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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, 1997
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)
DELAWARE 33-0174996
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2290 COSMOS COURT, CARLSBAD, CALIFORNIA 92009
(760) 438-8099
(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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, as of June 16, 1997 was approximately $59,409,099 (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 16, 1997 was 7,745,041.
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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 the 1997 Annual Meeting are incorporated herein 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, 1997.
Certain Exhibits filed with the registrant's Registration Statement on
Form S-1 (File No. 333-13183), as amended, 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, 1997
INDEX
PART I Page
----
Item 1. Business 1
Item 2. Properties 28
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market for the Registrants Common Stock and Related Stockholder Matters 29
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 31
Item 8. Financial Statements 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 35
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 37
Glossary of Selected Terms 40
Signatures 42
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. ViaSat, Inc. ("ViaSat" or the "Company") future results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not specifically limited to,
timely product development, variation of royalty, license and other revenues,
failure to satisfy performance obligations, uncertainty regarding the Company's
patents and property rights (including the risk that the Company may be forced
to engage in costly litigation to protect such patents and rights and the
material adverse consequences to the Company if there were unfavorable outcome
of any such litigation), difficulties in obtaining components needed for the
production of wireless equipment and changes in economic conditions of various
markets the Company serves, as well as the other risks detailed in this section,
in particular under the heading Risk Factors. See "Glossary of Selected Terms"
for definitions of certain terms used in this Report.
INTRODUCTION
ViaSat designs, produces and markets advanced digital satellite
telecommunications and wireless signal processing equipment. The Company has
achieved eleven consecutive years of internally generated revenue growth and ten
consecutive years of profitability, primarily through defense-related
applications. More recently, the Company has been developing and marketing its
technology through strategic alliances for emerging commercial markets, such as
rural telephony, alternative carrier access and Internet/Intranet access by
satellite to multiple servers. ViaSat is a leading provider of Demand Assigned
Multiple Access ("DAMA") technology, which allows a large number of Very Small
Aperture Terminal ("VSAT") subscribers to economically share common satellite
transponders for high-performance voice, fax or data communications.
The Company believes that DAMA satellite technology is superior to other
existing VSAT networking technologies for many important applications. The
existing Time Division Multiplex/Time Division Multiple Access ("TDM/TDMA")
networking technology features a "hub and spoke" architecture which requires all
transmissions to be routed through a central terrestrial hub. Unlike TDM/TDMA
systems, DAMA provides direct, on-demand switched networking capabilities which
do not require a terrestrial hub and allow faster and more efficient use of
expensive satellite transponder resources. In addition, the Company believes
that its DAMA products, commercially marketed under the tradename StarWire(TM),
offer greater network flexibility and permit up to 50% greater satellite
capacity than competing DAMA systems. See "-- The ViaSat Advantage" and "--
Technology."
ViaSat's DAMA products include satellite modems, networking processors and
network control systems for managing large numbers of network subscribers. The
Company's DAMA technology consists of proprietary real-time firmware and
software designed to run on industry-standard digital signal processors. The
Company also has developed DAMA network control software that operates on
IBM-compatible personal computers running Windows NT(TM) operating systems. The
Company's DAMA technology operates on satellites in the military UHF and SHF
frequency bands, and commercial C and Ku bands. In addition to DAMA products,
the Company offers network information security products, communications
simulation and test equipment, and spread spectrum digital radios for satellite
and terrestrial data networks.
RECENT DEVELOPMENTS
During the past year the Company has continued to demonstrate its
leadership in DAMA satellite networking. Communications products for the U.S.
Department of Defense and its prime contractors (collectively, the "DOD")
continue to lead the Company's growth, as they have for 11 years. In addition,
StarWire(TM) commercial network installations have reached India, Indonesia,
several locations in the Caribbean and Central America, Colombia, Hong Kong,
Brunei, Thailand, Bosnia, and Nigeria. Some specific highlights follow:
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- Installation, certification and commissioning of the DOD's 5 kHz DAMA
network controllers at Norfolk and Hawaii is complete, with
installations in Guam and Naples, Italy continuing in fiscal 1998.
- The EMUT UHF DAMA modem module received important government
certifications. More than 2,000 of these units have been delivered, and
the Company received a $20.9 million follow on order for additional
units, moving it into a dominant position in the government DAMA
equipment market.
- The Company won a $20 million, 3-year contract for two Joint
Communication Simulators.
- Hutchison Telecommunications' first equipment installations are
operational, with a network control site in Hong Kong and the first
network traffic terminal in Brunei. Two more traffic sites in Kuala
Lumpur, Malaysia and Pakistan, and a backup network control station in
Singapore are due to be installed in the summer of 1997. This
application offers cost-effective long distance telephone access across
Asia via single-hop thin-route connections among public network
carriers.
- StarWire(TM) distributor SCSI has inaugurated a network serving the
International Civil Aviation Organization (ICAO), an agency of the
United Nations that is responsible for worldwide air traffic control.
This network is using StarWire(TM) terminals to establish voice, data,
and radar communications among air traffic control sites in the
Caribbean and Central America.
- In May 1997 the Company and Nortel ("Northern Telecom") signed a
teaming agreement to jointly pursue fixed site and direct-to-home rural
satellite telephony network opportunities, initially in the
Asia-Pacific region. Nortel will contribute to this effort its
considerable expertise in design and deployment of large-scale digital
wireless and wireline networks. ViaSat will provide its advanced DAMA
satellite networking technology.
INDUSTRY BACKGROUND
A broad array of new consumer, business and government markets, as well as
the development of new technologies, have driven the significant expansion of
the wireless communications industry. In addition to common consumer
applications such as paging, cellular telephony and new Personal Communications
Services ("PCS"), there is a wide range of other specialized terrestrial- and
space-based wireless applications. Such wireless applications include government
fixed and mobile wireless networking and commercial fixed-site, switched
satellite services, ViaSat's principal lines of business. The growth in
software-intensive wireless equipment markets stems from, among other things,
increasing dependence on voice and data networks of all types, regulatory
reform, advances in technology, decreasing costs of equipment and services,
economic growth in developing nations, the increasing importance of
communications infrastructure as a catalyst of economic growth, and increasing
user acceptance of and confidence in wireless solutions. This growth in wireless
equipment markets corresponds to a transition away from mere point to point
radio links connecting remote or mobile users towards offering more
comprehensive wireless network services. Market demands for wireless services
are being addressed by both terrestrial- and satellite-based systems.
GOVERNMENT APPLICATIONS. Historically, the military has driven development
of many new wireless technologies -- 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
extended and increased in scale for broader non-defense use. Defense
applications of wireless technologies also have evolved over the same time
period. The break-up of the Soviet Union has caused a de-emphasis on strategic
missions and a shift towards more localized tactical roles such as
peace-keeping, counter-terrorism, counter-insurgency and drug enforcement. These
missions create new demands for rapidly deployable, mobile connectivity. Overall
reductions in the defense budget have led to a numerically smaller, more
technologically-advanced force structure. As a result, defense networks
increasingly build
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around real-time transmission of digital tactical data. Defense systems also are
adopting and extending low cost commercial technologies to meet their needs.
There has been a constantly shifting flow of technology between government
and commercial network applications. Both government and commercial users
developed fixed-site, long-haul applications. The government pioneered mobile
satellite terminals, as well as non-geosynchronous, high power and extremely
high frequency satellites. Commercial users adopted elements of these
technologies for Low Earth Orbit ("LEO") mobile telephony and high-powered
Direct Broadcast Satellite ("DBS") television systems. Now government agencies
are planning to integrate these technologies into still more advanced military
networks. Often, companies with both government and commercial expertise have
facilitated such technology transitions.
COMMERCIAL APPLICATIONS. The recent worldwide trend toward privatization
of public telephone operators and deregulation of local telephone ("local loop")
services has resulted in increased competition in the delivery of telephone
services from alternative access providers. Many of these new access providers,
such as long-distance telephone carriers, must install or upgrade infrastructure
to support basic and enhanced services. In addition, worldwide demand for basic
telephone service has grown, especially in developing countries. As new
infrastructure is established to deliver local telephone service, the technology
exists to provide cost-effective, satellite-based wireless transmission systems,
instead of a traditional wired approach, to connect subscribers to the public
telephone network.
A growing segment of the wireless communications industry involves VSATs,
which are communications systems utilizing fixed-site satellite terminals.
Historically, these systems were primarily designed for certain specific data
applications. But recent improvements in VSAT technology for satellite-based
wireless voice and data networks have led to their increasing use in a variety
of broader, higher system throughput commercial applications such as mobile and
rural telephony and more complicated data transmissions. Satellite telephony
systems are being utilized by developing countries that lack a terrestrial-based
telecommunication infrastructure, and which seek to provide telephone service
for large areas fairly rapidly and on a cost-effective basis. Additionally, even
where terrestrial systems exist, satellite systems are used to fill in coverage
for remote areas.
EVOLUTION OF VSAT TECHNOLOGY. The commercial VSAT business began with U.S.
customers who operated large, sophisticated private terrestrial networks using
TDM/TDMA technology. Customers such as chain retailers, hotels and auto dealers
operated private data networks with hundreds or thousands of sites and a high
flow of transactions from remote terminals to host mainframe computers for
credit card validations, point-of-sale data collection, reservations or similar
applications. Customers who used VSATs for data networking still relied on
terrestrial providers for telephone service and possibly other telecommunication
needs for their sites. Sales of such VSAT systems are often quite sensitive to
prices from telephone carriers for equivalent packet transaction services. Users
with large networks generally are the only ones who can justify the significant
one-time cost of a VSAT network management hub.
TDM/TDMA technology, while more established than DAMA technology, features
a "hub and spoke" architecture which requires all transmissions to be routed
through a central hub and is most useful for remote to mainframe network
connections. Remote-to-remote TDM/TDMA connections require two satellite hops.
DAMA is better suited for remote-to-remote connections than TDM/TDMA because the
voice quality is better and DAMA networks use expensive satellite transponders
more efficiently. DAMA satellite technology allows individual subscribers to
request links on demand directly to any other subscriber with a single satellite
hop. DAMA allows users to make exactly the connections needed, lasting only for
the duration of a voice call, fax, electronic mail or digital file transfer.
DAMA technology has been under development for many years by the DOD to serve
large networks of fixed and mobile subscribers sharing a limited amount of
satellite capacity, but is only recently being deployed in significant
quantities by the DOD.
The Company believes the opportunities for government and commercial
ground station equipment sales are increasing. The government is planning over
$1.0 billion in total UHF space segment expenditures for tactical
communications. DAMA is applicable to several different satellite bands,
including government
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UHF and SHF and commercial C, Ku and Ka bands. DAMA is also being used by
commercial customers who believe that it is better suited for their applications
than the earlier VSAT technologies.
THE VIASAT ADVANTAGE
In light of the limitations of the TDM/TDMA architecture, and the
magnitude of the potential market for primary telecommunications services
compared to the more limited market for data transaction services, ViaSat
believes that DAMA networks will better serve the emerging international market
for VSAT, voice and data services. Virtually all of the VSAT equipment makers
are now adding DAMA products to their line of products. This represents a
discontinuity in the VSAT market. VSAT vendors are now developing new
transmission waveforms, multiple access techniques, DAMA protocols, DAMA control
software, subscriber terminals and interface protocols to support the targeted
applications (voice, fax, dial-up data, video conferencing or others), which
creates an opportunity for new equipment suppliers such as the Company.
The Company believes that its DAMA-based products have technological
advantages over competing DAMA products in offering practical solutions for
telecommunications applications through several means:
FLEXIBILITY
Since communications networks are evolving so quickly, a system such as
the Company's that can be easily extended and configured has a competitive
advantage.
- REAL-TIME DIGITAL SIGNAL PROCESSING FIRMWARE. The Company's
technology involves extensive use of real-time digital signal
processing firmware to implement both signal processing and DAMA
networking protocol functions. This approach was developed and proven
under several government programs, especially UHF DAMA. The Company
believes that digital signal processing firmware offers great
flexibility in adding new features, because it allows modification
without more expensive hardware changes, and that product costs should
decrease if prices of Texas Instruments digital signal processing
chips and associated peripherals continue to decline. The Company's
digital signal processing design allows common hardware to be applied
to both government and commercial markets.
- WINDOWS NT(TM)-BASED NETWORK CONTROL. ViaSat believes that it is a
leader in using an Intel PC/Windows NT(TM) computer platform for its
network control system. Most vendors still use Unix platforms. ViaSat
developed and proved Windows NT(TM) as a viable network control
platform under government funded UHF and SHF DAMA programs. Windows
NT(TM) has several advantages which the Company believes support its
technical leadership position:
- True real-time multi-tasking, allowing many functions to be
moved from specialized VSAT hardware into an industry-standard
personal computer. Such functions can be developed more quickly
and are more easily modified to support new communication
applications and interfaces.
- Lower overall costs and faster time to market in terms of
development hardware and software tools, a more readily available
pool of experienced software engineers, lower recurring cost of
network control computer platforms, less expensive networking and
communications interfaces and lower operator training costs than
Unix-based systems.
- DOD approved access-control is built directly into the
network-controller computer operating system. This includes
secure remote-access via many built-in communication paths. The
Company believes computer security is essential technology for
mission critical telecommunication tasks such as billing.
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- STANDARD VSAT PLATFORM. ViaSat believes that it is the only company
building on a standard "open systems" VSAT platform for commercial and
SHF DAMA products. Open systems enable mix and match of satellite
equipment and baseband terrestrial interfaces on a circuit by circuit
basis. The architecture supports third party interface cards for
faster time to market for specialized terrestrial interfaces. While
open systems architecture does not offer the lowest possible
manufacturing cost for any single fixed terminal configuration, it is
consistent with two other strategic objectives: (i) rapid time to
market by building on industry standard third-party hardware and
software and (ii) flexibility to support a broad array of services and
applications consistent with the Company's target distribution
channels of service providers.
- INTERNALLY-DEVELOPED TECHNOLOGY. Many competing VSAT providers are
primarily systems integrators with little internally-developed
technology, particularly in the software and firmware areas. The
Company believes its extensive internal technology development
capability gives it an advantage in flexibility, time-to-market and
product quality.
CAPACITY
ViaSat's narrow-spacing technology, developed during the course of its
government DAMA contracts, results in less unused bandwidth between voice
channels than other DAMA systems, and this, along with more precise power-usage
control software, allows ViaSat's DAMA products to achieve up to 50% greater
satellite capacity than competing DAMA systems.
CERTIFICATION
ViaSat believes it is currently the only provider of DAMA products which
has received full certification from the U.S. government. The rigorous military
certification process may take up to several months to complete.
STRATEGY
ViaSat's objective is to become a leading developer and supplier of
DAMA-based products to commercial markets and to retain a leadership position in
developing and supplying DAMA-based products to the government market. The
Company's strategy incorporates the following key elements:
MAINTAIN AND ENHANCE TECHNOLOGY LEADERSHIP POSITION. The Company's
strategy is to maintain and enhance its leadership position in DAMA-based
satellite technology by continuing its participation in selected DOD programs
involving networking technology and other related real-time signal processing
and networking software. The Company is also investing in proprietary research
for commercial applications. The Company's objective is to continue to offer
high-performance, software-oriented products which provide the most effective
use of satellite power and bandwidth as well as offering the most flexible
platform for continued growth.
LEVERAGE TECHNOLOGICAL EXPERTISE INTO COMMERCIAL MARKETS. The Company's
strategy is to continue using its technological expertise developed in defense
applications to develop and market products to respond to the increasing demand
for DAMA-based VSAT solutions for commercial voice and data applications. The
Company is targeting commercial markets which it believes will offer high growth
potential and where it believes ViaSat's technology will have competitive
advantages, such as rural telephony, alternative carrier access and
Internet/Intranet access by satellite to multiple servers. The Company believes
its products are competitive largely because of their technological advantages
over competing products. The Company's strategy is to capitalize on these
technological advantages by utilizing a "cost of ownership" marketing approach
that emphasizes the overall lower cost to customers over the operating life of
the Company's products because of the products' adaptability and more efficient
use of limited satellite capacity.
DEVELOP BROAD BASE OF INNOVATIVE PROPRIETARY PRODUCTS. The Company's
strategy is to continue to develop and market to both defense and commercial
customers a broad variety of signal processing and
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networking software products. The Company has over 150 research engineers on
staff and emphasizes offering technologically-superior products. The Company
generally retains certain proprietary rights from the government-funded research
and development of its defense products and is also devoting a significant
amount of its own resources to independent product development.
DEVELOP STRATEGIC ALLIANCES. The Company's strategy is to develop
strategic alliances with leading prime defense contractors and major
international telecommunications companies and equipment suppliers. The Company
targets those companies whose financial and technological resources and
established customer bases allow them to jointly introduce new technologies and
penetrate new markets sooner and at a lower cost than the Company could alone.
The Company has entered into strategic alliances with defense companies, such as
Hughes Defense Communications, formerly Magnavox Electronic Systems Co. ("Hughes
Defense Communications") and Lockheed Martin Corporation ("Lockheed Martin"),
and commercial telecommunications companies, such as Hutchison Corporate Access
(HK) Limited ("Hutchison Telecommunications"), HCL Comnet Systems and Services
Limited ("HCL Comnet"), and Northern Telecom.
ESTABLISH GLOBAL PRESENCE. The Company's strategy is to develop its
products so that they may be marketed and used throughout the world. The Company
is a market leader in DAMA-based defense products for the United States and its
allies. The Company believes that the commercial market opportunities for the
Company's products are greater internationally. The Company believes its focus
on meeting applicable international communication standards and establishing key
international strategic alliances will enable it to effectively penetrate
foreign markets.
ADDRESS RURAL TELEPHONY MARKET. The Company believes there is a
substantial unmet demand for rural telephony services, especially in developing
countries. The Company's strategy is to capitalize on its networking software
expertise to develop technology for establishing regional rural telephony
network infrastructures of strategically located VSAT terminals capable of
handling multiple satellite telephone calls ("Point-of-Entry Terminals"). The
Company believes such an infrastructure would have a competitive advantage over
a single Point-of-Entry system by minimizing the ground transmission cost of
each satellite telephone call by permitting such calls to enter the Public
Switched Telephone Network (PSTN) through the Point-of-Entry Terminal closest to
the call's destination. The Company's strategy also includes seeking
partnerships with regional and local service providers to create distribution
channels for rural telephony infrastructures and to provide related retail
distribution services, including sales of Company-designed subscriber terminals,
installation and maintenance, as well as customer service, billing and revenue
collection. To this end, the Company has entered into a contract with Hutchison
Telecommunications for satellite telephony equipment which can serve as rural
telephony infrastructure.
TECHNOLOGY
The Company's VSAT technology is focused on DAMA which allows individual
subscribers to request links on demand to any other subscriber through one
satellite hop. TDM/TDMA technology, while more established than DAMA technology,
features a "hub and spoke" architecture which requires all transmissions to be
routed through a central hub and is most useful for remote to mainframe network
connections. Remote-to-remote TDM/TDMA connections require two satellite hops.
DAMA is better suited for remote-to-remote connections than TDM/TDMA because the
voice quality is better and DAMA networks use expensive satellite transponders
more efficiently.
DAMA technology has been under development for many years by the DOD, but
is only recently being deployed in significant quantities. DAMA is applicable to
several different satellite bands, including government UHF and SHF and
commercial C, Ku and Ka bands. A major objective for the DOD is to improve
capacity of extremely expensive government-owned satellite transponders. The
government expects DAMA to increase capacity for UHF tactical users by as much
as a factor of ten, depending on the application and traffic usage, compared to
dedicated non-DAMA links.
A DAMA system consists of (i) a set of subscribers with DAMA-capable
terminals, (ii) a network management terminal which orchestrates access to a
shared satellite resource, and (iii) satellite transponder
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capacity managed by the network controller and shared by subscribers. DAMA
subscribers use networking protocols to interact with the controller and each
other. The essence of DAMA is that the network controller allocates a shared
satellite resource to a particular combination of subscribers only when they
request it, and then terminates the connection when they are finished.
DAMA protocols may be either "open" or "proprietary." Open standards are
published so that multiple manufacturers can develop equipment that works
together. The DOD has designated two different open DAMA standards defining
over-the-air interfaces for narrowband UHF satellite communications channels.
MIL-STD 188-182 defines an interoperable waveform for channels with 5 kHz
bandwidth, and MIL-STD 188-183 defines the 25 kHz channel waveform. The DOD is
currently defining open standards for SHF channels and for government DAMA use
of commercial C and Ku band transponders. There are no widely accepted
commercial open DAMA standards, and no open standards have evolved for TDM/TDMA
VSATs.
DAMA VS. TDM/TDMA. DAMA is being sought by customers who see that it is
a better fit than TDM/TDMA VSATs for non-transaction applications such as voice
and fax. The principal limitations of TDM/TDMA for non-transaction applications
are:
CAPACITY LIMITATIONS AND COSTS
- The TDM/TDMA hub and spoke architecture is primarily designed for
rapid service for sporadic, short, burst transactions between a remote
site and a mainframe computer. The hubs typically only support a
maximum instantaneous aggregate data rate of 256 kbps to approximately
1 Mbps divided among the entire subscriber population (often several
thousand terminals). This is a severe bottleneck for sustained
circuit-type services like telephony, fax or peer-to-peer file
transfers, which often dominate when the VSAT becomes the primary
communication means for a site, as in telephony uses. In contrast, a
comparable DAMA system has a much higher aggregate capacity. For small
networks the TDM/TDMA hub performance is not a capacity bottleneck,
but the typical hub price of approximately $1.0 million, amortized
over a small number of subscribers, is usually prohibitively
expensive. The equipment cost for a comparable DAMA system for voice
use, in contrast, would be significantly less.
TRANSMISSION TIME
- The hub and spoke architecture requires all calls (voice or data)
between two remote nodes to be routed through the hub. This causes
each call to traverse two separate satellite hops in each direction
(remote A-to-satellite-to-hub and then hub-to-satellite-to-remote B,
with the return path from remote B to remote A also traversing two
satellite hops). The additional time delay due to the extra satellite
hops is striking for voice communications and is unacceptable to many
users. Plus, the two satellite hops consume more expensive transponder
resources per call than a single hop DAMA connection.
DAMA VS. DEDICATED SCPC. In contrast to DAMA, which allows individual
subscribers to request links to other subscribers on demand, dedicated Single
Channel Per Carrier ("SCPC")-based systems maintain dedicated, unswitched links
between subscribers, such as for long distance trunk lines. Dedicated links
provide high quality transmissions, but only between particular subscriber sets.
In order to provide connections among many sites, a SCPC-based system would
require a dedicated link between each subscriber and each other subscriber,
which would be prohibitively expensive. As a result, DAMA is a much more
attractive solution for managing large numbers of network subscribers, as DAMA
provides transmissions of equally high quality, without restricting the
subscribers' ability to establish links on demand to any other subscriber.
MOBILE SATELLITE VS. FIXED-SITE DAMA. The obvious advantage of commercial
mobile satellite systems, such as Iridium(TM) and GlobalStar(TM), is that they
allow subscribers to be mobile. A mobile satellite terminal can be used by
either a mobile or a fixed subscriber, while a fixed terminal cannot be used by
a mobile subscriber. However, in order to gain mobility, mobile terminals employ
an omni-directional
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antenna which operates at lower frequencies and provides less bandwidth than is
available in the fixed-site DAMA satellite bands. Less bandwidth corresponds to
less capacity and fewer voice circuits. Also, mobile satellite systems typically
require a greater investment in unique space-based satellite resources than
fixed-site DAMA systems which use existing capacity on general purpose
communication satellites. The combination of lower capacity plus higher capital
investments means that mobile service providers are projecting per-minute
service costs that are five to ten times higher than that possible through
fixed-site DAMA-based systems. Therefore, the Company believes that customers
who require satellite telephony services at fixed locations will find fixed-site
DAMA services to be much more economical than using mobile satellite phones --
even if they already own mobile satellite phones for mobile use.
NON-DAMA TECHNOLOGY. The Company offers products outside of DAMA and
satellite communications that benefit from the Company's wireless networking
software and related technology. Important non-DAMA applications include:
- Spread spectrum digital radios for real-time tactical data networks
among ground and airborne users. The JTIDS (Joint Tactical Information
Distribution System) radio builds on the Company's software, firmware
and hardware technology. The government is investing in "digitized
battlefield" communications in an effort to obtain greater
effectiveness from expensive tactical aircraft.
- Information security modules that encrypt classified information that
can be broadcasted and routed across unclassified wired or wireless
networks. This technology allows the government to make better use of
commercial networks for securely transmitting classified information.
- Equipment that tests wireless receivers in the presence of complex,
simulated radio wave environments. This technology allows the
government to thoroughly test sophisticated airborne radio equipment
without expensive flight exercises.
GOVERNMENT MARKETS, PRODUCTS AND CUSTOMERS
GOVERNMENT MARKETS. The Company believes it has an opportunity to build on
its government DAMA technology, software, hardware design and manufacturing base
to capture significant revenues in the government markets.
UHF DAMA MARKETS. The Company is considered a leader in the UHF DAMA
market. The Company believes its DAMA manpack subcontract is the largest
outstanding DAMA contract in terms of quantity of units sold. The Company also
believes that it was the first to develop and market a stand-alone airborne DAMA
modem. The DOD requires all UHF satellite communications terminals to meet open
DAMA standards. This mandate has helped stimulate the UHF DAMA market. ViaSat is
active in the following business segments:
- UHF DAMA NETWORK CONTROL INFRASTRUCTURE. Viasat has several
contracts with the U.S. Air Force for development, production,
installation and support for four global network control system
sites. Each site serves as a primary controller for seven channels
and as an alternate for seven channels. Each satellite has 38
channels, offering a potential market for additional production,
installation and support services.
- MANPACK TERMINALS. ViaSat has a contract with Hughes Defense
Communications for over 7,000 DAMA modems for manpacks. The
contract has options which allows Hughes Defense Communications,
in its discretion, to purchase up to an additional 4,000 of such
modems. As of March 31, 1997, the funded contract value was $37.7
million, of which $14.2 million had been delivered.
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- AIRBORNE DAMA TERMINALS. The 5 kHz channel DAMA protocols were
designed to support U.S. Air Force aircraft. The U.S. Navy is also
a major user of airborne UHF terminals. ViaSat equipment has been
designed into a number of platforms, including P-3, S-3, Air Force
One, EP-3, ES-3, Tomahawk cruise missiles and others.
- INTERNATIONAL UHF DAMA MARKET. Cooperative efforts among multiple
nations, such as in the Gulf War and Bosnia, require that allies
have a standard communications platform. There are requirements
for some units of NATO and other allies to have UHF DAMA capable
satellite terminals.
The Company's strategy includes actively working to expand the UHF DAMA
market as a whole, while sustaining its leading market share. Increasing the
market means extending UHF satellite communications capability to new users. UHF
satellite communications access and market size is limited in the following
ways:
- AVAILABILITY OF SATELLITE CAPACITY. Without DAMA, many users are
denied access because higher priorities consume all channels. DAMA
expands capacity. The Company anticipates increases in the UHF
market, versus pre-DAMA levels, over the next seven years due to
pent-up demand for service.
- EQUIPMENT SIZE AND WEIGHT. Most users are mobile and thus size
and weight sensitive. They carry equipment in back-packs, or
airframes where communication gear displaces weapons or mission
critical payloads. Easier to carry, smaller, lighter equipment may
expand the market beyond a core group who require DAMA to complete
their mission.
- EQUIPMENT PRICE. The Company believes that the UHF DAMA market
can expand by reducing the price of DAMA equipment. Embedded DAMA
radios are less expensive than stand-alone models, and offer
reduced size and weight.
- IMPROVED DAMA SUBSCRIBER SERVICES. The current DAMA system is a
data "pipe." The Company anticipates that demand for DAMA can grow
by increasing the value of the content sent over the pipes.
Several areas are being explored, including improved secure voice
quality, increased message routing capability, higher data rates
and improved service set-up times.
- DAMA SIGNAL PROCESSING. Airborne DAMA is currently limited to
large, slow aircraft for surveillance, airlift, command and
control, or similar missions. High performance aircraft are
excluded because current satellite communications antennas degrade
mission performance or safety. A promising solution is to use low
profile, conformal antennas with active antenna combiners. The
Company has a contract for such active antenna combiners with
Lockheed Martin which, if successful, opens the possibility of
extending the UHF DAMA market to high performance aircraft,
potentially resulting in an increase of up to 100% in the airborne
DAMA market.
ViaSat is also applying the market expansion strategy to its Advanced Data
Controller ("ADC") products. ADC conforms to MIL-STD 188-184 for packet
processing. It provides error-free data transmission over noisy channels. ADC
works for terrestrial and satellite communications wireless links. The Company
is working to reduce size, weight and price for ADC products, and potentially
licensing other manufacturers to embed ViaSat's ADC digital signal processing
firmware directly into their radios.
TRI-BAND DAMA MARKETS. The U.S. government is a major consumer of leased
commercial satellite capacity in the C and Ku bands. Since satellite
availability is limited, the government has specified the purchase of "tri-band"
terminals (i.e., terminals which can operate on any of three bands, SHF (X
band), C or Ku band). This makes it easier for subscribers to use available
capacity in any band, as a function of time and location. The government
established the Commercial Satellite Communications Initiative program to
manage:
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- Long term leases for commercial satellite transponders.
- Contracts to purchase tri-band satellite terminals.
- Bandwidth Management Centers to act as network controllers for
the tri-band terminals.
The DOD is defining an "open" standard for DAMA in SHF and commercial
satellite bands. The government owns and operates the Defense Satellite
Communication System constellation at SHF. Bandwidth at SHF is much greater than
at UHF -- over 200 MHz per satellite compared to less than 2 MHz at UHF. Still,
SHF capacity is insufficient and could be improved via DAMA. More effective SHF
use should reduce the government's monthly lease on commercial satellites used
for overflow. The potential market for SHF DAMA capable terminals may be as
large as that for UHF DAMA terminals.
Extending DAMA to commercial satellites vastly increases the bandwidth
available for government users. Increased bandwidth should support many more
terminals, increasing the potential DAMA user equipment market.
In 1994, ViaSat was awarded a $2.0 million contract by the U.S. Air Force
for prototype demonstration of a draft SHF DAMA standard. In February 1996, the
Company delivered and installed equipment which performs many, but not all, of
the protocols in the draft. The DOD has not yet designated a final version of
SHF DAMA, nor has the DOD yet issued a mandate for DAMA in SHF terminals.
The government tri-band DAMA market is very immature. This market will
likely not grow substantially until the DOD adopts a final standard and mandates
its use. However, there can be no assurance that the Company's products will be
procured by the government or prime contractors, even if a final standard
similar to the draft version is adopted. The Company is working to position its
SHF DAMA products through participation in government-industry standards working
groups. ViaSat also has been working with terminal manufacturers to help ensure
that its DAMA equipment integrates easily into their products. Finally, the
Company is working to maintain a prudent level of commonality between the
government and commercial DAMA modem platforms. The benefit of commonality is
that the larger commercial market offers economies of scale that reduce
manufacturing costs for the smaller government market. There is a potential
disadvantage if unique government product requirements increase the cost of
commercial products. The Company considers issues arising from this trade-off on
a case-by-case basis.
GOVERNMENT PRODUCTS
ViaSat's DAMA products for the government market include:
- EMUT (ENHANCED MANPACK UHF TERMINAL) is a battery-operated UHF
satellite radio which Hughes Defense Communications builds for the
U.S. Army. ViaSat provides a DAMA modem to Hughes under
subcontract. EMUT is used to send encrypted voice, electronic
mail, fax or other data via satellite. The DAMA modem allows the
operator to automatically request a portion of a satellite channel
to a selected destination whenever the operator asks to send a
message or make a call. The EMUT radio, combined with a portable
satellite antenna, can be used to make a secure voice or data call
almost anywhere in the world.
- INCS (INITIAL NETWORK CONTROL SYSTEM) is the DAMA network
management system for the U.S. Air Force. There are four sites
worldwide (Guam, Hawaii, Naples and Virginia) that manage
automatic DAMA access to 5 kHz band with UHF satellite channels.
The network control computer automatically allocates satellite
resources to subscriber terminals (such as EMUT) whenever a
subscriber requests a voice or data service. The INCS also keeps
track of which satellite terminals are active, how much capacity
is used and how much is available. ViaSat designs, installs and
supports the whole system at each site.
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- VM-200 (Also CALLED MD-1324) is ViaSat's stand-alone UHF DAMA
modem product. The modem can be used with many UHF satellite
radios having an industry standard 70 MHz interface. The VM-200
enables a satellite radio to connect to a DAMA network. VM-200
modems also are used in the INCS to communicate with subscribers.
The modems connect to external voice coders, computers or
encryption equipment and provide network access for those devices.
ViaSat's other government wireless networking products include:
- JTIDS (JOINT TACTICAL INFORMATION DISTRIBUTION SYSTEM) is an
anti-jam radio and message protocol standard for communicating
real-time data among aircraft and ground units. It connects to
sensors (like radar), computers, and targeting systems and
provides information used for navigation, target identification,
tracking and fire control. JTIDS is currently used as the wireless
communication system for "digital battlefields." For example, it
allows individual fighter planes to obtain a broad view of the
battlefield that is synthesized based on many different views from
many different participants.
- CES/JCS (COMMUNICATION ENVIRONMENT SIMULATOR/JOINT COMMUNICATION
SIMULATOR) is used to simulate a realistic radio environment which
can be used to test how well surveillance or other radio systems
work in the presence of various and changing signals. It can
simulate friendly military signals, neutral signals, commercial
signals and enemy signals. The government uses the simulated total
environment to verify that a system under test can correctly
analyze specific target signals within a complicated and cluttered
composite signal.
- EIP (EMBEDDABLE INFOSEC PRODUCT) is a plug-in module that
encrypts classified information so that it can be broadcast over
wireless systems (terrestrial or satellite) or sent over
unclassified wirelines. EIP is unique because it can work for
packet data systems instead of on circuits. For instance, EIP can
encrypt information for the Internet (or government equivalents).
EIP also can separate the addressing and routing information from
a packet and allow such information to remain unencrypted so that
the network can correctly route the packet to its destination.
- ADC (ADVANCED DATA CONTROLLER) is a packet processing system
which provides error-free data transmission over noisy channels.
ADC works for terrestrial and satellite communications wireless
lines.
GOVERNMENT CUSTOMERS
The Company's major customers in the government DAMA market include:
- Hughes Defense Communications is the customer for the EMUT DAMA
modem. Approximately 23.9% of the Company's fiscal 1997 revenues
were derived from this contract. Hughes is also a customer for the
Tomahawk Baseline Improvement Program which includes adding a UHF
DAMA satellite link to Tomahawk cruise missiles.
- The U.S. Air Force Electronics System Center ("ESC") is the
customer for the 5 kHz UHF DAMA Global Initial Network Control
System. ESC also procures stand-alone DAMA modems and
Control/Indicators for various Air Force user agencies.
- Lockheed Martin is the customer for the VM-200 under the
Communications Improvement Program.
- Lockheed Martin is the customer for the airborne DAMA-capable UHF
satellite communications antenna combiner.
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- The Company also has entered into a number of smaller contracts
with the DOD for UHF DAMA and ADC satellite equipment.
The Company's major government customers for other wireless networking
products include:
- The U.S. Air Force and Logicon Tactical Systems Division are the
customers for JTIDS.
- The U.S. Navy and U.S. Air Force are the customers for CES/JCS.
- The U.S. Navy is the customer for EIP.
COMMERCIAL MARKETS, PRODUCTS AND CUSTOMERS
COMMERCIAL MARKETS
DAMA technology is increasingly being used in emerging commercial
telecommunications markets. In contrast to "pre-assigned" or "hub and spoke"
satellite networks, DAMA is well suited to primary "circuit-oriented"
telecommunication because it routes connections in real-time on a call-by-call
basis from any subscriber to any other subscriber with only one satellite hop.
See "-- Industry Background" and "-- Technology." DAMA commercial markets can be
segmented as follows:
- TURN-KEY PRIVATE NETWORK EQUIPMENT SALES for corporations and
government agencies in developing nations. These customers require
voice and/or data services. Users manage their own networks and/or
contract for management services. They lease satellite capacity in
bulk. DAMA equipment is selected based primarily on purchase and
operating costs for specific needs. Customers typically need to
operate ten or more sites for a turn-key private network to be
economical.
- "SHARED HUB" PRIVATE NETWORK SERVICE PROVIDERS. Customers with
small networks may use a satellite service provider. The provider
purchases a DAMA network and obtains transponder capacity at
wholesale rates. The provider manages small "virtual" nets for its
customers. Customers buy capacity from the provider at retail
daily, hourly or minute rates. Service providers have different
priorities than turn-key operators. Breadth and depth of service
offerings are more important to providers since they must attract
a broad base of customers. DAMA terminals must support a range of
telephone and data equipment. Providers generally prefer flexible
user terminal configurations to meet varying customer needs. They
profit from the spread between wholesale transponder lease costs
and retail minute prices, so DAMA performance is important.
Efficiency advantages (measured, for example, by voice circuits
per unit bandwidth) can offset a higher initial terminal purchase
price over the term of a service contract.
- PUBLIC NETWORK CARRIER SERVICE PROVIDERS. Many telecommunications
carriers use satellite links as part of their long distance
networks. However, the satellite segment usually consists of a
pre-planned link establishing a particular geographic connection
at a fixed capacity. A satellite DAMA network can reduce costs for
independent carriers by bypassing transit switching charges
through a telecommunications hub city. Satellite DAMA can serve as
either a primary link or as a back-up when terrestrial links are
congested. DAMA satellite technology provides an economical
secondary connection because the satellite pool of trunk lines can
be quickly applied to any of the primary terrestrial routes. The
DAMA network's ability to reach many different destinations offers
a competitive advantage to a DAMA operator whose business is
selling wholesale minutes of long distance service to national or
regional carriers.
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- PUBLIC NETWORK "LOCAL LOOP" SUBSCRIBER SERVICE PROVIDERS.
Subscriber services differ from the carrier services in that there
is a local loop interface between the DAMA satellite switch and a
subscriber telephone. This allows a subscriber with a small VSAT
terminal to connect directly into the public switched telephone
network by using a single dial-tone to call to other satellite
subscribers or to terrestrial phones through national (and/or
international) switches. While the Company believes the local loop
subscriber service has, by far, the greatest potential market
volume for equipment manufacturers and also represents the
greatest opportunity for service providers, there are numerous
technical, regulatory and business management hurdles to
implementing this service.
COMMERCIAL PRODUCTS
STARWIRE(TM) is a satellite networking system consisting of two major
elements, a network control system and a subscriber terminal. The network
control system sends and receives messages over the satellite, while the
subscriber terminal switches all user interface ports (voice and data)
individually and connects them call-by-call to an available satellite modem.
StarWire(TM) provides toll-quality voice circuits on a demand basis, efficiently
sharing satellite resources and thereby reducing costs to the end-user and the
network service provider.
StarWire(TM) products include:
- AURORA TERMINAL is a ten slot rack mountable chassis configured
with one VMM-101 and one TIM-201 (described below). The terminal
is expandable to six user traffic channels by inserting additional
VMM modems and TIM modules. Expansion beyond six channels is
possible by using additional Aurora chassis with VMM modems and
TIM modules installed.
- VMM-101 is a DAMA modem module designed for the Aurora. The
VMM-101 is a single modem used for both user-data transmission and
order-wire control channels.
- TIM-201 is a dual channel voice encoder/decoder module designed
for the Aurora. The TIM-201 has a fax modem on board, along with
an integrated echo canceller.
- TMC-101 is a terminal monitor and control card designed for the
Aurora. The "EIP" version has an integrated LAN Ethernet port and
supports multiple daughter-cards for data communications and
additional external equipment control support.
- STARWIRE(TM) NETWORK CONTROL TERMINAL (NCT) is a ten slot rack
mountable Aurora chassis with one Network Control Computer (NCC)
interface card and two VMM-101 modems (operating as DAMA system
control channel modems).
- STARWIRE(TM) DAMA NETWORK CONTROL SOFTWARE (NCS) provides the
real-time network control and monitoring functions of the
StarWire(TM) DAMA networking system. The NCS software acts as a
switch to route calls through the network. In addition, the
StarWire(TM) NCS monitors all aspects of system operation as well
as collecting historical information about calls and maintaining
detailed call records for billing purposes.
- STARWIRE(TM) NETWORK CONTROL COMPUTER (NCC) is computing and
networking equipment designed to support the operation of the NCS
software. The non-redundant configuration (NCC-100) provides for
one operator workstation/server, Ethernet interface, Windows
NT(TM) operating system and back-up media. The redundant
configuration (NCC-200) provides two operator
workstations/servers, Ethernet adapter cards, Windows NT(TM)
operating system and back-up media.
- EXTERNAL DEVICE INTERFACE DRIVER (EDID) supports third party modem
and RF terminal equipment.
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COMMERCIAL CUSTOMERS
The Company is in the early stages of establishing sales for its
StarWire(TM) commercial DAMA product. Activities to date have primarily focused
on establishing distribution agreements with "in-country" service providers,
distributors and original equipment manufacturers ("OEMs"). The Company also has
delivered several test versions of the StarWire(TM) product for customer
evaluation and demonstration purposes. The Company's commercial sales accounted
for approximately 3% of sales for the year ended March 31, 1997.
The Company's major customers in the commercial DAMA market include:
- HUTCHISON TELECOMMUNICATIONS -- ViaSat and Hutchison
Telecommunications have entered into a contract for intranational
and international carrier satellite telephony equipment. The
contract also provides for advanced digital data capabilities for
public and private networks. The contract was awarded after
competition from many other DAMA vendors. Under the terms of the
contract, Hutchison Telecommunications has the right to terminate
the contract and, under certain circumstances, receive liquidated
damages from the Company of up to approximately $275,000, as well
as other damages. See "Risk Factors -- Development Contracts."
- HCL COMNET -- HCL Comnet, located in India, operates the largest
single VSAT network in India for the national stock exchange. HCL
Comnet selected ViaSat's StarWire(TM) system for HCL Comnet's DAMA
private network products and services. HCL Comnet has placed an
order for initial production systems.
- SATELLITE COMMUNICATIONS SERVICES INCORPORATED ("SCSI") -- SCSI
has inaugurated a network serving the International Civil Aviation
Organization, an agency of the United Nations that is responsible
for worldwide air traffic control. This network uses Starwire(TM)
terminals to establish voice, data, and radar communications among
air traffic control sites in the Caribbean and Central America.
- AT&T TRIDOM -- The Company believes AT&T Tridom has the third
largest VSAT revenues (counting equipment and services) in the
United States. AT&T Tridom selected ViaSat as the private label
manufacturer of an AT&T Tridom "Clearlink"-labeled DAMA VSAT
product through competitive bids. AT&T Tridom has taken delivery
of two test systems, one of which is installed at a customer site
in Indonesia.
- ViaSat also has executed distribution agreements and purchase
contracts with companies operating VSAT networks in Mexico, the
Caribbean, Africa, South America and other regions.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
adapt to the rapidly changing satellite communications and related real-time
signal processing and networking software environment, and to continue to meet
its customers' needs. Therefore, the continued timely development and
introduction of new products is essential in maintaining its competitive
position. The Company develops most of its products in-house and currently has a
research and development staff which includes over 160 engineers. A significant
portion of the Company's research and development efforts in the defense
industry have generally been conducted in direct response to the specific
requirements of a customer's order and, accordingly, such amounts are included
in the cost of sales when incurred and the related funding (which includes a
profit component) is included in net revenues at such time. Revenues for funded
research and development during the fiscal years ended March 31, 1997, 1996 and
1995 were approximately $21.3 million, $19.5 million, and $20.7 million,
respectively. In addition, the Company invested $5.1 million, $2.8 million and
$788,000, respectively, during the fiscal years ended March 31, 1997, 1996 and
1995 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
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and development. As a government contractor, the Company also is able to recover
a portion of its independent research and development expenses, consisting
primarily of salaries and other personnel-related expenses, supplies and
prototype materials related to research and development programs, pursuant to
its government contracts.
The Company has benefited and continues to benefit from the Small Business
Innovation Research ("SBIR") program, through which the government provides
research and development funding for companies with fewer than 500 employees.
While the Company has already harvested significant benefits from the SBIR
program throughout the initial developmental stages of its core technology base,
the Company believes that its business, financial condition and results of
operations would not be materially adversely affected if the Company were to
lose its SBIR funding status. The Company plans to leverage from this technology
base to further develop products for commercial applications.
MANUFACTURING
The Company's manufacturing objective is to produce products that conform
to its specifications at the lowest possible manufacturing cost. The Company is
engaged in an effort to increase the standardization of its manufacturing
process in order to permit it to more fully utilize contract manufacturers. As
part of its program to reduce the cost of its manufacturing and to support an
increase in the volume of orders, the Company primarily utilizes contract
manufacturers in its manufacturing process. The Company conducts extensive
testing and quality control procedures for all products before they are
delivered to customers.
The Company also relies on outside vendors to manufacture certain
components and subassemblies used in the production of the Company's products.
Certain components, subassemblies and services necessary for the manufacture of
the Company's 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 the Company in
substantially all of its products. The Company intends to reserve its limited
internal manufacturing capacity for new products and products manufactured in
accordance with a customer's custom specifications or expected delivery
schedule. Therefore, the Company's internal manufacturing capability for
standard products has been, and is expected to continue to be, very limited, and
the Company intends to rely on contract manufacturers for large scale
manufacturing. There can be no assurance that the Company's internal
manufacturing capacity and that of its contract manufacturers and suppliers will
be sufficient to fulfill the Company's orders in a timely manner. Failure to
manufacture, assemble and deliver products and meet customer demands on a timely
and cost effective basis could damage relationships with customers and have a
material adverse effect on the Company's business, financial condition and
operating results.
SALES AND MARKETING
The Company markets its products to the DOD and to commercial customers
worldwide primarily through the Company's internal sales and marketing staff of
nine people. After the Company has identified key potential customers in its
market segments, the Company makes sales calls with its sales, management and
engineering personnel. Many of the companies entering the wireless
communications markets possess expertise in digital processing and wired systems
but relatively little experience in DAMA wireless transmission. In order to
promote widespread acceptance of its products and provide customers with support
for their wireless transmission needs, the Company's sales and engineering teams
work closely with its customers to develop tailored solutions to their wireless
transmission needs. The Company believes that its customer engineering support
provides it with a key competitive advantage.
During the fiscal year ended March 31, 1997 ViaSat sold products to
approximately 50 customers of which DOD contracts accounted for approximately
97.0% of total revenues.
BACKLOG
At March 31, 1997, the Company had firm backlog of $78.4 million, of which
$67.6 million was funded, not including options of $24.9 million. Of the $78.4
million in firm backlog, approximately $46.7
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million is expected to be delivered in the fiscal year ending March 31, 1998,
$13.2 million is expected to be delivered in the fiscal year ending March 31,
1999 and the balance is expected to be delivered in the fiscal year ending March
31, 2000 and thereafter. The Company had firm backlog of $28.7 million, not
including options of $28.0 million, at March 31, 1996, compared to firm backlog
of $31.7 million, not including options of $27.3 million, at March 31, 1995. The
Company includes in its backlog only those orders for which it has accepted
purchase orders. However, backlog is not necessarily indicative of future sales.
A majority of the Company's backlog scheduled for delivery can be terminated at
the convenience of the government since orders are often made substantially in
advance of delivery, and the Company's contracts typically provide that orders
may be terminated with limited or no penalties. In addition, purchase orders may
set forth product specifications that would require the Company 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 contract or option amounts that customers may obligate
over the specified contract performance periods. The Company's customers
allocate funds for expenditures on long-term contracts on a periodic basis. The
Company is committed to produce products under its contracts to the extent funds
are provided. The funded component of the Company's backlog at March 31, 1997
was approximately $67.6 million, and the funded components of the Company's
backlog at March 31, 1996 and 1995 were $26.3 million and $29.6 million,
respectively. The ability of the Company 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 the Company's
control, the Company's experience indicates that actual contract fundings have
ultimately been approximately equal to the aggregate amounts of the contracts.
GOVERNMENT CONTRACTS
A substantial portion of the Company's revenues are derived from contracts
and subcontracts with the DOD and other federal government agencies. Many of the
Company's contracts are competitively bid and awarded on the basis of technical
merit, personnel qualifications, experience and price. The Company also receives
some contract awards involving special technical capabilities on a negotiated,
noncompetitive basis due to the Company's unique technical capabilities in
special areas. Future revenues and income of the Company could be materially
affected by changes in procurement policies, a reduction in expenditures for the
products and services provided by the Company, and other risks generally
associated with federal government contracts. See "Risk Factors -- Dependence on
Defense Market" and "--Government Regulations."
The Company provides 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 such
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.
The Company's 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 (to
the extent allowable, allocable and reasonable under Federal Acquisition
Regulations) and for payment of a fee. The fee may be either fixed by the
contract (cost-plus-fixed fee) or variable, based upon cost control, quality,
delivery and the customer's subjective evaluation of the work (cost-plus-award
fee). Under time-and-materials contracts, the Company receives a fixed amount by
labor category for services performed and is reimbursed (without fee) for the
cost of materials purchased to perform the contract. Under a fixed-price
contract, the Company agrees to perform certain work for a fixed price and,
accordingly, realizes the benefit or detriment to the extent that the actual
cost of performing the work differs from the contract price. Contract revenues
for the fiscal year ended March 31, 1997 were approximately
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30.7% from cost-reimbursement contracts, approximately 6.0% from
time-and-materials contracts and approximately 63.3% from fixed-price contracts.
See "Risk Factors -- Contract Profit Exposure."
The Company's 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
1994 have resulted in no material cost recovery disallowances for the Company.
The Company's 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 the
Company under the contract plus a pro rata fee based upon the work completed.
When the Company participates as a subcontractor, the Company is at risk if the
prime contractor does not perform its contract. Similarly, when the Company as a
prime contractor employs subcontractors, the Company is at risk if a
subcontractor does not perform its subcontract.
Some of the Company's federal government contracts contain options which
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 the
Company. In the Company's experience, options are usually exercised.
The Company's eligibility to perform under its federal government
contracts requires the Company to maintain adequate security measures. The
Company has implemented security procedures which it believes are adequate to
satisfy the requirements of its federal government contracts.
GOVERNMENT REGULATIONS
Certain of the Company's products are incorporated into wireless
telecommunications systems that are subject to regulation domestically by the
Federal Communications Commission and internationally by other government
agencies. Although the equipment operators and not the Company are responsible
for compliance with such 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 the Company's operations by restricting development efforts by the
Company's customers, making current products obsolete or increasing the
opportunity for additional competition. Changes in, or the failure by the
Company to manufacture products in compliance with, applicable domestic and
international regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
increasing demand for wireless telecommunications has exerted pressure on
regulatory bodies worldwide to adopt new standards for such products, generally
following extensive investigation and deliberation over competing technologies.
The delays inherent in this governmental 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 the Company's
customers, which in turn may have a material adverse effect on the sale of
products by the Company to such customers.
The Company is also subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations. To date, these regulations have not had a material
effect on the Company, as the Company has neither incurred significant costs to
maintain compliance nor to remedy past noncompliance.
The Company believes that it operates its business in material compliance
with applicable government regulations. The Company is not aware of any pending
legislation which if enacted could have a material adverse effect on the
Company's business, financial condition and results of operations.
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COMPETITION
The markets for the Company's products and services are extremely
competitive, and the Company expects that competition will increase in such
markets. See "Risk Factors -- Competition." The Company faces intense
competition in both government and commercial wireless networking markets.
Government DAMA Competition. Competition in the government DAMA market
consists primarily of other companies offering DAMA capable modem, radio or
network control equipment that is compatible with the open MIL-STD protocols.
The government DAMA competitors are significantly larger companies than ViaSat
and include Titan Corporation, Rockwell International, Raytheon Corporation and
GEC (UK). The Company believes that it is well-positioned among these
competitors because of its significant backlog of DAMA modem orders, its market
lead time with respect to DAMA product certification and its participation in
both the network control and subscriber terminal markets.
Government Non-DAMA Competition. There is also intense competition in
other wireless networking markets. The JTIDS market, in particular, is dominated
by two very large competitors (Rockwell and GEC- Marconi).
The Company's simulation and test equipment and information security
products represent relatively new technologies in markets that are still small.
Most of the Company's competition in these markets stems from alternative
technologies that may or may not be applicable to any particular customer.
Commercial DAMA Competition. There is intense competition in the
commercial DAMA market from companies that have strong positions in the TDM/TDMA
VSAT business, as well as from other companies that seek to enter the VSAT
market using DAMA technology. Most of the leading TDM/TDMA VSAT companies are
offering DAMA products, including Hughes Network Systems, an affiliate of Hughes
Defense Communications (see "Risk Factors -- Dependence on Defense Market"),
Scientific Atlanta Inc., Gilat Satellite Networks Ltd., STM Wireless Inc. and
NEC. In addition, there are also other types of competing DAMA technologies
being developed.
AT&T Tridom, which is one of the largest VSAT equipment and service
providers and which offers TDM/TDMA products, has entered into a strategic
alliance with the Company to sell the Company's products under an OEM agreement.
The Company believes that this may allow it to compete for customers seeking
hybrid TDM/TDMA and DAMA VSAT solutions.
In different situations, DAMA products may be evaluated in comparison with
either TDM/TDMA technology, DAMA technology from other companies, dedicated SCPC
technology, mobile satellite technology or possibly terrestrial wireless
solutions. The Company believes that it has a good understanding of those
situations where DAMA systems in general, and its technology in particular,
offer the best overall value to its customers, and tends to focus its marketing
and selling efforts on those applications. DAMA technology is most attractive
for customers with telephone, fax or other circuit-oriented applications. DAMA
technology also allows networks to achieve much higher total capacity, with
better voice quality than TDM/TDMA networks.
The Company seeks to establish strategic alliances with satellite service
providers which would most benefit from its particular technological advantages.
The Company has established such relationships with a few key companies,
including HCL Comnet in India. The Company believes that its products offer the
lowest total cost of ownership for service providers considering the flexibility
of its equipment, its transponder capacity advantages and the breadth of its
service offerings.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secrets, copyrights,
trademarks, service marks and contractual rights to protect its intellectual
property. The Company attempts to protect its trade secrets and other
proprietary information through agreements with its customers, suppliers,
employees and consultants, and through other security measures. Although the
Company intends to protect its rights vigorously, there
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can be no assurance that these measures will be successful. In addition, the
laws of certain countries in which the Company's products are or may be
developed, manufactured or sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the wireless personal communications
industry, its technical expertise and ability to introduce new products on a
timely basis will be more important in maintaining its competitive position than
protection of its 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 the Company's personnel,
new product introductions and frequent product enhancements. Although the
Company continues to implement protective measures and intends to defend
vigorously its intellectual property rights, there can be no assurance that
these measures will be successful. See "Risk Factors -- Limited Protection of
the Company's Intellectual Property."
There can be no assurance that third parties will not assert claims
against the Company with respect to existing and future products. In the event
of litigation to determine the validity of any third party's claims, such
litigation could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation is determined in favor of the Company. 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 such litigation, the
Company could be required to expend significant resources to develop
non-infringing technology or to obtain licenses to the technology which is the
subject of the litigation. There can be no assurance that the Company would be
successful in such development or that any such license would be available on
commercially reasonable terms.
EMPLOYEES
As of March 31, 1997, the Company had 275 employees (12 of which were
temporary employees), including over 160 in research and development, nine in
marketing and sales, 42 in production, and 60 in corporate, administration and
production coordination. The Company believes that its future prospects will
depend, in part, on its ability to continue to attract and retain skilled
engineering, marketing and management personnel, who are in great demand. In
particular, there is a limited supply of highly qualified engineers with
appropriate experience. See "Risk Factors -- Dependence on Key Personnel." Each
of the Company's employees is required to sign an Invention and Confidential
Disclosure Agreement upon joining the Company. Under such agreement, each
employee agrees that any inventions developed by such employee during the term
of employment are the exclusive property of the Company and that such employee
will not disclose or use in any way information related to the Company's
business or products, either during the term of such employee's employment or at
any time thereafter. The Company currently employs over 160 engineers, including
71 engineers who have masters degrees and seven engineers who have doctorate
degrees. None of the Company's employees are covered by a collective bargaining
agreement and the Company has never experienced any strike or work stoppage. The
Company believes that its relations with its employees are good.
RISK FACTORS
DEPENDENCE ON DEFENSE MARKET
Over 95% of the Company's revenues for the fiscal year ended March 31,
1997 were derived from U.S. government defense applications. Although the
Company has invested heavily in developing commercial satellite products, there
can be no assurance that the percentage of the Company's commercial business
will increase. In addition, there can be no assurance that the Company's
revenues from its government business will continue to increase at historical
rates or at all. U.S. government business is subject to various risks including
(i) unpredictable contract or project terminations, reductions in funds
available for the Company's projects due to government policy changes, budget
cuts and contract
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adjustments and penalties arising from post-award contract audits, and incurred
cost audits in which the value of the contract may be reduced, (ii) risks of
underestimating ultimate costs, particularly with respect to software and
hardware development, for work performed pursuant to fixed-price contracts where
the Company commits to achieve specified deliveries for a predetermined fixed
price, (iii) limited profitability from cost-reimbursement contracts under which
the amount of profit attainable is limited to a specified negotiated amount and
(iv) unpredictable timing of cash collections of certain unbilled receivables as
they may be subject to acceptance of contract deliverables by the customer and
contract close-out procedures, including government approval of final indirect
rates. See "Business -- Government Contracts." In addition, substantially all of
the Company's backlog scheduled for delivery can be terminated at the
convenience of the government since orders are often made well in advance of
delivery, and the Company's contracts typically provide that orders may be
terminated with limited or no penalties. See "Business -- Backlog."
Certain of the Company's contracts individually contribute a significant
percentage of the Company's revenues. For the fiscal year ended March 31, 1997,
the Company's largest contracts (by revenues) were contracts related to the
Company's UHF DAMA technology, which generated approximately 68.8% of the
Company's total revenues, including a contract with Hughes Defense
Communications which generated approximately 23.9% of the Company's total
revenues. In March 1997 the Company was awarded an option under this contract
valued at $20.9 million. Scheduled deliveries pursuant to firm purchase orders
under this contract are scheduled to be completed during the fiscal year ending
March 31, 2000. Hughes Defense Communications is an affiliate of Hughes Network
Systems (HNS), which is the Company's principal competitor in the commercial
DAMA market. See "Business -- Competition." The Company's five largest contracts
(by revenues) generated approximately 57.6% of the Company's total revenues for
the fiscal year ended March 31, 1997. The Company expects revenues to continue
to be concentrated in a relatively small number of large U.S. government
contracts. Termination or disruption of such contracts, especially the Company's
largest contract, or the Company's inability to renew or replace such contracts
when they expire, could have a material adverse effect on the Company's
business, financial condition and results of operations.
PENETRATION OF COMMERCIAL MARKETS; NEW PRODUCT INTRODUCTIONS
The Company's ability to grow will depend substantially on its and its
customers' ability to apply its expertise and technologies to existing and
emerging commercial wireless communications markets. The Company's efforts to
penetrate commercial markets has resulted, and the Company anticipates that it
will continue to result, in increased sales and marketing and research and
development expenses. If the Company's net revenues do not correspondingly
increase, the Company's business, financial condition and results of operations
could be materially adversely affected. The Company's success in penetrating
commercial markets also depends upon the success of new product introductions by
the Company, which will be dependent upon several factors, including timely
completion and introduction of new product designs, achievement of acceptable
product costs, establishment of close working relationships with major customers
for the design of their new wireless communications systems incorporating the
Company's products and market acceptance. Sales of the Company's commercial
StarWire(TM) products (see "Business -- Commercial Markets, Products and
Customers -- Commercial Products") have not yet achieved profitability. The
Company believes that as the market expands for the StarWire(TM) products,
average production costs for such products should decrease and sales of such
products should become profitable. However, there can be no assurance that the
market for such products will expand or that average production costs will
decrease. If the Company is unable to design, manufacture and market profitable
new products for existing or emerging commercial markets, its business,
financial condition and results of operations will be adversely affected. No
assurance can be given that the Company's product development efforts for
commercial products will be successful or that any new commercial products it
develops will achieve market acceptance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Commercial Markets, Products and Customers."
DEVELOPMENT CONTRACTS
The telecommunications industry is characterized by rapid technological
change. As a result, many companies involved in the telecommunications industry,
including the Company, are often parties to
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governmental and commercial contracts which involve development of various
products. Pursuant to such contracts, the company performing the development
services typically must agree to meet strict performance covenants and project
milestones which there is a risk it may not be able to satisfy. Under the terms
of such contracts, the failure by a 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 from the
breaching party. The Company is currently a party to a number of such contracts
with a number of customers including, but not limited to, Hutchison
Telecommunications, HCL Comnet, Hughes Defense Communications and the DOD. See
"Business -- Commercial Markets, Products and Customers -- Commercial Customers"
and " -- Government Markets, Products and Customers -- Government Customers." In
substantially all of these contracts, the Company is not currently or in the
past has not been in compliance with every outstanding performance covenant and
project milestone. While the Company's past experience has been that in
situations where the Company has not met all performance covenants and project
milestones generally the other party has not elected to terminate such contracts
or seek liquidated damages from the Company, there can be no assurance that this
will not occur in the future with respect to current or future contracts and
that such termination or damages would not have a material adverse effect on the
Company.
FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company has experienced and expects to continue to experience
significant fluctuations in quarterly and annual revenues, gross margins and
operating results. The procurement process for most of the Company's current and
potential customers is complex and lengthy, and the timing and amount of
revenues is difficult to predict reliably. The Company recognizes a majority of
its revenues under the percentage of completion method which requires estimates
regarding costs that will be incurred over the life of a specific contract.
Actual results may differ from those estimates. In such event, the Company has
been and may in the future be required to adjust revenues in subsequent periods
relating to revisions of prior period estimates, resulting in fluctuations in
the Company's results of operations from period to period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
addition, a single customer's order scheduled for delivery in a quarter can
represent a significant portion of the Company's potential revenues for such
quarter. The Company has at times failed to receive expected orders, and
delivery schedules have been deferred as a result of, among other factors,
changes in customer requirements or parts shortages. In fiscal 1997,
approximately 23.9% of the Company's revenues were derived from one contract.
Any disruption with respect to this contract could have a material adverse
effect on the Company in any period where such a disruption occurs. See
"Business -- Government Markets, Products and Customers -- Government
Customers." As a result of the foregoing and other factors, the Company's
operating results for particular periods have in the past been and may in the
future be materially adversely affected by a delay, rescheduling or cancellation
of even one purchase order. Moreover, purchase orders are often received and
accepted substantially in advance of delivery, and the failure to reduce actual
costs to the extent anticipated or an increase in anticipated costs before
delivery could materially adversely affect the gross margins for such orders,
and as a result, the Company's results of operations. There can be no assurance
that the Company will continue to realize positive gross margins or operating
results in the future, and even if so realized, there can be no assurance as to
the level of such gross margins and operating results.
A large portion of the Company's expenses are fixed and difficult to
reduce should revenues not meet the Company's expectations, thus magnifying the
material adverse effect of any revenue shortfall. Furthermore, announcements by
the Company or its competitors of new products and technologies could cause
customers to defer or cancel purchases of the Company's products and services,
which could materially adversely affect the Company's business, financial
condition and results of operations or result in fluctuations in the Company's
results of operations from period to period. Additional factors that may cause
the Company's revenues, gross margins and results of operations to vary
significantly from period to period include mix of products and services sold;
manufacturing efficiencies, costs and capacity; price discounts; market
acceptance and the timing of availability of new products by the Company or its
customers; usage of different distribution and sales channels; warranty and
customer support expenses; customization of products and services; and general
economic and political conditions. In addition, the Company's results of
operations are influenced by competitive factors, including the pricing and
availability of, and demand for,
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competitive products. All of the above factors are difficult for the Company to
forecast, and these and other factors could materially adversely affect the
Company's business, financial condition and results of operations or result in
fluctuations in the Company's results of operations from period to period. As a
result, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
CONTRACT PROFIT EXPOSURE
The Company's products and services are provided primarily through three
types of contracts: fixed-price, time-and-materials and cost-reimbursement
contracts. Approximately 63.3% of the Company's total revenues for the fiscal
year ended March 31, 1997, were derived from fixed-price contracts which require
the Company to provide products and services under a contract at a stipulated
price. The Company derived approximately 6.0% of its revenues during the year
from time-and-materials contracts which reimburse the Company 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. The
remaining 30.7% of the Company's revenues for the fiscal year ended March 31,
1997 were derived from cost-reimbursement contracts under which the Company is
reimbursed for actual costs incurred in performing the contract to the extent
that such costs are within the contract ceiling and allowable, allocable and
reasonable under the terms of the contract, plus a fee or profit. See "Business
- -- Government Contracts."
The Company assumes greater financial risk on fixed-price contracts than
on either time-and-materials or cost-reimbursement contracts. As the Company
increases its manufacturing business, it believes that an increasing percentage
of its contracts will be fixed-priced. Failure to anticipate technical problems,
estimate costs accurately or control costs during performance of a fixed-price
contract may reduce the Company's profit or cause a loss. In addition, greater
risks are involved under time-and-materials contracts than under
cost-reimbursement contracts because the Company assumes the responsibility for
the delivery of specified products or services at a fixed hourly rate. Although
management believes that it adequately estimates costs for fixed-price and
time-and-materials contracts, no assurance can be given that such estimates are
adequate or that losses on fixed-price and time-and-materials contracts will not
occur in the future.
To compete successfully for business, the Company must satisfy client
requirements at competitive rates. Although the Company continually attempts to
lower its costs, there are other companies that may provide the same or similar
products or services at comparable or lower prices than the Company. There can
be no assurance that the Company will be able to compete effectively on pricing
or other requirements, and as a result, the Company could lose clients or be
unable to maintain historic gross margin levels or to operate profitably. See
"Business -- Competition."
DECLINING AVERAGE SELLING PRICES; FLUCTUATIONS IN GROSS MARGINS
Average selling prices for the Company's products may fluctuate from
period to period due to a number of factors, including product mix, competition
and unit volumes. In particular, the average selling prices of a specific
product tend to decrease over that product's life. To offset such decreases, the
Company intends to rely primarily on obtaining yield improvements and
corresponding cost reductions in the manufacture of existing products and on
introducing new products that incorporate advanced features and therefore can be
sold at higher average selling prices. However, there can be no assurance that
the Company will be able to obtain any such yield improvements or cost
reductions or introduce any such new products in the future. To the extent that
such cost reductions and new product introductions do not occur in a timely
manner or the Company's or its customers' products do not achieve market
acceptance, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business --
Manufacturing."
The Company's gross margins in any period are affected by a number of
different factors. Because of the different gross margins on various products,
changes in product mix can impact gross margins in any particular period. In
addition, in the event that the Company is not able to adequately respond to
pricing pressures, the Company's current customers may decrease, postpone or
cancel current or planned orders,
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and the Company may not be able to secure new customers or orders. As a result,
the Company may not be able to achieve desired production volumes or gross
margins.
GOVERNMENT REGULATIONS
The Company's products are incorporated into wireless communications
systems that are subject to 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 significantly impact the Company's operations by
restricting development efforts by the Company's customers, making current
products obsolete or increasing the opportunity for additional competition.
There can be no assurance that regulatory bodies will not promulgate new
regulations that could have a material adverse effect on the Company's business,
financial condition and results of operations. Changes in, or the failure by the
Company to comply with, applicable domestic and international regulations could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the increasing demand for wireless
communications has exerted pressure on regulatory bodies worldwide to adopt new
standards for such products and services, generally following extensive
investigation of and deliberation over competing technologies. The delays
inherent in this governmental approval process have caused and may continue to
cause the cancellation, postponement or rescheduling of the installation of
communications systems by the Company's customers, which in turn may have a
material adverse effect on the sale of products by the Company to such
customers. See "Business -- Government Regulations."
The Company has benefitted and continues to benefit from the SBIR program,
through which the government provides research and development funding for
companies with fewer than 500 employees. While the Company has already harvested
significant benefits from the SBIR program throughout the initial developmental
stages of its core technology base, the Company believes that its business,
financial condition and results of operations would not be materially adversely
affected if the Company were to lose its SBIR funding status. See "Business --
Research and Development."
EMERGING MARKETS IN WIRELESS COMMUNICATIONS
A number of the commercial markets for the Company's products in the
wireless communications area, including its DAMA products, have only recently
begun to develop. 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
the Company's products in the commercial wireless communications area fail to
grow, or grow more slowly than anticipated, the Company's business, financial
condition and results of operations could be materially adversely affected.
Conversely, to the extent that growth in these markets results in capacity
limitations in the wireless communications area, the Company's business,
financial condition and results of operations could also be materially adversely
affected. See "Business -- Commercial Markets, Products and Customers."
RURAL TELEPHONY MARKET
The Company's strategy includes focusing on establishing rural telephony
networking infrastructure for developing countries through strategic alliances
with regional and local service providers (see "Business -- Strategy -- Address
Rural Telephony Market"). There can be no assurance that a substantial market
for rural telephony equipment in developing countries will ever develop, or if
such a market does develop that fixed-site DAMA VSAT-based equipment will
capture a significant portion of that market. The Company's ability to penetrate
such markets will be dependent upon its ability to develop equipment and
software which can be utilized by the regional and local service providers to
develop and implement such infrastructure and for such service providers to
market and sell the use of such systems. Furthermore, there can be no assurance
that the regional and local service providers will be able to successfully
market subscriber terminals to rural subscribers. The development and
implementation of such rural telephony systems will be dependent upon, among
other things, the continued development of the necessary hardware and software
technologies (including the necessary expenditures of a large amount of funds
and resources), the implementation of cost-effective systems, market acceptance
for such systems and approval by the appropriate regulatory agencies. There can
be no assurance that the Company will be able to develop
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equipment and software which can be utilized in such rural telephony systems and
accepted by regional and local service providers or that any regional or local
service providers will be able to develop, implement and market rural telephony
systems. Furthermore, if the Company successfully introduces such products and
the regional and local service providers successfully develop and implement such
systems, there is no assurance that the Company will generate enough revenues to
cover the Company expenditures in the development and marketing of such
products. Even if the Company is able to realize sales of such products, the
Company believes it is not likely that the Company will realize any significant
revenues from rural telephony applications any time in the foreseeable future,
including at least the next two years.
DEPENDENCE ON CONTRACT MANUFACTURERS; RELIANCE ON SOLE OR
LIMITED SOURCES OF SUPPLY
The Company's internal manufacturing capacity is limited. The Company has
recently begun to utilize contract manufacturers to produce its products and
expects to rely increasingly on such manufacturers in the future. The Company
also relies on outside vendors to manufacture certain components and
subassemblies, including printed wiring boards. Certain components,
subassemblies and services necessary for the manufacture of the Company's
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 the Company in
substantially all of its products. There can be no assurance that the Company's
internal manufacturing capacity and that of its contract manufacturers and
suppliers will be sufficient to timely fulfill the Company's orders. See
"Business -- Manufacturing."
The Company's reliance on contract manufacturers and on sole suppliers or
a limited group of suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, and reduced
control over the price, timely delivery, reliability and quality of finished
products. From time to time, the Company enters into long-term supply agreements
with its manufacturers and suppliers. Manufacture of the Company's products and
certain of its components and subassemblies is an extremely complex process, and
the Company has from time to time experienced and may in the future experience
delays in the delivery of and quality problems with products and certain
components and subassemblies from vendors. Certain of the Company's suppliers
have relatively limited financial and other resources. Any inability to obtain
timely deliveries of components and subassemblies of acceptable quality or any
other circumstance that would require the Company to seek alternative sources of
supply, or to manufacture its finished products or such components and
subassemblies internally, could delay or prevent the Company from timely
delivery of its systems or raise issues regarding quality, which could damage
relationships with current or prospective customers and have a material adverse
effect on the Company's business, financial condition and results of operations.
COMPETITION
The markets for the Company's products and services are extremely
competitive, and the Company expects that competition will increase in such
markets. Many of the Company's competitors have entrenched market positions,
established patents, copyrights, tradenames, trademarks, service marks and
intellectual property rights and substantial technological capabilities. The
Company's existing and potential competitors include large and emerging domestic
and international companies, many of which have significantly greater financial,
technical, manufacturing, marketing, sales and distribution resources and
management expertise than the Company. The Company believes that its ability to
compete successfully in the markets for its products and services depends upon a
number of factors within and outside its control, including price, quality,
availability, product performance and features, timing of new product
introductions by the Company, its customers and competitors, and customer
service and technical support. The Company's customers continuously evaluate
whether to develop and manufacture their own products and could elect to compete
with the Company at any time. Price competition in the markets in which the
Company currently competes is likely to increase, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Competition."
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LIMITED PROTECTION OF THE COMPANY'S INTELLECTUAL PROPERTY
The Company's ability to compete may depend, in part, on its ability to
obtain and enforce intellectual property protection for its technology in the
United States and internationally. The Company relies on a combination of trade
secrets, copyrights, trademarks, service marks and contractual rights to protect
its intellectual property. There can be no assurance that the steps taken by the
Company will be adequate to deter misappropriation or impede third party
development of the Company's technology. In addition, the laws of certain
foreign countries in which the Company's products are or may be sold do not
protect the Company's intellectual property rights to the same extent as do the
laws of the United States. The failure of the Company to protect its proprietary
information could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Intellectual
Property."
Litigation may be necessary to protect the Company's 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. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance 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 the Company in the future. If any claims or actions are
asserted against the Company, the Company may seek to obtain a license under a
third party's intellectual property rights. There can be no assurance, however,
that a license will be available under reasonable terms or at all. In addition,
should the Company decide to litigate such claims, such litigation could be
extremely expensive and time consuming and could materially adversely affect the
Company's business, financial condition and results of operations, regardless of
the outcome of the litigation. If the Company's products are found to infringe
upon the rights of third parties, the Company may be forced to incur substantial
costs to develop alternative products. There can be no assurance that the
Company would be able to develop such alternative products or that if such
alternative products were developed, they would perform as required or be
accepted in the applicable markets.
REQUIREMENT FOR RESPONSE TO RAPID TECHNOLOGICAL CHANGE AND REQUIREMENT FOR
FREQUENT NEW PRODUCT INTRODUCTIONS
The wireless communications market is subject to rapid technological
change, frequent new product introductions and enhancements, product
obsolescence and changes in end-user requirements. The Company's ability to be
competitive in this market will depend in significant part upon its ability to
successfully develop, introduce and sell new products and enhancements on a
timely and cost-effective basis that respond to changing customer requirements.
Any success of the Company in developing new and enhanced products will depend
upon a variety of factors, including new product selection, integration of the
various elements of its complex technology, timely and efficient completion of
product design, timely and efficient implementation of manufacturing and
assembly processes and its cost reduction efforts, development and completion of
related software tools, product performance, quality and reliability and
development of competitive products by competitors. The Company may experience
delays from time to time in completing development and introduction of new
products. Moreover, there can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products or
enhancements. There can be no assurance that errors will not be found in the
Company's products after commencement of deliveries, which could result in the
loss of or delay in market acceptance. The inability of the Company to introduce
in a timely manner new products that achieve market acceptance and thereby
contribute to revenues could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Research and Development."
INTERNATIONAL OPERATIONS; RISKS OF DOING BUSINESS IN DEVELOPING COUNTRIES
The Company anticipates that international sales will account for an
increasing percentage of its revenues for the foreseeable future. The Company's
international sales may be denominated in foreign or U.S. currencies. The
Company does not currently engage in foreign currency hedging transactions. As a
result, a decrease in the value of foreign currencies relative to the U.S.
dollar could result in losses from transactions denominated in foreign
currencies. With respect to the Company's international sales that are
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U.S. dollar-denominated, such a decrease could make the Company's products less
price-competitive. Additional risks inherent in the Company's international
business activities include various and changing regulatory requirements, cost
and risks of localizing systems in foreign countries, 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, difficulties in staffing and
managing foreign operations, difficulties in managing distributors, potentially
adverse taxes, complex foreign laws and treaties and the possibility of
difficulty in accounts receivable collections. Certain of the Company's customer
purchase agreements are governed by foreign laws, which may differ significantly
from U.S. laws. Therefore, the Company may be limited in its ability to enforce
its rights under such agreements and to collect damages, if awarded. There can
be no assurance that any of these factors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
VIABLE PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
The Company's Common Stock has traded on a public market for a relatively
short period of time, and there can be no assurance that a viable public market
for the Common Stock will be sustained. The Company believes that factors such
as announcements of developments related to the Company's business,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in the Company's relationships with
its customers, partners, distributors and suppliers, changes in analysts'
estimates, regulatory developments, fluctuations in results of operations and
general conditions in the Company's market or the markets served by the
Company's customers or the economy could cause the price of the Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and technology companies in particular have been subject to
significant price fluctuations, which have often been unrelated to the operating
performance of affected companies. Such fluctuations could adversely affect the
market price of the Common Stock. There can be no assurance that the market
price of the Common Stock will not experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's performance.
CONTROL BY EXISTING STOCKHOLDERS
As of March 31, 1997, members of the Board of Directors and the executive
officers of the Company, together with members of their families and entities
that may be deemed affiliates of or related to such persons or entities,
beneficially owned approximately 36.7% of the outstanding shares of the
Company's Common Stock. Accordingly, these stockholders may be able to elect all
members of the Company's Board of Directors and determine the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. This level of ownership may have a significant effect in delaying,
deferring preventing a change in control of the Company and may adversely affect
the voting and other rights of other holders of the Common Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws could discourage potential acquisition proposals, could
delay or prevent a change in control of the Company and could make removal of
management more difficult. Such provisions could diminish the opportunities for
a stockholder to participate in tender offers, including tender offers that are
priced above the then current market value of the Company's Common Stock. The
provisions also may inhibit increases in the market price of the Common Stock
that could result from takeover attempts. Additionally, the Board of Directors
of the Company, without further stockholder approval, may issue up to 5,000,000
shares of Preferred Stock, in one or more series, with such terms as the Board
of Directors may determine, including rights such as voting, dividend and
conversion rights which could adversely affect the voting power and other rights
of the holders of Common Stock. Preferred Stock may be issued quickly with terms
which delay or prevent the change in control of the Company or make removal of
management more difficult. Also, the issuance of Preferred Stock may have the
effect of decreasing the market price of the Common Stock.
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30
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued
service of its key technical, marketing and management personnel and on its
ability to continue to attract and retain qualified employees, particularly its
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 such
personnel is intense, and the loss of key employees could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company does not have employment agreements with any of its
officers or employees. The Company has obtained, however, a key man insurance
policy on the life of Mr. Dankberg in the amount of $500,000, of which the
Company is the sole beneficiary. See "Business -- Employees."
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31
ITEM 2. PROPERTIES
The Company's headquarters are located in an approximately 37,000 square
foot leased facility in Carlsbad, California. This facility houses the Company's
management, marketing and sales personnel. The lease for this facility
terminates in November 1998. The Company also leases another facility in
Carlsbad, California containing approximately 49,000 square feet for research
and development, application engineering and manufacturing coordination
activities. This lease terminates in July 1999 with options to renew for two
additional periods of two years each. In addition, the Company leases two
smaller sales facilities aggregating approximately 2,600 square feet located in
Boston, Massachusetts, and Melbourne, Florida. The Boston lease terminates in
May 1998 with an option to renew for one additional period of two years. The
Melbourne lease terminated in March 1997 and is currently being rented on a
monthly basis. Annual leasing costs of the Company totaled $781,000, $608,000
and $493,000 for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively. The Company is seeking additional facilities to meet its current
requirements and believes that suitable additional space will be located on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than various
claims and lawsuits arising in the ordinary course of its business which, in the
opinion of the Company's management, are not individually or in the aggregate
material to its business.
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, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "VSAT." The Common Stock was initially offered to the public on
December 3, 1996 at $9.00 per share. The following table sets forth the range of
high and low sales prices on the Nasdaq National Market of the Company's 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.
FISCAL 1997 HIGH LOW
---- ----
Third Quarter (a) $ 9.63 $8.38
Fourth Quarter $12.25 $8.75
As of June 16, 1997, there were 179 holders of record of the Common stock.
To date, the Company has neither declared nor paid any dividends on the
Common Stock. The Company currently intends to retain all future earnings, if
any, for use in the operation and development of its business and, therefore,
does not expect to declare or pay any cash dividends on the Common Stock in the
foreseeable future. In addition, an equipment financing agreement of the Company
prohibits the payment of any cash dividends on the Company's capital stock.
____________
(a) Subsequent to December 3, 1996.
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33
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from the Company's audited
financial statements. The balance sheet at March 31, 1997 and 1996 and the
related statements of income and of cash flows of the Company for the three
years ended March 31, 1997 and notes thereto appear elsewhere herein. The data
should be read in conjunction with the annual financial statements, related
notes and other financial information appearing elsewhere herein. All amounts
shown are in thousands, except per share data.
YEARS ENDED MARCH 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
STATEMENT OF INCOME DATA:
Revenues $ 47,715 $ 29,017 $ 22,341 $ 11,579 $ 5,072
Cost of revenues 33,102 20,983 16,855 9,033 3,939
-------- -------- -------- -------- --------
Gross profit 14,613 8,034 5,486 2,546 1,133
Operating expenses:
Selling, general and
administrative 4,752 3,400 2,416 1,554 740
Independent research and
development 5,087 2,820 788 134 59
-------- -------- -------- -------- --------
Income from operations 4,774 1,814 2,282 858 334
Net interest income (expense) 100 (231) (87) (45) (17)
-------- -------- -------- -------- --------
Income before income taxes 4,874 1,583 2,195 813 317
Provision (benefit) for income
taxes 1,702 (50) 888 328 93
-------- -------- -------- -------- --------
Net income $ 3,172 $ 1,633 $ 1,307 $ 485 $ 224
======== ======== ======== ======== ========
Pro forma net income per share(1) $ 0.47 $ 0.28
======== ========
Shares used in per share
calculations(1) 6,702 5,876
======== ========
MARCH 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents $12,673 $ 2,297 $ 2,731 $ 9 $ 75
Working capital 20,406 4,651 2,808 1,486 964
Total assets 35,674 13,262 9,377 4,986 2,550
Long-term debt, less current 1,428 1,747 1,220 297 124
portion
Total stockholders' equity 23,619 5,217 3,413 1,956 1,465
____________
(1) For an explanation of the determination of the number of shares used in
computing pro forma net income per share, see Note 1 of the Notes to
Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Historically, the Company's revenues have been principally derived from
contracts with the DOD. The Company's DOD revenues have continued to grow
significantly despite government budgetary constraints. Since 1992, such
revenues have grown at a compounded annual growth rate of approximately 63%. DOD
revenues amounted to $46.3 million, $28.3 million and $21.2 million for the
fiscal years ended March 31, 1997, 1996 and 1995, respectively. The Company has
achieved this growth rate entirely through internal growth, and not through
acquisitions. See "Risk Factors -- Fluctuations in Results of Operations."
The Company's products and services are provided primarily through three
types of contracts: fixed-price, time-and-materials and cost-reimbursement
contracts. Approximately 63.3% and 56.3% of the Company's total revenues for the
fiscal years ended March 31, 1997 and 1996, respectively, were derived from
fixed-price contracts which require the Company to provide products and services
under a contract at a stipulated price. The Company derived approximately 6.0%
and 5.0% of its revenues during such periods from time-and-materials contracts
which reimburse the Company 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. The remaining 30.7% and 38.7%
of the Company's revenues for the fiscal years ended March 31, 1997 and 1996,
respectively, were derived from cost-reimbursement contracts under which the
Company is 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. See "Risk Factors --
Contract Profit Exposure."
As of March 31, 1997, the Company had firm backlog of $78.4 million, of
which $67.6 million was funded. Of the $78.4 million in firm backlog,
approximately $46.7 million is expected to be delivered in the fiscal year
ending March 31, 1998, approximately $13.2 million is expected to be delivered
in the fiscal year ending March 31, 1999 and the balance is expected to be
delivered in the fiscal years ending March 31, 2000 and thereafter. The Company
received $100.0 million in awards during the year ended March 31, 1997,
consisting of $62.0 million in UHF DAMA satellite communications awards, $25.2
million in awards for the defense simulator business, $9.5 million in other
defense awards and $3.3 million in commercial satellite communications awards.
The Company's $78.4 million in firm backlog at March 31, 1997 excludes an
additional $24.9 million of customer options. See "Business -- Backlog."
Historically, a significant portion of the Company's revenue has been
derived from research and development contracts with the DOD. 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 net revenues at such time.
Revenues are recognized using the percentage of completion method on these
long-term development contracts. Revenues for funded research and development
during the fiscal years ended March 31, 1997, 1996 and 1995 were approximately
$21.3 million, $19.5 million and $20.7 million, respectively. See "Business --
Research and Development."
Beginning in fiscal 1995, production contracts for delivery of previously
developed equipment became a more significant percentage of total revenues.
Production contracts amounted to approximately 35.3%, 19.4%, and 6.5% of fiscal
1997, 1996, and 1995 total revenues, respectively.
The Company invests in independent research and development ("IR&D"),
which is not directly funded by a third party. The Company expenses IR&D costs
as they are incurred. IR&D expenses consist primarily of salaries and other
personnel-related expenses, supplies and prototype materials related to research
and development programs. IR&D expenses for governmental and commercial
applications were minimal prior to fiscal 1995. In the fourth quarter of fiscal
1995, the Company began investing a significant amount of IR&D funds primarily
in the development of satellite telephony and other satellite DAMA products. The
Company expended 10.6% and 9.7% of revenues in IR&D during the fiscal years
ended March 31, 1997 and 1996, respectively. The Company expects that IR&D
expenditures will continue to
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35
increase in order to fund growth in government and commercial applications. As a
government contractor, the Company is able to recover a portion of its IR&D
expenses pursuant to its government contracts.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
income data for the periods indicated.
FISCAL YEARS ENDED
MARCH 31,
---------------------------
1997 1996 1995
----- ----- -----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 69.4 72.3 75.4
----- ----- -----
Gross profit 30.6 27.7 24.6
Operating expenses:
Selling, general and administrative 10.0 11.7 10.8
Independent research and development 10.6 9.7 3.5
----- ----- -----
Income from operations 10.0 6.3 10.3
Income before income taxes 10.2 5.5 9.9
Net income 6.6 5.6 5.9
FISCAL YEAR ENDED MARCH 31, 1997 VS. FISCAL YEAR ENDED MARCH 31, 1996
Revenues. The Company's revenues increased 64.4% from $29.0 million in
fiscal 1996 to $47.7 million in fiscal 1997. This increase was primarily due to
a $13.0 million increase in revenues generated by contracts with the U.S. Air
Force for UHF DAMA network control stations, and a revenue increase of $8.7
million generated by Enhanced Manpack UHF Terminal ("EMUT") DAMA modem
production, offset in part by reduced activity in other product lines and the
completion of certain contracts. UHF DAMA business area revenues grew from $12.4
million (42.8% of revenues) in fiscal 1996 to $32.8 million (68.8% of revenues)
in fiscal 1997.
Gross Profit. Gross profit increased 81.9% from $8.0 million (27.7% of
revenues) in fiscal 1996 to $14.6 million (30.6% of revenues) in fiscal 1997.
This increase primarily reflects improved contract profitability and higher
prices related to the recovery of allowable IR&D costs under certain government
contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased 39.8% from $3.4 million (11.7% of
revenues) in fiscal 1996 to $4.8 million (10.0% of revenues) in fiscal 1997. The
Company continued to increase administrative staff to support IR&D related to
its StarWire(TM) DAMA product, increased its business development staff for
defense programs, and added to finance and administrative staffing. Bid and
proposal efforts increased from $1.0 million in fiscal 1996 to $1.2 million in
fiscal 1997.
Independent Research and Development. IR&D expenses increased 80.4% from
$2.8 million (9.7% of revenues) in fiscal 1996 to $5.1 million (10.6% of
revenues) in fiscal 1997. Expenditures on the development of the Company's
StarWire(TM) DAMA product began in the last quarter of fiscal 1995 and have been
steadily increasing.
Interest Expense. Interest expense decreased 2.3% from $260,000 in fiscal
1996 to $254,000 in fiscal 1997. Total outstanding equipment loans were $2.5
million at the end of fiscal 1996 and $2.6 million at the end of fiscal 1997.
There were no outstanding borrowings under the Company's line of credit at the
end of each fiscal year.
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36
Interest Income. Interest income increased from $29,000 in fiscal 1996 to
$354,000 in fiscal 1997. Interest income relates to interest earned on
short-term deposits of cash.
Provision (Benefit) for Income Taxes. The income tax benefit in fiscal 1996
was primarily attributable to the utilization of research and development
credits generated during the current period and the impact of a United States
Federal judicial decision which clarified the tax law related to the utilization
of research and development credits generated from funded research and
development. The income tax provision in fiscal 1997 was less than the combined
federal and state statutory rate due to the utilization of research and
development credits.
FISCAL YEAR ENDED MARCH 31, 1996 VS. FISCAL YEAR ENDED MARCH 31, 1995
Revenues. The Company's revenues increased 29.9% from $22.3 million in
fiscal 1995 to $29.0 million in fiscal 1996. This increase reflects the growth
in defense related production contracts, primarily associated with the Company's
EMUT DAMA modem products, which experienced a $5.3 million increase, and
Advanced Data Controller ("ADC") products, which experienced a $1.5 million
increase. Revenues from production orders (compared to funded research and
development) increased from $1.4 million (6.5% of revenues) in fiscal 1995 to
$5.6 million (19.4% of revenues) in fiscal 1996.
Revenues from UHF DAMA satellite communications products increased to 42.8%
of revenues in fiscal 1996. This increase was due to the first EMUT DAMA modem
production deliveries in the fourth quarter of 1996. UHF DAMA business area
revenues grew from $7.1 million (31.7% of revenues) in fiscal 1995 to $12.4
million (42.8% of revenues) in fiscal 1996.
Gross Profit. Gross profit increased 46.4% from $5.5 million (24.6% of
revenues) in fiscal 1995 to $8.0 million (27.7% of revenues) in fiscal 1996.
This increase primarily reflects higher prices related to the recovery of
allowable IR&D costs under certain government contracts and improved contract
profitability under certain production contracts.
Selling, General and Administrative Expenses. SG&A expenses increased 40.7%
from $2.4 million (10.8% of revenues) in fiscal 1995 to $3.4 million (11.7% of
revenues) in fiscal 1996. Increased SG&A expenses were offset somewhat by the
continuing revenue growth. The Company continued to increase administrative
staff to support IR&D related to its StarWire(TM) DAMA product, increased its
business development staff for defense programs, and added to finance and
administrative staffing. Bid and proposal efforts increased from $321,000 in
fiscal 1995 to $1.0 million in fiscal 1996.
Independent Research and Development. IR&D expenses increased 257.9% from
$788,000 (3.5% of revenues) in fiscal 1995 to $2.8 million (9.7% of revenues) in
fiscal 1996. Expenditures on the development of the Company's StarWire(TM) DAMA
product began in the last quarter of fiscal 1995 and have been steadily
increasing.
Interest Expense. Interest expense increased 128.1% from $114,000 in fiscal
1995 to $260,000 in fiscal 1996. Total outstanding equipment loans were $1.7
million at the end of fiscal 1995 and $2.5 million at the end of fiscal 1996.
There were no outstanding borrowings under the Company's line of credit at the
end of each fiscal year.
Interest Income. Interest income increased 7.4% from $27,000 in fiscal
1995 to $29,000 in fiscal 1996. Interest income relates to interest earned on
short-term deposits of cash.
Provision (Benefit) for Income Taxes. The income tax provision in fiscal
1995 approximated the combined federal and state statutory rate of 40.0%. The
income tax benefit in fiscal 1996 was primarily attributable to the utilization
of research and development credits generated during the current period and the
impact of a United States Federal judicial decision which clarified the tax law
related to the utilization of research and development credits generated from
funded research and development.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily from cash flow
from operations, bank line of credit financing, equity financing and loans for
the purchase of capital equipment. Cash (used)/provided by operating activities
for the fiscal years ended March 31, 1997 and 1996 was ($1.2) million and
$456,000, respectively. The relative increase in cash used for operating
activities for the year ended March 31, 1997 compared to the prior year was
primarily due to higher levels of accounts receivable and inventory, which was
partially offset by a $1.5 million increase in net income and higher levels of
accounts payable and accrued liabilities. The increase in accounts receivable,
accounts payable, and accrued liabilities resulted from an increase in the
Company's revenues. The growing share of revenues from production contracts led
to the need to build inventory levels to support production demands. The Company
anticipates that in future periods the level of inventory will be higher than
historical levels.
Cash used in investing activities for the fiscal years ended March 31,
1997 and 1996 was $3.7 million and $1.9 million, respectively. The increase was
the result of purchases of property and equipment, primarily consisting of test
equipment and computers.
Cash provided by financing activities for the fiscal years ended March 31,
1997 and 1996 was $15.3 million and $1.0 million, respectively. This increase
was primarily the result of $14.8 million of capital raised in the Company's
initial public offering which closed in December 1996. This relative increase
was offset by lower net financing provided by the Company's equipment line of
credit.
At March 31, 1997, the Company had $12.7 million in cash and cash
equivalents, $20.4 million in working capital and $1.4 million in long-term debt
which consists of equipment financing. The Company had a zero balance under its
line of credit at March 31, 1997 and 1996.
The Company's credit facility with Union Bank includes a $6.0 million line
of credit and $4.5 million in commitments for equipment financing. The line of
credit allows the Company to borrow, for general working capital purposes, the
greater of $2.0 million or 80% of eligible accounts receivable plus 50% of the
Company's eligible inventory. At the Company's option interest accrues either at
the bank's prime rate (8.5% at March 31, 1997) or at the banks LIBOR rate plus
1.75%(7.69% at March 31, 1997). The credit facility expires on September 15,
1998. The Company is required to pay a fee equal to 0.09% of the unused portion
of the line of credit on a quarterly basis.
The equipment line consists of three loans, each of which limits
borrowings to an 80.0% advance against the purchase price, net of sales tax,
delivery and insurance. The first loan has been converted into a fully
amortizing loan which matures on September 15, 1999. All borrowings under the
second loan, which may not exceed $2.0 million, must be made before September
15, 1997, at which time all unpaid principal under such loan will be converted
into a fully amortizing loan for a period of 36 months with a maturity date of
September 15, 2000. All borrowings under the third loan, which may not exceed
$2.5 million, must be made before September 15, 1998, at which time all unpaid
principal under such loan will be converted into a fully amortizing loan for a
period of 36 months with a maturity date of September 15, 2001.
The Company's future capital requirements, which management anticipates
will not exceed $10.0 million over the next 12 months, will depend upon many
factors, including the progress of the Company's research and development
efforts, expansion of the Company's marketing efforts, and the nature and timing
of commercial orders. The Company believes that its current cash balances,
amounts available under its credit facilities and net cash expected to be
provided by operating activities, will be sufficient to meet its working capital
and capital expenditure requirements for at least the next 12 months. Management
intends to invest the Company's cash in excess of current operating requirements
in short-term, interest-bearing, investment-grade securities.
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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 of the interim periods. Summarized quarterly data for
fiscal 1997 and 1996 is as follows (in thousands, except per share data):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1997
Revenues $9,732 $11,850 $12,079 $14,054
Gross profit 2,870 3,379 3,832 4,532
Income from operations 772 947 1,288 1,767
Net income 478 604 853 1,237
Pro forma net income per share (1) $ .08 $ .10 $ .13
Net income per share (1) $ .15
1996
Revenues $6,768 $ 7,388 $ 5,755 $ 9,106
Gross profit 1,938 2,108 1,713 2,275
Income from operations 553 545 129 587
Net income 541 503 70 519
Pro forma net income per share (1) $ .09 $ .09 $ .01 $ .09
- -------------
(1) Pro forma net income per share and net income per share computations for
each quarter are independent and may not add up to the pro forma net income
per share computation for the respective year. See Note 1 of Notes to the
Financial Statements for an explanation of the determination of pro forma
net income per share.
ITEM 8. FINANCIAL STATEMENTS
The Company's financial statements at March 31, 1997 and 1996, and for
each of the three years in the period ended March 31, 1997, and the Report of
Price Waterhouse 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.
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39
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 the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the 1997 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."
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40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
PAGE
NUMBER
------
(a) Documents filed as part of the report:
(1) Report of Independent Accountants F-1
Balance Sheets at March 31, 1997 and 1996 F-2
Statements of Income for Fiscal 1997, 1996 and 1995 F-3
Statements of Cash Flow for Fiscal 1997, 1996 and 1995 F-4
Statements of Stockholders' Equity for Fiscal 1997,
1996 and 1995 F-5
Notes to Financial Statements F-6
Financial statement schedules other than those listed above have been
omitted because they are either not required, not applicable or the information
is otherwise included.
(2) Exhibits
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
-------- ----------------------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Form of Common Stock Certificate.(1)
10.1 Preferred Stock Purchase Agreement, dated as of June 11,
1986, by and among the Company, Southern California
Ventures, Robert W. Johnson and Thomas A. Tisch.(1)
10.2 Shareholders' Agreement, dated June 11, 1986, by and among
Southern California Ventures, Robert W. Johnson, Thomas A.
Tisch, the Company, Mark D. Dankberg, Steven R. Hart and
Mark J. Miller.(1)
10.3 Form of Stock Restriction Agreement by and between the
Company and each stockholder of the Company.(1)
10.4 Form of Invention and Confidential Disclosure Agreement by
and between the Company and each employee of the Company.(1)
10.5 ViaSat, Inc. 1993 Stock Option Plan (the "1993 Stock Option
Plan").(1)
10.6 First Amendment to the 1993 Stock Option Plan.(2)
10.7 Form of Incentive Stock Option Agreement under the 1993
Stock Option Plan.(1)
10.8 Form of Nonqualified Stock Option Agreement under the 1993
Stock Option Plan.(1)
10.9 The 1996 Equity Participation Plan of ViaSat, Inc. (the
"1996 Equity Participation Plan").(1)
10.10 Form of Incentive Stock Option Agreement under the 1996
Equity Participation Plan.(1)
10.11 Form of Nonqualified Stock Option Agreement under the 1996
Equity Participation Plan.(1)
10.12 The ViaSat, Inc. Employee Stock Purchase Plan.(1)
10.13 ViaSat, Inc. 401(k) Profit Sharing Plan.(1)
10.14 Loan Agreement, dated as of September 15, 1995, by and
between the Company and Union Bank.(1)
10.15 Waiver and First Amendment to Loan Agreement, dated as of
March 31, 1997, by and between the Company and Union
Bank.(2)
10.16 Business Loan Agreement, dated as of April 5, 1994, as
amended, by and between the Company and Scripps Bank.(1)
10.17 Equipment Financing Agreement, dated April 28, 1994, by and
between the Company and Heritage Leasing Capital.(1)
10.18 Equipment Financing Agreement, dated May 13, 1994, by and
between the Company and Heritage Leasing Capital.(1)
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EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
-------- ----------------------
10.19 Equipment Financing Agreement, dated September 19, 1994, by
and between the Company and Heritage Leasing Capital.(1)
10.20 Equipment Financing Agreement, dated December 6, 1994, by
and between the Company and Heritage Leasing Capital.(1)
10.21 Sublease, dated as of August 20, 1993, by and between
Whittaker Corporation and the Company (2290 Cosmos Court,
Carlsbad, California).(1)
10.22 Lease Agreement, dated December 8, 1994, by and between The
Campus, LLC and the Company (The Campus, Carlsbad,
California).(1)
10.23 Lease, dated March 21, 1995, by and between Nagog
Development Co. and the Company (125 Nagog Park, Acton,
Massachusetts).(1)
10.24 Lease, dated March 8, 1996, by and between Harry and Wendy
Brandon and the Company(1900 S. Harbor City Blvd.,
Melbourne, Florida).(1)
10.25 Basic Ordering Agreement, dated November 8, 1994, as
amended, by and between the Company and AT&T acting through
its Tridom division.(1)
10.26 Supply & Services Contract, dated June 2, 1996, by and
between HCL Comnet Systems and Services Limited and the
Company.(1)
10.27 Basic Ordering Agreement Subcontract, dated March 4, 1994,
by and between Magnavox Electronic Systems Company and the
Company.(1)
10.28 Purchase Order Change to Basic Ordering Agreement
Subcontract, dated February 25, 1997, by and between Hughes
Defense Communications (formerly Magnavox Electronic Systems
Company) and the Company.(2)
10.29 Award/Contract, effective March 29, 1996, as amended, issued
by Electronic Systems Center/MCK Air Force Materiel Command,
USAF to the Company.(1)
10.30 Amendment of Award/Contract, effective February 24, 1997,
issued by Electronic Systems Center/MCK Air Force Materiel
Command, USAF to the Company.(2)
10.31 Award/Contract, effective October 2, 1995, issued by
Electronic Systems Center/MCK Air Force Materiel Command,
USAF to the Company.(1)
10.32 Award/Contract, effective September 29, 1993, as amended,
issued by Information Technology Acquisition Center to the
Company.(1)
10.33 Turnkey Agreement, dated August 9, 1996, by and between
Hutchison Corporate Access (HK) Limited and the Company.(1)
10.34 Award/Contract, effective July 30, 1991, issued by
Electronic Systems Division Air Force Systems Command, USAF
to the Company.(1)
10.35 Award/Contract, effective September 27, 1993, as amended,
issued by Contracting Officer Naval Research Laboratory to
the Company.(1)
10.36 Award Contract, effective September 21, 1994, as amended,
issued by Technical Contract Management Office to the
Company.(1)
10.37 Fixed Price Contract, dated as of October 18, 1995, by and
between the Company and Spectragraphics.(1)
11.1 Statement re: Computation of per share earnings.(2)
21.1 Subsidiaries.(1)
23.1 Consent of Independent Accountants.(2)
27.1 Financial Data Schedule.(2)
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission (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.
(2) Filed herewith.
38
42
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the registrant during the
forth quarter of the fiscal year ended March 31, 1997.
(c) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(2).
39
43
GLOSSARY OF SELECTED TERMS
DAMA..............................Demand Assigned Multiple Access. A protocol
for assigning a communication channel to a
user only upon request.
DOD...............................Department of Defense.
Downlink..........................A radio transmission from a satellite back
down toward the earth.
EMUT..............................Enhanced Manpack UHF Terminal. A small,
portable satellite terminal for DOD that
operates in the UHF frequency band.
FDMA..............................Frequency Division Multiple Access. A protocol
that assigns each communication channel to a
different transmission frequency.
GHz...............................Giga Hertz. One billion cycles per second. A
measure of frequency or bandwidth.
LEO...............................Low Earth Orbit.
Local Loop Services...............Local telephony service.
MHz...............................Mega Hertz. One million cycles per second. A
measure of frequency or bandwidth.
MIL-STD...........................Military standard.
NCS...............................Network Control System. The satellite terminal
and computer that manages channel
assignments in a DAMA network.
Network...........................A collection of user terminals linked together
by a satellite.
PSTN..............................Public Switched Telephone Network.
RF................................Radio Frequency.
SCPC..............................Single Channel Per Carrier. A signalling
technique that transmits one voice or data
circuit per radio channel.
SHF...............................Super High Frequency radio transmissions.
TDM...............................Time Division Multiplexing. A protocol for
combining several different circuits into a
single, continuous transmission.
TDMA..............................Time Division Multiple Access. A protocol for
time sharing a single communication channel
among a number of different users.
Transponder.......................A receiving and transmitting device on board a
satellite that relays an uplink transmission
from a satellite terminal back down to
earth.
UHF...............................Ultra High Frequency radio transmissions.
40
44
Uplink............................A radio transmission from a satellite terminal
that is sent up to a satellite.
VSAT..............................Very Small Aperture Terminal. A satellite
terminal with a very small antenna. A VSAT
antenna is typically considered to be less
than 3.7 meters in diameter.
Wireless Local Loop ..............Wireless switched local telephony service.
41
45
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 16, 1997.
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARK D. DANKBERG Chairman of the Board, June 16, 1997
--------------------------- President and Chief
Mark D. Dankberg Executive Officer (Principal
Executive Officer)
/s/ GREGORY D. MONAHAN Vice President, Chief June 16, 1997
- ---------------------------- Financial Officer and
Gregory D. Monahan General Counsel (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ ROBERT W. JOHNSON Director June 16, 1997
---------------------------
Robert W. Johnson
/s/ JEFFREY M. NASH Director June 16, 1997
---------------------------
Jeffrey M. Nash
/s/ B. ALLEN LAY Director June 16, 1997
---------------------------
B. Allen Lay
/s/ JAMES F. BUNKER Director June 16, 1997
---------------------------
James F. Bunker
42
46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ViaSat, Inc.
In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) on page 37 present fairly, in all material respects, the financial
position of ViaSat, Inc. at March 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
May 12, 1997
F-1
47
VIASAT, INC.
BALANCE SHEET
MARCH 31, MARCH 31,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,673,000 $ 2,297,000
Accounts receivable 10,315,000 6,171,000
Inventory 4,478,000 1,223,000
Deferred income taxes 863,000 484,000
Other current assets 1,825,000 170,000
------------ ------------
Total current assets 30,154,000 10,345,000
Property and equipment, net 5,085,000 2,789,000
Other assets 435,000 128,000
------------ ------------
Total assets $ 35,674,000 $ 13,262,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,844,000 $ 2,774,000
Accrued liabilities 3,769,000 2,157,000
Current portion of notes payable 1,135,000 763,000
------------ ------------
Total current liabilities 9,748,000 5,694,000
------------ ------------
Notes payable 1,428,000 1,747,000
Other liabilities 879,000 604,000
------------ ------------
Total long-term liabilities 2,307,000 2,351,000
------------ ------------
Commitments and contingencies (Notes 10 & 11)
Stockholders' equity:
Series A, convertible preferred stock, $.0001 par value;
5,000,000, and 3,225,000 shares authorized; no shares and
3,225,0000 shares issued and outstanding at March 31, 1997
and March 31,1996, respectively 32,000
Common stock, $.0001 par value, 25,000,000 and
7,335,000 shares authorized; 7,742,274 and
3,342,101 issued and outstanding at March 31,
1997 and March 31, 1996, respectively 81,000 46,000
Paid in capital 16,044,000 737,000
Stockholders' notes receivable (80,000)
Retained earnings 7,574,000 4,402,000
------------ ------------
Total stockholders' equity 23,619,000 5,217,000
------------ ------------
Total liabilities and stockholders' equity $ 35,674,000 $ 13,262,000
============ ============
See accompanying notes to financial statements
F-2
48
VIASAT, INC.
STATEMENT OF INCOME
YEAR ENDED MARCH 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues $47,715,000 $29,017,000 $22,341,000
Cost of revenues 33,102,000 20,983,000 16,855,000
----------- ----------- -----------
Gross profit 14,613,000 8,034,000 5,486,000
Operating expenses:
Selling, general and
administrative 4,752,000 3,400,000 2,416,000
Independent research and
development 5,087,000 2,820,000 788,000
----------- ----------- -----------
Income from operations 4,774,000 1,814,000 2,282,000
Other income (expense):
Interest income 354,000 29,000 27,000
Interest expense (254,000) (260,000) (114,000)
----------- ----------- -----------
Income before income taxes . 4,874,000 1,583,000 2,195,000
Provision (benefit) for income taxes 1,702,000 (50,000) 888,000
----------- ----------- -----------
Net income $ 3,172,000 $ 1,633,000 $ 1,307,000
=========== =========== ===========
Pro forma net income per share $ 0.47 $ 0.28
=========== ============
Shares used in computing pro
forma net income per share 6,702,414 5,875,729
=========== ===========
See accompanying notes to financial statements.
F-3
49
VIASAT, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 3,172,000 $ 1,633,000 $ 1,307,000
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation 1,389,000 982,000 542,000
Deferred income taxes (721,000) (350,000) (13,000)
Increase (decrease) in cash resulting
from changes in:
Accounts receivable (4,144,000) (1,871,000) (265,000)
Inventory (3,255,000) (1,019,000) (189,000)
Other assets (1,620,000) (186,000) (43,000)
Accounts payable 2,070,000 1,294,000 530,000
Accrued liabilities 1,612,000 (512,000) 1,331,000
Other liabilities 275,000 485,000 119,000
------------ ------------ ------------
Net cash (used in) provided by
operating activities (1,222,000) 456,000 3,319,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (3,685,000) (1,875,000) (1,701,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from short-term bank borrowings 2,600,000 1,400,000 --
Repayment of short-term bank borrowings (2,600,000) (1,400,000) (350,000)
Proceeds from issuance of notes payable 889,000 2,778,000 1,650,000
Repayment of notes payable (836,000) (1,964,000) (346,000)
Proceeds from issuance of common stock 15,230,000 171,000 150,000
------------ ------------ ------------
Net cash provided by financing activities 15,283,000 985,000 1,104,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 10,376,000 (434,000) 2,722,000
Cash and cash equivalents at beginning of period 2,297,000 2,731,000 9,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 12,673,000 $ 2,297,000 $ 2,731,000
============ ============ ============
Supplemental information:
Cash paid for interest $ 254,000 $ 260,000 $ 116,000
============ ============ ============
Cash paid for income taxes $ 2,293,000 $ 468,000 $ 642,000
============ ============ ============
See accompanying notes to financial statements.
F-4
50
VIASAT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- STOCKHOLDERS'
NUMBER OF NUMBER OF PAID IN NOTES RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS
--------- ---------- --------- --------- ------------ ------------- --------
Balance at March 31, 1994 3,225,000 $ 32,000 2,967,008 $ 40,000 $ 422,000 $1,462,000
Issuance of common stock 240,331 4,000 146,000
Net income 1,307,000
---------- -------- ---------- -------- ---------- -------- ----------
Balance at March 31, 1995 3,225,000 32,000 3,207,339 44,000 568,000 2,769,000
Issuance of common stock 134,762 2,000 169,000
Net income 1,633,000
---------- -------- ---------- -------- ---------- -------- ----------
Balance at March 31, 1996 3,225,000 32,000 3,342,101 46,000 737,000 4,402,000
Issuance of common stock 2,034,635 3,000 15,307,000
Conversion of
preferred stock
to common stock (3,225,000) (32,000) 2,365,538 32,000
Shares subscribed $(80,000)
Net income 3,172,000
---------- -------- ---------- -------- ---------- -------- ----------
Balance at March 31, 1997 -- $ -- 7,742,274 $ 81,000 $16,044,000 $(80,000) $7,574,000
========== ========= ========== ======== =========== ========= ==========
See accompanying notes to financial statements.
F-5
51
VIASAT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF 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. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less.
Investments
At March 31, 1997, the Company held investments in investment grade
securities with maturities of three months or less. Management determines the
appropriate classification of its investments in debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date. The
Company has included these securities, net of amortization, in cash and cash
equivalents and has designated them as held to maturity.
Revenue Recognition
The majority of the Company's revenues are derived from services performed
for the United States Government and its prime contractors under a variety of
contracts including cost-plus-fixed fee, fixed-price, and time and materials
type contracts. Such sales amounted to $46,292,000, $28,305,000, and $21,226,000
for the years ended March 31, 1997, 1996 and 1995, respectively. Included in
these revenues are sales to a significant customer under various subcontracts
totaling $12,830,000, $5,269,000 and $4,166,000 during the years ended March 31,
1997, 1996 and 1995, respectively. The Company's five largest contracts (by
revenues) generated approximately 57.6% and 36.5% of the Company's total
revenues for the fiscal year ended March 31, 1997 and 1996, 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 1994. Contract 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.
F-6
52
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash equivalents and trade
accounts receivable which are generally not collateralized. The Company limits
its exposure to credit loss by placing its cash equivalents with high credit
quality financial institutions. Concentrations of credit risk with respect to
receivables are limited because the Company's primary customers are various
agencies of the United States Government and its prime contractors.
Inventory
Inventories are valued at the lower of cost or market, cost being
determined by the first-in, first-out method.
Software Costs
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, 1997, no significant amounts were expended 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 3 to 7 years under 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 net cash flows is less than the carrying amount
of the asset. No such impairment losses have been identified by the Company.
Warranty Reserves
The Company provides limited warranties on certain of its products for
periods of up to three years. The Company recognizes warranty reserves based
upon an estimate of total warranty costs, with amounts expected to be incurred
within twelve months classified as a current liability.
Income Taxes
Income taxes are provided utilizing the liability method. The liability
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities. Additionally, under the
liability method, changes in tax rates and laws will be reflected in income in
the period such changes are enacted.
Fair Value of Financial Instruments
At March 31, 1997, the carrying amounts of the Company's financial
instruments, including cash equivalents, trade receivables and accounts payable,
approximated their fair values due to their short term maturities. At March 31,
1997, the estimated fair value of the Company's long-term debt approximated its
carrying value.
F-7
53
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-based
method had been applied in measuring compensation expense (Note 7).
Pro forma net income per share
Pro forma net income per share is computed based on the weighted average
number of common shares and common stock equivalents, using the treasury stock
method, outstanding during the respective periods after giving retroactive
effect to the conversion, which occurred upon the closing of the Company's
initial public offering, of all outstanding shares of preferred stock into
2,365,538 shares of common stock. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, all issuances of common stock and all stock
options granted within one year prior to the Company's initial public offering
have been included as outstanding for all periods using the treasury stock
method. Historical earnings per share are not presented because such amounts are
not deemed meaningful due to the significant change in the Company's capital
structure that occurred in connection with the initial public offering.
New Accounting Pronouncement
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 will be adopted by the Company as required in the third quarter of fiscal
1998. Upon adoption of SFAS No. 128, the Company will present basic earnings per
share as well as diluted earnings per share. Basic earnings per share will be
computed based on the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share will be computed based
on the weighted average number of shares of common stock outstanding during the
period increased by the effect of dilutive stock options using the treasury
stock method. Pro forma basic earnings per share for the years ended March 31,
1997 and 1996 are $0.49 and $0.28, respectively. Pro forma diluted earnings per
share for the years ended March 31, 1997 and 1996 are $0.47 and $0.28,
respectively.
Recapitalization
In November 1996, the Company filed an Amended and Restated Certificate of
Incorporation to effect a .7335 for 1 reverse stock split of all outstanding
shares of common stock and stock options. All shares and per share data in the
accompanying financial statements have been adjusted retroactively to give
effect to the reverse stock split. The Amended and Restated Certificate of
Incorporation increases the authorized stock of the Company such that the
Company is authorized to issue 5,000,000 shares of $0.0001 par value preferred
stock, and 25,000,000 shares of $0.0001 par value common stock. Concurrently,
the conversion ratio of the Company's preferred stock was changed to .7335 for
1.
NOTE 2 - COMPLETION OF INITIAL PUBLIC OFFERING
On December 3, 1996, the Company completed its initial public offering for the
sale of 2,400,000 shares of common stock (of which 1,850,000 shares were sold by
the Company and 550,000 shares were sold by certain stockholders) at a price to
the public of $9 per share, which resulted in net proceeds to the Company of
$15,485,000 after payment of the underwriters' commissions but before deduction
of offering expenses.
F-8
54
NOTE 3 - COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
MARCH 31,
-----------------------------
1997 1996
------------ -----------
Cash and cash equivalents:
Investments $ 8,979,000
Certificates of deposit 1,500,000
Cash 2,194,000 2,297,000
------------ ------------
$ 12,673,000 $ 2,297,000
============ ============
Accounts receivable:
Billed $ 6,860,000 $ 5,653,000
Unbilled 3,455,000 518,000
------------ ------------
$ 10,315,000 $ 6,171,000
============ ============
Inventory:
Raw materials $ 1,418,000 $ 753,000
Work in process 2,662,000 402,000
Finished goods 398,000 68,000
------------ ------------
$ 4,478,000 $ 1,223,000
============ ============
Property and equipment:
Machinery and equipment $ 5,320,000 $ 2,313,000
Computer equipment 3,012,000 2,213,000
Furniture and fixtures 256,000 380,000
------------ ------------
8,588,000 4,906,000
Less accumulated depreciation (3,503,000) (2,117,000)
------------ ------------
$ 5,085,000 $ 2,789,000
============ ============
Accrued liabilities:
Accrued vacation $ 821,000 $ 591,000
Current portion of warranty reserve 806,000 413,000
Accrued bonus 762,000 347,000
Accrued 401(k) matching contribution 553,000 444,000
Collections in excess of revenues 355,000 237,000
Income taxes payable 252,000 40,000
Other 220,000 85,000
------------ ------------
$ 3,769,000 $ 2,157,000
============ ============
NOTE 4 - SHORT-TERM BANK BORROWINGS
The Company has a $6,000,000 line of credit with a bank which allows it to
borrow the greater of $2,000,000 or 80% of eligible accounts receivable plus 50%
of the Company's eligible inventory. At the Company's option interest accrues
either at the bank's prime rate (8.5% at March 31, 1997) or at the banks LIBOR
rate plus 1.75% (7.69% at March 31, 1997). There were no borrowings outstanding
as of March 31, 1997 and 1996. The Company is required to pay a fee equal to
0.09% of the unused portion of the line of credit on a quarterly basis. The
credit agreement includes covenants which, among other things, require the
Company to maintain stated net worth amounts plus specific liquidity and
long-term solvency ratios as well as a minimum net income level. The line of
credit expires on September 15, 1998. Amounts borrowed are secured by
substantially all of the Company's assets.
F-9
55
NOTE 5 - NOTES PAYABLE
MARCH 31,
-----------------------------
1997 1996
----------- -----------
Bank installment loans, with various
expiration dates through September 1999,
total monthly payments of $87,000 with
interest rates ranging between 8% and 12%,
collateralized by equipment $ 2,232,000 $ 1,989,000
Finance company installment loans, with
various expiration dates through April 1999,
total monthly payments of $20,000 with
interest rates ranging between 10.23%
and 11.81%, collateralized by equipment 331,000 521,000
----------- -----------
2,563,000 2,510,000
Less current portion (1,135,000) (763,000)
----------- -----------
$ 1,428,000 $ 1,747,000
=========== ===========
Principal maturities of notes payable as of March 31, 1997 are summarized as
follows:
YEAR ENDING MARCH 31,
---------------------
1998 1,135,000
1999 907,000
2000 417,000
2001 104,000
----------
$2,563,000
==========
NOTE 6 - CONVERTIBLE PREFERRED STOCK
At March 31, 1996, the Company had 3,225,000 shares of its convertible
$.01 par value Series A preferred stock outstanding with a liquidation
preference of $.10 per share. Holders of the preferred stock have votes per
share equivalent to the number of shares of common stock to which the preferred
stock may be converted. On December 3, 1996, the Company completed its initial
public offering which resulted in the conversion of all outstanding shares of
the preferred stock into 2,365,538 shares of common stock.
NOTE 7 - 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 market 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 were issued under the Plan since July 1996.
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 750,000 shares
are reserved for issuance under the 1996 Equity Participation Plan. As of March
31, 1997, the Company has granted 175,000 options to purchase 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 of the Company in
acquiring a stock ownership interest in the Company and to encourage them to
remain in the employment of the Company. The Employee Stock
F-10
56
Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code. A maximum of 250,000 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.
Transactions under the Company's stock option plans are summarized as
follows:
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ------------
Outstanding at March 31, 1994 54,829 $ .34
Options granted 135,587 $ .48 - .82
--------
Outstanding at March 31, 1995 190,416 $ .34 - .82
Options granted 128,033 $ 1.36
Options canceled (147) $ .82
Options exercised (8,215) $ .34 - .82
--------
Outstanding at March 31, 1996 310,087 $ .34 - 1.36
Options granted 295,673 $4.09 -10.75
Options canceled (5,284) $ .82 - 4.09
Options exercised (73,458) $ .34 - 1.36
--------
Outstanding at March 31, 1997 527,018 $ .34 -10.75
========
The Company also granted certain officers and employees the opportunity to
purchase at fair market value 118,607, 124,805 and 254,855, shares of the
Company's common stock in fiscal 1997, 1996 and 1995, respectively.
The following table summarizes all options outstanding and exercisable by
price range as of March 31, 1997:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
--------------- ----------- ---------- ----- ----------- -----
$ 0.34 - 1.50 235,380 7.80 $1.00 112,349 $0.84
$ 4.09 - 4.50 116,638 9.25 $4.15 -- --
$ 9.00 - 10.75 175,000 9.86 $9.84 -- --
--------------- -------
$ 0.34 - 10.75 527,018
=============== =======
Pro forma information
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," to account for its employee stock options because,
as discussed below, the alternative fair value based accounting provided for
under SFAS No. 123 "Accounting for Stock-Based Compensation," requires the use
of option valuation models that were not developed for use in valuing employee
stock options. These valuation models were developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Under APB
No. 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized in the Company's financial statements.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. Such information is determined as if the Company had
accounted for its employee stock options and shares
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57
issued under the Employee Stock Purchase Plan (hereafter referred to as
"options") granted subsequent to March 31, 1995 using the fair value methodology
prescribed by that statement.
The fair values of options granted during the years ended March 31, 1997
and 1996 reported below were estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
EMPLOYEE EMPLOYEE STOCK
STOCK OPTIONS PURCHASE PLAN
----------------------------- ---------------
1997 1996 1997
----------- ------- ------
Expected life (in years) 3.50 - 5.00 3.50 0.50
Risk-free interest rate 6.45% 5.93% 5.97%
Expected volatility 50.00% 50.00% 50.00%
Expected dividend yield 0.00% 0.00% 0.00%
The weighted average estimated fair value of employee stock options
granted during 1997 and 1996 was $3.55 and $0.57 per share, respectively. The
weighted average estimated fair value of shares granted under the Employee Stock
Purchase Plan during fiscal 1997 was $2.78 per share.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. Because SFAS
No. 123 is applicable only to options granted subsequent to March 31, 1995, the
pro forma effect will not be fully reflected until the options granted in fiscal
1996 are fully vested in fiscal 2000. The Company's pro forma information for
the years ended March 31, 1997 and 1996 are as follows:
1997 1996
---------- ----------
Pro forma net income $3,016,000 $1,615,000
Pro forma earnings per share $ 0.46 $ 0.28
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes includes the following:
YEAR ENDED MARCH 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
Current tax provision
Federal $ 1,954,000 $ 344,000 $ 708,000
State 469,000 9,000 193,000
----------- ----------- -----------
2,423,000 353,000 901,000
----------- ----------- -----------
Deferred tax provision:
Federal (563,000) (310,000) (10,000)
State (158,000) (93,000) (3,000)
----------- ----------- -----------
(721,000) (403,000) (13,000)
----------- ----------- -----------
Total provision (benefit)
for income taxes $ 1,702,000 $ (50,000) $ 888,000
=========== =========== ===========
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Significant components of the Company's deferred tax assets and
liabilities are as follows:
MARCH 31,
----------------------------
1997 1996
----------- -----------
Deferred tax assets:
Warranty reserve $ 528,000 $ 219,000
Inventory Reserve 280,000
Accrued vacation 247,000 190,000
Other 260,000 142,000
----------- -----------
Total deferred tax assets 1,315,000 551,000
Deferred tax liabilities:
Depreciation (57,000) (14,000)
----------- -----------
Net deferred tax assets $ 1,258,000 $ 537,000
=========== ===========
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:
MARCH 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
Tax expense at statutory rate $ 1,657,000 $ 538,000 $ 746,000
State tax provision (benefit),
net of federal benefit 205,000 (60,000) 153,000
Research tax credit (181,000) (480,000) (18,000)
Other 21,000 (48,000) 7,000
----------- ----------- -----------
$ 1,702,000 $ (50,000) $ 888,000
=========== =========== ===========
The Company's income tax benefit for the fiscal year ended March 31, 1996
was primarily attributable to the utilization of research and development
credits generated in the period and the impact of a favorable United States
Federal judicial decision which clarified the tax law related to the utilization
of research and development credits generated from the Company's funded research
and development.
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 1997, 1996 and 1995 amounted to $553,000, $444,000 and $275,000,
respectively. The cost of administering the plan is not significant.
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59
NOTE 10 - COMMITMENTS
The Company leases office facilities under noncancelable operating leases
with terms ranging from one to five years which expire between May 1998 and July
1999. Certain of the Company's facilities leases contain option provisions which
allow for extension of the lease terms. Rent expense was $793,000, $608,000 and
$493,000 in fiscal years 1997, 1996 and 1995, respectively.
Future minimum lease payments are as follows:
YEAR ENDING MARCH 31,
---------------------
1998 $ 755,000
1999 649,000
2000 151,000
----------
$1,555,000
==========
Additionally, the Company enters into long term purchase commitments with
certain of its vendors to purchase materials used to manufacture products
delivered under long term contracts. At March 31, 1997, the Company had
commitments to purchase $1,280,000, $1,181,000, $1,181,000, and $66,000 of
materials in fiscal 1998, 1999, 2000, and 2001, respectively. Purchases under
these contracts totaled $2,098,000 during the year ended March 31, 1997.
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.
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