<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 2000
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
GLOBECOMM SYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3225567
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
45 OSER AVENUE, HAUPPAUGE, NEW YORK 11788
(631) 231-9800
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
DAVID E. HERSHBERG
CHIEF EXECUTIVE OFFICER
GLOBECOMM SYSTEMS INC.
45 OSER AVENUE
HAUPPAUGE, NEW YORK 11788
(631) 231-9800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
LUCI STALLER ALTMAN, ESQ.
MICHAEL RACANELLI, ESQ.
RISHI A. VARMA, ESQ. LORRAINE MASSARO, ESQ.
BROBECK, PHLEGER & HARRISON LLP MORRISON & FOERSTER LLP
1633 BROADWAY, 47TH FLOOR 1290 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10104-0050
(212) 581-1600 (212) 468-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable on or after this Registration Statement is declared effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE AGGREGATE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share............................ 2,300,000 $27.0625 $62,243,750 $16,433
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 300,000 shares of common stock subject to cover the
over-allotment option granted by the company and the selling
stockholders to the underwriters.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of computing
the registration fee, based on the average high and low trading prices
of the common stock, as reported on the Nasdaq National Market, on
February 16, 2000.
(3) Calculated pursuant to Rule 457(e) based on an estimate of the maximum
offering price.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY OUR EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek an offer to
buy these securities in any jurisdiction where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 22, 2000
PROSPECTUS
2,000,000 SHARES
[GRAPHIC OMITTED]
[GSI LOGO]
GLOBECOMM SYSTEMS INC.
COMMON STOCK
Globecomm Systems Inc. is offering 2,000,000 shares of common stock. Our
shares are listed on the Nasdaq National Market under the symbol "GCOM." On
February , 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $ per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAVE APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
- ------------------------------------------- ------------- ------------
<S> <C> <C>
Public Offering Price ...................... $ $
Underwriting Discounts and Commissions .... $ $
Proceeds to Globecomm Systems Inc. ........ $ $
- -----------------------------------------------------------------------------
</TABLE>
The underwriters have an option to purchase up to an additional 190,000
shares from us and up to an additional 110,000 shares from selling
stockholders to cover over-allotments. The underwriters expect to deliver the
shares to purchasers on or about , 2000.
ING BARINGS C.E. UNTERBERG, TOWBIN
February , 2000.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read this entire prospectus carefully, including the
"Risk Factors" section and the financial statements and the notes to those
statements. In addition, we incorporate by reference important business and
financial information in this prospectus.
OUR BUSINESS
We offer end-to-end, value-added satellite-based communications services.
The services we offer include wide area network connectivity, broadband
connectivity to end users, Internet connectivity, intranet extension, media
distribution and other network services on a global basis. To provide these
services, we leverage our engineering experience and satellite services
capabilities. We engineer and provide all the necessary satellite and
terrestrial facilities as well as the integration services required to
implement those facilities. We also operate and maintain these communications
services on an ongoing basis. Our customers generally have operations in
areas of the world where high-speed terrestrial networks are unreliable, too
costly or not readily available. Our customers include communications
services providers, multinational corporations, Internet service providers,
content providers and government entities.
Our services business is built on our core business as a supplier of
ground segment systems and networks for satellite-based communications. Our
ground segment implementations include the necessary hardware and software to
support a wide range of satellite communications applications using fixed
satellite, direct broadcast and mobile satellite systems.
NetSat Express, our majority-owned subsidiary, is an Internet service
provider that combines satellite and terrestrial communication networks to
provide its customers around the world high-speed access services to the United
States Internet backbone. Most of Netsat Express' customers are Internet
service providers located in areas of the world underserved by high-speed
terrestrial networks.
For our fiscal year ended June 30, 1999, our consolidated revenues were
approximately $49.1 million, including approximately $2.7 million for NetSat
Express, and for the six months ended December 31, 1999, our consolidated
revenues were approximately $36.8 million, including approximately $3.6
million for NetSat Express.
OUR MARKET OPPORTUNITY
Satellite-based communications networks are a rapidly growing segment of
the global communications infrastructure. These networks offer the following
advantages over terrestrial-based communications facilities:
o enable high-speed communications services where terrestrial
alternatives are unavailable or inadequate
o rapid deployment and flexibility in their configuration
o ability to bypass much of the often complex terrestrial networks
o capable of transmitting data simultaneously from one point to
multiple locations
o more cost-effective in some situations than terrestrial
alternatives where the flow of data traffic to the user is greater
than the flow of data from the user
o costs are independent of the distance between sending and receiving
locations
We believe the market for satellite-based communications services is being
driven by the following:
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o continued worldwide deregulation of telecommunications markets
o worldwide economic development and the increasing globalization of
businesses
o growth in the Internet outside North America and Western Europe
o growth in new Internet technology-based applications
o increased distribution of television programming and other content
to regional, national and international audiences
o continued technological advancements that reduce the cost of
providing satellite-based communications services
OUR STRATEGY
Our strategy is to leverage our expertise in ground segment systems and
networks to expand our core business and our communications services
business. To implement this strategy, we intend to do the following:
TARGET OPPORTUNITIES TO SUPPLY END-TO-END COMMUNICATIONS SERVICES
WORLDWIDE. We seek to capture recurring revenues by providing end-to-end,
value-added communications services worldwide. Our end-to-end services enable
our customers to address their needs quickly and cost-effectively without
having to integrate products and services from different suppliers and
enable them to outsource their ongoing communications services needs.
FOCUS ON HIGH MARGIN COMPLEX PROJECTS. We will continue to focus on
opportunities to use our technological expertise in high value-added ground
segment systems and network projects. Our emphasis positions us to earn
higher gross margins through the delivery of innovative and cost-effective
solutions tailored to our customers' requirements.
EXPAND EXISTING CUSTOMER RELATIONSHIPS AND TARGET INDUSTRY-SPECIFIC MARKETS.
We seek to expand and strengthen our existing customer relationships by
providing value-added integration and ongoing communications services to our
existing customers. In addition, we are targeting specific industries which we
believe will offer high growth potential and where we believe our expertise and
relationships will provide us with a competitive advantage.
CONTINUE TO DEVELOP STRATEGIC SUPPLIER RELATIONSHIPS. We seek to continue
to establish strategic relationships with suppliers that we believe are in a
position to provide us with products or services that will improve our
competitive position in the markets that we serve.
NETSAT EXPRESS STRATEGY. NetSat Express intends to continue to invest in
its infrastructure to enhance its global reach in providing Internet access and
broaden its service offerings. NetSat Express intends to offer Internet service
providers infrastructure related services including ongoing outsourcing of
software applications. NetSat Express plans on providing transmission services
that ensure the security of sensitive corporate data when transmitted over the
Internet or other shared networks. NetSat Express also intends to provide
content delivery services for corporations and content providers who must
transmit multimedia streams and electronic files to multiple locations
around the globe.
On February 22, 2000, NetSat Express announced that it intends to make an
initial public offering of shares of its common stock. NetSat Express has not
yet filed a registration statement relating to its securities with the
Securities and Exchange Commission. None of its securities may be sold, nor
may offers to buy be accepted, prior to the time a registration statement is
declared effective by the Securities and Exchange Commission. The offering of
its securities will be made only by means of a prospectus that will be
contained in NetSat Express' effective registration statement. This paragraph
does not constitute an offer to sell or the solicitation of an offer to buy
any securities of NetSat Express, which only will be made by means of a
NetSat Express prospectus.
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THE OFFERING
Common stock offered by Globecomm ........... 2,000,000 shares
Common stock to be outstanding after the
offering.................................... 11,650,298 shares
Use of proceeds.............................. A revolving credit facility for up
to $15 million to NetSat Express,
Inc., our majority-owned
subsidiary, for its working
capital and general corporate
purposes; and for our working
capital and general corporate
purposes.
Nasdaq National Market symbol................ "GCOM"
The number of shares of common stock to be outstanding immediately after
the offering is based upon shares outstanding as of February 4, 2000 and does
not include:
o 1,703,576 shares of common stock issuable upon the exercise of
outstanding stock options granted pursuant to our 1997 Stock
Incentive Plan at a weighted exercise price of $9.17 per share, and
o 57,325 shares of common stock issuable upon exercise of warrants,
all with an exercise price of $8.07 per share.
Please see the section of this prospectus entitled "Capitalization" for a
more complete discussion regarding outstanding shares of our common stock and
warrants and options to purchase shares of our common stock and other related
matters.
Unless we specifically state otherwise, the information in this prospectus
does not take into account up to 300,000 shares of common stock which the
underwriters have the option to purchase from us and selling stockholders to
cover over-allotments.
----------
We were incorporated in Delaware on August 17, 1994. Our principal
executive offices are located at 45 Oser Avenue, Hauppauge, New York 11788,
and our telephone number is (631) 231-9800.
The names Globecomm Systems Inc., MBB2001 and CTF2001 are registered
trademarks that belong to us. The name NetSat Express, Inc. is a registered
trademark that belongs to NetSat Express, Inc. The names CES2001, Internet
Anywhere, Wide Area Network Anywhere, Intranet Anywhere, ISDN Anywhere and
Bandwidth on Demand Anywhere are trademarks that belong to us. The name Impact
ISP is a trademark that belongs to NetSat Express, Inc. This prospectus contains
the names and trade names of other entities that are the properties of their
respective owners.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 17,
1994
(INCEPTION)
THROUGH SIX MONTHS ENDED
JUNE 30, YEAR ENDED JUNE 30, DECEMBER 31,
------------- -------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1998 1999
------------- ---------- ---------- --------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.......................... $ 72 $13,476 $36,220 $58,105 $49,058 $25,175 $36,798
Costs of revenues................. 58 11,238 32,060 49,532 43,516 21,919 31,885
------------- ---------- ---------- --------- ---------- ---------- ---------
Gross profit...................... 14 2,238 4,160 8,573 5,542 3,256 4,913
------------- ---------- ---------- --------- ---------- ---------- ---------
Operating expenses:
Network operations............... -- -- -- -- 514 204 718
Selling and marketing............ 346 1,915 3,282 4,187 5,183 2,324 2,426
Research and development......... -- 712 649 1,188 1,325 550 355
General and administrative ...... 772 1,945 3,449 5,010 6,040 2,656 4,114
Terminated acquisition costs .... -- -- -- -- 972 972 --
Write-down of investments........ -- -- -- -- 679 -- --
------------- ---------- ---------- --------- ---------- ---------- ---------
Total operating expenses.......... 1,118 4,572 7,380 10,385 14,713 6,706 7,613
------------- ---------- ---------- --------- ---------- ---------- ---------
Loss from operations.............. (1,104) (2,334) (3,220) (1,812) (9,171) (3,450) (2,700)
Other income (expense):
Interest income.................. 54 121 298 1,271 980 610 448
Interest expense................. (15) (32) (22) (5) (1) -- (317)
Gain on sale of subsidiary's
common stock.................... -- -- -- -- -- -- 2,353
------------- ---------- ---------- --------- ---------- ---------- ---------
Loss before minority interests in
operations of consolidated
subsidiary....................... (1,065) (2,245) (2,944) (546) (8,192) (2,840) (216)
Minority interests in operations
of consolidated subsidiary....... -- -- 275 -- -- -- 614
------------- ---------- ---------- --------- ---------- ---------- ---------
Net (loss) income ................ $(1,065) $(2,245) $(2,669) $ (546) $(8,192) $(2,840) $ 398
============= ========== ========== ========= ========== ========== =========
Basic net (loss) income
per common share................. $ (0.06) $ (0.90) $ (0.31) $ 0.04
========= ========== ========== =========
Diluted net (loss) income
per common share................. $ (0.06) $ (0.90) $ (0.31) $ 0.04
========= ========== ========== =========
Shares used in the calculation of
basic net (loss) income
per common share................. 8,553 9,109 9,127 9,268
========= ========== ========== =========
Shares used in the calculation of
diluted net (loss) income
per common share................. 8,553 9,109 9,127 10,157
========= ========== ========== =========
Pro forma basic and diluted net
loss per common share
(unaudited)...................... $ (0.44)
==========
Shares used in the calculation of
pro forma basic and diluted net
loss per common share
(unaudited)...................... 6,086
==========
</TABLE>
6
<PAGE>
The following as adjusted balance sheet data gives effect to our sale of
2,000,000 shares of common stock in this offering at the assumed offering price
of $ per share, after deducting the underwriting discount and estimated offering
expenses, and the application of the net proceeds from this offering.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
ACTUAL AS ADJUSTED
--------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents................................... $23,071
Working capital........................................ 29,742
Total assets........................................... 75,890
Long-term obligations.................................. 12,416
Minority interests in consolidated subsidiary ......... 1,963
Series A Participating Preferred stock of consolidated
subsidiary............................................ 5,000
Total stockholders' equity............................. 40,414
</TABLE>
7
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RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks,
together with the other information contained in this prospectus, before you
decide to buy our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW AND EXPECT OUR
LOSSES TO CONTINUE.
We have incurred significant net losses since we began operating in August
1994. We incurred net losses of $2.7 million during the fiscal year ended
June 30, 1997, $0.5 million during the fiscal year ended June 30, 1998, and
$8.2 million during the fiscal year ended June 30, 1999. Our net losses
include net losses of $1.5 million during the fiscal year ended June 30,
1997, $1.7 million during the fiscal year ended June 30, 1998, and $2.1
million during the fiscal year ended June 30, 1999 for NetSat Express. As of
December 31, 1999, our accumulated deficit was approximately $14.3 million.
We anticipate that we will continue to incur net losses. Our ability to
achieve and maintain profitability will depend upon our ability to generate
significant revenues through new customer contracts and the expansion of our
existing products and services, including our communications services. We
cannot assure you that we will be able to obtain new customer contracts or
generate significant additional revenues from those contracts or any new
products or services that we introduce. Even if we become profitable, we may
not sustain or increase our profits on a quarterly or annual basis in the
future.
RISKS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS COULD RESTRICT OUR
ABILITY TO EXPAND GLOBALLY AND HARM OUR BUSINESS AND PROSPECTS.
We market and sell our products and services in the United States and
internationally. We anticipate that international sales will continue to
account for a significant portion of our total revenues for the foreseeable
future. We presently conduct our international sales in the following
regions: Africa, the Pacific Rim Region, Australia, Central and South
America, Eastern and Central Europe and the Middle East. There are some risks
inherent in conducting our business internationally, including:
o changes in regulatory requirements could restrict our ability to
deliver services to our international customers;
o export restrictions, tariffs, licenses and other trade barriers
could prevent us from adequately equipping our network facilities;
o differing technology standards across countries may impede our
ability to integrate our products and services across international
borders;
o political and economic instability in international markets could
impede our ability to deliver our services to customers and harm
our financial results;
o protectionist laws and business practices favoring local
competition may give unequal bargaining leverage to key vendors in
countries where competition is scarce, significantly increasing our
operating costs;
o increased expenses associated with marketing services in foreign
countries;
o decreases in value of foreign currency relative to the U.S. dollar;
o relying on local subcontractors for installation of our products
and services;
o difficulties in staffing and managing foreign operations;
o potentially adverse taxes;
o complying with complex foreign laws and treaties; and
o difficulties in collecting accounts receivable.
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These and other risks could impede our ability to manage our international
business effectively, limit the future growth of our business, increase our
costs and require significant management attention.
IF WE ARE NOT SUCCESSFUL IN SELLING OUR COMMUNICATIONS SERVICES TO OUR
CUSTOMERS FOR WHOM WE HAVE HISTORICALLY PROVIDED SATELLITE GROUND SEGMENT
SYSTEMS AND NETWORKS, OUR RESULTS OF OPERATIONS WILL BE HARMED.
We have historically provided our customers with satellite ground segment
systems and networks on a project basis. We currently market our
communications services to our existing customers. These services not only
provide the implementation of the satellite ground segment systems and
networks but also provide the ongoing operation and maintenance of these
services. If we are not successful in selling these communications services
to our existing customers, it will harm our results of operations.
IF NETSAT EXPRESS DOES NOT EXECUTE ITS BUSINESS STRATEGY OR IF THE MARKET FOR
ITS SERVICES FAILS TO DEVELOP OR DEVELOPS MORE SLOWLY THAN IT EXPECTS, OUR
STOCK PRICE MAY BE ADVERSELY AFFECTED.
NetSat Express' future revenues and results of operations are dependent on
its execution of its business strategy and the development of the market for
its current and future services. If NetSat Express does not execute its
business strategy or execute it to the expectation level of public market
analysts, these public market analysts may reduce the value they assign to
NetSat Express. If the market for its current or future services fails to
develop, or develops more slowly than it expects, then public market analysts
may reduce the value they assign to NetSat Express. In the event these
analysts, in either case, reduce the value they assign NetSat Express, it
would have a material adverse affect on the market price of our stock.
CURRENCY DEVALUATIONS IN THE FOREIGN MARKETS IN WHICH WE OPERATE COULD
DECREASE DEMAND FOR OUR PRODUCTS AND SERVICES.
We denominate our foreign sales in U.S. dollars. Consequently, decreases
in the value of local currencies relative to the U.S. dollar in the markets
in which we operate, adversely affect the demand for our products and
services by increasing the price of our products and services in the
currencies of the countries in which they are sold. The difficult economic
conditions in the Pacific Rim region, Russia and other international markets
and the resulting foreign currency devaluations have led to a decrease in
demand for our products and services and the decrease in bookings received by
us from these and other foreign regions has adversely effected our results of
operations for the fiscal year ended June 30, 1999 and the six months ended
December 31, 1999. We expect that these negative trends will continue to
adversely impact our results of operations.
YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF
OUR FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND
IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS,
OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY.
Our future revenues and results of operations may significantly fluctuate
due to a combination of factors, including:
o the length of time needed to initiate and complete customer
contracts;
o the demand for and acceptance of our existing products and
services;
o the cost of providing our products and services;
o the introduction of new and improved products and services by us or
our competitors;
o the level of demand for our existing products and services in
developing countries with emerging markets for our services;
o our ability to hire and retain additional personnel;
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o the timing of significant marketing programs;
o the mix of revenue between our standard products, custom-built
products and our communications services;
o the competition in our markets; and
o general economic conditions in the United States and abroad,
including the difficult economic conditions and currency
devaluations in the Pacific Rim region, Russia and other
international markets which have, and may continue to, adversely
impact our quarterly results.
Accordingly, you should not rely on quarter-to-quarter comparisons of our
results of operations as an indication of our future performance. It is
possible that in future periods our results of operations may be below the
expectations of public market analysts and investors, which could cause the
trading price of our common stock to decline.
OUR MARKETS ARE HIGHLY COMPETITIVE AND WE HAVE MANY ESTABLISHED COMPETITORS,
AND WE MAY LOSE MARKET SHARE AS A RESULT.
The markets in which we operate are highly competitive and this
competition could harm our ability to sell our products and services on
prices and terms favorable to us. Our primary competitors in the satellite
ground segment and networks services include vertically integrated satellite
systems providers like Nippon Electric Corporation, and systems integrators
like IDB Systems, a division of MCI WorldCom, Inc.
In the communications services and Internet access services markets, we do
compete with other satellite communication companies who provide similar
services, like Loral CyberStar, Inc. and PanAmSat Corporation, as well as
other Internet services providers. In addition, we may compete with other
communications services providers like Teleglobe, Inc. and MCI WorldCom. We
anticipate that our competitors may develop or acquire services that provide
functionality that is similar to that provided by our services and that those
services may be offered at significantly lower prices or bundled with other
services.
These competitors have the financial resources to withstand substantial
price competition and may be in a better position to endure difficult
economic conditions in the Pacific Rim region, Russia and other international
markets, and may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Moreover, many of
our competitors have more extensive customer bases, broader customer
relationships and broader industry alliances that they could use to their
advantage in competitive situations.
The markets in which we operate have limited barriers to entry and we
expect that we will face additional competition from existing competitors and
new market entrants in the future. Moreover, our current and potential
competitors have established or may establish strategic relationships among
themselves or with third parties to increase the ability of their products
and services to address the needs of our current and prospective customers.
Existing and new competitors with their potential strategic relationships may
rapidly acquire significant market share, which would harm our business and
financial condition.
IF THE SATELLITE COMMUNICATIONS INDUSTRY FAILS TO CONTINUE TO DEVELOP OR NEW
TECHNOLOGY MAKES IT OBSOLETE, OUR BUSINESS AND FINANCIAL CONDITION WILL BE
HARMED.
Our business is dependent on the continued success and development of
satellite communications technology, which competes with terrestrial
communications transport technologies like terrestrial microwave, coaxial
cable and fiber optic communications systems. If the satellite communications
industry fails to continue to develop, or any technological development
significantly improves the cost or efficiency of competing terrestrial
systems relative to satellite systems, then our business and financial
condition would be materially harmed.
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WE MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OUR CAPITAL REQUIREMENTS
IN THE FUTURE.
We have incurred negative cash flows from operations in each year since
our inception. We believe that our available cash resources, together with
the proceeds of this offering, will be sufficient to meet our working capital
and capital expenditure requirements through February 2001. However, our
future liquidity and capital requirements are difficult to predict, as they
depend on numerous factors, including the success of our existing product and
services offerings as well as competing technological and market
developments. We may need to raise additional funds in order to meet
additional working capital requirements and to support additional capital
expenditures. Should this need arise, additional funds may not be available
when needed and, even if additional funds are available, we may not find the
terms favorable or commercially reasonable. If adequate funds are
unavailable, we may be required to delay, reduce or eliminate some of our
operating activities, including marketing programs, hiring of additional
personnel and research and development programs. If we raise additional funds
by issuing equity securities, our existing stockholders will own a smaller
percentage of our capital stock and new investors may pay less on average for
their securities than, and could have rights superior to existing
stockholders. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for a
more complete description of our historical financial condition, results of
operations and liquidity.
WE RELY ON OUR RELATIONSHIPS WITH RESELLERS IN DEVELOPING COUNTRIES WITH
EMERGING MARKETS FOR SALES OF OUR PRODUCTS AND SERVICES AND THE LOSS OR
FAILURE OF ANY OF THESE RELATIONSHIPS MAY HARM OUR ABILITY TO MARKET AND SELL
OUR SERVICES.
We intend to provide our products and services and NetSat Express'
services almost entirely in developing countries where we have little or no
market experience. We intend to rely on resellers in those markets to provide
their expertise and knowledge of the local regulatory environment in order to
make access to customers in emerging markets easier. If we are unable to
maintain these relationships, or develop new ones in other emerging markets,
our ability to enter into and compete successfully in developing countries
would be adversely affected.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUE,
AND THE LOSS OF A KEY CUSTOMER WOULD ADVERSELY AFFECT OUR REVENUES, BUSINESS
AND FINANCIAL CONDITION.
We rely on a small number of customers for a large portion of our revenues
and expect that a significant portion of our revenues will continue to be
derived from a limited number of customers. For the six months ended December
31, 1999, four customers accounted for approximately 29.8% of our total
revenues. We anticipate that our operating results in any given period will
continue to depend to a significant extent upon revenues from large contracts
with a small number of customers. As a result of this concentration of our
customer base, a loss of or decrease in business from one or more of these
customers would materially adversely affect our revenues and financial
condition.
OUR INABILITY TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION COULD SERIOUSLY
HARM OUR ABILITY TO EFFECTIVELY RUN OUR BUSINESS.
Since our inception, we have continued to increase the scope of our
operations. This growth has placed, and our anticipated growth will continue
to place, a significant strain on our personnel, management, financial and
other resources. Any failure to manage our growth effectively could seriously
harm our ability to respond to customers, monitor the quality of our products
and services and maintain the overall efficiency of our operations. In order
to continue to pursue the opportunities presented by our satellite-based
communications services, we plan to continue to hire a significant number of
key officers and other employees and to increase our operating expenses by
broadening our customer support capabilities, expanding our sales and
marketing operations and improving our operating and financial systems. If we
fail to manage any future growth in an efficient manner, and at a pace
consistent with our business, our revenues, financial condition and business
will be harmed.
11
<PAGE>
WE ANTICIPATE SIGNIFICANT REVENUES FROM OUR SIRIUS SATELLITE RADIO CONTRACT
AND A MODIFICATION OR TERMINATION OF THIS CONTRACT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR REVENUES AND FINANCIAL CONDITION.
We have an agreement with Sirius Satellite Radio, Inc. to provide
equipment for their satellite radio transmission system, which we expect to
generate substantial revenues. Sirius Satellite Radio anticipates beginning
operations of its system at the end of the fourth quarter of 2000. If it is
unable to implement its plan to build a nationwide radio broadcast system,
the market for digital radio declines, or Sirius Satellite Radio modifies or
terminates its agreement with us, our financial condition and results of
operations would be harmed.
WE ARE PAID A FIXED PRICE IN MOST OF OUR CUSTOMER CONTRACTS, AND ANY
VARIATION BETWEEN THE FIXED PRICE AND THE ACTUAL COST OF PERFORMANCE MAY HARM
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
A majority of our customer contracts are on a fixed-price basis. The
profitability of these contracts is subject to inherent uncertainties in the
cost of performance, including costs related to unforeseen obstacles and
unexpected problems encountered in engineering, design, implementation and
testing of our products and services. Because a significant portion of our
revenues is dependent upon a small number of customers, if the fixed price is
significantly less than the actual cost of performance on any one contract,
our financial condition and results of operations could be adversely
affected.
IF OUR PRODUCTS AND SERVICES ARE NOT ACCEPTED IN DEVELOPING COUNTRIES WITH
EMERGING MARKETS, OUR REVENUES WILL BE IMPAIRED.
We anticipate that a substantial portion of the growth in the demand for
our products and services will come from customers in developing countries
due to a lack of basic communications infrastructure in these countries.
However, we cannot guarantee an increase in the demand for our products and
services in developing countries or that customers in these countries will
accept our products and services at all. Our ability to penetrate emerging
markets in developing countries is dependent upon various factors including:
o the speed at which communications infrastructure, including
terrestrial microwave, coaxial cable and fiber optic communications
systems, which compete with satellite-based services, is built;
o the effectiveness of our local resellers and sales representatives
in marketing and selling our products and services; and
o the acceptance of our products and services by customers.
If our products and services are not accepted, or the market potential we
anticipate does not develop, our revenues will be impaired.
WE DEPEND UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE
EMPLOYEES OR RECRUIT ADDITIONAL QUALIFIED PERSONNEL, WHICH WOULD HARM OUR
BUSINESS.
Our future performance depends on the continued service of our key
technical, managerial and marketing personnel. In particular, we are highly
dependent on our management team, including David Hershberg, Kenneth Miller,
Marni Ehrlich, Burt Liebowitz, Steven Yablonski and Don Woodring. The
employment of any of our key personnel could cease at any time.
Our future success depends upon our ability to attract, retain and
motivate highly-skilled employees. Because the competition for qualified
employees among companies in the satellite communications industry and the
networking industry is intense, we may not be successful in recruiting or
retaining qualified personnel, which would harm our business.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BUSINESS.
We regard our trademarks, trade secrets and other intellectual property as
critical to our success. Unauthorized use of our intellectual property by
third parties may damage our business. We rely on
12
<PAGE>
trademark, trade secret and patent protection and contracts including
confidentiality and license agreements with our employees, customers,
strategic collaborators, consultants and others to protect our intellectual
property rights. Despite our precautions, it may be possible for third
parties to obtain and use our intellectual property without our
authorization. Failure to maintain protection of our intellectual property
for any reason could have a materially adverse effect on our business.
We currently have been granted two patents in the United States, for
remote access to the Internet using satellites, and for satellite
communication with automatic frequency control, and have a patent pending in
the United States. We also intend to seek further patents on our technology,
if appropriate. We cannot assure you that patents will be issued for any of
our pending or any future applications or that any claims allowed from such
applications will be of sufficient scope, or be issued in all countries where
our products and services can be sold, to provide meaningful protection or
any commercial advantage to us. Also, our competitors may be able to design
around our patents. The laws of some foreign countries in which our products
and services are or may be developed, manufactured or sold may not protect
our products and services or intellectual property rights to the same extent
as do the laws of the United States and thus make the possibility of piracy
of our technology and products and services more likely.
We have filed applications for trademark registration of Globecomm Systems
Inc. in the United States and various other countries and have received
trademark registrations for NetSat Express in the United States, the European
Community, Russia, and Brazil. We intend to seek registration of other
trademarks and service marks in the future. We cannot assure you that
registrations will be granted from any of our pending or future applications,
or that any registrations that are granted will prevent others from using
similar trademarks in connection with related goods and services.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME
CONSUMING AND EXPENSIVE, AND IF WE ARE NOT SUCCESSFUL, COULD CAUSE
SUBSTANTIAL EXPENSES AND DISRUPT OUR BUSINESS.
We cannot be sure that the products, services, technologies, and
advertising we employ in our business do not or will not infringe valid
patents, trademarks, copyrights or other intellectual property rights held by
third parties. We may be subject to legal proceedings and claims from time to
time relating to the intellectual property of others in the ordinary course
of our business. We may incur substantial expenses in defending against these
third party claims, regardless of their merit. Successful infringement claims
against us may result in substantial monetary liability and/or may materially
disrupt the conduct of, or necessitate the cessation of, our business.
THROUGH ITS OWNERSHIP, OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES MAY BE
ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER OUR MANAGEMENT.
As of February 4, 2000, our officers and directors, and their affiliates
beneficially own approximately 1.7 million shares, constituting approximately
17% of our outstanding common stock. These stockholders, acting together, may
be able to exert significant influence over the election of directors and
other corporate actions requiring stockholder approval.
WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGES WHICH WOULD MAKE
OUR PRODUCTS AND SERVICES BECOME NON-COMPETITIVE AND OBSOLETE.
The telecommunications industry, including satellite-based communications
services and Internet access services, is characterized by rapidly changing
technologies, frequent new product and service introductions and evolving
industry standards. If we are unable, for technological or other reasons, to
develop and introduce new products and services or enhancements to existing
products and services in a timely manner or in response to changing market
conditions or customer requirements, our products and services would become
non-competitive and obsolete, which would harm our business, results of
operations and financial condition.
13
<PAGE>
WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE OUR SOLE OR A LIMITED SOURCE OF
SUPPLY, AND THE LOSS OF THESE SUPPLIERS WOULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We currently obtain most of our critical components and services from
single or limited sources and generally do not maintain significant
inventories or have long-term or exclusive supply contracts with our source
vendors. We have from time to time experienced delays in receiving products
from vendors due to lack of availability, quality control or manufacturing
problems, shortages of materials or components or product design
difficulties. We may experience delays in the future and replacement services
or products may not be available when needed, or at all, or at commercially
reasonable rates or prices. If we were to change some of our vendors, we
would have to perform additional testing procedures on the service or product
supplied by the new vendors, which would prevent or delay the availability of
our products and services. Furthermore, our costs could increase
significantly if we need to change vendors. If we do not get timely
deliveries of quality products and services, or if there are significant
increases in the prices of these products or services, it could have a
material adverse effect on our business, results of operations and financial
condition.
WE MAY BE UNABLE TO LEASE TRANSPONDER SPACE ON SATELLITES WHICH COULD LIMIT
OUR ABILITY TO PROVIDE OUR SERVICES TO OUR CUSTOMERS.
We and NetSat Express lease transponder space on satellites in order to
provide telecommunications and Internet services to our customers and the
customers of NetSat Express. The supply of transponder space serving a
geographic region on earth is limited by the number of satellites that are in
orbit above that geographic region. If companies that own and deploy
satellites in orbit underestimate the demand for transponder space in a given
geographic area or they are simply unable to build and launch enough
satellites to keep up with increasing demand, the price for leasing
transponder space could rise, increasing our cost of operations or we simply
may not be able to lease enough transponder space to meet the demands of our
customers. We currently anticipate that the rapid growth in the demand for
satellite-based communications in the Pacific Rim region could lead to a
short-term shortage of transponder space in that region.
WE RELY ON NETSAT EXPRESS, OUR MAJORITY-OWNED SUBSIDIARY, FOR OUR MAIN SUPPLY
OF TRANSPONDER SPACE ON SATELLITES. IF THEIR BUSINESS FAILS OR WE ARE
OTHERWISE UNABLE TO CONTINUE TO RELY ON THEM FOR THIS SUPPLY, OUR BUSINESS
MAY BE HARMED.
We currently depend on NetSat Express for a majority of our transponder
space on satellites. We do not have a long-term agreement in place with
NetSat Express, as most of our needs are filled on a purchase order basis. If
NetSat Express is unable to develop its business or if we are unable to
continue to rely on their supply for transponder space, then we will have to
find alternative suppliers. If we are unable to find another supplier of
transponder space or if we are unable to find one on terms favorable to us,
then our business may be harmed.
OUR NETWORK MAY EXPERIENCE SECURITY BREACHES WHICH COULD DISRUPT OUR
SERVICES.
Our network infrastructure may be vulnerable to computer viruses,
break-ins, denial of service attacks and similar disruptive problems caused
by our customers or other Internet users. Computer viruses, break-ins, denial of
service attacks or other problems caused by third parties could lead to
interruptions, delays or cessation in service to our customers. There currently
is no existing technology that provides absolute security, and the cost of
minimizing these security breaches could be prohibitively expensive. We may face
liability to customers for such security breaches. Furthermore, these incidents
could deter potential customers and adversely affect existing customer
relationships.
SATELLITES UPON WHICH WE RELY MAY BE DAMAGED OR LOST, OR MALFUNCTION.
The damage, loss or malfunction of any of the satellites used by us, or a
temporary or permanent malfunction of any of the satellites upon which we
rely, would likely result in the interruption of our satellite-based
communications services. This interruption would have a material adverse
effect on our business, results of operations and financial condition.
14
<PAGE>
PROBLEMS RESULTING FROM THE YEAR 2000 PROBLEM COULD RESULT IN A DECREASE IN
SALES OF OUR PRODUCTS AND SERVICES OR REQUIRE US TO DIRECT OUR RESOURCES.
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally
and the compliance and remediation work accomplished leading up to 2000 was
effective in preventing any problems. Computer experts have warned that there
may still be residual consequences of the change in centuries and any such
difficulties could result in a decrease in sales of our products and
services, an increase in allocation of resources to address Year 2000
problems of our customers without additional revenue commensurate with such
dedication of resources, or an increase in litigation costs relating to
losses suffered by our customers due to such Year 2000 problems.
RISKS RELATED TO GOVERNMENT APPROVALS
WE ARE SUBJECT TO MANY GOVERNMENT REGULATIONS, AND FAILURE TO COMPLY WITH
THEM WILL HARM OUR BUSINESS.
OPERATIONS AND USE OF SATELLITES
We are subject to various federal laws and regulations which may have
negative effects on our business. We operate earth stations in Hauppauge, New
York, subject to the Communications Act of 1934, as amended, and the rules
and regulations of the Federal Communications Commission, or FCC. Pursuant to
the Act and rules, we have obtained and are required to maintain radio
transmission licenses from the FCC for both domestic and foreign operations
of our earth stations. These licenses should be renewed by the FCC in the
normal course as long as we are in compliance with the FCC rules and
regulations. However, we cannot guarantee that additional licenses will be
granted by the FCC when our existing licenses expire, nor are we assured that
the FCC will not adopt new or modified technical requirements that will
require us to incur expenditures to modify or upgrade our equipment as a
condition of retaining our licenses.
We are also required to comply with FCC regulations regarding the exposure
of humans to radio frequency radiation from our earth stations. These
regulations, as well as local land use regulations, restrict our freedom to
choose where to locate our earth stations.
FOREIGN OWNERSHIP
We may, in the future, be required to seek FCC approval for foreign
ownership if we operate as a common carrier and ownership of our stock
exceeds the specified criteria. Failure to comply with these policies may
result in an order to divest the offending foreign ownership, fines, denial
of license renewal, and/or license revocation proceedings against the
licensee by the FCC.
FOREIGN REGULATIONS
Regulatory schemes in countries in which we may seek to provide NetSat
Express' services may impose impediments on our operations. Some countries in
which we intend to operate have telecommunications laws and regulations that
do not currently contemplate technical advances in telecommunications
technology like Internet/intranet transmission by satellite. We cannot assure
you that the present regulatory environment in any of those countries will
not be changed in a manner which may have a material adverse impact on our
business. Either we or our local partners typically must obtain authorization
for each country in which we provide our satellite-delivered data
communications services. The regulatory schemes in each country are
different, and thus there may be instances of noncompliance of which we are
not aware. We cannot assure you that our licenses and approvals are or will
remain sufficient in the view of foreign regulatory authorities, or that
necessary licenses and approvals will be granted on a timely basis in all
jurisdictions in which we wish to offer our products and services or that
applicable restrictions will not be unduly burdensome.
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<PAGE>
REGULATION OF THE INTERNET
Due to the increasing popularity and use of the Internet it is possible
that a number of laws and regulations may be adopted at the local, national
or international levels with respect to the Internet, covering issues
including user privacy and expression, pricing of products and services,
taxation, advertising, intellectual property rights, information security or
the convergence of traditional communication services with Internet
communications. It is anticipated that a substantial portion of our Internet
operations will be carried out in countries which may impose greater
regulation of the content of information coming into the country than that
which is generally applicable in the United States, for example, privacy
regulations in Europe and content restrictions in countries like the Republic
of China. To the extent that we provide content as a part of our Internet
services, it will be subject to laws regulating content. Moreover, the
adoption of laws or regulations may decrease the growth of the Internet,
which could in turn decrease the demand for our Internet services or increase
our cost of doing business or in some other manner have a material adverse
effect on our business, operating results and financial condition. In
addition, the applicability to the Internet of existing laws governing issues
including property ownership, copyrights and other intellectual property
issues, taxation, libel and personal privacy is uncertain. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies. Changes to these laws
intended to address these issues, including some recently proposed changes,
could create uncertainty in the marketplace which could reduce demand for our
products and services, could increase our cost of doing business as a result
of costs of litigation or increased product development costs, or could in
some other manner have a material adverse effect on our business, financial
condition and results of operations.
TELECOMMUNICATIONS TAXATION, SUPPORT REQUIREMENTS, AND ACCESS CHARGES
All telecommunications carriers providing domestic services in the United
States are required to contribute a portion of their gross revenues for the
support of universal telecommunications services; and some telecommunications
services are subject to special taxation and to contribution requirements to
support services to special groups, like persons with disabilities. Our
services may be subject to new or increased taxes and contribution
requirements that could affect our profitability, particularly if we are not
able to pass them through to customers for either competitive or regulatory
reasons.
Internet services are currently exempt from charges that long distance
telephone companies pay for access to the networks of local telephone
companies in the United States. Efforts have been made from time to time, and
may be made again in the future, to eliminate this exemption. If these access
charges are imposed on telephone lines used to reach Internet service
providers, and/or if flat rate telephone services for Internet access are
eliminated or curtailed, the cost to customers who access our satellite
facilities using telephone company-provided facilities could increase to an
extent that could discourage the demand for our services. Likewise, the
demand for our services in other countries may be affected by the
availability and cost of local telephone or other telecommunications
facilities to reach our facilities.
EXPORT OF TELECOMMUNICATIONS EQUIPMENT
The sale of our ground segment systems, networks, and communications
services outside the United States is subject to compliance with the
regulations of the United States Export Administration Regulations. The
absence of comparable restrictions on competitors in other countries may
adversely affect our competitive position. In addition, in order to ship our
products into other countries, the products must satisfy the technical
requirements of that particular country. If we were unable to comply with
these requirements with respect to a significant quantity of our products,
our sales in those countries could be restricted, which could have a material
adverse effect on our business, financial condition and results of
operations.
RISKS RELATED TO THE OFFERING
OUR STOCK PRICE IS HIGHLY VOLATILE.
Our stock price has fluctuated substantially since our initial public
offering, which was completed in August 1997. The market price for our common
stock, like that of the securities of many telecommunications and high
technology industry companies, is likely to remain volatile based on many
factors, including the following:
16
<PAGE>
o quarterly variations in operating results;
o announcements of new technology, products or services by us or any
of our competitors;
o acceptance of satellite-based communication services and Internet
access services in developing countries with emerging markets;
o changes in financial estimates or recommendations by security
analysts; or
o general market conditions.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. We may become involved in this type of
litigation in the future. Litigation of this type is often extremely
expensive and diverts management's attention and resources, which could
significantly harm our business.
NetSat Express has announced its intentions to make an initial public
offering of shares of its common stock. Because we own a large percentage of the
shares of NetSat Express, an adverse change in the market price of NetSat
Express' common stock, whether or not it accurately reflects the financial
performance or prospects of NetSat Express, may affect the market price of our
common stock. In addition, any perceived delay or actual postponement of an
initial public offering of NetSat Express' common stock may adversely affect the
market price of our common stock. We currently report in our consolidated
financial statements the operations of NetSat Express. The timing and size of
NetSat Express' anticipated offering is dependent on market conditions and other
factors. If NetSat Express completes its anticipated initial public offering,
our equity ownership may decrease to a percentage that would cause us to no
longer consolidate the financial position and results of operations of NetSat
Express. Therefore, we may in the future report our financial statements without
consolidating the financial statements of NetSat Express. If public market
analysts view this change in our financial statement reports negatively, it
could have a material adverse affect on the market price of our stock.
WE MAY SPEND THE NET PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT
AGREE.
We will have broad discretion as to the use of the net proceeds of this
offering. Accordingly, investors in this offering will be relying on
management's judgment with only limited information about our specific
intentions regarding the use of proceeds. We may spend most of the net
proceeds from this offering in ways with which you may not agree. Our failure
to apply these funds effectively could have a material and adverse effect on
our business, results of operations and financial condition.
A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING YOUR SHARES OF STOCK AT A
PREMIUM TO THE MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS AND
POISON PILL.
Various provisions with respect to votes in the election of directors,
special meetings of stockholders, and advance notice requirements for
stockholder proposals and director nominations of our amended and restated
certificate of incorporation, bylaws and Section 203 of the General
Corporation Laws of the State of Delaware could make it more difficult for a
third party to acquire us, even if doing so might be beneficial to you and
our other stockholders. In addition, we have a poison pill in place that
could make an acquisition of us by a third party more difficult.
17
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are principally contained in the sections on "Prospectus Summary,"
"Risk Factors," "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In some cases, you can identify forward-looking statements by terms like
"intends," "may," "will," "should," "could," "would," "expects," "plans,"
"anticipates," "believes," "estimates," "projects," "predicts," "potential" or
"continue" or other terms of or the negative of those forms or other comparable
terms. Our forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. These
factors are discussed in more detail elsewhere in this prospectus, including
under the captions "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
Because of these uncertainties, you should not place undue reliance on our
forward-looking statements. We do not intend to update any of these factors or
to publicly announce the result of any revisions to any of our forward-looking
statements contained herein, whether as a result of new information, future
events or otherwise.
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<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of
2,000,000 shares of common stock will be approximately $ million after
deducting underwriting discounts and offering expenses, or approximately $
million if the underwriters fully exercise their over-allotment option.
We expect to use the net proceeds of this offering as follows:
o a revolving credit facility for up to $15 million to NetSat Express,
our majority-owned subsidiary, for its working capital and general
corporate purposes;
o for working capital; and
o for general corporate purposes.
We are not currently in negotiations to acquire any products or companies.
We will have broad discretion to use the unspecified proceeds as we see fit.
Based upon the current plans, we believe that the net proceeds from this
offering, together with interest thereon, and our existing capital resources
will satisfy our capital requirements through February 2001.
Pending such uses, we intend to invest the net proceeds in
interest-bearing, investment-grade instruments, certificates of deposit or
direct or guaranteed obligations of the United States or its agencies.
DIVIDEND POLICY
We have not declared or paid cash dividends on our common stock in the
past and do not intend to pay dividends on our common stock in the
foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
and as adjusted to reflect the sale of 2,000,000 shares of common stock
pursuant to this offering, assuming an offering price of $ and after
deducting the estimated underwriting discounts and offering expenses. This
table should be read in conjunction with the consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," appearing elsewhere in the
prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Capital lease obligations............................................ $ 11,111
Minority interests in consolidated subsidiary........................ 1,963
Series A Participating Preferred stock of consolidated subsidiary,
at redemption value................................................. 5,000
Stockholders' equity:
Preferred stock, $0.001 par value; 3,000,000 shares authorized:
Class A Convertible, shares issued and outstanding: none .......... --
Class B Convertible, shares issued and outstanding: none .......... --
Series A Junior Participating, shares issued and outstanding:
none.............................................................. --
Common stock, $0.001 par value, 22,000,000 shares authorized,
shares issued: 9,712,988........................................... 10
Additional paid-in capital.......................................... 55,781
Accumulated deficit................................................. (14,319)
Deferred compensation............................................... (255)
Treasury stock at cost, 139,638 shares ............................. (803)
----------
Total stockholders' equity........................................... 40,414
----------
Total capitalization................................................. $ 58,488
==========
</TABLE>
Excludes 1,703,576 shares of common stock issuable upon exercise of
options outstanding as of February 4, 2000 at a weighted average exercise
price of $9.17 per share, and 57,325 shares of common stock issuable upon the
exercise of warrants, all with an exercise price of $8.07 per share.
20
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999 was approximately
$39.7 million, or $4.14 per share. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the total number of shares of common stock outstanding. After
giving effect to the sale by us of 2,000,000 shares of common stock offered
by this prospectus at an assumed offering price of $ per share and after
deducting underwriting discounts and commissions and estimated offering
expenses of $ per share, the net tangible book value at December 31, 1999
would have been approximately $ million, or $ per share. This represents
an immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors in
this offering, as illustrated by the following table:
<TABLE>
<CAPTION>
<S> <C>
Assumed public offering price per share ............................... $
Net tangible book value per share before the offering ................. $4.14
Increase per share attributable to new investors ......................
Pro forma net tangible book value per share after the offering ........
-----
Net tangible book value dilution per share to new investors ........... $
=====
</TABLE>
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SELECTED HISTORICAL FINANCIAL DATA
Our selected historical financial data as of and for each of the five years
in the period ended June 30, 1999 have been derived from our audited financial
statements. Our selected historical financial data as of and for the six months
ended December 31, 1998 and 1999 were derived from our unaudited condensed
financial statements. We believe that the unaudited financial data fairly
reflects our results of operations and financial condition for the respective
periods. In the table below, shares used in the calculation of pro forma basic
and diluted net loss was computed on the basis described in the Notes to the
Consolidated Financial Statements. EBITDA represents earnings before minority
interests in operations of our consolidated subsidiary, net interest income, net
income taxes, depreciation and amortization expenses. EBITDA does not represent
cash flows defined by generally accepted accounting principles and does not
necessarily indicate that our cash flows are sufficient to fund all of our cash
needs. EBITDA is a financial measure commonly used in our industry and should
not be considered in isolation or as a substitute for net income, cash flows
from operating activities or other measures of liquidity determined in
accordance with generally accepted accounting principles. EBITDA may not be
comparable to other similarly titled measures of other companies.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 17,
1994
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30, DECEMBER 31,
JUNE 30, ------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1998 1999
------------- ---------- ---------- --------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................. $ 72 $13,476 $36,220 $58,105 $49,058 $25,175 $36,798
Costs of revenues.................... 58 11,238 32,060 49,532 43,516 21,919 31,885
------------- ---------- ---------- --------- ---------- ---------- ---------
Gross profit......................... 14 2,238 4,160 8,573 5,542 3,256 4,913
------------- ---------- ---------- --------- ---------- ---------- ---------
Operating expenses:
Network operations.................. -- -- -- -- 514 204 718
Selling and marketing............... 346 1,915 3,282 4,187 5,183 2,324 2,426
Research and development............ -- 712 649 1,188 1,325 550 355
General and administrative.......... 772 1,945 3,449 5,010 6,040 2,656 4,114
Terminated acquisition costs ....... -- -- -- -- 972 972 --
Write-down of investments........... -- -- -- -- 679 -- --
------------- ---------- ---------- --------- ---------- ---------- ---------
Total operating expenses............. 1,118 4,572 7,380 10,385 14,713 6,706 7,613
------------- ---------- ---------- --------- ---------- ---------- ---------
Loss from operations................. (1,104) (2,334) (3,220) (1,812) (9,171) (3,450) (2,700)
Other income (expense):
Interest income..................... 54 121 298 1,271 980 610 448
Interest expense.................... (15) (32) (22) (5) (1) -- (317)
Gains on sale of subsidiary's
common stock....................... -- -- -- -- -- -- 2,353
------------- ---------- ---------- --------- ---------- ---------- ---------
Loss before minority interests in
operations of consolidated
subsidiary.......................... (1,065) (2,245) (2,944) (546) (8,192) (2,840) (216)
Minority interests in operations of
consolidated subsidiary............. -- -- 275 -- -- -- 614
------------- ---------- ---------- --------- ---------- ---------- ---------
Net (loss) income.................... $(1,065) $(2,245) $(2,669) $ (546) $(8,192) $(2,840) $ 398
============= ========== ========== ========= ========== ========== =========
Basic net (loss) income per common
share............................... $ (0.06) $ (0.90) $ (0.31) $ 0.04
========= ========== ========== =========
Diluted net (loss) income per common
share............................... $ (0.06) $ (0.90) $ (0.31) $ 0.04
========= ========== ========== =========
Shares used in the calculation of
basic net (loss) income per common
share............................... 8,553 9,109 9,127 9,268
========= ========== ========== =========
Shares used in the calculation of
diluted net (loss) income per
common share........................ 8,553 9,109 9,127 10,157
========= ========== ========== =========
Pro forma basic and diluted net loss
per common share (unaudited)........ $ (0.44)
==========
Shares used in the calculation of
pro forma basic and diluted net
loss per common share (unaudited) .. 6,086
==========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 17,
1994
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30, DECEMBER 31,
JUNE 30, ------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1998 1999
------------- ---------- ---------- --------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED OPERATING
DATA:
EBITDA........................... $(1,036) $(2,141) $(2,858) $(1,096) $(7,904) $(2,638) $ 761
Cash flows used in operating
activities...................... (454) (2,510) (1,958) (5,678) (4,408) (1,335) (3,133)
Cash flows (used in) provided by
investing activities............ (593) (1,714) (8,221) (7,342) (4,435) (3,082) 3,761
Cash flows provided by (used in)
financing activities............ 4,554 4,151 11,908 29,198 (555) (562) 10,499
Capital expenditures............. 437 339 6,765 3,678 3,818 1,152 2,393
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........ $3,507 $3,435 $ 5,164 $21,342 $11,944 $16,363 $23,071
Working capital.................. 2,663 4,727 6,379 31,461 19,450 26,588 29,742
Total assets..................... 6,375 9,503 33,286 58,619 58,010 57,159 75,890
Long-term liabilities............ 109 74 18 -- -- -- 12,416
Minority interests............... -- -- -- -- -- -- 1,963
Series A Participating Preferred
stock of consolidated
subsidiary...................... -- -- -- -- -- -- 5,000
Total Stockholders' equity ...... 3,207 5,730 15,996 44,014 36,257 40,666 40,414
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following management's discussion and analysis in
conjunction with our consolidated financial statements and related notes
included in this prospectus.
OVERVIEW
Since our inception, substantially all of our revenue has been generated
by our ground segment systems and networks and communications services
business. Contracts for these ground segment systems and networks and
communications services have been fixed-price contracts in virtually all cases.
Profitability of such contracts is subject to inherent uncertainties as to the
cost of performance. In addition to possible errors or omissions in making
initial estimates, cost overruns may be incurred as a result of unforeseen
obstacles including both physical conditions and unexpected problems encountered
in engineering design and testing. Since our business may at times be
concentrated in a limited number of large contracts, a significant cost overrun
on any contract could have a material adverse effect on our business, financial
condition and results of operations. The period from contract award through
installation of ground segment systems and networks and communications services
supplied by us generally requires from three to 12 months. We use the percentage
of completion method of accounting for contract revenues, upon the achievement
of various milestones. Accordingly, most of the revenue from sales of products
is typically recognized when the product is shipped, with the balance recognized
at the time of acceptance by the customer. Revenues from providing
satellite-based communications services are recognized at the time the service
is performed. Costs of revenues are generally recorded based on the relationship
of the amount of projected final costs to the percentage of revenue recorded for
the specific contract.
Costs of revenues consist primarily of the costs of purchased material,
direct labor and related overhead expenses, project-related travel, living
costs and subcontractor salaries. In addition, cost of revenues relating to
Internet access service fees consists primarily of satellite space segment
charges and Internet connectivity fees. Network operations expenses consist
primarily of costs associated with the operation of NetSat Express' network
operations center on a twenty-four hour a day, seven day a week basis
including personnel and related costs. Selling and marketing expenses consist
primarily of salaries, travel and living costs for sales and marketing
personnel. Research and development expenses consist primarily of salaries
and related overhead expenses paid to engineers. General and administrative
expenses consist of expenses associated with our management, accounting,
contract and administrative functions. We anticipate that research and
development will increase and network operations, selling and marketing and
general and administrative expenses will continue to increase during the next
several years due to expected increases in personnel and related expenses to
support our increasing service base.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth some operating data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------- -------------------
1997 1998 1999 1998 1999
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES:
Revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of revenues................... 88.5 85.2 88.7 87.1 86.6
-------- -------- --------- --------- --------
Gross profit........................ 11.5 14.8 11.3 12.9 13.4
Operating expenses:
Network operations................. -- -- 1.0 0.8 2.0
Selling and marketing.............. 9.1 7.2 10.6 9.2 6.6
Research and development........... 1.8 2.1 2.7 2.2 0.9
General and administrative......... 9.5 8.6 12.3 10.5 11.2
Terminated acquisition costs ...... -- -- 2.0 3.9 --
Write-down of investments.......... -- -- 1.4 -- --
-------- -------- --------- --------- --------
Total operating expenses............ 20.4 17.9 30.0 26.6 20.7
-------- -------- --------- --------- --------
Loss from operations................ (8.9) (3.1) (18.7) (13.7) (7.3)
Other income (expense):
Interest income.................... 0.8 2.2 2.0 2.4 1.2
Interest expense................... -- -- -- -- (0.9)
Gain on sale of subsidiary's
common stock...................... -- -- -- -- 6.4
-------- -------- --------- --------- --------
Loss before minority interests in
operations of consolidated
subsidiary......................... (8.1) (0.9) (16.7) (11.3) (0.6)
Minority interests in operations of
consolidated subsidiary............ 0.7 -- -- -- 1.7
-------- -------- --------- --------- --------
Net (loss) income .................. (7.4)% (0.9)% (16.7)% (11.3)% 1.1%
======== ======== ========= ========= ========
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999
Revenues. Revenues increased by $11.6 million, or 46.2% from $25.2 million
for the six months ended December 31, 1998 to $36.8 million for the six
months ended December 31, 1999. The increase reflects increased shipments for
both international and domestic projects and an increase in revenues
generated by NetSat Express. Although we experienced increased revenues for
the six months ended December 31, 1999, we expect the trends in revenues that
adversely affected our results of operations for the fiscal year ended June
30, 1999 to continue to adversely impact us. These trends include the
difficult economic conditions in the Pacific Rim region, Russia and other
international markets and the decrease in bookings received by us from these
regions.
Gross Profit. Gross profit increased by $1.7 million, or 50.9% from $3.3
million for the six months ended December 31, 1998 to $4.9 million, for the
six months ended December 31, 1999. The increase reflects increased shipments
for both international and domestic projects and an increase in revenues
generated by NetSat Express. Gross profit as a percentage of revenues
increased from 12.9% for the six months ended December 31, 1998 to 13.4% for
the six months ended December 31, 1999. This increase is mainly attributable
to an increase in the NetSat Express gross profit for the six months ended
December 31, 1999 compared to the comparable period in the prior year.
Network Operations. Network operations expenses increased by $0.5 million,
or 252.0% from $0.2 million for the six months ended December 31, 1998 to
$0.7 million for the six months ended
26
<PAGE>
December 31, 1999. The increase is due to the continuing expansion of NetSat
Express' network operations center and related expenses to support the
increasing service base.
Selling and Marketing. Selling and marketing expenses increased by $0.1
million, or 4.4% from $2.3 million for the six months ended December 31, 1998
to $2.4 million for the six months ended December 31, 1999. This slight
increase is attributable to an increase in NetSat Express' sales and
marketing efforts.
Research and Development. Research and development expenses decreased by
$0.2 million, or 35.5% from $0.6 million for the six months ended December
31, 1998 to $0.4 million for the six months ended December 31, 1999. This
decrease is due to our reduced research and development efforts in the first
quarter ended September 30, 1999.
General and Administrative. General and administrative expenses increased
by $1.5 million, or 54.9% from $2.7 million for the six months ended December
31, 1998 to $4.1 million for the six months ended December 31, 1999. General
and administrative expenses as a percentage of revenues increased from 10.5%
for the six months ended December 31, 1998 to 11.2% for the six months ended
December 31, 1999. The increase in general and administrative expenses for
the six months ended mainly resulted from an increase in NetSat Express'
personnel and related expenses.
Terminated Acquisition. Terminated acquisition costs of approximately $1.0
million for the six months ended December 31, 1998 relate to legal,
accounting and other expenses associated with the termination of a proposed
acquisition of a mobile satellite communications business during the first
quarter ended September 30, 1998 due to the determination that the
acquisition was not in the best interest of our stockholders.
Interest Income. Interest income decreased by $0.2 million, or 26.6% from
$0.6 million for the six months ended December 31, 1998 to $0.4 million for
the six months ended December 31, 1999. This decrease was primarily due to
the reduction of cash and cash equivalents during the first quarter ended
September 30, 1999 compared to same period in the prior year.
Interest Expense. Interest expense was minimal for the six months ended
December 31, 1998 and $0.3 million for the six months ended December 31,
1999. This increase relates to NetSat Express' 15-year capital lease entered
into in September 1999 for satellite space segment on the SatMex 5 satellite.
Gain on Sale of Subsidiary's Common Stock. The gain on sale of
subsidiary's common stock of approximately $2.4 million for the six months
ended December 31, 1999 relates to our sale of 1,400,000 shares of common
stock of NetSat Express at $2.50 per share.
NetSat Express. Our consolidated subsidiary, NetSat Express, experienced
an increase in revenues of $2.9 million, or 420.5% from $0.7 million for the
six months ended December 31, 1998 to $3.6 million for the six months ended
December 31, 1999. The increase resulted from additional service and hardware
revenues derived from new and existing Internet access service customers. The
loss from operations associated with NetSat Express increased by $1.4
million, or 142.8% from $1.0 million for the six months ended December 31,
1998 to $2.4 million for the six months ended December 31, 1999. The
increase was primarily associated with an increase in general and
administrative expenses due to an increase in NetSat Express personnel and
the related expenses and an increase in network operation expenses.
FISCAL YEARS ENDED JUNE 30, 1998 AND 1999
Revenues. Revenues, which were primarily derived from sales of ground
segment systems and networks, decreased by $9.0 million, or 15.6% from $58.1
million for the fiscal year ended June 30, 1998, to $49.1 million for the
fiscal year ended June 30, 1999. The decrease relates primarily to the
decrease in the shipment and/or completion of ground segment systems and
networks contracts as a result of a decline in the bookings of contract
orders due to the continuing difficult economic conditions in the Pacific
Rim, Russia and other international markets.
27
<PAGE>
Gross Profit. Gross profit decreased by $3.0 million, or 35.4%, from $8.6
million for the fiscal year ended June 30, 1998 to $5.5 million for the
fiscal year ended June 30, 1999. The decrease was primarily due to the
decrease in the shipment and/or completion of ground segment systems and
networks contracts. Gross profit as a percentage of revenues decreased from
14.8% for the fiscal year ended June 30, 1998 to 11.3% for the fiscal year
ended June 30, 1999. The decrease was due primarily to a significant
negotiated contract in the second and third quarters of fiscal 1998, which
resulted in a higher gross profit margin for the fiscal year ended June 30,
1998, as well as, pricing pressures in the marketplace.
Network Operations. Network operations expenses for the fiscal year ended
June 30, 1999 were $0.5 million and related to the implementation of NetSat
Express' network operations center on a twenty-four hour a day, seven day a
week basis during the current fiscal year.
Selling and Marketing. Selling and marketing expenses increased by $1.0
million, or 23.8%, from $4.2 million for the fiscal year ended June 30, 1998
to $5.2 million for fiscal year ended June 30, 1999. The increase was
primarily due to the increase in marketing and bid and proposal efforts in
the Americas and Africa, as well as the related increase in sales and
marketing personnel.
Research and Development. Research and development expenses increased by
$0.1 million, or 11.5%, from $1.2 million for the fiscal year ended June 30,
1998 to $1.3 million for the fiscal year ended June 30, 1999. The increase
was primarily due to the development of the Explorer-Ku Multimedia Portable
Satellite Earth Station, offset by a decrease in costs associated with custom
solutions.
General and Administrative. General and administrative expenses increased
by $1.0 million, or 20.6%, from $5.0 million for the fiscal year ended June
30, 1998 to $6.0 million for fiscal year ended June 30, 1999 and increased as
a percentage of revenues from 8.6% for the fiscal year ended June 30, 1998 to
12.3% for the fiscal year ended June 30, 1999. The increase in general and
administrative expenses resulted mainly from an increase in personnel and
related expenses.
Terminated Acquisition Costs. Terminated acquisition costs of
approximately $1.0 million for fiscal year ended June 30, 1999, relate to
legal, accounting and other expenses associated with the termination of a
proposed acquisition of a mobile satellite communications business during the
first quarter of the fiscal year ended June 30, 1999 due to the determination
that the acquisition was not in the best interest of our stockholders.
Write-down of investments. Write-down of investments of approximately $0.7
million for fiscal year ended June 30, 1999, related to two investments which
were written down in the fourth quarter ended June 30, 1999. Our management
evaluated the investments and believed it would be appropriate to write-down
the investments to zero.
Interest Income Net of Interest Expense. Interest income decreased by $0.3
million from $1.3 million for the fiscal year ended June 30, 1998 to $1.0
million for the fiscal year ended June 30, 1999. This decrease was primarily
due to the reduction of cash and cash equivalents from June 30, 1998 to June
30, 1999.
NetSat Express. Our consolidated subsidiary, NetSat Express, experienced
an increase in revenues of $2.0 million, or 287.9%, from $0.7 million for the
fiscal year ended June 30, 1998 to $2.7 million for the fiscal year ended
June 30, 1999. The increase resulted from the implementation of Internet
access services in January 1998, as well as an increase in the equipment
sales and activations. The loss from operations associated with NetSat
Express increased by $0.4 million, or 26.9%, from $1.7 million for the fiscal
year ended June 30, 1998 to $2.1 million for the fiscal year ended June 30,
1999. The increase was primarily associated with an increase in general and
administrative expenses relating to an increase in personnel to support the
overall growth of NetSat Express and the implementation of operating NetSat
Express' network operations center on a twenty-four hour a day, seven day a
week basis during the year.
FISCAL YEARS ENDED JUNE 30, 1997 AND 1998
Revenues. Revenues, which were primarily derived from sales of ground
segment systems and networks and communications services, increased by $21.9
million, or 60.4%, from $36.2 million for
28
<PAGE>
the fiscal year ended June 30, 1997 to $58.1 million for the fiscal year ended
June 30, 1998. 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 we continued to expand our businesses.
Gross Profit. Gross profit increased by $4.4 million from $4.2 million for
the fiscal year ended June 30, 1997 to $8.6 million for the fiscal year ended
June 30, 1998. The increase was primarily due to the increase in the shipment
of ground segment systems and networks, and communications services. Gross
profit as a percentage of revenues increased from 11.5% for the fiscal year
ended June 30, 1997 to 14.8% for the fiscal year ended June 30, 1998. 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%, from $3.3 million for the fiscal year ended June 30, 1997
to $4.2 million for the fiscal year ended June 30, 1998. The increase was
primarily due to the increase in the number of bids and proposals we
prepared, as well as an increase in marketing personnel from 25 at June 30,
1997 to 35 at June 30, 1998. Selling and marketing expenses as a percentage
of revenues decreased from 9.1% for the fiscal year ended June 30, 1997 to
7.2% for the fiscal year ended June 30, 1998.
Research and Development. Research and development expenses increased by
$0.5 million, or 83.1%, from $0.6 million for the fiscal year ended June 30,
1997 to $1.2 million for the fiscal year ended June 30, 1998 due to an
increase in development costs associated with custom solutions. Research and
development expenses as a percentage of revenues increased from 1.8% for the
fiscal year ended June 30, 1997 to 2.1% for the fiscal year ended June 30,
1998.
General and Administrative. General and administrative expenses increased
by $1.6 million, or 45.3%, from $3.4 million for the fiscal year ended June
30, 1997 to $5.0 million for the fiscal year ended June 30, 1998, but
decreased as a percentage of revenues from 9.5% for the fiscal year ended
June 30, 1997 to 8.6% for the fiscal year ended June 30, 1998. 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 our business.
Interest Income Net of Interest Expense. Interest income increased by $1.0
million from $0.3 million for the fiscal year ended June 30, 1997 to $1.3
million for the fiscal year ended June 30, 1998. The increase was primarily
the result of the investment of remaining net proceeds from our initial
public offering.
NetSat Express. During the fiscal year ended June 30, 1998, our
consolidated subsidiary, NetSat Express, experienced an increase in revenues
of approximately $0.6 million from approximately $0.1 million for the fiscal
year ended June 30, 1997 to approximately $0.7 million. The increase resulted
from the implementation of Internet access 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 from $1.5 million for the fiscal year ended June
30, 1997 to $1.7 million for the fiscal year ended June 30, 1998 was mainly
attributable to initial start up costs associated with providing Internet
access and PC Vector services.
QUARTERLY RESULTS
The following tables set forth unaudited financial information for each of
the eight fiscal quarters in the period ended December 31, 1999. We believe
that this information has been presented on the same basis as the audited
consolidated financial statements appearing elsewhere in this prospectus,
and we believe all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations. You should read these
quarterly data in conjunction with our audited consolidated financial
statements and related notes included elsewhere in this prospectus. The
operating results for any quarter are not
29
<PAGE>
necessarily indicative of the operating results for any future period. Some
quarters in fiscal 1999 have been reclassed to conform to the current fiscal
year presentation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues........................ $16,261 $10,984 $13,293 $11,882 $ 6,498 $17,385 $19,425 $17,373
Costs of revenues............... 13,294 9,417 11,673 10,246 5,714 15,883 16,917 14,968
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Gross profit.................... 2,967 1,567 1,620 1,636 784 1,502 2,508 2,405
Operating expenses:
Network operations............. -- -- 98 106 113 197 276 442
Selling and marketing.......... 1,167 1,223 1,031 1,293 1,315 1,544 1,045 1,381
Research and development ...... 287 317 291 259 412 363 130 225
General and administrative .... 1,235 1,534 1,290 1,366 1,474 1,910 1,984 2,130
Terminated acquisition costs .. -- -- 972 -- -- -- -- --
Write-down of investments ..... -- -- -- -- -- 679 -- --
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Total operating expenses........ 2,689 3,074 3,682 3,024 3,314 4,693 3,435 4,178
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Income (loss) from operations .. 278 (1,507) (2,062) (1,388) (2,530) (3,191) (927) (1,773)
Other income (expense):
Interest income................ 292 332 338 272 204 165 170 277
Interest expense............... (1) -- -- -- -- -- (58) (258)
Gain on sale of subsidiary's
common stock.................. -- -- -- -- -- -- -- 2,353
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Income (loss) before minority
interests...................... 569 (1,175) (1,724) (1,116) (2,326) (3,026) (815) 599
Minority interests in
operations of consolidated
subsidiary..................... -- -- -- -- -- -- 76 538
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Net income (loss) .............. $ 569 $(1,175) $(1,724) $(1,116) $(2,326) $(3,026) $ (739) $ 1,137
========== ========== =========== ========== ========== ========== =========== ==========
PERCENTAGE OF TOTAL REVENUES:
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of revenues............... 81.8 85.7 87.8 86.2 87.9 91.4 87.1 86.2
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Gross profit.................... 18.2 14.3 12.2 13.8 12.1 8.6 12.9 13.8
Operating expenses:
Network operations............. -- -- 0.7 0.9 1.7 1.1 1.4 2.5
Selling and marketing.......... 7.2 11.1 7.8 10.9 20.2 8.9 5.4 7.9
Research and development ...... 1.7 2.9 2.2 2.2 6.3 2.1 0.7 1.3
General and administrative .... 7.6 14.0 9.7 11.5 22.8 11.0 10.2 12.3
Terminated acquisition costs .. -- -- 7.3 -- -- -- -- --
Write-down of investments ..... -- -- -- -- -- 3.9 -- --
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Total operating expenses........ 16.5 28.0 27.7 25.5 51.0 27.0 17.7 24.0
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Income (loss) from operations .. 1.7 (13.7) (15.5) (11.7) (38.9) (18.4) (4.8) (10.2)
Other income (expense):
Interest income................ 1.8 3.0 2.5 2.3 3.1 1.0 0.9 1.6
Interest expense............... -- -- -- -- -- -- (0.3) (1.5)
Gain on sale of subsidiary's
common stock.................. -- -- -- -- -- -- -- 13.5
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Income (loss) before minority
interests...................... 1.7 (10.7) (13.0) (9.4) (35.8) (17.4) (4.2) 3.4
Minority interests in
operations of consolidated
subsidiary..................... -- -- -- -- -- -- 0.4 3.1
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Net income (loss) .............. 3.5% (10.7)% (13.0)% (9.4)% (35.8)% (17.4)% (3.8)% 6.5%
========== ========== =========== ========== ========== ========== =========== ==========
</TABLE>
30
<PAGE>
We may continue to experience significant quarter to quarter fluctuations
in our results of operations, which may result in volatility in the price of
our common stock. Quarterly results of operations may fluctuate as a result
of a variety of factors, including:
o the timing of the initiation and completion of contracts;
o delays in the booking of new contracts;
o the demand for our products and services;
o the introduction of new or enhanced products and services by us or
our competitors;
o market acceptance of new products and services;
o the mix of revenues between custom-built satellite communications
systems and networks designed for our customers, standard
installations provided to our customers, and communications
services provided to our customers;
o the growth of demand for Internet infrastructure-based products and
services in developing countries;
o the timing of significant marketing programs;
o the extent and timing of the hiring of additional personnel; and
o competitive conditions in the industry and general economic
conditions in the United States and abroad, including 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 quarterly results.
Due to the foregoing factors, it is likely that in one or more future
quarters our 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 our common stock.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had working capital of $29.7 million, including
cash and cash equivalents of $23.1 million, restricted cash of $0.8 million,
accounts receivable of $15.4 million, inventories of $4.8 million and prepaid
and other current assets of $1.7 million, offset by $11.7 million in accounts
payable and $4.4 million in accrued expenses and other current liabilities.
Several factors had an effect on our liquidity during the six months ended
December 31, 1999. First, we used approximately $3.1 million for operating
activities, which primarily relates to a decrease in accounts payable of $7.1
million reflecting the timing of a large payment to a major vendor and a gain
on sale of subsidiary common stock of $2.4 million, offset by a decrease in
accounts receivable of $2.6 million due to timing of receipts from customers,
a decrease in inventory of $1.2 million due to an increase in shipments and
an increase in the deferred liability of $2.1 due to a technology agreement
entered into in connection with NetSat Express' private placement of common
stock.
The second factor affecting liquidity during the six months ended December
31, 1999 was our financing activities. In August 1999, NetSat Express
completed a private placement of common and preferred stock yielding net
proceeds of approximately $7.0 million, net of issuance costs. These proceeds
will be used to fund NetSat Express' operations, expand marketing
initiatives, engineering efforts and fund capital expansion. In October 1999,
we, together with NetSat Express, entered into a common stock purchase
agreement with an investor to purchase 2,000,000 shares of NetSat Express
common stock of which 1,400,000 shares were purchased directly from us (see
investing activities below) and 600,000 shares were issued and sold directly
by NetSat Express for $1.5 million. The net proceeds received by NetSat
Express of $1.4 million, net of issuance costs, are intended to be used to
fund operations, expand marketing initiatives, engineering efforts and fund
capital expansion. Management anticipates that NetSat Express will experience
negative cash flow due to the capital investment required for continued
development of its operations and continued loss from operating
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activities for an extended period of time. In addition, during the six months
ended December 31, 1999, we received $2.1 million in proceeds from the
exercise of stock options.
The third factor affecting liquidity during the six months ended December
31, 1999, was our investing activities. During the six months ended December
31, 1999, we purchased $2.4 million in fixed assets, restricted cash
decreased $2.7 million due to the expiration of a letter of credit and the
redemption of a certificate of deposit held as collateral, and we received
$3.5 million of net proceeds from the sale of the 1,400,000 shares of NetSat
Express common stock which are intended to be used for general corporate
purposes.
We have a $9.0 million credit facility consisting of a $5.0 million
secured domestic line of credit and a $4.0 million secured export-import
guaranteed line of credit. Each line of credit bears interest at the prime
rate (8.5% as of December 31, 1999) plus 1.0% per annum and is collateralized
by a first security interest on all our assets. No amounts are outstanding
under this credit facility as of February 4, 2000.
We expect that our cash and working capital requirements for our operating
activities will continue to increase as we expand our operations.
Our future capital requirements will depend upon many factors, including
the success of our marketing efforts in the ground segment systems, networks,
and communications services business, the nature and timing of customer
orders, the extent to which it is able to locate additional strategic
suppliers in whose technology it wishes to invest, the extent to which it
must conduct research and development efforts internally and potential
acquisitions of complementary businesses, products or technologies. Based on
current plans, we believe that our existing capital resources will be
sufficient to meet our capital requirements through February 2001. However,
we cannot assure you that there will be no change that would consume
available resources significantly before that time. Additional funds may not
be available when needed and even if available, additional funds may be
raised through financing arrangements and/or the issuance of preferred or
common stock or convertible securities on terms and prices significantly more
favorable than those of the currently outstanding common stock, which could
have the effect of diluting or adversely affecting the holdings or rights of
our existing stockholders. If adequate funds are not available, we will be
required to delay, scale back or eliminate some of our operating activities,
including without limitation, the timing and extent of its marketing
programs, the extent and timing of hiring additional personnel and our
research and development activities and operating activities of NetSat
Express. We cannot assure you that that additional financing will be
available to us on acceptable terms, or at all.
IMPACT OF YEAR 2000
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
sigificant disruptions in mission critial information technology and
non-information technology systems and believe those systems sucessfully
responded to the Year 2000 date change. We incurred minimal costs during 1999 in
connection with remediating our systems. We are not aware of any material
problems resulting from Year 2000 issues, either with our products, our internal
systems, or the products and services of third parties. We will continue to
monitor our mission critical computer applications and those of our suppliers
and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
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BUSINESS
OVERVIEW
We offer end-to-end, value-added satellite-based communications services.
We do this by leveraging our core satellite ground segment systems and
networks capabilities, and the satellite services capabilities that are
generally provided by our majority-owned subsidiary, NetSat Express, Inc. The
services we offer include wide area network connectivity, broadband
connectivity to end users, Internet connectivity, intranet extension, media
distribution and other network services on a global basis. To provide these
services, we engineer all the necessary satellite and terrestrial facilities
as well as provide the integration services required to implement those
facilities. We also operate and maintain these communications services on an
ongoing basis. Our customers generally have operations in areas of the world
where high-speed terrestrial links are unreliable, too costly, or not readily
available and include communications service providers, multinational
corporations, Internet Service Providers, or ISPs, content providers and
government entities. Our service business is built on the foundation of our
core business as a supplier of ground segment systems and networks for
satellite-based communications. We provide these ground segment systems and
networks on a contract basis. These implementations include the necessary
hardware and software to support a wide range of satellite communications
applications using fixed satellite, direct broadcast and mobile
satellite systems.
NetSat Express is an ISP that offers Internet access and related services
to ISPs and other enterprises around the world. NetSat Express combines
satellite and terrestrial communication networks to provide its customers
high-speed access services to the United States Internet backbone. Most of
Netsat Express' customers are ISPs located in geographically dispersed areas
of the world. The equity ownership of NetSat Express is approximately as
follows, excluding 18% in unexercised options and warrants: Globecomm owns
60%, Globix Corporation owns 12%, Reuters Holdings Switzerland SA owns 12%,
George A. Soros owns 12%, and Hughes Electronics Corporation owns 4%.
INDUSTRY OVERVIEW
Satellite communications systems consist of satellites, or the space
segment, and ground-based transmitting and receiving systems, or the ground
segment. The space segment consists of one or more satellites orbiting the
earth, which typically provide continuous communications coverage over a wide
geographic area. Satellites usually contain multiple transponders, each
capable of independently receiving and transmitting one or more signals from
and to multiple users simultaneously. A transponder is a device that receives
signals from transmitting earth stations, translates these received signals
into transmit signals and amplifies and transmits these signals to receiving
earth stations. The ground segment consists principally of one or more earth
stations, which provide a communications link to the end user either directly
or through a terrestrial network. An earth station is an integrated system
consisting of antennas, radio signal transmitting and receiving equipment,
modulation/demodulation equipment, monitor and control systems and voice,
data and video network interface equipment.
Satellite communications is a rapidly growing segment of the global
communications infrastructure. Satellites are increasingly becoming important
in light of the growth of the Internet and other broadband applications and the
globalization of communications. New broadband satellite systems offer services
similar to newly built broadband terrestrial systems. Pioneer Consulting, LLC,
an independent research firm, projects that global broadband satellite services
revenues will increase from approximately $230 million in 1999 to approximately
$37 billion is 2008, with broadband business-related revenues increasing from
approximately $150 million to approximately $16 billion during the same time
period.
Satellite communications industry participants include:
o designers, manufacturers and operators of satellites;
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o designers, manufacturers and integrators of ground segment products,
systems and networks; and
o communications services providers, which may or may not own the
actual satellites used for transmission.
The three principal classes of satellite services include:
Fixed Satellite Services. Fixed satellite services are used to provide
communications applications like voice, data and video between fixed
land-based earth stations. These applications include Internet access,
business to business communications, Internet Protocol-based telephony
services and cable and broadcast television distribution. The introduction of
high-power satellites that deliver a wide array of broadband applications has
created additional growth within the fixed satellite services segment. This
is enabled by the use of smaller, less costly earth stations, including very
small aperture terminals. Future higher bandwidth systems are expected to
increase the number of applications and further reduce the cost of providing
satellite services. We believe these systems will offer the additional
bandwidth needed for emerging broadband communications applications.
Direct Broadcast Services. Direct broadcast satellite services provide a
direct transmission link from high-power satellites to customers over a wide
geographic area. These services deliver content cost-effectively by
incorporating the use of smaller satellite receiving antennas and digital
video technology, particularly in areas underserved by cable. These services
are used in direct-to-home television services and are increasingly being
used in direct broadcast data services.
Mobile Satellite Services. Mobile satellite services, which operate
between fixed earth stations and mobile earth stations, or terminals, provide
mobile voice and data transmission capability on land, sea and air. New
mobile satellite services are being developed using satellite systems that
orbit at different altitudes above the earth. These satellite systems are
designed to bring more extensive coverage and circuit reliability for mobile
telephone and data services to users throughout the world.
ADVANTAGES OF SATELLITES OVER TERRESTRIAL ALTERNATIVES
We believe satellites provide the following advantages over terrestrial
alternatives for broadband applications:
o Satellites enable high-speed communications services where
terrestrial alternatives are unavailable or inadequate. Many areas
of the world lack the sophisticated fiber optic cable and digital
switching infrastructure required for the high-speed transmission
of data. Satellites are well suited to connect these areas that
cannot be connected efficiently or cost-effectively by terrestrial
transmission systems.
o Satellite networks can be rapidly installed, upgraded and
reconfigured. In contrast, the installation of fiber optic cable is
time consuming and requires obtaining rights-of-way.
o Satellite networks bypass much of the often complex terrestrial
networks. This avoids the service level issues related to potential
terrestrial network congestion as well as the use of multiple
network service providers.
o Satellite networks, because of their broadcast nature, are
inherently capable of multicasting, or transmitting data
simultaneously from one point to multiple locations.
o Satellite networks, in some situations, are more cost-effective than
terrestrial alternatives where the flow of data traffic to the user is
greater than the flow of data from the user. For example, an Internet
user wanting to access a web site sends a small bandwidth request to a
content server that returns a high bandwidth response, which is the
web page viewed. Capacity can go unused on many terrestrial networks
due to this uneven flow of traffic whereas satellite networks are
capable of providing capacity on an imbalanced, or asymmetric, basis.
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o The cost to provide satellite services does not increase with the
distance between sending and receiving locations. In contrast, the
cost of terrestrial network transmission increases with distance.
MARKET OPPORTUNITY AND DRIVERS
Continuing worldwide deregulation of telecommunications services market
Many countries are deregulating their telecommunications services markets
in response to growing consumer and business demands, international
competition, and technological developments. The Global Agreement on Trade in
Services administered by the World Trade Organization provides for the
deregulation of telecommunications markets in the 75 countries which have signed
the agreement. These countries include developed countries in North America,
Western Europe, and Asia and developing countries in Africa, Asia, and
Central and South America. Pioneer Consulting estimates that the number of
new carriers worldwide should grow from the few hundred in existence today to
over 10,000 by 2002. This deregulation is creating opportunities for new
companies to compete with the incumbent national telecommunications
companies. These new companies will need to build communications
infrastructure and/or buy communications services. We believe this trend toward
deregulation is favorable to the growth of satellite services, as new service
providers can establish their own infrastructure faster and generally at a
lower cost with satellite communications services than with terrestrial
alternatives.
Economic development worldwide and the increasing globalization of
business
We believe that as multinational corporations globalize and expand into
new markets, the demand for diverse and customized communications services
will continue to grow. For many large national or multinational companies
operating in geographically dispersed locations, satellite networks provide
the only opportunity for broadband connectivity as the capacity, quality or
availability of terrestrial infrastructure is often limited or nonexistent in
many of these locations. We believe that these corporations, including those
operating in sectors including energy and transportation which have continually
changing global network needs, will expand their use of satellite-based
communications. Pioneer Consulting estimates that the global business subscriber
base for broadband satellite services will increase from approximately 30,000
businesses in 1999 to approximately 7 million by 2008.
Growth of the Internet outside North America and Western Europe
The growth of the Internet has been dramatic, and this growth is projected
to continue, particularly outside North America and Western Europe. According
to the 1999 Computer Almanac, the number of Internet users outside North
America and Western Europe is expected to grow from approximately 40 million
users in 1998 to over 275 million users by 2005. Satellite-based communications
are benefiting from this trend as many of these regions lack the terrestrial
networks required to accommodate the rapid and reliable transmission of the vast
amounts of information underlying the Internet. We believe the development of
communications infrastructure in much of the world will in large part depend
upon the rapid installation of satellite communications services. In addition,
according to Pioneer Consulting, 75% of Internet content resides in North
America, which results in greater amounts of data exiting North America than
data entering North America. Satellite-based communications services, in some
situations, are better suited than terrestrial alternatives to cost-effectively
address the imbalance of traffic flows inherent in international Internet usage
today because they provide capacity on an asymmetric basis.
The September 1999 report from TeleGeography estimates that the total
amount of international Internet backbone traffic amounts to 28.9 gigabits,
or Gbps, of which between 15% and 30% is transmitted over satellites. The
Irwin report, Internet Delivery by Satellite, projects that the amount of
Internet data transmitted by satellites worldwide will increase from
approximately 10.7 Gbps in 1999, to approximately 42.1 Gbps by 2003, a 293%
increase. In terms of total worldwide satellite capacity, this represents an
increase from 5% of capacity in 1999 to 9% of projected available capacity in
2003.
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New Internet technology-based applications
Corporate intranets and Virtual Private Networks. The technologies which
have been developed for the Internet have been used in the creation of private
corporate networks, or intranets. Intranets provide employees in geographically
dispersed locations with access to corporate databases and other private
corporate information. There is a rapidly growing marketplace for intranet
services in the United States and other developed countries, as corporations
have recognized their benefits. In parts of the world where land-based networks
are inadequate or unavailable, we believe intranets represent a rapidly growing
market for satellite-based communications services. The growth of intranets is
being supported by the evolution of virtual private network technology and
services that ensure the security of sensitive corporate data when transmitted
over the Internet or other shared networks. Virtual private networks offer the
appearance, functionality and usefulness of a dedicated private network at a
lower cost because they use shared networks. Furthermore, virtual private
networks not only allow access to internal corporate information, but can also
be used to provide telephony services using Internet Protocol and to transmit
video or a combination of any of these three.
Content Delivery Services and Multicasting. Content providers and large
ISPs are increasingly using content delivery services that can enhance access to
multimedia and static content for their users and enhance web site response
times by avoiding delays and outages caused by public network congestion. One
implementation being used to improve web site response times involves
broadcasting data simultaneously to geographically dispersed servers that are
closer to the person requesting the information, thereby avoiding potential
congestion that could occur on standard terrestrial networks. This broadcasting
of data from one location to many locations is known as multicasting. Satellite
multicasting is not only used for content delivery services as described above,
but also for the transmission of multimedia content in real time.
Increased distribution of television programming to regional, national and
international audiences
Significant growth in the number of broadcasters creating programming and
the number of channels available to viewers is largely responsible for the
expansion of the global cable and broadcast television markets. The introduction
of digital television technology has also contributed to the growth in this
market by reducing the transmission costs for channels reaching smaller and more
distant audiences.
We believe that the number of smaller programmers will continue to
increase as transmission costs decline, while major programmers will increase
their offerings by expanding the number of regional channels and specialized
versions of their primary channels. Satellites offer advantages in providing
enhanced television to rural markets given the cost and time to install
traditional cable and fiber optic infrastructure.
Continuing technological advancements
We believe a number of technological advances will stimulate demand for
satellite-based communications services:
o Internet Protocol. Internet Protocol is transforming the
communications industry by allowing all forms of communications to be
carried in one the format using a standard protocol. Therefore,
Internet Protocol allows for the transmission of voice, video, and
data on a single network. These networks use bandwidth efficiently,
thereby reducing transmission costs and allowing for enhanced
applications. We believe the reduction in transmission costs and
enhanced applications will continue to stimulate demand for
communications services worldwide including satellite-based services.
o Enhancements in satellite technology help reduce costs. The latest
generation of satellites has up to three times more power than
satellites launched in the early 1990s. As technology improves,
satellites in the future will be even more powerful and
longer-lived than current satellites. In addition, we believe
satellites in the future will carry more transponders and therefore
provide more transmission capacity. We expect these new satellites
will decrease the cost of capacity, thereby increasing the demand
for satellite-based communications services.
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o Ka-band technology. The Ka-band transponders will offer five to ten
times the bandwidth of today's transponders. Ka-band technology
typically uses smaller, more high-powered spot beams, which allow
for smaller ground antennas and lower cost per data transmitted.
The use of Ka-band technology is expected to lead to less expensive
capacity and increase the demand for satellite-based
communications.
o Broadband technology. Broadband technology, increasingly available
on fiber optic networks, sophisticated urban cable networks and
through high-bandwidth telephone line technologies, is creating
demand for robust applications like delivery of multimedia content
that narrow-band technologies cannot satisfy. We believe that
satellites can provide the principal means to deliver broadband
applications beyond the geographical limitations of both existing
and future broadband terrestrial networks.
o Compressed digital video. Compressed digital video technology is
designed to compress up to ten high-quality video channels in the
same bandwidth that previously carried a single analog channel.
This technology has lowered the costs of delivering programming via
satellite and cable television systems, thereby permitting more
programming options to be provided to smaller niche markets.
OUR BUSINESS STRATEGY
Our strategy is to leverage our expertise in ground segment systems and
networks to expand our core business and our communications services
business. We believe that this strategy will diversify our revenue stream,
broaden and deepen our customer relationships, enhance customer loyalty,
generate recurring revenues and expand the markets we serve. To implement
this strategy, we intend to do the following:
TARGET OPPORTUNITIES TO SUPPLY END-TO-END COMMUNICATIONS SERVICES
WORLDWIDE. We seek to capture recurring revenues by providing end-to-end,
value-added communications services worldwide. We provide "one-stop-shopping"
customized solutions to meet the specific needs of service providers,
enterprises, and system integrators. The services we package include all
necessary terrestrial and satellite facilities, as well as the integration
services required to implement those facilities. We also seek to operate and
maintain these communications services on an ongoing basis for recurring
service revenues. Our end-to-end services enable our customers to address
their needs quickly and cost-effectively without having to integrate products
and services from different suppliers. Moreover, this allows our customers to
outsource their ongoing communications services needs while providing us with
a recurring revenue stream.
FOCUS ON HIGH MARGIN COMPLEX PROJECTS. We will continue to focus on
opportunities to use our technological expertise in high value-added ground
segment systems and network projects. These projects require
engineering-intensive design and implementation. Our emphasis positions us to
earn higher gross margins through the delivery of innovative and cost-effective
solutions tailored to our customers' requirements. These projects are
typically priced on a negotiated basis, as opposed to being priced on a
lower-margin competitive bid basis. The engineering and implementation of
these projects involves the integration of satellite and terrestrial networks
and requires consulting expertise in the areas of information technology,
satellites and Internet Protocol. We believe we have demonstrated a strong
capability in this specialized field of communications engineering.
EXPAND EXISTING CUSTOMER RELATIONSHIPS AND TARGET INDUSTRY-SPECIFIC
MARKETS. We seek to expand our existing customer relationships by providing
value-added integration and ongoing communications services to our existing
customers. These additional services allow us to increase revenues and maintain
high customer retention by strengthening our relationships with them.
Additionally, we are targeting specific industries like the oil industry and
broadcasting industry which we believe will offer high growth potential and
where we believe our expertise will provide us with a competitive advantage.
Focusing on specific industries allows us to take advantage of our customized
solutions addressing the specific needs of companies in each particular industry
and leverage our experience and relationships in that industry.
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CONTINUE TO DEVELOP STRATEGIC SUPPLIER RELATIONSHIPS. We seek to continue
to establish strategic relationships with suppliers that we believe are in a
position to provide us with products or services that will improve our
competitive position in the markets that we serve.
NETSAT EXPRESS STRATEGY
Internet Access Services, Intranets and Virtual Private Networks. NetSat
Express intends to continue to invest in its infrastructure to enhance its
global reach in providing Internet access and to provide additional services
like intranets and virtual private networks. NetSat Express plans on
expanding its relationships with terrestrial network providers to increase
the number of corporate customers to which it can offer virtual private
networks.
Web and Application Hosting and ISP Infrastructure. NetSat Express intends to
provide web and application hosting and ISP infrastructure solutions. NetSat
Express' target customers for this service are ISPs in emerging economies that
wish to open new points of presence, or POPs, or to rapidly increase the
capacity of existing POPs and expand their functionality. Many ISPs outsource
their technology needs so that they can concentrate on building a customer base.
To meet this need NetSat Express, in combination with Globecomm and Cisco,
intends to provide the equipment, software and implementation services for use
at the customers' POP and will host the desired ISP applications using IBM
software and hardware at NetSat Express' facilities. These facilities are
expected to support email, subscriber management, domain addressing and caching
services. This service is being marketed under the brand name Impact ISP. NetSat
Express also intends to re-brand Globix Corporation's complex hosting
capabilities, [including co-location and advanced e-commerce solutions.
Content Delivery Networks for Business Customers. NetSat Express intends
to expand its infrastructure to provide electronic content delivery services
for corporations and content providers who must transmit multimedia video
streams and electronic files to multiple locations around the globe. These
content delivery services will enable corporations typically located in the
United States and Western Europe to multicast data anywhere in the world at
the speed they need. NetSat Express anticipates billing its customers on
a usage basis and using digital video broadcasting technology for low cost
transmission of this content. In addition, NetSat Express intends to base its
content delivery services on an open standards architecture.
SERVICES AND PRODUCTS
OUR COMMUNICATIONS SERVICES
We offer end-to-end, value-added satellite-based communications services.
We engineer and provide all the necessary satellite and terrestrial
facilities, as well as provide the integration services required to implement
those facilities. We also operate and maintain these communications services
on an ongoing basis. We tailor these services to meet our customers' needs by
offering standardized services and custom-engineered solutions. Our
standardized services may be sold separately or may be used as building
blocks as a part of a custom-engineered solution. We use our expertise in
satellite communications, Internet Protocol, communications networks and
information technology in designing our custom-engineered solutions.
The following describes some of our Anywhere(Trademark) standardized
services:
Internet Anywhere. This service offering provides high-speed access to the
United States Internet backbone. We provide all the necessary satellite and
terrestrial facilities and integration services in conjunction with our
current re-branding of NetSat Express' Internet access service. For example,
we are under contract to provide a high-speed satellite connection to Bezeq
International's 9-meter earth station in Israel from its United States
Internet backbone connection.
Wide Area Network Anywhere. This service offering provides high speed
networking between major communications points of presence, or POPs. We are
currently providing this service for Nippon Telephone and Telegraph,
connecting POPs in Los Angeles and Okinawa, Japan. This is an example of
using this standardized service as a building block in a custom-engineered
solution.
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Intranet Anywhere. This service offering provides secure high-speed data
transmission directly to local area networks using standards-based satellite
receiver technology. We intend to offer this service to customers requiring
secure high-speed data transmission between corporate headquarters and one or
more remote offices.
ISDN Anywhere. This service offering provides full-time connections at
rates of 64 kilobits per second, or Kbps, and 128 Kbps to geographically
dispersed locations. We can provide these services to organizations needing
full-time digital connections for voice, data and videoconferencing in
locations around the world where the terrestrial infrastructure is inadequate
or unavailable.
Bandwidth on Demand Anywhere. This service offering provides high speed
data connections for intermittent use through a bandwidth subscription
service. This service provides data rates from 64 Kbps up to 384 Kbps to
geographically dispersed locations. Customers who have high bandwidth
requirements would use this service to reduce their costs when they only need
intermittent services, like emergency communications services. We intend to
initiate this service in early 2000 with coverage of North and South America.
The following is an example of how we provide custom-engineered
communications services for one of our customers:
The Challenge. We were selected by Mercury Communications, Inc., a new
communications service provider in Angola, to design and implement the voice,
data and Internet infrastructure as well as the connections between Angola
and the United States, where the existing communications infrastructure was
inadequate.
The Solution. We designed and continue to build a nationwide voice and
data telecommunications network using a combination of satellite systems,
terrestrial microwave systems and local wireless communications technology.
In addition, we provided Mercury with the information technology
infrastructure necessary to provide Internet access from the United States
Internet backbone to Soyo and Luanda, Angola using satellites. We also
provide international satellite connections for voice and data traffic
between Soyo and Luanda, and Houston, Texas as well as the associated billing
services. The voice and data satellite network we custom-engineered is based on
a combination of network technologies, each designed to enhance delivery of a
particular service. We currently provide network services to operate and
maintain these communications services.
[DIAGRAM OF MERCURY COMMUNICATIONS, INC. NETWORK DEPICTING THE COMMUNICATIONS
SYSTEM INFRASTRUCTURE THAT PROVIDES PHONE SERVICE CONNECTIVITY AND INTERNET
CONNECTIVITY FOR USERS IN ANGOLA USING TERRESTRIAL CONNECTIONS AND WIRELESS
LOCAL LOOP CONNECTIONS WITH THE U.S. PUBLIC TELEPHONE NETWORK AND THE U.S.
INTERNET BACKBONE USING A SATELLITE THAT TRANSMITS TO AND FROM EARTH STATIONS IN
THE UNITED STATES AND ANGOLA.]
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OUR GROUND SEGMENT SYSTEMS AND NETWORKS
We design, engineer, integrate and install satellite-based ground segment
system and network solutions for the complex and changing communications
requirements of our customers. Our ground segment systems typically consist
of an earth station and ancillary subsystems. An earth station is an
integrated system consisting of antennas, radio signal transmitting and
receiving equipment, modulation/demodulation equipment, monitor and control
systems and voice, data and video network interface equipment. Ancillary
subsystems may include microwave links or fiber optic links, for the
transmission of communications traffic to a central office, or generators for
emergency power requirements. Our customizable modular earth stations may be
sold separately as stand-alone ground segment systems or may be used as
building blocks to be integrated into a complete ground segment system or
network. We believe that this modular approach allows us to engineer our
ground segment systems and networks to serve client-specific service
requirements rapidly, cost-effectively and efficiently with minimal site
preparation. All of our earth stations are configurable to conform to
applicable satellite standards.
CUSTOMIZABLE MODULAR EARTH STATIONS
Modular Building Block Earth Station. These earth stations provide
point-to-point high-capacity data links and hubs for satellite networks.
Generally, all electronics are housed in an indoor equipment enclosure. We
typically sell these earth stations at prices ranging from approximately
$250,000 to $600,000.
Commercial Terminal Family. This family of earth stations encompass a
range of general purpose, medium-capacity earth stations, and are principally
used by corporate, common carrier and government networks. Generally, all
radio frequency electronics are housed in weatherproof enclosures mounted on
the antenna. The satellite modem is housed in an indoor equipment enclosure.
We typically sell these earth stations at prices ranging from approximately
$100,000 to $300,000.
Compact Earth Station. We designed this family of digital earth stations
to be used principally to provide limited capacity to areas with limited or
no telecommunications infrastructure. These earth stations integrate radio
frequency and satellite modem components into one antenna mounted package. We
typically sell these earth stations at prices ranging from approximately
$20,000 to $45,000.
Explorer C/K Transportable Earth Station. We designed this family of
digital earth stations primarily for emergency communications and news
gathering. The group is comprised of portable, modular earth stations
designed to be quickly deployed and operated anywhere in the world. The
latest model, the Explorer Ku, incorporates technology from the Compact Earth
Station product line to minimize cost, size and weight. All components are
mounted in separate cases, which are small enough to be easily transported by
commercial carriers, including airplanes and trucks. We market these earth
stations at prices ranging from approximately $50,000 to $100,000.
Explorer II Mobile Terminals. We designed this family of digital terminals
to serve the mobile satellite services market for high speed data and voice
terminals with optional video conferencing. We offer the Explorer II, a high
speed data terminal for use in news gathering, emergency communications, data
gathering, and other applications requiring mobility and data at rates of 64
Kbps. We typically sell these earth stations at prices ranging from
approximately $20,000 to $50,000.
RECENT GROUND SEGMENT SYSTEMS AND NETWORKS PROJECTS
We have recently been responsible for, or are in the process of,
designing, engineering, integrating and installing the following ground
segment systems and networks:
Sirius Satellite Radio. We were awarded a contract by Sirius Satellite
Radio, formerly CD Radio, Inc., to build a terrestrial repeater network that
will be deployed in major urban areas throughout the continental United
States. Sirius will broadcast up to 100 channels of music and entertainment
programming to motorists in the continental United States. The network is
designed to augment the signal from Sirius' three orbiting satellites where
tall buildings may interfere with the satellite signal. The design of this
network requires sophisticated engineering and the implementation requires
experienced project management to assure timely delivery of installations.
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CBS Corporation. We are integrating, installing and testing digital
satellite receiver equipment for CBS' network affiliate broadcasting stations
across the United States to facilitate state-of-the-art digital television
broadcast distribution. In addition, we are providing web-based access to a
data base for each of the affiliate broadcasting stations which provides
information about the equipment provided by us. We also provide ongoing
maintenance support for the equipment being supplied.
Worldspace Management Corporation. We developed and began supplying uplink
stations for the first global digital audio radio satellite system to
Worldspace. This system will distribute broadcast radio to low cost satellite
receivers through processed feeder link stations provided by us for customers
in Africa, Asia and Latin America. In 1999, Worldspace launched the Afristar
satellite, the first in a series of three satellites for global coverage. We
installed the first two processed feeder link stations, and completed testing
with the actual satellite receivers to be sold to customers in Africa.
Thomson CSF. We were awarded a contract by Thomson to provide four
ground segment systems in a hub and spoke network configuration for use in
providing communications between airports in Central Asia. This private
network includes voice compression technology and a network management system
for the monitoring and remote control of all facilities in the network.
Telkom South Africa Ltd. We were awarded a contract by Telkom South Africa
to supply a Standard B earth station, a standard configuration specified by
Intelsat, in April 1999. Our project team was able to meet our customer's
needs by delivering this earth station and completing installation in South
Africa in 45 days.
NETSAT EXPRESS SERVICES
NetSat Express is an ISP that offers Internet access and related services
to ISPs and other enterprises around the world. NetSat Express combines
satellite and terrestrial communications networks to provide customers around
the world high-speed access services to the United States Internet backbone.
NetSat Express currently has customers in Africa, the Asia-Pacific Region,
Australia, Central and South America, Eastern and Central Europe and the Middle
East.
Internet Access Services
NetSat Express' Internet access service, marketed under the Access Plus
brand name, provides high speed access to the United States Internet
backbone. NetSat Express provides the necessary satellite transmission
services and terrestrial transit and routing services. In addition, it
currently provides earth stations and the necessary installation services
together with Globecomm. NetSat Express' services are highly configurable,
providing guaranteed levels of service for its customers. Its services can be
implemented through its worldwide network, and global deployment capabilities
through suppliers like Globecomm. NetSat Express provides a wide variety of
circuit sizes, which allows it to serve large and small ISPs, communications
services providers and corporations. A circuit is comprised of satellite and
terrestrial components that provide the bandwidth needed by the customer.
NetSat Express' customers lease circuits as small as 64 Kbps and as large as
45 Mbps, where a megabit is 1000 times larger than a kilobit. NetSat Express
offers two-way circuits, providing bandwidth to and from the Internet, as
well as one-way circuits, where the customer has its own return circuit
through a local terrestrial connection to the Internet.
NetSat Express also provides a bandwidth capacity bursting option,
allowing bursts of up to the full capacity of a satellite circuit. With
bursting, the customer's guaranteed bandwidth is a part of a shared satellite
channel with other customers who also have guaranteed bandwidths. The
bursting service allows a customer to acquire more bandwidth than its
guarantee when there is available bandwidth on the same shared satellite
channel that it has not committed to other customers.
NetSat Express' Strategic Relationships
NetSat Express has developed a number of strategic relationships that are
expected to provide it with access to services and technology that
complements its strategy. An agreement with Globix Corporation provides
quality access to the United States Internet backbone and hosting facilities.
An
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agreement with Cisco Systems, Inc. provides NetSat Express with support
from Cisco in the sale and service of Cisco networking equipment. A
re-marketing agreement with IBM provides NetSat Express with access to
technology and marketing assistance in the delivery of ISP-related hardware
and software solutions. These agreements all complement NetSat Express'
strategy to facilitate the development of ISPs around the world.
SALES AND MARKETING
We market our products and services to communications services providers,
multinational corporations, ISPs, content providers and government entities.
We have structured our sales and marketing approach to respond effectively to
the growing opportunities in the communications services market as well as
the traditional ground segment systems and networks market. Our marketing
activities are organized regionally as well as on an industry-specific basis.
We use both direct and indirect sales channels to market our services and
products.
We use regional business teams to sell and market our communications
services and ground segment systems and networks. These business teams are
responsible for orders and programs in the regions to which they are assigned
as well as for the delivery of our products and services, and finally,
for account management of our existing customers. Currently, we have business
teams responsible for the Americas, the Asia-Pacific region, Africa, the
Middle East and Europe. These regional business teams work together to
identify, develop and maintain customer relationships through local sales
representatives, sales executives and account managers. Together, they
develop close and continuing relationships with our customers. Our sales
representatives in these regions provide a local presence and identify
prospective customers for our sales executives. Our account managers may also
function as project engineers for network integration and service initiation
programs for their accounts. We believe this account management focus
provides continuity and loyalty between us and our customers. We also believe
that our approach fosters long-term relationships that lead to follow-on work
and referrals to new customers. These accounts also provide us with a market
for the new products and services that we develop. In addition, we obtain
sales leads for new customers through referrals from industry suppliers.
We also sell to industry-specific markets through direct and indirect
sales channels. These industry-specific markets currently include the oil
industry, the broadcast industry and the United States government. We intend
to expand our direct and indirect sales and marketing efforts to these
industry-specific markets.
We have sales and marketing staff located at our headquarters in
Hauppauge, New York, as well as in Atlanta, Georgia, Hong Kong and the United
Kingdom. Our office in the United Kingdom is part of our Globecomm Systems
Europe Limited subsidiary. These offices provide both sales and technical
support in the regions for which they have responsibility. As of December 31,
1999, we employed 47 persons with sales and marketing responsibility, of
which 19 are full-time sales executives and 28 have dual engineering and
sales and marketing responsibilities.
Our marketing program is intended to build national and international
awareness of our brand. We use direct mailings, print advertising to targeted
markets and trade publications to enhance awareness and acquire leads for our
direct and indirect sales teams. We create brand awareness by participating in
industry trade shows sponsored by organizations like the International
Telecommunications Union, the National Association of Broadcasters and the
Communications Managers Association. We also provide marketing information on
our web site and conduct joint marketing programs with sales representatives in
various regions to reach new customers.
NetSat Express' marketing strategy is carried out primarily through
resellers and sales representatives in regions in which NetSat Express
markets its services. NetSat Express is seeking to expand its marketing
capabilities and enter into new regions.
CUSTOMERS
We have established a diversified base of customers in a variety of
industries. Our customers include communications service providers,
multinational corporations, system integrators, ISPs,
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content providers and government entities. We typically rely upon a small number
of customers for a large portion of our revenues. For example, approximately
29.8% of our revenues for the six months ended December 31, 1999 were derived
from sales to four customers. We expect that in the near term a significant
portion of our 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 we seek to
expand our business and our customer base.
COMMUNICATIONS INFRASTRUCTURE
We built and own the teleport facility located at our headquarters in
Hauppauge, New York. We currently lease it, on a short-term basis, to NetSat
Express. We are a member of the World Teleport Association. Our teleport is
designed to meet the most stringent requirements for high speed data
communications requirements. This teleport is used to transmit and receive
signals from satellites positioned to serve customers in Latin America, the
United States, Canada, Europe, the Middle East and Africa. Our teleport uses
redundant critical systems and uninterruptable power supplies with back-up
power generation.
NetSat Express also leases teleport services in Los Angeles to transmit
and receive signals from satellites positioned to serve customers in
Australia and the Pacific Rim region. Connection to the United States
Internet backbone in Los Angeles is achieved through leased fiber optic
circuits.
We, along with NetSat Express, lease transponder capacity to meet the
bandwidth needs of our and their customers. NetSat Express leases multiple,
redundant, high-capacity fiber connections to provide reliable Internet data,
voice and data traffic to locations in New York City where it interconnects
with telecommunications service providers and the United States Internet
backbone.
NetSat Express has built and staffed a network operations center, or NOC,
to manage its customer circuits. The NOC operates 24 hours per day, seven
days per week to monitor customer circuits, respond to complaints and
initiate new services. Customers can purchase or lease from us or, from
NetSat Express, as a part of its service the equipment needed at the
customers' locations to transmit and receive the satellite signals. We offer
installation and maintenance services for this equipment.
PRODUCT DESIGN, ASSEMBLY AND TESTING
We assign a project team to each contract into which we enter. Each team
is led by a project engineer who is responsible for execution of the project.
This includes engineering and design, assembly and testing, installation and
customer acceptance. Project teams generally consist of between two and 10
employees and may include engineers, integration specialists, buyer-planners and
an operations team. Our products and system design capabilities are used 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 integrating the
purchased equipment, components and subsystems into a complete functioning
system. Assembly, integration and test operations are conducted on both an
automated and manual basis, depending primarily on production volume.
We provide facilities for complete in-plant testing of all our systems
before delivery in order to assure all performance specifications will be met
during installation at the customer's site. We employ formal total quality
management programs and other training programs, and have been certified by
the International Organization of Standards quality certification process for
ISO 9001, a standard that enumerates specific requirements an organization
must follow in order to assure consistent quality in the supply of products
and services. The certification process qualifies us for access to virtually
all domestic and international projects, and we believe that this represents
a competitive advantage.
RESEARCH AND DEVELOPMENT
We have outsourced much of our research and development by making
strategic investments in some of our suppliers who perform research and
development for us. Thus, the costs of developing
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new technologies are funded partially by the investments made in these strategic
suppliers. This provides us with a cost-effective means to develop new
technology, while minimizing our direct expenditures. Furthermore, we believe
that outsourcing research and development allows us to retain our flexibility in
developing solutions for our customers, while at the same time providing the
opportunity to develop products through our strategic supplier relationships.
Our internal research and development efforts generally focus on the development
of products not available from other suppliers to the industry. Current efforts
are focused on developing customizable systems. For the years ended June 30,
1997, 1998 and 1999 and for the six months ended December 31, 1998 and 1999, we
have incurred approximately $0.6 million, $1.2 million, $1.3 million, $0.5
million and $0.4 million, respectively, in internal research and development
expenses.
COMPETITION
In the satellite ground segment systems and networks market, we believe
that our ability to compete successfully is based primarily on management
reputation and the ability to provide a solution that meets the customer's
requirements, including competitive pricing, performance, on-time delivery,
reliability, and customer support.
In the communications services market, we believe that our ability to
compete successfully is based primarily on management reputation and
providing prompt delivery and initiation of service, competitive pricing,
consistent and reliable connections, and high-quality customer support.
Our primary competitors in the satellite ground segment systems and
networks market generally fall into two groups: (1) vertically integrated
satellite systems providers like Nippon Electric Corporation and (2) system
integrators like IDB Systems, a division of MCI WorldCom Inc.
In the communications services and Internet access services markets, we
compete with other satellite communication companies who provide similar
services, like Loral CyberStar, Inc., and PanAmSat Corporation, as well as
other Internet services providers. In addition, we may compete with other
communications services providers like MCI WorldCom and Teleglobe, Inc. We
anticipate that our competitors may develop or acquire services that provide
functionality that is similar to that provided by our services and that those
services may be offered at significantly lower prices or bundled with other
services.
Current and potential participants in the markets in which we compete have
established or may establish cooperative relationships among themselves or
with third parties. These cooperative relationships may increase the ability
of their products and services to address the needs of our current and
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge that will enable them to acquire
significant market share rapidly. We believe that increased competition is
likely to result in price reductions, reduced gross profit margins and loss
of market share, any of which would have a material adverse effect on our
business, results of operations and financial condition.
INTELLECTUAL PROPERTY
We rely heavily on the technological and creative skills of our personnel,
new product developments, computer programs and designs, frequent product
enhancements, reliable product support and proprietary technological
expertise in maintaining our competitive position. We have secured patent
protection on some of our products, and have secured trademarks and service
marks to protect some of our products and services.
We currently have two patents in the United States, for remote access to
the Internet using satellites and for satellite communication with automatic
frequency control and have a patent pending in the United States. We also
intend to seek further patents on our technology, if appropriate. We have
filed applications for trademark registration of Globecomm Systems Inc. in
the United States and various other countries. NetSat Express has received
trademark registration for NetSat Express in the
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United States, the European Community, Russia, and Brazil. We have also received
trademark registrations in the United States for MBB2001 and CTF2001, which are
two of our customizable modular earth stations. We intend to seek registration
of other trademarks and service marks in the future.
GOVERNMENT REGULATIONS
OPERATIONS AND USE OF SATELLITES
We are subject to various federal laws and regulations which may have
negative effects on our business. We operate earth stations in Hauppauge, New
York, subject to the Communications Act of 1934, as amended, and the rules
and regulations of the Federal Communications Commission, or FCC. Pursuant to
the Communications Act and rules, we have obtained and are required to
maintain radio transmission licenses from the FCC for both domestic and
foreign operations of our earth stations. These licenses should be renewed by
the FCC in the normal course as long as we are in compliance with the FCC
rules and regulations. However, we cannot guarantee that additional licenses
will be granted by the FCC when our existing licenses expire, nor can we
assure you that the FCC will not adopt new or modified technical requirements
that will require us to incur expenditures to modify or upgrade our equipment
as a condition of retaining our licenses.
We are also required to comply with FCC regulations regarding the exposure
of humans to radio frequency radiation from our earth stations. These
regulations, as well as local land use regulations, restrict our freedom to
choose where to locate our earth stations.
NetSat Express does not currently hold any FCC licenses, permits, or
authorizations, nor does it currently provide any FCC regulated services.
Therefore it is not subject to the Communications Act or the rules and
regulations of the FCC. However, NetSat Express may hold these licenses,
permits, or authorizations, or provide these services in the future, and
would then be required to comply with the FCC requirements mentioned in this
prospectus.
COMMON CARRIER REGULATION
We currently provide services to our customers on a private carrier basis
and not as a common carrier. However, we do have FCC authority to operate as
a common carrier, if we so choose. Were our business methods or the federal
regulatory structure to change such that operating as a common carrier
becomes desirable, we would be required to comply with the FCC's requirements
for common carriers. These requirements include, filing tariffs setting forth
our rates and service terms, being forbidden from unjust and unreasonable
discrimination among customers, notifying the FCC before discontinuing
service, and complying with FCC equal employment opportunity regulations and
reporting requirements.
We do not currently provide telecommunications services between points in
the same state and so are exempt from state regulation of our services.
However, we could become subject to state telecommunications regulations if
we did provide intrastate telecommunications services.
FOREIGN OWNERSHIP
As long as we offer services on a private basis, there are no restrictions
on foreign ownership of our earth stations. If we offered services as a
common carrier, however, we would be subject to statutory requirements that
generally forbid more than 20% ownership or control of an FCC licensee by
non-United States citizens and more than 25% ownership of a licensee's parent
by non-United States citizens. The FCC may authorize foreign ownership in the
licensee's parent in excess of these percentages. Under current policies, the
FCC has liberally granted these authorizations where the applicant does not
control monopoly or bottleneck facilities and the foreign owners are citizens
of countries that are members of the World Trade Organization or provide
equivalent competitive opportunities to United States citizens.
We may, in the future, be required to seek FCC approval for foreign
ownership if we operate as a common carrier and ownership of our stock
exceeds the thresholds mentioned above. Failure to
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comply with these policies may result in an order to divest the offending
foreign ownership, fines, denial of license renewal, and/or license revocation
proceedings against the licensee by the FCC. We have no knowledge of the FCC
rules and regulations regarding foreign ownership, if such ownership exceeds the
thresholds mentioned above.
FOREIGN REGULATIONS
Regulatory schemes in countries in which we may seek to provide our
satellite-delivered data communications services may impose impediments on
our operations. Some countries in which we intend to operate have
telecommunications laws and regulations that do not currently contemplate
technical advances in telecommunications technology like Internet/intranet
transmission by satellite. We cannot assure you that the present regulatory
environment in any of those countries will not be changed in a manner which
may have a material adverse impact on our business. Either we or our local
sales representatives typically must obtain authorization for each country in
which we provide our satellite-delivered data communications services.
Although we believe that we or our local sales representatives will be able
to obtain the requisite licenses and approvals from the countries in which we
intend to provide products and services, the regulatory schemes in each
country are different, and thus there may be instances of noncompliance of
which we are not aware. Although we believe these regulatory schemes will not
prevent us from pursuing our business plan, we cannot assure you that our
licenses and approvals are or will remain sufficient in the view of foreign
regulatory authorities. In addition, we cannot assure you that necessary
licenses and approvals will be granted on a timely basis in all jurisdictions
in which we wish to offer our products and services or that restrictions
applicable thereto will not be unduly burdensome.
REGULATION OF THE INTERNET
Our Internet operations (other than the operation of a teleport) are not
currently subject to direct government regulation in the United States or
most other countries, and there are currently few laws or regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet it is possible that a
number of laws and regulations may be adopted at the local, national or
international levels with respect to the Internet, covering issues like user
privacy and expression, pricing of products and services, taxation,
advertising, intellectual property rights, information security, or the
convergence of traditional communication services with Internet
communications. For example, the Child Online Protection Act, enacted in the
United States in 1998, imposes civil and criminal penalties on Internet
content providers who fail to restrict minor's access to material that is
deemed harmful to them. However, enforcement of this act is currently
judicially enjoined, and its constitutionality is being adjudicated. We
anticipate that a substantial portion of our or NetSat Express' Internet
operations will be carried out in countries which may impose greater
regulation of the content of information coming into their country than that
which is generally applicable in the United States. Examples of this include
privacy regulations in Europe and content restrictions in countries like the
Republic of China. To the extent that we provide content as a part of our
Internet services, it will be subject to laws regulating content. Moreover,
the adoption of laws or regulations may decrease the growth of the Internet,
which could in turn decrease the demand for our Internet services or increase
our cost of doing business or otherwise negatively affect our business. In
addition, the applicability to the Internet of existing laws governing issues
including property ownership, copyrights and other intellectual property
issues, taxation, libel and personal privacy is uncertain. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies. Changes to these laws
intended to address these issues, including some recently proposed changes,
could create uncertainty in the marketplace. These changes could reduce
demand for our products and services or could increase our cost of doing
business as a result of costs of litigation or increased product development
costs.
TELECOMMUNICATIONS TAXATION, SUPPORT REQUIREMENTS, AND ACCESS CHARGES
All telecommunications carriers providing domestic services in the United
States are required to contribute a portion of their gross revenues for the
support of universal telecommunications services. Some telecommunications
services are subject to special taxation and to contribution requirements to
support services to special groups, like persons with disabilities.
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Internet services are currently exempt from charges that long distance
telephone companies pay for access to the networks of local telephone
companies in the United States. Efforts have been made from time to time, and
may be made again in the future, to eliminate this exemption. If these access
charges are imposed on telephone lines used to reach Internet service
providers, and/or if flat rate telephone services for Internet access are
eliminated or curtailed, the cost to customers who access our satellite
facilities using telephone company-provided facilities could increase to an
extent that could discourage the demand for our services. Likewise, the
demand for our services in other countries may be affected by the
availability and cost of local telephone or other telecommunications
facilities to reach our facilities or the facilities of our customers.
EXPORT OF TELECOMMUNICATIONS EQUIPMENT
The sale of our ground segment systems, networks, and communications
service solutions outside the United States is subject to compliance with the
regulations of the United States Export Administration Regulations. The
absence of comparable restrictions on competitors in other countries may
adversely affect our competitive position. In addition, in order to ship our
products or implement our services into some countries, these products or
services must satisfy the technical requirements of that particular country. If
we were unable to comply with these requirements with respect to a significant
quantity of our products, our sales in Europe could be restricted, which could
have a material adverse effect on our business, financial condition and results
of operations.
EMPLOYEES
As of December 31, 1999, we had 160 full-time employees, including 81 in
engineering and program management, 34 in the manufacturing, manufacturing
support group, and network operations, 19 in sales and marketing, and 26 in
management and administration. Our employees are not covered by any
collective-bargaining agreements. We believe that our relations with our
employees are good.
PROPERTIES
We own approximately 122,000 square feet of space in a facility on
approximately seven acres located at 45 Oser Avenue, Hauppauge, New York.
These premises house our principal offices and production facilities as well
as offices and the network operations center of NetSat Express. We have a
lease on office space in Hong Kong at a monthly rental fee of approximately
$3,000. We are in the second year of a three-year lease for office space in
the Atlanta, Georgia, at a current base monthly rent of $2,050, which rental
amount increases to $2,130 per month in year three of the lease. In addition,
we are in the first year of a five-year lease at a base monthly rent of
$3,600 for office and operations facilities for our Globecomm Systems Europe
Limited subsidiary in the United Kingdom.
LEGAL PROCEEDINGS
We are not currently a party in any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information about our executive officers
and directors as of February 11, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- ----- -------------------------------------------------
<S> <C> <C>
David E. Hershberg ... 62 Chief Executive Officer and Chairman of the Board
of Directors and Chairman of the Board of
Directors of NetSat Express
Kenneth A. Miller ... 55 President and Director
Donald G. Woodring .. 52 Vice President--Network and Systems Analysis and
Director
Stephen C. Yablonski 53 Vice President, General Manager and Director
Herman Fialkov ....... 77 Director
Benjamin Duhov ....... 72 Director
C.J. Waylan .......... 58 Director
A. Robert Towbin .... 64 Director
Richard E. Caruso .... 53 Director
Paul J. Johnson ...... 44 Vice President--Contracts and Corporate Secretary
Andrew C. Melfi ...... 46 Vice President and Chief Financial Officer
Paul J. Eterno ....... 44 Vice President--Human Resources
Marni S. Ehrlich .... 45 Chief Executive Officer--NetSat Express
Burt H. Liebowitz ... 62 President and Chief Operating Officer--NetSat
Express
William M. Bartens .. 32 Chief Financial Officer and Treasurer--NetSat
Express
</TABLE>
David E. Hershberg founded Globecomm in 1994 and has served as Chief
Executive Officer and Chairman of the Board of Directors since our inception
and is Chairman of the Board of Directors of NetSat Express, Inc. From 1976
to 1994, Mr. Hershberg was the President of Satellite Transmission Systems,
Inc., or STS, a provider of satellite ground segment systems and networks,
which he founded and which became a subsidiary of California Microwave, Inc.,
or CMI, and which is currently a subsidiary of L3 Communications Corporation.
From 1990 to 1994, Mr. Hershberg also served as Group President of the Satellite
Communications Group of CMI, where he also had responsibility for EFData, Inc.,
a manufacturer of satellite communications modems and for Viasat Technology
Corp., a manufacturer of communications systems which specialized in portable
and mobile satellite communications equipment. Mr. Hershberg is a Director of
Primus Telecommunications Group, Inc. a telecommunications company providing
long distance services. In 1998, Mr. Hershberg was given the award of Long
Island Entrepreneur of the Year for Emerging Technology. He holds a B.S.E.E.
from Rensselaer Polytechnic Institute, an M.S.E.E. from Columbia University and
an M.S. in Management Science from Stevens Institute of Technology.
Kenneth A. Miller has served as President and a Director since joining us
in October 1994. From 1978 to 1994, he held various positions with STS, and
succeeded Mr. Hershberg as President of STS in 1994. Prior to his employment
at STS, Mr. Miller was Manager of Satellite Systems at Comtech and a
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Satellite Communications Staff Officer with the United States Army. Mr.
Miller holds a B.S.E.E. from the University of Michigan and an M.B.A. from
Hofstra University.
Donald G. Woodring has served as Vice President--Network and Systems
Analysis and a Director since joining us in September 1994. From 1982 to
1994, he was Assistant Vice President for System Analysis at STS. From 1980
to 1982, he was employed by the SHAPE Technical Center and from 1972 to 1980
was employed by the U.S. Department of Defense. Mr. Woodring holds a B.S.
from Penn State University and an M.S.E.E. from Catholic University.
Stephen C. Yablonski has served as Vice President of Commercial Systems
and a Director since joining us in June 1995. Additionally, in November 1999,
he was promoted to the title of general manager. From 1988 to 1995, he was
employed by STS, most recently as Vice President of the Commercial Systems
and Networks Division. Prior to that he was Vice President of Engineering at
Argo Communications, a telecommunications services provider. Mr. Yablonski
holds a B.S.E.E. from Brown University and an M.S.E.E. from the University of
Pennsylvania.
Herman Fialkov has been a Director since January 1995. In 1968, Mr.
Fialkov started the venture capital firm of Geiger & Fialkov and has been
involved in venture investments since that time. He was a General Partner of
PolyVentures Associates I, L.P., a high technology venture capital fund from
1987 to 1999. From 1972 to 1983, he was President and later Chairman of
Standard Microsystems Corporation, a manufacturer and provider of large-scale
integrated circuits and local area network products. He also is a Director of
Primus Telecommunications, Inc. and a Trustee of Polytechnic University. Mr.
Fialkov holds a B.Ad.E. from New York University.
Benjamin Duhov has been a Director since January 1996. Since 1993, he has
been a consultant and the President of Stamford Consulting Group which
provides consulting services to the aerospace industry. He worked for
Thomson-CSF Inc. from June 1975 to October 1993. Mr. Duhov holds a B.S.E.E.
from Washington University.
C. J. Waylan has been a Director since January 1997. Since 1992, he has
served as President, Chief Executive Officer and Director at Constellation
Communications, Inc., a satellite communications provider of voice, data,
positioning and other services to mobile and fixed-site users. From May 1996 to
September 1997, Dr. Waylan served as Executive Vice President of NextWave
Telecom Inc., a provider of wireless personal telecommunications services. Prior
to joining NextWave, Dr. Waylan worked for GTE Corporation from February 1981 to
April 1996, where he served as Executive Vice President for GTE Mobilnet and
President of GTE Spacenet Corporation. He was recently elected as a Director at
Radyne Comstream. Dr. Waylan holds a B.S. from the University of Kansas and an
M.S.E.E. and a Ph.D. from the Naval Postgraduate School.
A. Robert Towbin has been a Director since November 1997 and has been a
Managing Director of C.E. Unterberg, Towbin, an investment banking firm,
since September 1995. In January 2000, he was elected to Co-Chairman of C.E.
Unterberg, Towbin. From January 1994 to August 1995 he was the President and
Chief Executive Officer of the Russian-American Enterprise Fund, a U.S.
Government owned investment fund. From 1987 to 1994, he was co-head of
technology banking and a Managing Director of Lehman Brothers. From 1977 to
1986, Mr. Towbin held various executive positions with L.F. Rothschild,
Unterberg, Towbin, an investment banking firm. He also is a Director of
Bradley Real Estate, Inc., Globalstar Telecommunications Ltd., Gerber
Scientific, Inc., K&F Industries Inc. and TrueTime, Inc. Mr. Towbin holds a
B.A. from Dartmouth College.
Richard E. Caruso has been a Director since February 2000. He currently
serves as President of the application service provider market at Nortel
Networks. From 1983 to 1994, Mr. Caruso held various positions with Bellcore,
including vice president of industry markets. From 1994 to 1999, Mr. Caruso
served as vice president and general manager of digital media projects for
IBM Global Media and Entertainment Industries and general manager of
solutions for IBM Global Telecom and Media Industries. Mr. Caruso holds a
B.S. in science from Rutgers University and an M.S. in science from the New
Jersey Institute of Technology.
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Paul J. Johnson has served as Vice President--Contracts since joining us
in October 1996. From 1991 to 1996, he was Director of Contracts for STS. He
holds a B.B.A. from St. Bonaventure University.
Andrew C. Melfi has served as Vice President since September 1997 and as
Chief Financial Officer since joining us in January 1996. From 1982 to 1995,
he was the Controller of STS. From 1980 to 1982, he was the Assistant
Controller of Dorne and Margolin, Inc., a designer and manufacturer of
antennas. Mr. Melfi holds a B.B.A in accounting from Dowling College and an
M.B.A. from Dowling College.
Paul Eterno has served as Vice President of Human Resources since November
1999 and he served as Senior Director of Human Resources from January 1998 to
November 1999. From October 1997 to January 1998, Mr. Eterno served as a
consultant to us. From July 1995 to October 1997 he served as Senior Vice
President of Human Resources for US Computer Group, a turnkey provider of
computer service maintenance and products. Prior to that, he served most
recently as Senior Director of Human Resources at STS, where he was employed
from April 1983 through June 1995. Mr. Eterno holds a B.S. in Management from
the New York Institute of Technology and a M.B.A. in Executive Management
from St. John's University.
Marni S. Ehrlich has served as Chief Executive Officer of NetSat Express
since October 1999. Mr. Ehrlich has 20 years of senior management experience
in Internet services, international telecommunications business and
e-business, most notably with IBM and AT&T. From January 1997 through October
1999, Mr. Ehrlich held positions as global solutions director of IBM's ISP
division and was previously program director for IBM's voice and IP solutions
division. From June 1995 through January 1997, he was product marketing
director for AT&T WorldNet(Trademark) Service, and was a founder of the AT&T
Internet service. He jointly holds a patent for Internet radio advertising
mediation, and has lectured worldwide on how to become a valued-added
Internet Service Provider. Mr. Ehrlich holds B.A. in marketing from Fairleigh
Dickinson University.
Burt H. Liebowitz has served as President, Chief Operating Officer and a
Director of NetSat Express since April 1999. From 1992 to 1999 he served as
Vice President of Technology and Chief Technical Officer for Loral Orion,
Inc. responsible for the development of VSAT products and enterprise software
support for Loral Orion's international networking and Internet access
business. Prior to joining Loral Orion, Mr. Liebowitz was Principal Engineer
at the MITRE Corporation from 1989 to 1992. Mr. Liebowitz is the author of
two books on distributed processing, and numerous articles on the development
of highly reliable, high performance computing and communications systems. He
holds three patents related to data networking over satellites. Mr. Liebowitz
holds a B.E.E. and M.S. in mathematics from Rensselaer Polytechnic Institute,
and an M.S.E.E. from Polytechnic Institute of Brooklyn.
William M. Bartens has served as Chief Financial Officer and Treasurer of
NetSat Express since May 1999 and he served as Controller of Globecomm from
September 1997 to April 1999. From October 1996 through September 1997 he was
an Audit Manager at Ernst & Young LLP and held various audit staff positions
with Ernst & Young LLP from January 1992 through September 1996. Mr. Bartens
holds a B.A. in economics from the State University of New York at Stony
Brook and an M.S. in accounting from Long Island University--C.W. Post.
50
<PAGE>
CERTAIN TRANSACTIONS AND RELATED PARTIES
In August 1999, NetSat Express, Inc. completed a private placement
yielding gross proceeds of $10,000,000. C.E. Unterberg, Towbin acted as
placement agent for such transaction. A. Robert Towbin, a Director of
Globecomm, serves as a Managing Director of C.E. Unterberg, Towbin. C.E.
Unterberg, Towbin was paid an investment advisor fee of $500,000 and issued a
warrant for 200,000 shares of NetSat Express, Inc. common stock at $3.00 per
share relating to this private placement, subject to equitable adjustment for
stock splits.
51
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of February 4, 2000, information with
respect to the beneficial ownership of shares of common stock of: (1) each
stockholder whom we know to beneficially own more than 5% of our outstanding
common stock, (2) each director and each executive officer named in the
summary compensation table in our proxy statement, dated October 15, 1999,
(3) each stockholder who is selling shares in this offering, and (4) all of
our directors and executive officers as a group. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and includes voting and investment power with respect to shares.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
STOCK PERCENTAGE PERCENTAGE
BENEFICIALLY OF SHARES OF SHARES
OWNED BEFORE OUTSTANDING OUTSTANDING
NAME AND ADDRESS OF THE BEFORE THE AFTER THE
BENEFICIAL OWNER(1) OFFERING(2) OFFERING OFFERING
- -------------------------------------------- -------------- ------------- -------------
<S> <C> <C> <C>
David E. Hershberg .......................... 955,000(3) 9.9% 8.2%
Kenneth A. Miller ........................... 276,254(4) 2.8% 2.4%
Donald G. Woodring .......................... 166,164(6) 1.7% 1.4%
Stephen C. Yablonski ........................ 112,737(5) 1.2% *
Herman Fialkov .............................. 40,151 * *
Benjamin Duhov .............................. 5,700 * *
C.J. Waylan ................................. 42,750(7) * *
A. Robert Towbin ............................ 16,590(8) * *
All current directors and executive officers
as a group (14 persons) .................... 1,693,278(9) 16.9% 14.1%
</TABLE>
- ------------
* Represents less than 1%
(1) Except as otherwise indicated, the stockholders named in the table have
sole voting and investment power with respect to all shares
beneficially owned by them, and the address of all stockholders listed
in the table is: c/o GSI, 45 Oser Avenue, Hauppauge, New York 11788.
(2) The number of shares of common stock outstanding as of February 4, 2000
is 9,650,298. Amounts shown for each stockholder include (i) all shares
of common stock owned by each stockholder and (ii) shares of common
stock underlying options, warrants and rights of first refusal
exercisable within 60 days of February 4, 2000.
(3) Includes 171,000 shares of common stock held by Deerhill Associates, a
family partnership of which Mr. Hershberg is General Managing Partner.
Mr. Hershberg disclaims beneficial ownership of the shares held by
Deerhill Associates except to the extent of his proportionate pecuniary
interest therein.
(4) Includes 84,975 shares of common stock issuable upon exercise of stock
options.
(5) Consists of 1,485 shares of common stock held by Mr. Yablonski's wife
and sons of which Mr. Yablonski disclaims beneficial ownership and
109,627 shares of common stock issuable upon exercise of stock options.
(6) Includes 17,150 shares of common stock held by some members of Mr.
Woodring's family of which Mr. Woodring disclaims beneficial ownership
and 69,687 shares of common stock issuable upon exercise of stock
options.
(7) Consists of 42,750 shares of common stock issuable upon exercise of
stock options.
(8) Includes 10,000 shares of common stock issuable upon the exercise of
stock options.
(9) See Notes (3) through (8) above.
If the underwriters exercise their over-allotment option to purchase up to
300,000 shares of common stock, then the following stockholders will sell up
to the following number of shares and have the following beneficial
ownership: David E. Hershberg, 85,000 shares, 7.3%, and Kenneth A. Miller,
25,000 shares, 2.1%.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting
agreement, dated the date hereof, the underwriters named below, who are
represented by ING Barings LLC and C.E. Unterberg, Towbin, have severally
agreed to purchase from us the number of shares of common stock set forth
opposite their names below.
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
ING Barings LLC. ...............................
C.E. Unterberg, Towbin ........................
-----------------
Total..........................................
=================
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock of
this offering are subject to approval by their legal counsel and to other
terms and conditions. The underwriters are obligated to purchase and accept
delivery of all the shares of common stock (other than those shares covered
by the over-allotment option described below) if any are purchased.
The underwriters propose initially to offer the shares of common stock in
part directly to the public at the public offering price set forth on the
cover page of this prospectus and in part to dealers (including the
underwriters) at the offering price less a concession not in excess of $
per share. The underwriters may allow, and such dealers may re-allow, to
other dealers, a concession not in excess of $ per share. After the
offering of the shares of common stock, the public offering price and other
selling terms may be changed by ING Barings LLC at any time without notice.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.
NO EXERCISE FULL EXERCISE
----------- -------------
Per share......................... $ $
Total............................. $ $
Other expenses of this offering, including the registration fees and the
fees of financial printers, counsel and accountants, payable by us are
expected to be approximately $ million.
We and our selling stockholders have granted to the underwriters an
option, exercisable within 30 days after the date of this prospectus, to
purchase up to a total of up to 190,000 additional shares of common stock
from us and up to 110,000 additional shares of common stock from selling
stockholders at the public offering price less the underwriting discounts and
commissions. The underwriters may exercise this option solely to cover
over-allotments, if any, made in connection with this offering. To the extent
that the underwriters exercise this option, each underwriter will have a
conditional obligation to purchase its pro rata portion of such additional
shares based on the underwriter's percentage underwriting commitment as
indicated in the table above.
Under an agreement between Globecomm and Thomson-CSF, Inc., Thomson was
granted some preemptive and other rights regarding future issuances of our
securities, including (1) a preemptive right to purchase up to 15% of the
total number of securities offered in any public offering undertaken by us,
and (2) the right to participate in any private offering to the extent
required to maintain its percentage ownership in us. These rights survive so
long as Thomson's stock ownership does not fall below 5% of our outstanding
share capital as a result of Thomson selling or otherwise disposing of a
portion of its shares.
We have agreed to indemnify the underwriters against some types of
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect of any
of those liabilities. These liabilities generally consist of losses,
53
<PAGE>
claims, damages or actions arising from or relating to the offer, purchase or
sale of common stock in this offering by the underwriters. Indemnification
under the Securities Act may be unenforceable as against public policy.
We, our executive officers and directors, have agreed not to: (1) issue,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into,
exercisable or exchangeable for, or represent the right to receive common
stock, or (2) grant any options or warrants to purchase common stock or enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any common stock
(regardless of whether any of the transactions described in the first or
second clause is to be settled by the delivery of common stock, or such other
securities, in cash or otherwise) for a period of 120 days after the date of
this prospectus without the prior written consent of ING Barings LLC. This
agreement does not apply to any shares reserved for issuance under existing
employee benefit plans. In addition, during this period, we have also agreed
not to file any registration statement with respect to (other than a Form S-8
registration statement in connection with shares received under a stock plan,
stock ownership plan, employment agreement or dividend reinvestment plan),
and our executive officers and directors have agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of ING
Barings LLC.
Other than in the United States, no action has been taken by us or by the
underwriters that would permit a public offering of the shares of common
stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of common stock offered hereby may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisements in connection with the offer and sale of any such
shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of that jurisdiction. Persons who come to possess this
prospectus are advised to inform themselves about, and to observe, any
restrictions relating to the offering of the common stock and the
distribution of this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy any shares of common stock offered hereby in
any jurisdiction in which that offer or solicitation is unlawful.
We have been informed that the underwriters do not intend to confirm sales
to any accounts over which they exercise discretionary authority without the
prior written approval of the customer.
Our common stock is quoted on the Nasdaq National Market under the symbol
"GCOM."
Until the distribution of our common stock is completed, rules of the SEC
may limit the ability of the underwriters and the selling group members to
bid for and purchase the common stock. As an exception to these rules, the
representatives of the underwriters are permitted to engage in transactions
that stabilize the price of the common stock. These transactions may consist
of bids or purchases for the purpose of pegging, fixing or maintaining the
price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering by selling more shares of the common stock than
are set forth on the cover pages of this prospectus, the representatives of
the underwriters may reduce that short position by purchasing the common
stock in the open market. The representatives of the underwriters may elect
to reduce any short position by exercising all or part of the over-allotment
option described above.
The representatives of the underwriters may also impose a penalty bid on
some underwriters and selling group members. This means that if the
representatives purchase shares of the common stock in the open market to
reduce an underwriters' short position or to stabilize the price of the
common stock, it may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares as part of the
offering.
54
<PAGE>
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of these purchases. The imposition of a
penalty bid might also have an effect on the price of the common stock if it
were to discourage resales of the common stock.
In addition, in connection with this offering, some of the underwriters
may engage in passive market making transactions in our common stock on the
Nasdaq National Market prior to the pricing and completion of the offering.
Passive market making consists of displaying bids on the Nasdaq National
Market no higher than the bid prices of independent market makers and making
purchases at prices no higher than those independent bids and effected in
response to order flow. Net purchases by a passive market maker on each day
are limited to a specified percentage of the passive market maker's average
daily trading volume in the common stock during a specified period and must
be discontinued when such limit is reached. Passive market making may cause
the price of our common stock to be higher than the price that otherwise
would exist in the open market in the absence of such transactions. If
passive market making is commenced, it may be discontinued at any time.
We make, and each of the underwriters makes, no representation or
prediction as to the direction or magnitude of any effect that the
transaction described above may have on the price of our common stock. In
addition, we make, and each of the underwriters makes, no representation that
the representatives of the underwriters will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
LEGAL MATTERS
The validity of the common stock offered in this prospectus will be passed
upon for us by Brobeck, Phleger & Harrison LLP, New York, New York. Other
legal matters in connection with this offering will be passed upon for the
underwriters by Morrison & Foerster LLP, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K
for the year ended June 30, 1999 as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our consolidated financial statements are included elsewhere in the
registration statement and our consolidated financial statements and schedule
are incorporated by reference in reliance upon Ernst & Young LLP's report, given
on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and
copy any document we file at the public reference facilities of the SEC
located at 450 Fifth Street, N.W., Washington D.C. 20549. You may obtain
information on the operation of the SEC's public reference facilities by
calling the SEC at 1-800-SEC-0330. You can also access copies of such
material electronically on the SEC's home page on the World Wide Web at
http://www.sec.gov. Reports, proxy statements and other information
concerning us is also available for inspection at the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
This prospectus is part of a registration statement (Registration No.
333- ) we filed with the SEC. The SEC permits us to "incorporate by
reference" the information that we file with them, which means that we can
disclose important information to you by referring you to those documents.
The information incorporated by reference is considered to be part of this
prospectus, and information that we file with the SEC after the date of this
prospectus will automatically update and supercede this information.
55
<PAGE>
We incorporate by reference the following documents filed by us with the SEC
(File No. 000-22839). We also incorporate by reference any future filings made
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended, after the date of this prospectus until the termination
of this offering.
1. Our Annual Report on Form 10-K for the fiscal year ended June 30, 1999.
2. Our Quarterly Report on Form 10-Q for the quarters ended September 30,
1999 and December 31, 1999.
3. Our Proxy Statement dated October 15, 1999, filed in connection with
our 1999 Annual Meeting of Stockholders.
4. The description of our common stock which is contained in its
Registration Statement on Form 8-A filed under the Securities Exchange Act on
July 15, 1997, including any amendment or reports filed for the purpose of
updating such description.
If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies requested at no charge.
However, we will not send exhibits to such documents, unless such exhibits
are specifically incorporated by reference in such documents. You should
direct requests for such copies to: Mr. Andrew C. Melfi, Chief Financial
Officer, Globecomm Systems Inc., 45 Oser Avenue, Hauppauge, New York 11788.
56
<PAGE>
GLOBECOMM SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors ........................................................... F-2
Consolidated Balance Sheets as of June 30, 1998 and 1999 ................................. F-3
Consolidated Statements of Operations for the years ended June 30, 1997, 1998 and 1999 ... F-4
Consolidated Statement of Changes in Stockholders' Equity for the years ended June 30,
1997, 1998 and 1999...................................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1998 and 1999 ... F-7
Notes to Consolidated Financial Statements ............................................... F-8
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED)
Consolidated Balance Sheet as of December 31, 1999 ....................................... F-24
Consolidated Statements of Operations for the six months ended December 31, 1998 and 1999 F-25
Consolidated Statement of Changes in Stockholders' Equity for the six months ended
December 31, 1999 ....................................................................... F-26
Consolidated Statements of Cash Flows for the six months ended December 31, 1998 and 1999 F-27
Notes to Consolidated Financial Statements ............................................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Globecomm Systems Inc.
We have audited the accompanying consolidated balance sheets of Globecomm
Systems Inc. at June 30, 1998 and 1999 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Globecomm
Systems Inc. at June 30, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1999, in conformity with accounting principles generally accepted in
the United States.
/S/ ERNST & YOUNG LLP
Melville, New York
August 24, 1999, except for the last paragraph of
Note 16. Subsequent Events, as to which the date is September 14, 1999
F-2
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $21,342 $ 11,944
Restricted cash...................................................... 4,416 3,486
Accounts receivable, net............................................. 18,017 18,147
Inventories, net..................................................... 1,656 6,419
Prepaid expenses and other current assets............................ 635 1,207
--------------- ---------------
Total current assets.................................................. 46,066 41,203
Fixed assets, net..................................................... 10,165 12,684
Investments........................................................... 2,093 2,961
Other assets, net of accumulated amortization of $100 in 1998 and
$197 in 1999......................................................... 295 1,162
--------------- ---------------
Total assets.......................................................... $58,619 $ 58,010
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $13,042 $ 18,749
Deferred revenue..................................................... 103 299
Accrued payroll and related fringe benefits.......................... 632 859
Accrued commissions.................................................. 216 72
Other accrued expenses............................................... 594 1,774
Capital lease obligations............................................ 18 --
--------------- ---------------
Total current liabilities............................................. 14,605 21,753
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 3,000,000 shares authorized:
Class A Convertible, shares authorized, issued and outstanding:
none in 1998 and 1999.............................................. -- --
Class B Convertible, shares authorized, issued and outstanding:
none in 1998 and 1999.............................................. -- --
Series A Junior Participating, shares authorized, issued and
outstanding: none in 1998 and 1999................................. -- --
Common stock, $.001 par value, 22,000,000 shares authorized, shares
issued: 9,165,908 in 1998 and 9,365,489 in 1999..................... 9 9
Additional paid-in capital........................................... 50,530 52,061
Accumulated deficit.................................................. (6,525) (14,717)
Deferred compensation................................................ -- (293)
Treasury stock, at cost, none in 1998 and 139,638 shares in 1999 ... -- (803)
--------------- ---------------
Total stockholders' equity............................................ 44,014 36,257
--------------- ---------------
Total liabilities and stockholders' equity............................ $58,619 $ 58,010
=============== ===============
</TABLE>
See accompanying notes.
F-3
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JUNE 30, JUNE 30, JUNE 30,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenues............................................... $36,220 $58,105 $49,058
Costs of revenues...................................... 32,060 49,532 43,516
---------- ---------- ----------
Gross profit........................................... 4,160 8,573 5,542
---------- ---------- ----------
Operating expenses:
Network operations.................................... -- -- 514
Selling and marketing................................. 3,282 4,187 5,183
Research and development.............................. 649 1,188 1,325
General and administrative............................ 3,449 5,010 6,040
Terminated acquisition costs.......................... -- -- 972
Write-down of investments............................. -- -- 679
---------- ---------- ----------
Total operating expenses............................... 7,380 10,385 14,713
---------- ---------- ----------
Loss from operations................................... (3,220) (1,812) (9,171)
Interest income, net of interest expense of $22, $5
and $1 in 1997, 1998 and 1999, respectively........... 276 1,266 979
---------- ---------- ----------
Loss before minority interests in operations of
consolidated subsidiary............................... (2,944) (546) (8,192)
Minority interests in operations of consolidated
subsidiary............................................ 275 -- --
---------- ---------- ----------
Net loss............................................... $(2,669) $ (546) $(8,192)
========== ========== ==========
Basic and diluted net loss per common share............ $ (0.06) $ (0.90)
========== ==========
Shares used in the calculation of basic and diluted
net loss per common share............................. 8,553 9,109
========== ==========
Pro forma basic and diluted net loss per common share
(unaudited)........................................... $ (0.44)
==========
Shares used in the calculation of pro forma basic and
diluted net loss per common share (unaudited) ........ 6,086
==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------- COMMON
CLASS A CLASS B STOCK
------------------ ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996............ 156 $-- -- $-- 3,769 $ 4
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
Sale of convertible preferred stock
to investor........................ 16 --
Exercise of warrants................ 107 --
Sale of convertible preferred stock
to investor........................ 30 --
Issuance of common stock in
exchange for minority shares in
subsidiary......................... 30 --
Options granted to employees and
directors..........................
Net loss............................
-------- -------- -------- -------- -------- --------
Balance at June 30, 1997............ 172 -- 515 1 3,906 4
Conversion of convertible preferred
stock into common stock............ (172) -- (515) (1) 1,958 2
Proceeds from initial public
offering, net of issuance costs of
$3,721............................. 3,163 3
Proceeds from exercise of stock
options............................ 132 --
Proceeds from exercise of warrants . 7 --
Options granted to employees and
directors..........................
Net loss............................
-------- -------- -------- -------- -------- --------
Balance at June 30, 1998............ -- -- -- -- 9,166 9
Issuance of common stock in
exchange for minority shares in
subsidiary......................... 43 --
Issuance of common stock in
connection with acquisition........ 50 --
Proceeds from exercise of stock
options............................ 39 --
Exercise of stock options in
exchange for shares of common
stock.............................. 49 --
Issuance of common stock in
connection with employee stock
purchase plan...................... 18 --
Purchases of treasury stock.........
Options granted to employees and
directors..........................
Grant of employee stock options ....
Amortization of deferred
compensation ......................
Net loss............................
-------- -------- -------- -------- -------- --------
Balance at June 30, 1999............ -- $-- -- $-- 9,365 $ 9
======== ======== ======== ======== ======== ========
</TABLE>
F-5
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TREASURY STOCK TOTAL
PAID-IN ACCUMULATED DEFERRED -------------------- STOCKHOLDERS'
CAPITAL DEFICIT COMPENSATION SHARES AMOUNT EQUITY
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 9,036 $ (3,310) $ -- -- $ -- $ 5,730
10,964 10,965
257 257
563 563
824 824
243 243
83 83
(2,669) (2,669)
------------ ------------- -------------- -------- -------- ---------------
21,970 (5,979) -- -- -- 15,996
(1) --
27,901 27,904
534 534
55 55
71 71
71 (546) (546)
------------ ------------- -------------- -------- -------- ---------------
50,530 (6,525) -- -- -- 44,014
250 250
406 406
148 148
258 26 (258) --
94 94
114 (545) (545)
75 75
300 (300) --
7 7
(8,192) (8,192)
------------ ------------- -------------- -------- -------- ---------------
$52,061 $(14,717) $(293) 140 $(803) $36,257
============ ============= ============== ======== ======== ===============
</TABLE>
See accompanying notes.
F-6
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JUNE 30, JUNE 30, JUNE 30,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................................... $ (2,669) $ (546) $(8,192)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................................. 362 716 1,267
Stock compensation expense................................................ 83 71 82
Provision for doubtful accounts........................................... -- 40 100
Loss on disposal of fixed assets.......................................... -- -- 129
Write-down of investments................................................. -- -- 679
Minority interests in operations of consolidated subsidiary .............. (275) -- --
Changes in operating assets and liabilities:
Accounts receivable, net................................................. (12,351) (3,707) (230)
Inventories, net......................................................... (943) 664 (4,763)
Prepaid expenses and other current assets................................ (73) (328) (572)
Other assets............................................................. (1) 68 (74)
Accounts payable......................................................... 13,322 (3,047) 5,707
Deferred revenue......................................................... 27 76 196
Accrued payroll and related fringe benefits.............................. 221 194 227
Accrued commissions and other accrued expenses........................... 339 121 1,036
---------- ---------- ----------
Net cash used in operating activities...................................... (1,958) (5,678) (4,408)
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of investments................................................... (1,069) (785) (1,547)
Purchases of fixed assets.................................................. (6,765) (3,678) (3,818)
Payment of organization costs.............................................. (81) -- --
Restricted cash............................................................ (306) (2,879) 930
---------- ---------- ----------
Net cash used in investing activities...................................... (8,221) (7,342) (4,435)
FINANCING ACTIVITIES:
Proceeds from sales of common stock, net................................... -- 28,665 94
Proceeds from sales of preferred stock, net................................ 12,046 -- --
Proceeds from exercise of warrants......................................... 563 55 --
Proceeds from exercise of stock options.................................... -- 534 148
Purchases of treasury stock................................................ -- -- (545)
Investment from minority stockholders...................................... 275 -- --
Repayment of loan to stockholder........................................... 150 -- --
Repayment of loans payable to stockholder.................................. (315) -- --
Payment of deferred offering costs......................................... (761) -- (234)
Payments under capital leases.............................................. (50) (56) (18)
---------- ---------- ----------
Net cash provided by (used in) financing activities........................ 11,908 29,198 (555)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents....................... 1,729 16,178 (9,398)
Cash and cash equivalents at beginning of year............................. 3,435 5,164 21,342
---------- ---------- ----------
Cash and cash equivalents at end of year................................... $ 5,164 $21,342 $11,944
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest..................................................... $ 51 $ 5 $ 1
========== ========== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Globecomm Systems Inc. (the "Company") was incorporated in the State of
Delaware on August 17, 1994. The Company designs, assembles and installs
satellite ground segment systems and networks which support a wide range of
satellite communications applications including fixed, mobile and direct
broadcast services as well as certain military applications. During fiscal
1997, the Company established a subsidiary, NetSat Express, Inc. ("NetSat
Express"), to develop service revenues by providing high-speed,
satellite-delivered data communications to developing markets world wide. In
addition, the Company offers communications services which are typically
comprised of ground segment systems and networks in combination with
terrestrial and space segment services to provide end-to-end service
solutions.
On July 18, 1997, the Board of Directors authorized and, on August 5,
1997, the stockholders approved a 2.85-for-one stock split of the outstanding
shares of common stock, and amended and restated the Company's certificate of
incorporation increasing the number of authorized shares of common stock to
22,000,000 and preferred stock to 3,000,000, and changed the par value of its
common and preferred stock to $.001. All common stock, stock options and
warrant data has been restated to reflect the stock split.
The Company has incurred operating losses since its inception and had an
accumulated deficit at June 30, 1999 of approximately $14,717,000. Such
losses have resulted principally from general and administrative and selling
and marketing expenses associated with the Company's operations. The Company
expects that its cash and working capital requirements will continue to
increase as the Company expands its operations. Management believes that its
existing capital resources will be sufficient to meet its working capital
needs through June 30, 2000 (see Note 16).
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary, NetSat Express. All significant
intercompany balances and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company uses the percentage-of-completion method of accounting for
contract revenues, upon the achievement of certain milestones. Accordingly,
revenue from long-term, fixed-price contracts, are generally recorded based
on the relationship of total costs incurred to date to total projected final
costs. Contract costs generally include purchased material, direct labor,
overhead and other indirect costs. Anticipated contracted losses are
recognized as they become known.
NetSat Express revenues are derived primarily from Internet access service
fees and sales of hardware and equipment. Service revenue from Internet
access is recognized ratably over the period services are provided. Sales of
hardware and equipment are recognized upon shipment. Payments received in
advance of providing Internet access service are deferred until the period
such services are provided and are presented as deferred revenue in the
accompanying consolidated balance sheets.
F-8
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cost of Revenues
In addition to contract costs, cost of revenues relating to Internet
access service fees consist primarily of satellite space segment charges and
Internet connectivity fees. Cost of revenues associated with hardware and
equipment sales consist primarily of the purchase of the related products.
Network Operations
Network operations expense consist primarily of costs associated with the
operation of the Network Operation Center (the "NOC"), including teleport
services and maintaining a twenty-four hour a day, seven-day a week staff to
monitor the operations of the NOC.
Research and Development
Research and development expenditures are expensed as incurred.
Inventories
Inventories, which consist primarily of work-in-progress from costs
incurred in connection with specific customer contracts, are stated at the
lower of cost (using the first-in, first-out method of accounting) or market
value, less customer progress payments.
Cash Equivalents
The Company classifies all highly liquid financial instruments with a
maturity of three months or less when purchased as cash equivalents.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets ranging from three to twenty-five
years. Amortization of assets held under capital leases is calculated using
the straight-line method over the estimated useful lives of the assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the shorter of the lease term or estimated useful lives of the
improvement.
Income Taxes
Income taxes are provided using the liability method. Accordingly,
deferred tax assets and liabilities are recognized for future tax
consequences attributable to the difference between the carrying amount of
the assets and liabilities for financial statement and income tax purposes,
as determined under the enacted tax laws and rates that will be in effect
when the differences are expected to reverse.
Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable, and accrued liabilities approximate their fair
values principally because of the short-term nature of these items.
F-9
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and complies with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based-Compensation"
("Statement 123").
Goodwill
Goodwill represents excess of the purchase price over the fair value of
net assets acquired. Amortization expense relating to goodwill is amortized
on a straight-line basis over periods ranging from five to ten years. Such
amounts are included in other assets in the accompanying consolidated balance
sheets.
Long-Lived Assets
When impairment indicators are present, the Company reviews the carrying
value of its assets in determining the ultimate recoverability of their
unamortized values using future undiscounted cash flow analyses expected to
be generated by the assets. If such assets are considered impaired, the
impairment recognized is measured by the amount by which the carrying amount
of the asset exceeds the future discounted cash flows. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less cost
to sell.
The Company evaluates the periods of amortization continually in
determining whether later events and circumstances warrant revised estimates
of useful lives. If estimates are changed, the unamortized cost will be
allocated to the increased or decreased number of remaining periods in the
revised lives.
Segment Disclosures
Effective June 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("Statement 131"). Statement 131 supersedes
Statement of Financial Accounting Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise". Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports.
Statement 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
operates in two business segments, its Ground Segment Systems and Networks
Segment, through Globecomm Systems Inc. and its Data Communications Services
Segment, through NetSat Express (see Note 13).
Reclassifications
Certain balances in the prior years have been reclassified to conform to
the current year presentation.
F-10
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and component
parts............................ $ 78 $ 87
Work-in-progress.................. 3,576 9,975
---------- ----------
3,654 10,062
Less progress payments............ 1,998 3,643
---------- ----------
$1,656 $ 6,419
========== ==========
</TABLE>
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land........................................... $ 1,750 $ 1,750
Building and improvements...................... 5,261 5,309
Computer equipment............................. 1,437 1,410
Machinery and equipment........................ 844 2,469
Network Operations Center...................... 565 749
Satellite earth station equipment.............. 148 630
Furniture and fixtures......................... 933 987
Leasehold improvements......................... 29 29
Equipment under capital leases................. 159 159
Construction-in-progress....................... 158 1,481
---------- ----------
11,284 14,973
Less accumulated depreciation and
amortization.................................. 1,119 2,289
---------- ----------
$10,165 $12,684
========== ==========
</TABLE>
F-11
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. INVESTMENTS
Investments consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Shiron Satellite Communications (1996), Ltd.
("Shiron")(a).................................. $ 285 $ 285
Euro Broadcasting Corporation
("Euro")(b).................................... 440 --
Newpoint Technologies, Inc.
("Newpoint Technologies")(c)................... 950 950
Armer Communications Engineering Services, Inc.
("Armer")(d)................................... 200 200
Joint Communications Technology Corp.
("JCTC")(e).................................... 214 --
McKibben Communications, LLC
("McKibben")(f)................................ -- 1,522
Other........................................... 4 4
---------- ----------
$2,093 $2,961
========== ==========
</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 20% interest of
Shiron in accordance with the terms of the purchase agreement. As of
June 30, 1999, the Company's interest in Shiron was diluted to 8.91%.
(b) During August 1996, the Company purchased 19% of the common stock of
Euro, a Delaware corporation, for $240,000 with a one-year option to
purchase an additional 10% at a price ranging from $125,000 to
$200,000 depending upon the exercise date. During August 1997, the
Company exercised its option to purchase an additional 10% for
$200,000. During December 1998, the Company purchased an additional
100,000 shares of Euro's common stock for $25,000. During June 1999,
the Company's management evaluated this investment and believed it
would be appropriate to write-down this investment to zero and
recorded a charge to operations of approximately $465,000.
(c) On August 30, 1996, the Company purchased 5% of the common stock of
Newpoint Technologies, a New Hampshire corporation, for approximately
$400,000. In May 1997, the Company purchased an additional 1.6% for
$150,000. In August and September 1997, the Company purchased
additional common stock of Newpoint Technologies for $400,000. As of
June 30, 1999, the Company's interest in Newpoint Technologies has
been diluted to 10.3%.
(d) On November 18, 1996, the Company purchased 15% of the common stock
of Armer, an Arizona corporation, for $150,000 and in March 1997,
purchased an additional 2% for $50,000.
(e) On January 13, 1998, the Company purchased 6.7% of the common stock
of JCTC, a New Jersey corporation, for approximately $214,000. The
Company has a two-year option to purchase an additional 6.7% for
$200,000. In addition, the Company has an additional option to
purchase up to a total of 20% interest in JCTC provided the Company
has purchased the first option. The price of the second option will
be the then current market price or the last price for which JCTC's
common stock has been sold. During June 1999, the Company's
management evaluated this investment and believed it would be
appropriate to write-down this investment to zero and recorded a
charge to operations of approximately $214,000.
F-12
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. INVESTMENTS (Continued)
(f) On August 20, 1998, the Company purchased 18.75% of the future
profits, losses and equity (subject to certain liquidation and income
preferences) of McKibben, a California limited liability corporation,
for $1.5 million. The Company has a two-year option to purchase up to
an additional 11.25% for $1.5 million and has an anti-dilution
provision. Furthermore, the Company has an "Absolute Option", whereby
it has the right to buy up to 20% of the equity of McKibben at any
time prior to the sale of substantially all of the assets or an
Initial Public offering of McKibben.
The above investments have been accounted for at cost since the Company
does not have the ability to exercise significant influence over operating
and financial policies of the investees.
6. TERMINATED ACQUISITION COSTS
During the year ended June 30, 1999, the Company incurred certain costs in
connection with an attempt to acquire another company. During the first
quarter of fiscal 1999, the Company terminated this proposed acquisition and
as a result incurred costs of approximately $972,000 representing legal,
accounting and other acquisition related costs which have been charged to
operations.
7. COMMON STOCK
Issuance of Common Stock in Connection with Acquisition
On May 25, 1999, the Company acquired the business of Global-Net, Inc.
("Global-Net"), a wireless local loop telephone network solutions business,
located in New York, in exchange for 50,000 shares of the Company's common
stock with a fair market value of $8.125 per share on the date of
acquisition. The purchase agreement provides for additional consideration to
be paid by the Company if certain revenue goals are met during the fifteen
months subsequent to the acquisition date. Had this acquisition been
consummated as of July 1, 1997, the unaudited pro forma revenues and results
of operations would not have been considered material for the years ended
June 30, 1998 and 1999. The purchase price of approximately $406,000 has been
allocated to goodwill and is being amortized over five-years.
Sales of Common Stock
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.
During November 1996, a minority shareholder in NetSat Express agreed to
exchange 19,000 shares (representing approximately 2%) of NetSat Express for
approximately 30,000 shares in the Company. The shares in the Company were
valued at $8.07 per share at the date of the agreement. Accordingly, the
Company recorded goodwill of approximately $243,000, which is being amortized
over ten-years.
F-13
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. COMMON STOCK (Continued)
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 March 1999, a minority shareholder in NetSat Express agreed to
exchange 840,000 shares of convertible preferred stock (representing
approximately 14%) of NetSat Express for 42,553 shares in the Company. The
shares in the Company were valued at $5.875 per share at the date of the
agreement. Accordingly, the Company recorded goodwill of approximately
$250,000 in connection with this transaction, which is being amortized over
five-years. During May 1999, the Company exercised its right to convert its
840,000 shares of convertible preferred stock into 840,000 shares of common
stock of NetSat Express.
Stock Issued to Consultants
During November 1996, the Company issued a ten-year warrant to five
consultants for future services to purchase an aggregate of approximately
64,000 shares of common stock at a price per share of $8.07, equal to the
fair market value of the shares at the date of issuance. During the year
ended June 30, 1998, warrants to purchase 6,700 shares of common stock were
exercised. No warrants were exercised during the year ended June 30, 1999.
Issuance of Common Stock as Commission
In November 1995, the Company issued approximately 37,000 shares of its
common stock to an investor, or 1% of the then outstanding share capital.
This issuance resulted in approximately $174,000 of commission expense based
on the fair market value of the shares at the date of issuance, which was
also the date of the agreement. Such amount was included in selling and
marketing expense in the accompanying consolidated statement of operations
during the year ended June 30, 1997, the period in which the related revenue
was recognized.
In addition, the investor was granted certain preemptive and other rights
regarding future issuances of securities of the Company including (i) a
preemptive right to purchase up to 15% of the total number of securities
offered in any public offering undertaken by the Company and (ii) the right
to participate in any private offering to the extent required to maintain its
percentage ownership in the Company as well as the right to nominate a
director to the Board of Directors. These rights survive for so long as the
investor's stock ownership does not fall below 5% of the outstanding share
capital of the Company as a result of the investor selling or otherwise
disposing of a portion of its shares.
Treasury Stock
On September 1, 1998, the Company's Board of Directors authorized the
repurchase of up to $2.0 million of the Company's outstanding common stock.
The repurchase program allows for purchases to be made intermittently,
through open market and privately negotiated transactions. Timing, price,
quantity and the manner of purchase are at the discretion of the Company's
management subject to compliance with the applicable securities laws. During
the year ended June 30, 1999, the Company repurchased approximately 114,000
shares of the Company's common stock under the repurchase program for an
aggregate purchase price of approximately $545,000.
During June 1999, an employee of the Company surrendered approximately
26,000 shares of the Company's common stock, with the fair market value at
time of surrender of $10.125 per share, in
F-14
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. COMMON STOCK (Continued)
exchange for the exercise of approximately 49,000 stock options with exercise
prices ranging from $4.68 to $8.07. Accordingly, the Company recorded
approximately 26,000 shares in treasury stock, which amounted to
approximately $258,000, and issued approximately 49,000 shares of the
Company's common stock to the employee.
8. CONVERTIBLE PREFERRED STOCK
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.
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.
The Class A Convertible and Class B Convertible outstanding at the time of
the Company's initial public offering in August 1997 was converted into
approximately 1,958,000 shares of common stock.
9. STOCK OPTION AND STOCK PURCHASE PLANS
In February 1995, the Company adopted a stock option plan (the "Employee
Stock Option Plan"), which provided that the Company may grant employees
options to acquire up to an aggregate of 285,000 shares of the Company's
common stock. During December 1996, the Company increased the number of
shares it may grant to 1,710,000. The options generally vest in equal
installments over a four-year period and expire on the tenth anniversary of
the date of grant.
In June 1995, the Company adopted a stock option plan (the "Director Stock
Option Plan"), which provides that the Company may grant outside directors
options to acquire up to an aggregate of 285,000 shares of the Company's
common stock. The options vest annually in equal installments over a
three-year period commencing on the date of grant. The options expire the
earlier of five years from the date of grant or three years from concluding
service as director of the Company.
On February 26, 1997, the Company's Board of Directors authorized, and the
stockholders subsequently approved, the 1997 Stock Incentive Plan ("1997
Plan"), which serves as a successor plan to the Employee Stock Option Plan
and Director Stock Option Plan. The 1997 Plan provides for an increase of
285,000 shares to previously existing stock option plans, among other
matters.
On September 23, 1998, the Company's Board of Directors approved an
increase of 181,335 shares to the 1997 Plan. At June 30, 1999, the remaining
shares available for grant under the 1997 Plan was 234,248.
On September 23, 1998, the Board of Directors adopted, and the
stockholders subsequently approved, the 1999 Employee Stock Purchase Plan
("1999 Plan"). Pursuant to the 1999 Plan, 400,000 shares of the Company's
common stock will be reserved for issuance. The 1999 Plan is intended to
provide eligible employees of the Company, and its participating affiliates,
the opportunity to acquire a propriety interest in the Company at 85% of fair
market value at date of issuance through
F-15
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. STOCK OPTION AND STOCK PURCHASE PLANS (Continued)
participation in the payroll-deduction based employee stock purchase plan.
During the year ended June 30, 1999, the Company issued 18,529 shares of its
common stock to participating employees in connection with the 1999 Plan.
Employee Plan
The following table summarizes activity in employee stock options (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year. ..... 820 $4.46 1,546 $ 6.19 1,667 $ 7.22
Grants........................... 733 $8.15 206 $13.98 305 $ 7.54
Exercised........................ -- $ -- (75) $ 4.42 (60) $ 5.09
Canceled......................... (7) $7.39 (10) $ 7.84 (6) $10.64
-------- ----------- -------- ----------- -------- -----------
Balance, end of year............. 1,546 $6.19 1,667 $ 7.22 1,906 $ 7.32
======== =========== ======== =========== ======== ===========
Weighted-average fair value of
options granted during the
year............................ $3.56 $ 7.96 $ 3.94
=========== =========== ===========
</TABLE>
As a result of stock options granted during the years ended June 30, 1995,
1996 and 1997, the Company recorded compensation expense of approximately
$43,000, $56,000 and $75,000 during the years ended June 30, 1997, 1998 and
1999, respectively, based on the difference between the fair market value of
the shares and the option exercise prices at the dates of grant. As of June
30, 1999, remaining compensation expense to be recorded through the year
ended June 30, 2001 was approximately $234,000. As of June 30, 1999,
approximately 941,000 employee stock options were exercisable.
Director Plan
Pursuant to the Director Stock Option Plan, in June 1995, the Company
granted certain outside directors options to purchase approximately 128,000
shares of the Company's common stock at $3.51 per share. As a result of these
grants, the Company recorded compensation expense during the years ended June
30, 1997 and 1998, of $40,000 and $15,000, respectively, based on the fair
market value of the shares at the date of grant. As of June 30, 1998, there
was no additional compensation expense to be recorded relating to these
grants. During January 1997, an additional outside director was granted
approximately 43,000 options at $8.07 per share, the estimated fair value of
such shares on the date of grant. During November 1997, an additional outside
director was granted 15,000 options at $15.75 per share, the fair value of
such shares on the date of grant. Approximately, 100,500 options were
outstanding of which approximately 76,000 options were exercisable at June
30, 1999, and approximately 28,500 options were exercised during the year
ended June 30, 1999.
Netsat Express' Stock Option Plan
In May 1999, NetSat Express' Board of Directors authorized, and the
stockholders subsequently approved, the 1999 Stock Incentive Plan ("1999
Incentive Plan"), which provides for the granting of 1,980,000 options to
purchase shares of NetSat Express' common stock. Options granted under the
F-16
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. STOCK OPTION AND STOCK PURCHASE PLANS (Continued)
1999 Incentive Plan may be issued to either employees, consultants or
non-employee directors of NetSat Express or employees of the Company. Options
granted to employees generally vest annually in equal installments over a
four-year period commencing on the date of grant and expire ten years from
the date of grant. Options granted to directors generally vest annually in
equal installments over a three-year period commencing on the date of grant
and expire the earlier of ten-years from the date of grant or one-year from
concluding service as director of NetSat Express.
In connection with the adoption of the 1999 Incentive Plan, NetSat Express
granted options to purchase 847,506 shares of its common stock with exercise
prices ranging from $3.00 to $5.00 per share to its employees and to
employees of Globecomm Systems Inc., with a weighted-average exercise price
of $4.66 per share, and granted options to purchase 30,000 shares of its
common stock with an exercise price of $5.00 per share to its directors at
fair market value at date of grant. As of June 30, 1999, options to purchase
approximately 364,000 shares of NetSat Express' common stock were
exercisable.
In connection with options to purchase 150,000 shares of common stock
granted during May 1999, NetSat Express recorded deferred compensation of
approximately $300,000 based on the difference between the fair market value
of the common stock and the exercise prices of the options at the date of
grant. Deferred compensation is being amortized over the vesting period of
the options. The amount recognized as expense during the year ended June 30,
1999 was approximately $7,000.
Fair Value Disclosures
Pro forma information regarding net loss and net loss per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its stock options granted
subsequent to July 1, 1995 under the fair value method of that Statement. The
fair value of the options granted under the Company's 1997 and 1999 Plans
were estimated at date of grant using a Black-Scholes option pricing model
with the following assumptions for the years ended June 30, 1997, 1998 and
1999: risk-free interest rate of 6.5%, volatility factor of the expected
market price of the Company's common stock of .40 (1997), .51 (1998) and .91
(1999), a weighted-average expected life of the option of six-years and no
dividend yields. The fair value of the options granted under the NetSat
Express 1999 Incentive Plan was estimated at date of grant using the minimum
value option pricing model with the following assumptions for the year ended
June 30, 1999: no dividend yield, weighted-average expected life of the
options of 4.25 years and a risk free interest rate of 6.0%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options under the Black-Scholes option valuation model.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Pro forma net loss (in thousands)..................... $(3,433) $ (1,868) $(9,851)
======= ======== =======
Basic and diluted pro forma net loss per common
share................................................ $ (0.56) $ (0.22) $ (1.08)
======= ======= =======
</TABLE>
F-17
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. STOCK OPTION AND STOCK PURCHASE PLANS (Continued)
The following tables summarize information about employee and director
stock options outstanding at June 30, 1999 (option amounts in thousands):
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
RANGE OF REMAINING
EXERCISE OPTIONS OPTIONS CONTRACTUAL
PRICES OUTSTANDING EXERCISABLE LIFE (YEARS)
------------- ------------- -------------
<S> <C> <C> <C>
$3.51 - $5.06 .. 1,776 980 6.7
$5.50 - $8.09 .. 633 284 7.6
$9.00 - $13.25 .. 342 82 8.7
$14.13 - $18.38 .. 134 35 8.3
----- --- ---
$3.51 - $18.38 .. 2,885 1,381 7.4
===== ===== ===
</TABLE>
The Company and NetSat Express have reserved approximately 2,942,300
shares of its common stock for issuance upon exercise of all outstanding
options and warrants at June 30, 1999.
10. BASIC AND DILUTED LOSS PER SHARE AND PRO FORMA BASIC AND DILUTED LOSS PER
SHARE
Basic loss per share for the years ended June 30, 1998 and 1999 is based
on the weighted-average number of common shares outstanding during the
period. Diluted loss per share for the years ended June 30, 1998 and 1999
excluded the effect of approximately 891,000 and 321,000 stock options,
respectively, and approximately 23,000 warrants in 1998 and 1999, as the
effect of inclusion would have been anti-dilutive as the Company reported net
losses for the years ended June 30, 1998 and 1999.
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.
11. PENSION PLAN
The Company maintains a 401(k) plan which covers substantially all
employees of the Company. Participants may elect to contribute from 1% to 20%
of their pre-tax compensation. Participant contributions up to 4% of pre-tax
compensation were fully matched by the Company during the years ended June
30, 1997, 1998 and 1999. The plan also provides for discretionary
contributions by the Company. The Company contributed approximately $117,000,
$242,000 and $317,000 to the 401(k) plan during the years ended June 30,
1997, 1998 and 1999, respectively. There were no discretionary contributions
made by the Company during the years ended June 30, 1997, 1998 and 1999.
12. INCOME TAXES
As a result of losses incurred from inception, the Company has available
net operating loss carryforwards ("NOL's") of approximately $14.1 million
($8.6 million and $5.5 million for the Company and NetSat Express,
respectively) for income tax purposes which expire through 2019. However, as
a result of significant ownership changes and separate company limitations it
is anticipated that an annual limitation will be applied to the Company's
utilization of the NOL's.
F-18
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. INCOME TAXES (Continued)
As the Company has had cumulative losses and there is no assurance of
future taxable income, a valuation allowance has been established to offset
deferred tax assets. The components of the Company's net deferred tax assets
are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Projects in progress ....................... $ 157 $ --
Depreciation and amortization .............. 153 192
------ ------
Total deferred tax liabilities .............. 310 192
Deferred tax assets:
Net operating loss carryforwards ........... 3,294 5,660
Projects in progress ....................... -- 270
Accruals and reserves ...................... 116 333
Write-down of investments .................. -- 272
Non-cash compensation charge ............... -- 33
------ ------
Total deferred tax assets ................... 3,410 6,568
Valuation allowance for deferred tax assets 3,100 6,376
------ ------
Net deferred tax assets ..................... 310 192
------ ------
Net deferred taxes .......................... $ -- $ --
</TABLE>
Approximately $455,000 of the valuation allowance, if recognized, will be
allocated directly to stockholders' equity relating to non-qualified
dispositions of stock option exercises. For the years ended June 30, 1997,
1998 and 1999, the valuation allowance increased $1,179,000, $691,000 and
$3,276,000, respectively.
13. SEGMENT INFORMATION
The Company operates through two business segments. Its Ground Segment
Systems and Networks Segment, through Globecomm Systems Inc., is engaged in
the design, assembly and installation of ground segment systems and network
solutions for the complex and changing communications requirements of its
customers. The Company's ground segment systems typically consist of an earth
station and ancillary subsystems such as microwave links for back-haul of
traffic to a central office or generators for emergency power restoral. An
earth station is an integrated system consisting of antennas, transmitting
and receiving equipment, modulation/demodulation equipment, monitor and
control systems and voice, data and video network interface equipment. Its
Data Communications Services Segment, through the NetSat Express subsidiary,
is engaged in providing high-speed, satellite-delivered data communications
to developing markets worldwide. NetSat Express is currently providing
Internet access to customers who have limited or no access to terrestrial
network infrastructure capable of supporting the economical delivery of such
services.
The Company's reportable segments are business units that offer different
products and services. The reportable segments are each managed separately
because they provide distinct products and services.
The following is business segment information as of and for the years
ended June 30, 1997, 1998 and 1999:
F-19
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Ground Segment Systems and Networks....................... $36,169 $57,419 $46,397
Data Communications Services.............................. 51 686 2,661
------- ------- -------
Total revenues............................................. $36,220 $58,105 $49,058
======= ======= =======
Loss from operations:
Ground Segment Systems and Networks....................... $(1,766) $ (157) $(7,070)
Data Communications Services.............................. (1,454) (1,655) (2,101)
Interest income, net....................................... 276 1,266 979
Minority interests in operations of consolidated
subsidiary................................................ 275 -- --
------- ------- -------
Net Loss................................................... $(2,669) $ (546) $(8,192)
======= ======= =======
ASSETS:
Ground Segment Systems and Networks....................... $34,201 $60,894 $62,664
Data Communications Services.............................. 152 1,279 3,200
Intercompany eliminations................................. (1,040) (3,554) (7,854)
------- ------- -------
Total assets............................................... $33,313 $58,619 $58,010
======= ======= =======
Depreciation and amortization:
Ground Segment Systems and Networks....................... $ 338 $ 628 $ 1,007
Data Communications Services.............................. 24 88 260
------- ------- -------
Total depreciation and amortization........................ $ 362 $ 716 $ 1,267
======= ======= =======
Expenditures for long-lived assets:
Ground Segment Systems and Networks....................... $ 6,686 $ 2,879 $ 2,907
Data Communications Services.............................. 79 799 911
------- ------- -------
Total expenditures for long-lived assets................... $ 6,765 $ 3,678 $ 3,818
======= ======= =======
</TABLE>
14. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
The Company designs, assembles and installs satellite ground segment
systems and networks and provides data communications services for customers
in diversified geographic locations. Concentration of credit risk with
respect to accounts receivables is limited due to the limited number of
customers and that a substantial portion of accounts receivables are related
to balances owed by major satellite communication companies. The timing of
cash realization is determined based upon the contract or service agreement
with the customers. The Company performs ongoing credit evaluations of its
customers' financial condition and in most cases requires a letter of credit
or cash in advance for foreign customers. Allowances related to account
receivable at June 30, 1998 and 1999, are approximately $40,000 and $107,000,
respectively. Credit losses have been within management expectations.
Sales to two major customers accounted for approximately 42% (29% and 13%)
and one major customer accounted for approximately 29% of the Company's net
revenues for the years ended June 30, 1997 and 1998, respectively. No one
customer accounted for more than 10% of sales for the year ended June 30,
1999.
F-20
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK (Continued)
Revenues from foreign sales as a percentage of total consolidated revenue:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Africa............ 1% 33% 14%
South America..... -- 1% 11%
Asia.............. 28% 17% 10%
Europe............ 11% 9% 7%
Middle East....... -- 9% 2%
---- ---- ----
40% 69% 44%
</TABLE>
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 and 1999. Cash
equivalents are comprised of short-term debt instruments, certificates of
deposit of direct or guaranteed obligations of the United States, which are
held to maturity and approximate cost. At times, cash may be in excess of
FDIC insurance limits.
15. COMMITMENTS AND CONTINGENCIES
Line of Credit
The Company has a $9.0 million credit facility, as amended, consisting of
(1) a $5.0 million secured domestic line of credit and (2) a $4.0 million
secured export-import guaranteed line of credit. Each line of credit bears
interest at the prime rate (7.75% at June 30, 1999) plus 1% per annum and is
collateralized by a first security interest on all the Company's assets. Such
line of credit expires in December 1999. The amended credit facility contains
certain financial covenants, which the Company is in compliance with at June
30, 1999. As of June 30, 1998 and 1999, no amounts were outstanding under
such credit facility.
Letters of Credit
The Company utilizes standby letters of credit to secure certain bid
proposals and performance guarantees, while NetSat Express utilizes standby
letters of credit to secure certain service agreements with third party
vendors in the normal course of business. As of June 30, 1999, NetSat Express
had a standby letter of credit outstanding of approximately $185,000, which
is secured by the Company's domestic credit facility. The Company provides
cash collateral for a majority of these letters of credit. As of June 30,
1998 and 1999, cash collateral related to bid proposals amounted to $588,000
and $0, respectively, and cash collateral related to performance guarantees
amounted to approximately $3,828,000, and $3,486,000, respectively. These
amounts are included in restricted cash in the accompanying consolidated
balance sheets.
Lease Commitments
The Company currently leases satellite space segment services, office
space and other equipment under various operating leases which expire in
various years through 2002. As leases expire, it can be expected that in the
normal course of business they will be renewed or replaced. Most lease
agreements contain renewal options.
F-21
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum payments under non-cancelable operating leases for
satellite space segment services, office space and other equipment with terms
of one-year or more, consist of the following at June 30, 1999 (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
2000........................................ $1,689
2001........................................ 521
2002........................................ 11
--------
$2,221
========
</TABLE>
Rent expense for satellite space segment services, office space and other
equipment was approximately $315,000, $279,000 and $1,042,000 for the years
ended June 30, 1997, 1998 and 1999, respectively.
Pursuant to several NetSat Express Internet access service agreements,
NetSat Express is the lessor of satellite earth station equipment which
leases are classified as operating leases and expire at various dates through
2004. Equipment under these operating leases are included in fixed assets in
the accompanying consolidated balance sheets and have a net book value of
approximately $136,000 and $524,000 at June 30, 1998 and 1999. At June 30,
1999, future minimum lease payments to be received form equipment under
operating leases are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
2000............................................. $243
2001............................................. 227
2002............................................. 114
2003............................................. 21
2004............................................. 18
------
$623
======
</TABLE>
Employment Agreements
During January 1997, the Company entered into three-year employment
agreements with two of its officers for an aggregate amount of $325,000 per
year. Effective November 1998, such employment agreements increased to an
aggregate amount of $400,000 per year. The Company will have certain
obligations to the two officers if they are terminated for disability, cause
or following a change in control.
16. SUBSEQUENT EVENTS
On August 11, 1999, NetSat Express completed a private placement of
2,000,000 shares of its Series A Participating Preferred Stock and 2,000,000
shares of common stock yielding gross proceeds of $10,000,000. The preferred
stock has preference in liquidation and each share of preferred stock is
convertible into one share of common stock at the option of the holder at any
time, or automatically following the third anniversary of the date of
issuance, or following the period of sixty consecutive days on which the
price per share of the common stock is equal to or greater than $3.75 per
share.
The holders of Preferred Stock shall be entitled to receive an annual
dividend on the anniversary date of issuance equal to 0.166667 shares of
common stock for each share of Preferred Stock until the third anniversary
date of the Preferred Stock issuance provided that if the fair market value
of the common stock issued as dividends is less than $2,500,000, the holders
of the Preferred Stock will be entitled to receive a special dividend equal
to the shortfall. Additionally, the holder of the Preferred Stock may
purchase services from NetSat Express at cost and payment for such services,
at the option of the holder, may be either in dollars or shares of the NetSat
Express' common stock valued at fair
F-22
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
16. SUBSEQUENT EVENTS (Continued)
market value. In connection with the sale of preferred stock and common
stock, NetSat Express paid an investment advisor a fee of $500,000 and issued
a warrant to purchase 200,000 shares of NetSat Express common stock at $3.00 per
share which expires in five years.
On August 11, 1999, the Company contributed $3,500,000 of the amount it
was owed at June 30, 1999 from NetSat Express as additional paid-in capital
and entered into a promissory note agreement with NetSat Express for the
repayment of the balance which approximated $3,582,000. The promissory note
is due and payable in seven-years and accrues interest (payable monthly) at a
variable rate equal to the Company's cost of funds, which is currently at the
prime rate plus 1%. Amounts owed by NetSat Express to the Company pursuant to
the Master Operating Agreement and for any advances made subsequent to June
30, 1999 are payable currently.
On September 14, 1999, NetSat Express signed a 15-year lease for satellite
space segment on the SatMex 5 satellite. This satellite will provide NetSat
Express the capability of providing its services to the Caribbean Islands and
the North, South and Central America regions covered by the SatMex 5
satellite. The annual lease payments for this space segment is approximately
$1,386,000 for a total commitment of approximately $20.8 million over the
15-year lease term.
F-23
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1999
--------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 23,071
Restricted cash...................................................................... 832
Accounts receivable, net............................................................. 15,419
Inventories, net..................................................................... 4,832
Prepaid expenses and other current assets............................................ 1,685
--------------
Total current assets.................................................................. 45,839
Fixed assets, net..................................................................... 25,250
Investments........................................................................... 2,961
Other assets, net..................................................................... 1,840
--------------
Total assets.......................................................................... $ 75,890
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 11,672
Deferred revenue .................................................................... 591
Accrued payroll and related fringe benefits ......................................... 676
Accrued commissions ................................................................. 14
Other accrued expenses .............................................................. 2,349
Deferred liability .................................................................. 420
Capital lease obligations ........................................................... 375
--------------
Total current liabilities ............................................................ 16,097
Capital lease obligations, less current .............................................. 10,736
Deferred liability, less current ..................................................... 1,680
Minority interests in consolidated subsidiary ........................................ 1,963
Series A Participating Preferred stock of consolidated subsidiary, at redemption
value................................................................................ 5,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 3,000,000 shares authorized:
Class A Convertible, shares authorized, issued and outstanding:
none .............................................................................. --
Class B Convertible, shares authorized, issued and outstanding:
none .............................................................................. --
Series A Junior Participating, shares authorized, issued and outstanding:
none ............................................................................. --
Common stock, $.001 par value, 22,000,000 shares authorized, shares issued:
9,712,988 .......................................................................... 10
Additional paid-in capital .......................................................... 55,781
Accumulated deficit ................................................................. (14,319)
Deferred compensation ............................................................... (255)
Treasury stock at cost, 139,638 shares .............................................. (803)
--------------
Total stockholders' equity ........................................................... 40,414
--------------
Total liabilities and stockholders' equity ........................................... $ 75,890
==============
</TABLE>
See accompanying notes.
F-24
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- --------------
<S> <C> <C>
Revenues ............................................................... $25,175 $36,798
Costs of revenues ...................................................... 21,919 31,885
-------------- --------------
Gross profit ........................................................... 3,256 4,913
-------------- --------------
Operating expenses:
Network operations .................................................... 204 718
Selling and marketing ................................................. 2,324 2,426
Research and development .............................................. 550 355
General and administrative ............................................ 2,656 4,114
Terminated acquisition costs .......................................... 972 --
-------------- --------------
Total operating expenses ............................................... 6,706 7,613
-------------- --------------
Loss from operations ................................................... (3,450) (2,700)
Other income (expense):
Interest income ....................................................... 610 448
Interest expense ...................................................... -- (317)
Gain on sale of subsidiary's
common stock ......................................................... -- 2,353
-------------- --------------
Loss before minority interests ......................................... (2,840) (216)
Minority interests in operations of
consolidated subsidiary ............................................... -- 614
-------------- --------------
Net (loss) income ...................................................... $(2,840) $ 398
============== ==============
Basic net (loss) income per common share ............................... $ (0.31) $ .04
============== ==============
Diluted net (loss) income per common share ............................. $ (0.31) $ .04
============== ==============
Weighted-average shares used in the calculation of net (loss) income
per common share:
Basic ................................................................. 9,127 9,268
============== ==============
Diluted ............................................................... 9,127 10,157
============== ==============
</TABLE>
See accompanying notes.
F-25
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
----------------- PAID-IN ACCUMULATED DEFERRED ---------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION SHARES AMOUNT EQUITY
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 ......... 9,365 $ 9 $52,061 $(14,717) $(293) 140 $(803) $36,257
Net proceeds from issuance of
consolidated subsidiary's common
stock ........................... 3,398 3,398
Minority interests resulting from
issuance of consolidated
subsidiary's common stock ....... (1,903) (1,903)
Proceeds from exercise of stock
options ......................... 334 1 2,069 2,070
Issuance of common stock in
connection with employee stock
purchase plan ................... 14 119 119
Options granted to employees and
directors ....................... 37 37
Amortization of deferred
compensation .................... 38 38
Net income ....................... 398 398
----- --- ------- -------- ----- --- ----- -------
Balance at December 31, 1999 .... 9,713 $10 $55,781 $(14,319) $(255) 140 $(803) $40,414
===== === ======= ======== ===== === ===== =======
</TABLE>
See accompanying notes.
F-26
<PAGE>
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income .................................................. $(2,840) $ 398
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization .................................... 812 1,108
Stock compensation expense ....................................... 37 75
Provision (credit) for doubtful accounts ......................... (13) 153
Minority interests in operations of consolidated subsidiary ..... -- (614)
Gain on sale of subsidiary's common stock ........................ -- (2,353)
Changes in operating assets and liabilities:
Accounts receivable, net ........................................ (150) 2,575
Inventories, net ................................................ (980) 1,238
Prepaid expenses and other current assets ....................... (218) (478)
Other assets .................................................... (24) (760)
Accounts payable ................................................ 1,962 (7,077)
Deferred revenue ................................................ (8) 292
Accrued payroll and related fringe benefits ..................... (218) (183)
Accrued commissions and other accrued expenses .................. 305 393
Deferred liability .............................................. -- 2,100
------- -------
Net cash used in operating activities .............................. (1,335) (3,133)
------- -------
INVESTING ACTIVITIES:
Purchases of investments ........................................... (1,559) --
Purchases of fixed assets .......................................... (1,152) (2,393)
Restricted cash .................................................... (371) 2,654
Proceeds from sale of consolidated subsidiary's common stock ...... -- 3,500
------- -------
Net cash (used in) provided by investing activities ................ (3,082) 3,761
------- -------
FINANCING ACTIVITIES:
Proceeds from sale of consolidated subsidiary common stock, net of
issuance costs of $1,002 .......................................... -- 3,398
Proceeds from sale of consolidated subsidiary's preferred stock ... -- 5,000
Proceeds from exercise of stock options ............................ -- 2,070
Proceeds from sale of common stock in connection with employee
stock purchase plan ............................................... -- 119
Purchases of treasury stock ........................................ (545) --
Payments under capital leases ...................................... (17) (88)
------- -------
Net cash (used in) provided by financing activities ................ (562) 10,499
------- -------
Net (decrease) increase in cash and cash equivalents ............... (4,979) 11,127
Cash and cash equivalents at beginning of period ................... 21,342 11,944
------- -------
Cash and cash equivalents at end of period ......................... $16,363 $23,071
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ............................................. $ 1 $ 317
======= =======
</TABLE>
See accompanying notes.
F-27
<PAGE>
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all material adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the results for the periods
have been included. The results of operations for the six months ended
December 31, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year ended June 30, 2000, or for any future
period. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.
The accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the fiscal year ended June 30, 1999 and the accompanying notes thereto
contained in the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on September 28, 1999.
RECLASSIFICATIONS
Certain balances in the six months ended December 31, 1998 have been
reclassified to conform to the six months ended December 31, 1999 and fiscal
year ended June 30, 1999 presentation.
COMPREHENSIVE INCOME
The Company's comprehensive income (loss) for the six months ended
December 31, 1998 and 1999, were equal to the respective net income (loss)
for each of the respective periods presented.
INCOME TAXES
A valuation allowance has been established to offset deferred tax assets
primarily related to net operating loss carryforwards, as there is no
assurance of future taxable income. Due to the gain on the sale of the
subsidiary's common stock during the fiscal 2000 second quarter ended
December 31, 1999, it is anticipated that the Company will realize taxable
income for the fiscal 2000 year ended June 30, 2000. As such, the valuation
allowance has been reduced accordingly.
2. BASIC AND DILUTED INCOME (LOSS) PER SHARE
Basic income (loss) per share for the six months ended December 31, 1998
and 1999 is based on the weighted-average number of common shares outstanding
during the period. Diluted loss per share for the six months ended December
31, 1998 excluded the effect of approximately 235,000 stock options since the
effect of inclusion would have been anti-dilutive as the Company reported a
net loss for the period then ended. Diluted income per share for the six
months ended December 31, 1999 include the effect of approximately 866,000
stock options and approximately 23,000 warrants.
3. INVENTORIES
Inventories, which consist primarily of work-in-progress from costs
incurred in connection with specific customer contracts, are stated at the
lower of cost (using the first-in, first-out method of accounting) or market
value, less customer progress payments.
F-28
<PAGE>
3. INVENTORIES (Continued)
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
--------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Raw materials and component parts................... $ 100
Work-in-progress.................................... 8,469
--------------
8,569
Less progress payments.............................. 3,737
--------------
$4,832
==============
</TABLE>
4. SUBSIDIARY EQUITY TRANSACTIONS
On August 11, 1999, the Company contributed $3,500,000 of the amount it
was owed at June 30, 1999 from NetSat Express as additional paid-in capital
and entered into a promissory note agreement with NetSat Express for the
repayment of the balance of $3,582,000. The promissory note is due and
payable in seven-years and accrues interest (payable monthly) at a variable
rate equal to the Company's cost of funds, which is currently at the prime
rate plus 1%. Amounts owed by NetSat Express to the Company pursuant to the
Master Operating Agreement and for any advances made subsequent to June 30,
1999 are payable currently.
On August 11, 1999, NetSat Express issued and sold 1,000,000 shares of its
Series A Participating Preferred Stock ("Preferred Stock") for $5 per share
and 2,000,000 shares of its common stock for $2.50 per share in a private
offering yielding net proceeds of approximately $6,963,000, net of offering
costs of approximately $937,000. In connection with the common stock offering
NetSat Express entered into a Technology Agreement to purchase $5,000,000 of
services from a company participating in the private common stock offering.
As a result, the Company allocated $2.1 million from the proceeds of the
common stock offering to the value of the Technology Agreement based on an
independent valuation and classified such between current and non-current
deferred liability at December 31, 1999. The Company's common stock ownership
percentage in NetSat Express was reduced from approximately 95% to
approximately 81% following the issuance and sale of the common stock.
Accordingly, the Company recorded a credit to stockholders' equity of
approximately $1,700,000 reflecting the increase in its share of the net
equity of NetSat Express as a result of the common stock offering and the
$3,500,000 of additional capital contributed by the Company.
The preferred stock has preference in liquidation and each share of
preferred stock is convertible into one share of common stock at the option
of the holder at any time, or automatically following the third anniversary
of the date of issuance, or following the period of 180 days after an initial
public offering ("IPO") plus sixty consecutive days on which the price per
share of the common stock is equal to or greater than $7.50 per share.
Prior to an IPO the holders of Preferred Stock shall be entitled to
receive an annual dividend on the anniversary date of issuance equal to
0.166667 shares of common stock for each share of Preferred Stock until the
third anniversary date of the Preferred Stock issuance provided that if the
fair market value of the common stock issued as dividends is less than
$2,500,000, the holders of the Preferred Stock will be entitled to receive a
special dividend equal to the shortfall. Additionally, the holder of the
Preferred Stock may purchase up to $5,000,000 in services from NetSat Express
at cost, as defined in the agreement, and payment for such services, at the
option of the holder, may be either in dollars or shares of the NetSat
Express' common stock valued at fair market value. In connection with the
sale of preferred stock and common stock, NetSat Express paid an investment
advisor a fee of $500,000 and issued a warrant to purchase 200,000 shares of
common stock at $3.00 per share which expires in five years.
F-29
<PAGE>
4. SUBSIDIARY EQUITY TRANSACTIONS (Continued)
During October 1999, the Company and NetSat Express entered into a common
stock purchase agreement with an investor to purchase 2,000,000 million
shares of NetSat Express common stock for $2.50 per share, of which 1,400,000
shares were purchased directly from the Company and 600,000 shares were
issued and sold directly by NetSat Express, yielding net proceeds of
approximately $4,935,000, net of offering costs of $65,000. As a result, the
Company recorded a gain of approximately $2,353,000 from the sale of its
1,400,000 shares of NetSat Express common stock during the second quarter of
fiscal 2000 ended December 31, 1999. The Company's common stock ownership
percentage in NetSat Express was reduced from approximately 81% to
approximately 68.5% following the issuance and sale of the NetSat Express
common stock. Accordingly, the Company recorded a credit to stockholders'
equity of approximately $830,000 reflecting the increase in its share of the
net equity of NetSat Express as a result of the common stock offering.
On November 11, 1999, the Board of Directors of NetSat Express approved,
effective on November 11, 1999, a 2-for-1 common stock split in the form of a
common stock dividend of NetSat Express. Accordingly, the accompanying
consolidated financial statements and footnotes have been retroactively restated
to reflect the stock dividend.
In order to comply with NetSat Express' Amended and Restated Certificate
of Incorporation to allow for the effectuation of a Preferred Stock dividend,
NetSat Express intends to amend and restate the Amended and Restated
Certificate of Incorporation to provide for a two-for-one stock split of its
Preferred Stock to be effected as a dividend of one share of Preferred Stock
for each share of Preferred Stock outstanding.
5. COMMITMENTS AND CONTINGENCIES
In September, 1999, NetSat Express signed a 15-year lease for satellite
space segment on the SatMex 5 satellite. This satellite will provide NetSat
Express the capability of providing its services to the Caribbean Islands and
the North, South and Central America regions covered by the SatMex 5
satellite. In connection with this lease, NetSat Express recorded equipment
under a capital lease of approximately $11,199,000 and the related current
and long-term portion of the capital lease obligation in the accompanying
consolidated balance sheet. The annual lease payments for this capital lease
is approximately $1,387,000, and has a total lease commitment of
approximately $20.8 million over the 15-year lease term.
6. 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 its majority-owned NetSat
Express subsidiary, is engaged in providing high-speed, satellite-delivered
data communications to developing markets worldwide. NetSat Express is
currently providing Internet access to customers who have limited or no
access to terrestrial network infrastructure capable of supporting the
economical delivery of such services.
The Company's reportable segments are business units that offer different
products and services. The reportable segments are each managed separately
because they provide distinct products and services.
F-30
<PAGE>
6. SEGMENT INFORMATION (Continued)
The following is the Company's business segment information as of and for
the six months ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenues:
Ground Segment Systems and Networks....................... $24,482 $36,363
Data Communications Services.............................. 693 4,089
Intercompany eliminations................................. -- (3,654)
-------------- --------------
Total revenues............................................. $25,175 $36,798
============== ==============
Loss from operations:
Ground Segment Systems and Networks....................... $(2,469) $ (79)
Data Communications Services.............................. (981) (2,378)
Interest income............................................ 610 448
Interest expense........................................... -- (317)
Gain on sale of subsidiary's common stock.................. -- 2,353
Minority interests in operations of consolidated
subsidiary................................................ -- 614
Intercompany eliminations.................................. -- (243)
-------------- --------------
Net (loss) income ......................................... $(2,840) $ 398
============== ==============
Depreciation and amortization:
Ground Segment Systems and Networks....................... $ 647 $ 752
Data Communications Services.............................. 165 356
Intercompany eliminations................................. -- --
-------------- --------------
Total depreciation and amortization........................ $ 812 $ 1,108
============== ==============
Expenditures for long-lived assets:
Ground Segment Systems and Networks....................... $ 876 $ 689
Data Communications Services.............................. 276 1,737
Intercompany eliminations................................. -- (33)
-------------- --------------
Total expenditures for long-lived assets................... $ 1,152 $ 2,393
============== ==============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1999
(UNAUDITED)
--------------
(IN THOUSANDS)
<S> <C>
Assets:
Ground Segment Systems and
Networks.......................... $60,352
Data Communications Services ...... 25,466
Intercompany eliminations.......... (9,928)
--------------
Total assets........................ $75,890
==============
</TABLE>
F-31
<PAGE>
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH
WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT. THIS DOCUMENT MAY BE USED ONLY WHERE
IT IS LEGAL TO SELL THESE SECURITIES.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary............................ 3
Risk Factors ................................. 8
Information Regarding Forward-Looking
Statements .................................. 18
Use of Proceeds .............................. 19
Dividend Policy .............................. 19
Capitalization ............................... 20
Dilution ..................................... 21
Selected Historical Financial Data ........... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................. 25
Business ..................................... 33
Management ................................... 48
Certain Transactions and Related Parties .... 51
Principal and Selling Stockholders ........... 52
Underwriting ................................. 53
Legal Matters ................................ 55
Experts ...................................... 55
Where You Can Find More Information ......... 55
</TABLE>
2,000,000 SHARES
[GRAPHIC OMITTED]
[GSI LOGO]
COMMON STOCK
------------------
PROSPECTUS
------------------
ING BARINGS
C.E. UNTERBERG, TOWBIN
FEBRUARY , 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions, payable by the company in connection
with the sale of common stock being registered hereby. All of the amounts
shown are estimates except the SEC registration fee and the Nasdaq National
Market additional listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
--------------
<S> <C>
SEC registration fee........................................ $16,400
NASD filing fee............................................. $ 6,725
Nasdaq National Market additional listing of shares fee .... $ *
Blue Sky Fees and Expenses.................................. $ 5,000
Accounting fees and expenses................................ $ *
Legal fees and expenses..................................... $ *
Printing and engraving expenses............................. $ *
Transfer Agent and registrar fees........................... $ *
Miscellaneous............................................... $ *
--------------
Total....................................................... $[ ]
</TABLE>
* to be filed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under some circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of
1933, as amended (the "Act"). Article Seven of the Registrant's Amended and
Restated Certificate of Incorporation provides for indemnification of its
directors and officers and permissible indemnification of employees and other
agents to the maximum extent permitted by the Delaware General Corporation
Law. Reference is also made to Section of the Underwriting Agreement
contained on Exhibit 1.1, which sets forth some indemnification provisions.
The Registrant has liability insurance for its Directors and Officers.
ITEM 16. EXHIBITS
The following is a list of Exhibits filed as part of the Registration
Statement:
1.1* Form of Underwriting Agreement
4.2 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 herein by
reference to Exhibits 3.1 and 3.3 to the Company's Form 10-K for the
year ended June 30, 1999
5.1* Opinion of Brobeck, Phleger & Harrison LLP
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in the opinion
filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, independent auditors
24.1 Power of Attorney (included with signature page)
- ------------
* to be filed by amendment
II-1
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made of the securities offered hereby, a post-effective
amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that the undertakings set forth in paragraphs (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in
II-2
<PAGE>
reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on our behalf by the undersigned,
thereunto duly authorized, in Hauppauge, New York, on February 22, 2000.
GLOBECOMM SYSTEMS, INC.
By: /s/ David E. Hershberg
------------------------
David E. Hershberg
Chairman and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose signature
appears below constitutes and appoints David E. Hershberg, Kenneth A. Miller
and Andrew C. Melfi, and each of them, our true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for it and in
our name, place and stead, in any and all capacities, to sign any and all
amendments, including any post-effective amendments, to this Registration
Statement on Form S-3, or any registration statement relating to the offering
to be effective upon filing pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as it might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on February 22, 2000.
SIGNATURE TITLE
--------- -----
/s/ David E. Hershberg
- ---------------------------- Chairman of the Board and Chief Executive Officer
David E. Hershberg (Principal Executive Officer)
/s/ Andrew C. Melfi
- ---------------------------- Vice President and Chief Financial Officer
Andrew C. Melfi (Principal Financial and Accounting Officer)
/s/ Kenneth A. Miller
- ---------------------------- President and Director
Kenneth A. Miller
/s/ Donald G. Woodring
- ---------------------------- Vice President and Director
Donald G. Woodring
/s/ Stephen C. Yablonski
- ---------------------------- Vice President and Director
Stephen C. Yablonski
/s/ Herman Fialkov
- ---------------------------- Director
Herman Fialkov
II-4
<PAGE>
SIGNATURE TITLE
--------- -----
/s/ Benjamin Duhov
- ---------------------------- Director
Benjamin Duhov
/s/ C.J. Waylan
- ---------------------------- Director
C.J. Waylan
/s/ A. Robert Towbin
- ---------------------------- Director
A. Robert Towbin
/s/ Richard Caruso
- ---------------------------- Director
Richard Caruso
II-5
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
1.1* Form of Underwriting Agreement
4.2 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 herein by reference to Exhibits 3.1
and 3.3 to the Company's Form 10-K for the year ended June 30,
1999.
5.1* Opinion of Brobeck, Phleger & Harrison LLP
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in the opinion
filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, independent auditors
24.1 Power of Attorney (included with signature page)
- ----------
* to be filed by amendment
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 24, 1999 (except for the last paragraph of
Note 16. Subsequent Events, as to which the date is September 14, 1999) in
the Registration Statement (Form S-3) and related Prospectus of Globecomm
Systems Inc. for the registration of 2,000,000 shares of its common stock and
to the incorporation by reference therein of our report dated August 24, 1999
(except for the last paragraph of Note 16. Subsequent Events, as to which the
date is September 14, 1999), with respect to the consolidated financial
statements and schedule of Globecomm Systems Inc. included in its Annual
Report (Form 10-K) for the year ended June 30, 1999, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Melville, New York
February 18, 2000
