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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ____________ to ____________.
Commission File Number (0-21767)
VIASAT, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 33-0174996
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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6155 EL CAMINO REAL, CARLSBAD, CALIFORNIA 92009
(760) 476-2200
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of June 21, 2000 was approximately $457,104,430 (based on the
closing price for shares of the registrant's Common Stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares outstanding of the registrant's Common Stock, $.0001 par
value, as of June 21, 2000 was 10,860,717.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with its 2000 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Report. Such Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after the registrant's fiscal
year ended March 31, 2000.
Certain exhibits filed with the registrant's Registration Statement on
Form S-3 (File No. 333-31758), as amended, Registration Statement on Form S-1
(File No. 333-13183), as amended, Annual Report on Form 10-K for the fiscal
years ended March 31, 1997, 1998 and 1999, and Proxy Statement relating to its
1998 Annual Meeting of Stockholders, are incorporated by reference into Part IV
of this Report.
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VIASAT, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
INDEX
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PART I Page
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Item 1. Business 1
Item 2. Facilities 30
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II
Item 5. Market for the Registrant's Common Stock and Related 31
Stockholder Matters
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures 38
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 40
8-K
Signatures 43
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PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a leading provider of advanced broadband digital satellite
communications and other wireless networking and signal processing equipment and
services. Based on our extensive experience in complex defense communications
systems, we have developed the capability to design and implement innovative
communications solutions which enhance bandwidth utilization by applying our
sophisticated networking and digital signal processing techniques. On April 25,
2000, we completed the acquisition of the satellite networks business ("the
Satellite Networks Business") of Scientific-Atlanta, Inc., which will allow us
to accelerate significantly the growth of our commercial business. For a more
detailed discussion of the acquisition, see "--Acquisition of the Satellite
Networks Business" below. To date, we have achieved 14 consecutive years of
internally generated revenue growth and 13 consecutive years of profitability.
Our goal is to leverage our advanced technology and capabilities to capture a
significant share of the global satellite communications services and equipment
segment of the high-growth broadband communications market.
Our internal growth to date has been driven largely by our success in
meeting the need for advanced communications products for the U.S. military. By
developing cost-effective communications products incorporating our advanced
technologies we have continued to grow the markets for our defense products and
services in an environment of shrinking defense budgets. Our current defense
products include our UHF DAMA satellite communications products consisting of
modems, terminals and network control systems, our advanced multifunction
information distribution system, or MIDS, product line, and our simulation and
test equipment which allows the testing of sophisticated airborne radio
equipment without expensive flight exercises. The MIDS terminal operates as part
of the Link-16 line-of-sight tactical radio system that enables real time data
networking among ground and airborne military users providing an electronic
overview of the battlefield. We were recently selected by the U.S. government as
a new Link-16 terminal contractor and one of only three current U.S. government
certified manufacturers of Link-16 MIDS terminals.
We have been increasing our focus in recent years on offering satellite
based communications products to address commercial market needs. Our commercial
business has grown from approximately 5% of our revenues in fiscal year 1999 to
approximately 24.2% of our revenues in fiscal year 2000. Based on our DAMA
technology and systems integration experience, we have recently won several
important projects, including our $36 million contract with Science Applications
International Corporation (SAIC) to provide two-way broadband on demand services
in the oil field industry and our $6.9 million contract with Star Cruises
Management, Ltd. to outfit its entire ship fleet for mobile broadband and
telephony. To date, our principal commercial offerings have been our StarWire
DAMA-based VSAT terminals, network control systems, and related network
integration and network services. StarWire utilizes Internet Protocol circuits
on a demand basis to provide high-speed data, video, voice and fax
communications.
ACQUISITION OF THE SATELLITE NETWORKS BUSINESS
On April 25, 2000, we completed the acquisition of the Satellite
Networks Business from Scientific-Atlanta. The aggregate purchase price
(including post-closing adjustments) for the Satellite Networks Business was
approximately $60 million in cash plus warrants to purchase 50,000 shares of our
common stock. We believe our acquisition of the Satellite Networks Business will
give us the scale and scope to become a larger player in the market for
broadband commercial satellite communications and services. The recent
acquisition of the Satellite Networks Business, which is also a significant
DAMA-based VSAT vendor, will further strengthen our position in the DAMA
marketplace. The Satellite Networks Business provides additional product lines
addressing the non-DAMA VSAT market, the gateway market, the asset tracking and
meter reading market, and the telemetry and antenna systems market. In addition,
the Satellite Networks Business brings us a larger and more experienced
commercial sales force, a significant customer base, additional research
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and development and engineering capabilities. Our plan is to rapidly integrate
our existing commercial activities with those of the Satellite Networks Business
to form a new division named ViaSat Satellite Networks and to move the
headquarters of our commercial business to the Satellite Networks Business
facilities in Norcross, Georgia. On a combined basis, we expect that our
commercial satellite business will represent over half of our total revenues.
The Satellite Networks Business currently consists of the following four
business units:
SATELLITE TELECOMMUNICATIONS. The satellite telecommunications unit
designs, manufactures and markets two primary satellite VSAT terminal products,
SkyRelay and Skylinx. This business unit is a large supplier of VSAT terminals
in the satellite communications market. In addition to selling satellite
networking equipment, the satellite telecommunications unit also produces
network control systems and provides communications services, such as network
operations, monitoring and control to customers in North America through its
network operations center.
COMMUNICATIONS AND TRACKING SYSTEMS. The communications and tracking
systems unit is a leader in developing and deploying high performance,
state-of-the-art antenna and tracking systems that perform tracking, telemetry
and command functions in the L, S, X, Ku, and Ka-band frequency spectrums.
Typical products include remote sensing data reception for polar orbiting
satellites, advanced gateways for orbiting and geostationary satellites and
telemetry systems for tracking moving targets, such as satellites and aircraft.
DATA TRACKING COMMUNICATORS. The data tracking communicators unit
designs, manufactures and markets terminals and services that work with low
earth orbit satellite systems, such as the ORBCOMM satellite system, to provide
global two-way data messaging services. Fixed-site terminals support
applications including remote automated meter reading, and monitoring and
controlling of electric utility distribution networks. Low-cost mobile terminals
support automated vehicle location systems that track and monitor the status of
remote vehicles such as trucks, trailers and railway locomotives.
ANTENNA MANUFACTURING. The antenna manufacturing business unit designs
and manufactures a broad line of antenna products that range in diameter from
1.8 meters to 18 meters. The highly complex antennas produced by the antenna
manufacturing unit are integrated into other networking products.
In connection with the acquisition, we also entered into various other
agreements with Scientific-Atlanta at the closing. These agreements include: (1)
a services agreement under which Scientific-Atlanta will provide computer and
office support as well as reimburse us for transition expenses up to $2.0
million; (2) a manufacturing agreement under which Scientific-Atlanta will
retain a substantial portion of the Satellite Networks Business' inventory to
manufacture a specified amount of products for us at a 30% discount to
Scientific-Atlanta's standard cost for a period of six months, at the end of
which we will purchase the remaining inventory from Scientific-Atlanta; (3)
another manufacturing agreement under which Scientific-Atlanta will purchase up
to $4.0 million of antenna products from us over a one year term; (4) a study
contract under which Scientific-Atlanta will pay us $3.5 million to conduct a
technology suitability study; and (5) leases for three facilities, each for an
initial term of two years with options to extend up to five years.
THE VIASAT ADVANTAGE
LEADING INDUSTRY POSITION. We have a leading position in certain
segments of the advanced communications network industry, including our
leadership in DAMA and Link-16 MIDS businesses. More recently, some of our
largest contracts have related to the provision of broadband equipment and
services to commercial customers utilizing existing satellites. The recent
acquisition of the Satellite Networks Business will increase our presence in the
satellite communications ground segment and services business. We believe that
our leadership position in the development of advanced technologies and the
provision of broadband equipment and services provides us with a competitive
advantage in developing
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and enhancing our products and services to capture a significant portion of the
emerging high growth broadband communications market.
LEADING TECHNOLOGY INNOVATOR. We are a leading provider of innovative
and advanced communications network products and services. We have achieved this
leadership through our expertise in applying emerging technologies to satellite
networks as well as developing entirely new technologies. To maintain our
technological edge we have over 300 engineers focusing on the research, design
and development of new and enhanced communications network technologies and
techniques. Because we provide our engineers with the opportunity to continually
work with and develop state of the art technologies, we have been successful in
hiring and retaining highly-qualified engineers.
EXPERIENCED MANAGEMENT TEAM. We have a strong and experienced management
team, which has overseen our profitable internally-generated growth for more
than a decade. Prior to joining us, several members of our management team have
had experience in successfully acquiring and integrating advanced technology
businesses. Mark D. Dankberg, a co-founder of ViaSat and a leader in satellite
systems solutions and development, has been our President, Chief Executive
Officer and Chairman since our inception in 1986. Each of the other two founders
of ViaSat, Mark J. Miller, Vice President and Chief Technical Officer, and
Steven R. Hart, Vice President-Engineering and Chief Technical Officer, continue
to serve as integral members of our management team. In addition, the remainder
of our senior management team has significant long-term experience in the
satellite communications industry.
HIGH QUALITY AND EFFICIENT MANUFACTURING PROCESSES. We believe that our
ability to deliver high-quality, low-cost products through our manufacturing
processes has been a key factor in our success in attracting and retaining
customers. We utilize a range of contract manufacturers to maintain low-cost
products and to support rapid increases in the volume of units. By using
contract manufacturers for a large portion of our manufacturing, we are able to
take advantage of the contract manufacturers' high-volume purchasing power,
advanced manufacturing equipment, and highly-trained workforce. We also maintain
the internal capability to conduct limited manufacturing for small volume
productions, final assembly, integration and testing. As part of our
manufacturing accomplishments, we have for the past three years maintained ISO
9000 certification for our product development, manufacturing and support
services. As further recognition of our manufacturing success, Lockheed Martin
Corporation recently honored us with a Star Supplier award for continued product
quality and delivery. We were one of the four suppliers to receive this award
among 65,000 of Lockheed Martin's suppliers.
STRATEGY
Our objective is to leverage our advanced technology and capabilities to
capture a significant share of the global satellite services and equipment
segment of the high growth broadband communications market, as well as to
maintain a leadership position in developing and supplying DAMA-based products
to the government market. To implement this strategy, we intend to:
CAPITALIZE ON OUR EXISTING TECHNOLOGY LEADERSHIP IN NEW AND EMERGING
HIGH GROWTH COMMUNICATIONS MARKETS. We believe that the global satellite
communications services and equipment segment of the high-growth broadband
communications market presents a number of attractive opportunities to apply our
advanced technologies and capabilities. We plan to develop new products and
enhance existing products to capture a significant share of this anticipated
growth opportunity. As part of our strategy to penetrate the broadband
communications market, we intend to significantly expand our activity as a
network service provider. As a result of the recent acquisition of the Satellite
Networks Business, we have significantly increased our ability to offer our
customers satellite bandwidth, installation of network equipment, on-line
network monitoring and network maintenance.
MAINTAIN AND ENHANCE OUR TECHNOLOGY LEADERSHIP POSITION. We are a leader
in the development of advanced broadband digital satellite and other wireless
technologies. We continually strive to improve our technology by meeting complex
network design needs for customers and by devoting significant resources to
research, design and development efforts in emerging markets. In order to
enhance our technology
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leadership position we intend to leverage the experience of our skilled
research, design and engineering team to develop new and enhanced satellite
products and applications. We also intend to devote additional funds, consisting
partially from the cost-savings associated with eliminating duplicative
research, design and development efforts between us and the Satellite Networks
Business, to further strengthen our technological expertise.
PROVIDE SUPERIOR CUSTOMER VALUE BY DESIGNING ADVANCED SYSTEMS AND
LOWERING THE TOTAL COST OF NETWORK OWNERSHIP. We plan to continue to provide our
customers superior value by offering network solutions with the lowest total
cost of ownership, considering factors such as equipment purchase cost, cost of
satellite bandwidth, delivery schedules and installation and maintenance costs.
With the recent emergence of broadband networks where the cost of bandwidth
represents a higher proportion of the overall network cost, products that are
based on technologies which increase the efficient use of bandwidth, such as
DAMA and PCMA, offer a means to provide additional customer value. We intend to
develop new products and enhance existing products, primarily based on our DAMA
technology, to offer customers a cost-effective two-way broadband solution.
EMPHASIZE STRATEGIC PARTNERSHIPS TO ACCELERATE MARKET PENETRATION. We
intend to establish relationships with companies whose financial, marketing,
operational or technological resources can accelerate the introduction of new
technologies and the penetration of new markets. We are seeking to develop
strategic relationships with satellite manufacturers, satellite network
equipment manufacturers, high-volume consumer product manufacturers and
distributors, systems integrators and installers, ground-based network equipment
manufacturers, satellite operators, and satellite network service providers
through teaming arrangements, joint ventures and equity investments. Large,
complex network systems typically involve partnering or teaming arrangements as
a means to compete successfully for and implement complete network systems. As a
leader of innovative network designs and communications solutions, we believe we
are an attractive partner for other companies in the satellite communications
market.
MAINTAIN OUR HISTORICAL EMPHASIS ON OPERATIONAL EFFICIENCY AND FINANCIAL
PERFORMANCE. We have maintained a strong emphasis on operational efficiency and
financial performance. We believe that operational focus is essential to our
continuing success in providing advanced communications network solutions. In
order to continue this performance, we devote significant time and resources to
key components of our business, such as our manufacturing processes, design
systems, customer relationships, research and development efforts, and the
expansion of our markets. We expect our strong emphasis on operational
efficiency and financial performance to be a key factor in successfully
integrating the Satellite Networks Business.
TECHNOLOGY
We develop innovative technologies aimed at rapidly evolving
communications markets. Our development efforts focus on enhancing existing
communications technologies and developing new technologies to increase the
efficiency of our communications products. We integrate advanced signal
processing, networking and multiple access techniques into our networks to
increase the efficiency of satellite resources and to support more users with a
given amount of bandwidth.
Since no single technology is optimal for all applications, we believe
it is important to maintain expertise in a broad range of communications
technologies. We excel at determining and designing the optimal technologies for
a specific network use and then integrating those technologies with our
products. Our technology development efforts have led to the successful
introduction of a number of advanced digital communications products ranging
from our innovative commercial satellite networks to our military Link-16 MIDS
products.
As a result of our technological expertise, we have developed numerous
communications products based on DAMA technology. DAMA technology enables
efficient utilization of satellite resources by allowing users to share
bandwidth based on their changing needs. DAMA network subscribers only access
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a communications link for the duration of the transmission. The terminated
communication link is then made available for use by other subscribers in the
DAMA network. In addition, DAMA technology allows the development of networks
providing unrestricted direct connectivity among users.
DAMA-based networks provide two primary communications solutions:
switching services and access for network users. DAMA satellite networks
essentially enable the satellite to act as a "switch in the sky." An originator
of a communication can use a DAMA-based network to be connected or switched
directly to the desired destination either through a single hop to a
ground-based gateway where the signal is then routed through the ground-based
network or through a single hop point-to-point connection between terminals in
the network. In the latter case, the signal is switched directly to the end user
by the satellite through the use of an Internet Protocol router embedded in our
network control products.
Mesh networks based on DAMA technology are particularly advantageous
where both in-bound and out-bound, point-to-point transmission at high data
rates are needed since traditional non-DAMA networks are capable of providing
high data rates in only one direction. The optimal application for DAMA mesh
networks are networks comprised of a large number of users communicating at high
data rates with other users, such as corporate and government networks or
Intranets.
We have also developed advanced satellite networks incorporating our
advanced technology using "hub and spoke" architectures. These networks require
all transmissions to be routed through a central ground-based hub location and
are most useful for communications from remote locations to a central network
location. These networks require two satellite transmissions, or hops, for
communication from one remote user to another user.
Recently, we developed our patented PCMA technology which represents a
fundamentally new technique for two-way satellite communications. PCMA
technology is a key example of our advanced signal processing and multiple
access techniques. PCMA technology enables two satellite terminals to use the
same bandwidth at the same time, enabling satellite networks to support up to
twice as many users or double the traffic on a given satellite resource. For
users of the same bandwidth, the satellite communications signal represents an
aggregate of the signal sent to the other user and the signal received from the
other user. PCMA technology permits each user receiving the combined signal to
delete the signal that the user sent, leaving only the signal intended to be
received. The separation and deletion of the unwanted portion of the signals
takes place on the ground by the terminal and does not interfere with the
satellite transmission. We have recently developed prototypes and models for the
integration and testing of the PCMA technology and anticipate offering products
using our PCMA technology in the near future.
COMMERCIAL MARKETS
MARKET OPPORTUNITY
The introduction of satellite communications technology in the 1950's
represented a fundamental change in communications networks. A communications
satellite, in essence, provides the ability to route a communications signal
through the sky. Signals are sent from users on the ground to the satellite,
which then amplifies the signal and sends it back to the end-user on the ground.
Depending on the altitude of a satellite's orbit, it can cover a geographic
area, or footprint, larger than the size of a continent. The key components of a
satellite communications system include:
- user terminals connecting the users to the satellite network,
- satellites which relay communications signals to and from the users,
and
- gateways that control the satellite network and connect it to
communications networks on the ground.
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The essential advantage of satellite communications is that they allow a
network provider to rapidly deploy new communications services to large numbers
of people anywhere in the footprint of the satellite. Consequently, satellites
can be used to deploy broadband services in developed and developing markets in
a shorter period of time than building ground-based infrastructure. Moreover, in
some areas satellite solutions are less expensive than terrestrial wired and
wireless alternatives. As satellite communications equipment becomes less
expensive and new capabilities emerge in satellite communications technology, we
believe that the market for satellite communications offers tremendous growth
opportunities.
The demand in the commercial market for communications network products
has been growing in both developed and developing countries. Much of the growth
in demand is due to high data rate, or broadband, Internet or Intranet access,
which requires transmission speeds that are much higher than traditional voice
connections. We believe there are significant opportunities to provide satellite
links to fill in gaps in ground-based wired and wireless coverage. The high
growth projected in the commercial satellite communications industry is expected
to be driven by the following major factors: (1) rapidly growing world-wide
demand for communications services in general, and broadband data networks in
particular, (2) the relative cost-effectiveness of satellite communications for
many uses, (3) recent technological advancements which broaden applications for
and increase the capacity and efficiency of satellite based networks, and (4)
global deregulation and privatization of government-owned telecommunications
carriers.
We provide satellite communications network solutions for multiple
segments of the commercial market.
DATA NETWORKS. Satellite networks are well suited for data networks
which focus on (1) rapidly deploying new services across large geographic areas,
(2) reaching multiple user locations separated by long distances, (3) filling in
gaps or providing support for data points of congestion, or "bottlenecks," in
ground-based communications networks, and (4) providing communications
capabilities in remote locations and in emerging markets where ground-based
infrastructure has not yet been developed.
Corporate users are increasingly appreciating the benefits of satellite
networks as they realize the advantages described above. Satellite networks are
experiencing significant growth as a substitute for, or supplement to,
ground-based communications services such as frame relay, digital subscriber
lines, fiber optic cables, and Integrated Services Digital Networks (ISDN). We
believe satellite data network products and services will continue to present us
with significant growth opportunities as broadband data networks continue to
expand in developed and developing markets throughout the world.
INTERNATIONAL AND RURAL TELECOMMUNICATIONS SERVICES. In a large number
of remote or rural areas in developed countries and throughout developing
countries, voice services are limited by the lack of ground-based
infrastructure. In these areas, satellite networks are able to rapidly provide
high-quality communications services in a cost-effective manner. In contrast to
ground-based networks, satellite networks are simple to reconfigure or expand
and are generally immune to difficulties of adding additional users in
geographically dispersed areas. Another primary advantage of satellite networks
is that additional users can be connected to a network in a short period of
time.
We believe there are growth opportunities for providing satellite
communications equipment and services to communications service providers
targeting rural and residential areas in developed and developing countries
where it may not be cost effective or time efficient to lay the necessary
ground-based infrastructure for telephone and voice services. We believe
satellite based telecommunications products and services represent a growth
opportunity for us.
INTERNET APPLICATIONS. The Internet is evolving into a global medium,
allowing millions of individuals throughout the world to communicate, share
information, and engage in electronic commerce. In recent years, there has been
significant growth in the use of satellites for Internet traffic. This growth
has been centered on connecting Internet service providers, or ISPs, with the
Internet. Satellite capacity is being used primarily where fiber cable is
prohibitively expensive or rare, such as rural areas or emerging countries.
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We expect satellite communications to continue to offer a cost-effective
augmentation capability for ISPs, particularly in markets where ground-based
networks are unlikely to be either cost-effective or abundant. Additionally,
satellite broadcast architecture provides an attractive alternative for ISPs,
which are presently dealing with congestion associated with rapid and uneven
Internet growth. Satellite systems can relieve congestion by providing a
low-cost means of selectively distributing content to sites closer to end users.
PRODUCTS AND SERVICES
We offer a broad range of satellite communications and other wireless
communications products and services, including:
VSAT NETWORK PRODUCTS. A VSAT terminal usually consists of an indoor
unit and an outdoor unit. The indoor unit usually connects to a user's desktop
or equipment similar to a modem and contains the circuitry needed to connect the
desktop or equipment to the satellite. The outdoor unit usually includes an
antenna, generally two to six feet in diameter, and electronic equipment that
transmits and receives signals to and from the satellite. The network control
system manages communications between the user terminals.
StarWire. Our StarWire VSAT products employing DAMA technology provide
"mesh" broadband data, video and voice services via satellite to remote
locations and areas that lack adequate ground-based communications
infrastructure. Using frequency pre-correction, one of our resource management
techniques, StarWire provides high levels of DAMA operating efficiency. In
addition, all of our StarWire products are embedded with Internet Protocol
routing and are compatible with Internet and Intranet applications. Our StarWire
line currently consists of two terminal products and a network control system.
Our Calypso terminal represents a lower priced terminal with up to two
DAMA channels and operating rates from 4.8 kbps to 2 Mbps. This terminal is
ideal for backup and restoral of ground-based networks, file transfers,
extending coverage of existing ground-based communications networks, and
networks with multiple server locations such as corporate Intranets. Many
features and functions of the Calypso terminal are implemented in our advanced
software and are downloadable over the satellite. This flexibility makes the
implementation of new enhancements and features easy, extends the life of the
equipment and enables the terminal to quickly adapt to different network
protocols.
In contrast, our Aurora terminal is a subscriber terminal providing up
to six DAMA channels, with a standard operating rate of 2 Mbps per second. The
Aurora terminal further enhances bandwidth efficiency by determining satellite
and terminal transmission power prior to establishing a connection and then
optimizing the terminal power based on service type, error correction
requirements, antenna size, and satellite footprint. Users of the Aurora
terminal can connect computers, phones, a private branch exchange (PBX), or
facsimile machines directly to the terminal, or use the terminal as part of a
gateway into a public-switched telephone network. The Aurora terminal also
implements many of the functions in our advanced software, making it simple to
download software through the satellite for on-going maintenance or adding new
product enhancements.
The StarWire product line also consists of a scaleable network control
system consisting of a computer workstation and network server similar to the
StarWire subscriber terminals, which together essentially function as a
"switchboard in the sky." This system performs real-time circuit assignment,
system-wide resource management, and extensive network management. The system
can assign network resources in three ways: (1) on demand, (2) by reservation
one time or periodically, and (3) permanently. The network control systems are
Windows NT-based, giving users a graphically rich interface to make the system
easy to learn and simple to use. The configuration implements two control
channels: inbound for satellite resource requests and outbound for resource
assignment. The StarWire network control system is significantly less expensive
than large installations required by conventional VSAT systems. The network
control system works to further enhance the optimization of the network with
comprehensive monitoring of peak loading, utilization percentages, blocking
statistics, network-wide status, terminal configurations, and diagnostics.
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Skylinx. Our Skylinx VSAT product, which was developed by the Satellite
Networks Business, is a competitively-priced VSAT terminal based on DAMA
technology. This product is designed to provide inexpensive, toll quality
telephone service for voice and fax communication for small businesses and
cities in areas lacking adequate telephone infrastructure. An important feature
of the Skylinx terminal is the large number of telephone interfaces which it
supports. The ability to interface with many different telephone protocols gives
the Skylinx terminal a much larger addressable market as compared to other VSAT
systems which normally only support one or two voice interfaces. These voice
protocols include 2-wire E&M, 4-wire E&M, MF, DTMF, R2, China #1, SS#5, and
SS#7.
The Skylinx VSAT terminal's flexibility, in conjunction with the Skylinx
network control system, allows common or custom numbering plans, downloadable
channel unit circuit types, interfaces and signaling systems. This enables a
network to accommodate specific customer requirements for private business
telephony, public rural telephony and disaster recovery. In addition, a single
Skylinx network control system can support up to 62,000 subscribers in the
network. We believe the Skylinx terminals offer a cost-effective communications
solution for rural telephony users who have historically been without service.
SkyRelay. Our SkyRelay products, which were developed by the Satellite
Networks Business, are based on TDM/TDMA technology and are designed for
transaction-oriented, single point to multi-point satellite networks. The
feature that distinguishes a TDM/TDMA network from other satellite networks is
that information for each specific site is quickly transmitted a few bits at a
time instead of being all sent in one continuous transmission. The SkyRelay VSAT
terminal product is designed to efficiently distribute large amounts of data
through a network from a central hub location to many remote users. The SkyRelay
is a high-end product supporting multiple data protocols, including X.25,
SDLC/SNA, BSC 2780, 3780, BSC 3270, Async, and Internet Protocol routing. The
ability to interface with many different data protocols gives SkyRelay networks
a much larger addressable market as compared to other VSAT data communication
systems which support fewer data protocols. Protocols may be assigned on a port
by port basis on the SkyRelay terminals with different ports using different
protocols. All protocol parameters are configured remotely by the network
management system, then downloaded to the remote site.
Another important feature of the SkyRelay VSAT terminal is that it
increases the efficiency of bandwidth utilization by automatically adjusting
bandwidth resources to fit the precise nature of user traffic. As traffic
switches from simple interactive transactions to complex batch transfer, each
SkyRelay terminal is able to transition automatically from a straightforward
contention protocol on the satellite link to an array of alternative channel
access schemes. Transparent to the user, these dynamic adjustments in traffic
loading minimize transmission delays. The SkyRelay network management system
further increases bandwidth efficiency by tracking bandwidth utilization,
identifying traffic patterns, providing automatic trouble-tickets, and creating
user profiles. Typical applications supported by SkyRelay include remote network
access, email, voice communications, ATM networks, credit card and check
authorizations, inventory control, and information management.
New VSAT Network Product Development. We continually strive to develop
new commercial products and services, both from our research and development
efforts as well as through leveraging our government technologies and techniques
to commercial applications. For example, we intend to implement our patented
PCMA technology into products in the near future. In addition, with the recent
acquisition of the Satellite Networks Business, we have gained a wide range of
new technologies and products. We intend to harmonize our products and
technologies with the products and technologies of the Satellite Networks
Business to create derivative products and technologies composed of the
strengths and best features of each of our combined products.
COMMUNICATIONS AND TRACKING SYSTEMS. Our communications and tracking
systems products, which were developed by the Satellite Networks Business, are
designed for three market segments: (1) gateway infrastructure, (2) remote
sensing ground stations and (3) tracking, telemetry and command ground stations.
Communications and tracking systems products consist of essentially the same
three components:
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a large satellite antenna dish, a high-powered radio transmitter and receiver,
and an ultra high speed satellite modem. The size of antennas range from 3.6
meters to 18 meters in diameter depending on the power of the transmissions from
the satellite. The modems integrated into these systems can process data at
rates of up to 150 Mbps per second, depending on the application of the
satellite system. These systems support functions in the L, S, X, Ku, and
Ka-band frequency spectrums.
Gateways. Our gateway business represents a key component of our ability
to offer complete network development and integration services. The gateway
products are used to connect satellites to the communications infrastructure on
the ground, such as public switched telephone networks. We offer a number of
different gateway products depending on the type, speed and size of the network.
The gateways consist of our internally developed hardware and software as well
as third party hardware. Although each of these components employs advanced
technologies, the most complex component of a gateway is the design and software
used to integrate each of the hardware components and operate the system.
Gateways represent a key part of any satellite network since all satellite
networks need gateways to route the traffic in the network.
We believe that we will derive many benefits and efficiencies from our
gateway building capabilities. Since the gateway is the most complex and central
component of any network, the optimization of the gateway for the specific
network use is critical to optimizing the entire network. The ability to provide
gateways and integrate those gateways into our innovative network solutions will
provide us with an advantage over other network manufacturers and integrators,
most of which purchase gateways from third parties. Our recent acquisition of
the Satellite Networks Business has provided us with extensive experience in
developing gateways for systems using Ka-band technologies. These new
technologies are the cornerstone of emerging satellite services like broadband
on demand.
Remote Sensing Ground Stations. The Satellite Networks Business has been
a leader in the remote sensing ground station market for over 20 years. Remote
sensing ground stations receive images of the earth transmitted from low earth
orbit satellites. These images are often collected for both civilian and
military purposes. Our remote sensing ground station products typically include
a personal computer with software to provide satellite pre-mission planning,
automated pre-pass set-up, system performance integrity analysis, signal routing
assignments, and maintenance actions.
Tracking, Telemetry and Command Systems. Our tracking, telemetry and
command products are designed to provide a means for monitoring and controlling
satellites in orbit. The telemetry subsystem in the satellite supplies
measurements of various parameters to an earth station which is responsible for
the satellite management. The tracking systems provide the tracking and command
functions of the system. The tracking subsystem provides the facilities by which
the satellite orbit can be determined. Satellites operating in low earth orbit
need to have their orbit parameters determined so that their passage over the
earth station can be accurately predicted. The command subsystem provides the
means by which the satellite is controlled.
DATA TRACKING COMMUNICATORS. Our data tracking communicators, which were
developed by the Satellite Networks Business, are designed to relay information
at low data rates through small satellites in low earth orbit, whereas
traditional VSAT terminals relay information at higher data rates through large
satellites placed far higher up in orbit. Because they do much less than
traditional VSAT terminals, data tracking communicators cost only a few hundred
dollars, as opposed to thousands of dollars for traditional VSAT terminals.
For fixed applications like automated meter reading and the monitoring
and controlling of electric utility distribution networks, data tracking
communicators are proving to be cost effective in areas where ground-based
communications may not be available or reliable. The fixed site communicator
includes a single card modem board, multiple access ports, industry-standard
connectors, AC and backup DC power supply, and a fully integrated antenna. The
entire unit is housed in a case with knockouts for power and communication lines
to facilitate installation.
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For mobile applications like automated vehicle location systems that
track and monitor the status of remote vehicles such as trucks, trailers and
railway locomotives as well as marine vessels, data tracking communicators can
provide substantial savings to large fleet operators. The mobile communicator
includes a single card modem board, multiple access ports, industry-standard
connectors, DC battery-based power supply with charger, and an external antenna.
Extra space is provided in the electronics compartment of the unit to
accommodate third party components, such as PCS and cellular systems.
NETWORK INTEGRATION SERVICES. We provide a suite of network integration
services. Network integration services are a primary competitive advantage we
maintain in the commercial satellite communications industry. Most of the
manufacturers in this industry do not perform complex and customized network
integration. Instead, most manufacturers only sell hardware and software
communications products. Although some companies build standardized networks
limited to the applications offered by the hardware and software used in the
network, we are one of the few companies that develop complex, fully-operational
networks integrating thousands of advanced hardware and software communications
products. With expertise in satellite network engineering, gateway construction,
and remote terminal manufacturing for all types of interactive communications
services, we take end-to-end responsibility for building, initially operating,
and then handing over a fully-operational, customized satellite network. Often
our development efforts in building these complex networks results in the
development of both new and enhanced technologies that can be leveraged to
generate future products and services.
Network integration services first include network design and then
network implementation. Network design involves analyzing the complex
configuration or technology required to operate the customer's network,
designing the system, determining critical system components and parameters of
the system, and developing components and specifications for the network's
hardware and software. Network implementation involves network hardware and
software installation as well as interfacing the network equipment with the
customer's other communications equipment. Network designs and implementations
are planned and managed by our in-house network design teams.
NETWORK SERVICES. Satellite network services are a natural extension of
our network integration business. Many of our customers want to maintain
satellite communications networks without purchasing network control systems,
directly purchasing bandwidth from satellite providers, or hiring and training
specialized personnel. As part of our strategy to penetrate the broadband
communications market, we intend to significantly expand our activity as a
network service provider. Our turnkey network services include the provision of
bandwidth to our customers by procuring satellite transponder capacity, which we
obtain from third parties on an as-needed basis. We provide on-site installation
of our equipment sold to customers, systems integration and training of customer
on-site personnel. We also provide our customers with access to our network
operations center (NOC) and to our network control systems for users of our VSAT
terminal products. Although pricing terms vary, we offer flexible terms for our
network services based on both a fixed recurring charge per site or variable
pricing based on usage. Our recent acquisition of the Satellite Networks
Business provides us with greater ability to provide our customers with
satellite capacity as the Satellite Networks Business currently has contracted
for satellite capacity to support growth in its network services business. We
package satellite bandwidth together with our network operation services and the
use of our network control systems to provide our customers with immediate
access to a satellite network.
Many of our customers who operate their own networks require technical
support. When our customers experience a problem with their network, they can
contact the network operations center on a 24 hour basis, seven days a week,
where one of our technicians or engineers, using our advanced monitoring and
control technology, will work to resolve the problem and restore service. If
service cannot be restored to satisfactory levels through our network operations
center, we will dispatch one of our experienced field technicians, usually third
parties trained and certified by us, to repair or replace the faulty equipment
or software. Our maintenance services are supported by our internal logistics
and repair organizations. The recent acquisition of the Satellite Networks
Business will further strengthen our ability to provide high-quality technical
support to our customers. A key component of our ability to provide end-to-end
network solutions is our expertise in network support services.
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Our largest network operations center is located in Norcross, Georgia,
which is staffed by technicians who are trained in network fault isolation,
problem resolution and customer service. We also operate a network operations
center at our corporate headquarters in Carlsbad, California.
CUSTOMERS
The majority of our customers for our commercial products and services
are satellite network integrators, large communications service providers and
corporations requiring complex communications networks. Although we currently
only have a limited number of commercial customers, the recent acquisition of
the Satellite Networks Business has expanded our commercial customer base both
domestically and internationally.
Significant commercial customers of our StarWire terminal products and
network integration services include Star Cruises Management, Ltd. and Science
Applications International Corporation (SAIC). Star Cruises is implementing
ship-to-shore and ship-to-ship voice, data, and video communications onboard its
fleet of cruise ships using a network designed and implemented by us based on
our StarWire DAMA Internet Protocol, satellite-networking products. In addition,
we are using our StarWire products to build a fully-operational satellite
network for SAIC's global broadband network for oil and gas exploration. This
network will represent the first global network operated by our network
management services division.
We are currently developing and building the satellite control portion
of the gateways for a multi-billion dollar Ka-band broadband satellite system
currently under development. In addition, we have provided satellite network
products and services for domestic and international customers, including major
foreign automobile manufacturers, foreign financial institutions, and major
foreign and domestic satellite equipment and service providers such as Telstra,
SAAB, Cable and Wireless, Telespazio SpA (Astrolink) and Vantage.
SALES AND MARKETING
We primarily use direct sales channels to market and sell our products
and services. Our marketing and sales activities are organized geographically,
with the majority of our salesforce focusing on North America. In addition, the
Satellite Networks Business has provided us with an international salesforce and
agent relationships, primarily covering Europe, Asia and South America, which we
plan to use to target foreign customers for our existing StarWire commercial
products. As a result of the acquisition, our sales and marketing group has
grown to include approximately 40 persons, with over one half located outside
the United States.
Our sales teams consist of account managers and sales engineers, who act
as the primary interface to establish account relationships and determine
technical requirements for the customers' networks. In addition to our sales
force, we maintain a highly-trained service staff to provide technical product
and service support to our customers. The sales cycle in the commercial
satellite network market is lengthy and it is not unusual for a sale to take up
to 18 months from the initial contact through the execution of the agreement.
The sales process often includes several network design iterations, network
demonstrations, and pilot networks consisting of a few sites.
In addition, we seek to develop key strategic relationships to market
and sell our network products and services. We seek strategic relationships and
partners based on many factors, including financial resources, technical
capability, geographic location and market presence. Recently, we developed
strategic relationships with SeaTel Inc. and Satpool AB for the development of
the Star Cruises customized broadband communications network. We worked closely
with SeaTel and Satpool for the development and successful integration of the
integral shipboard antennas for these networks.
We also obtain sales to new customers through referrals from existing
customers, industry suppliers, and other sources such as participation in trade
shows. Additionally, we direct our sales and marketing
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efforts to our strategic partners, primarily through our senior management. In
some cases a strategic ally may be the prime contractor for a system or network
installation and will subcontract a portion of the project to us. In other
cases, the strategic ally may recommend us as the prime contractor for the
design and integration of the network.
We provide service, repair and technical support for our products and
services. Through our sales teams and support services, we are constantly made
aware of customers' needs and their use of products and services. Accordingly, a
superior level of continuing customer service and support is integral to our
objective of developing and maintaining long-term relationships with our
customers. The majority of our service and support activities are provided by
our field engineering team, systems engineers, and sales and administrative
support personnel, both on-site at the customer's location and by telephone.
COMPETITION
The commercial communications industry is highly competitive and the
level of competition is increasing. As a provider of commercial network products
and designer of commercial network solutions in the United States and
internationally, we compete with a number of wireless and ground-based
communications service providers. Many of these competitors have significant
competitive advantages, including strong customer relationships, more experience
with regulatory compliance, greater financial and management resources, and
control over central communications networks. To compete with these providers,
we emphasize:
- the overall cost of our satellite networks, which includes both
equipment and bandwidth costs, as compared to products offered by
ground-based and other satellite service providers,
- the distinct advantages of satellite data networks,
- our end-to-end network implementation services, and
- our network management services.
Our principal competitors in the supply of commercial satellite data
networks are Hughes Network Systems, Gilat Satellite Networks Ltd., NEC
Corporation, and STM Wireless, Inc., each of which offers a broad range of
satellite communications products and services. In competing with these
companies, we emphasize:
- the advanced and flexible features integrated into our products,
- our proven design solutions and network integration services for
complex, customized network needs, and
- the increased bandwidth efficiency offered by our networks and
products.
In addition, we compete in large part with Datron/Transco Inc. in the
communications and tracking systems market.
In the future there will likely be formidable competition for high-speed
broadband networking from several announced Ka-band satellite systems such as
Spaceway, Astrolink, and Teledesic and the Ku-band Skybridge system. In many
cases these systems will offer capabilities that are similar to those enabled by
StarWire networks.
GOVERNMENT MARKETS
MARKET OPPORTUNITY
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Historically, the U.S. military has driven development of many new
wireless technologies. This includes pioneering applications of satellite
communications, digital radios, spread spectrum, and mobile wireless networks to
connect widely dispersed operations. In many cases, these technologies have been
transitioned to serve broader commercial markets. However, more recently,
technology developed for commercial applications has been increasingly used for
military markets as the military looks for more efficient ways to rapidly access
the most advanced technology for warfare applications.
The break-up of the Soviet Union has caused the U.S. military to
de-emphasize strategic missions and shift towards more localized tactical roles
such as peacekeeping, counter-terrorism, counter-insurgency and drug
enforcement. These missions create new demands for rapidly deployable, mobile
connectivity. In addition, reductions in the defense budget have led to a
numerically smaller, more technologically advanced military force. As a result,
defense networks are increasingly built around advanced technologies and
products providing high-speed transmissions of digital tactical data.
The market for defense applications of wireless technologies is growing
at a higher rate than other parts of the defense market due in large measure to
an increasing reliance on complex weapon and tactical data communication
systems. Key reasons for this growth include:
- the need to communicate target information and the location of
coalition and enemy forces to all military units in the battlefield,
- the need to maintain smaller, lighter, less expensive and better
performing voice and data equipment for rapid deployment of ground
troops and weapons systems to all parts of the world,
- the need to develop advanced networks capable of supporting modern
military maneuvers and operations, and
- the development of new technologies that are increasing the utility
of wireless communications networks by decreasing operating costs
and increasing bandwidth utilization and capabilities.
We believe that we are well positioned to take advantage of the trends
in the defense industry. Our leadership in the UHF DAMA market and
communications test equipment, and our recent selection as one of only three
current U.S. government certified manufacturers of Link-16 MIDS terminals,
provide an advantage for future United States and international procurements in
these areas and a foundation from which to expand our sales opportunities. We
intend to continue applying commercial standards (e.g., Internet Protocols) and
products (e.g., StarWire) into government applications to expand our traditional
opportunities by both increasing capabilities and functionality of our
government products as well as increasing the cost competitiveness of these
offerings.
PRODUCTS AND SERVICES
We offer a broad range of products and services to the government
communications market. We are a leading developer of UHF DAMA products and
services for the U.S. military. In addition, we have recently developed highly
sophisticated communications products for military applications such as the
Link-16 MIDS terminal and our simulator and test products.
UHF DAMA PRODUCTS. UHF is a globally available U.S. satellite radio
frequency for military communications. We have historically developed many
advanced products for the U.S. military for use on the UHF frequency. Many of
these products employ DAMA-based technology to efficiently manage the limited
bandwidth represented by the UHF frequency. Our UHF DAMA products and services
for the government market include:
AN/PSC-5 Terminal is also known as the Spitfire. The Spitfire is a
battery-operated UHF satellite radio that Raytheon Systems Company builds for
the U.S. Army. Spitfires are used to send encrypted voice, electronic mail, fax
or other data via satellite. Our DAMA modem, which is a central component of the
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Spitfire, allows the radio operator to automatically request a portion of a
satellite channel for a selected destination at the time the operator needs to
send a message or transmit data. The Spitfire radio, combined with a portable
satellite antenna, can be used to transmit secure voice or other data from
almost anywhere in the world. We have provided over 7,000 DAMA modems to
Raytheon for the Spitfire. A next-generation modem development is underway with
a recent order for 3,000 modems for application in Raytheon's extended Skyfire
and Shadowfire line of radios as well as other applications such as the Tomahawk
missile program.
Worldwide Network Control System is the DAMA network management system
originally developed and installed by us for the U.S. Air Force, which has
recently been used by the U.S. Navy. The network consists of four sites
worldwide that manage automatic DAMA access to UHF satellite channels. The
network control computer developed by us automatically allocates satellite
resources to subscriber terminals when a subscriber requests a voice or data
service. The network control system also keeps track of which satellite
terminals are active and the capacity available for each satellite. We continue
to offer technical support services to each network management site.
MD-1324 is our stand-alone UHF DAMA modem product. This modem can be
used with many types of UHF satellite radios. The MD-1324 enables a satellite
radio connected to external equipment to connect to a DAMA-based network. We
have provided over 1,000 of these modems to U.S. and international forces. We
also recently developed an upgrade to our MD-1324 product which adds an improved
digital signal processor to enable better performance within the same package.
VT-320 is our next generation UHF DAMA terminal product. The VT-320 is a
programmable, modular radio system providing flexible configuration of UHF
satellite communications terminals and test equipment. This product line is
intended for near-term applications throughout the U.S. services and in
international military sales.
QDC-100 is our antenna combiner product. Without this product, an
aircraft loses communications if its single fixed antenna is pointed away from
the satellite by aircraft position changes. This product is currently used on
U.S. Navy P-3 Orion reconnaissance aircraft. Additional potential uses for this
product include international and naval shipboard applications. Recent upgrades
to our QDC-100 product will provide a stand-alone satellite communications and
antenna-combining solution in one piece of equipment for applications to the
United States and international aircraft and surface ships which currently have
multiple antennas.
DOCCT/S is our trainer and simulator product. By simulating signals,
this product enables users to integrate and test UHF DAMA systems as well as
train UHF DAMA users without actually accessing the DAMA network through the
satellite. Access to this tool simplifies the user's activity by providing
realistic communications experiences without the difficult and expensive process
of obtaining satellite resources.
LINK-16 PRODUCTS. Link-16 is a high performance broadband data link
system selected by the U.S. government and international allied nations to
support networked information transmission across a variety of air, sea and
ground-based platforms. The Link-16 system is a wireless line-of-sight system
used to communicate among ground and airborne military users without the use of
a satellite. We were recently selected by the U.S. government as a new Link-16
terminal contractor, and only one of two current U.S. government qualified
manufacturers of Link-16 MIDS terminals. A third Link-16 MIDS manufacturer has
been certified by the U.S. government but has not yet met all the requirements
to serve as a government contractor. The Link-16 market segment has significant
technology and data certification barriers to entry, and the U.S. and
international military portion of the Link-16 MIDS market is expected to total
approximately 8,000 units and generate approximately $2 billion in revenues for
Link-16 providers over the next five to ten years. In addition, this market may
experience growth from non-military applications and the development of other
related Link-16 products and test equipment. Our Link-16 products include:
Multifunction Information Distribution System, or MIDS, terminals are
designed to operate in a highly secure, high performance wireless networking
system that allows military platforms, including fighter
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aircraft, ships, command and control aircraft, and ground-based units, to share
critical real-time information. Platforms that employ MIDS/Link-16 within a
theater of operation use it to first collect tactical information from each
user's on-board sensors such as radars, early warning electronic warfare
systems, and electronic identification systems and then disseminate a packaged
set of information back to the other network users. By sharing this critical
information, MIDS allows each user in a Link-16 network to maintain a real-time
situational awareness picture of the entire battle space.
Our MIDS terminals communicate in a Link-16 network using a complex,
highly secure waveform. This waveform is designed to provide reliable
communications to multiple users within a hostile electromagnetic environment.
It employs many advanced techniques, such as direct sequence spread spectrum,
frequency hopping, error detection and correction coding, and encryption, to
ensure maximum robustness and jam resistance.
The first U.S. platforms to receive MIDS will be the Navy F/A-18 fighter
aircraft and the Air Force F-16 Fighting Falcon. Other platforms include U.S.
ground-based Command and Control platforms, bomber aircraft, ships, submarines,
the French Rafael fighter, the European EF-2000, Italy's AMX/Tornado fighters,
and Spain's EF-18 fighters.
Link-16 Test Products include a system we developed for Logicon's
Link-16 Monitoring System which provides the capability to receive
transmissions, complete with signal quality measures, for monitoring and
analyzing the Link-16 wireless network. The Link-16 Simulator is another of our
test products that allows the generation of low power Link-16 signals
representing many different participants in the network for testing of Link-16
equipment in a dynamic, dense environment.
COMMUNICATION ENVIRONMENT SIMULATOR/JOINT COMMUNICATION
SIMULATOR/COMMUNICATIONS NAVIGATION AND IDENTIFICATION SIMULATOR. CES/JCS/CNIS
is a product designed to simulate realistic radio environments that can be used
to test how well surveillance or other radio systems work in the presence of
various and changing communications signals. The simulation product generates a
large number of very accurate radio frequency signals which can be radiated and
received by the equipment under test or potentially directly inserted into
multiple antenna ports.
VIASAT INTERNET PROTOCOL CRYPTO. Our KIV-21 Crypto (formerly VIP Crypto)
product is a device that encrypts classified information so that it can be
transmitted over communications networks, ground-based or satellite. This
product enables classified private networks to be set up and operated over
unclassified networks such as the public Internet. KIV-21 Crypto is based on our
Embeddable Infosec Product, which has been approved by the National Security
Agency for transmission of classified information classified up to top secret.
We received National Security Agency endorsement of the VIP Crypto on May 5,
2000 clearing the way for deployment in U.S. Department of Defense operated
networks.
CUSTOMERS
The primary customers for our government products and services are the
U.S. Department of Defense, international allied nations and large defense
contractors. While most of our commercial customers are based in the United
States, many of our large defense contractor customers have recently been
leveraging our network design experience and the advanced capabilities of our
products to sell communications products to international military forces.
Examples of large defense contractors with which we have worked in the past
include Raytheon Systems Company, Lockheed Martin Corporation, The Boeing
Company, Northrop-Grumman Corporation and Marconi Communications, Elmer S.p.A.
SALES AND MARKETING
We use both direct and indirect sales channels to sell our government
products. We have approximately six sales and marketing personnel who offer our
government products and services. All of these sales personnel are located in
the United States. International government sales are conducted through our U.S.
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sales personnel. Although many of our sales are generated from direct sales, we
often sell our products directly to prime contractors responsible for developing
the entire network system where our products are integrated and embedded into
the system.
Our government sales teams consist of engineers, program managers,
marketing managers and contract managers who work together to identify business
opportunities, develop customer relationships, develop solutions for the
customer's needs, prepare proposals and negotiate a contractual arrangement. The
period of time from initial contact through the point of product sale and
delivery can take over three years for more complex product developments or for
product developments including prototypes and demonstrations. Products already
in production can usually be delivered to a customer between 90 to 180 days.
Our indirect sales are primarily generated from strategic relationships
with prime contractors for large defense projects and referrals from existing
large defense contractor customers.
COMPETITION
The government communications industry is highly competitive and the
level of competition is increasing. As a developer of communications products
and services for the government markets in the United States and
internationally, we compete with a variety of communications providers. Many of
these companies have significant competitive advantages, including long standing
customer relationships, more experience with meeting government standards, and
greater financial and management resources. To compete effectively, we
emphasize:
- our record of developing and producing products in relatively short
periods of time,
- our products featuring advanced and flexible architectures,
- our proven network design solutions, and
- our competitive product and service prices.
Our principal competitors in the supply of communications products and
services to the U.S. government include The Titan Corporation, Rockwell
International Corporation, Raytheon Systems Company, Motorola, Inc., and BAE
Systems. With respect to Link-16 products, our principal competitor is Data Link
Solutions (DLS), a partnership between BAE Systems and Rockwell's Collins
division, which is also a U.S. government qualified Link-16 MIDS provider.
EuroMIDS, a third provider of Link-16 MIDS products, which has been certified by
the U.S. government, is a consortium among Thomson-CSF(France), MID S.p.A.
(Italy), INDRA (Spain), and DaimlerChrysler AG (DASA-Germany). We compete with
EuroMIDS in the international MIDS terminal market. We believe that we are
competitively positioned among these companies because of our installed base of
equipment, our existing contracts, our market lead time with respect to some
DAMA product capabilities and our participation in both the network control and
subscriber terminal markets.
RESEARCH AND DEVELOPMENT
We believe that future success depends on the ability to adapt to the
rapidly changing satellite communications and related signal processing and
networking software environment. Therefore, the continued timely development and
introduction of new products is essential in maintaining our competitive
position. We develop most of our products in-house and currently have a research
and development and engineering staff that includes over 300 engineers. A
significant portion of our research and development efforts in the defense
industry has generally been conducted in direct response to the specific
requirements of a customer's order and, accordingly, these amounts are included
in the cost of sales when incurred and the related funding is included in
revenues at that time. In contrast, all of the research and development
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efforts of the Satellite Networks Business have been focused on the development
of commercial products and services.
Our revenues for research and development funded by government and
commercial customers during the during fiscal year 1998 were approximately $25.6
million, during fiscal year 1999 were approximately $40.5 million, and during
fiscal year 2000 were approximately $35.0 million. In addition, we invested $7.6
million in fiscal years 1998, 1999, and 2000 on independent research and
development, which is not directly funded by a third party. Funded research and
development contains a profit component and is therefore not directly comparable
to independent research and development. As a government contractor, we also are
able to recover a portion of our independent research and development expenses,
consisting primarily of salaries and other personnel-related expenses, supplies
and prototype materials related to research and development programs.
We have benefited from the Small Business Innovation Research program,
known as SBIR, through which the government provides research and development
funding for companies with fewer than 500 employees. As we have grown, our
reliance on SBIR funding for research and development has significantly
decreased. Upon completion of the recent acquisition of the Satellite Networks
Business we became ineligible for SBIR funding due to the increased size of the
combined entity. We cannot assure you that our loss of SBIR funding status will
not materially harm our business. Nevertheless, we plan to build from this
established technology base to further develop products for commercial
applications.
MANUFACTURING
Our manufacturing objective is to produce high-quality products that
conform to their specifications at the lowest possible manufacturing cost. We
primarily utilize a range of contract manufacturers, based on the volume of the
production, to reduce the costs of products and to support rapid increases in
delivery rates when needed. As part of our manufacturing process, we conduct
extensive testing and quality control procedures for all products before they
are delivered to customers.
Contract manufacturers produce products for many different customers and
are able to pass on the benefits of large scale manufacturing to their
customers. These manufacturers are able to achieve high quality products with
lower levels of costs by (1) exercising their high-volume purchasing power, (2)
employing advanced and efficient production equipment and systems on a full-time
basis, and (3) using a highly skilled workforce. Our primary contract
manufacturers include Jabil Circuit, Inc., SMS Technologies, Inc. and SMTEK
International.
Our experienced management team facilitates the efficient contract
manufacturing process through the development of strong relationships with a
number of different contract manufacturers. By negotiating beneficial contract
provisions and purchasing some of the equipment needed to manufacture our
products, we retain the ability to move the production of our products from one
contract manufacturing source to another if required. Our operations management
has experience in the successful transition from in-house production to contract
manufacturing. The degree to which we employ contract manufacturing depends on
the maturity of the product. We intend to limit our internal manufacturing
capacity to new product development support and customized products which need
to be manufactured in strict accordance with a customer's specifications and
delivery schedule. Therefore, our internal manufacturing capability for standard
products has been, and is expected to continue to be, very limited, and we
intend to rely on contract manufacturers for large scale manufacturing.
We also rely on outside vendors to manufacture specific components and
subassemblies used in the production of our products. Some components,
subassemblies and services necessary for the manufacture of our products are
obtained from a sole supplier or a limited group of suppliers. In particular,
Texas Instruments is a sole source supplier of digital signal processing chips,
which are critical components used by us in substantially all of our products.
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During the transition period, the Satellite Networks Business will
continue to rely in large part on internal manufacturing capabilities of
Scientific-Atlanta to manufacture its products. As part of the acquisition, we
entered into an agreement with Scientific-Atlanta under which Scientific-Atlanta
will continue to manufacture some products of the Satellite Networks Business
for an interim period of six months. During this interim period, we intend to
transition the manufacturing of the products to contract manufacturers.
BACKLOG
We had firm backlog of $44.9 million at March 31, 1999, of which $36.8
million was funded, not including options of $45.2 million. As of March 31,
2000, we had firm backlog of $88.2 million, of which $58.6 million was funded.
Of the $88.2 million in firm backlog at March 31, 2000, approximately $43.0
million is expected to be delivered in fiscal year 2001, approximately $29.6
million is expected to be delivered in fiscal year 2002 and the balance is
expected to be delivered in fiscal year 2003 and thereafter. The increase in
backlog results from growth in total awards for both commercial and defense
products from $43.7 million for fiscal year 1999 to $119.3 million for fiscal
year 2000. We include in our backlog only those orders for which we have
accepted purchase orders. Our firm backlog does not include contract options of
$53.3 million. These options include $44.6 million of Indefinite
Delivery/Indefinite Quantity (IDIQ) contracts for our UHF DAMA satellite
communications products and $6.6 million of IDIQ contracts for our other
products.
Backlog is not necessarily indicative of future sales. A majority of our
backlog from U.S. military contracts scheduled for delivery can be terminated at
the convenience of the government since orders are often made substantially in
advance of delivery, and our contracts typically provide that orders may be
terminated with limited or no penalties. In addition, purchase orders may
present product specifications that would require us to complete additional
product development. A failure to develop products meeting such specifications
could lead to a termination of the related purchase order.
The backlog amounts as presented are comprised of funded and unfunded
components. Funded backlog represents the sum of contract amounts for which
funds have been specifically obligated by customers to contracts. Unfunded
backlog represents future amounts that customers may obligate over the specified
contract performance periods. Our customers allocate funds for expenditures on
long-term contracts on a periodic basis. Our ability to realize revenues from
government contracts in backlog is dependent upon adequate funding for such
contracts. Although funding of its government contracts is not within our
control, our experience indicates that actual contract fundings have ultimately
been approximately equal to the aggregate amounts of the contracts.
GOVERNMENT CONTRACTS
A substantial portion of our revenues are generated from contracts and
subcontracts with the U.S. Department of Defense and other federal government
agencies. Many of our contracts are competitively bid and awarded on the basis
of technical merit, personnel qualifications, experience and price. We also
receive some contract awards involving special technical capabilities on a
negotiated, noncompetitive basis due to our unique technical capabilities in
special areas. Recently the Federal Acquisition Streamlining Act of 1994 has
encouraged the use of commercial type pricing on dual use products. Our future
revenues and income could be materially affected by changes in procurement
policies, a reduction in expenditures for the products and services provided by
us, and other risks generally associated with federal government contracts.
We provide products under federal government contracts that usually
require performance over a period of one to five years. Long-term contracts may
be conditioned upon continued availability of congressional appropriations.
Variances between anticipated budget and congressional appropriations may result
in a delay, reduction or termination of these contracts. Contractors often
experience revenue uncertainties with respect to available contract funding
during the first quarter of the government's fiscal year beginning October 1,
until differences between budget requests and appropriations are resolved.
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Our federal government contracts are performed under cost-reimbursement
contracts, time-and-materials contracts and fixed-price contracts.
Cost-reimbursement contracts provide for reimbursement of costs and for payment
of a fee. The fee may be either fixed by the contract or variable, based upon
cost control, quality, delivery and the customer's subjective evaluation of the
work. Under time-and-materials contracts, we receive a fixed amount by labor
category for services performed and are reimbursed for the cost of materials
purchased to perform the contract. Under a fixed-price contract, we agree to
perform specific work for a fixed price and, accordingly, realize the benefit or
detriment to the extent that the actual cost of performing the work differs from
the contract price. Revenues generated from contracts with the federal
government or our prime contractors for fiscal year 2000 were approximately 20%
from cost-reimbursement contracts, approximately 1% from time-and-materials
contracts and approximately 79% from fixed-price contracts of total revenues.
Our allowable federal government contract costs and fees are subject to
audit by the Defense Contract Audit Agency. Audits may result in
non-reimbursement of some contract costs and fees. While the government reserves
the right to conduct further audits, audits conducted for periods through fiscal
year 1996 have resulted in no material cost recovery disallowances for us.
Our federal government contracts may be terminated, in whole or in part,
at the convenience of the government. If a termination for convenience occurs,
the government generally is obligated to pay the cost incurred by us under the
contract plus a pro rata fee based upon the work completed. When we participate
as a subcontractor, we are at risk if the prime contractor does not perform its
contract. Similarly, when we act as a prime contractor employing subcontractors,
we are at risk if a subcontractor does not perform its subcontract.
Some of our federal government contracts contain options that are
exercisable at the discretion of the customer. An option may extend the period
of performance for one or more years for additional consideration on terms and
conditions similar to those contained in the original contract. An option may
also increase the level of effort and assign new tasks to us. In our experience,
options are exercised more often than not.
Our eligibility to perform under our federal government contracts
requires us to maintain adequate security measures. We have implemented security
procedures that we believe are adequate to satisfy the requirements of our
federal government contracts.
REGULATORY ENVIRONMENT
Some of our products are incorporated into wireless communications
systems that are subject to regulation domestically by the Federal
Communications Commission and internationally by other government agencies.
Although the equipment operators and not us are responsible for compliance with
these regulations, regulatory changes, including changes in the allocation of
available frequency spectrum and in the military standards which define the
current networking environment, could materially adversely affect our operations
by restricting development efforts by our customers, making current products
obsolete or increasing the opportunity for additional competition. Changes in,
or our failure to manufacture products in compliance with, applicable
regulations could materially harm our business. In addition, the increasing
demand for wireless communications has exerted pressure on regulatory bodies
worldwide to adopt new standards for these products, generally following
extensive investigation and deliberation over competing technologies. The delays
inherent in this government approval process have in the past caused and may in
the future cause the cancellation, postponement or rescheduling of the
installation of communication systems by our customers, which in turn may have a
material adverse effect on the sale of our products to the customers.
We are also subject to a variety of local, state and federal government
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture our products. The failure to comply with current or future
regulations
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could result in the imposition of substantial fines on us, suspension of
production, alteration of our manufacturing processes or cessation of
operations. To date, these regulations have not had a material effect on our
business, as we have neither incurred significant costs to maintain compliance
nor to remedy past noncompliance.
We believe that we operate our business in material compliance with
applicable government regulations. We are not aware of any pending legislation
that if enacted could materially harm our business.
In addition to the local, state and federal government regulations, we
must comply with applicable laws and obtain the approval of the regulatory
authorities of each foreign country in which it operates. The laws and
regulatory requirements relating to satellite communications and other wireless
communications systems vary from country to country. Some countries have
substantially deregulated satellite communications and other wireless
communications, while other countries maintain strict and often burdensome
regulations. The procedure to obtain these regulatory approvals can be
time-consuming and costly, and the terms of the approvals vary for different
countries. In addition, in some countries there may be restrictions on the
ability to interconnect satellite communications with ground-based
communications systems.
INTELLECTUAL PROPERTY
We rely on a combination of patents, trade secrets, copyrights,
trademarks, service marks and contractual rights to protect our intellectual
property. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, suppliers, employees and
consultants, and through other security measures. Although we intend to protect
our rights vigorously, we cannot assure you that these measures will be
successful. In addition, the laws of some countries in which our products are or
may be developed, manufactured or sold may not protect our products and
intellectual property rights to the same extent as the laws of the United
States.
While our ability to compete may be affected by our ability to protect
our intellectual property, we believe that, because of the rapid pace of
technological change in the wireless personal communications industry, our
technical expertise and ability to introduce new products on a timely basis will
be more important in maintaining our competitive position than protection of our
intellectual property and that patent, trade secret and copyright protections
are important but must be supported by other factors such as the expanding
knowledge, ability and experience of our personnel, new product introductions
and frequent product enhancements. Although we continue to implement protective
measures and intend to defend vigorously our intellectual property rights, we
cannot assure you that these measures will be successful.
In the event of litigation to determine the validity of any third
party's claims, the litigation could result in significant expense to us and
divert the efforts of our technical and management personnel, whether or not the
litigation is determined in our favor. The wireless communications industry has
been subject to frequent litigation regarding patent and other intellectual
property rights. Leading companies and organizations in the industry have
numerous patents that protect their intellectual property rights in these areas.
In the event of an adverse result of any litigation, we could be required to
expend significant resources to develop non-infringing technology or to obtain
licenses to the technology that is the subject of the litigation.
EMPLOYEES
As of March 31, 2000, we had 380 employees (of which 28 were temporary
employees), including over 194 in research and development, 14 in sales and
marketing, 87 in production, and 85 in corporate, administration and production
coordination. We currently employ 182 engineers, including 75 engineers who have
masters degrees and seven engineers who have doctorate degrees. None of our
employees are covered by a collective bargaining agreement and we have never
experienced any strike or work stoppage. We believe that our relations with our
employees are good.
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As of March 31, 2000, the Satellite Networks Business had 338 employees,
including over 128 in research and development, 25 in sales and marketing, 161
in production, and 24 in corporate, administration and production coordination.
The Satellite Networks Business employs 128 engineers. None of the employees of
the Satellite Networks Business are covered by a collective bargaining
agreement.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
ANY FAILURE TO SUCCESSFULLY INTEGRATE THE SATELLITE NETWORKS BUSINESS WITH OUR
BUSINESS MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
Our future performance will depend in part on whether we can integrate
our operations with the operations of the Satellite Networks Business in an
effective and efficient manner. Integrating our operations with the Satellite
Networks Business will be a complex, time consuming and expensive process. The
recent acquisition creates risks such as:
- disruption of our ongoing business,
- difficulty assimilating the operations, including financial and
accounting functions, sales and marketing procedures, technology and
other corporate administrative functions of the combined operations,
- difficulty in converting the Satellite Networks Business' current
business information system to our system,
- difficulty maintaining relationships with present and potential
customers, distributors and suppliers of the Satellite Networks
Business due to uncertainties regarding service, production quality
and prices,
- diversion of attention of our senior management team from existing
operations and other potential business opportunities, and
- problems hiring and retaining key employees who were previously
employed by Scientific-Atlanta in the Satellite Networks Business.
We cannot guarantee that we will successfully integrate our operations with the
operations of the Satellite Networks Business. If we are unable to address any
of the risks described above, it could materially harm our business and impair
the value of our common stock.
THE SATELLITE NETWORKS BUSINESS HAS A HISTORY OF LOSSES AND MAY CONTINUE TO
EXPERIENCE LOSSES IN THE FUTURE
Since its fiscal year 1998, the Satellite Networks Business has incurred
substantial net losses. Although we believe that, as part of the integration of
our commercial business with the Satellite Networks Business, we can implement
cost savings and operational efficiencies that will improve the Satellite
Networks Business' financial performance, we cannot assure you that the
Satellite Networks Business will become profitable in the foreseeable future, if
at all. If the Satellite Networks Business fails to achieve profitability, that
failure could materially harm our business and impair the value of our common
stock.
THE RECENT ACQUISITION OF THE SATELLITE NETWORKS BUSINESS WILL RESULT IN COSTS
OF INTEGRATION AND ACQUISITION EXPENSES THAT COULD ADVERSELY AFFECT OUR
FINANCIAL RESULTS
If the benefits of the acquisition of the Satellite Networks Business do
not exceed the costs associated with the acquisition, our financial results
could be adversely affected. We estimate that, the total purchase price will be
approximately $60 million, (including post-closing adjustments).
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A portion of the costs in excess of the purchase price will likely be
associated with integrating our operations with the operations of the Satellite
Networks Business, including the elimination of duplicative operations and
consolidation of administrative, financial and accounting functions, sales and
marketing operations, support and research and development activities. Actual
costs may substantially exceed our estimates. In addition, unanticipated
expenses associated with integrating the Satellite Networks Business into our
business may arise.
WE FACE RISKS FROM OUR OPERATION OF THE SATELLITE NETWORKS BUSINESS
Although the Satellite Networks Business had historically been operated
as a separate division of Scientific-Atlanta, the Satellite Networks Business
had neither been operated as a stand-alone business nor conducted without the
benefit of the financial resources or trade name of Scientific-Atlanta. Under
the terms of the asset purchase agreement, we will be entitled to use
Scientific-Atlanta trademarks for products made or distributed by the Satellite
Networks Business for a period of six months after the closing. However, we
cannot assure you that we will not encounter financial, managerial or other
difficulties as a result of operating the Satellite Networks Business
independent of the resources provided by Scientific-Atlanta. If we are unable to
successfully address any of the foregoing risks, it could materially harm our
business and impair the value of our common stock.
WE FACE RISKS ASSOCIATED WITH OUR ACQUISITION AGREEMENT WITH SCIENTIFIC-ATLANTA
In connection with the recent acquisition of the Satellite Networks
Business, we entered into an asset purchase agreement and other related
agreements with Scientific-Atlanta. The acquisition agreement contemplates
post-closing adjustments to the purchase price which may require us to pay
additional amounts to Scientific-Atlanta after the closing or may require
Scientific-Atlanta to pay additional amounts to us. In addition, we and
Scientific-Atlanta will have additional payment obligations, including
indemnification obligations, under both the acquisition agreement and the
related agreements. If our payment obligations significantly increase, or if
Scientific-Atlanta fails or delays in making its required payments, it could
materially harm our business and impair the value of our common stock.
WE FACE RISKS FROM CHANGES IN THE ALLOCATION OF THE PURCHASE PRICE OF THE
SATELLITE NETWORKS BUSINESS
The acquisition of the Satellite Networks Business will be accounted for
by the purchase method of accounting. Under purchase accounting, the total
purchase price will be allocated to the tangible and intangible assets and
liabilities of the Satellite Networks Business based upon their respective fair
values as of the closing of the acquisition based on valuations and other
studies which are not yet available. We have not made a final determination as
to the value of the Satellite Networks Business' in-process research and
development, if any. To the extent that a portion of the purchase price would be
allocated to in- process research and development, generally accepted accounting
principles would require that this amount be written off as a one-time charge to
operations. Consequently, the amounts reflected in the pro forma financial
information are subject to change, and the final amounts may differ
significantly.
OUR RELIANCE ON U.S. GOVERNMENT CONTRACTS COULD HARM OUR BUSINESS
Approximately 92% of our revenues for fiscal year 1999 and approximately
76% of our revenues for fiscal year 2000 were derived from U.S. government
applications. While the recent acquisition of the Satellite Networks Business
will substantially reduce our dependence on U.S. government business in the near
term, such business will continue to represent a significant portion of our
revenues for the foreseeable future. U.S. government business exposes us to
various risks, including:
- unpredictable contract or project terminations,
- reductions in government funds available for our projects due to
government policy changes, budget cuts and contract adjustments,
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- penalties arising from post-award contract audits,
- cost audits in which the value of our contracts may be reduced,
- higher-than-expected final costs, particularly relating to software
and hardware development, for work performed under contracts where
we commit to specified deliveries for a fixed price,
- limited profitability from cost-reimbursement contracts under which
the amount of profit is limited to a specified amount, and
- unpredictable cash collections of unbilled receivables that may be
subject to acceptance of contract deliverables by the customer and
contract close-out procedures, including government approval of
final indirect rates.
In addition, substantially all of our U.S. government backlog scheduled for
delivery can be terminated at the convenience of the U.S. government since
orders are often placed well before delivery, and our contracts typically
provide that orders may be terminated with limited or no penalties. If we are
unable to address any of the risks described above, it could materially harm our
business and impair the value of our common stock.
OUR SUCCESS DEPENDS ON OUR ABILITY TO GROW OUR COMMERCIAL BUSINESS
To date, our internal growth has been driven largely by our success in
meeting the need for advanced communications products for the U.S. military. We
have been increasing our focus in recent years on offering satellite-based
communications products to address commercial market needs. We believe our
recent acquisition of the Satellite Networks Business gives us the scale and
scope to become a larger player in this market. Our goal is to leverage our
advanced technology and capabilities to capture a significant share of the
global satellite services and equipment segment of the high-growth broadband
communications market. However, we cannot assure you that we will be able to
grow our commercial satellite communications business or that we will be able to
compete effectively in the commercial market in the future. If we are unable to
grow our commercial business or compete effectively in the commercial market in
the future, it could materially harm our business and impair the value of our
common stock.
A SIGNIFICANT PORTION OF OUR REVENUE IS DERIVED FROM A FEW OF OUR CONTRACTS
A small number of our contracts account for a significant percentage of
our revenues. Historically, our largest revenue producing contracts have been
U.S. government contracts related to our UHF DAMA technology, which generated
approximately 51% of our revenues for our fiscal year 1999 and 33% of our
revenues for fiscal year 2000. Our five largest contracts generated
approximately 61% of our revenues for fiscal year 1999 and 35% of our revenues
for fiscal year 2000. Termination or disruption of these contracts, or our
inability to renew or replace these contracts when they expire, could materially
harm our business and impair the value of our common stock.
OUR SUCCESS DEPENDS UPON THE DEVELOPMENT OF NEW SATELLITE AND OTHER WIRELESS
COMMUNICATIONS PRODUCTS AND OUR ABILITY TO GAIN ACCEPTANCE OF THESE PRODUCTS
The wireless communications market in general, and the satellite
communications market in particular, are subject to rapid technological change,
frequent new and enhanced product introductions, product obsolescence and
changes in user requirements. Our ability to compete successfully in these
markets depends on our success in applying our expertise and technology to
existing and emerging satellite and other wireless communications markets. Our
ability to compete in these markets also depends in large part on our ability to
successfully develop, introduce and sell new products and enhancements on a
timely and cost-effective basis that respond to ever changing customer
requirements. Our ability to successfully introduce new products depends on
several factors, including:
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- successful integration of various elements of our complex
technologies and system architectures,
- timely completion and introduction of new product designs,
- achievement of acceptable product costs,
- timely and efficient implementation of our manufacturing and
assembly processes and cost reduction efforts,
- establishment of close working relationships with major customers
for the design of their new wireless communications systems
incorporating our products,
- development of competitive products by competitors, and
- market acceptance of our new products.
We cannot assure you that our product development efforts for communications
products will be successful or that any of our new products we develop will
achieve market acceptance. We may experience difficulties that could delay or
prevent us from successfully selecting, developing, manufacturing or marketing
new products or enhancements. We cannot assure you that defects will not be
found in our products after we begin deliveries, which could result in the delay
or loss of market acceptance. If we are unable to design, manufacture,
integrate, and market profitable new products for existing or emerging
communications markets, it could materially harm our business and impair the
value of our common stock.
OUR SUCCESS DEPENDS UPON THE GROWTH OF COMMERCIAL WIRELESS COMMUNICATIONS
MARKETS
A number of the commercial markets for our products in the wireless
communications area, including our DAMA products, have only recently developed.
Because these markets are relatively new, it is difficult to predict the rate at
which these markets will grow, if at all. If the markets for commercial wireless
communications products fail to grow, or grow more slowly than anticipated, our
business could be materially harmed. Conversely, to the extent that growth in
these markets results in capacity limitations in the wireless communications
area, it could materially harm our business and impair the value of our common
stock.
WE DEPEND HEAVILY ON THE VSAT MARKET
We derived approximately 5% of our product revenues for fiscal year 1999
and approximately 24% of our product revenues for fiscal year 2000 from sales of
VSAT communications networks. While the market for VSAT communications networks
and services has grown steadily since its inception in the mid-1980's, this
market may not continue to grow or VSAT technology may be replaced by an
alternative technology. A significant decline in this market or the replacement
of VSAT technology by an alternative technology could materially harm our
business and impair the value of our common stock.
ANY FAILURE BY US TO EFFICIENTLY AND EFFECTIVELY MANAGE OUR GROWTH COULD
ADVERSELY AFFECT OUR BUSINESS
Future expansion of our business may place strains on our personnel,
financial and other resources. In order to successfully manage our growth we
must identify, attract, motivate, train and retain highly skilled managerial,
financial, engineering, business development, sales and marketing and other
personnel. Competition for these types of personnel is intense. If we fail to
efficiently manage our growth and compete for these types of personnel, it could
adversely affect the quality of our services and, in turn, materially harm our
business and impair the value of our common stock.
IF THE SELLING PRICES OF OUR PRODUCTS DECREASE, IT COULD MATERIALLY HARM OUR
BUSINESS
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The average selling prices of wireless communications products
historically decline over product life cycles. In particular, we expect the
average selling prices of our products to decline as a result of competitive
pricing pressures and customers who negotiate discounts based on large unit
volumes. We also expect that competition in this industry will continue to
increase. To offset these price decreases, we intend to rely primarily on
obtaining yield improvements and corresponding cost reductions in the
manufacturing process of existing products and on the introduction of new
products with advanced features that can be sold at higher prices. However, we
cannot assure you that we will be able to obtain any yield improvements or cost
reductions or introduce any new products in the future. To the extent that we do
not reduce costs or introduce new products in a timely manner, or our customers'
products do not achieve market acceptance, it could materially harm our business
and impair the value of our common stock.
OUR DEVELOPMENT CONTRACTS MAY BE DIFFICULT FOR US TO COMPLY WITH AND MAY EXPOSE
US TO DAMAGES
The wireless communications industry is characterized by rapid
technological change. We are often party to government and commercial contracts
that involve the development of new products. We derived 57% of our revenues for
fiscal year 1999 and 46% of our revenues for fiscal year 2000 from these
development contracts. These contracts typically contain strict performance
obligations and project milestones. We cannot assure you that we will comply
with these performance obligations or meet these project milestones. If we are
unable to comply with these performance obligations or meet these milestones,
our customers may terminate these contracts and, under some circumstances,
recover damages or other penalties from us. We are not currently, nor have we
always been, in compliance with all outstanding performance obligations and
project milestones. In the past, when we have not complied with the performance
obligations or project milestones in a contract, generally, the other party has
not elected to terminate the contract or seek damages from us. However, we
cannot assure you that in the future other parties will not terminate their
contracts or seek damages from us. If other parties elect to terminate their
contracts or seek damages from us, it could materially harm our business and
impair the value of our common stock.
WE MAY EXPERIENCE LOSSES FROM OUR FIXED-PRICE CONTRACTS
Approximately 80% of our revenues for fiscal year 1999 and 79% of our
revenues for fiscal year 2000 were derived from contracts with fixed prices. We
assume greater financial risk on fixed-price contracts than on other types of
contracts since if we do not anticipate technical problems, estimate costs
accurately or control costs during performance of a fixed-price contract, it may
significantly reduce our net profit or cause a loss on the contract. We believe
that an increasing percentage of our contracts will be at fixed prices in the
future. Although we believe that we adequately estimate costs for fixed-price
contracts, we cannot assure you that our estimates will be adequate or that
substantial losses on fixed-price contracts will not occur in the future. If we
are unable to address any of the risks described above, it could materially harm
our business and impair the value of our common stock.
WE EXPECT TO INCREASE OUR RESEARCH AND DEVELOPMENT COSTS WHICH COULD
SIGNIFICANTLY REDUCE OUR PROFITABILITY
Our future growth depends on penetrating new markets, adapting existing
satellite communications products to new applications, and introducing new
communications products that achieve market acceptance. Accordingly, we are
actively applying our communications expertise to design and develop new
hardware and software products and enhance existing products. We expended $7.6
million in fiscal year 1999 and fiscal year 2000 on research and development
activities. Since we account for research and development as an operating
expense, these expenditures will adversely affect our earnings in the near
future. Additionally, even if adequately funded, our research and development
program may not produce successful results, which could materially harm our
business and impair the value of our common stock.
OUR RELIANCE ON A LIMITED NUMBER OF THIRD PARTIES TO MANUFACTURE OUR PRODUCTS
EXPOSES US TO VARIOUS RISKS
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Our internal manufacturing capacity is limited and we do not intend to
expand that capability in the foreseeable future. We rely on a limited number of
contract manufacturers to produce our products and expect to rely increasingly
on these manufacturers in the future. Some components, subassemblies and
services necessary for the manufacture of our products are obtained from a sole
supplier or a limited group of suppliers. In particular, Texas Instruments is a
sole source supplier of digital signal processing chips, which are critical
components in substantially all of our products. In addition, we plan to
increase our reliance on contract manufacturing by engaging additional contract
manufacturers to produce the products that are currently being manufactured by
the Satellite Networks Business.
Our reliance on contract manufacturers and on sole suppliers or a
limited group of suppliers involves several risks. We may not be able to obtain
an adequate supply of required components, and our control over the price,
timely delivery, reliability and quality of finished products may be reduced.
The process of manufacturing our products and some of our components and
subassemblies is extremely complex, and we have in the past experienced and may
in the future experience delays in the delivery of and quality problems with
products and components and subassemblies from vendors. Some of the suppliers
that we rely upon have relatively limited financial and other resources. If we
are not able to obtain timely deliveries of components and subassemblies of
acceptable quality or if we are otherwise required to seek alternative sources
of supply, or to manufacture our finished products or components and
subassemblies internally, it could delay or prevent us from delivering our
systems promptly and at high quality. This failure could damage relationships
with current or prospective customers, which, in turn, could materially harm our
business and impair the value of our common stock.
THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE AND OUR COMPETITORS MAY HAVE GREATER
RESOURCES THAN US
The wireless communications industry generally is highly competitive and
competition is increasing. In addition, because our industry is evolving and
characterized by rapid technological change, it is difficult for us to predict
whether, when and by whom new competing technologies, products or services may
be introduced into our markets. Currently, we face substantial competition from
domestic and international wireless and ground-based communications service
providers in the commercial and government industries. In the commercial
industry, our major competitors include Hughes Network Systems and Gilat
Satellite Networks Ltd., which have captured a substantial portion of the
overall VSAT market over the past several years. In the government industry, our
major competitors include The Titan Corporation and Rockwell International
Corporation. Many of our competitors and potential competitors have significant
competitive advantages, including strong customer relationships, more experience
with regulatory compliance, greater financial and management resources, and
control over central communications networks. In addition, some of our customers
continuously evaluate whether to develop and manufacture their own products and
could elect to compete with us at any time. Increased competition from any of
these or other entities could materially harm our business and impair the value
of our common stock.
WE DEPEND ON A LIMITED NUMBER OF KEY EMPLOYEES WHO WOULD BE DIFFICULT TO REPLACE
We depend on a limited number of key technical, marketing and management
personnel to manage and operate our business. In particular, we believe that our
success depends to a significant degree on our ability to attract and retain
highly skilled personnel, including our President and Chief Executive Officer,
Mark D. Dankberg, and those highly skilled design, process and test engineers
involved in the manufacture of existing products and the development of new
products and processes. The competition for these types of personnel is intense,
and the loss of key employees could materially harm our business and impair the
value of our common stock. We do not have employment agreements with any of our
officers. We have obtained a key person insurance policy on the life of Mr.
Dankberg.
OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY IS LIMITED AND INFRINGEMENT
CLAIMS AGAINST US COULD RESTRICT OUR ABILITY TO CONDUCT BUSINESS
26
<PAGE> 30
Our success depends significantly on our ability to protect our
proprietary rights to the technologies we use in our products and services. If
we are unable to protect our proprietary rights adequately, our competitors
could use the intellectual property that we have developed to enhance their own
products and services, which could materially harm our business and impair the
value of our common stock. We currently rely on a combination of patents, trade
secret laws, copyrights, trademarks, service marks and contractual rights to
protect our intellectual property. We cannot assure you that the steps we have
taken to protect our proprietary rights will be adequate. Additionally, the laws
of some foreign countries in which our products are or may be sold do not
protect our intellectual property rights to the same extent as do the laws of
the United States.
Litigation may be necessary to protect our intellectual property rights
and trade secrets, to determine the validity and scope of the proprietary rights
of others or to defend against claims of infringement or invalidity. We cannot
assure you that infringement, invalidity, right to use or ownership claims by
third parties or claims for indemnification resulting from infringement claims
will not be asserted against us in the future. If any claims or actions are
asserted against us, we may seek to obtain a license under a third party's
intellectual property rights. We cannot assure you, however, that a license will
be available under reasonable terms or at all. Litigation of intellectual
property claims could be extremely expensive and time consuming, which could
materially harm our business, regardless of the outcome of the litigation. If
our products are found to infringe upon the rights of third parties, we may be
forced to incur substantial costs to develop alternative products. We cannot
assure you that we would be able to develop alternative products or that if
these alternative products were developed, they would perform as required or be
accepted in the applicable markets. If we are unable to address any of the risks
described above, it could materially harm our business and impair the value of
our common stock.
ADVERSE REGULATORY CHANGES COULD IMPAIR OUR ABILITY TO SELL PRODUCTS
Our products are incorporated into wireless communications systems that
must comply with various government regulations. Regulatory changes, including
changes in the allocation of available frequency spectrum and in the military
standards and specifications which define the current satellite networking
environment, could materially harm our business by (1) restricting development
efforts by us and our customers, (2) making our current products less attractive
or obsolete, or (3) increasing the opportunity for additional competition.
Changes in, or our failure to comply with, applicable regulations could
materially harm our business and impair the value of our common stock. In
addition, the increasing demand for wireless communications has exerted pressure
on regulatory bodies worldwide to adopt new standards for these products and
services, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this government approval process
have caused and may continue to cause our customers to cancel, postpone or
reschedule their installation of communications systems. This, in turn, may have
a material adverse effect on our sales of products to our customers.
BECAUSE WE CONDUCT BUSINESS INTERNATIONALLY, WE FACE ADDITIONAL RISKS RELATED TO
GLOBAL POLITICAL AND ECONOMIC CONDITIONS AND CURRENCY FLUCTUATIONS
We anticipate that international sales will account for an increasing
percentage of our revenues over the next several years. In addition,
international sales represent a significant portion of the Satellite Networks
Business' revenues. Many of these international sales may be denominated in
foreign currencies. Since we do not currently engage in nor do we currently
anticipate engaging in foreign currency hedging transactions, a decrease in the
value of foreign currencies relative to the U.S. dollar could result in losses
from transactions denominated in foreign currencies. This decrease in value
could make our products less price-competitive.
There are additional risks in conducting business internationally,
including:
- unexpected changes in regulatory requirements,
- increased cost of localizing systems in foreign countries,
27
<PAGE> 31
- increased sales and marketing and research and development expenses,
- availability of suitable export financing,
- timing and availability of export licenses,
- tariffs and other trade barriers,
- political and economic instability,
- challenges in staffing and managing foreign operations,
- difficulties in managing distributors,
- potentially adverse tax consequences, and
- potential difficulty in collecting accounts receivable.
In addition, some of our customer purchase agreements are governed by foreign
laws, which may differ significantly from U.S. laws. Therefore, we may be
limited in our ability to enforce our rights under these agreements and to
collect damages, if awarded. If we are unable to address any of the risks
described above, it could materially harm our business and impair the value of
our common stock.
OUR OPERATING RESULTS HAVE VARIED SIGNIFICANTLY FROM QUARTER TO QUARTER IN THE
PAST AND, IF THEY CONTINUE TO DO SO, THE MARKET PRICE OF OUR COMMON STOCK COULD
BE IMPAIRED
Our operating results have varied significantly from quarter to quarter
in the past and may continue to do so in the future. As a result, we believe
that period-to-period comparisons of our revenues are not necessarily meaningful
and you should not rely upon them as indicators of future performance. It is
likely that in one or more future quarters our results may fall below the
expectations of analysts and investors. In this event, the trading price of our
common stock would likely decrease. The factors that cause our
quarter-to-quarter operating results to be unpredictable include:
- a complex and lengthy procurement process for most of our customers
or potential customers,
- the difficulty in estimating costs over the life of a contract,
which may require adjustment in future periods,
- the timing, quantity and mix of products and services sold,
- price discounts given to some customers,
- market acceptance and the timing of availability of our new
products,
- the timing of customer payments for significant contracts,
- the failure to receive an expected order or a deferral of an order
to a later period, and
- general economic and political conditions.
If we are unable to address any of the risks described above, it could
materially harm our business and impair the value of our common stock.
WE FACE POTENTIAL PRODUCT LIABILITY CLAIMS
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<PAGE> 32
We may be exposed to legal claims relating to the products we sell or
the services we provide. Our agreements with our customers generally contain
terms designed to limit our exposure to potential product liability claims. We
also maintain a product liability insurance policy for our business. However,
our insurance may not cover all relevant claims or may not provide sufficient
coverage. To date, we have not experienced any material product liability
claims. If our insurance coverage does not cover all costs resulting from future
product liability claims, it could materially harm our business and impair the
value of our common stock.
THE LOSS OF SMALL BUSINESS INNOVATION RESEARCH FUNDING STATUS COULD HARM OUR
BUSINESS
We have benefited from the Small Business Innovation Research program,
known as SBIR, through which the government provides research and development
funding for companies with fewer than 500 employees. As we have grown, our
reliance on SBIR funding for research and development has significantly
decreased. Upon completion of the acquisition of the Satellite Networks Business
we became ineligible for SBIR funding due to the increased size of the combined
entity. We cannot assure you that our loss of SBIR funding status will not
materially harm our business.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR COMMON STOCK
AND EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER APPROVAL
As of March 31, 2000 our executive officers and directors and their
affiliates beneficially owned an aggregate of approximately 32.9 % of our common
stock. Accordingly, these stockholders may be able to significantly influence
the board of directors and the outcome of corporate actions requiring
stockholder approval, such as mergers and acquisitions. These stockholders may
exercise this ability in a manner that advances their best interests and not
necessarily those of other stockholders. This ownership interest could also have
the effect of delaying or preventing a change in control.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD PREVENT AN ACQUISITION
OF OUR BUSINESS AT A PREMIUM PRICE
Some of the provisions of our certificate of incorporation and bylaws
could discourage, delay or prevent an acquisition of our business at a premium
price. These provisions:
- permit the board of directors to increase its own size and fill the
resulting vacancies,
- provide for a board comprised of three classes of directors with
each class serving a staggered three year term,
- authorize the issuance of preferred stock in one or more series, and
- prohibit stockholder action by written consent.
In addition, Section 203 of the Delaware General Corporation Law also imposes
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our common stock.
OUR FORWARD-LOOKING STATEMENTS ARE SPECULATIVE AND MAY PROVE TO BE WRONG
Some of the information under "Item 1. Business," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this annual report are forward-looking statements. These
forward-looking statements include, but are not limited to, statements about our
plans, objectives, expectations and intentions and other statements contained in
this annual report that are not historical facts. When used in this annual
report, the words "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates" and similar expressions are generally intended to identify
forward-looking
29
<PAGE> 33
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors, including the factors discussed in
this "Factors that May Affect Future Performance" section of the annual report,
that could cause actual results to differ materially from those expressed or
implied by these forward-looking statements.
ITEM 2. FACILITIES
We are headquartered in facilities consisting of approximately 180,000
square feet in Carlsbad, California, under a lease expiring in 2009.
Additionally, we maintain offices in Boston, Massachusetts and Sydney,
Australia. We anticipate operating additional regional sales offices in 2000 and
beyond.
ViaSat Satellite Networks operates from three facilities consisting of
an aggregate of approximately 141,534 square feet located in Norcross, Georgia.
These facilities are subject to leases expiring in 2002, with options to extend
the terms through 2005. ViaSat Satellite Networks also maintains offices or a
sales presence in the United Kingdom, Australia, China, Chile and Canada.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation arising in the
ordinary course of our business. We are not presently a party to any material
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended March 31, 2000.
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<PAGE> 34
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the
symbol "VSAT." The following table sets forth the range of high and low sales
prices on the Nasdaq National Market of our common stock for the periods
indicated, as reported by Nasdaq. Such quotations represent inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
---------- ---------
<S> <C> <C>
First Quarter $20.38 $13.38
Second Quarter 20.13 8.25
Third Quarter 13.00 7.00
Fourth Quarter 13.00 8.75
FISCAL 2000 HIGH LOW
---------- ---------
First Quarter $15.75 $7.81
Second Quarter 22.25 13.31
Third Quarter 55.50 18.06
Fourth Quarter 105.00 43.00
</TABLE>
To date, we have neither declared nor paid any dividends on our common
stock. We currently intend to retain all future earnings, if any, for use in the
operation and development of our business and, therefore, do not expect to
declare or pay any cash dividends on our common stock in the foreseeable future.
As of June 21, 2000, there were 269 holders of record of our common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected financial information for us for
each of the fiscal years in the five-year period ended March 31, 2000. The data
as of and for each of the fiscal years in the five-year period ended March 31,
2000 have been derived from our audited financial statements and include, in the
opinion of our management, all adjustments necessary to present fairly the data
or those periods. You should consider the financial statement data provided
below in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
which are included elsewhere in this annual report. All amounts shown are in
thousands, except per share data.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Revenues $ 29,017 $ 47,715 $ 64,197 $ 71,509 $ 75,880
Cost of revenues 20,983 33,102 40,899 44,182 45,557
-------- -------- -------- -------- --------
Gross profit 8,034 14,613 23,298 27,327 30,323
Operating expenses:
Selling, general and administrative 3,400 4,752 7,862 10,093 11,269
Independent research and
development 2,820 5,087 7,631 7,639 7,590
-------- -------- -------- -------- --------
Income from operations 1,814 4,774 7,805 9,595 11,464
Net interest income (expense) (231) 100 586 584 913
-------- -------- -------- -------- --------
Income before income taxes 1,583 4,874 8,391 10,179 12,377
Provision (benefit) for income taxes (50) 1,702 3,104 3,883 4,471
-------- -------- -------- -------- --------
Net income $ 1,633 $ 3,172 $ 5,287 $ 6,296 $ 7,906
======== ======== ======== ======== ========
Basic net income per share $ 0.50 $ 0.66 $ 0.68 $ 0.79 $ 0.98
======== ======== ======== ======== ========
Diluted net income per share $ 0.28 $ 0.48 $ 0.65 $ 0.77 $ 0.91
======== ======== ======== ======== ========
Shares used in computing basic net
income per share 3,267 4,810 7,801 7,977 8,097
======== ======== ======== ======== ========
Shares used in computing diluted net
income per share 5,735 6,642 8,175 8,173 8,711
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term $ 2,297 $12,673 $ 9,208 $20,793 $19,641
investments
Working capital 4,651 20,406 24,276 31,298 38,169
Total assets 13,262 35,674 42,793 50,016 61,930
Notes payable, less current portion 1,747 1,428 1,544 1,243 336
Total stockholders' equity 5,217 23,619 29,610 36,847 45,997
</TABLE>
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<PAGE> 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
ViaSat was incorporated in 1986 and completed its initial public
offering in 1996. From 1992 to 2000, our total revenues increased at a
compounded annual growth rate of approximately 44.5% through internal growth,
and not through acquisitions. We have achieved 14 consecutive years of
internally generated revenue growth and 13 consecutive years of profitability.
Historically, our revenues have been primarily generated from contracts with the
U.S. Department of Defense. Our revenues from U.S. Department of Defense
applications have grown despite government budgetary constraints. Our commercial
business grew from 5% of revenues in fiscal year 1999 to 24% of revenues in
fiscal year 2000.
On April 25, 2000, we acquired the Satellite Networks Business, which
will substantially increase our revenue and transform us into a predominantly
commercial business.
Our revenue mix for fiscal year 2000 consisted of U.S. Department of
Defense (71%), commercial customers (24%), and foreign military sales (5%). To
date, our ability to grow and maintain our revenues has depended on obtaining
additional sizable contract awards. It is difficult to predict the probability
and timing of obtaining these awards. Generally, revenues are recognized as
services are performed using the percentage of completion method, measured
primarily by costs incurred to date compared with total estimated costs at
completion or based on the number of units delivered. We provide for anticipated
losses on contracts by charges to income during the period in which they are
first identified.
Our products and services are provided primarily through three types of
contracts: fixed-price, time-and-materials and cost-reimbursement contracts.
Historically, approximately 72.8% for fiscal year 1998, 80.3% for fiscal year
1999, and 79.1% for fiscal year 2000, of our revenues were derived from
fixed-price contracts which require us to provide products and services under a
contract at a stipulated price. Our proportion of fixed-price contracts has
continued to increase as our commercial business has grown and as government
customers are increasingly relying on fixed-price awards. The remainder of our
annual revenue was derived from cost-reimbursement contracts, under which we are
reimbursed for all actual costs incurred in performing the contract to the
extent that such costs are within the contract ceiling and allowable under the
terms of the contract, plus a fee or profit, and from time-and-materials
contracts which reimburse us for the number of labor hours expended at an
established hourly rate negotiated in the contract, plus the cost of materials
utilized in providing such products or services.
Historically, a significant portion of our revenues has been generated
from funded research and development contracts. The research and development
efforts are conducted in direct response to the specific requirements of a
customer's order and, accordingly, expenditures related to such efforts are
included in cost of sales when incurred and the related funding (which includes
a profit component) is included in revenues. Revenues for our funded research
and development were approximately $25.6 million or 39.9% of our total revenues
during fiscal year 1998, $40.5 million or 56.6% of our total revenues during
fiscal year 1999 and $35.0 million or 46.2% of our total revenues during fiscal
year 2000.
We invest in independent research and development, which is not directly
funded by a third party. We expense independent research and development costs
as they are incurred. Independent research and development expenses consist
primarily of salaries and other personnel-related expenses, supplies and
prototype materials related to research and development programs. Independent
research and development expenses were approximately 11.9% of revenues during
fiscal year 1998, 10.7% of revenues during fiscal year 1999, and 10.0% of
revenues during fiscal year 2000. As a government contractor, we are able to
recover a portion of our independent research and development expenses pursuant
to our government contracts. The newly acquired Satellite Networks Business has
relied heavily on self-financed research and development, and we expect to
decrease our proportion of funded research and development in future periods as
a result of the acquisition.
RESULTS OF OPERATIONS
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<PAGE> 37
The following table presents, as a percentage of total revenues, income
statement data for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Revenues ....................................... 100.0% 100.0% 100.0%
Cost of revenues ............................... 63.7 61.8 60.0
------ ------ ------
Gross profit ................................. 36.3 38.2 40.0
Operating expenses:
Selling, general and administrative .......... 12.2 14.1 14.9
Independent research and development ......... 11.9 10.7 10.0
------ ------ ------
Income from operations ......................... 12.2 13.4 15.1
Income before income taxes ..................... 13.1 14.2 16.3
Provision for income taxes ..................... 4.8 5.4 5.9
Net income ..................................... 8.2 8.8 10.4
</TABLE>
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Revenues. Revenues increased 6.1% from $71.5 million for fiscal year
1999 to $75.9 million for fiscal year 2000. This was primarily due to an
increase in our commercial revenues as a result of our recent Science
Applications International Corporation (SAIC) and Star Cruises Management Ltd.
commercial broadband contracts, offset in part by lower revenues from volumes of
selected UHF defense products.
Gross Profit. Gross profit increased 11.0% from $27.3 million (38.2% of
revenues) for fiscal year 1999 to $30.3 million (40.0% of revenues) for fiscal
year 2000. The increase in gross profit was primarily due to an improvement in
our commercial margins as a result of greater commercial volumes and increased
operating efficiencies in the commercial business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 11.7% from $10.1 million (14.1% of revenues)
for fiscal year 1999 to $11.3 million (14.9% of revenues) for fiscal year 2000.
The increase in selling, general and administrative expenses reflects increased
expenditures relating to the marketing of commercial products, increased
business development and bid and proposal expenses for defense programs, and
additional administrative staffing. Selling, general and administrative expenses
consist primarily of personnel costs and expenses for business development,
marketing and sales, bid and proposal, finance, contract administration and
general management. Some selling, general and administrative expenses are
difficult to predict and vary based on specific government and commercial sales
opportunities.
Independent Research and Development. Independent research and
development expenses remained at $7.6 million for both fiscal years but
decreased as a percent of revenues (10.7% of revenues for fiscal 1999 and 10.0%
for fiscal 2000.) The decrease as a percentage of sales resulted in part from
the award of funded development contracts related to our commercial products,
and from the overall increase in sales.
Interest Expense. Interest expense decreased from $250,000 for fiscal
year 1999 to $157,000 for fiscal year 2000. Interest expense relates to loans
for the purchase of capital equipment, which are generally three year
variable-rate term loans. Total outstanding equipment loans were $2.5 million at
March 31, 1999 and $1.2 million at March 31, 2000.
Interest Income. Interest income increased from $834,000 for fiscal year
1999 to $1.1 million for fiscal year 2000. This increase resulted from higher
average invested cash balances and higher yields, offset in part by a decrease
in interest income from overdue government receivables from $102,000 for fiscal
year 1999 to $45,000 for fiscal year 2000.
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<PAGE> 38
Provision for Income Taxes. Our effective income tax rate decreased from
38% for fiscal year 1999 to 36% for fiscal year 2000. The decrease relates
primarily to greater than anticipated research and development tax credits in
prior years.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Revenues. Our revenues increased 11.4% from $64.2 million in fiscal year
1998 to $71.5 million in fiscal year 1999. This increase was primarily due to
increases in revenues generated by government development and production
programs. These increases were partially offset by a decrease in revenues
related to our commercial business as we shifted our commercial focus from
telephony applications to pursue larger commercial data network opportunities.
Gross Profit. Gross profit increased 17.3% from $23.3 million (36.3% of
revenues) in fiscal year 1998 to $27.3 million (38.2% of revenues) in fiscal
year 1999. The increase in gross profit was primarily the result of increased
recovery of independent research and development expenditures and a mix of
higher margin products in our sales for fiscal year 1999 relative to the prior
year. In addition, some long-term contracts realized higher profits than
initially expected. The increases were offset in part by a write-down of
StarWire inventory to the lower of cost or market in connection with the shift
in our commercial business strategy.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 28.4% from $7.9 million (12.2% of revenues) in
fiscal year 1998 to $10.1 million (14.1% of revenues) in fiscal year 1999. We
increased our business development and administrative staffing in support of
both defense and commercial programs. Bid and proposal expenses increased from
$1.5 million in fiscal year 1998 to $1.8 million in fiscal year 1999.
Independent Research and Development. Independent research and
development expenses remained at $7.6 million for both years, but decreased as a
percentage of revenues from 11.9% of revenues in fiscal year 1998 to 10.7% of
revenues in fiscal year 1999. The decrease as a percentage of sales resulted
from the overall increase in sales.
Interest Expense. Interest expense increased 18.5% from $211,000 in
fiscal year 1998 to $250,000 in fiscal year 1999. Interest expense relates to
loans for the purchase of capital equipment. Total outstanding equipment loans
were $2.6 million at March 31, 1998 and $2.5 million at March 31, 1999.
Interest Income. Interest income increased 4.6% from $797,000 in fiscal
year 1998 to $834,000 in fiscal year 1999. Interest income relates to interest
earned on cash and short-term investments, as well as overdue government
receivables where interest income increased from $17,000 in fiscal year 1998 to
$102,000 in fiscal year 1999.
Provision for Income Taxes. Our effective income tax rate increased from
37% in fiscal year 1998 to 38% in fiscal year 1999. Our effective income tax
rate increased due to expected limitations on our research and development tax
credits.
BACKLOG
We had firm backlog of $44.9 million at March 31, 1999, of which $36.8
million was funded, not including options of $45.2 million. As of March 31,
2000, we had firm backlog of $88.2 million, of which $58.6 million was funded.
Of the $88.2 million in firm backlog at March 31, 2000, approximately $43.0
million is expected to be delivered in fiscal year 2001, approximately $29.6
million is expected to be delivered in fiscal year 2002 and the balance is
expected to be delivered in fiscal year 2003 and thereafter. The increase in
backlog results from growth in total awards for both commercial and defense
products from $43.7 million for fiscal year 1999 to $119.3 million for fiscal
year 2000. We include in our backlog only those orders for which we have
accepted purchase orders. Our firm backlog does not include contract options of
$53.3 million. These options include $44.6 million of Indefinite
Delivery/Indefinite Quantity
35
<PAGE> 39
(IDIQ) contracts for our UHF DAMA satellite communications products and $6.6
million of IDIQ contracts for our other products.
Backlog is not necessarily indicative of future sales. A majority of our
backlog from U.S. military contracts scheduled for delivery can be terminated at
the convenience of the government since orders are often made substantially in
advance of delivery, and our contracts typically provide that orders may be
terminated with limited or no penalties. In addition, purchase orders may
present product specifications that would require us to complete additional
product development. A failure to develop products meeting such specifications
could lead to a termination of the related purchase order.
The backlog amounts as presented are comprised of funded and unfunded
components. Funded backlog represents the sum of contract amounts for which
funds have been specifically obligated by customers to contracts. Unfunded
backlog represents future amounts that customers may obligate over the specified
contract performance periods. Our customers allocate funds for expenditures on
long-term contracts on a periodic basis. Our ability to realize revenues from
government contracts in backlog is dependent upon adequate funding for such
contracts. Although funding of our government contracts is not within our
control, our experience indicates that actual contract fundings have ultimately
been approximately equal to the aggregate amounts of the contracts.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily with cash flows from
operations, bank line of credit financing, equity financing and loans for the
purchase of capital equipment. Cash provided by operating activities was $3.7
million and $13.3 million for fiscal year 2000 and fiscal year 1999,
respectively. The relative decrease in cash provided from operating activities
for fiscal year 2000 compared to the prior year was primarily due to an increase
in accounts receivable. The increase in accounts receivable resulted from the
high volume of sales in the fourth quarter of fiscal year 2000, and the timing
of milestone billings on certain defense contracts. Days sales outstanding were
higher during fiscal year 2000 due in part to delays in payments on some
government contracts. The payments were delayed due to processing delays at the
government paying offices, but have since been paid.
Cash provided from investing activities in fiscal year 2000 was $9.8
million as compared to cash used in investing activities for the fiscal year
1999 of $11.4 million. During fiscal year 2000, $14.7 million in short-term
investments matured and were reinvested into investments classified as cash
equivalents. This was offset in part by $4.8 million of purchases of property
and equipment in fiscal year 2000, primarily consisting of test equipment and
computers.
Cash provided by financing activities for fiscal years 2000 and
1999 was $25,000 and $799,000, respectively. This decrease was primarily the
result of reduced borrowings for equipment financing, offset in part by
increased proceeds from common stock.
At March 31, 1999, we had $6.0 million in cash and cash equivalents,
$14.8 million in short-term investments, $31.3 million in working capital and
$2.5 million in long-term debt which consisted of equipment financing. At March
31, 2000, we had $19.6 million in cash, cash equivalents and short-term
investments, $38.2 million in working capital and $1.2 million in equipment
financing. We had no outstanding borrowings under our line of credit at March
31, 2000.
We received a commitment from Union Bank of California and Washington
Mutual Bank to provide a total credit facility of $50.0 million for to the
acquisition of the Satellite Networks Business. This facility also provided
for a secured revolving credit facility of $25 million for general working
capital. We did not use the acquisition financing and are now in the process of
negotiating the terms of the $25 million revolving line of credit facility.
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<PAGE> 40
Our future capital requirements will depend upon many factors, including
the progress of our research and development efforts, expansion of our marketing
efforts, the nature and timing of orders and the ability to improve the
financial results of the Satellite Networks Business. We believe that our
current cash balances and net cash expected to be provided by operating
activities will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months. We invest our cash in
excess of current operating requirements in short-term, interest-bearing,
investment-grade securities. Our working capital requirements are likely to
increase as a result of the acquisition of the Satellite Networks Business.
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<PAGE> 41
SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for the fair
statement of the results for the interim periods. Summarized quarterly data for
fiscal years 1999 and 2000 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1999
<S> <C> <C> <C> <C>
Revenues $16,304 $18,037 $18,928 $18,240
Gross profit 6,472 6,809 6,527 7,519
Income from operations 2,177 2,127 2,485 2,806
Net income 1,389 1,377 1,657 1,873
Basic net income per share 0.18 0.17 0.21 0.23
Diluted net income per share 0.17 0.17 0.20 0.23
2000
Revenues $17,035 $17,017 $18,041 $23,787
Gross profit 7,326 7,459 7,548 7,990
Income from operations 2,788 2,736 2,616 3,324
Net income 1,805 1,804 2,007 2,290
Basic net income per share 0.22 0.22 0.25 0.28
Diluted net income per share 0.22 0.22 0.23 0.26
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risks at March 31, 2000, pursuant to Item 7A are minimal and
therefore are not separately disclosed.
ITEM 8. FINANCIAL STATEMENTS
Our financial statements at March 31, 2000 and 1999, and for each of the
three years in the period ended March 31, 2000, and the Report of
PricewaterhouseCoopers LLP, Independent Accountants, are included in this Report
on pages F-1 through F-14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth under the
captions "Election of Directors" and "Executive Officers" in our definitive
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with our 2000 Annual Meeting of Stockholders (the "Proxy Statement"),
which is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Certain Transactions."
39
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
(a) Documents filed as part of the report:
(1) Report of Independent Accountants F-1
Balance Sheet as of March 31, 1999 and 2000 F-2
Statement of Income for the years ended March 31, 1998,
1999 and 2000 F-3
Statement of Cash Flows for the years ended March 31,
1998, 1999 and 2000 F-4
Statement of Stockholders' Equity for the years ended
March 31, 1998, 1999 and 2000 F-5
Notes to Financial Statements F-6
</TABLE>
(2) Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
2.1 Asset Purchase Agreement, dated January 18, 2000, by and between
the Company and Scientific-Atlanta, Inc.(1)
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 Bylaws.(2)
4.1 Form of Common Stock Certificate.(2)
10.1 Warrants to purchase shares of common stock of the Company issued
to Scientific-Atlanta, Inc.(3)
10.2 Form of Invention and Confidential Disclosure Agreement by and
between the Company and each employee of the Company.(2)
10.3 ViaSat, Inc. 1993 Stock Option Plan (the "1993 Stock Option
Plan").(2)
10.4 First Amendment to the 1993 Stock Option Plan.(4)
10.5 Form of Incentive Stock Option Agreement under the 1993 Stock
Option Plan.(2)
10.6 Form of Nonqualified Stock Option Agreement under the 1993 Stock
Option Plan.(2)
10.7 The 1996 Equity Participation Plan of ViaSat, Inc. (the "1996
Equity Participation Plan").(5)
10.8 Form of Incentive Stock Option Agreement under the 1996 Equity
Participation Plan.(2)
10.9 Form of Nonqualified Stock Option Agreement under the 1996 Equity
Participation Plan.(2)
10.10 The ViaSat, Inc. Employee Stock Purchase Plan.(2)
10.11 ViaSat, Inc. 401(k) Profit Sharing Plan.(2)
10.12 Loan Agreement, dated as of September 15, 1995, by and between
the Company and Union Bank.(2)
10.13 Waiver and First Amendment to Loan Agreement, dated as of March
31, 1997, by and between the Company and Union Bank.(2)
10.14 Lease, dated March 24, 1998, by and between W9/LNP Real Estate
Limited Partnership and the Company (6155 El Camino Real,
Carlsbad, California).(6)
10.15 Supply & Services Contract, dated June 2, 1996, by and between
HCL Comnet Systems and Services Limited and the Company.(2)
10.16 Award/Contract, effective March 29, 1996, as amended, issued by
Electronic Systems Center/MCK Air Force Materiel Command, USAF to
the Company.(2)
10.17 Amendment of Award/Contract, effective February 24, 1997, issued
by Electronic
</TABLE>
40
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
Systems Center/MCK Air Force Materiel Command, USAF to the
Company.(4)
10.18 Award/Contract, effective October 2, 1995, issued by
Electronic Systems Center/MCK Air Force Materiel Command,
USAF to the Company.(2)
10.19 Award/Contract, effective September 29, 1993, as amended, issued
by Information Technology Acquisition Center to the Company.(2)
10.20 Award Contract, effective September 21, 1994, as amended, issued
by Technical Contract Management Office to the Company.(2)
10.21 Amendment to Lease, dated January 4, 1999, by and between
Prentiss Properties Acquisition Partners, L.P. and the Company
(The Campus, Carlsbad, California).(7)
10.22 Amendment to Lease, dated January 4, 1999, by and between
Prentiss Properties Acquisition Partners, L.P. and the Company
(5962 La Place Court, Carlsbad, California).(7)
10.23 Lease, dated June 18, 1999, by and between Nagog Development
Company and the Company (125 Nagog Park, Acton, Massachusetts,
01720).(8)
21.1 Subsidiaries.(8)
23.1 Consent of Independent Accountants.(8)
27.1 Financial Data Schedule.(8)
</TABLE>
----------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission (the
"Commission") on March 6, 2000 (File No. 333-31758), as amended by
Amendment No. 1 filed with the Commission on March 31, 2000 and
Amendment No. 2 filed with the Commission on April 18, 2000.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1 filed with the Commission on October 1, 1996 (File No.
333-13183), as amended by Amendment No. 1 filed with the Commission on
November 5, 1996, Amendment No. 2 filed with the Commission on November
20, 1996, and Amendment No. 3 filed with the Commission on November 22,
1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Commission on May 8, 2000 (File No. 0-21767).
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997.
(5) Incorporated by reference to Exhibit A to the Company's Proxy Statement
relating to its 1998 Annual Meeting of Stockholders.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1998.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1999.
(8) Filed herewith.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed with the Commission on January
19, 2000 regarding the Company's acquisition of the Satellite Networks Business
from Scientific-Atlanta.
41
<PAGE> 45
(c) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(3).
42
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 28, 2000
ViaSat, Inc.
By: /s/ MARK D. DANKBERG
------------------------------
Mark D. Dankberg
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MARK D. DANKBERG Chairman of the Board, June 28, 2000
--------------------------------- President and Chief
Mark D. Dankberg Executive Officer (Principal
Executive Officer)
/s/ RICHARD BALDRIDGE Executive Vice President, June 28, 2000
--------------------------------- Chief Financial Officer
Richard Baldridge and Chief Operating Officer
(Principal Financial and
Accounting Officer)
/s/ ROBERT W. JOHNSON Director June 28, 2000
---------------------------------
Robert W. Johnson
/s/ JEFFREY M. NASH Director June 28, 2000
---------------------------------
Jeffrey M. Nash
/s/ B. ALLEN LAY Director June 28, 2000
---------------------------------
B. Allen Lay
/s/ JAMES F. BUNKER Director June 28, 2000
---------------------------------
James F. Bunker
/s/ WILLIAM A. OWENS Director June 28, 2000
---------------------------------
William A. Owens
</TABLE>
43
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ViaSat, Inc.
In our opinion, the accompanying balance sheet and the related
statements of income, of cash flows, of stockholders' equity present fairly, in
all material respects, the financial position of ViaSat, Inc., at March 31, 1999
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
May 16, 2000
F-1
<PAGE> 48
VIASAT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, MARCH 31,
1999 2000
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 6,005,000 $19,520,000
Short-term investments ............................................ 14,788,000 121,000
Accounts receivable ............................................... 16,176,000 26,268,000
Inventory ......................................................... 2,525,000 3,122,000
Deferred income taxes ............................................. 2,358,000 1,813,000
Other current assets .............................................. 446,000 2,167,000
----------- -----------
Total current assets ......................................... 42,298,000 53,011,000
Property and equipment, net ......................................... 6,630,000 8,164,000
Other assets ........................................................ 1,088,000 755,000
----------- -----------
Total assets ................................................. $50,016,000 $61,930,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 3,754,000 $ 8,934,000
Accrued liabilities ............................................... 6,027,000 5,001,000
Current portion of notes payable .................................. 1,219,000 907,000
----------- -----------
Total current liabilities .................................... 11,000,000 14,842,000
----------- -----------
Notes payable ....................................................... 1,243,000 336,000
Other liabilities ................................................... 926,000 755,000
----------- -----------
Total long-term liabilities .................................. 2,169,000 1,091,000
----------- -----------
Commitments and contingencies (Notes 10 & 11)
Stockholders' equity:
Series A, convertible preferred stock, $.0001 par value; 5,000,000
shares authorized; no shares issued and outstanding at March 31,
1999 and 2000, respectively
Common stock, $.0001 par value, 25,000,000 shares
authorized; 8,034,203 and 8,196,604 shares issued and
outstanding at March 31, 1999 and 2000, respectively ........... 1,000 1,000
Paid in capital ................................................... 17,689,000 18,933,000
Retained earnings ................................................. 19,157,000 27,063,000
----------- -----------
Total stockholders' equity ................................... 36,847,000 45,997,000
----------- -----------
Total liabilities and stockholders' equity ................... $50,016,000 $61,930,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 49
VIASAT, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenues ............................................... $ 64,197,000 $ 71,509,000 $ 75,880,000
Cost of revenues ....................................... 40,899,000 44,182,000 45,557,000
------------ ------------ ------------
Gross profit ......................................... 23,298,000 27,327,000 30,323,000
Operating expenses:
Selling, general and administrative .................. 7,862,000 10,093,000 11,269,000
Independent research and development ................. 7,631,000 7,639,000 7,590,000
------------ ------------ ------------
Income from operations ................................. 7,805,000 9,595,000 11,464,000
Other income (expense):
Interest income ...................................... 797,000 834,000 1,070,000
Interest expense ..................................... (211,000) (250,000) (157,000)
------------ ------------ ------------
Income before income taxes ............................. 8,391,000 10,179,000 12,377,000
Provision for income taxes ............................. 3,104,000 3,883,000 4,471,000
------------ ------------ ------------
Net income ............................................. $ 5,287,000 $ 6,296,000 $ 7,906,000
============ ============ ============
Basic net income per share ............................. $ 0.68 $ 0.79 $ 0.98
============ ============ ============
Diluted net income per share ........................... $ 0.65 $ 0.77 $ 0.91
============ ============ ============
Shares used in computing basic net income per share .... 7,801,212 7,976,848 8,096,500
============ ============ ============
Shares used in computing diluted net income per share .. 8,174,994 8,172,660 8,711,222
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 50
VIASAT, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 5,287,000 $ 6,296,000 $ 7,906,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation .............................................. 2,182,000 2,853,000 3,292,000
Deferred income taxes ..................................... (811,000) (1,082,000) 843,000
Increase (decrease) in cash resulting from changes in:
Accounts receivable ....................................... (8,741,000) 2,880,000 (10,092,000)
Inventory ................................................. (209,000) 2,162,000 (597,000)
Other assets .............................................. 1,078,000 46,000 (1,686,000)
Accounts payable .......................................... (289,000) (801,000) 5,180,000
Accrued liabilities ....................................... 1,318,000 940,000 (1,026,000)
Other liabilities ......................................... 58,000 (11,000) (171,000)
------------ ------------ ------------
Net cash provided by (used in) operating
activities ........................................... (127,000) 13,283,000 3,649,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of short-term investments, net ..................... (5,918,000) (8,870,000) 14,667,000
Purchases of property and equipment .......................... (4,083,000) (2,497,000) (4,826,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities ..... (10,001,000) (11,367,000) 9,841,000
------------ ------------ ------------
Cash flows from financing activities:
Tax benefit from exercise of stock options ................... -- 82,000 68,000
Proceeds from issuance of notes payable ...................... 1,448,000 1,092,000 --
Repayment of notes payable ................................... (1,407,000) (1,234,000) (1,219,000)
Proceeds from issuance of common stock ....................... 704,000 859,000 1,176,000
------------ ------------ ------------
Net cash provided by financing
activities ........................................... 745,000 799,000 25,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents .................................................. (9,383,000) 2,715,000 13,515,000
Cash and cash equivalents at beginning of year ................. 12,673,000 3,290,000 6,005,000
------------ ------------ ------------
Cash and cash equivalents at end of year ....................... $ 3,290,000 $ 6,005,000 $ 19,520,000
============ ============ ============
Supplemental information:
Cash paid for interest ....................................... $ 211,000 $ 250,000 $ 157,000
============ ============ ============
Cash paid for income taxes ................................... $ 3,857,000 $ 4,263,000 $ 4,349,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 51
VIASAT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------- -----------------------------
NUMBER OF NUMBER OF PAID IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 ..................... -- -- 7,742,273 1,000 16,124,000
Exercise of stock options ................... 126,273 149,000
Issuance for Employee Stock Purchase Plan ... 52,092 475,000
Payment for shares subscribed ...............
Net income ..................................
------------- ------------- ------------- ------------- -------------
Balance at March 31, 1998 ..................... -- -- 7,920,638 1,000 16,748,000
Tax benefit from exercise of stock options .. 82,000
Exercise of stock options ................... 60,481 334,000
Issuance for Employee Stock Purchase Plan ... 53,084 525,000
Net income ..................................
------------- ------------- ------------- ------------- -------------
Balance at March 31, 1999 ..................... -- -- 8,034,203 1,000 17,689,000
Tax benefit from exercise of stock options .. 68,000
Exercise of stock options ................... 114,224 681,000
Issuance for Employee Stock Purchase Plan ... 48,177 495,000
Net income ..................................
------------- ------------- ------------- ------------- -------------
Balance at March 31, 2000 ..................... -- -- 8,196,604 $ 1,000 $ 18,933,000
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS'
NOTES RETAINED
RECEIVABLE EARNINGS
------------- -------------
<S> <C> <C>
Balance at March 31, 1997 ..................... (80,000) 7,574,000
Exercise of stock options ...................
Issuance for Employee Stock Purchase Plan ...
Payment for shares subscribed ............... 80,000
Net income .................................. 5,287,000
------------- -------------
Balance at March 31, 1998 ..................... -- 12,861,000
Tax benefit from exercise of stock options ..
Exercise of stock options ...................
Issuance for Employee Stock Purchase Plan ...
Net income .................................. 6,296,000
------------- -------------
Balance at March 31, 1999 ..................... -- 19,157,000
Tax benefit from exercise of stock options ..
Exercise of stock options ...................
Issuance for Employee Stock Purchase Plan ...
Net income .................................. 7,906,000
------------- -------------
Balance at March 31, 2000 ..................... -- $ 27,063,000
============= =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 52
VIASAT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
ViaSat, Inc. (the "Company") designs, produces and markets advanced
digital satellite telecommunications and wireless signal processing equipment.
Management Estimates and Assumptions
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 reported amounts of revenues and expenses during the reporting
period. Estimates have been prepared on the basis of the most current and best
available information and actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less.
Short-term Investments
At March 31, 1999 and 2000, the Company held investments in investment
grade debt securities with various maturities. Management determines the
appropriate classification of its investments in debt securities at the time of
purchase and has designated all of its investments as held to maturity. The
Company's investments in these securities as of March 31, 1999 and 2000 totaled
$18,686,000 and $16,769,000, respectively. The Company has included $3,898,000
and $16,648,000 of these securities in cash and cash equivalents as of March 31,
1999 and 2000, respectively, as they have original maturities of less than 90
days. The remaining $14,788,000 and $121,000 as of March 31, 1999 and 2000,
respectively, have been classified as short-term investments.
Revenue Recognition
The majority of the Company's revenues are derived from services
performed under a variety of contracts including cost-plus-fixed fee,
fixed-price, and time and materials contracts. Revenues from the United States
Government Department of Defense and its prime contractors amounted to
$58,249,000, $65,478,000 and $53,859,000 for the years ended March 31, 1998,
1999 and 2000, respectively. Revenues from commercial customers amounted to
$5,941,000, $3,836,000, and $18,409,000 for the years ended March 31, 1998, 1999
and 2000 respectively. Revenues to customers in foreign countries are not
significant. The Company's five largest contracts (by revenues) generated
approximately 65%, 61% and 35% of the Company's total revenues for the fiscal
year ended March 31, 1998, 1999 and 2000, respectively.
Generally, revenues are recognized as services are performed using the
percentage of completion method, measured primarily by costs incurred to date
compared with total estimated costs at completion or based on the number of
units delivered. The Company provides for anticipated losses on contracts by a
charge to income during the period in which they are first identified.
Contract costs, including indirect costs, are subject to audit and
negotiations with Government representatives. These audits have been completed
and agreed upon through fiscal year 1996. Contract
F-6
<PAGE> 53
revenues and accounts receivable are stated at amounts which are expected to be
realized upon final settlement.
Unbilled Accounts Receivable
Unbilled receivables consist of costs and fees earned and billable on
contract completion or other specified events. The majority of unbilled
receivables is expected to be collected within one year.
Concentration of Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash equivalents,
short-term investments, and trade accounts receivable which are generally not
collateralized. The Company limits its exposure to credit loss by placing its
cash equivalents and short-term investments with high credit quality financial
institutions and investing in high quality short-term debt instruments.
Concentrations of credit risk with respect to receivables are generally limited
because the Company performs ongoing credit evaluations. The Company also
maintains reserves for potential credit losses, which it considers adequate to
cover such losses.
The Company relies on a limited number of contract manufacturers to
produce its products.
Inventory
Inventory is valued at the lower of cost or market, cost being
determined by the first-in, first-out method.
Independent research and development
Independent research and development, which is not directly funded by a
third party, is expensed as incurred. Independent research and development
expenses consist primarily of salaries and other personnel-related expenses,
supplies and prototype materials related to research and development programs.
Software product development costs incurred from the time technological
feasibility is reached until the product is available for general release to
customers are capitalized and reported at the lower of cost or net realizable
value. Through March 31, 2000, no significant amounts were incurred subsequent
to reaching technological feasibility.
Property and Equipment
Equipment, computers, and furniture and fixtures are recorded at cost,
and depreciated over estimated useful lives of three to seven years using the
straight-line method. Additions to property and equipment together with major
renewals and betterments are capitalized. Maintenance, repairs and minor
renewals and betterments are charged to expense. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts and any resulting gain or loss is
recognized.
Long-lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future undiscounted net cash flows is less than the
carrying amount of the asset. No such impairment losses have been identified by
the Company.
Warranty Reserves
F-7
<PAGE> 54
The Company provides limited warranties on certain of its products for
periods of up to three years. The Company records warranty reserves when
products are shipped based upon an estimate of total warranty costs, with
amounts expected to be incurred within twelve months classified as a current
liability.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future tax consequences resulting from differences
in the financial reporting and tax bases of assets and liabilities and for the
expected future tax benefit to be derived from tax credit and loss
carryforwards. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred income tax expense
(benefit) is the net change during the year in the deferred income tax asset or
liability.
Stock Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value method had
been applied in measuring compensation expense.
Earnings Per Share
Basic earnings per share is computed based upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is based upon the weighted average number of common shares outstanding and
dilutive common stock equivalents during the period. Common stock equivalents
include options granted under the Company's stock option plans which are
included in the earnings per share calculations using the treasury stock method
and common shares expected to be issued under the Company's employee stock
purchase plan
Fair Value of Financial Instruments
At March 31, 2000, the carrying amounts of the Company's financial
instruments, including cash equivalents, short-term investments, trade
receivables and accounts payable, approximated their fair values due to their
short-term maturities. At March 31, 2000, the estimated fair value of the
Company's long-term debt approximated its carrying value, as a majority of the
related borrowing rates are variable.
Segment Reporting
Operating segments are determined consistent with the way that
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. The Company operates in one
segment.
NOTE 2 -- COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
AS OF MARCH 31,
-------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Cash and cash equivalents:
Investments in debt securities .......... $ 3,898,000 $ 16,648,000
Cash .................................... 2,107,000 2,872,000
------------ ------------
$ 6,005,000 $ 19,520,000
============ ============
Accounts receivable:
Billed .................................. $ 7,765,000 $ 13,031,000
Unbilled ................................ 8,411,000 13,237,000
------------ ------------
$ 16,176,000 $ 26,268,000
============ ============
</TABLE>
F-8
<PAGE> 55
<TABLE>
<S> <C> <C>
Inventory:
Raw materials ........................... $ 914,000 $ 2,263,000
Work in process ......................... 1,157,000 484,000
Finished goods .......................... 454,000 375,000
------------ ------------
$ 2,525,000 $ 3,122,000
============ ============
Property and equipment:
Machinery and equipment ................. $ 9,249,000 $ 11,602,000
Computer equipment ...................... 4,179,000 5,642,000
Furniture and fixtures .................. 326,000 877,000
------------ ------------
13,754,000 18,121,000
Less accumulated depreciation ........... (7,124,000) (9,957,000)
------------ ------------
$ 6,630,000 $ 8,164,000
============ ============
Accrued liabilities:
Current portion of warranty reserve ..... $ 1,440,000 $ 799,000
Accrued vacation ........................ 1,143,000 1,188,000
Accrued bonus ........................... 1,195,000 1,004,000
Accrued 401(k) matching contribution .... 791,000 917,000
Income taxes payable .................... 694,000 --
Collections in excess of revenues ....... 527,000 694,000
Other ................................... 237,000 399,000
------------ ------------
$ 6,027,000 $ 5,001,000
============ ============
</TABLE>
NOTE 3 -- SHORT-TERM BANK BORROWINGS
The Company's credit facilities, including the line of credit and
commitment for future equipment financing, expired on December 15, 1998. The
Company has received a commitment from Union Bank of California and Washington
Mutual Bank to provide a secured revolving credit facility of $25 million for
general working capital. ViaSat is in the process of negotiating the terms of
this commitment.
NOTE 4 -- NOTES PAYABLE
<TABLE>
<CAPTION>
AS OF MARCH 31,
-----------------------------
1999 2000
----------- -----------
<S> <C> <C>
Bank installment loans, with various maturity dates through
September 2001, total monthly payments of $86,000 with
interest rates ranging between 8% and 9%, collateralized by
equipment ................................................... $ 2,462,000 $ 1,243,000
----------- -----------
Less current portion .......................................... (1,219,000) (907,000)
----------- -----------
$ 1,243,000 $ 336,000
=========== ===========
</TABLE>
Principal maturities of notes payable as of March 31, 2000 are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------
<S> <C>
2001 .......... 907,000
2002 .......... 336,000
----------
$1,243,000
==========
</TABLE>
NOTE 5 -- COMMON STOCK AND OPTIONS
In July 1993, the Company adopted the 1993 Stock Option Plan (the
"Plan") which authorizes 733,500 shares to be granted no later than July 2003.
The Plan provides for the grant of both incentive stock options and
non-qualified stock options which are subject to a three-year vesting period.
The exercise prices of the options represent the estimated fair value of the
Company's common stock as determined by the Company's Board of Directors. In
November 1996, the Plan was terminated and replaced by the 1996 Equity
Participation Plan. No options have been issued under the Plan since July 1996.
F-9
<PAGE> 56
In November 1996, the Company adopted the ViaSat, Inc. 1996 Equity
Participation Plan (the "1996 Equity Participation Plan") designed to update and
replace the 1993 Stock Option Plan. The 1996 Equity Participation Plan provides
for the grant to executive officers, other key employees, consultants and non-
employee directors of the Company a broad variety of stock-based compensation
alternatives such as nonqualified stock options, incentive stock options,
restricted stock and performance awards. A maximum of 1,250,000 shares are
reserved for issuance under the 1996 Equity Participation Plan. As of March 31,
2000, the Company had granted options to purchase 1,194,250 shares of common
stock under this plan with vesting terms of 3 to 5 years.
In November 1996, the Company adopted the ViaSat, Inc. Employee Stock
Purchase Plan (the "Employee Stock Purchase Plan") to assist employees in
acquiring a stock ownership interest in the Company and to encourage them to
remain in the employment of the Company. The Employee Stock Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code. A maximum of
500,000 shares of common stock are reserved for issuance under the Employee
Stock Purchase Plan. The Employee Stock Purchase Plan permits eligible employees
to purchase common stock at a discount through payroll deductions during
specified six-month offering periods. No employee may purchase more than $25,000
worth of stock in any calendar year. The price of shares purchased under the
Employee Stock Purchase Plan is equal to 85% of the fair market value of the
common stock on the first or last day of the offering period, whichever is
lower. As of March 31, 2000, the Company has issued 153,353 shares of common
stock under this plan.
Transactions under the Company's stock option plans are summarized as
follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
---------- --------------
<S> <C> <C>
Outstanding at March 31, 1997........... 527,018 .34 - 10.75
Options granted......................... 269,450 12.25 - 19.81
Options canceled........................ (13,511) .48 - 12.75
Options exercised....................... (126,273) .34 - 4.09
----------
Outstanding at March 31, 1998........... 656,684 .34 - 19.81
Options granted......................... 324,000 7.38 - 17.08
Options canceled........................ (109,908) 1.36 - 15.53
Options exercised....................... (60,480) .34 - 14.13
----------
Outstanding at March 31, 1999........... 810,296 .48 - 19.81
Options granted......................... 425,800 8.50 - 87.63
Options canceled........................ (32,471) 4.09 - 15.53
Options exercised....................... (114,224) .48 - 19.81
----------
Outstanding at March 31, 2000........... 1,089,401 1.36 - 87.63
==========
</TABLE>
The following table summarizes all options outstanding and exercisable
by price range as of March 31, 2000:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
-------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 1.36 - 8.50 225,040 3.57 $ 5.70 114,380 $ 3.41
9.00 - 11.72 282,300 8.29 10.80 79,204 10.00
12.25 - 15.13 193,375 7.14 13.36 90,027 13.10
15.25 - 16.13 195,286 8.03 15.55 42,648 15.53
16.41 - 52.31 183,400 7.48 42.44 15,168 17.07
71.25 - 87.63 10,000 5.42 81.22 0 0.00
---------- ----------
1.36 - 87.63 1,089,401 6.90 17.03 341,427 9.61
========== ==========
</TABLE>
F-10
<PAGE> 57
NOTE 6 -- SHARES USED IN EARNINGS PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding used
in calculating basic net income per share ............... 7,801,212 7,976,848 8,096,500
Weighted average options to purchase common
stock as determined by application of the
treasury stock method ................................... 360,118 185,452 611,585
Employee Stock Purchase Plan equivalents ................... 13,664 10,360 3,137
--------- --------- ---------
Shares used in computing diluted net income per share ...... 8,174,994 8,172,660 8,711,222
========= ========= =========
</TABLE>
Antidilutive shares excluded from the calculation were 18,493, 420,735,
and 30,420 shares for the fiscal years ended March 31, 1998, 1999, and 2000
respectively.
NOTE 7 -- PRO FORMA EARNINGS PER SHARE
The fair values of options granted during the years ended as reported
below were estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
-------------------------------------- -----------------------------------
1998 1999 2000 1998 1999 2000
---------- ---------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years) ... 3.50-5.50 3.50-5.00 4.99-5.00 0.50 0.50 0.50
Risk-free interest rate .... 5.65-5.68% 4.46-5.42% 5.69% 5.54% 5.66-6.22% 5.55%
Expected volatility ........ 50.00% 50.00% 71.00% 50.00% 50.00% 71.00%
Expected dividend yield .... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
The weighted average estimated fair value of employee stock options
granted during 1998, 1999, and 2000 was $6.30, $6.27, and $16.61 per share,
respectively. The weighted average estimated fair value of shares granted under
the Employee Stock Purchase Plan during 1998, 1999 and 2000 was $4.00, $4.00 and
$5.43 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the vesting period. The Company's pro forma
information for the years ended March 31, 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Net income as reported ................. $ 5,287,000 $ 6,296,000 $ 7,906,000
Pro forma net income ................... 4,489,000 5,157,000 5,974,000
Pro forma basic earnings per share ..... 0.58 0.65 0.74
Pro forma diluted earnings per share ... 0.56 0.65 0.70
</TABLE>
F-11
<PAGE> 58
NOTE 8 -- INCOME TAXES
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Current tax provision
Federal ................................. $ 3,200,000 $ 3,977,000 $ 2,947,000
State ................................... 715,000 988,000 681,000
----------- ----------- -----------
3,915,000 4,965,000 3,628,000
----------- ----------- -----------
Deferred tax (benefit) provision
Federal ................................. (683,000) (863,000) 680,000
State ................................... (128,000) (219,000) 163,000
----------- ----------- -----------
(811,000) (1,082,000) 843,000
----------- ----------- -----------
Total provision for income taxes ... $ 3,104,000 $ 3,883,000 $ 4,471,000
=========== =========== ===========
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------
1999 2000
---------- ----------
<S> <C> <C>
Deferred tax assets:
Warranty reserve ................ $ 706,000 $ 418,000
Inventory ....................... 1,377,000 820,000
Accrued vacation ................ 396,000 374,000
State income taxes .............. 335,000 231,000
Depreciation .................... 186,000 307,000
Other ........................... 151,000 158,000
---------- ----------
Total deferred tax assets ....... $3,151,000 $2,308,000
========== ==========
</TABLE>
A reconciliation of the provision for income taxes to the amount
computed by applying the statutory federal income tax rate to income before
income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at statutory rate .................... $ 2,853,000 $ 3,461,000 $ 4,208,000
State tax provision, net of federal benefit ...... 388,000 507,000 558,000
Research tax credit .............................. (179,000) (67,000) (240,000)
Other ............................................ 42,000 (18,000) (55,000)
----------- ----------- -----------
$ 3,104,000 $ 3,883,000 $ 4,471,000
=========== =========== ===========
</TABLE>
NOTE 9 -- EMPLOYEE BENEFITS
The Company has a voluntary deferred compensation plan under Section
401(k) of the Internal Revenue Code. The Company may make discretionary
contributions to the plan which vest equally over six years. Employees who have
completed 90 days of service and are at least 21 years of age are eligible to
participate in the plan. Participants are entitled, upon termination or
retirement, to their vested portion of the plan assets which are held by an
independent trustee. Discretionary contributions accrued by the Company during
fiscal years 1998, 1999 and 2000 amounted to $671,000, $791,000 and $917,000,
respectively. The cost of administering the plan is not significant.
F-12
<PAGE> 59
NOTE 10 -- COMMITMENTS
The Company leases office facilities under noncancelable operating
leases with initial terms ranging from one to ten years which expire between
June 2002 and December 2009. Certain of the Company's facilities leases contain
option provisions which allow for extension of the lease terms. Rent expense,
which is recognized on a straight-line basis, was $1,079,000, $1,312,000 and
$1,939,000 in fiscal years 1998, 1999 and 2000, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------
<S> <C>
2001.......................................... $ 2,422,000
2002.......................................... 2,390,000
2003.......................................... 2,380,000
2004.......................................... 2,380,000
2005.......................................... 2,380,000
Thereafter.................................... 11,106,000
--------------
$ 23,058,000
==============
</TABLE>
NOTE 11 -- CONTINGENCIES
The Company is currently a party to various government and commercial
contracts which require the Company to meet performance covenants and project
milestones. Under the terms of these contracts, failure by the Company to meet
such performance covenants and milestones permit the other party to terminate
the contract and, under certain circumstances, recover liquidated damages or
other penalties. The Company is currently not in compliance (or in the past was
not in compliance) with the performance or milestone requirements of certain of
these contracts. Historically, the Company's customers have not elected to
terminate such contracts or seek liquidated damages from the Company and
management does not believe that its existing customers will do so; therefore,
the Company has not accrued for any potential liquidated damages or penalties.
F-13
<PAGE> 60
NOTE 12 -- SUBSEQUENT EVENT
On April 24, 2000, the Company completed a secondary stock offering for
the sale of 2,612,075 shares of common stock for net proceeds of approximately
$73,000,000.
On April, 25, 2000, the Company completed the acquisition of the
satellite networks business (the "Satellite Networks Business") of
Scientific-Atlanta, Inc. for an aggregate purchase price of approximately
$59,000,000 in cash (including post-closing adjustments), plus warrants to
purchase 50,000 shares of common stock valued at approximately $1,215,000.
The Satellite Networks Business is a significant DAMA-based VSAT
supplier with additional product lines addressing the non-DAMA VSAT market, the
gateway market, the asset tracking and meter reading market, and the telemetry
and antenna systems market. In addition, the Satellite Networks Business brings
the Company a larger and more experienced commercial sales force, a significant
customer base, additional research and development, and engineering
capabilities. The Company has moved the headquarters of our commercial business
to the Satellite Networks Business facilities in Norcross, Georgia.
The acquisition will be accounted for by the purchase method of
accounting as defined in APB Opinion No. 16. Under purchase accounting, the
total purchase price will be allocated to the tangible and intangible assets and
liabilities of the Satellite Networks Business based on valuations and other
studies which are not yet available. We have not made a final determination as
to the value of the Satellite Networks Business's in-process research and
development, if any. To the extent that a portion of the purchase price would be
allocated to in-process research and development, generally accepted accounting
principles would require that this amount be written off as a one-time charge to
operations. Consequently, the amounts reflected in the pro forma financial
statements are subject to change, and the final amounts may differ
significantly.
The following unaudited pro forma condensed combined financial
information give effect to the acquisition as of April 1, 1999. Because the
Satellite Networks Business has been operated as a division of
Scientific-Atlanta, its results may not reflect those that would have resulted
had it operated as an independent or as a part of ViaSat. The pro forma
information does not reflect (1) the effects of the anticipated post-acquisition
cost savings or restructuring efficiencies or (2) any interest income
attributable to the net cash proceeds of this offering not utilized for the
acquisition. When reviewing the following pro forma information, you should note
that:
- The pro forma condensed combined financial information combines ViaSat's
income statement for its fiscal year ended March 31, 2000 with the Satellite
Network Business' unaudited income statement for the twelve months ended
March 31, 2000.
<TABLE>
<CAPTION>
Year Ended
March 31, 2000
(in thousands, except per share data) (unaudited)
-----------
<S> <C>
Revenues.................................... $ 162,280
Net Income.................................. 1,270
Earnings per share
Basic..................................... $ .12
Diluted................................... $ .11
Weighted average number of shares*
Basic..................................... 10,708,575
Diluted................................... 11,323,297
</TABLE>
* The weighted average number of shares include the 2,612,075 shares issued in
the secondary stock offering.
The unaudited pro forma financial information presented is not necessarily
indicative of either the results of operations that would have occurred had the
acquisition taken place on April 1, 1999 or the future results of operations of
the combined entities.
F-14
<PAGE> 61
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
ALLOWANCE
FOR WARRANTY
DATE COSTS
---- -------------
<S> <C>
Balance, March 31, 1997....................................... $ 1,316,000
Provision............................................ 1,048,000
Write-off............................................ (510,000)
-----------
Balance, March 31, 1998....................................... 1,854,000
Provision............................................ 624,000
Write-off............................................ (707,000)
-----------
Balance, March 31, 1999....................................... 1,771,000
Provision............................................ 66,000
Write-off............................................ (788,000)
-----------
Balance, March 31, 2000 $ 1,049,000
===========
</TABLE>
