Item 1A. Risk Factors
Risks Related to Our Business
There are risks and uncertainties associated with our proposed acquisition by Wasserstein Cosmos Co-Invest, L.P.
The announcement and pendency of the Merger may adversely affect our business due to customers and employees uncertainty and other
disruptions as well as intensified competition from our competitors as they attempt to take advantage of these uncertainties. In addition, we have incurred substantial legal and other expenses in connection with the pending Merger. All of these
factors may have an adverse effect on our consolidated financial position, results of operations or cash flows.
Under the terms of the
Merger Agreement, we have agreed to operate our business in the ordinary course consistent with past practice, as well as to refrain from taking certain actions in the conduct of our business without the acquiring partys prior written consent
until the consummation of the Merger. Actions that may require the acquiring partys consent include, but are not limited to, entry into or amendment of material contracts, new indebtedness, major capital expenditures, loans and investments,
acquisitions, and issuances of securities. These restrictions could adversely affect our business and have an adverse effect on our consolidated financial position, results of operations or cash flows.
Our merger is subject to certain conditions to closing that could result in the Merger not being completed or being delayed, either of which could
negatively impact our stock price and future business and results of operations.
Consummation of the Merger is subject to certain
conditions, including (i) the adoption of the Merger Agreement by the Companys stockholders, (ii) the absence of any law or order prohibiting the closing, (iii) the expiration or termination of any applicable statutory waiting
periods and any National Industrial Security Program Operating Manual requirements having been met, (iv) to the extent necessary, receipt of approval from the Committee on Foreign Investment in the United States, (v) the receipt of certain
FCC consents and the completion of certain actions relating to certain of the FCC licenses, (vi) the satisfaction of a financial test by the Company, (vii) the absence of any Material Adverse Effect (as defined in the Merger Agreement)
with respect to the Company, (viii) the absence of certain events relating to Companys financial statements, (ix) the absence of any debarment of the Company from contracting with the federal government of the United States, and
(x) other customary closing conditions. Failure to compete the Merger would prevent stockholders of our company from realizing the anticipated benefits of the Merger.
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We have already incurred and expect to continue to incur significant costs associated with
transaction fees, professional services and other costs related to the Merger. In the event that the Merger is not completed, we will remain liable for these costs and expenses. Furthermore, the Merger Agreement contains certain customary
termination payments which may be incurred by Globecomm. If the Merger Agreement is terminated, upon specified circumstances, Globecomm would be required to pay Parent a termination fee. If payment of a termination fee is due from Globecomm, the
amount of the termination fee will be $10,200,000, except that such termination fee will be reduced to $3,400,000 if the Merger Agreement is terminated by either party due to Globecomms stockholders failing to adopt the Merger Agreement in
certain circumstances (such amount reflecting a reasonable estimate of the acquiring partys out-of-pocket fees and expenses (including fees and expenses of third party advisors), overhead costs and charges and lost opportunity costs). In
addition, the current market price of our common stock may reflect a market assumption that the Merger will occur, and a failure to complete the Merger could result in a negative perception by the market of us generally and resulting decline in the
market price of our common stock. Any delay in the consummation of the Merger or any uncertainty about the consummation of the merger could also negatively impact our future business and results of operations.
Potential legal proceedings in connection with the Merger could adversely affect our business and divert managements attention and resources from
other matters.
Class action lawsuits have been, and may be, filed by third parties challenging the contemplated Merger. Globecomm,
members of our board of directors, the acquiring party and members of the acquiring partys board of directors, among others, may be named as defendants in these class action lawsuits brought by Globecomm stockholders challenging the Merger. If
lawsuits are filed and the plaintiffs are successful, the may prevent the parties from completing the Merger in the expected timeframe, if at all, and, in any event, lawsuits, if filed, could adversely affect our business, financial position and
results of operations and divert managements attention and resources from other matters.
Since sales of telecommunications equipment are
dependent on the growth of communications networks, if market demand for these networks does not increase from recent depressed levels, the revenue and profitability of our infrastructure solutions segment are likely to decline, which may not be
offset by growth in our services segment.
We derive, and expect to continue to derive, a significant amount of revenue from the
sale of telecommunications equipment, in particular, satellite infrastructure solutions. During the past several years, many businesses, including ours, have faced uncertain economic environments and cutbacks in government spending. If the long-term
growth in demand for communications networks does not increase from recent depressed levels, the demand for our infrastructure solutions may continue to decline or grow more slowly than we expect. The demand for communications networks and the
products used in these networks is affected by various factors, many of which are beyond our control. For example, many companies have found it difficult to raise capital to finish building their communications networks and, therefore, have placed
fewer orders and government budgetary constraints are likely to reduce demand for products and services such as those we offer. Our infrastructure solutions segment in particular was impacted by this decreased demand and capital spending by our
customers and we have incurred operating losses in that segment for several years. Further, increased competition among satellite ground segment systems and network manufacturers has increased pricing pressures and depressed margins. As a result, we
may not be able to grow our infrastructure business, our revenues may decline from current levels and our results of operations may be harmed. The growth and profitability of our services segment in recent periods may not be sufficient to offset any
prolonged continuation of a decline in business in our infrastructure segment.
A limited number of customer contracts, including those in which we
provide subcontractor services for a prime contractor, account for a significant portion of our revenues, and the inability to replace a key customer contract or the failure of the customer to implement its plans, including the loss of a prime
contract by a prime contractor, would adversely affect our results of operations, business and financial condition.
We rely on a
small number of customer contracts, including those in which we provide subcontractor services for a prime contractor, for a large portion of our revenue. In the three months ended September 30, 2013, 13% of our revenues were derived from
Inmarsat Government. We have performed work as a subcontractor to Inmarsat Government since February 2012 for services for the U.S. Government. This subcontract is expected to
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continue to be material to our results of operations and has provided profit margin significantly above our norm. If our key customers are unable to implement their business plans, the market for
these customers services declines, political or military conditions make performance impossible or if any or all of the major customers modify or terminate their agreements with us, or a prime contractor we are working with loses its contract,
and we are unable to replace these contracts, our results of operations, business and financial condition would be materially harmed.
We have
derived, from time to time, a substantial portion of our revenues from the government marketplace, and a downturn or other reduction in defense spending in this marketplace, including as a result of the U.S. governments so-called sequester and
U.S. militarys withdrawal from combat in Afghanistan would adversely affect us.
In the three months ended September 30,
2013, we derived 57% of our consolidated revenues from the government marketplace. This business, in particular the service segment therein, tends to have higher gross margins than other markets we serve. A future reduction in the proportion of our
business from the government marketplace, or the recent decreases and expected further decreases in the government agency budgets, would negatively impact our future results of operations.
There are a number of other risks associated with the government marketplace; specifically, purchasing decisions of agencies are subject to
political influence, contracts are subject to cancellation if government funding becomes unavailable, and unsuccessful bidders may challenge contracts that are awarded to us, which can lead to increased costs, delays and possible loss of contracts.
In particular, the mounting government deficits and efforts to reduce expenditures in upcoming budgets and Congressional initiatives have resulted in failures to fund various government programs. In particular, the current so-called sequester has
had, and may continue to have, a dampening effect on U.S. government spending. Recently, Congressional deadlocks have led to a shutdown of much of the Federal government. A withdrawal of military forces from areas of conflict could result in
curtailed spending in military programs in which we participate, particularly in Afghanistan, from which we have generated a significant amount of revenue in recent periods and from which combat troops are currently expected to be completely
withdrawn by the end of 2014.
We often act as a subcontractor, particularly in the government marketplace and our results could be adversely
affected by the prime contractors inability to obtain or renew its contracts with the ultimate customer.
We regularly act as
subcontractor to prime contractors (or subcontractors), principally in the government marketplace. In these subcontractor arrangements, we have no control over the contracting process and we may not be able to influence or control issues that arise
between the prime contractor and its customer. Our future success may be materially impaired if the companies for which we serve as subcontractor cannot obtain or renew their contracts with the ultimate customer, which has happened in the past.
Also, disputes between a prime contractor and its customer could result in a customer terminating the contract, which could negatively impact our operating results, irrespective of the quality of our services as a subcontractor. Similar
considerations apply when we act as a subcontractor to a subcontractor.
Risks associated with operating in international markets, including areas
of conflict, could restrict our ability to expand globally and harm our business and prospects.
We market and sell a substantial
portion of our services and products internationally. We anticipate that international sales will continue to account for a significant portion of our total revenues for the foreseeable future, including revenues from our acquisitions, with a
significant portion of the international revenue coming from developing countries, including countries in areas of conflict like Iraq and Afghanistan. There are a number of risks inherent in conducting our business internationally, including:
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general political and economic instability in international markets, including the hostilities in Iraq and Afghanistan, could impede our ability to deliver our services and products to customers;
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longer payment terms and difficulties in collecting accounts receivable could affect our results of operations;
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changes in regulatory requirements could restrict our ability to deliver services to our international customers, including the addition of a country to the list of sanctioned countries under the International Emergency
Economic Powers Act or similar legislation;
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export restrictions, tariffs, licenses and other trade barriers could prevent us from adequately equipping our network facilities;
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differing technology standards across countries may impede our ability to integrate our services and products across international borders;
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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;
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increased expenses associated with marketing services in foreign countries could affect our ability to compete;
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relying on local subcontractors for installation of our services and products could adversely impact the quality of our services and products;
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difficulties in staffing and managing foreign operations could affect our ability to compete;
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complex foreign laws and treaties could affect our ability to compete; and
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potentially adverse taxes could affect our results of operations.
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These and other risks could
impede our ability to manage our international operations effectively, limit the future growth and profitability of our business, increase our costs and require significant management attention.
Since our service revenue has generally increased as a percentage of total revenue in prior periods and generally has higher gross margins, if our
service revenue decreases or service margins decrease, our results of operations will be harmed
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Future revenues and
results of operations of our services business are dependent on the development of the market for our current and future services. In the three months ended September 30, 2013, services revenues were 78% of total revenue. In the year ended
June 30, 2013 services revenues were 62% of total revenue compared to 58% in fiscal 2012. The service business tends to have significantly higher gross margins than our infrastructure solutions business. A future reduction in the proportion of
our services business would disproportionately impact our results of operations.
We derive a substantial portion of our revenues from fixed-price
projects, under which we assume greater financial risk if we fail to accurately estimate the costs of the projects.
We derive a
substantial portion of our revenues from fixed-price projects. We assume greater financial risks on a fixed-price project than on a time-and-expense based project. If we miscalculate the resources or time we need for these fixed-price projects, the
costs of completing these projects may exceed our original estimates, which would negatively impact our financial condition and results of operations. In the three months ended September 30, 2013 we recorded $0.2 million for additional costs
incurred on a fixed-price contract in the infrastructure solutions segment. The additional costs were due in large part to unexpected difficulties associated with engineering issues.
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Future acquisitions and strategic investments may divert our resources and managements attention,
results may fall short of expectations and, as a result, our operating results may be difficult to forecast and may be volatile.
We have made several acquisitions and intend to continue pursuing acquisitions or investments in complementary businesses, technologies and
product lines as a key component of our growth strategy. Any future acquisitions or investments may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses
related to intangibles assets. Acquisitions involve numerous risks, including:
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volatility in reported results due to the reassessment of the valuation of any earn-out provisions included in acquisition transactions;
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failure of the acquisition or investment to meet the expectations upon which we made a decision to proceed;
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difficulties in the integration of the operations, technologies, products and personnel of an acquired business;
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diversion of managements attention from other business concerns;
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substantial transaction costs even if the acquisition is abandoned prior to completion;
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the potential of significant goodwill and intangibles write-offs in the future in the event that an acquisition or investment does not meet expectations;
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increased expenses associated with the consummation and integration of an acquisition; and
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loss of key employees, customers or suppliers of any acquired business.
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We cannot assure you
that any acquisition or strategic investment will be consummated, will be successful and will not adversely affect our business, results of operations or financial condition.
In the event of a catastrophic loss affecting our operations in Hauppauge, New York, Laurel, Maryland or the Netherlands, our results of operations
would be harmed.
The services segments revenues and results of operations are dependent on the infrastructure of the network
operations center and the Kenneth A. Miller International Teleport at our headquarters in Hauppauge, New York, and the network operations centers and teleports at our Laurel, Maryland and Netherlands facilities. A catastrophic event to any of these
facilities or to the infrastructure of the surrounding areas would result in significant delays in restoring service capabilities. These capabilities permit us to offer an integrated suite of services and products and the incapacity of our
communications infrastructure would also negatively impact our ability to sell our infrastructure solutions. This would result in the loss of revenues and adversely affect our business, results of operations and financial condition.
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 services and products on prices
and terms favorable to us. Our primary competitors in the infrastructure solutions market generally fall into two groups: (1) system integrators, such as Thales, Rockwell Collins and SED Systems, and (2) equipment manufacturers who also
provide integrated systems, such as General Dynamics, SATCOM Technologies, Viasat Inc., Alcatel and ND Satcom AG.
In the enterprise and
broadcast solutions markets, we compete with other communication companies who provide similar services, such as Encompass Digital Media Inc. and Hughes Networks Systems, LLC. In addition, we may compete with other communications services providers
such as CapRock and Inmarsat Government, and satellite owners like SES Americom and Intelsat. 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
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offered at significantly lower prices or bundled with other services. These competitors may have the financial resources to withstand substantial price competition, may be in a better position to
endure difficult economic conditions in 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 than we do 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 services and
products to address the needs of our current and prospective customers. The potential strategic relationships of existing and new competitors may rapidly acquire significant market share, which would harm our business and financial condition.
If our services and products 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 services and products 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 services and products in developing countries or that customers in these countries will accept our
services and products at all. Our ability to penetrate emerging markets in developing countries is dependent upon various factors including:
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the speed at which communications infrastructure, including terrestrial microwave, coaxial cable and fiber optic communications systems, which compete with satellite-based services, is built;
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the effectiveness of our local resellers and sales representatives in marketing and selling our services and products; and
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the acceptance of our services and products by customers.
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If our services and products 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. If we lose the services of these individuals or cannot hire additional qualified personnel, our business will be harmed.
Our success also depends to a substantial degree on our ability to attract, motivate and retain highly-qualified personnel. There is
considerable competition for the services of highly-qualified technical and engineering personnel. We may not be able either to retain our current personnel or hire additional qualified personnel if and when needed.
Our future performance depends on the continued service of our key technical, managerial and marketing personnel; in particular, David
Hershberg, our Chairman and Chief Executive Officer, and Keith Hall, our President and Chief Operating Officer, are key to our success based upon their individual knowledge of the markets in which we operate. The employment of any of our key
personnel could cease at any time, which would harm our future performance.
Satellites upon which we rely may malfunction or be damaged or lost.
In the delivery of our services, we lease space segment from various satellite transponder vendors. The damage or loss of any of
the satellites used by us, or the 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 could have a material adverse
effect on our business, results of operations and financial condition.
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We depend on our suppliers, some of which are our sole or a limited source of supply, and the loss of these
suppliers could materially adversely affect our business, results of operations and financial condition.
We currently obtain most
of our critical components and services from limited sources and generally do not maintain significant inventories or have long-term or exclusive supply contracts with our 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 services and products. Furthermore, our costs could increase significantly if we need to change vendors. If we do not receive timely deliveries of quality services and products, 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.
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. We may face liability to customers for such security breaches. Furthermore, these incidents could deter potential customers and adversely affect existing customer relationships.
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. Fiber optic communications systems have penetrated areas in which we have traditionally provided services. If
the satellite communications industry fails to continue to develop, or if 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.
We may not be able to keep pace with technological changes, which would make our services and products become
non-competitive and obsolete.
The telecommunications industry, including satellite-based communications services, is characterized
by rapidly changing technologies, frequent new service and product introductions and evolving industry standards. If we are unable, for technological or other reasons, to develop and introduce new services and products or enhancements to existing
services and products in a timely manner or in response to changing market conditions or customer requirements, our services and products would become non-competitive and obsolete, which would harm our business, results of operations and financial
condition.
Unauthorized use of our intellectual property by third parties may damage our business.
We regard our trademarks, trade secrets and other intellectual property as beneficial to our success. Unauthorized use of our intellectual
property by third parties may damage our business. We rely on trademark, trade secret, 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.
We currently have been granted seven patents, and have five patent applications pending in the United States and one patent application
pending in a foreign country. 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 future patent applications or that any claims allowed from such
applications will be of sufficient scope, or be issued in all countries where our services and products can be sold, to provide meaningful protection or any commercial advantage to us.
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We have registered the trademarks Globecomm, GSI and Telaurus in the United States and various
other countries. We have various other trademarks and service marks registered or pending for registration in the United States and in other countries and may 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. Prosecuting infringers and defending against intellectual property infringement claims could be time consuming and expensive, and regardless of whether we are or are not successful, could cause
substantial expenses and disrupt 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, segments of our business.
Risks Related to the Securities Markets and
Ownership of Our Common Stock
Our stock price is volatile.
From October 1, 2012 through October 31, 2013, our stock price ranged from a low of $10.11 per share to a high of $14.91 per share.
The price for our common stock in the Merger Agreement is $14.15 per share. The market price of our common stock, like that of the securities of many telecommunications and high technology industry companies, could be subject to significant
fluctuations and is likely to remain volatile based on many factors, including the following:
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quarterly variations in operating results;
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announcements of new technology, products or services by us or any of our competitors;
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anticipated strategic transactions in which we might participate
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changes in financial estimates or recommendations by securities analysts;
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general market conditions, including periods of significant volatility; or
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domestic and international economic factors unrelated to our performance.
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Additionally,
numerous factors relating to our business may cause fluctuations or declines in our stock price. Should the Merger fail to be completed, it is likely that the price of our common stock will fall from its current level.
The stock markets in general and the markets for telecommunications stocks in particular have experienced extreme volatility that has often
been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
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Because our common stock is thinly traded, it may be difficult to sell shares of our common stock into the
markets without experiencing significant price volatility.
Our common stock is currently traded on the Nasdaq Global Market.
Because of the relatively small number of shares that are traded as well as the concentration of ownership of our common stock, it may be difficult for an investor to find a purchaser for shares of our common stock without experiencing significant
price volatility. Based solely on information contained in SEC filings, as of October 31, 2013, six institutional groups of shareholders beneficially own 46% of our outstanding common stock; investment decisions by these shareholders could
significantly affect the liquidity and price of our common stock and could result in a substantial shift in ownership of our company. We cannot guarantee that an active trading market will develop, that our common stock will have a higher trading
volume than it has historically had or that it will maintain its current market price. This illiquidity could have a material adverse effect on the market price of our stock.
A third party could be prevented from acquiring shares of our stock at a premium to the market price because of our anti-takeover provisions.
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, by-laws and Section 203 of the General Corporation Law 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 our stockholders. In addition, we have entered into employment agreements with our senior executives that have change of control provisions that would add substantial costs to an
acquisition of us by a third party. Although these provisions will not impact our ability to complete the Merger, if the Merger is not completed, they will remain in place and may adversely impact possible future transactions.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our
stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in
the foreseeable future. The payment of dividends on our common stock will depend on our future earnings, capital requirements, financial condition, future prospects and other factors as the board of directors might deem relevant. If we do not pay
dividends our stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
Our business could be
negatively affected as a result of actions of activist shareholders.
Several of the institutional holders of our common stock have
filed Schedule 13Ds with the SEC and are considered activist shareholders. Responding to actions by activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our
employees. The perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners. We cannot assure that the
execution of the Merger Agreement or any failure to complete the Merger will not result in disputes between us and these activist shareholders.
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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 FCC licensed teleports in
Hauppauge, New York, and Laurel, Maryland subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. We also have licenses from Agentschap Telecom, the licensing authority in The Netherlands, for
the teleports operated by Globecomm Europe in The Netherlands. We cannot guarantee that the applicable government agencies will grant renewals when our existing licenses expire, nor are we assured that the agencies 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 regulations regarding the exposure of humans to radio frequency
radiation from our teleports. These regulations, as well as local land use regulations, restrict our freedom to choose where to locate our teleports. In addition, prior to a third party acquisition of us, we would need to seek approval from the FCC
to transfer the radio transmission licenses we have obtained to the third party upon the consummation of the acquisition. We have applied for transfer of our FCC licenses in connection with the Merger; however, we cannot assure you that the FCC will
permit the transfer of these licenses or the timing of any such approvals.
Common Carrier Regulation
We currently provide services to our customers on a private carrier and on a common carrier basis. Our operations as a common carrier require
us to comply with the FCC's requirements for common carriers. These requirements include, but are not limited to, providing 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 intend to request termination of our common carrier licenses and to apply for private carrier status in connection with the
Merger. We cannot assure you that the FCC will approve our applications.
Foreign Regulations
Regulatory schemes in countries in which we may seek to provide our satellite-delivered 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 that may have a material adverse impact on our business. Either we or our local partners typically must obtain authorization from each country in which we
provide our satellite-delivered 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 services and products or that restrictions applicable thereto
will not be unduly burdensome.
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 services and products, 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 that may impose greater regulation of the content of information coming into
the country than that which is generally applicable in the United States, including but not limited to privacy regulations in numerous European countries and content restrictions in countries such as the Peoples 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
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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 of existing laws
governing issues including property ownership, copyrights and other intellectual property issues, taxation, libel, court jurisdiction and personal privacy to the Internet is uncertain. The vast majority of these laws were adopted prior to the advent
of the Internet and related technologies and, as a result, the laws 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 services and products, 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
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, telecommunications relay services for the deaf, and/or other regulatory fees. We are subject to some of these fees, and we may be subject to other
fees or 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.
Broadband Internet access services provided by telephone companies are currently classified as Information Services under the Communications
Act and therefore not considered a telecommunications service subject to payment of access charges to local telephone companies in the United States. Should this situation change or other charges be imposed, the increased cost to our customers who
use telephone-company provided facilities to connect with our satellite facilities could discourage the demand for our services. Likewise, the demand for our services in other countries could be affected by the availability and cost of local
telephone or other telecommunications services required to connect with our facilities in those countries.
Export of Telecommunications Equipment
The sale of our infrastructure solutions outside the United States is subject to compliance with the United States Export
Administration Regulations and, in certain circumstances, with the International Traffic in Arms 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 and implement our services in some countries, the products must satisfy the technical requirements of that particular country. If we were unable to comply with such 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, results of operations and financial condition.
Foreign Ownership
To the extent
we hold certain FCC licenses subject to foreign ownership restrictions, we may in the future be required to seek FCC approval if foreign ownership of our stock is to exceed certain specified levels. Failure to comply with these requirements could
result in an order to block or divest the offending foreign ownership, fines, denial of license renewal and/or license revocation proceedings against the licensee by the FCC, or denial of certain contracts from other United States government
agencies.
Foreign Corrupt Practices Act
In light of the nature of countries in which we sell products and services, we are subject to the Foreign Corrupt Practices Act, or the FCPA,
which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain
adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable
for actions taken by strategic or local partners or representatives. If we or our intermediaries fail to comply with the requirements of the FCPA, or similar laws of other countries, such as the recently-effective UK Anti-Bribery Act, governmental
authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could have a material adverse effect on our business, results of operations, financial conditions and cash flows.
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