result of the economic conditions in the Pacific Rim region, Russia and other
international markets. The Company expects the trend in revenues that adversely
affected its results of operations for the three month period ended June 30,
1998 to continue to impact the Company. These trends include the difficult
economic conditions in the Pacific Rim region, Russia and other international
markets and the decrease in bookings received by the Company from these regions.
Gross Profit. Gross profit increased by $4.4 million to $8.6 million
for the fiscal year ended June 30, 1998 from $4.2 million for the fiscal year
ended June 30, 1997. The increase was primarily due to the increase in the
shipment of ground segment systems and networks. Gross profit as a percentage
of revenues was 14.8% for the fiscal year ended June 30, 1998 compared to 11.5%
for the fiscal year ended June 30, 1997. The increase was due primarily to a
significant negotiated contract with Sonangol, U.E.E., which resulted in higher
gross profit margin offset in part by an increase in orders awarded through a
competitive bidding process, which typically result in lower gross profit
margins than negotiated contracts.
Selling and Marketing. Selling and marketing expenses increased by
$0.9 million, or 27.6%, to $4.2 million for the fiscal year ended June 30, 1998
from $3.3 million for the fiscal year ended June 30, 1997. The increase was
primarily due to the increase in the number of bids and proposals prepared by
the Company, as well as an increase in marketing personnel from 25 at
June 30, 1997 to 35 at June 30, 1998. Selling and marketing expenses as a
21
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percentage of revenues was 7.2% for the fiscal year ended June 30, 1998 compared
to 9.1% for the fiscal year ended June 30, 1997.
Research and Development. Research and development expenses increased
by $0.5 million, or 83.1%, to $1.2 for the fiscal year ended June 30, 1998 from
$0.6 million for the fiscal year ended June 30, 1997 due to an increase in
development costs associated with custom solutions. Research and development
expenses as a percentage of revenues increased to 2.1% for the fiscal year
ended June 30, 1998 from 1.8% for the fiscal year ended June 30, 1997.
General and Administrative. General and administrative expenses
increased by $1.6 million, or 45.3%, to $5.0 million for the fiscal year ended
June 30, 1998 from $3.4 million for the fiscal year ended June 30, 1997, but
decreased as a percentage of revenues to 8.6% for the fiscal year ended June
30, 1998 from 9.5% for the fiscal year ended June 30, 1997. The increase in
general and administrative expenses resulted primarily from an increase of
approximately $0.7 million in legal and other costs associated with operating a
public company, and an increase of approximately $0.5 million in personnel and
related expenses to support the continued growth of the Company's business.
Interest Income. Interest income increased by $1.0 million to $1.3
million for the fiscal year ended June 30, 1998 from $0.3 million for the
fiscal year ended June 30, 1997. The increase was primarily the result of the
investment of remaining net proceeds from the Company's initial public
offering.
NetSat Express. During the fiscal year ended June 30, 1998, the
Company's consolidated consolidated subsidiary NetSat Express experienced an
increase in revenues of approximately $0.6 million to approximately $0.7
million from approximately $0.1 million for the year ended June 30, 1997. The
increase resulted from the implementation of Access Plus services in January
1998, an increase in the number of PC Vector equipment sales and related
activations. The increase in loss from operations associated with NetSat
Express of approximately $0.2 million to $1.7 million for the fiscal year ended
June 30, 1998 from $1.5 million for the year ended June 30, 1997 was mainly
attributable to initial start up costs associated with providing Access Plus
and PC Vector services.
FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
Revenues. Revenues, which were derived from sales of ground segment
systems and networks, increased by $22.7 million, or 168.8%, to $36.2 million
for the fiscal year ended June 30, 1997 from $13.5 million for the fiscal year
ended June 30, 1996. The increase was primarily the result of an increase in
the number of shipments and/or completion of contracts from 22 for the fiscal
year ended June 30, 1996 to 47 for the fiscal year ended June 30, 1997.
Gross Profit. Gross profit increased by $1.9 million to $4.2 million
for the fiscal year ended June 30, 1997 from $2.2 million for the fiscal year
ended June 30, 1996. The increase was primarily due to the increase in the
shipment of ground segment systems and networks. Gross profit as a percentage
of revenues was 11.5% for the fiscal year ended June 30, 1997 compared to 16.6%
for the fiscal year ended June 30, 1996. Such decrease was due primarily to an
increase in orders awarded through a competitive bidding process, which
typically result in lower gross profit margins than negotiated contracts and a
contract awarded in the previous year with an unusually high profit margin.
Selling and Marketing. Selling and marketing expenses increased by $1.4
million, or 71.4%, to $3.3 million for the fiscal year ended June 30, 1997 from
$1.9 million for the fiscal year ended June 30, 1996. The increase was
primarily due to the opening of marketing offices in Hong Kong and in Atlanta,
Georgia, the hiring of selling and marketing personnel for NetSat Express,
which accounted for approximately $0.6 million, or 17.5%, of the selling and
marketing expenses for the year and the increase in the number of bids and
proposals prepared by the Company. Selling and marketing expenses as a
percentage of revenues was 9.1% for the fiscal year ended June 30, 1997
compared to 14.2% for the fiscal year ended June 30, 1996.
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Research and Development. Research and development expenses decreased
by $0.1 million, or 8.9%, to $0.6 million for the fiscal year ended June 30,
1997 from $0.7 million for the fiscal year ended June 30, 1996 due to a decline
in development costs associated with customizable systems. Research and
development expenses as a percentage of revenues decreased to 1.8% for the
fiscal year ended June 30, 1997 from 5.3% for the fiscal year ended June 30,
1996.
General and Administrative. General and administrative expenses
increased by $1.5 million, or 77.3%, to $3.4 million for the fiscal year ended
June 30, 1997 from $1.9 million for the fiscal year ended June 30, 1996, but
decreased as a percentage of revenues to 9.5% for the fiscal year ended June 30,
1997 from 14.4% for the fiscal year ended June 30, 1996. The increase in general
and administrative expenses resulted from personnel increases to service the
increasing customer base for the Company's ground segment business as well as
the hiring of NetSat Express administrative personnel, which accounted for
approximately $0.6 million, or 17.6%, of the general and administrative expenses
for the year.
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QUARTERLY RESULTS
The following tables set forth certain unaudited financial information
for each of the eight fiscal quarters in the period ended June 30, 1998. The
Company believes that this information has been presented on the same basis as
the audited Consolidated Financial Statements appearing elsewhere in the
Prospectus and in the opinion of management all necessary adjustments
(consisting only of normal recurring adjustments) have been included in the
amounts stated below to present fairly the unaudited quarterly results when
read in conjunction with the audited Consolidated Financial Statements of the
Company and related Notes thereto included elsewhere in this Form 10-K. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $ 4,155 $ 9,151 $ 8,226 $ 14,688 $ 14,591 $ 16,269 $ 16,261 $ 10,984
Costs of revenues........... 3,591 7,906 7,239 13,324 12,919 13,902 13,294 9,417
---------------------------------------------------------------------------------------------
Gross profit............... 564 1,245 987 1,364 1,672 2,367 2,967 1,567
Operating expenses:
Selling and marketing.... 554 847 815 1,066 831 966 1,167 1,223
Research and development. 92 137 122 298 280 304 287 317
General and administrative 661 755 1,118 915 1,088 1,153 1,235 1,534
---------------------------------------------------------------------------------------------
Total operating expenses.... 1,307 1,739 2,055 2,279 2,199 2,423 2,689 3,074
---------------------------------------------------------------------------------------------
(Loss) income from operations (743) (494) (1,068) (915) (527) (56) 278 (1,507)
Interest income, net........ 14 56 117 89 264 379 291 332
---------------------------------------------------------------------------------------------
(Loss) income before
minority interests in
operations of consolidated
subsidiary................. (729) (438) (951) (826) (263) 323 569 (1,175)
Minority interests in
operations of consolidated
subsidiary................. 175 100 - - - - - -
---------------------------------------------------------------------------------------------
Net (loss) income......... $ (554) $ (338) $ (951) $ (826) $ (263) $ 323 $ 569 $ (1,175)
=============================================================================================
PERCENTAGE OF TOTAL REVENUES:
Revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of revenues........... 86.4 86.4 88.0 90.7 88.5 85.5 81.8 85.7
---------------------------------------------------------------------------------------------
Gross profit............... 13.6 13.6 12.0 9.3 11.5 14.5 18.2 14.3
Operating expenses:
Selling and marketing.... 13.3 9.3 10.0 7.3 5.7 5.9 7.2 11.1
Research and development. 2.2 1.5 1.5 2.0 1.9 1.8 1.7 2.9
General and administrative 15.9 8.2 13.6 6.2 7.5 7.1 7.6 14.0
---------------------------------------------------------------------------------------------
Total operating expenses.... 31.4 19.0 25.1 15.5 15.1 14.8 16.5 28.0
---------------------------------------------------------------------------------------------
(Loss) income from operations (17.8) (5.4) (13.1) (6.2) (3.6) (0.3) 1.7 (13.7)
Interest income, net........ 0.3 0.6 1.4 0.6 1.8 2.3 1.8 3.0
---------------------------------------------------------------------------------------------
(Loss) income before
minority interests in
operations of consolidated
subsidiary................. (17.5) (4.8) (11.7) (5.6) 1.8 2.0 3.5 (10.7)
Minority interests in
operations of consolidated
subsidiary................. 4.2 1.1 - - - - - -
---------------------------------------------------------------------------------------------
Net (loss) income......... (13.3)% (3.7)% (11.7)% (5.6)% (1.8)% 2.0% 3.5% (10.7)%
=============================================================================================
</TABLE>
The Company may continue to experience significant quarter to quarter
fluctuations in its results of operations, which may result in volatility in
the price of the Company's Common Stock. Quarterly results of operations may
fluctuate as a result of a variety of factors, including the timing of the
initiation and completion of contracts, delays in the booking of new contracts,
the demand for the Company's products and services, the introduction of new or
enhanced products and services by the Company or its competitors, market
acceptance of new products and services, the mix of revenues between
custom-built satellite communications systems and networks designed for its
24
<PAGE>
customers and standard installations provided to its customers, the growth of
demand for Internet infrastructure-based products and services in developing
countries, the timing of significant marketing programs, the extent and timing
of the hiring of additional personnel, competitive conditions in the industry
and general economic conditions in the U.S. and abroad, such as the difficult
economic conditions and currency devaluations in the Pacific Rim region, Russia
and other international markets which have adversely impacted and may continue
to adversely impact the Company's quarterly results. Due to the foregoing
factors, it is likely that in one or more future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. Such an event could have a material adverse effect on the price of
the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily from the
sale of equity securities and, to a lesser degree, from stockholder loans.
Through June 30, 1998, the Company raised approximately $49.1 million of net
proceeds through a public offering of its Common Stock and private offerings of
its Common Stock and Convertible Preferred Stock. During the fiscal year ended
June 30, 1998, the Company received net proceeds of approximately $28.7 million
from sales of Common Stock through the Company's Initial Public Offering. In
addition, the Company received approximately $0.6 million in proceeds from the
exercise of stock options and warrants during the fiscal year ended June 30,
1998.
At June 30, 1998, the Company had working capital of $31.7 million,
including cash and cash equivalents of $21.3 million, restricted cash of $4.4
million, accounts receivable of $18.0 million, inventories of $1.6 million and
prepaid and other current assets of $0.6 million, offset by $13.0 million in
accounts payable and $1.2 million in accrued expenses.
The Company has experienced negative cash flow from operations since
its inception. Such negative cash flows were due to the net losses, increases
in accounts receivable and decreases in accounts payable during the respective
periods. Net cash used in operating activities for the fiscal years ended June
30, 1998, 1997 and 1996 was $5.9 million, $2.0 million and $2.5 million,
respectively.
Management anticipates that NetSat Express will experience negative
cash flow for at least the next 12 months as a result of additional capital
investments required for continued development of its operations in Eastern
Europe and losses from operations.
Several factors had a major effect on the Company's liquidity during
the fiscal year ended June 30, 1998. First, revenues increased substantially as
a result of a significant increase in contract deliveries and completed
installations. The higher revenues increased the Company's working capital
needs, as accounts receivable increased by approximately $3.7 million and
accounts payable decreased by approximately $3.0 million during the fiscal year
ended June 30, 1998. Offsetting this increase was an increase in accrued
expenses of approximately $0.1 million. Because the Company records progress
payments as an offset to inventory, the approximately $0.7 million decrease in
net inventory during the fiscal year is lower than might be expected based on
the increased level of activity and shipments against progress payments for
contracts completed (a decrease of approximately $3.4 million from June 30,
1997 to June 30, 1998). Inventory levels may be expected to increase as work
proceeds on newly acquired and existing contracts.
The second factor affecting liquidity during the fiscal year ended
June 30, 1998 was the Company's investment activities. The Company increased
its investment in its strategic suppliers by approximately $0.8 million during
the fiscal year and purchased approximately $1.6 million in additional computer,
machinery and test equipment. In addition, the Company completed renovation of
its new office and assembly facility for which it spent approximately $1.0
million in cash on improvements and has spent an additional $0.8 million on
furniture and fixtures.
The third major factor affecting liquidity was the completion of an
initial public offering of Common Stock and the exercise of options and
warrants during the fiscal year ended June 30, 1998. Net proceeds of these
25
<PAGE>
transactions were approximately $29.3 million leaving the Company with cash and
cash equivalents at the end of the fiscal year of approximately $21.3 million,
which does not include $4.4 million of restricted cash.
The Company has incurred losses since its inception and therefore has
not been subject to federal income taxes. Through June 30, 1998, the Company,
for income tax purposes, has generated net operating loss carryforwards of
approximately $8.2 million which may be available to reduce future taxable
income and future tax liabilities. These carryforwards expire through 2013. The
Tax Reform Act of 1986 provides for an annual limitation on the use of net
operating loss carryforwards (following certain ownership changes) that could
significantly limit the Company's ability to utilize these carryforwards. The
exercise of options or warrants or in connection with future sales of equity
could limit the Company's ability to utilize the aforementioned carryforwards to
reduce future taxable income and tax liabilities. Additionally, because the
United States tax laws limit the time during which these carryforwards may be
applied against future taxes, the Company may not be able to take full advantage
of these attributes for federal income tax purposes.
The Company has a $7.5 million credit facility consisting of (1) a
$5.0 million secured domestic line of credit and (2) a $2.5 million secured
export-import guaranteed line of credit. Each line of credit bears interest at
the prime rate plus 1/2% per annum and is collateralized by a first security
interest on all assets.
The Company's future capital requirements will depend upon many
factors, including the extent to which it is able to locate additional
strategic suppliers in whose technology it wishes to invest, the success of the
Company's marketing efforts in both the satellite ground segment and Internet
services fields, the demand, nature and timing of customer orders and the
extent to which it must conduct research and development efforts internally.
Based on current plans, the Company believes that its existing capital
resources will be sufficient to meet its capital requirements for at least the
next 12 months.
RISK FACTORS
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company, which was formed in August 1994, has a limited operating
history upon which an evaluation of the Company can be based and has incurred
significant operating losses since its inception. The Company has financed its
operations to date primarily from the sale of equity securities and, to a
lesser degree, from stockholder loans. The Company generated its first revenue
from its ground segment systems and networks business in June 1995 and has
generated only minimal revenues from its satellite-delivered data
communications services business, which commenced operations in July 1996. The
Company incurred operating losses of $1.1 million, $2.3 million, $2.7 million
and $0.5 million during the fiscal years ended June 30, 1995, 1996, 1997 and
1998, respectively and may incur further operating losses as it attempts to
expand its business. The Company's ability to expand its business and generate
additional revenues and future positive operating and net income is dependent,
in large part, on its ability to obtain new contracts and the profitability of
such contracts, and there can be no assurance that the Company will generate
significant additional revenues or report quarterly or annual positive
operating or net income. As of June 30, 1998, the Company had an accumulated
deficit of $6.5 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
INHERENT RISK OF INTERNATIONAL OPERATIONS
Most of the Company's revenues are derived from sales to customers
outside the United States. The Company anticipates that foreign sales will
continue to account for a significant portion of total revenues in the
foreseeable future. The Company's foreign sales are generally denominated in
U.S. dollars. Consequently, the decrease in the value of foreign currencies
relative to the U.S. dollar, such as the currency devaluations in the Pacific
Rim region, Russia and other international currencies, has adversely affected
and may continue to adversely affect the demand for the Company's products and
services by increasing the price of the Company's products and services in the
26
<PAGE>
currency of the countries in which they are sold. Additional risks inherent in
the Company's international business activities include various and changing
regulatory requirements, costs and risks of relying upon local subcontractors
for the installation of its ground segment systems and networks, increased sales
and marketing expenses, availability of export licenses, tariffs and other trade
barriers, political and economic instability, difficulties in staffing and
managing foreign operations, potentially adverse taxes, complex foreign laws and
treaties and the possibility of difficulty in accounts receivable collections.
The recent economic and monetary crisis in the Pacific Rim countries, including
Korea, Malaysia, Thailand, Philippines, Indonesia and other countries in the
region, as well as the recent economic and monetary declines in Russia, has
resulted in a decreased demand in such countries and other foreign regions for
capital equipment such as the ground segment systems and networks supplied by
the Company. The difficult economic conditions in the Pacific Rim region, Russia
and other international markets and the decrease in bookings received by the
Company from these and other foreign regions have adversely effected the
Company's results of operations for the fourth quarter of 1998 and the Company
expects that these negative trends will continue to adversely impact it. In
addition, the Company is subject to the Foreign Corrupt Practices Act (the
"FCPA") which may place the Company at a competitive disadvantage to foreign
companies, which are not subject to the FCPA. There can be no assurance that any
of these factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
QUARTERLY FLUCTUATIONS
The Company may continue to experience significant
quarter to quarter fluctuations in its results of operations, which may result
in volatility in the price of the Company's Common Stock. Quarterly results of
operations may fluctuate as a result of a variety of factors, including the
timing of the initiation and completion of contracts, delays in the booking of
new contracts, the demand for the Company's products and services, the
introduction of new or enhanced products and services by the Company or its
competitors, market acceptance of new products and services, the mix of
revenues between custom-built satellite communications systems and networks
designed for its customers and standard installations provided to its
customers, the growth of demand for Internet infrastructure-based products and
services in developing countries, the timing of significant marketing programs,
the extent and timing of the hiring of additional personnel, competitive
conditions in the industry and general economic conditions in the U.S. and
abroad, such as the difficult economic conditions and currency devaluations in
the Pacific Rim region, Russia and other international markets which have
adversely impacted, and may continue to, adversely impact the Company's
quarterly results. See "Inherent Risk of International Operations". Due to the
foregoing factors, it is likely that in one or more future quarters the
Company's operating results will be below the expectations of public market
analysts and investors. Such an event could have a material adverse effect on
the price of the Company's Common Stock.
INTENSE COMPETITION; LIMITED BARRIERS TO ENTRY
The markets for both ground segment systems and networks and
satellite-delivered data communications services are highly competitive. Many
of the Company's competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to the Company. As a result, such competitors may be able
to develop and expand their products and services more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products and services than
can the Company. In addition, there are limited barriers to entry in the
Company's markets and certain of the Company's strategic suppliers and
customers have technologies and capabilities in the Company's product areas and
could choose to compete with the Company or to replace the Company's products
or services with their own. The entry of new competitors, the decision by a
strategic ally to compete with the Company or the decision by a customer to
develop and employ in-house capability to satisfy its satellite communications
needs could have a material adverse effect on the Company's business, financial
condition and results of operations.
27
<PAGE>
The Company anticipates that its competitors may develop or acquire
competing products or that provide functionality that is similar to that
provided by the Company's products and that such products may be offered at
significantly lower prices or bundled with other products. In addition, current
and potential competitors in both markets in which the Company competes have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products and services to address
the needs of the Company's current and prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced gross profit margins and loss of market
share, any of which would have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also is dependent on the continued success and development
of the satellite communications industry, which itself competes with other
technologies such as terrestrial microwave, copper wire and fiber optic
communications systems. Any failure of the satellite communications industry to
continue to develop, or any technological development which significantly
improves the capacity, cost or efficiency of such competing systems relative to
satellite systems, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Rapid Industry
Change; Technological Obsolescence."
RELIANCE ON STRATEGIC RELATIONSHIPS
The Company is dependent on certain customers and suppliers for the
development and expansion of its ground segment system and network business.
However, such relationships are not governed by any contract and accordingly
neither the Company nor such customers or suppliers are obligated to maintain
such strategic relationships. There can be no assurance that the Company will
be able to maintain such strategic relationships, that its strategic customers
and suppliers will continue to assist the Company by developing and expanding
its business and by providing research and development expertise, or that such
strategic customers and suppliers will not actually compete with the Company in
the future. See "Intense Competition; Limited Barriers to Entry."
In addition, the Company relies on the Personal Earth Station and
DirecPC technologies provided by HNS, a subsidiary of Hughes Electronics Corp.
in connection with the operation of NetSat Express's satellite-delivered data
communications services business. Each project for which NetSat Express uses
HNS' DirecPC technology will require the grant of a license from HNS to NetSat
Express. HNS is under no obligation to grant such licenses and there can be no
assurance that NetSat Express will be able to negotiate such licensing
arrangements with HNS on acceptable terms, or at all. In addition, failure to
maintain a business relationship with HNS would have a material adverse effect
on the Company's business, financial condition and results of operations.
Because the Company intends to provide its satellite-delivered data
communications services almost entirely in developing markets where the Company
has little or no market experience, the Company will also be dependent on local
partners in such markets to provide marketing expertise and knowledge of the
local regulatory environment in order to facilitate the acquisition of
necessary licenses and access to existing customers. The Company has not yet
formally established an alliance with a local partner. The Company's failure to
form and maintain such alliances with local partners, or the preemption or
disruption of such alliances by the actions of the Company's competitors or
otherwise, would adversely affect the Company's ability to penetrate and
compete successfully in such emerging markets. There can be no assurance that
the Company will be able to compete successfully in the future in such markets
or that competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
28
<PAGE>
RISK OF CUSTOMER CONCENTRATION
The Company typically relies upon a small number of customers for a
large portion of its revenues. For example, approximately 29% of the Company's
revenues in fiscal 1998 were derived from sales to Sonangol, U.E.E. At June 30,
1998, $12.2 million, or approximately 28% of the Company's backlog, was
accounted for by a contract between the Company and Transworld Communications
Services, Inc. and $7.1 million, or approximately 16% of the Company's backlog,
was accounted for by a contract between the Company and Sonangol, U.E.E. The
Company expects that in the near term a significant portion of its revenues
will continue to be derived from one or a limited number of customers (the
identity of whom may vary from period to period) as the Company seeks to expand
its business and its customer base. The reduction, delay, or cancellation of
orders from one or more of such significant customers would have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISK OF MANAGEMENT OF RAPID GROWTH
The Company has been significantly and rapidly expanding its
operations since its inception. In order to pursue successfully the
opportunities presented by the ground segment and emerging satellite-delivered
communications and Internet/intranet-infrastructure markets, the Company will
be required to continue to expand its operations. Such expansion has placed,
and is expected to continue to place, a significant strain on the Company's
personnel, management, financial and other resources. In order to manage any
future growth effectively, the Company will, among other things, be required to
attract, train, motivate and manage a significantly larger number of employees
successfully to conduct product engineering and management, product
implementation, sales activity and customer support activities; manage higher
working capital requirements; and improve its operating and financial systems.
Any failure to manage any future growth in an efficient manner and at a pace
consistent with the Company's business could have a material adverse effect on
the Company's business, financial condition and results of operations.
RISK OF FIXED-PRICE CONTRACTS
Virtually all of the Company's contracts for installation of ground
segment systems and networks are on a fixed-price basis. Profitability of such
contracts is subject to inherent uncertainties as to the cost of performance.
In addition to possible errors or omissions in making initial estimates, cost
overruns may be incurred as a result of unforeseen obstacles, including both
physical conditions and unexpected problems encountered in engineering, design
and testing. Since the Company's business may at certain times be concentrated
in a limited number of large contracts, a significant cost overrun on any one
contract could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk of Customer
Concentration."
EMPHASIS ON DEVELOPING MARKETS; UNCERTAIN MARKET POTENTIAL
The Company believes a substantial portion of the growth in demand for
its ground segment systems and networks and its recently launched
satellite-delivered data communications services will come from customers in
developing countries. There can be no assurance that such increases in demand
will occur or that prospective customers will accept such products and services
in sufficient quantities or at all. The degree to which the Company is able to
penetrate potential markets in developing countries will be affected in major
part by the speed with which other competing elements of the communications
infrastructure, such as telephone lines, other satellite-delivered solutions
and fiber optic cable and television cable, are installed in the developing
countries and with respect to the Company's data communications services, on
the effectiveness of the Company's local partners in such markets. The failure
to have its products and services accepted in developing countries would have a
material adverse effect on the Company's business, financial condition and
29
<PAGE>
results of operations. See "Intense Competition; Limited Barriers to Entry" and
"Reliance on Strategic Relationships."
RAPID INDUSTRY CHANGE; TECHNOLOGICAL OBSOLESCENCE
The telecommunications industry, including the satellite
communications ground segment systems and networks and data communication
services businesses, is characterized by rapid and continuous technological
change. Future technological advances in the telecommunications industry may
result in the availability of new products or services that could compete with
the satellite ground segment products and services provided by the Company or
render the Company's products and services obsolete. There can be no assurance
that the Company will be successful in developing and introducing new products
and services that meet changing customer needs or in responding to
technological changes or evolving industry standards in a timely manner, if at
all, or that services or technologies developed by others will not render the
Company's products or services noncompetitive. Any failure by the Company to
respond to changing market conditions, technological developments, evolving
industry standards or changing customer requirements, or the development of
competing technology or products that render the Company's products and
services noncompetitive or obsolete would have a material adverse effect on the
Company's business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the data code field. These data code
fields will need to accept four digit entries to distinguish 21st century
dates. As a result, in less than two years, computer systems and/or software
used by many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance. Although the
Company's internal systems as well as the software it installs in its satellite
ground segment systems and networks are designed to be Year 2000 compliant,
there can be no assurance that such systems and software contain all necessary
date code changes.
The Company and its customers may be affected by Year 2000 issues.
Compliance with Year 2000 requirements may disrupt the Company's ability to
continue designing, assembling and installing its satellite ground segment
systems and networks. The Company may also incur certain expenditures in
connection with Year 2000 compliance. Additionally, even if the Company's
internal systems and the software it installs in its ground segment systems and
networks are Year 2000 compliant, there can be no assurance that the equipment
the Company obtains from third-party vendors and incorporates into its ground
segment systems and networks is Year 2000 compliant. If such equipment is not
Year 2000 compliant, it could disrupt the ability of the Company's customers to
use the Company's ground segment systems and networks. In addition, there can
be no assurance that equipment operated by third parties that interface with or
contain the Company's products will timely achieve Year 2000 compliance.
Furthermore, if the Company's ground segment systems and networks were unable
to be used by the Company's customers because of Year 2000 compliance problems,
there can be no assurance that the Company's customers will not commence
litigation against the Company for such systems and networks failure. Any of
the foregoing could result in a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company currently procures most of the critical components and
services for its products from single or limited sources in connection with
specific contracts and does not otherwise carry significant inventories or have
long-term or exclusive supply contracts with its source vendors. The Company
has from time to time experienced delays in receiving products from certain of
its vendors due to quality control or manufacturing problems, shortages of
materials or components or product design difficulties. There can be no
assurance that similar problems will not recur or that replacement products
will be available when needed at commercially reasonable rates, or at all. If
the Company were to change certain of its vendors, the Company would be
30
<PAGE>
required to perform additional testing procedures upon the components supplied
by such new vendors, which could prevent or delay product shipments.
Additionally, prices could increase significantly in connection with changes of
vendors. Any inability of the Company to obtain timely deliveries of materials
of acceptable quality or timely services, or any significant increase in the
prices of materials or services, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk of
Fixed-Price Contracts" and "Quarterly Fluctuations".
RISK OF FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS
The Company is subject to various federal laws and regulations which
may have negative effects on the Company. The Company operates a teleport in
Hauppauge, New York, which is subject to FCC Rules and Regulations. The Company
has obtained certain licenses from the FCC for both domestic and international
operation of the teleport and must operate it in compliance with FCC Rules and
Regulations for the term of the license. There can be no assurance that the
Company will be able to obtain additional licenses that may be required or
maintain the necessary licenses.
Under the FCC Rules and Regulations, non-U.S. citizens or their
representatives, foreign governments, or corporations otherwise subject to
control by non-U.S. citizens, may not own more than 20% of a licensee directly,
or, if the FCC finds it consistent with the public interest, may not own more
than 25% of the parent of a licensee. Non-U.S. citizens may not serve as
officers of a licensee or as members of a licensee's board of directors,
although the FCC may waive this requirement in whole or in part. Failure to
comply with these requirements may result in the FCC issuing an order to the
entity requiring divestiture of alien ownership to bring the entity into
compliance with the FCC Rules and Regulations. In addition, fines, a denial of
renewal or revocation of the license are possible. The Company has no knowledge
of any present foreign ownership which would result in a violation of the FCC
Rules and Regulations, but there can be no assurance that foreign holders will
not in the future hold more than 20% or 25% of the Common Stock of the Company.
Regulatory schemes in countries in which the Company may seek to
provide its satellite-delivered data communications services may impose
impediments on the Company's operations. Certain countries in which the Company
intends to operate have telecommunications laws and regulations that do not
currently contemplate technical advances in broadcast technology such as
Internet/intranet transmission by satellite. There can be no assurance that the
present regulatory environment in any such country will not be changed in a
manner which may have a material adverse impact on the Company's business. The
Company or its local partners typically must obtain authorization for each
country in which the Company provides its satellite-delivered data
communications services. Although the Company believes that it or its local
partners will be able to obtain the requisite licenses and approvals from the
countries in which the Company intends to provide service, the regulatory
schemes in each country are different and thus there may be instances of
noncompliance of which the Company is not aware. Although the Company believes
these regulatory schemes will not prevent the Company from pursuing its
business plan, there can be no assurance such licenses and approvals are or
will remain sufficient in the view of foreign regulatory authorities, or that
necessary licenses and approvals will be granted on a timely basis in all
jurisdictions in which the Company wishes to offer its services or that
restrictions applicable thereto will not be unduly burdensome.
The Company's Internet operations (other than the operation of a
teleport) are not currently subject to direct government regulation in most
countries, and there are currently few laws or regulations directly applicable
to access to or commerce on the Internet. However, due to the increasing
popularity and use of the Internet, it is likely that a number of laws and
regulations may be adopted at the local, national or international levels with
respect to the Internet, covering issues such as user privacy and expression,
pricing of products and services, taxation, advertising, intellectual property
rights, information security or the convergence of traditional communication
services with Internet communications. For example, the Telecommunications Act
of 1996 (the constitutionality of certain portions of which is currently under
challenge) was recently enacted in the United States, and imposes criminal
penalties via the Communications Decency Act on anyone who distributes obscene,
lascivious or indecent communications over the Internet. It is anticipated
31
<PAGE>
that a substantial portion of the Company's Internet operations will be carried
out in countries which may impose greater regulation of the content of
information coming into the country than that which is generally applicable in
the United States. To the extent that the Company provides content as a part of
its Internet services, it will be subject to any such laws regulating content.
Moreover, the adoption of any such laws or regulations may decrease the growth
of the Internet, which could in turn decrease the demand for the Company's
Internet services or increase the Company's cost of doing business or in some
other manner have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the applicability to the Internet
of existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel and personal privacy is
uncertain. The vast majority of such laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Changes to
such laws intended to address these issues, including some recently proposed
changes, could create uncertainty in the marketplace which could reduce demand
for the Company's services, could increase the Company's cost of doing business
as a result of costs of litigation or increased product development costs, or
could in some other manner have a material adverse effect on the Company's
business, financial condition and results of operations.
The sale of the Company's ground segment systems and networks outside
the United States is subject to compliance with the regulations of the United
States Export Administration Regulations. The absence of comparable
restrictions on competitors in other countries may adversely affect the
Company's competitive position. In addition, in order to ship its products into
European Union countries, the Company must satisfy certain technical
requirements. If the Company were unable to comply with such requirements with
respect to a significant quantity of the Company's products, the Company's
sales in Europe could be restricted, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on its
executive officers and certain technical, managerial and marketing personnel.
The loss of the services of any of these individuals or group of individuals
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company maintains term life insurance
in the amount of $1.0 million on David E. Hershberg, the Chairman and Chief
Executive Officer of the Company and term life insurance in the amount of
$0.5 million for each of Messrs. Miller, DiCicco, Woodring, Yablonski and Melfi,
all of whom are officers of the Company. The Company believes that its future
success also will depend significantly upon its ability to attract, motivate and
retain additional highly skilled technical, managerial and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, assimilating and retaining the
personnel it requires to grow and operate profitably.
PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
The Company relies heavily on the technological and creative skills of
its personnel, new product developments, computer programs and designs,
frequent product enhancements, reliable product support and proprietary
technological expertise in maintaining its competitive position, and lacks
patent protection for its products and services. There can be no assurance that
others will not independently develop or acquire substantially equivalent
techniques or otherwise gain access to the Company's proprietary and
confidential technological expertise or disclose such technologies or that the
Company can ultimately protect its rights to such proprietary technological
expertise.
The Company generally relies on confidentiality agreements with its
consultants, key employees and sales representatives to protect its proprietary
technological expertise, and generally controls access to and distribution of
its technology, software and other proprietary information. Despite these
precautions, there can be no assurance that such agreements will not be
breached, that the Company will have adequate remedies for any such breach or
32
<PAGE>
that a third party will not copy or otherwise obtain and use the Company's
products or technology without authorization or develop similar products or
technology independently. Failure by the Company to maintain protection of its
proprietary technological expertise for any reason could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is subject to the risk of alleged infringement of
intellectual property rights of others. Most of the Company's officers and
employees were formerly officers or employees of other companies in the
industry. The Company believes that neither it nor its officers or employees
have violated any agreements with, or obligations to, prior employers. Although
the Company is not aware of any pending or threatened infringement claims with
respect to the Company's current or future products, there can be no assurance
that third parties, including previous employers, will not assert such claims
or that any such claims will not require the Company to enter into license
arrangements or result in protracted and costly litigation, regardless of the
merits of such claims. No assurance can be given that any necessary licenses
will be available or that, if available, such licenses can be obtained on
commercially reasonable terms. Furthermore, litigation may be necessary to
enforce or protect the Company's intellectual property rights, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company currently has three patent applications pending in the
United States and a PCT application, corresponding to one of the United States
applications, is pending in a number of foreign jurisdictions. The Company also
intends to seek further patents on its technology, if appropriate. There can be
no assurance that patents will issue from any of the Company's pending or any
future applications or that any claims allowed from such applications will be of
sufficient scope or strength, or be issued in all countries where the Company's
products can be sold, to provide meaningful protection or any commercial
advantage to the Company. Also, competitors of the Company may be able to design
around the Company's patents. The laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold may not protect
the Company's products or intellectual property rights to the same extent as do
the laws of the United States and thus make the possibility of piracy of the
Company's technology and products more likely.
The Company has filed applications for trademark registration of
Globecomm Systems Inc. in the United States, China, the European Union and the
Russian Federation and of NetSat Express in the United States, Singapore, the
European Union, the Russian Federation and Brazil, and intends to seek
registration of other trademarks in the future. There can be no assurance that
registrations will be granted from any of the Company's pending or future
applications, or that any registrations that are granted to the Company will
prevent others from using similar trademarks in connection with related goods
and services.
RISK OF CONCENTRATED OWNERSHIP
As of September 25, 1998, the Company's officers and directors, and
their affiliates beneficially own approximately 2,236,985 shares, constituting
approximately 23.2% of the Company's outstanding Common Stock. These
stockholders, if acting together, may be able to exert significant influence
over the election of directors and other corporate actions requiring
stockholder approval.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or
its competitors, acceptance of satellite communication services in developing
countries, and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations, which have affected the
market price of securities of many companies in the telecommunications and
33
<PAGE>
high technology industries. These broad market fluctuations may adversely affect
the market price of the Company's Common Stock. See "Quarterly Fluctuations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is subject to a variety of risks, including foreign
currency exchange rate fluctuations relating to certain purchases from foreign
vendors. In the normal course of business, the Company assesses these risks and
has established policies and procedures to manage its exposure to fluctuations
in foreign currency values.
The Company's objective to managing its exposure to foreign currency
exchange rate fluctuations is to reduce the impact of adverse fluctuations in
earnings and cash flows associated with foreign currency exchange rates for
certain purchases from foreign vendors, if applicable. Accordingly, the Company
utilizes foreign currency forward contracts to hedge its exposure on firm
commitments denominated in foreign currency. As of June 30, 1998, the Company
has only one such foreign currency forward contract to hedge its exposure
relating to a commitment to purchase approximately U.S. $3.2 million of
equipment from a vendor in Swedish Krona. The Company's hedge with respect to
this transaction reduces, but does not eliminate, the impact of foreign
currency exchange rate movements. If there were an adverse change in the
exchange rate of Swedish Krona of 10%, the expected effect on net income would
be immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------
The information required by this item is incorporated by reference to
the Consolidated Financial Statements listed in Item 14(a) of Part IV of the
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On November 27, 1996, the Company dismissed PricewaterhouseCoopers LLP
as its independent accountants. The reports of PricewaterhouseCoopers LLP on
the Company's financial statements for the two fiscal years prior to such
dismissal contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with its audits for the year ended June 30, 1996 and for the
period from August 17, 1994 (inception) through June 30, 1995, and through
November 27, 1996, there have been no disagreements with PricewaterhouseCoopers
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to
make reference thereto in their report on the financial statements for such
years. The decision to change firms was approved by the Company's Board of
Directors. The Company had requested that PricewaterhouseCoopers LLP furnish it
with a letter addressed to the Commission stating whether or not it agrees with
the above statements. A copy of such letter was filed as an exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-22425).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Certain information in response to this item is incorporated herein by
reference to "Election of Directors" and "Executive Officers" in Globecomm
Systems Inc.'s Proxy Statement to be filed with the Securities and Exchange
Commission (the "SEC"). Information on compliance with section 16(a) of the
Exchange Act is incorporated herein by reference to "Compliance with Reporting
Requirements" in the Registrant's Proxy Statement to be filed with the SEC.
34
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information in response to this item is incorporated herein by
reference to "Executive Compensation and Other Information" in the Registrant's
Proxy Statement to be filed with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information in response to this item is incorporated herein by
reference to "Security Ownership of Certain Beneficial Owners and Management"
in the Registrant's Proxy Statement to be filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information in response to this item is incorporated herein by
reference to "Certain Transactions" in the Registrant's Proxy Statement to be
filed with the SEC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(A) (1) FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors-Ernst & Young LLP......................................... F-1
Report of Independent Accountants-PricewaterhouseCoopers LLP............................. F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997................................. F-3
Consolidated Statements of Operations for the years ended June 30, 1998, 1997 and 1996... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30,
1998, 1997 and 1996.................................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996... F-6
Notes to Consolidated Financial Statements............................................... F-7
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES
None
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in
Financial Statements or notes thereto.
(3)EXHIBITS
Exhibit No.
- -----------
3.1 Amended and Restated Certificate of Incorporation (filed herewith)
3.3 Amended and Restated By-Laws of the Registrant (filed herewith)
4.2 See Exhibits 3.1 and 3.3 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated By-Laws of the
Registrant defining rights of holders of Common Stock of the
Registrant. (incorporated by reference to Exhibit 4.2 of the
Registrant's Registration Statement on Form S-1, File No. 333-22425
(the "Registration Statement"))
35
<PAGE>
10.1 Form of Registration Rights Agreement dated as of February 1997
(incorporated by reference to exhibit 10.1 of the Registration
Statement).
10.2 Form of Registration Rights Agreement dated May 30, 1996
(incorporated by reference to exhibit 10.2 of the Registration
Statement).
10.3 Form of Registration Rights Agreement dated December 31, 1996, as
amended (incorporated by reference to exhibit 10.3 of the Registration
Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common
Stock dated November 9, 1995 between the Registrant and Thomson-CSF
(incorporated by reference to exhibit 10.4 of the Registration
Statement).
10.5 Investment Agreement dated February 12, 1996 by and between Shiron
Satellite Communications (1996) Ltd. and the Registrant (incorporated
by reference to exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between
C-Grams Unlimited Inc. and the Registrant (incorporated by reference
to exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding dated December 18, 1996 by and between
NetSat Express, Inc. and Applied Theory Communications, Inc.
(incorporated by reference to exhibit 10.7 of the Registration
Statement).
10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between
NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by
reference to exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement dated as of January 27, 1997 between the
Registrant and David E. Hershberg (incorporated by reference to
exhibit 10.9 of the Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the
Registrant and Kenneth A. Miller (incorporated by reference to exhibit
10.10 of the Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York,
dated December 12, 1996 by and between Eaton Corporation and the
Registrant (incorporated by reference to exhibit 10.13 of the
Registration Statement).
10.12 1997 Stock Incentive Plan (incorporated by reference to exhibit 10.14
of the Registration Statement).
10.13 Investment Agreement dated August 21, 1998 by and between McKibben
Communications LLC and the Registrant (filed herewith).
16.1 Letter from PricewaterhouseCoopers LLP (incorporated by reference to
exhibit 16.1 of the Registration Statement).
21.1 Subsidiary of the Registrant (filed herewith).
23.1 Consent of Ernst & Young LLP (filed herewith).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
27 Financial Data Schedule (filed herewith).
* Confidential treatment granted for portions of this agreement.
(B) REPORTS ON FORM 8-K
None
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf of the undersigned, thereunto duly authorized.
GLOBECOMM SYSTEMS INC.
<TABLE>
<CAPTION>
Date
<S> <C>
By: /s/ David E. Hershberg 9/28/98
------------------------------------------------------------------------------------- -------
David E. Hershberg, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date
By: /s/ David E. Hershberg 9/28/98
------------------------------------------------------------------------------------- -------
David E. Hershberg, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
By: /s/ Andrew C. Melfi 9/28/98
------------------------------------------------------------------------------------- -------
Andrew C. Melfi, Vice President and Chief Financial Officer (Principal Financial and
Accounting Officer)
By: /s/ Kenneth A. Miller 9/28/98
------------------------------------------------------------------------------------- -------
Kenneth A. Miller, President and Director
By: /s/ Thomas A. DiCicco 9/28/98
------------------------------------------------------------------------------------- -------
Thomas A. DiCicco, Vice President and Director
By: /s/ Donald G. Woodring 9/28/98
------------------------------------------------------------------------------------- -------
Donald G. Woodring, Vice President and Director
By: /s/ Stephen C. Yablonski 9/28/98
------------------------------------------------------------------------------------- -------
Stephen C. Yablonski, Vice President and Director
37
<PAGE>
By: /s/ Herman Fialkov 9/28/98
------------------------------------------------------------------------------------- -------
Herman Fialkov, Director
By: /s/ Shelly A. Harrison 9/28/98
------------------------------------------------------------------------------------- -------
Shelley A. Harrison, Director
By: /s/ Benjamin Duhov 9/28/98
------------------------------------------------------------------------------------- -------
Benjamin Duhov, Director
By: : /s/ C.J. Waylan 9/28/98
------------------------------------------------------------------------------------- -------
C.J. Waylan, Director
By: : /s/ A. Robert Towbin 9/28/98
------------------------------------------------------------------------------------- -------
A. Robert Towbin, Director
38
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Globecomm Systems Inc.
We have audited the accompanying consolidated balance sheets of
Globecomm Systems Inc. at June 30, 1998 and 1997 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Globecomm Systems Inc. at June 30, 1998 and 1997, and the consolidated results
of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Melville, New York
August 7, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Globecomm Systems Inc.
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the results of operations and cash flows of Globecomm
Systems Inc. and its subsidiary for the year ended June 30, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
August 23, 1996, except as to Note 1,
which is as of August 5, 1997
F-2
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 21,342 $ 5,164
Restricted cash......................................................................... 4,416 1,537
Accounts receivable..................................................................... 18,017 14,350
Inventories, net........................................................................ 1,583 2,293
Prepaid expenses and other current assets............................................... 635 307
-----------------------------------
Total current assets...................................................................... 45,993 23,651
Fixed assets, net......................................................................... 9,963 7,151
Investments............................................................................... 2,093 1,308
Other assets.............................................................................. 295 1,176
-----------------------------------
Total assets.............................................................................. $ 58,344 $ 33,286
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 13,042 $ 16,089
Accrued payroll and related fringe benefits............................................. 632 438
Accrued commissions..................................................................... 216 360
Other accrued expenses.................................................................. 422 329
Capital lease obligations............................................................... 18 56
-----------------------------------
Total current liabilities................................................................. 14,330 17,272
Capital lease obligations................................................................. - 18
-----------------------------------
Total liabilities......................................................................... 14,330 17,290
-----------------------------------
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 3,000,000 shares authorized:
Class A Convertible - shares authorized, issued and outstanding: none at
June 30, 1998 and 172,304 at June 30, 1997........................................ - -
Class B Convertible - shares authorized, issued and outstanding: none at
June 30, 1998 and 514,714 at June 30, 1997........................................ - 1
Common stock, $.001 par value; 22,000,000 shares authorized, shares issued and
outstanding: 9,165,908 at June 30, 1998 and 3,906,119 at June 30, 1997................. 9 4
Additional paid-in capital.............................................................. 50,530 21,970
Accumulated deficit..................................................................... (6,525) (5,979)
-----------------------------------
Total stockholders' equity................................................................ 44,014 15,996
-----------------------------------
Total liabilities and stockholders' equity................................................ $ 58,344 $ 33,286
===================================
See accompanying notes.
F-3
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Revenues.................................................................... $ 58,105 $ 36,220 $ 13,476
Costs of revenues........................................................... 49,532 32,060 11,238
-----------------------------------------------------
Gross profit................................................................ 8,573 4,160 2,238
-----------------------------------------------------
Operating expenses:
Selling and marketing..................................................... 4,187 3,282 1,915
Research and development.................................................. 1,188 649 712
General and administrative................................................ 5,010 3,449 1,945
-----------------------------------------------------
Total operating expenses.................................................... 10,385 7,380 4,572
-----------------------------------------------------
Loss from operations........................................................ (1,812) (3,220) (2,334)
Interest income, net of interest expense of $5, $22 and $32 in 1998, 1997
and 1996, respectively.................................................... 1,266 276 89
-----------------------------------------------------
Loss before minority interests in operations of consolidated
subsidiary............................................................... (546) (2,944) (2,245)
Minority interests in operations of consolidated subsidiary................. - 275 -
-----------------------------------------------------
Net loss.................................................................... $ (546) $ (2,669) $ (2,245)
=====================================================
Basic and diluted loss per share............................................ $ (0.06)
===================
Basic and diluted weighted average shares................................... 8,553
===================
Pro forma basic and diluted net loss per share (unaudited).................. $ (0.44)
=================
Shares used in computing pro forma basic and diluted net loss per
share (unaudited)........................................................ 6,086
=================
See accompanying notes.
F-4
<PAGE>
<CAPTION>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PREFERRED STOCK
---------------------------------- ADDITIONAL STOCK TOTAL
CLASS A CLASS B COMMON STOCK PAID-IN SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS'
---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995................ - $ - - $ - 3,506 $ 4 $ 5,168 $ (900) $ (1,065) $ 3,207
Proceeds from stock
subscriptions
receivable.......... 900 900
Sale of common stock
to investor, net of
issuance costs of
$17................. 200 - 915 915
Issuance of common
stock as sales
commissions......... 37 - 174 174
Sale of common stock
to investors........ 11 - 50 50
Issuance of common
stock to consultants 15 - 52 52
Sale of convertible
preferred stock to
investors, net of
issuance costs of
$15................. 156 - 2,485 2,485
Options granted to
employees and
directors........... 192 192
Net loss.............. (2,245) (2,245)
-----------------------------------------------------------------------------------------------------
Balance at June 30,
1996................ 156 - - - 3,769 4 9,036 - (3,310) 5,730
Sale of convertible
preferred stock to
investors, net of
issuance costs of
$2,623; paid in
cash of $1,135 and
53 shares of stock.. 485 1 10,964 10,965
Sale of convertible
preferred stock to
investor............ 16 - 257 257
Exercise of warrants.. 107 - 563 563
Sale of convertible
preferred stock to
investor............ 30 - 824 824
Issuance of common
stock in exchange
for minority shares
in subsidiary....... 30 - 243 243
Options granted to
employees and
directors........... 83 83
Net loss.............. (2,669) (2,669)
-----------------------------------------------------------------------------------------------------
Balance at June 30,
1997................ 172 - 515 1 3,906 4 21,970 - (5,979) 15,996
Conversion of
convertible preferred
stock into common
stock.............. (172) - (515) (1) 1,958 2 (1) -
Proceeds from initial
public offering,
net of issuance
costs of $3,721..... 3,163 3 27,901 27,904
Proceeds from
exercise of stock
options............. 132 - 534 534
Proceeds from
exercise of warrants 7 - 55 55
Options granted to
employees and
directors........... 71 71
Net loss.............. (546) (546)
-----------------------------------------------------------------------------------------------------
Balance at June 30,
1998................ - $ - - $ - 9,166 $ 9 $50,530 $ - $ (6,525) $ 44,014
=====================================================================================================
See accompanying notes.
F-5
<PAGE>
<CAPTION>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
-----------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................... $ (546) $ (2,669) $ (2,245)
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock issued to investor as commission............................... - - 174
Stock issued to consultants for services............................. - - 46
Depreciation and amortization........................................ 650 334 181
Amortization of organization costs................................... 52 28 12
Stock compensation expense........................................... 71 83 192
Minority interests in operations of consolidated subsidiary.......... - (275) -
Changes in operating assets and liabilities:
Accounts receivable.............................................. (3,667) (12,351) (1,930)
Inventories, net................................................. 710 (916) 664
Prepaid expenses and other current assets........................ (328) (73) (224)
Other assets..................................................... 68 (1) (39)
Accounts payable................................................. (3,047) 13,322 338
Accrued payroll and related fringe benefits...................... 194 221 114
Accrued commissions and other accrued expenses................... (51) 339 207
-----------------------------------------------------------
Net cash used in operating activities.................................. (5,894) (1,958) (2,510)
-----------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments............................................... (785) (1,069) (238)
Purchases of fixed assets.............................................. (3,462) (6,765) (339)
Payment of organization costs.......................................... - (81) -
Restricted cash........................................................ (2,879) (306) (1,136)
-----------------------------------------------------------
Net cash used in investing activities.................................. (7,126) (8,221) (1,713)
-----------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from sales of common stock, net............................... 28,665 - 1,871
Proceeds from sales of preferred stock, net............................ - 12,046 2,485
Proceeds from exercise of warrants..................................... 55 563 -
Proceeds from exercise of stock options................................ 534 - -
Investment from minority stockholders.................................. - 275 -
Loan to stockholder.................................................... - - (150)
Repayment of loan to stockholder....................................... - 150 -
Repayment of loans payable to stockholder.............................. - (315) (21)
Payment of deferred offering costs..................................... - (761) -
Payments under capital leases.......................................... (56) (50) (34)
-----------------------------------------------------------
Net cash provided by financing activities.............................. 29,198 11,908 4,151
-----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents................... 16,178 1,729 (72)
Cash and cash equivalents at beginning of year......................... 5,164 3,435 3,507
-----------------------------------------------------------
Cash and cash equivalents at end of year............................... $ 21,342 $ 5,164 $ $3,435
===========================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................. $ 5 $ 51 $ 13
===========================================================
See accompanying notes.
</TABLE>
F-6
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Globecomm Systems Inc. (the "Company") was incorporated in the State
of Delaware on August 17, 1994. The Company designs, assembles and installs
satellite ground segment systems and networks which support a wide range of
satellite communications applications including fixed, mobile and direct
broadcast services as well as certain military applications.
On July 18, 1997, the Board of Directors authorized and, on August 5,
1997 the stockholders approved a 2.85-for-one stock split of the outstanding
shares of common stock, and amended and restated the Company's certificate of
incorporation increasing the number of authorized shares of common stock to
22,000,000 and preferred stock to 3,000,000, and changing the par value of its
common and preferred stock to $.001. All common stock, stock option and
warrant data has been restated to reflect the stock split.
The Company has incurred operating losses since its inception and had
an accumulated deficit at June 30, 1998 of $6,525,000. Such losses have
resulted principally from general and administrative and selling and marketing
expenses associated with the Company's operations. The Company expects that its
cash and working capital requirements will continue to increase in connection
with the Company's plans to continue to expand operations. Management believes
that its existing capital resources will be sufficient to meet its working
capital needs through June 30, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and its majority-owned subsidiary, NetSat Express, Inc. ("NetSat
Express"). All significant intercompany balances and transactions have been
eliminated in consolidation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the financial statements and accompanying notes. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company uses the percentage-of-completion method of accounting for
contract revenues, upon the achievement of certain milestones. Accordingly,
revenue from long-term, fixed-price contracts, are generally recorded based on
the relationship of total costs incurred to date to total projected final
costs. Contract costs generally include purchased material, direct labor,
overhead and other indirect costs. Anticipated contracted losses are recognized
as they become known.
Revenues from sales of products and services are generally recognized
when the product is shipped or the service is performed.
INVENTORIES
Inventories, which consist primarily of costs incurred in connection
with specific customer contracts, are stated at the lower of cost or market
value.
F-7
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid
instruments with a maturity of three months or less at the time of purchase.
FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation and
amortization. Depreciation of fixed assets is provided on a straight-line basis
over their estimated useful lives of three to twenty-five years. Certain leased
office equipment has been capitalized. These amounts are included in fixed
assets within the accompanying consolidated balance sheets and are being
amortized over the estimated useful lives of the equipment.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
INCOME TAXES
The financial statements have been prepared in conformity with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". This statement requires recognition of deferred income taxes under the
liability method.
BASIC AND DILUTED LOSS PER SHARE AND PRO FORMA BASIC AND DILUTED LOSS PER SHARE
During the year ended June 30, 1998, Financial Accounting Standards
Board's Statement of Financial Accounting Standard No. 128 ("Statement 128"),
"Earnings Per Share" became effective. Statement 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share.
Basic loss per share for the year ended June 30, 1998 is based on the
weighted average number of common shares outstanding during the period. Diluted
loss per share for the year ended June 30, 1998 excluded the effect of
approximately 891,000 stock options and approximately 23,000 warrants as the
effect of inclusion would have been anti-dilutive as the Company reported a net
loss for the year ended June 30, 1998.
Pro forma basic loss per share for the year ended June 30, 1997 is
based on the weighted average number of shares of common stock outstanding
including the conversion of the Class A and Class B Convertible Preferred Stock
into common stock, which occurred upon the consummation of the Company's
initial public offering. However, in accordance with Staff Accounting Bulletin
98 of the Securities and Exchange Commission, options to purchase common stock
for nominal consideration have been reflected in diluted loss per share for all
periods presented in a manner similar to a stock split, even if anti-dilutive.
Historical losses per share have not been presented because such amounts are
not deemed meaningful due to the significant change in the Company's capital
structure which occurred in connection with the initial public offering.
F-8
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities approximate their fair values
principally because of the short-term maturities of these instruments.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations
in accounting for its stock options because, as discussed below in Note 8, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based-Compensation"
("Statement 123"), requires the use of option valuation models that were not
developed for use in valuing employee and director stock options.
LONG-LIVED ASSETS
When impairment indicators are present, the Company reviews the
carrying value of its long-lived assets to determine the ultimate
recoverability of their unamortized values using future undiscounted cash flow
analyses.
SEGMENT DISCLOSURES
As of June 30, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 supersedes FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information (see Note 12).
3. INVENTORY
Inventory consists of the following:
JUNE 30, 1998 JUNE 30, 1997
------------------------------
(IN THOUSANDS)
Raw materials ........ $ 78 $ 51
Work-in-progress ..... 3,778 7,877
-----------------------
3,856 7,928
Less progress payments 2,273 5,635
-----------------------
$1,583 $2,293
=======================
F-9
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
4. FIXED ASSETS
Fixed assets consist of the following:
JUNE 30, 1998 JUNE 30, 1997
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Land.............................................................. $ 1,750 $ -
Building and improvements......................................... 5,261 -
Computer equipment................................................ 1,437 881
Machinery and equipment........................................... 1,409 398
Furniture and fixtures............................................ 933 144
Leasehold improvements............................................ 29 149
Equipment under capital leases.................................... 159 159
Construction in progress.......................................... 91 5,995
-----------------------------------------
11,069 7,726
Less accumulated depreciation and amortization.................... 1,106 575
-----------------------------------------
$ 9,963 $ 7,151
=========================================
<CAPTION>
5. INVESTMENTS
Investments consists of the following:
JUNE 30, 1998 JUNE 30, 1997
------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Shiron Satellite Communications (1996), Ltd.
("Shiron") (a)............................................... $ 285 $ 285
Euro Broadcasting Corporation
("Euro") (b)................................................. 440 240
Newpoint Technologies, Inc.
("Newpoint Technologies") (c)................................ 950 550
Armer Communications Engineering Services, Inc.
("Armer") (d)................................................ 200 200
Joint Communications Technology Corp.
("JCTC") (e) ................................................ 214 -
Other............................................................. 4 33
------------------------------------------
$ 2,093 $ 1,308
==========================================
</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 a total of a 30% interest of
Shiron in accordance with the terms of the purchase agreement. As of
June 30, 1998, the Company's interest in Shiron was diluted to 11.6%.
(b) During August 1996, the Company purchased 19% of the common stock of
Euro, a Delaware corporation, for $240,000 with a one year option to
purchase an additional 10% at a price ranging from $125,000 to $200,000
F-10
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
depending upon the exercise date. In August 1997, the Company exercised
its option to purchase an additional 10% for $200,000. As of June 30,
1998, the Company's interest in Euro was diluted to 22.9%. The
financial position and results of operations of Euro at June 30, 1998
were not material.
(c) On August 30, 1996, the Company purchased 5% of the common stock of
Newpoint Technologies (formerly C-Grams Unlimited Inc.), a New
Hampshire corporation, for approximately $400,000. In May 1997, the
Company purchased an additional 1.6% for $150,000. In August and
September 1997, the Company purchased additional common stock of
Newpoint Technologies for $400,000. As of June 30, 1998, the Company's
interest in Newpoint Technologies has been diluted to 10.3%. The
Company has an option to purchase an additional 9.7% at a price in
accordance with the terms of the agreement.
(d) On November 18, 1996, the Company purchased 15% of the common stock of
Armer, an Arizona corporation, for $150,000 and in March 1997
purchased an additional 2% for $50,000. The Company has an option to
purchase up to an additional 8% at a price of $25,000 for each
additional 1% through December 31, 1997.
(e) On January 13, 1998, the Company purchased 6.7% of the common stock of
JCTC, a New Jersey corporation, for approximately $214,000. The Company
has a two-year option to purchase an additional 6.7% for $200,000. In
addition, the Company has an additional option to purchase up to a
total of 20% interest in JCTC provided the Company has purchased the
first option. The price of the second option will be the then current
market price or the last price for which JCTC's common stock has been
sold.
The above investments have been accounted for at cost, except for Euro
which has been accounted for under the equity method, since the Company does
not have the ability to exercise significant influence over operating and
financial policies of the investees.
6. COMMON STOCK
SALES OF COMMON STOCK
In August 1997, the Company completed an initial public offering of
3,162,500 shares of common stock for an aggregate offering price of
$31,625,000. The Company incurred total expenses in the offering of
approximately $3,721,000 of which approximately $2,214,000 represented
underwriting discounts and commissions and approximately $1,507,000 represented
other related expenses. The net offering proceeds to the Company after
deducting the total expenses were approximately $27,904,000.
During November 1996, a minority shareholder in the Company's
subsidiary, NetSat Express, agreed to exchange its 19,000 shares (representing
approximately 2%) of NetSat Express for approximately 30,000 shares in the
Company. The shares in the Company were valued at $8.07 per share at the date
of the agreement. The transaction was completed during April 1997 and,
accordingly, the Company recorded goodwill of approximately $243,000.
During the year ended June 30, 1996, the Company sold approximately
210,000 shares of its common stock to various investors. Proceeds from the sale
of these shares totaled approximately $966,000, net of related expenses of
approximately $17,000.
F-11
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1995, the Company completed a private placement offering in
which the Company issued approximately 1,219,000 shares of common stock to
various investors. Proceeds from the issuance of these shares totaled
approximately $5,032,000, including approximately $861,000 of stock
subscriptions received in July 1995, and net of related expenses of
approximately $1,402,000. In satisfaction of these related expenses, the
Company paid approximately $670,000 in cash and issued approximately 156,000
shares of its common stock valued at approximately $732,000. Additionally, in
connection with this offering, the Company sold to one of its investors for
approximately $4,000, a five-year warrant to purchase approximately 107,000
shares of the Company's common stock at a price of $5.26 per share. The warrant
contains certain anti-dilution provisions as specified in the warrant
agreement. On January 24, 1997, the investor exercised the outstanding warrant.
STOCK ISSUED TO CONSULTANTS
During November 1996, the Company issued a ten-year warrant to five
consultants for future services to purchase an aggregate of approximately
64,000 shares of common stock at a price per share of $8.07, equal to the fair
market value of the shares at the date of issuance. During the year ended June
30, 1998, warrants to purchase 6,700 shares of common stock were exercised.
During the year ended June 30, 1996, the Company issued approximately
10,000 shares of its common stock to a consultant in payment for his efforts in
assisting in various Company matters. These shares were purchased by the
consultant at a price of $.04 per share. Consulting expense recorded as a
result of this transaction amounted to approximately $46,000, which represents
the difference between the fair market value of the shares at the date of
issuance and the purchase price.
ISSUANCE OF COMMON STOCK AS COMMISSION
On November 9, 1995, and in connection with the Company's sale of
approximately 200,000 shares of its common stock to an investor also during the
year ended June 30, 1996, the Company entered into a commitment to issue up to
5% of its share capital as follows: (i) 1% of the then outstanding share
capital of the Company upon receipt of sales orders from this stockholder
totaling $1,500,000 and (ii) an additional 1% of the then outstanding share
capital of the Company upon the receipt of each of four subsequent increments
of $3,000,000 in sales orders from this stockholder. This commitment expired in
May 1998.
In November 1995, the Company issued approximately 37,000 shares of
its common stock to this investor, or 1% of the then outstanding share capital.
This issuance resulted in approximately $174,000 of commission expense based on
the fair market value of the shares at the date of issuance, which was also the
date of the agreement. As of June 30, 1996, this entire amount was included in
prepaid expenses within the consolidated balance sheet as the related orders
were not recorded as revenue during the year ended June 30, 1996. Such amount
was included in selling and marketing expense in the accompanying consolidated
statement of operations during the year ended June 30, 1997, the period in
which the related revenue was recognized.
In addition, the investor was granted certain preemptive and other
rights regarding future issuances of securities of the Company including (i) a
preemptive right to purchase up to 15% of the total number of securities
offered in any public offering undertaken by the Company and (ii) the right to
participate in any private offering to the extent required to maintain its
percentage ownership in the Company as well as the right to nominate a director
to the Board of Directors. These rights survive for so long as the investor's
stock ownership does not fall below 5% of the outstanding share capital of the
Company as a result of the investor selling or otherwise disposing of a portion
of its shares.
F-12
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. CONVERTIBLE PREFERRED STOCK
In December 1996, the Company issued approximately 485,000 shares
(including approximately 53,000 shares issued as commission) of its Class B
convertible preferred stock ("Class B Convertible") at $28.00 per share to
investors. Proceeds from the sales of these shares totaled $10,965,000, net of
related cash expenses of $1,135,000. In March 1997, and in connection with
certain anti-dilution provisions related to a sale of common stock to an
investor during the year ended June 30, 1996, the Company issued approximately
29,000 shares of Class B Convertible at $28.00 per share.
On May 30, 1996, the Company issued approximately 156,000 shares of
its Class A convertible preferred stock ("Class A Convertible") at $16.00 per
share to investors. Proceeds from the sale of these shares totaled $2,485,000,
net of related expenses of $15,000. In addition, during August 1996, the
Company issued approximately 16,000 shares of Class A Convertible at $16.00 per
share to an investor.
The Class A Convertible and Class B Convertible outstanding at the
time of the Company's initial public offering in August 1997 was converted into
approximately 1,958,000 shares of common stock.
8. STOCK OPTION PLANS
In February 1995, the Company adopted a stock option plan (the
"Employee Stock Option Plan"), which provided that the Company may grant
employees options to acquire up to an aggregate of 285,000 shares of the
Company's common stock. During December 1996, the Company increased the number
of shares it may grant to 1,710,000. The options generally vest in equal
installments over a four-year period and expire on the tenth anniversary of the
date of grant.
In June 1995, the Company adopted a stock option plan (the "Director
Stock Option Plan"), which provides that the Company may grant outside
directors options to acquire up to an aggregate of 285,000 shares of the
Company's common stock. The options vest annually in equal installments over a
three-year period commencing on the date of grant. The options expire the
earlier of five years from the date of grant or three years from concluding
service as director of the Company.
On February 26, 1997, the Company's Board of Directors authorized, and
the stockholders subsequently approved, the 1997 Stock Incentive Plan ("1997
Plan"), which serves as a successor plan to the Employee Stock Option Plan and
Director Stock Option Plan. The 1997 Plan provides for an increase of 285,000
shares to previously existing stock option plans, among other matters.
F-13
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
EMPLOYEE PLAN
The following table summarizes activity in employee stock options (in
thousands except for per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
----------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER OPTION EXERCISE PRICE UNDER OPTION EXERCISE PRICE UNDER OPTION EXERCISE PRICE
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 1,546 $ 6.19 820 $ 4.46 209 $ 3.51
Grants.................... 206 $13.98 733 $ 8.15 730 $ 4.57
Exercised................. (75) $ 4.42 - $ - - $ -
Canceled.................. (10) $ 7.84 (7) $ 7.39 (119) $ 3.51
-------------- --------------- --------------
Balance, end of year...... 1,667 $ 7.22 1,546 $ 6.19 820 $ 4.46
============== =============== ==============
Weighted-average fair
value of options
granted during the year $ 7.96 $ 3.56 $ 2.26
</TABLE>
As a result of stock options granted during the years ended June 30,
1997, 1996 and 1995, the Company recorded compensation expense of approximately
$56,000, $43,000 and $99,000 during the years ended June 30, 1998, 1997 and
1996, respectively, based on the difference between the fair market value of
the shares and the option exercise prices at the dates of grant. As of June 30,
1998, remaining compensation expense to be recorded through the year ended June
30, 2001 was approximately $309,000. As of June 30, 1998, approximately 567,000
employee stock options were exercisable.
DIRECTOR PLAN
Pursuant to the Director Stock Option Plan, in June 1995, the Company
granted certain outside directors options to purchase approximately 128,000
shares of the Company's common stock at $3.51 per share. As a result of these
grants, the Company recorded compensation expense during the years ended June
30, 1998, 1997 and 1996, of $15,000, $40,000 and $93,000, respectively, based
on the fair market value of the shares at the date of grant. As of June 30,
1998, there was no additional compensation expense to be recorded relating to
these grants. During January 1997, an additional outside director was granted
approximately 43,000 options at $8.07 per share, the estimated fair value of
such shares on the date of grant. During November 1997, an additional outside
director was granted 15,000 options at $15.75 per share, the fair value of such
shares on the date of grant. As of June 30, 1998, approximately 86,000 options
were exercisable and 57,000 were exercised during the year ended June 30, 1998.
STATEMENT 123
Pro forma information regarding net loss and net loss per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its stock options granted
subsequent to July 1, 1995 under the fair value method of that Statement. The
fair value for these options was estimated using a Black-Scholes option pricing
model with the following weighted-average assumptions for the years ended
F-14
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 1998, 1997 and 1996: risk-free interest rate of 6.5%, volatility factor
of the expected market price of the Company's common stock of .51 (1998) and .40
(1997 and 1996), a weighted-average expected life of the option of six years and
no dividend yields.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
YEAR ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------
Pro forma net loss (in thousands)....... $ (1,868) $ (3,433)
Pro forma net loss per share............ $ (0.22) $ (0.56)
The following tables summarize information about employee and director stock
options outstanding at June 30, 1998 (option amounts in thousands):
WEIGHTED-
AVERAGE
RANGE OF REMAINING
EXERCISE OPTIONS OPTIONS CONTRACTUAL
PRICES OUTSTANDING EXERCISABLE LIFE (YEARS)
- -------------------------------------------------------------------------
$3.51 - $4.68 879 477 7.3
$7.02 - $10.50 695 171 8.5
$11.38 - $15.75 204 5 9.3
$17.13 - $18.38 18 0 9.3
=========================================================================
$3.51 - $18.38 1,796 653 8.0
=========================================================================
The Company has reserved approximately 2,205,000 shares of common
stock for issuance upon exercise of all outstanding options and warrants at
June 30, 1998.
9. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE FROM STOCKHOLDER
On December 8, 1995, the Company loaned $150,000 to an employee, who
is also a stockholder of the Company. Interest was receivable at an annual rate
of 5%. The note was due on June 30, 1996 and was extended until June 30, 1997.
On June 13, 1997, the full amount of principal plus accrued interest in the
aggregate amount of approximately $153,000 was repaid.
F-15
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE AND LOAN PAYABLE TO STOCKHOLDER
On October 28, 1994, the Company received $315,000 in exchange for a
note payable to the Company's chief executive officer, who is also a
stockholder of the Company. Interest is payable at an annual rate of 6%.
Principal and any unpaid interest are payable in full upon demand at any time
on or after October 28, 1995. Interest expense related to this note was
approximately $9,000 and $19,000, during the years ended June 30, 1997 and
1996, respectively. The note payable and accrued interest was paid on January
14, 1997.
During the period ended June 30, 1995, the Company also received
non-interest bearing working capital loan advances of approximately $81,000
from the Company's chief executive officer, of which $60,000 was repaid during
the period ended June 30, 1995 and approximately $21,000 was repaid during the
year ended June 30, 1996.
10. PENSION PLAN
The Company maintains a 401(k) plan which covers substantially all
employees of the Company. Participants may elect to contribute from 1% to 20%
of their pre-tax compensation. Participant contributions up to 4% of pre-tax
compensation were fully matched by the Company during the years ended June 30,
1998, 1997 and 1996. The plan also provides for discretionary contributions by
the Company. The Company contributed approximately $242,000, $117,000 and
$42,000 to the plan during the years ended June 30, 1998, 1997 and 1996,
respectively. There were no discretionary contributions made by the Company
during the years ended June 30, 1998, 1997 and 1996.
11. INCOME TAXES
As a result of losses incurred from inception, the Company has
available net operating loss carryforwards ("NOL's") of approximately $8.2
million ($5.1 million and $3.1 million for Globecomm Systems Inc. and NetSat
Express, respectively) for income tax purposes which expire through 2013.
However, as a result of significant ownership changes and separate company
limitations it is anticipated that an annual limitation will be applied to the
Company's utilization of the NOL's.
As the Company has had cumulative losses and there is no assurance of
future taxable income, a valuation allowance has been established to offset
deferred tax assets. The components of the Company's net deferred tax assets
are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
(IN THOUSANDS)
-----------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Projects in progress............................................... $ 157 $ -
Depreciation and amortization...................................... 153 16
-----------------------------------------
Total deferred tax liabilities....................................... 310 16
Deferred tax assets:
Net operating loss carryforwards................................... 3,294 2,045
Projects in progress............................................... - 307
Accruals........................................................... 116 73
-----------------------------------------
Total deferred tax assets........................................... 3,410 2,425
Valuation allowance for deferred tax assets.......................... 3,100 (2,409)
-----------------------------------------
Net deferred tax assets.............................................. 310 16
-----------------------------------------
Net deferred taxes................................................... $ - $ -
=========================================
</TABLE>
F-16
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
At June 30, 1996, the Company had a valuation allowance for deferred
tax assets of $1,230,000. In addition, approximately $455,000 of the valuation
allowance, if recognized, will be allocated directly to stockholders' equity
relating to non-qualified dispositions of stock option exercises.
12. SEGMENT INFORMATION
The Company operates through two business segments. Its Ground Segment
Systems and Networks Segment, through Globecomm Systems Inc., is engaged in the
design, assembly and installation of ground segment systems and network
solutions for the complex and changing communications requirements of its
customers. The Company's ground segment systems typically consist of an earth
station and ancillary subsystems such as microwave links for back-haul of
traffic to a central office or generators for emergency power restoral. An
earth station is an integrated system consisting of antennas, transmitting and
receiving equipment, modulation/demodulation equipment, monitor and control
systems and voice, data and video network interface equipment. Its Data
Communications Services Segment, through the NetSat Express subsidiary, is
engaged in providing high-speed, satellite-delivered data communications to
developing markets worldwide. NetSat Express is currently providing Internet
access to customers who have limited or no access to terrestrial network
infrastructure capable of supporting the economical delivery of such services.
The Company's reportable segments are business units that offer
different products and services. The reportable segments are each managed
separately because they provide distinct products and services.
The following is business segment information as of and for the years
ended June 30, 1998 and 1997, as NetSat Express commenced operations during
July 1996:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1998 1997
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Ground Segment Systems and Networks........................$ 57,419 $ 36,169
Data Communications Services............................... 686 51
------------------------------------
Total revenues...............................................$ 58,105 $ 36,220
====================================
Loss from operations:
Ground Segment Systems and Networks........................$ (157) $ (1,766)
Data Communications Services............................... (1,655) (1,454)
Interest income, net......................................... 1,266 276
Minority interests in operations of consolidated
subsidiary................................................ - 275
------------------------------------
Net Loss.....................................................$ (546) $ (2,669)
====================================
</TABLE>
F-17
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. SEGMENT INFORMATION (CONTINUED)
JUNE 30, 1998 JUNE 30, 1997
-------------------------------------
(IN THOUSANDS)
Assets:
Ground Segment Systems and Networks.. $ 60,894 $ 34,201
Data Communications Services......... 1,169 125
Intercompany eliminations............ (3,719) (1,040)
-------------------------------------
Total assets........................... $ 58,344 $ 33,286
=====================================
Depreciation and amortization:
Ground Segment Systems and Networks.. $ 592 $ 326
Data Communications Services......... 58 8
-------------------------------------
Total depreciation and amortization.... $ 650 $ 334
=====================================
Expenditures for long-lived assets:
Ground Segment Systems and Networks.. $ 2,878 $ 6,686
Data Communications Services......... 584 79
-------------------------------------
Total expenditures for long-lived
assets............................... $ 3,462 $ 6,765
=====================================
13. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
The Company designs, assembles and installs satellite ground segment
systems and networks for customers in diversified geographic locations. The
Company performs ongoing credit evaluations of its customers' financial
condition and in most cases requires a letter of credit or cash in advance for
foreign customers. Historically, the Company has not incurred significant
losses from trade receivables.
Sales to one major customer accounted for approximately 29% and two
major customers accounted for approximately 42% (29% and 13%) and 61% (43% and
18%) of the Company's net revenues for the years ended June 30, 1998, 1997 and
1996, respectively.
Revenues from foreign sales accounted for 69% (33% Africa, 17% Asia,
9% Middle East, 9% Europe and 1% South America), 40% (28% Asia, 11% Europe and
1% Africa) and 22% (13% Europe, 5% Africa and 4% Asia) of total revenues for
the years ended June 30, 1998, 1997 and 1996, respectively.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and trade
receivables. The Company places its cash and cash equivalents with high quality
financial institutions. Substantially all cash and cash equivalents are held in
two financial institutions at June 30, 1998. Cash equivalents are comprised of
short-term debt instruments, certificates of deposit or direct or guaranteed
obligations of the United States, which are held to maturity and approximate
cost. At times, cash may be in excess of FDIC insurance limits.
14. FINANCIAL INSTRUMENTS
The Company has entered into a foreign currency forward contract
designed to minimize the exposure to exchange rate fluctuations on a purchase
commitment denominated in Swedish Krona. At June 30, 1998, this contract, which
matures on December 18, 1998, was for the purchase of Swedish Krona for a
F-18
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
total of approximately $3.2 million. Gains or losses which relate to such
contracts are recognized upon payment of the purchase commitment as an
adjustment to the carrying value of the related inventory.
15. COMMITMENTS
LINE OF CREDIT
The Company has a $7.5 million credit facility consisting of (1) a
$5.0 million secured domestic line of credit and (2) a $2.5 million secured
export-import guaranteed line of credit. Each line of credit bears interest at
the prime rate plus 1/2% per annum and is collateralized by a first security
interest on all assets. Such line of credit expires in October 1998.
LETTERS OF CREDIT
The Company utilizes standby letters of credit to secure certain bid
proposals and performance guarantees in the normal course of business. The
Company provides cash collateral for a majority of these letters of credit. As
of June 30, 1998 and 1997, cash collateral related to bid proposals amounted to
approximately $588,000 and $1,257,000, respectively, and cash collateral
related to performance guarantees amounted to approximately $3,828,000, and
$280,000, respectively. These amounts are included in restricted cash in the
accompanying consolidated balance sheets.
LEASE COMMITMENTS
Future minimum payments under non-cancelable leases for office space
and equipment with terms of one year or more, consist of the following at June
30, 1998 (in thousands):
CAPITAL OPERATING
LEASES LEASES
--------------------------------
Year ending June 30, 1999...................... $ 19 $ 107
Year ending June 30, 2000...................... - 6
Year ending June 30, 2001...................... - 1
--------------------------------
Total minimum lease payments................... 19 $ 114
================
Less amounts representing interest............. 1
--------------
Present value of net minimum lease payments.... $ 18
==============
EMPLOYMENT AGREEMENTS
During January 1997, the Company entered into three-year employment
agreements with two of its officers for an aggregate amount of $325,000 per
year. The Company will have certain obligations to the two officers if they are
terminated for disability, cause or following a change in control.
16. SUBSEQUENT EVENTS (UNAUDITED)
On August 20, 1998, the Company purchased 18.75% of the future
profits, losses and equity (subject to certain liquidation and income
preference) of McKibben Communications, LLC, a California limited liability
corporation, for $1.5 million. The Company has a two-year option to purchase up
to an additional 11.25% for $1.5 million.
F-19
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On September 1, 1998, the Company's Board of Directors authorized the
repurchase of up to $2.0 million of the Company's outstanding common stock. The
repurchase program allows for purchases to be made intermittently, through open
market and privately negotiated transactions. Timing, price, quantity and the
manner of purchase will be at the discretion of the Company's management
subject to compliance with the applicable securities laws. Any repurchased
shares under the repurchase program will be used for general corporate
purposes.
F-20
<PAGE>
INDEX TO EXHIBITS:
- ------------------
Exhibit No.
- -----------
3.1 Amended and Restated Certificate of Incorporation (filed herewith)
3.3 Amended and Restated By-Laws of the Registrant (filed herewith)
4.2 See Exhibits 3.1 and 3.3 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated By-Laws of the
Registrant defining rights of holders of Common Stock of the
Registrant. (incorporated by reference to Exhibit 4.2 of the
Registrant's Registration Statement on Form S-1, File No. 333-22425
(the "Registration Statement"))
10.1 Form of Registration Rights Agreement dated as of February 1997
(incorporated by reference to exhibit 10.1 of the Registration
Statement).
10.2 Form of Registration Rights Agreement dated May 30, 1996 (incorporated
by reference to exhibit 10.2 of the Registration Statement).
10.3 Form of Registration Rights Agreement dated December 31, 1996, as
amended (incorporated by reference to exhibit 10.3 of the Registration
Statement).
10.4 Letter Agreement for purchase and sale of 199,500 shares of Common
Stock dated November 9, 1995 between the Registrant and Thomson-CSF
(incorporated by reference to exhibit 10.4 of the Registration
Statement).
10.5 Investment Agreement dated February 12, 1996 by and between Shiron
Satellite Communications (1996) Ltd. and the Registrant (incorporated
by reference to exhibit 10.5 of the Registration Statement).
10.6* Stock Purchase Agreement dated as of August 30, 1996 by and between
C-Grams Unlimited Inc. and the Registrant (incorporated by reference
to exhibit 10.6 of the Registration Statement).
10.7 Memorandum of Understanding dated December 18, 1996 by and between
NetSat Express, Inc. and Applied Theory Communications, Inc.
(incorporated by reference to exhibit 10.7 of the Registration
Statement).
10.8 Stock Purchase Agreement dated as of August 23, 1996 by and between
NetSat Express, Inc. and Hughes Network Systems, Inc. (incorporated by
reference to exhibit 10.8 of the Registration Statement).
10.9 Employment Agreement dated as of January 27, 1997 between the
Registrant and David E. Hershberg (incorporated by reference to
exhibit 10.9 of the Registration Statement).
10.10 Employment Agreement dated as of January 27, 1997 between the
Registrant and Kenneth A. Miller (incorporated by reference to exhibit
10.10 of the Registration Statement).
10.11 Purchase and Sale Agreement, 45 Oser Avenue, Hauppauge, New York,
dated December 12, 1996 by and between Eaton Corporation and the
Registrant (incorporated by reference to exhibit 10.13 of the
Registration Statement).
10.12 1997 Stock Incentive Plan (incorporated by reference to exhibit 10.14
of the Registration Statement).
10.13 Investment Agreement dated August 21, 1998 by and between McKibben
Communications LLC and the Registrant (filed herewith).
16.2 Letter from PricewaterhouseCoopers LLP (incorporated by reference to
exhibit 16.1 of the Registration Statement).
21.1 Subsidiary of the Registrant (filed herewith).
23.1 Consent of Ernst & Young LLP (filed herewith).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
<PAGE>
27 Financial Data Schedule (filed herewith).
* Confidential treatment granted for portions of this agreement.
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
GLOBECOMM SYSTEMS INC.
(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)
Globecomm Systems Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "General
Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the name of this corporation is Globecomm Systems
Inc., and that this corporation was originally incorporated in Delaware under
the name Worldcomm Systems Inc., on August 17, 1994, pursuant to the General
Corporation Law.
SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Certificate of Incorporation of this
corporation, declaring said amendment and restatement to be advisable and in
the best interests of this corporation and its stockholders, and authorizing
the appropriate officers of this corporation to solicit the consent of the
stockholders therefore, which resolution setting forth the proposed amendment
and restatement is as follows:
"RESOLVED, that the Certificate of Incorporation of this
corporation be amended and restated in its entirety as follows:
ARTICLE I.
The name of this corporation is Globecomm Systems Inc.
ARTICLE II.
The address of the registered office of this corporation in
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
<PAGE>
ARTICLE III.
The purpose of this corporation is to engage in any lawful
act or activity for which a corporation may be organized under the General
Corporation Law.
ARTICLE IV.
A. This corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares which this corporation is authorized to issue is
25,000,000 shares. 22,000,000 shares, par value $.001 per share, shall be
Common Stock and 3,000,000 shares, par value $.001 per share, shall be
Preferred Stock.
B. The number of authorized shares of Common Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the stock
of this corporation entitled to vote, irrespective of the provisions of Section
242(b)(2) of the General Corporation Law of Delaware.
ARTICLE V.
A. Common Stock.
(a) General. All shares of Common Stock will be
identical and will entitle the holders thereof to the same rights, powers and
privileges. The rights, powers and privileges of the holders of the Common
Stock are subject to and qualified by the rights of holders of the Preferred
Stock.
(b) Dividends. Dividends may be declared and
paid on the Common Stock from funds lawfully available therefor as and when
determined by the Board of Directors and subject to any preferential dividend
rights of any then outstanding Preferred Stock.
(c) Dissolution, Liquidation or Winding Up. In
the event of any dissolution, liquidation or winding up of the affairs of this
corporation, whether voluntary or involuntary, each issued and outstanding
share of Common Stock shall entitle the holder thereof to receive an equal
portion of the net assets of this corporation available for distribution to the
holders of Common Stock, subject to any preferential rights of any then
outstanding Preferred Stock.
(d) Voting Rights. Except as otherwise required
by law or this Amended and Restated Certificate of Incorporation, each holder
of Common Stock shall have one vote in respect of each share of stock held of
record by such holder on the books of this corporation for the election of
directors and on all matters submitted to a vote of stockholders of this
corporation. Except as otherwise required by law or provided herein, holders of
Common
-2-
<PAGE>
Stock shall vote together with holders of Common Stock as a single class,
subject to any special or preferential voting rights of any then outstanding
Preferred Stock. There shall be no cumulative voting.
(e) Redemption. The Common Stock is not redeemable.
(f) Stock Split. Upon the effectiveness of this
Amended and Restated Certificate of Incorporation, each outstanding share of
Common Stock, par value $.01 per share, shall be changed into 2.85 shares of
Common Stock, par value $.001. Each holder of record of a certificate for one
or more shares of Common Stock of the corporation as of the close of business
on the date this Amended and Restated Certificate of Incorporation becomes
effective shall be entitled to receive as soon as practicable, and without
surrender of such certificate, a certificate or certificates representing 1.85
additional shares of Common Stock, par value $.001, for each one share of
Common Stock represented by the certificate of such holder.
B. Preferred Stock. The Board of Directors is authorized,
subject to limitations prescribed by law and the provisions of ARTICLE IV, to
provide for the issuance of the shares of Preferred Stock in series, and by
filing a certificate pursuant to the applicable law of the State of Delaware,
to establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences, and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof.
The authority of the Board with respect to each series shall
include, but not be limited to, determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series;
(b) The dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;
(c) Whether that series shall have voting rights, in addition
to the voting rights provided by law, and, if so, the terms of such voting
rights;
(d) Whether that series shall have conversion privileges,
and, if so, the terms and conditions of such conversion, including provision
for adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) Whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
-3-
<PAGE>
(f) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund;
(g) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of this
corporation, and the relative rights or priority, if any, of payment of shares
of that series; and
(h) Any other relative rights, preferences and limitations of
that series.
Dividends on outstanding shares of Preferred Stock shall be
paid or declared and set apart for payment before any dividends shall be paid
or declared and set apart for payment on the Common Stock with respect to the
same dividend period.
If upon any voluntary or involuntary liquidation, dissolution
or winding up of this corporation, the assets available for distribution to
holders of shares of Preferred Stock of all series shall be insufficient to pay
such holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
C. This Amended and Restated Certificate of Incorporation is
being filed in connection with this corporation's initial public offering of
its securities. Upon the closing of such initial public offering, each share of
Class A Preferred Stock, and each share of Class B Preferred Stock, previously
outstanding, will be automatically converted, pursuant to the terms of the
respective Certificates of Designation with respect to such classes, into 2.85
shares of Common Stock, par value $.001. Following such conversion, each
certificate evidencing shares of either of such classes shall be deemed to
evidence the same number of shares of Common Stock, par value $.001, and each
holder of record of a certificate for one or more shares of such class shall be
entitled to receive as soon as practicable, and without surrender of such
certificate, a certificate or certificates representing 1.85 additional shares
of Common Stock, par value $.001 for each one share of Preferred Stock of such
class representative by the certificate of such holder.
ARTICLE VI.
In furtherance of and not in limitation of powers conferred
by statute, it is further provided:
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt,
amend or repeal the Bylaws of this corporation.
-4-
<PAGE>
ARTICLE VII.
Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
ARTICLE VIII.
A director of this corporation shall not be personally liable
to this corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to this corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the General Corporation Law is amended after approval by
the stockholders of this Article to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of this corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of this corporation shall not adversely affect any right or
protection of a director of this corporation existing at the time of such
repeal or modification.
-5-
<PAGE>
ARTICLE IX.
This corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware, as amended from time to
time, indemnify each person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was, or has agreed to become, a director or officer of this
corporation, or is or was serving, or has agreed to serve, at the request of
this corporation, as a director, officer or trustee of, or in a similar
capacity with, another corporation, partnership, joint venture, trust or other
enterprise (including any employee benefit plan), or by reason of any action
alleged to have been taken or omitted in such capacity, against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with
such action, suit or proceeding and any appeal therefrom.
Indemnification may include payment by this corporation of
expenses in defending an action or proceeding in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by the
person indemnified to repay such payment if it is ultimately determined that
such person is not entitled to indemnification under this Article, which
undertaking may be accepted without reference to the financial ability of such
person to make such repayment.
This corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person unless the initiation thereof was approved by the Board of
Directors of this corporation.
The indemnification rights provided in this Article (i) shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any law, agreement or vote of stockholders or disinterested
directors or otherwise, and (ii) shall inure to the benefit of the heirs,
executors and administrators of such persons. This corporation may, to the
extent authorized from time to time by its Board of Directors, grant
indemnification rights to other employees or agents of this corporation or
other persons serving this corporation and such rights may be equivalent to, or
greater or less than, those set forth in this Article.
ARTICLE X.
This corporation reserves the right to amend, alter, change
or repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Amended and Restated Certificate of Incorporation, and all rights conferred
upon stockholders herein are granted subject to this reservation.
-6-
<PAGE>
ARTICLE XI.
The number of directors of this corporation shall be fixed
from time to time by a bylaw or amendment thereof duly adopted by the Board of
Directors or by the stockholders.
ARTICLE XII.
Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws of this corporation may provide. The books of
this corporation may be kept (subject to any provision contained in the
statutes) outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or in the Bylaws of this
corporation.
The Stockholders of this corporation may not take any action
by written consent in lieu of a meeting."
* * *
THIRD: The foregoing amendment was approved by the holders of
the requisite number of shares of said corporation in accordance with Section
228 of the General Corporation Law.
FOURTH: That said amendments were duly adopted in accordance
with the provisions of Section 242 and 245 of the General Corporation Law.
-7-
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed by the Chief Financial Officer of this
corporation this 5th day of August, 1997.
/s/ Andrew C. Melfi
--------------------------
Andrew C. Melfi
Chief Financial Officer
-8-
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED BY-LAWS
OF
GLOBECOMM SYSTEMS INC.
Article 1.
OFFICES
Section 1.01 The registered office shall be in the city of Wilmington,
County of New Castle, State of Delaware.
Section 1.02 The corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may
from time to time determine or the business of the corporation may require.
Article 2.
MEETINGS OF STOCKHOLDERS
Section 2.01 All meetings of the stockholders for the election of
directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State
of Delaware as shall be designated from time to time by the Board of Directors
and stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2.02 Annual meetings of stockholders shall be held at such date
and time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting, at which they shall elect by a plurality
vote a Board of Directors, and transact such other business as may properly be
brought before the meeting.
Section 2.03 Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 2.04 The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to
<PAGE>
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
Section 2.05 Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the Chairman of the Board or the Chief
Executive Officer and shall be called by the Chairman of the Board, the Chief
Executive Officer or Secretary at the request in writing of a majority of the
Board of Directors.
Section 2.06 Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 2.07 Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 2.08 The holders of fifty percent (50%) of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented. At such
adjourned meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty (30) days, or
if after the adjournment a new record date is fixed for the adjourned meeting,
a notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 2.09 When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or
of the certificate of incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of such
question.
Section 2.10 Unless otherwise provided in the certificate of incorporation
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no proxy shall be voted on after three (3)
years from its date, unless the proxy provides for a longer period.
Section 2.11 [Section Heading]
(a) Annual Meetings of Stockholders
(i) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by
the stockholders may be
<PAGE>
made at an annual meeting of stockholders (a) pursuant to the
corporation's notice of meeting, (b) by or at the direction
of the Board of Directors or (c) by any stockholder of the
corporation who was a stockholder of record at the time of
giving of notice provided for in this Section 11, who is
entitled to vote at the meeting and who complies with the
notice procedures set forth in this Section 11.
(ii) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause
(c) of paragraph (A)(1) of this Section 11, the stockholder
must have given timely notice thereof in writing to the
Secretary of the corporation and such other business must
otherwise be a proper matter for stockholder action. To be
timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the
corporation not later than the close of business on the one
hundred twentieth (120th) day nor earlier than the close of
business on the one hundred fiftieth (150th) day prior to the
first anniversary of the date of the proxy statement
delivered to stockholders in connection with the preceding
year's annual meeting; provided, however, that if either (i)
the date of the annual meeting is more than thirty (30) days
before or more than sixty (60) days after such an anniversary
date or (ii) no proxy statement was delivered to stockholders
in connection with the preceding year's annual meeting,
notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the ninetieth
(90th) day prior to such annual meeting and not later than
the close of business on the later of the sixtieth (60th) day
prior to such annual meeting or the close of business on the
tenth (10th) day following the day on which public
announcement of the date of such meeting is first made by the
corporation. Such stockholder's notice shall set forth (a) as
to each person whom the stockholder proposes to nominate for
election or reelection as a director, all information
relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person' written consent to
being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if
any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made (i)
the name and address of such stockholder, as they appear on
the corporation's books, and of such beneficial owner and
(ii) the class and number of shares of capital stock of the
corporation that are owned beneficially and held of record by
such stockholder and such beneficial owner.
<PAGE>
(iii) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Section 11 to the contrary, in the
event that the number of directors to be elected to the Board
of Directors of the corporation is increased and there is no
public announcement by the corporation naming all of the
nominees for director or specifying the size of the increased
Board of Directors at least seventy (70) days prior to the
first anniversary of the preceding year's annual meeting (or,
if the annual meeting is held more than thirty (30) days
before or seventy (70) days after such anniversary date, at
least sixty (60) days prior to such annual meeting), a
stockholder's notice required by this Section 11 shall also
be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive office
of the corporation not later than the close of business on
the tenth (10th) day following the day on which such public
announcement is first made by the corporation.
(b) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the corporation's notice of
meeting. Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the corporation's notice of
meeting (a) by or at the direction of the Board of Directors or (b)
provided that the Board of Directors has determined that directors
shall be elected at such meeting, by any stockholder of the
corporation who is a stockholder of record at the time of giving of
notice of the special meeting, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in
this Section 11. If the corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to
the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be), for election to such position(s)
as specified in the corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this Section
11 shall be delivered to the Secretary at the principal executive
offices of the corporation not earlier than the ninetieth (90th)
day prior to such special meeting not later than the later of (x)
the close of business of the sixtieth (60th) day prior to such
special meeting or (y) the close of business of the tenth (10th)
day following the day on which public announcement is first made of
the date of such special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting.
(c) General.
(i) Only such persons who are nominated in accordance with
the procedures set forth in this Section 11 shall be eligible
to serve as directors and only such business shall be
conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures
set forth in this Section 11. Except as otherwise provided by
law, the Certificate of Incorporation or these By-Laws, the
chairman of the meeting shall have the power and duty to
determine whether a nomination
<PAGE>
or any business proposed to be brought before the meeting was
made or proposed, as the case may be, in accordance with the
procedures set forth in this Section 11 and, if any proposed
nomination or business is not in compliance herewith, to
declare that such defective proposal or nomination shall be
disregarded.
(ii) For purposes of this Section 11, "public announcement"
shall mean disclosure in a press release reported by the Dow
Jones News Service, Associated Press or comparable national
news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 and 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this
Section 11, a stockholder shall also comply with all
applicable requirements of the Exchange Act and the rules and
regulations thereunder with respect to the matters set forth
herein. Nothing in this Section 11 shall be deemed to affect
any rights (i) of stockholders to request inclusion of
proposals in the corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act or (ii) of the holders of
any series of Preferred Stock to elect directors under
specified circumstances.
Notwithstanding any other provision of law, the Certificate of
Incorporation or these By-Laws, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the votes which all the stockholders would
be entitled to cast at any annual election of directors or class of directors
shall be required to amend or repeal, or to adopt any provision inconsistent
with, this Section 11.
Article 3.
DIRECTORS
Section 3.01 The number of directors which shall constitute the whole
Board shall be determined by resolution of the Board of Directors or by the
stockholders at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold office until
said director's successor is elected and qualified. Directors need not be
stockholders.
Section 3.02 Vacancies and new created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of
<PAGE>
the shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in office.
Section 3.03 The business of the corporation shall be managed by or under
the direction of its Board of Directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these by-laws directed or required to
be exercised or done by the stockholders.
Section 3.04 The Board of Directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 3.05 The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly
elected Board of Directors, or in the event such meeting is not held at the
time and place so fixed by the stockholders, the meeting may be held at such
time and place as shall be specified in a notice given as hereinafter provided
for special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 3.06 Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the Board.
Section 3.07 Special meetings of the Board may be called by the Chairman
of the Board or the Chief Executive Officer on two (2) days' notice to each
director by mail or forty-eight (48) hours notice to each director either
personally or by facsimile or electronic mail; special meetings shall be called
by the Chairman of the Board, the Chief Executive Officer or the Secretary in
like manner and on like notice on the written request of two directors unless
the Board consists of only one director, in which case special meetings shall
be called by the Chairman of the Board, the Chief Executive Officer or the
Secretary in like manner and on like notice on the written request of the sole
director.
Section 3.08 At all meetings of the Board a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 3.09 Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
<PAGE>
Section 3.10 Unless otherwise restricted by the certificate of
incorporation or these by-laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 3.11 Committees of Directors. The Board of Directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not the member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting
an agreement of merger or consolidation, recommending to the stockholders the
sale, lease or exchange of all or substantially all of the corporation's
property and assets, recommending to the stockholders a dissolution of the
corporation or a revocation of a dissolution, or amending the by-laws of the
corporation; and, unless the resolution or the certificate of incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the Board of Directors.
Section 3.12 Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
Section 3.13 Compensation of Directors. Unless otherwise restricted by the
certificate of incorporation or these by-laws, the Board of Directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director or receive shares of stock or
options to purchase shares of stock in lieu of cash payments. No such payment
shall preclude any director from serving the corporation in any other capacity
and receiving compensation therefor. Members of special or standing committees
may be allowed like compensation for attending committee meetings.
<PAGE>
Section 3.14 Removal of Directors. Unless otherwise restricted by the
certificate of incorporation or bylaws, any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority
of shares entitled to vote at an election of directors.
Article 4.
NOTICES
Section 4.01 Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be
given to any director or stockholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed to
such director or stockholder, at such director's or stockholder's address as it
appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given by
facsimile or electronic mail.
Section 4.02 Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be
deemed equivalent thereto.
Article 5.
OFFICERS
Section 5.01 The officers of the corporation shall be chosen by the Board
of Directors and shall be a chairman of the Board, chief executive officer,
president, chief financial officer, treasurer and a secretary. The Board of
Directors may elect from among its members a chairman of the Board and a vice
chairman of the Board. The Board of Directors may also choose one or more
senior vice-president, vice-presidents, assistant secretaries and assistant
treasurers. Any number of offices may be held by the same person, unless the
certificate of incorporation or these by-laws otherwise provide.
Section 5.02 The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose a president, a treasurer, and a secretary
and may choose vice presidents.
Section 5.03 The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 5.04 The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
Section 5.05 The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed
<PAGE>
at any time by the affirmative vote of a majority of the Board of Directors.
Any vacancy occurring in any office of the corporation shall be filled by the
Board of Directors.
Section 5.06 The Chairman of the Board. The Chairman of the Board, if any,
shall preside at all meetings of the Board of Directors and of the stockholders
at which the Chairman shall be present. The Chairman shall have and may
exercise such powers as are, from time to time, assigned to the Chairman by the
Board and as may be provided by law.
Section 5.07 In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which the Vice Chairman shall be present.
The Vice Chairman shall have and may exercise such powers as are, from time to
time, assigned to the Vice Chairman by the Board and as may be provided by law.
Section 5.08 The Chief Executive Officer. The Chief Executive Officer
shall be the chief executive officer of the Corporation and shall have general
supervision over the business of the Corporaiton. The Chief Executive Officer
shall have all powers and duties usually incident to the office of Chief
Executive Officer. The Chief Executive Officer shall have such other powers and
perform such other duties as may be assigned to the Chief Executive Officer
from time to time by the Board of Directors.
Section 5.09 The President and Vice-President. The President shall be the
Chief Operating Officer of the corporation; and in the absence of the Chairman
and Vice Chairman of the Board the President shall preside at all meetings of
the stockholders and the Board of Directors; the President shall have general
and active management of the business of the corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect.
Section 5.10 The President shall execute bonds, mortgages and other
contracts, requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the corporation.
Section 5.11 In the absence of the President or in the event of the
President's inability or refusal to act, a senior vice-president, if any, (or
in the event there be more than one senior vice-president, the senior
vice-presidents in the order designated by the directors, or in the absence of
any designation, then in the order of their election) shall perform the duties
of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. The Senior Vice-President
and the Vice-Presidents shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
Section 5.12 The Secretary and Assistant Secretary. The Secretary shall
attend all meetings of the Board of Directors and all meetings of the
stockholders and record all the proceedings of the meetings of the corporation
and of the Board of Directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders
and special meetings of the Board of Directors, and shall perform such other
duties as may be prescribed by
<PAGE>
the Board of Directors, the President or the Chairman of the Board, under whose
supervision the secretary shall be. The Secretary shall have custody of the
corporate seal of the corporation and the Secretary, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by the signature of the secretary or by the
signature of such assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the corporation and to
attest the affixing by said officer's signature.
Section 5.13 The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the Secretary or in the event of the Secretary's inability or
refusal to act, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
Section 5.14 The Treasurer and Assistant Treasurers. The Treasurer shall
have the custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board of Directors.
Section 5.15 The Treasurer shall disburse the funds of the corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all the Treasurer's transactions as treasurer and of the financial condition of
the corporation.
Section 5.16 If required by the Board of Directors, the Treasurer shall
give the corporation a bond (which shall be renewed every six years) in such
sum and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the office of the
Treasurer and for the restoration to the corporation, in case of the
Treasurer's death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in the
Treasurer's possession or under the Treasurer's control belonging to the
corporation.
Section 5.17 The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the Treasurer or in the event of the treasurer's inability or
refusal to act, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
<PAGE>
Article 6.
CERTIFICATE OF STOCK
Section 6.01 Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by, the
Chairman or Vice-Chairman of the Board of Directors, or the President or a
vice-president and the Treasurer or an assistant treasurer, or the Secretary or
an assistant secretary of the corporation, certifying the number of shares
owned by such holder in the corporation.
Certificates may be issued for partly paid shares
and in such case upon the face or back of the certificate issued to represent
any such partly paid shares, the total amount of the consideration to be paid
therefor, and the amount paid thereon shall be specified.
If the corporation shall be authorized to issue more
than one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualification,
limitations or restrictions or such preferences and/or rights shall be set
forth in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in section 202 of the General Corporation
Law of Delaware, in lieu of the foregoing requirements, there may be set forth
on the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 6.02 Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if the
former officer, transfer agent or registrar were such officer, transfer agent
or registrar at the date of issue
Section 6.03 Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or the legal representative of the owner of such lost, stolen or
destroyed certificate or certificates, to advertise the same in such manner as
it shall require and/or give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
<PAGE>
Section 6.04 Transfer of Stock. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 6.05 Fixing Record Date. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty (60) nor less
than ten (10) days before the date of such meeting, nor more than sixty days
prior to any other action. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 6.06 Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
Article 7.
GENERAL PROVISIONS DIVIDENDS
Section 7.01 Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 7.02 Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Section 7.03 Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
<PAGE>
Section 7.04 Fiscal Year. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
Section 7.05 Seal. The Board of Directors may adopt a corporate seal
having inscribed thereon the name of the corporation, the year of its
organization and the words "Corporate Seal, Delaware." The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
Section 7.06 Indemnification. The corporation shall, to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware, as amended
from time to time, indemnify each person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she is or was, or has agreed to become, a director or
officer of the corporation, or is or was serving, or has agreed to serve, at
the request of the corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust
or other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person or on such person's
behalf in connection with such action, suit or proceeding and any appeal
therefrom. Indemnification may include payment by the corporation of expenses
in defending an action or proceeding in advance of the final disposition of
such action or proceeding upon receipt of an undertaking by the person
indemnified to repay such payment if it is ultimately determined that such
person is not entitled to indemnification under this Section, which undertaking
may be accepted without reference to the financial ability of such person to
make such repayment.
The corporation shall not indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person unless the initiation thereof was approved by the
Board of Directors of the corporation.
The indemnification rights provided in this Section
(i) shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any law, agreement or vote of stockholders or
disinterested directors or otherwise, and (ii) shall inure to the benefit of
the heirs, executors and administrators of such persons. The corporation may,
to the extent authorized from time to time by its Board of Directors, grant
indemnification rights to other employees or
agents of the corporation or other persons serving the corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Section.
Section 7.07 Transaction with Interested Parties. No contract or
transaction between the corporation and one or more of the directors or
officers, or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of the directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because such director or officer
is present at or participates in the meeting of the Board of Directors or a
committee of the Board of Directors which authorizes the contract or
transaction or solely because his, her or their votes are counted for such
purpose, if:
<PAGE>
(a) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed
or are known to the Board of Directors or the committee, and
the Board or committee in good faith authorizes the contract
or transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested
directors be less than a quorum;
(b) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed
or are known to the stockholders entitled to vote thereon,
and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee of the Board of Directors, or
the stockholders.
Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
Article 8.
AMENDMENTS
These by-laws may be altered, amended or repealed or new
by-laws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the certificate of
incorporation at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
by-laws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal by-laws is conferred upon the Board of Directors by the
certificate or incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal by-laws.
<PAGE>
INVESTMENT AGREEMENT
BY AND BETWEEN
GLOBECOMM SYSTEMS INC.,
AS PURCHASER,
AND
MCKIBBEN COMMUNICATIONS,
AS SELLER
<PAGE>
ARTICLE I PURCHASE AND SALE
1.01. Purchase and Sale.......................................-2-
1.02. Encumbrance of Acquired Equity..........................-2-
1.03. Purchase Price..........................................-2-
1.04. Payment of Purchase Price...............................-2-
ARTICLE II CLOSING
2.01. Closing Date............................................-2-
2.02. Purchaser's Deliveries at Closing.......................-2-
2.03. Seller's Deliveries at Closing..........................-3-
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER
3.01. Corporate Organization..................................-4-
3.02. Authorization...........................................-4-
3.03. Enforceability..........................................-4-
3.04. Accuracy of Representations and Warranties..............-4-
3.05. Requirements for Notification or Approval...............-4-
3.06. Brokers and Finders.....................................-5-
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MCKIBBEN
4.01. Corporate Organization and Good Standing................-5-
4.02. Authorized and Issued Acquired Equity...................-5-
4.03. Authority to Sell.......................................-5-
4.04. Enforceability..........................................-6-
4.05. No Violation............................................-6-
4.06. Records and Books; Accounting...........................-6-
4.07. Statement of Operations.................................-6-
4.08. Distinct Entity.........................................-6-
4.09. Status of Intellectual Property.........................-7-
4.10. Taxes...................................................-8-
4.11. Contracts and Commitments...............................-8-
4.12. Litigation, Judgments and Decrees.......................-8-
4.13. ERISA; Employee Benefit Plans...........................-9-
4.14. Brokers and Finders.....................................-9-
4.15. Compliance with Law; Necessary Authorizations...........-9-
4.16. Requirements for Notification or Approval...............-9-
4.17. Business Restrictions...................................-9-
4.18. Nature and Conduct of Business.........................-10-
4.19. Binding Obligations....................................-10-
4.20. Accuracy of Representations and Warranties.............-10-
ARTICLE V
5.01. Registration of Securities.............................-10-
5.02. Governmental Consents..................................-10-
ARTICLE VI CERTAIN COVENANTS AND AGREEMENTS
6.01. Right of First Refusal.................................-11-
6.02. Option To Purchase Acquired Equity.....................-12-
6.03. Absolute Option........................................-13-
6.04. Dilution...............................................-13-
<PAGE>
6.06. Board Rights...........................................-15-
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
7.01. Survival of Representations............................-15-
7.02. Indemnification by Purchaser...........................-15-
7.03. Indemnification by Seller and Parent...................-15-
7.04. Remedies Cumulative....................................-16-
ARTICLE VIII MISCELLANEOUS PROVISIONS
8.01. Modification or Waiver.................................-16-
8.02. Expenses...............................................-16-
8.03. Notices................................................-16-
8.04. Binding Effect; Assignment.............................-18-
8.05. Governing Law..........................................-18-
8.06. Entire Agreement.......................................-18-
8.07. Severability...........................................-19-
8.08. Acknowledgment of Representation.......................-19-
8.09. Headings...............................................-19-
8.10. Counterparts...........................................-19-
<PAGE>
INVESTMENT AGREEMENT
AGREEMENT, made this 21st day of August, 1998, by and between
Globecomm Systems Inc., a Delaware corporation, with offices at 45 Oser Avenue,
Hauppauge, New York 11788 (hereinafter referred to as "Purchaser"), McKibben
Communications, a California corporation, with offices at 20640 Bahama Street,
Chatsworth, California 91311 (hereinafter referred to as "Parent") and McKibben
Communications, LLC, a limited liability corporation, with offices at 20640
Bahama Street, Chatsworth, California 91311 (hereinafter referred to as
"Seller"; Parent and Seller are hereinafter collectively, jointly and severally
referred to as "McKibben").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Parent has recently formed Seller in anticipation of the
investment by Purchaser as contemplated by this Agreement (the "Investment"),
in addition to another planned investment;
WHEREAS, the Investment is subject to, and it is the intention of
the parties that all of the assets (as set forth on SCHEDULE A annexed hereto)
and operations of Parent, subject to the liabilities set forth on SCHEDULE B
annexed hereto (collectively, the "Assets") have been transferred to Seller
solely in consideration of Parent's ownership interest in Seller; and
WHEREAS, Seller desires to issue and sell to Purchaser an interest
in the equity of Seller, such interest constituting exactly 2083.3 Class B
Units which constitute approximately eighteen and three quarters percent
(18.75%) of the profits, losses and equity of Seller on an after acquired
basis, which shall be subject to a liquidation and income preference granted to
the Class A Unit holders (hereinafter referred to as the "Acquired Equity") as
at the date of this Agreement, and Purchaser desires to purchase the Acquired
Equity upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual premises and of the
representations, warranties, covenants and agreements hereinafter set forth,
and for other good and valuable consideration, the receipt and sufficiency of
which each of the parties hereto hereby acknowledge, the parties hereto hereby
agree as follows:
ARTICLE I
PURCHASE AND SALE
-----------------
1.01. PURCHASE AND SALE. Upon the terms and conditions hereinafter
set forth, Seller hereby sells, assigns, conveys, transfers and delivers to
Purchaser and Purchaser's successors and assigns forever, and Purchaser hereby
purchases and acquires, for the consideration hereinafter set forth, all right,
title and interest in, to, relating to or arising from the Acquired Equity.
-1-
<PAGE>
1.02. ENCUMBRANCE OF ACQUIRED EQUITY. (a) Seller hereby sells the
Acquired Equity free and clear of any and all mortgages, liens, pledges,
charges, security interests, claims, equities, encumbrances, exceptions,
restrictions, reservations, conditions, limitations or interests of any kind,
type or nature whatsoever, except such restrictions as are expressly set forth
in the Operating Agreement (as hereinafter defined) or imposed by applicable
law, or any similar right of any third party in respect of the Acquired Equity
being transferred by such party (hereinafter collectively referred to as
"Liens").
(b) Purchaser shall not assume or be responsible for any
liability, obligation, debt or commitment of either Seller or Parent of any
kind or nature whatsoever pursuant to this Agreement or otherwise.
1.03. PURCHASE PRICE. In consideration of the purchase of the
Acquired Equity by Purchaser pursuant to this Agreement and the covenants and
provisions to be performed by Seller, Purchaser shall pay to Seller an
aggregate purchase price of One Million Five Hundred Thousand Dollars
($1,500,000.00) (the "Purchase Price").
1.04. PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid
in full by Purchaser to Seller simultaneously with the Closing (as hereinafter
defined) by certified check or wire transfer.
ARTICLE II
CLOSING
-------
2.01. CLOSING DATE. The closing shall take place at the offices of
Goldman & Associates, LLP, 666 Old Country Road, Suite 304, Garden City, New
York 11530 on the date hereof, or at such other time, place and date as the
parties may agree upon in writing (such closing being herein called the
"Closing" and the time and date of the Closing being herein called the "Closing
Date").
2.02. PURCHASER'S DELIVERIES AT CLOSING. At or prior to the
Closing, Purchaser shall take such actions as are provided for herein or
contemplated hereby and shall deliver or cause the following to be delivered to
Seller:
(a) an executed copy of this Agreement;
(b) the Purchase Price in the manner set forth in Section
1.04 above;
(c) an executed copy of the operating agreement in the form
annexed hereto as EXHIBIT A (the "Operating Agreement");
(d) an executed copy of the registration rights agreement in
the form annexed hereto as EXHIBIT B (the "Registration Rights Agreement");
-2-
<PAGE>
(e) resolutions of the Board of Directors of Purchaser
approving the Agreement, the Operating Agreement the Registration Rights
Agreement (collectively referred to herein as the "Operative Documents"), and
all of the transactions contemplated thereby, in the form annexed hereto as
EXHIBIT C;
(f) an executed copy of the Mutual Co-Operation Agreement in
the form annexed hereto as EXHIBIT D; and
(g) Purchaser shall deliver such other documents, if any, to
Seller or Seller's representative in form and substance reasonably satisfactory
to Seller's counsel, and shall take such other action, if any, and execute such
additional documents as may be provided for or contemplated hereby.
2.03. MCKIBBEN'S DELIVERIES AT CLOSING. At or prior to the Closing,
McKibben shall take such actions as are provided for herein or contemplated
hereby and shall deliver or cause the following to be delivered to Purchaser:
(a) an executed copy of this Agreement;
(b) a certificate issued in the name of the Purchaser
representing the Acquired Equity or exactly 2,083.3 Class B Units or
approximately eighteen and three quarters percent (18.75%) of the equity of
Seller on an after acquired basis, which shall be subject to a liquidation and
income preference granted to the Class A Unit holders (the "Preference");
(c) an executed copy of the Operating Agreement;
(d) an executed copy of the Registration Rights Agreement;
(e) an executed copy of the Mutual Co-Operation Agreement in
the form annexed hereto as EXHIBIT D;
(f) an executed copy of the employment agreement between
Seller and Mark McKibben, in the form annexed hereto as EXHIBIT E;
(g) a Certificate issued by the Secretary of State of the
State of California, as of recent date, with respect to the good standing of
both Seller and Parent, and good standing certificates from each jurisdiction
where either Seller or Parent is qualified to do business;
(h) resolutions of the members of Seller approving the
Operative Documents, and all of the transactions contemplated thereby in the
form annexed hereto as EXHIBIT F;
-3-
<PAGE>
(i) resolution of the shareholders and Board of Directors of
Parent approving the Operative Documents, and all of the transactions
contemplated thereby in the form annexed hereto on EXHIBIT G;
(j) an opinion of counsel for Seller and Parent, dated the
date hereof, in the form annexed hereto as EXHIBIT H; and
(k) Seller shall deliver such other documents, if any, to
Purchaser or Purchaser's representative in form and substance reasonably
satisfactory to Purchaser's counsel, and shall take such other action, if any,
and execute such additional documents as may be provided for or contemplated
hereby, including, but not limited to, the transfer of the Assets from Parent
to Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser hereby makes the following representations and warranties
to Seller and Seller's successors and assigns, and acknowledges and confirms
that Seller is relying upon such representations and warranties in connection
with the execution, delivery and performance of this Agreement and the
transactions contemplated hereby, notwithstanding any investigation made by
Seller or on Seller's behalf:
3.01. CORPORATE ORGANIZATION. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Purchaser has full corporate power and authority to carry on its
business as is now being conducted and to own, lease and operate its properties
and assets as and in the places where such business is now conducted and where
such properties and assets are now owned, leased or operated.
3.02. AUTHORIZATION. Purchaser has full corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to carry out the transactions contemplated hereby. Purchaser has taken all
action required by law or otherwise to be taken by Purchaser to authorize
Purchaser's execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Purchaser and constitutes a valid and binding
agreement of and upon Purchaser, enforceable against Purchaser in accordance
with its terms.
3.03. ENFORCEABILITY. Purchaser represents, with respect to each of
the Operative Documents that (i) each of the Operative Documents constitute
legally valid and binding agreements, enforceable against Purchaser in
accordance with their terms; and (ii) the execution and delivery by Purchaser
of the Operative Documents does not, and the performance by Purchaser of the
transactions contemplated hereby and thereby will not, violate any of the
provisions of any contract
-4-
<PAGE>
or agreement to which Purchaser is a party or by which Purchaser is bound, or
any order, writ, injunction, or decree applicable to Purchaser.
3.04. REQUIREMENTS FOR NOTIFICATION OR APPROVAL. To the best
knowledge of Purchaser, the execution and delivery of the Operative Documents
by Purchaser, the consummation of the transactions contemplated hereby and
thereby by Purchaser, and the performance of any obligation hereunder or
thereunder by Purchaser, does not, and will not, require notice, registration,
report or other filing or qualification with or consent, waiver, approval,
license or authority of any third party or public authority, except for such as
have been duly and validly obtained at or prior to the Closing.
3.05. BROKERS AND FINDERS. No person has been authorized by
Purchaser, or by anyone acting on behalf of Purchaser or its officers,
directors, employees, agents or trustees, to act as a broker, finder or in any
other similar capacity in connection with the transactions contemplated by this
Agreement in such a manner as to give rise to any valid claim against Seller or
Purchaser for any broker's or finder's fee or commission or similar type of
compensation.
3.06. ACCURACY OF REPRESENTATIONS AND WARRANTIES. No representation
or warranty of Purchaser contained herein, or information with respect to
Purchaser contained herein or in any statement, certificate, exhibit or other
document furnished or to be furnished to Seller by Purchaser or Purchaser's
representatives pursuant hereto or in connection with the transactions
contemplated hereby, contains or will contain any untrue statement of material
fact or omits or will omit to state any material fact necessary to make the
statements herein or therein not false or misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MCKIBBEN
------------------------------------------
Seller and Parent, jointly and severally, hereby make the following
representations and warranties to Purchaser, Purchaser's successors and
assigns, and acknowledges and confirms that Purchaser is relying upon such
representations and warranties in connection with the execution, delivery and
performance of this Agreement and the transactions contemplated hereby,
notwithstanding any investigation made by Purchaser or on Purchaser's behalf:
4.01. ORGANIZATION AND GOOD STANDING. Seller and Parent are, and
will be at the Closing, a limited liability company and a corporation,
respectively, duly organized, validly existing and in good standing under the
laws of the State of California, duly authorized to carry on the business
presently conducted by them, and are qualified to do business and are in good
standing in any other jurisdiction in which, by reason of their respective
ownership of property or the manner in which it conducts business, such
qualification is necessary.
4.02. AUTHORIZED AND ISSUED ACQUIRED EQUITY. Prior to giving effect
to the transactions contemplated hereby, the Members listed on SCHEDULE 4.02
annexed hereto collectively own one hundred Percent (100%) of the equity
Seller. The shareholders listed on Schedule 4.02(a) annexed hereto collectively
own one
-5-
<PAGE>
hundred percent (100%) of the equity of Parent. All equity of each of Seller
and Parent has been properly issued and is fully paid and non-assessable. There
are no outstanding subscriptions, warrants, options, agreements, convertible
securities or other commitments or contractual rights pursuant to which either
Seller or Parent is or may become obligated to issue any of their respective
equity or other securities, except for that certain Limited Liability Company
Interest Purchase Agreement, to be dated August 1998 between Seller and Richard
Wolfe, in the form annexed hereto as EXHIBIT H.
4.03. AUTHORITY TO SELL. Seller has, and at the Closing will have,
the full right, power and authority to sell, transfer, convey and deliver to
Purchaser the Acquired Equity agreed to be sold, transferred, conveyed and
delivered by Seller hereunder, free and clear of any statutory, contractual or
other limitation of any kind, type or nature whatsoever, and the Acquired
Equity is not, nor will it be at the Closing, subject to any lien, pledge,
hypothecation or any encumbrance or interest of any third party whatsoever,
except as may be expressly provided herein. The sale provided for herein will
vest in Purchaser all right, title and interest in and to the Acquired Equity,
free and clear of any and all liens, encumbrances, restrictions, options,
agreements and conditions, except those expressly provided for herein, in the
Operating Agreement or applicable securities law. Similarly, Parent has the
full right, power and authority to transfer to Seller the Assets. Parent's
transfer of the Assets will vest in Seller all right, title and interest in all
to the Assets, free and clear of any and all Liens, except those set forth on
SCHEDULE 4.03 annexed hereto.
4.04. ENFORCEABILITY. Seller and Parent each represent, with
respect to each of the Operative Documents that (i) each of the Operative
Documents constitute legally valid and binding agreements, enforceable against
Seller and, as applicable, Parent in accordance with their terms; and (ii) the
execution and delivery by Seller and, as applicable, Parent of each of the
Operative Documents does not, and the performance by Seller and Parent of the
transactions contemplated hereby will not, violate any of the provisions of any
contract or agreement to which either Seller or Parent is a party or by which
Seller or Parent is bound, or any order, writ, injunction, or decree applicable
to Seller or Parent.
4.05. NO VIOLATION. (a) Except for obtaining consents to the
assignment of certain leases, vendor contracts and customer contracts from
Parent to Seller as set forth on SCHEDULE 4.05 (collectively, the "Consents"),
neither the transfer of the Assets by Parent to Seller, the execution and
delivery of each of the Operative Documents by McKibben nor the consummation by
McKibben of the transactions contemplated hereby will violate any provision or
be in conflict with, or constitute a default (or an event which, with or
without notice, lapse of time or both, would constitute a default) under, or
result in the termination or invalidity of, or accelerate the performance
required by, or cause the acceleration of the maturity of any debt or
obligation of McKibben, or result in the creation or imposition of any security
interest, lien or other encumbrance upon any of the Acquired Equity or the
Assets under, any agreement or commitment to which McKibben is a party or by
which McKibben is bound or to which any of the Acquired Equity or the Assets is
subject, or violate any
-6-
<PAGE>
statute or law or any judgment, decree, order, writ, injunction, regulation or
rule of any domestic or foreign court or government authority applicable to
McKibben, the Acquired Equity or the Assets.
(b) Seller and Parent shall undertake to obtain the Consents
and transfer all of the Assets of Parent to Seller in a timely fashion. Seller
and Parent represent and warrant that all of the assets of Parent, of every
kind, type and nature whatsoever, are being transferred to Seller in connection
with the transactions contemplated by this Agreement, and that from the date
hereof until such time as all of the Consents have been obtained, Parent shall
hold the assets which are subject to the Consents for the sole and exclusive
use and benefit of Seller, including, but not limited to, any and all profits
and proceeds thereof. Notwithstanding the provisions of Section 7.01 hereof,
the representations, warranties and undertakings contained in this Section
4.05(b) shall survive the Closing indefinately.
4.06. RECORDS AND BOOKS; ACCOUNTING. The records and books of
account of Seller and Parent have been regularly kept and maintained in
conformity with the past accounting principles and practices on a consistent
basis during the past three (3) years, if applicable. The minute books of
Seller and Parent are correct, complete and current in all respects and fairly
reflect all corporate actions of the board of representatives and/or board of
directors as the case may be, including, but not limited to, all committees,
and the members and/or shareholders, as the case may be.
4.07. STATEMENT OF OPERATIONS. (a) The financial statements of
Seller and Parent previously delivered to Purchaser and annexed hereto as
SCHEDULE 4.07 (the "Financial Statements") are true, complete and accurate for
what they purport to be, have been prepared in accordance with generally
accepted accounting principles and fairly present the financial condition and
results of operations of Seller and Parent for the periods indicated therein,
exclusive of normal year end adjustments and accruals, in each case in
accordance with the past accounting practices and principles consistently
applied by Seller and Parent in the preparation of their respective tax returns
and unaudited financial statements.
(b) To the best knowledge of Seller and Parent, neither
Seller nor Parent has any material liabilities or obligations of any nature,
absolute, accrued, contingent or otherwise and whether due or to become due,
arising out of or relating primarily to the business of either Seller or
Parent, except (a) as and to the extent disclosed or reserved against in the
Financial Statements (including the notes thereto) and (b) liabilities that
under GAAP are not required to be disclosed in the Financial Statements.
4.08. DISTINCT ENTITY. Except for Parent's ownership of Seller,
neither Seller nor Parent (i) own, directly or indirectly, any equity
securities of, or interest in, any entity or enterprise, (ii) conduct any of
its business through any subsidiary or other entity or enterprise, or (iii)
share any facilities, personnel or assets with any related or unrelated third
party.
4.09. STATUS OF INTELLECTUAL PROPERTY. Attached hereto as SCHEDULE
4.09 is a true and correct schedule which describes all of the patents
(including, but not limited to, all reissues,
-7-
<PAGE>
divisions, continuations and extensions thereof), applications for patents,
patent disclosures docketed, inventions, improvements, trade secrets,
trademarks, trademark applications, trade natures, copyright registrations or
applications therefor and proprietary computer software or similar property
owned by either Seller or Parent within the last three (3) years and all
licenses, franchises, permits, authorizations, agreements and arrangements that
concern any of the foregoing or that concern like items owned by others and
used by either Seller or Parent within the last three (3) years. Except as
indicated on SCHEDULE 4.09:
(i) The patents shown on SCHEDULE 4.09 are owned by Seller
free and clear of all mortgages, liens, charges or encumbrances of every kind,
type or nature whatsoever. No licenses have been granted with respect to such
patents and neither Seller nor Parent has received notice of any claim by a
third party suggesting that its practice of the inventions covered by such
patents, or any other inventions practiced by Seller or Parent would infringe
the patent rights of any third party, nor are there grounds for any such claim.
(ii) The copyright registrations shown on SCHEDULE 4.09 are
owned by Seller free and clear of all mortgages, liens, charges or encumbrances
of every kind, type or nature whatsoever. Except for licenses granted to end
users in accordance with Seller's standard terms, no licenses have been granted
with respect to any of Seller's copyrighted material and neither Seller nor
Parent has received notice of any claim by a third party suggesting that any of
its activities in the conduct of its business as presently conducted infringe
the copyrights of any third party, nor are there grounds for any such claim.
(iii) The trademark registrations shown on SCHEDULE 4.09
are owned by Seller free and clear of all mortgages, liens, charges or
encumbrances of every kind, type or nature whatsoever. No licenses have been
granted with respect to any of Seller's trademarks and neither Seller nor
Parent has received notice of any claim by a third party suggesting that any of
its activities in the conduct of its business as presently conducted infringe
the trademarks, trade names or trade dress of any third party, nor are there
grounds for any such claim.
(iv) All proprietary information, technical information and
know-how in possession of either Seller or Parent relating to the design or
manufacture of products sold, and services performed, by it, including, without
limitation, methods of manufacture, lab journals, manufacturing, engineering
and other drawings, design and engineering specifications and similar items
recording or evidencing such information, is owned by Seller free and clear of
all mortgages, liens, charges or encumbrances of every kind, type or nature
whatsoever. Seller has not granted any license or other permission with respect
to the use of such information and neither Seller nor Parent has received
notice of any claim by a third party suggesting that its use of such
information would infringe or misappropriate the rights of any third party, nor
are there grounds for any such claim.
4.10. TAXES. All taxes and other assessments and levies required to
be withheld by either Seller or Parent from customers with respect to the sale
of goods, or from or on behalf of employees for income, social security,
unemployment insurance and any other taxes or similar charges have
-8-
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been collected or withheld and either paid to the appropriate government agency
or set aside and held in accounts for such purpose. All Federal, state and
local tax returns and reports required to be filed by either Seller or Parent
on or prior to the Closing Date with respect to taxable periods ending on or
prior to the Closing Date have been or will be filed with the appropriate
governmental authorities on or prior to the Closing Date.
4.11. CONTRACTS AND COMMITMENTS. (a) Except those set forth on
SCHEDULE 4.11(A) of this Agreement, neither Seller nor Parent is bound by any
written or binding oral (i) employment agreements, (ii) non-competition
agreements or restrictive covenants, (iii) collective bargaining or union
contracts or agreements, (iv) any agreements that contain any express severance
or termination pay liabilities or obligations or (v) any agreements of any kind
or nature that are not terminable at the will of Seller or Parent, as the case
may be.
(b) SCHEDULE 4.11(B) to this Agreement sets forth all of
Seller and Purchaser's executory purchase or sale contracts or written or oral
binding bids or commitments as of the Closing Date, all of which have been
assigned to Seller.
(c) SCHEDULE 4.11(C) to this Agreement sets forth a complete
and accurate list of all insurance policies, including, but not limited to,
policies of fire, liability, malpractice, medical insurance, workers'
compensation and other forms of insurance owned or held by either Seller or
Parent. The insurance policies listed on SCHEDULE 4.11(C), taken together, are
of the kind that are, and are in amounts no less than is, customarily obtained
by corporations of established reputations engaged in the same or similar
business and similarly situated as Seller and Parent.
(d) Except as set forth on SCHEDULE 4.11(D), Neither Seller
nor Parent is in default, nor, to the best knowledge of Seller or Parent, is
there any basis for any valid claim of default, under any contract, agreement,
commitment or restriction, pertaining to the Acquired Equity being purchased
pursuant to the terms of this Agreement or the Assets being transferred in
contemplation of this Agreement, and no event of default on the part of either
Seller or Parent has occurred which (whether with or without the giving of
notice, lapse of time, or both, or the happening or occurrence of any other
event) would constitute a default thereunder.
4.12. LITIGATION, JUDGMENTS AND DECREES. (a) Except as set forth on
SCHEDULE 4.12(A), there has not been, nor is there currently, any action, suit
or proceeding or any claim or investigation of any nature whatsoever, at law or
in equity or both, by or before any domestic or foreign court or government or
other regulatory or administrative agency, arbitration tribunal, board, bureau,
authority or commission pending or threatened against or involving either
Seller or Parent, or any of their respective assets, or which would question or
challenge the validity of this Agreement or any action taken or to be taken by
Seller or Parent pursuant to this Agreement or in connection with the
transactions contemplated hereby.
(b) Except as set forth on SCHEDULE 4.12(B), Neither Seller
nor Parent is subject to any judgment, order, award or decree of any domestic
or foreign court or government or other
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bureau, authority or commission orders, awards or decrees which may have an
adverse effect on either Seller or Parent's business, operations, financial
condition, business practices or prospects, or on its ability to acquire any
property or conduct its business in any area.
4.13. ERISA; EMPLOYEE BENEFIT PLANS. Except as set forth on
SCHEDULE 4.13, neither Seller nor Parent has any bonus, deferred compensation,
pension, profit-sharing, retirement, equity purchase, equity option, phantom
equity, medical or any similar or other employee benefit plan, or general
arrangement or practice, whether written or unwritten (an "Employee Benefit
Plan"). Neither Seller nor Parent has any legally binding commitment, whether
formal or informal, to create any such plan or arrangement.
4.14. BROKERS AND FINDERS. No person has been authorized by either
Seller or Parent, or by anyone acting on behalf of Seller or Parent or any of
their respective officers, directors, employees, agents or trustees, to act as
broker, finder or in any other similar capacity in connection with the
transactions contemplated by this Agreement in such a manner as to give rise to
any valid claim against Purchaser, Seller or Parent for any broker's or
finder's fee or commission or similar type of compensation.
4.15. COMPLIANCE WITH LAW; NECESSARY AUTHORIZATIONS. In conducting
their respective business, operations and properties, Seller and Parent have,
in all respects, duly complied and are presently in all respects duly complying
with all material laws (whether statutory or otherwise), rules, regulations,
orders, zoning and other ordinances, permits, licenses, authorizations,
judgments and decrees of all Federal, state, local, foreign or other
governmental authorities, to the extent applicable.
4.16. REQUIREMENTS FOR NOTIFICATION OR APPROVAL. To the best
knowledge of Parent and Seller, the execution and delivery of this Agreement by
Parent, the execution and delivery of the Operative Documents by Seller, the
consummation of the transaction contemplated hereby, the transfer of the Assets
from Parent to Seller and the performance of any obligations hereunder does not
require notice, registration, report or other filing or qualification with, or
consent, waiver, approval, license or authority of any third party or public
authority except for such as have been duly and validly obtained and assigned,
if necessary, to Purchaser at or prior to the Closing.
4.17. BUSINESS RESTRICTIONS. Except as set forth on SCHEDULE 4.17,
neither Seller nor Parent is under any restriction under any agreement to which
either Seller or Parent is a party or under which Seller, Parent or any of
their respective assets may be bound, or under any order or other process
issued by any court or governmental authority, which restricts either Parent or
Seller from carrying on any type of business anywhere in the world, and neither
Seller nor Parent will be so restricted in any such manner upon or as a result
of the consummation of the transactions contemplated by this Agreement.
4.18. NATURE AND CONDUCT OF BUSINESS. Since March 31, 1998,
Parent's business has been conducted in all material respects in the ordinary
course consistent with past practices in that no event has occurred which would
materially adversely affect (i) existing relations between Parent or
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Seller and their lessors, suppliers, customers or employees or (ii) the
business, operation, financial condition or prospects of the business of either
Seller or Parent or in the condition of any of their respective assets. There
are no events with respect to any of the foregoing that threaten to disrupt,
prevent or impair the conduct of such business in any material adverse manner
whatsoever.
4.19. BINDING OBLIGATIONS. Except as disclosed to Purchaser in
writing prior to the date hereof and as set forth on SCHEDULE 4.19, neither
Seller nor Parent has entered into any arrangement or agreement, nor has Seller
or Parent taken, or agreed to take, any action which would bind or commit
Seller or Parent to expend any amount, or which would constitute a debt or
obligation of Seller or Parent or their respective equity holders outside of
the ordinary course of business.
4.20. ACCURACY OF REPRESENTATIONS AND WARRANTIES. No representation
or warranty of Seller or Parent contained herein, or information with respect
to Seller or Parent contained herein or in any statement, certificate, exhibit
or other document furnished or to be furnished to Purchaser by Seller or Parent
or their representatives pursuant hereto or in connection with the transactions
contemplated hereby, contains or will contain any untrue statement of fact or
omits or will omit to state any material fact necessary to make the statements
herein or therein not false or misleading.
ARTICLE V
SECURITIES MATTERS
------------------
5.01. REGISTRATION OF SECURITIES. No portion of the Acquired Equity
to be delivered in accordance with this Agreement will be registered with the
Securities and Exchange Commission and will be sold and transferred to the
Purchaser pursuant to an exemption from registration under the Securities Act
of 1933, as amended. All certificates representing the Acquired Equity shall be
imprinted with a legend restricting the transfer of such Shares unless the same
is registered with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, or an exemption from registration therefor is
available. Purchaser hereby represents and warrants that it will acquire the
Acquired Equity for investment and without a view to the sale or distribution
thereof.
5.02. GOVERNMENTAL CONSENTS. The transfer of the Acquired Equity
has not been qualified with any state securities regulatory agency. Purchaser
shall be entitled to rely upon any exemption or exemptions available under
applicable state law for the issuance of securities hereunder.
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ARTICLE VI
CERTAIN COVENANTS AND AGREEMENTS
--------------------------------
6.01. RIGHT OF FIRST REFUSAL. (a) Purchaser and any party to whom
Purchaser's rights under this Section 6.01 have been duly assigned (each such
holder or assignee being hereinafter referred to as a "Rights Holder") has the
right of first refusal to purchase such Rights Holder's Pro Rata Share (as
defined below), of all or any part of any "New Securities" (as defined in
Section 6.01(b)) that Seller may from time to time issue after the date of this
Agreement. A Rights Holder's "Pro Rata Share" for purposes of this right of
first refusal only is such Rights Holder's share of residual net income (it
being the intention of the parties hereto that, after giving effect the
transactions contemplated hereby and the anticipated sale of Class A Units to
Richard Wolfe, Purchaser is entitled to an eighteen and three quarter percent
(18.75%) share of residual net income).
(b) "New Securities" shall mean any equity interest of Seller
of any nature whatsoever whether now authorized or not, and rights, options or
warrants to purchase such equity interest, and securities of any type
whatsoever that are, or may become, convertible or exchangeable into equity of
Seller or other equity interest in Seller whatsoever; provided, however, that
the term "New Securities" does not include:
(i) any securities issuable upon exercise of any options,
warrants or rights to purchase any securities of Seller outstanding on the date
of this Agreement ("Warrant Securities") and any securities issuable upon the
conversion of any Warrant Securities;
(ii) any equity interest in Seller of any nature whatsoever
issued in connection with any stock split or stock dividend;
(iii) securities offered by Seller to the public pursuant
to a registration statement filed under the Securities Act;
(iv) any Class A Units issuable to Richard Wolfe pursuant
to the Subscription Agreement annexed hereto as EXHIBIT I;
(v) any securities authorized under a duly authorized
employee equity plan; or
(vi) any securities issued pursuant to a strategic
alliance, including but not limited to a merger or other business combination.
(c) In the event that Seller proposes to undertake an
issuance of New Securities, it shall give to each Rights Holder written notice
of its intention to issue New Securities (the "Notice"), describing the type of
New Securities, the price and the general terms upon which Seller proposes to
issue such New Securities. Each Rights Holder shall have twenty (20) days from
the date of
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mailing of any such Notice to agree in writing to purchase such Rights Holder's
Pro Rata Share of such New Securities for the price and upon the general terms
specified in the Notice by giving written notice to Seller and stating therein
the quantity of New Securities to be purchased (not to exceed such Rights
Holder's Pro Rata Share). If any Rights Holder fails to so agree in writing
within such twenty (20) day period to purchase all or a portion of such Rights
Holder's Pro Rata Share of an offering of New Securities (a "Nonpurchasing
Holder"), then such Nonpurchasing Holder shall forfeit the right hereunder to
purchase that part of its Pro Rata Share of such New Securities that it did not
so agree to purchase.
(d) In the event that the Rights Holders fail to execute in
full the right of first refusal within such twenty (20) day period, then Seller
shall have one hundred twenty (120) days thereafter to sell the New Securities
with respect to which the Rights Holders' rights of first refusal hereunder
were not exercised, at a price and upon terms no more favorable to the
purchasers thereof than specified in Seller's Notice to the Rights Holders. In
the event that Seller has not issued and sold the New Securities within such
one hundred twenty (120) day period, then Seller shall not thereafter issue or
sell any New Securities without again first offering such New Securities to the
Right Holders pursuant to this Section 6.
(e) This right of first refusal shall terminate (i)
immediately before the closing of the first underwritten sale of Seller's
securities to the public pursuant to a registration statement filed with, and
declared effective by, the Securities and Exchange Commission under the
Securities Act, covering the offer and sale of Seller's securities to the
public of at least $7.5 million, or (ii) upon (a) the acquisition of all or
substantially all the assets of Seller or (b) an acquisition of Seller by
another corporation or entity by consolidation, merger or other reorganization
in which the holders of Seller's outstanding voting equity immediately prior to
such transaction own, immediately after such transaction, securities
representing less than fifty percent (50%) or more of the voting power of the
corporation or other entity surviving such transaction pursuant to this Section
6.01.
6.02. OPTION TO PURCHASE ADDITIONAL EQUITY. (a) Seller does hereby
grant to Purchaser an irrevocable option (the "Option") to purchase additional
Class B Units which represent eleven and one quarter percent (11.25%) of the
then issued and outstanding equity, and the profits and losses of Seller, on an
after acquired basis, which shall be subject to the Preference (the "Option
Equity"), pursuant to the terms and conditions of this Agreement. It being the
intention of the parties that Purchaser shall have the right to acquire and
maintain, should Purchaser so elect, the Option Equity, which when added to the
Acquired Equity would represent a thirty percent (30%) ownership interest in
Seller, subject to the Preference.
(b) The Option term shall commence on the date hereof and
shall continue for a period ending the earlier of (i) two (2) years from the
date hereof, or (ii) upon the occurrence of either of the event described in
Section 6.01(e)(i) or Section 6.01(e)(ii) (the "Option Term").
(c) Purchaser may exercise the Option at any time and
from time to time during the Option Term by giving written notice (the
"Option Notice") of its intention to do so to Seller. The
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date notice is given shall be referred to as the "Exercise Date". Purchaser
shall have the right to exercise the Option in increments, at Purchaser's
discretion, at any time and from time to time during the Option Term.
(d) Within thirty (30) days after each Option Notice has been
delivered by Purchaser to Seller, Seller shall issue, transfer and deliver to
Purchaser certificates representing the percent of the then issued and
outstanding equity, on an after acquired basis, as was exercised by Purchaser.
All Option Equity, as and when exercised, shall be free and clear of all liens,
security interests and other encumbrances, other than as set forth in the
Operating Agreement and applicable securities laws, and upon payment as
provided in Section 6.02(e) below, such Option Equity shall be duly and validly
issued, fully paid and nonassessable. Such Option Equity shall be recorded on
the books of Seller in the name of Purchaser.
(e) The purchase price for the entire Option Equity shall be
One Million Five Hundred Thousand Dollars ($1,500,000.00) (the "Option Price").
Lesser portions of the Option Equity exercised by Purchaser, from time to time,
shall be proportionately priced. The Option Price, or appropriate portion
thereof, shall be paid by Purchaser to Seller at each Option Closing (as
hereinafter defined) by certified check or wire transfer.
(f) Each Option Notice shall specify a date (the "Option
Closing Date") not less than thirty (30) and not more than forty-five (45) days
subsequent to the date of such Option Notice for the closing (the "Option
Closing"); provided that, if no Option Closing Date is specified in the Option
Notice, the Option Closing Date shall be the first business day that is at
least forty-five (45) days after the Exercise Date. The Option Closing shall
occur at the offices of Goldman & Associates, LLP, 666 Old Country Road, Suite
304, Garden City, New York 11530 at 10:00 a.m. or at such other time, place and
date as may be agreed upon by Seller and Purchaser.
(g) At each Option Closing and thereafter, each party shall
execute and deliver to the other party such instruments and documents as are
reasonably required to accomplish and conclude the transactions contemplated
under this Section 6.02; Seller shall also provide copies of any books and
records reasonably requested by Purchaser on or prior to each Option Closing.
(h) Purchaser's obligation to close following each exercise
of the Option shall be subject to there having been no material adverse change
in the condition, value or prospects of Seller between each Exercise Date and
the related Option Closing Date.
6.03. ABSOLUTE OPTION. After the expiration of the Option Term,
notwithstanding any other provision contained herein, Purchaser shall have an
absolute right and option to purchase such additional Class B Units which when
added to the Acquired Equity and the Option Equity, if any is purchased, would
equal twenty percent (20%) of the profits, losses and equity of Seller, which
shall be subject to the Preference, free and clear of all liens, charges,
claims, encumbrances, security interests or third party rights, subject to the
restrictions contained in the Operating Agreement and applicable securities
laws (the "Additional Equity"). The purchase price for Additional Equity shall
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be the then current market price or the last price for which Seller's Units
have been sold, whichever is higher. It being the intention and the
understanding of the parties hereto, that Purchaser be permitted to, and that
Purchaser's purpose in pursuing the transactions set forth in, and contemplated
by, this Agreement is to be able in the future, upon the exercise of its
options, to own at least twenty percent (20%) of the profits, losses and equity
of Seller, subject to the Preference. This option shall expire upon the
happening of either of the event described in Section 6.01(e)(i) or Section
6.01(e)(ii)
6.04. DILUTION. Upon the execution and effectiveness of this
Agreement and for a period of twenty-four (24) months thereafter, Purchaser's
investment in Seller and the percentage of issued and outstanding equity owned
by Purchaser hereunder, shall not be subject to dilution, on a current or
deferred basis, as a result of any issuance of equity or security, exercise of
options or otherwise, for any reason whatsoever (including, but not limited to,
any investment by Richard Wolfe).
6.05. TAG-ALONG SALES. (a) In the event any of the parties to the
Operating Agreement (the "Founding Members") acting individually or in concert
in connection with one transaction or series of transactions, agree to sell all
or any portion of their equity interest and/or rights in Seller (such Founding
Members are referred to herein as "Selling Founders"), including, but not
limited to, a sale of equity to a third party (a "Founders' Sale"), then
Purchaser or Parent, as the case may be (a "Tag-Along Right Holder"), shall
have the right, but not the obligation, to participate in such Founders' Sale
on a pari passu basis (the "Tag-Along Right").
(b) The Selling Founders' shall not agree, enter into nor
consummate a Founders' Sale unless the terms of such Founders' Sale shall
include an offer to the Tag-Along Right Holder to participate, on a pari passu
basis, in such Founders' Sale, at the same price and on the same terms and
conditions offered to, and accepted by, the Selling Founders. It being the
intention of the parties hereto that the Tag-Along Right Holder be, at all
times that such the Tag-Along Right Holder is a member of Seller, treated in
the same fashion and entitled to receive and participate in all of the
benefits, opportunities, advantages and privileges that are afforded to the
Founding Members.
(c) Promptly upon receiving, or in advance of extending, an
offer for a proposed Founders' Sale, such Selling Founders shall notify, or
cause to be notified, the Tag-Along Right Holder of such proposed transfer in
writing. Such written notice shall set forth: (i) the name and address of the
third party and the equity or rights proposed to be transferred, (ii) the
proposed amount and form of consideration, the terms and conditions of payment
and all other material terms and conditions offered by, or to be offered to,
the third party (collectively, the "Terms"), and (iii) that the third party has
been or, in the case of an offer from the Founding Members, will be informed of
the Tag-Along Right provided herein.
(d) The Tag-Along Right may be exercised by the Tag-Along
Right Holder by delivery of a written notice to the Selling Founders or the
Founding Members, as the case may be (the "Tag-Along Notice"), within thirty
(30) days following receipt of the notice specified in Section 6.06(c) above.
The Tag-Along Notice shall state the equity or rights that the Tag-Along Right
Holder wishes to include in such Founders' Sale. After expiration of the thirty
(30) day period referred to in this Section 6.06(d) above, provided, however,
that all of the provisions of this Section 6.06 have been compiled with in all
respects, the Selling Founders shall have the right for a sixty (60) day period
to close on such Founders'
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Sale on the Terms without further notice to the Tag-Along Right Holder if the
Tag-Along Right Holder has either elected not to participate in the Founders'
Sale or has not given a Tag-Along Notice. Notwithstanding the foregoing, after
such sixty (60) day period, no such Founders' Sale may be made without again
giving notice to the Tag-Along Right Holder of the proposed transfer and
complying with the requirements of this Section 6.06.
6.06. BOARD RIGHTS. Immediately upon the Closing, Purchaser shall
be entitled to appoint, from time to time, one (1) representative of its
choosing to the Board of Representatives of Seller. If Purchaser chooses not to
appoint a representative at such time, it shall be entitled to have a
representative attend Board of Representatives' meetings as an observer until
such time as it chooses to appoint a representative.
6.07. REPORTS AND ACCOUNTING. (a) Seller shall send Purchaser
quarterly technical progress reports reviewing its progress with the
development of all products and services and any relevant changes or advances.
Purchaser shall be entitled to give its input to the product development plans.
(b) Seller shall provide Purchaser with unaudited quarterly
financial reports within sixty (60) days of the end of each fiscal quarter.
Seller shall provide Purchaser with audited annual financial reports within one
hundred twenty (120) days of the end of each fiscal year.
(c) Purchaser shall have the right at all reasonable times
during usual business hours with at least one (1) days' advanced written notice
to Seller to examine and make copies of or extracts from the books of account
of Seller; such examination shall not materially interfere with Seller's
business. Such right may be exercised through any agent or employee of
Purchaser.
(d) Seller shall provide Purchaser with Seller's annual
business plan by the 15th day of June (or its equivalent in the event of a
change in Seller's year end) of each fiscal year.
6.08. PUBLIC ANNOUNCEMENTS. Neither Seller nor Parent shall make
any public announcement in respect of this Agreement or the transactions
contemplated hereby without the prior written consent of Purchaser.
6.09. FURTHER ASSURANCES. Following the Closing, each of the
parties hereto shall, from time to time, execute and deliver any further
instruments, certificates and documents, and take such other actions, as shall
be necessary or otherwise reasonably requested by an other party, to confirm
and assure the rights and obligations provided for in this Agreement and render
effective the consummation of the transactions contemplated hereby.
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ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
-----------------------------------------------------------
7.01. SURVIVAL OF REPRESENTATIONS. All representations and
warranties contained in this Agreement shall survive the Closing for a period
of two (2) years after the Closing Date (the "Survival Period"). Each of
Purchaser's, Seller's and Parent's covenants and agreements which are contained
in, or contemplated by, this Agreement or any of the instruments delivered at
Closing, including, but not limited to, the provisions of Section 4.05(b)
hereof, shall survive beyond the Survival Date and shall remain in full force
and effect until they expire by their respective terms.
7.02. INDEMNIFICATION BY PURCHASER. Purchaser agrees to indemnify,
defend and hold Seller harmless, at any time after the Closing, from and
against all losses, costs, damages, liabilities, interest, penalties,
settlements, judgments or expenses, including, but not limited to, reasonable
attorneys' fees and expenses, asserted against, resulting from, imposed upon or
incurred by Seller, directly or indirectly, arising out of or in connection
with (i) the breach or inaccuracy of any of the representations or warranties
of Purchaser made in or pursuant to this Agreement; (ii) any breach or
non-fulfillment of any covenant or agreement of Purchaser contained in this
Agreement; and (iii) Purchaser's ownership of the Acquired Equity after the
Closing.
7.03. INDEMNIFICATION BY SELLER AND PARENT. (a) Seller and Parent,
jointly and severally, agree to indemnify, defend and hold Purchaser harmless,
at any time after the Closing, from and against all losses, costs, damages,
liabilities, interest, penalties, settlements, judgments or expenses,
including, but not limited to, reasonable attorneys' fees and expenses,
asserted against, resulting from, imposed upon or incurred by Purchaser,
directly or indirectly, arising out of or in connection with (i) the breach or
inaccuracy of any of the representations or warranties of Seller and/or Parent
made in or pursuant to this Agreement; (ii) any breach or non-fulfillment of
any covenant or agreement of Seller and/or Parent contained in this Agreement;
and (iii) Seller's ownership of the Acquired Equity on and prior to the
Closing.
(b) Notwithstanding the foregoing, neither Seller nor Parent
shall be required to pay any amount under this Section 7.03 unless and until
the aggregate of all claims for indemnification pursuant to this Section 7.03
shall equal or exceed Fifty Thousand Dollars ($50,000.00) (the "Basket"), in
which event Seller and/or Parent shall pay to Purchaser all such amounts,
including, but not limited to, the Basket and all amounts in excess thereof.
(c) Seller's and Parent's indemnification obligations under
Section 7.03 shall be limited to a maximum of one hundred fifty percent (150%)
of Purchaser's investment in Seller, including, but not limited to, amounts
paid for the Acquired Equity, and any New Securities, Option Equity and/or
Additional Equity acquired.
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7.04. CLAIMS PROCEDURE. (a) A party agreeing to indemnify another
party against any matter pursuant to this Agreement is referred to herein as
the "Indemnifying Party" and the other party claiming indemnity is referred to
herein as the "Indemnified Party".
(b) Whenever any claim shall arise for indemnification
hereunder, the Indemnified Party shall notify the Indemnifying Party in writing
promptly after the Indemnified Party has actual knowledge of the acts
constituting the basis for such claim (the "Notice of Claim"), provided,
however, that the omission to so notify the Indemnifying Party shall not
relieve the Indemnifying Party from any liability which the Indemnifying Party
may have to the Indemnified Partyotherwise than under Section 7.03 or to the
extent the Indemnifying Party is not materially prejudiced as a proximate
result of the failure to give such notice promptly. The Notice of Claim shall
specify all material facts known to the Indemnified Party giving rise to such
indemnification claim and the amount or a non-binding estimate of the amount of
the liability arising therefrom.
(c) If the facts giving rise to any such indemnification
shall involve any actual, threatened or possible claim or demand by any person
against the Indemnified Party, the Indemnifying Party shall be entitled
(without prejudice to the right of the Indemnified Party to participate at its
expense through counsel of its own choosing) to contest, defend, compromise or
settle (without imposing any liability, obligation or detriment on the
Indemnified Party) such claim at its expense and through counsel of its own
choosing, so long as it gives written notice to the Indemnified Party within
thirty (30) days after receipt of the Notice of Claim (i) of its intention to
do so, and (ii) subject to the liability limits contained in Section 7.03(c),
of its agreeing to indemnify the Indemnified Party for such claim hereunder.
The Indemnified Party shall provide such cooperation and such access to its
books, records and properties as the Indemnifying Party shall reasonably
request with respect to such matter and the parties hereto agree to cooperate
with each other in order to ensure the proper and adequate defense thereof.
(d) The Indemnified Party shall not make any settlement of
any claim which would give rise to liability on the part of the Indemnifying
Party under the indemnity contained in Section 7.03 without the written consent
of the Indemnifying Party, which consent shall not be unreasonably withheld or
delayed. If a firm offer is made to settle a claim or litigation defended by
the Indemnified Party and the Indemnifying Party refuses to accept such offer
within twenty (20) days after written notice from the Indemnified Party of the
terms of such offer, then, in such event, the Indemnified Party may, in its
sole discretion, continue to contest or defend such claim and shall be
indemnified pursuant to the terms of Section 7.03 hereof.
(e) In the event of any action or proceeding brought by any
party hereto to seek indemnity under this Agreement, the prevailing party shall
be entitled to recover reasonable attorneys' fees and expenses upon final
judgment.
(f) In the event of full and complete payment by an
Indemnifying Party to an Indemnified Party as contemplated by Section 7.03, the
Indemnifying Party shall be subrogated to and shall stand in the place of the
Indemnified Party as to any events or circumstances in respect of
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which the Indemnified Party has any right or claim against any third party
relating to such event giving rise to the claim for which the Indemnifying
Party shall have made payment to the Indemnified Party. The Indemnified Party
shall cooperate with the Indemnifying Party in a reasonable manner in
prosecuting any such subrogated right or claim.
7.05. REMEDIES CUMULATIVE. The remedies provided for herein shall
be cumulative and shall not preclude assertion by any party of any other rights
or the seeking of any other remedies against any other party in connection with
this Agreement, subject to the liability limits contained in Section 7.03(c)
and the time periods contained in Section 7.01. Nothing contained in this
Section 7.04 shall be construed in any way to limit, impair or modify the
provisions of this Agreement or otherwise impose any liability or obligation on
any party at any time for any liability, obligation, debt or commitment of the
other party or the corporate obligations of Seller or Parent pursuant to this
Agreement arising or relating to periods either prior to or after the Closing.
In connection with this Agreement, neither Seller nor Parent (or any
representative thereof) has made any representations or warranties other than
for those set forth in Article 4 hereof.
7.06. SUCCESSORS. The merger, sale of all or substantially all of
the assets or voting securities, consolidation, liquidation, dissolution, or
winding up of, or any similar transaction with respect to, any party herein
shall not affect in any manner the obligations of the Indemnifying Party
pursuant to Section 7.03 hereof, or any other term or provision of this
Agreement, and the Indemnifying Party covenants and agrees to make adequate
provision for its liabilities and obligations hereunder in the event of any
such transaction.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
------------------------
8.01. MODIFICATION OR WAIVER. (a) This Agreement may not be
changed, modified or rescinded orally. Any change, modification or rescission
need be in writing, signed by the party against whom enforcement of any change,
modification or rescission is sought.
(b) Any waiver of any of the provisions of this Agreement, or
of any inaccuracy in or non-fulfillment of any of the representations,
warranties or obligations hereunder or contemplated hereby, shall not be
effective unless made in a writing signed by the party against whom the
enforcement of any such waiver is sought. A waiver given in any case shall only
apply with respect to that particular act or omission, and shall not be
effective as to any further acts or omissions, regardless of whether they be of
the same or similar nature.
8.02. EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, each of the parties hereto shall pay the fees
and expenses of their respective counsel, accountants and other experts, and
shall pay all other expenses incurred by such party incident to the
negotiation, preparation, execution and consummation of this Agreement.
-19-
<PAGE>
8.03. NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered by hand or mailed, express,
certified or registered mail, return receipt requested, with postage prepaid,
or sent by a nationally recognized overnight courier service that regularly
maintains records of items picked up and delivered to the parties as follows:
If to Seller or Parent: McKibben Communications
20640 Bahama Street
Chatsworth, California 91311
Attention: Mr. Mark McKibben
with a copy to: Weinstein, Boldt, Racine, Halfhide
& Camel, P.C.
1801 Century Park East, Suite 2200
Los Angeles, California 90067-2336
Attention: Scott H. Racine, Esq.
If to Purchaser: Globecomm Systems Inc.
45 Oser Avenue
Hauppauge, New York 11788
Attention: Mr. David E. Hershberg
with a copy to: Goldman & Associates, LLP
666 Old Country Road, Suite 304
Garden City, New York 11530
Attention: Ronald G. Goldman, Esq.
or to such other person or address as any party shall furnish to all other
parties in writing. Notices delivered personally or by such courier service
shall be deemed communicated as of the date of actual receipt, mailed notices
shall be deemed communicated as of the date two (2) days after mailing.
8.04. BINDING EFFECT; ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, administrators, successors and permitted
assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned or assignable by any of the parties
hereto without the prior written consent of the other party.
8.05. GOVERNING LAW. All questions pertaining to the validity,
construction, execution and performance of this Agreement shall be governed by
and construed in accordance with the laws of the State of New York, without
giving effect to the conflicts or choice of law provisions thereof.
Notwithstanding the foregoing, the Company's issuance of securities under this
Agreement shall be
-20-
<PAGE>
governed by California law and shall be pursuant an exemption from registration
under California law.
8.06. ENTIRE AGREEMENT. (a) This Agreement sets forth the entire
agreement and understanding of the parties hereto in respect of the subject
matter contained herein, and supersedes all prior agreements, promises,
understandings, letters of intent, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any party hereto or
by any related or unrelated third party.
(b) All exhibits and schedules attached hereto, and all
certificates, documents and other instruments delivered or to be delivered
pursuant to the terms hereof are hereby expressly made a part of this Agreement
as fully as though set forth herein, and all references herein to the terms
"this Agreement", "hereunder", "herein", "hereby" or "hereto" shall be deemed
to refer to this Agreement and to all such writings.
8.07. SEVERABILITY. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
8.08. ACKNOWLEDGMENT OF REPRESENTATION. This Agreement has been
drafted on the basis of mutual contribution of language, the parties each
having been represented by independent counsel of their own choosing, and is
not to be construed against any party as being the drafter or causing the same
to be drafted.
8.09. HEADINGS. The headings of the sections of this Agreement are
inserted for convenience only and shall not constitute a part or affect in any
way the meaning or interpretation of this Agreement.
8.10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute the same instrument.
-21-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.
SELLER:
MCKIBBEN COMMUNICATIONS, LLC
BY MCKIBBEN COMMUNICATIONS,
A CALIFORNIA CORPORATION, AS MANAGER
By: /s/ Carol McKibben
----------------------------------------
Carol McKibben, President
PARENT:
MCKIBBEN COMMUNICATIONS
A CALIFORNIA CORPORATION
[ Corporate
Seal ]
By: /s/ Mark McKibben
----------------------------------------
Mark McKibben, President
PURCHASER:
GLOBECOMM SYSTEMS INC.
A DELAWARE CORPORATION
[ Corporate
Seal ]
By: /s/ David E. Hershberg
----------------------------------------
David E. Hershberg, CEO
-22-
<PAGE>
EXHIBIT 21.2
SUBSIDIARY OF THE REGISTRANT
NETSAT EXPRESS, INC. DELAWARE
<PAGE>
Exhibit 23.1 - Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-33137) pertaining to the Globecomm Systems Inc. 1997 Stock
Incentive Plan of our report dated August 7, 1998, with respect to the
consolidated financial statements of Globecomm Systems Inc. included in the
Annual Report (Form 10-K) for the year ended June 30, 1998.
Ernst & Young LLP
Melville, New York
September 28, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (333-33137) of our report dated August 23,
1996, except as to the stock split described in Note 1 which is as of August 5,
1997, relating to the financial statements of Globecomm Systems Inc., which
appears on page F-2 of this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
New York, New York
September 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Globecomm Systems Inc. Financial Statements, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,342
<SECURITIES> 0
<RECEIVABLES> 18,017
<ALLOWANCES> 0
<INVENTORY> 1,583
<CURRENT-ASSETS> 45,993
<PP&E> 11,069
<DEPRECIATION> 1,106
<TOTAL-ASSETS> 58,344
<CURRENT-LIABILITIES> 14,330
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 50,530
<TOTAL-LIABILITY-AND-EQUITY> 58,344
<SALES> 58,105
<TOTAL-REVENUES> 58,105
<CGS> 49,532
<TOTAL-COSTS> 10,385
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (546)
<INCOME-TAX> 0
<INCOME-CONTINUING> (546)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (546)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
