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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, 1998
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, 1998 was approximately $86,389,958 (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, 1998 was 7,925,526.
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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 1998 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, 1998.
Certain exhibits filed with the registrant's Registration Statement on Form
S-1 (File No. 333-13183), as amended, and Annual Report on Form 10-K for the
fiscal year ended March 31, 1997, 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, 1998
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 Registrant's Common Stock and Related 29
Stockholder Matters
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
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 41
Signatures 43
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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 an 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 twelve consecutive years of internally generated revenue growth and
eleven 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,
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 Intel
based 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 fiscal year ended March 31, 1998, the Company executed existing
critical government UHF satellite contracts, and also established significant
milestones in other important government markets including TCP/IP-based network
encryption, digital anti-jam radios, and communications simulation. In addition,
the Company made considerable investments in commercial satellite networking and
achieved significant revenue growth in that area, while capturing new
applications and geographic markets. Some specific highlights follow:
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o Final installation, testing and commissioning of the worldwide 5
kHz UHF DAMA satellite network control system for the Department
of Defense ("DOD"). The completion of the network control system
enables deployment of UHF DAMA satellite terminals by ground,
air, and sea forces.
o First production deliveries of the QDC-100 UHF Satellite Antenna
Processing units delivered to Lockheed Martin for installation
on US Navy P3 Aircraft.
o Initial DOD order for 600 copies of ViaSat eMail Messaging
Software, a new program for sending email-like communications
over satellite and wireless channels using the Windows(R)
operating system.
o First international orders for ViaSat UHF DAMA satellite modems
from US allies -- Australia, Canada, New Zealand, and the UK.
o Selection by the U.S. Navy as a candidate supplier of production
quantities of Multifunction Information Distribution System
(MIDS) terminals, via a $5 million agreement for the MIDS
Production Readiness Program.
o Continued growth in our Communication Simulation business area
with a $15.4 million award from Lockheed Martin Aerospace
Systems.
o First production order, valued at $2.5 million, for STAR
portable satellite communication terminals.
o Initial over-the-air satellite testing of ViaSat's patented
Paired Carrier Multiple Access (PCMA) -- the company's new
bandwidth re-use technology. Depending on the application, this
technique can as much as double the bandwidth efficiency of
two-way satellite links. The Company does not project any
significant near-term financial benefit from this technology,
but believes it can provide a meaningful competitive advantage
once it is incorporated into the Company's products.
o Introduction of new features for the Company's StarWire DAMA
satellite networks, including integrated Demand Assigned
Internet Protocol (IP) routing capabilities. The Company
deployed a U.S. system for backup and congestion relief of a
terrestrial frame-relay network.
o The National Security Agency certified that ViaSat's Embeddable
INFOSEC Product (EIP) can be used to secure U.S. Government
classified data up through Top Secret. EIP enables users to
securely transmit information through non-secure, packet
networks such as the Internet.
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.
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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 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
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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 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.
o 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.
o 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. ViaSat
developed and proved Windows NT(TM) as a viable network
control platform under government funded UHF and SHF
DAMA programs.
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.
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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 networking software products.
The Company has over 160 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
Raytheon Systems Company, formerly Hughes Defense Communications ("Raytheon
Systems Company"), Lockheed Martin Corporation ("Lockheed Martin"), and ITT
Industries, Inc., Aerospace/Communications Division, and commercial
telecommunications companies, such as Hutchison Corporate Access (HK) Limited
("Hutchison Telecommunications"), and HCL Comnet Systems and Services Limited
("HCL Comnet").
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
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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.
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 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
o 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
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subscribers, is usually prohibitively expensive. The equipment
cost for a comparable DAMA system for voice use, in contrast,
would be significantly less.
TRANSMISSION TIME
o 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 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:
o Spread spectrum digital radios for real-time tactical data
networks among ground and airborne users. The MIDS radio system
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.
o 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.
o 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.
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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:
o UHF DAMA NETWORK CONTROL INFRASTRUCTURE. Viasat has completed
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.
o MANPACK TERMINALS. ViaSat has a contract with Raytheon Systems
Company for over 7,000 DAMA modems for manpacks. As of March 31,
1998, the funded contract value was $39.5 million, of which
$23.1 million had been delivered.
o 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, ES-3, Tomahawk cruise missiles and others.
o 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:
o 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.
o 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.
o 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.
o 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
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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.
o 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:
o Long term leases for commercial satellite transponders.
o Contracts to purchase tri-band satellite terminals.
o Bandwidth Management Centers to act as network controllers for
the tri-band terminals.
The DOD is planning to define 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 limited 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 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
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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:
o EMUT (ENHANCED MANPACK UHF TERMINAL) is a battery-operated UHF
satellite radio which Raytheon Systems Company builds for the
U.S. Army. ViaSat provides a DAMA modem to Raytheon 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.
o 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 bandwidth 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.
o 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:
o MIDS (MULTIFUNCTION INFORMATION DISTRIBUTION SYSTEM) is an
anti-jam radio system which implements the Link-16 waveform,
message, and networking protocols for communicating real-time
tactical data among ships, aircraft and ground units. MIDS
terminals connect to sensors (like radar), computers, and
targeting systems and provides information used for navigation,
target identification, tracking and fire control. Link-16 is
currently being implemented as a key element of 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 from many different views from
many different participants.
o CES/JCS/CNIS (COMMUNICATION ENVIRONMENT SIMULATOR/JOINT
COMMUNICATION SIMULATOR/ COMMUNICATIONS NAVIGATION AND
IDENTIFICATION 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.
o 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
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allow such information to remain unencrypted so that the network
can correctly route the packet to its destination.
o QDC-100 (QUAD DIVERSITY COMBINER) is a unique product that
combines four satellite antennas into one steerable high gain
"virtual" antenna. Without the Combiner, an aircraft loses
communications if its single fixed antenna is pointed away from
the satellite by aircraft position changes. First production
units were completed in March 1998, and are in use on US Navy P3
reconnaissance aircraft in the Anti Surface Warfare Improvement
Program (AIP). Markets for the Combiner could potentially expand
to international customers and shipboard applications. In
addition to an order from the Royal Norwegian Air Force, the US
and Royal New Zealand navies are evaluating the product for
shipboard use, where it can replace heavy, mechanically driven
antennas.
o 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
links. The ADC family of products include the VDC-200 which uses
a serial PC interface, the VDC-300 which can be used in aircraft
or vehicles, the VDC-400 which is packaged in a type II PCMCIA
card for use with mobile PCs, and the VDC-500 which integrates
Internet Protocol for communications from an Ethernet LAN to a
wireless VDC network. The Company also offers two messaging
applications which include DTS/WIN and ViaSat eMail(TM). Both
applications give users a Windows(R) operating system interface
to set up, control, manage, and log messages when communicating
using VDCs.
GOVERNMENT CUSTOMERS
The Company's major customers in the government DAMA market include:
o Raytheon Systems Company is the customer for the EMUT DAMA
modem. Approximately 14% of the Company's fiscal 1998 revenues
were derived from this contract
o 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 user agencies.
o Lockheed Martin is the customer for the airborne DAMA-capable
UHF satellite communications antenna combiner.
o 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:
o The U.S. Air Force, U.S. Navy, International Program Office and
Logicon Tactical Systems Division are the customers for MIDS.
o Lockheed Martin is the customer for CNIS which will become part
of Lockheed's Integrated Hardware-in-the-loop Avionics Test Lab.
o The U.S. Navy and U.S. Air Force are the customers for CES/JCS.
o The U.S. Navy is the customer for EIP.
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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:
o 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.
o "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
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.
o 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.
o 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.
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COMMERCIAL PRODUCTS
STARWIRE 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 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 products include:
o 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.
o 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.
o 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.
o 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.
o STARWIRE 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).
o STARWIRE DAMA NETWORK CONTROL SOFTWARE (NCS) provides the
real-time network control and monitoring functions of the
StarWire DAMA networking system. The NCS software acts as a
switch to route calls through the network. In addition, the
StarWire NCS monitors all aspects of system operation as well as
collecting historical information about calls and maintaining
detailed call records for billing purposes.
o STARWIRE 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.
o EXTERNAL DEVICE INTERFACE DRIVER (EDID) supports third party
modem and RF terminal equipment.
COMMERCIAL CUSTOMERS
The Company is in the early stages of establishing sales for its
StarWire 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 product for customer evaluation
and demonstration purposes. The Company's major customers in the commercial DAMA
market include:
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o 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.
o HCL COMNET -- HCL Comnet, ViaSat's exclusive distributor in
India, operates the largest single VSAT network for India's
national stock exchange. HCL Comnet selected ViaSat's StarWire
system for HCL Comnet's DAMA private network products and
services.
o SATELLITE COMMUNICATIONS SYSTEMS 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 terminals to establish voice, data, and radar
communications among air traffic control sites in the Caribbean
and Central America.
o ViaSat also has executed distribution agreements and purchase
contracts with companies operating VSAT networks in Mexico,
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 revenues at such time. Revenues for funded
research and development during the fiscal years ended March 31, 1998, 1997 and
1996 were approximately $25.6 million, $21.3 million, and $19.5 million,
respectively. In addition, the Company invested $7.6 million, $5.1 million and
$2.8 million, respectively, during the fiscal years ended March 31, 1998, 1997
and 1996 on independent research and development, which is not directly funded
by a third party. Funded research and development contains a profit component
and is therefore not directly comparable to independent research and
development. As a government contractor, 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.
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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.
After the Company has identified key potential customers in its market segments,
the Company makes sales calls with its sales, management and engineering
personnel. 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, 1998, ViaSat sold products to
approximately 60 customers, of which DOD related contracts accounted for
approximately 91% of total revenues.
BACKLOG
At March 31, 1998, the Company had firm backlog of $72.7 million, of
which $48.0 million was funded, not including options of $24.3 million. Of the
$72.7 million in firm backlog, approximately $46.6 million is expected to be
delivered in the fiscal year ending March 31, 1999, $15.2 million is expected to
be delivered in the fiscal year ending March 31, 2000 and the balance is
expected to be delivered in the fiscal year ending March 31, 2001 and
thereafter. The Company had firm backlog of $78.4 million, not including options
of $24.9 million, at March 31, 1997, compared to firm backlog of $28.7 million,
not including options of $28.0 million, at March 31, 1996. 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, 1998
was approximately $48.0 million, and the funded components of the Company's
backlog at March 31, 1997 and 1996 were $67.6 million and $26.3 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
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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. Revenues generated
from contracts with the federal government or its prime contractors for the
fiscal year ended March 31, 1998 were approximately 22.6% from
cost-reimbursement contracts, approximately 4.0% from time-and-materials
contracts and approximately 64.1% from fixed-price contracts of total revenues.
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
1995 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.
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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.
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 MIDS 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.
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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 using DAMA technology. Most of
the leading TDM/TDMA VSAT companies are offering DAMA products, including Hughes
Network Systems, (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.
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 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.
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EMPLOYEES
As of March 31, 1998, the Company had 345 employees (24 of which were
temporary employees), including over 180 in research and development, 11 in
marketing and sales, 81 in production, and 64 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
72 engineers who have masters degrees and six 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
Approximately 91% of the Company's revenues for the fiscal year ended
March 31, 1998 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 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, 1998,
the Company's largest contracts (by revenues) were contracts related to the
Company's UHF DAMA technology, which generated approximately 61% of the
Company's total revenues, including a contract with Raytheon Systems Company
which generated approximately 14% of the Company's total revenues. Scheduled
deliveries pursuant to firm purchase orders under this contract are scheduled to
be completed during the fiscal year ending March 31, 2000. Raytheon Systems
Company is an affiliate of Raytheon Corporation, which is the Company's
principal competitor in the government DAMA market. See "Business --
Competition."
The Company's five largest contracts (by revenues) generated
approximately 65% of the Company's total revenues for the fiscal year ended
March 31, 1998. 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.
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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 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 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 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 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
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requirements or parts shortages. In fiscal 1998, approximately 14% 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, 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 72.8% of the Company's total revenues for the fiscal
year ended March 31, 1998, 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 4.6% 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.
Approximately 22.6% of the Company's revenues for the fiscal year ended March
31, 1998 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.
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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, 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."
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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."
FIXED SITE SATELLITE TELEPHONY MARKET
The Company's strategy includes establishing satellite 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 fixed site 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 subscribers. The development and implementation
of such satellite 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 equipment and software which can be
utilized in such 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 satellite 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
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27
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."
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
patents, 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.
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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 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.
VOLATILITY OF STOCK PRICE
Historically, the Company's stock price has been volatile. The sales
price for the Company's Common Stock has ranged from $8.88 to $24.38 per share
during the 52-week period ended March 31, 1998. 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.
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CONTROL BY EXISTING STOCKHOLDERS
As of March 31, 1998, 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% 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 or 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 a 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.
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, for which the
Company is the sole beneficiary. See "Business -- Employees."
26
30
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 leases two other facilities in
Carlsbad, California containing approximately 56,000 and 26,000 square feet for
research and development, application engineering and manufacturing coordination
activities. The first facility lease terminates in July 1999 with options to
renew for two additional periods of two years each. The second facility lease
terminates in November 1998 with options to renew for two additional periods of
one year each. In addition, the Company leases three smaller sales facilities
aggregating approximately 3,000 square feet located in Acton, Massachusetts,
Marietta, Georgia, and Durango, Colorado. The Massachusetts lease terminates in
April 1999 with an option to renew for a period of one year. The Georgia lease
terminates in June 1998. The Colorado lease terminates in January 1999. Annual
leasing costs of the Company totaled $1.1 million, $793,000 and $608,000 for the
fiscal years ended March 31, 1998, 1997 and 1996, respectively.
In April 1998, the Company entered into a long-term agreement to lease a
facility in Carlsbad, California which will house the Company's entire
California based operations. The facility will contain approximately 180,000
square feet and is expected to be completed in September 1999. The term of the
lease is 10 years with two three-year option periods. The initial minimum lease
payments are $2.3 million per year and will be payable commencing upon
completion of the facility.
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, 1998.
27
31
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
FISCAL 1998 HIGH LOW
--------- ---------
First Quarter $ 16.13 $ 8.88
Second Quarter 23.50 11.00
Third Quarter 24.38 10.00
Fourth Quarter 19.13 12.81
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. As
of June 16, 1998, there were 294 holders of record of the Common Stock.
- ----------
(a) Subsequent to December 3, 1996.
28
32
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from the Company's audited financial
statements. The balance sheet at March 31, 1998 and 1997 and the related
statements of income, of cash flows and of stockholders' equity of the Company
for the three years ended March 31, 1998 and notes thereto appear elsewhere
herein. The data should be read in conjunction with such financial statements
and other financial information appearing elsewhere herein. All amounts shown
are in thousands, except per share data.
YEARS ENDED MARCH 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
STATEMENT OF INCOME DATA:
Revenues $ 64,197 $ 47,715 $ 29,017 $ 22,341 $ 11,579
Cost of revenues 40,899 33,102 20,983 16,855 9,033
-------- -------- -------- -------- --------
Gross profit 23,298 14,613 8,034 5,486 2,546
Operating expenses:
Selling, general and administrative 7,862 4,752 3,400 2,416 1,554
Independent research and
development 7,631 5,087 2,820 788 134
-------- -------- -------- -------- --------
Income from operations 7,805 4,774 1,814 2,282 858
Net interest income (expense) 586 100 (231) (87) (45)
-------- -------- -------- -------- --------
Income before income taxes 8,391 4,874 1,583 2,195 813
Provision (benefit) for
income taxes 3,104 1,702 (50) 888 328
-------- -------- -------- -------- --------
Net income $ 5,287 $ 3,172 $ 1,633 $ 1,307 $ 485
======== ======== ======== ======== ========
Basic net income per share(1) $ 0.68 $ 0.66 $ 0.50 $ 0.42 $ 0.16
======== ======== ======== ======== ========
Diluted net income per share(1) $ 0.65 $ 0.48 $ 0.28 $ 0.24 $ 0.09
======== ======== ======== ======== ========
Shares used in Basic per share
calculations (1) 7,801 4,810 3,267 3,080 2,957
======== ======== ======== ======== ========
Shares used in Diluted per
share calculations (1) 8,175 6,642 5,735 5,479 5,323
======== ======== ======== ======== ========
MARCH 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- ------
BALANCE SHEET DATA:
Cash and short-term investments $ 9,208 $12,673 $ 2,297 $ 2,731 $ 9
Working capital 24,276 20,406 4,651 2,808 1,486
Total assets 42,793 35,674 13,262 9,377 4,986
Long-term debt, less current portion 1,544 1,428 1,747 1,220 297
Total stockholders' equity 29,610 23,619 5,217 3,413 1,956
- ----------
(1) Earnings per share calculations have been restated to comply with Statement
of Financial Accounting Standards (SFAS) No. 128. For an explanation of the
determination of the number of shares used in computing net income per
share, see Note 1 and Note 7 of the Notes to Financial Statements.
29
33
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
despite government budgetary constraints. Since 1992, the Company's total
revenues have grown at a compounded annual growth rate of approximately 58%. DOD
revenues amounted to $58.2 million and $46.3 million for the fiscal years ended
March 31, 1998 and 1997, 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 72.8% and 63.3% of the Company's total revenues for the
fiscal years ended March 31, 1998 and 1997, 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 4.6%
and 6.0% 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 22.6% and 30.7%
of the Company's revenues for the fiscal years ended March 31, 1998 and 1997,
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, 1998, the Company had firm backlog of $72.7 million, of
which $48.0 million was funded. Of the $72.7 million in firm backlog,
approximately $46.6 million is expected to be delivered in the fiscal year
ending March 31, 1999, approximately $15.2 million is expected to be delivered
in the fiscal year ending March 31, 2000 and the balance is expected to be
delivered in the fiscal years ending March 31, 2001 and thereafter. The Company
received $58.0 million in awards during the year ended March 31, 1998,
consisting of $19.6 million in UHF DAMA satellite communications awards, $15.8
million in awards for the defense simulator business, $18.4 million in other
defense awards and $4.2 million in commercial satellite communications awards.
The Company's $72.7 million in firm backlog at March 31, 1998 excludes an
additional $24.3 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, 1998 and 1997 were approximately $25.6
million and $21.3 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 52.6% and 35.3% of
fiscal 1998 and 1997 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 11.9% and 10.6% of revenues in IR&D during the fiscal years
ended
30
34
March 31, 1998 and 1997, respectively. 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,
---------------------------------------
1998 1997 1996
------- ------- -------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 63.7 69.4 72.3
------- ------- -------
Gross profit 36.3 30.6 27.7
Operating expenses:
Selling, general and 12.2 10.0 11.7
administrative
Independent research and
development 11.9 10.6 9.7
------- ------- -------
Income from operations 12.2 10.0 6.3
Income before income taxes 13.1 10.2 5.5
Net income 8.2 6.6 5.6
FISCAL YEAR ENDED MARCH 31, 1998 VS. FISCAL YEAR ENDED MARCH 31, 1997
Revenues. The Company's revenues increased 34.5% from $47.7 million in
fiscal 1997 to $64.2 million in fiscal 1998. This increase was primarily due to
increases in revenues generated by MD-1324s (UHF DAMA stand-alone modems),
StarWire satellite networking systems and Joint Communication Simulator ("JCS")
products. These increases were partially offset by a decrease in revenues
derived from UHF DAMA network control stations and modems and Enhanced Manpack
UHF Terminal ("EMUT") production.
Revenue from commercial customers grew from $1.5 million in fiscal 1997
to $5.9 million in fiscal 1998. Simulator product revenues grew from $4.8
million in fiscal 1997 to $11.5 million in fiscal 1998. UHF DAMA business area
revenues grew from $32.8 million (68.8% of revenues) in fiscal 1997 to $35.0
million (54.5% of revenues) in fiscal 1998.
Gross Profit. Gross profit increased 59.4% from $14.6 million (30.6% of
revenues) in fiscal 1997 to $23.3 million (36.3% of revenues) in fiscal 1998.
The increase in gross profit was primarily the result of a larger content of
higher margin products in the Company's sales for the year ended March 31, 1998
relative to the same period of the prior year. In addition, certain long-term
contracts realized higher profits than initial estimates.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased 65.5% from $4.8 million (10.0% of
revenues) in fiscal 1997 to $7.9 million (12.2% of revenues) in fiscal 1998. The
Company increased its business development and administrative staffing in
support of both defense and commercial programs. Bid and proposal efforts
increased from $1.2 million in fiscal 1997 to $1.5 million in fiscal 1998.
Independent Research and Development. IR&D expenses increased 50.0% from
$5.1 million (10.6% of revenues) in fiscal 1997 to $7.6 million (11.9% of
revenues) in fiscal 1998. This increase resulted primarily from higher IR&D
expenses related to the Company's StarWire DAMA product, which represented
approximately 88% of total IR&D for fiscal 1998.
31
35
Interest Expense. Interest expense decreased 16.9% from $254,000 in
fiscal 1997 to $211,000 in fiscal 1998. Interest expense relates to loans for
the purchase of capital equipment and to short-term borrowings under the
Company's line of credit to cover working capital requirements. Total
outstanding equipment loans were $2.6 million at March 31, 1997 and 1998. There
were no outstanding borrowings under the Company's line of credit at the end of
each fiscal year.
Interest Income. Interest income increased 125.1% from $354,000 in
fiscal 1997 to $797,000 in fiscal 1998. Interest income relates to interest
earned on cash and short-term investments.
Provision (Benefit) for Income Taxes. The Company's effective income tax
rate increased from 35% in fiscal 1997 to 37% in fiscal 1998. The Company's
effective income tax rate increased due to a limitation on qualified research
and development expenditures used to calculate the Company's research and
development tax credit.
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 EMUT 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. 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 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 DAMA product began in the last quarter of fiscal 1995 and have steadily
increased.
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.
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.
32
36
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily from cash
flows from operations, bank line of credit financing, equity financing and loans
for the purchase of capital equipment. Cash used in operating activities for the
fiscal years ended March 31, 1998 and 1997 was $127,000 and $1.2 million,
respectively. The relative decrease in cash used for operating activities for
the year ended March 31, 1998 compared to the prior year was primarily due to an
increase in net income of $2.1 million, relatively flat inventory growth and a
reduction in other assets, which was offset by an increase in accounts
receivable and a decrease in accounts payable. Other assets decreased primarily
due to the collection of a non-trade receivable. The increase in accounts
receivable resulted from an increase in the Company's revenues and the timing of
customer payments.
Cash used in investing activities for the fiscal years ended March 31,
1998 and 1997 was $10.0 million and $3.7 million, respectively. This increase
was the result of purchasing $5.9 million in short-term, investment grade, debt
securities and purchases of property and equipment, primarily consisting of test
equipment and computers.
Cash provided by financing activities for the fiscal years ended March
31, 1998 and 1997 was $745,000 and $15.3 million, respectively. This decrease
was primarily the result of $14.8 million of capital raised in the Company's
initial public offering which closed in December 1996.
At March 31, 1998, the Company had $3.3 million in cash and cash
equivalents, $5.9 million in short-term investments, $24.3 million in working
capital and $2.6 million in long-term debt which consists of equipment
financing. The Company had a zero balance under its line of credit at March 31,
1998 and 1997.
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, 1998) or at the bank's LIBOR
rate plus 1.75% (7.44% at March 31, 1998). 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 and second loans have been converted into
fully amortizing loans which mature on September 15, 1999 and 2000,
respectively. 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 has commenced the evaluation of computer systems and
products to insure its operations will not be adversely effected by the year
2000 software problems. Presently, the Company does not believe that year 2000
compliance will result in additional material investments by the Company, nor
does the Company anticipate that the year 2000 problem will have a material
adverse effect on the business operations or financial performance of the
Company. There can be no assurances, however, that the year 2000 problem will
not adversely effect the Company and its business.
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 and short-term
investment 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.
33
37
SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for the fair
statement of the results for the interim periods. Summarized quarterly data for
fiscal 1998 and 1997 is as follows (in thousands, except per share data):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1998
Revenues $14,476 $15,931 $15,991 $17,799
Gross profit 5,117 5,418 5,757 7,006
Income from operations 1,706 1,760 2,006 2,333
Net income 1,175 1,203 1,351 1,558
Basic net income per share (1) 0.15 0.15 0.17 0.20
Diluted net income per share (1) 0.15 0.15 0.16 0.19
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
Basic net income per share (1) 0.14 0.18 0.18 0.16
Diluted net income per share (1) 0.08 0.10 0.13 0.15
- -------------
(1) Earnings per share calculations have been restated to comply with Statement
of Financial Accounting Standards (SFAS) No. 128. Basic and diluted net
income per share computations for each quarter are independent and may not
add up to the net income per share computation for the respective year. See
Note 1 and Note 7 of Notes to the Financial Statements for an explanation of
the determination of basic and diluted net income per share.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8 FINANCIAL STATEMENTS
The Company's financial statements at March 31, 1998 and 1997, and for
each of the three years in the period ended March 31, 1998, 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.
34
38
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 1998 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."
35
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT 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, 1998 and 1997 F-2
Statements of Income for Fiscal 1998, 1997 and 1996 F-3
Statements of Cash Flow for Fiscal 1998, 1997 and 1996 F-4
Statements of Stockholders' Equity for Fiscal
1998, 1997 and 1996 F-5
Notes to Financial Statements F-6
Financial statement schedules 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)
36
40
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 Lease, dated December 9, 1997, by and between Newport
National Corporation and the Company(5962 La Place Court,
Carlsbad, California).(3)
10.26 Lease, dated April 22, 1997, by and between Onimac
Corporation and the Company (2320 Camino Vida Roble,
Carlsbad, California).(3)
10.27 Lease, dated March 24, 1998, by and between W9/LNP Real
Estate Limited Partnership and the Company (6155 El Camino
Real, Carlsbad, California).(3)
10.28 Basic Ordering Agreement, dated November 8, 1994, as
amended, by and between the Company and AT&T acting through
its Tridom division.(1)
10.29 Supply & Services Contract, dated June 2, 1996, by and
between HCL Comnet Systems and Services Limited and the
Company.(1)
10.30 Basic Ordering Agreement Subcontract, dated March 4, 1994,
by and between Magnavox Electronic Systems Company and the
Company.(1)
10.31 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)
10.32 Award/Contract, effective March 29, 1996, as amended, issued
by Electronic Systems Center/MCK Air Force Materiel Command,
USAF to the Company.(1)
10.33 Amendment of Award/Contract, effective February 24, 1997,
issued by Electronic Systems Center/MCK Air Force Materiel
Command, USAF to the Company.(2)
10.34 Award/Contract, effective October 2, 1995, issued by
Electronic Systems Center/MCK Air Force Materiel Command,
USAF to the Company.(1)
10.35 Award/Contract, effective September 29, 1993, as amended,
issued by Information Technology Acquisition Center to the
Company.(1)
10.36 Turnkey Agreement, dated August 9, 1996, by and between
Hutchison Corporate Access (HK) Limited and the Company.(1)
10.37 Award/Contract, effective July 30, 1991, issued by
Electronic Systems Division Air Force Systems Command, USAF
to the Company.(1)
10.38 Award/Contract, effective September 27, 1993, as amended,
issued by Contracting Officer Naval Research Laboratory to
the Company.(1)
10.39 Award Contract, effective September 21, 1994, as amended,
issued by Technical Contract Management Office to the
Company.(1)
10.40 Fixed Price Contract, dated as of October 18, 1995, by and
between the Company and Spectragraphics.(1)
21.1 Subsidiaries.(1)
23.1 Consent of Independent Accountants.(3)
27.1 Financial Data Schedule.(3)
27.2 Restated Financial Data Schedule for the six months ended
September 30, 1997.(3)
27.3 Restated Financial Data Schedule for the nine months ended
December 31, 1996.(3)
27.4 Restated Financial Data Schedule for the year ended
March 31, 1997.(3)
- ----------
(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.
37
41
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997.
(3) Filed herewith.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the registrant during the
fourth quarter of the fiscal year ended March 31, 1998.
(c) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(2).
38
42
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.
39
43
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.
40
44
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 26, 1998.
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 26, 1998
- ------------------------------------ President and Chief
Mark D. Dankberg Executive Officer (Principal
Executive Officer)
/s/ GREGORY D. MONAHAN Vice President, Chief June 26, 1998
- ------------------------------------ Financial Officer and
Gregory D. Monahan General Counsel (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ ROBERT W. JOHNSON Director June 26, 1998
- ------------------------------------
Robert W. Johnson
/s/ JEFFREY M. NASH Director June 26, 1998
- ------------------------------------
Jeffrey M. Nash
/s/ B. ALLEN LAY Director June 26, 1998
- ------------------------------------
B. Allen Lay
/s/ JAMES F. BUNKER Director June 26, 1998
- ------------------------------------
James F. Bunker
41
45
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 36 present fairly, in all material respects, the financial
position of ViaSat, Inc. at March 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998, 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 13, 1998
F-1
46
VIASAT, INC.
BALANCE SHEET
MARCH 31, MARCH 31,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,290,000 $ 12,673,000
Short-term investments 5,918,000 --
Accounts receivable 19,056,000 10,315,000
Inventory 4,687,000 4,478,000
Deferred income taxes 1,548,000 863,000
Other current assets 479,000 1,825,000
------------ ------------
Total current assets 34,978,000 30,154,000
Property and equipment, net 6,986,000 5,085,000
Other assets 829,000 435,000
------------ ------------
Total assets $ 42,793,000 $ 35,674,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,555,000 $ 4,844,000
Accrued liabilities 5,087,000 3,769,000
Current portion of notes payable 1,060,000 1,135,000
------------ ------------
Total current liabilities 10,702,000 9,748,000
------------ ------------
Notes payable 1,544,000 1,428,000
Other liabilities 937,000 879,000
------------ ------------
Total long-term liabilities 2,481,000 2,307,000
------------ ------------
Commitments and contingencies (Notes 11 & 12)
Stockholders' equity:
Series A, convertible preferred stock, $.0001 par
value; 5,000,000 shares authorized; no shares
issued and outstanding at March 31, 1998 and
1997, respectively
Common stock, $.0001 par value, 25,000,000
shares authorized; 7,920,639 and 7,742,274
shares issued and outstanding at March 31,
1998 and 1997, respectively 81,000 81,000
Paid in capital 16,668,000 16,044,000
Stockholders' notes receivable -- (80,000)
Retained earnings 12,861,000 7,574,000
------------ ------------
Total stockholders' equity 29,610,000 23,619,000
------------ ------------
Total liabilities and stockholders'
equity $ 42,793,000 $ 35,674,000
============ ============
See accompanying notes to financial statements.
F-2
47
VIASAT, INC.
STATEMENT OF INCOME
YEAR ENDED MARCH 31,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenues $ 64,197,000 $ 47,715,000 $ 29,017,000
Cost of revenues 40,899,000 33,102,000 20,983,000
------------ ------------ ------------
Gross profit 23,298,000 14,613,000 8,034,000
Operating expenses:
Selling, general and
administrative 7,862,000 4,752,000 3,400,000
Independent research and
development 7,631,000 5,087,000 2,820,000
------------ ------------ ------------
Income from operations 7,805,000 4,774,000 1,814,000
Other income (expense):
Interest income 797,000 354,000 29,000
Interest expense (211,000) (254,000) (260,000)
------------ ------------ ------------
Income before income taxes 8,391,000 4,874,000 1,583,000
Provision (benefit) for income
taxes 3,104,000 1,702,000 (50,000)
------------ ------------ ------------
Net income $ 5,287,000 $ 3,172,000 $ 1,633,000
============ ============ ============
Basic net income per share
$ 0.68 $ 0.66 $ 0.50
============ ============ ============
Diluted net income per share
$ 0.65 $ 0.48 $ 0.28
============ ============ ============
Shares used in computing basic
net income per share 7,801,212 4,810,472 3,267,141
============ ============ ============
Shares used in computing diluted
net income per share 8,174,994 6,641,805 5,734,637
============ ============ ============
See accompanying notes to financial statements.
F-3
48
VIASAT, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 5,287,000 $ 3,172,000 $ 1,633,000
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Depreciation 2,182,000 1,389,000 982,000
Deferred income taxes (811,000) (721,000) (350,000)
Increase (decrease) in cash resulting
from changes in:
Accounts receivable (8,741,000) (4,144,000) (1,871,000)
Inventory (209,000) (3,255,000) (1,019,000)
Other assets 1,078,000 (1,620,000) (186,000)
Accounts payable (289,000) 2,070,000 1,294,000
Accrued liabilities 1,318,000 1,612,000 (512,000)
Other liabilities 58,000 275,000 485,000
------------ ------------ ------------
Net cash (used in) provided by
operating activities (127,000) (1,222,000) 456,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of short-term investments (5,918,000) -- --
Purchases of property and equipment (4,083,000) (3,685,000) (1,875,000)
------------ ------------ ------------
Net cash used in investing
activities (10,001,000) (3,685,000) (1,875,000)
------------ ------------ ------------
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)
Proceeds from issuance of notes payable 1,448,000 889,000 2,778,000
Repayment of notes payable (1,407,000) (836,000) (1,964,000)
Proceeds from issuance of common stock 704,000 15,230,000 171,000
------------ ------------ ------------
Net cash provided by financing
activities 745,000 15,283,000 985,000
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (9,383,000) 10,376,000 (434,000)
Cash and cash equivalents at
beginning of year 12,673,000 2,297,000 2,731,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,290,000 $ 12,673,000 $ 2,297,000
============ ============ ============
Supplemental information:
Cash paid for interest $ 211,000 $ 254,000 $ 260,000
============ ============ ============
Cash paid for income taxes $ 3,857,000 $ 2,293,000 $ 468,000
============ ============ ============
See accompanying notes to financial statements.
F-4
49
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, 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
Exercise of stock options 126,273 149,000
Issuance for Employee Stock
Purchase Plan 52,092 475,000
Payment for shares subscribed $ 80,000
Net income 5,287,000
----------- ------------ ---------- ------------ ------------ ------------ -----------
Balance at March 31, 1998 7,920,639 $ 81,000 $ 16,668,000 $12,861,000
=========== ============ ========== ============ ============ ============ ============
See accompanying notes to financial statements.
F-5
50
VIASAT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
ViaSat, Inc. (the "Company") designs, produces and markets advanced
digital satellite telecommunications and wireless signal processing equipment.
Management Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Estimates have been prepared on the basis of the most current and best
available information and actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less.
Investments
At March 31, 1998, the Company held investments in investment grade debt
securities with various maturities. Management determines the appropriate
classification of its investments in debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company's total
investments in these securities as of March 31, 1998 and 1997 totaled $9,176,000
and $8,979,000, respectively. The Company has included $3,258,000 and $8,979,000
of these securities in cash and cash equivalents, as of March 31, 1998 and 1997,
respectively, as they have maturities of less than 90 days. The remaining
$5,918,000 as of March 31, 1998 has been classified as short-term investments.
The Company has designated all of its investments 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 contracts. Such sales amounted to $58,249,000, $46,292,000, and
$28,305,000 for the years ended March 31, 1998, 1997 and 1996, respectively.
Included in these revenues are sales to a significant customer under various
subcontracts totaling $8,964,000, $12,830,000 and $5,269,000 during the years
ended March 31, 1998, 1997 and 1996, respectively. The Company's five largest
contracts (by revenues) generated approximately 65%, 58% and 37% of the
Company's total revenues for the fiscal year ended March 31, 1998, 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 1995. Contract revenues and accounts
receivable are stated at amounts which are expected to be realized upon final
settlement.
F-6
51
Unbilled Accounts Receivable
Unbilled receivables consist of costs and fees earned and billable on
contract completion or other specified events. The majority of unbilled
receivables is expected to be collected within one year.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash equivalents,
short-term investments, and trade accounts receivable which are generally not
collateralized. The Company limits its exposure to credit loss by placing its
cash equivalents and short-term investments with high credit quality financial
institutions which invest in high quality short-term debt instruments.
Concentrations of credit risk with respect to receivables are generally limited
because the Company's principal 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, 1998, 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 undiscounted net cash flows is less than the
carrying amount of the asset. No such impairment losses have been identified by
the Company.
Warranty Reserves
The Company provides limited warranties on certain of its products for
periods of up to three years. The Company recognizes warranty reserves when
products are shipped based upon an estimate of total warranty costs, with
amounts expected to be incurred within twelve months classified as a current
liability.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future tax consequences resulting from differences
in the financial reporting and tax bases of assets and liabilities. Deferred
income tax expense (benefit) is the net change during the year in the deferred
income tax asset or liability.
F-7
52
Stock Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value method had
been applied in measuring compensation expense (Note 8).
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", which establishes new standards for computing earnings per share. Under
the new requirements, historically reported "primary" and "fully diluted"
earnings per share have been replaced with "basic" and "diluted" earnings per
share. Basic earnings per share is computed based upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is based upon the weighted average number of common shares outstanding and
dilutive common stock equivalents during the period. Common stock equivalents
include options granted under the Company's stock option plans which are
included in the earnings per share calculations using the treasury stock method
and common shares expected to be issued under the Company's employee stock
purchase plan. All earnings per share data reported in prior years has been
restated in accordance with SFAS No. 128.
Fair Value of Financial Instruments
At March 31, 1998, the carrying amounts of the Company's financial
instruments, including cash equivalents, short-term investments, trade
receivables and accounts payable, approximated their fair values due to their
short-term maturities. At March 31, 1998, the estimated fair value of the
Company's long-term debt approximated its carrying value, as a majority of the
related borrowing rates are variable.
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
53
NOTE 3 - COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
MARCH 31,
-------------------------------
1998 1997
------------ ------------
Cash and cash equivalents:
Investments in debt securities $ 3,258,000 $ 8,979,000
Certificates of deposit -- 1,500,000
Cash 32,000 2,194,000
------------ ------------
$ 3,290,000 $ 12,673,000
============ ============
Accounts receivable:
Billed $ 12,077,000 $ 6,860,000
Unbilled, less progress payments of
$3,092,000 and $7,399,000 at
March 31, 1998 and 1997, respectively 6,979,000 3,455,000
------------ ------------
$ 19,056,000 $ 10,315,000
============ ============
Inventory:
Raw materials $ 1,564,000 $ 1,418,000
Work in process 2,372,000 2,662,000
Finished goods 751,000 398,000
------------ ------------
$ 4,687,000 $ 4,478,000
============ ============
Property and equipment:
Machinery and equipment $ 8,224,000 $ 5,320,000
Computer equipment 4,108,000 3,012,000
Furniture and fixtures 339,000 256,000
------------ ------------
12,671,000 8,588,000
Less accumulated depreciation (5,685,000) (3,503,000)
------------ ------------
$ 6,986,000 $ 5,085,000
============ ============
Accrued liabilities:
Current portion of warranty reserve $ 1,279,000 $ 806,000
Accrued vacation 974,000 821,000
Collections in excess of revenues 930,000 355,000
Accrued 401(k) matching contribution 671,000 553,000
Accrued bonus 500,000 762,000
Income taxes payable 309,000 252,000
Other 424,000 220,000
------------ ------------
$ 5,087,000 $ 3,769,000
============ ============
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, 1998) or at the
bank's LIBOR rate plus 1.75% (7.44% at March 31, 1998). There were no borrowings
outstanding as of March 31, 1998 and 1997. 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
54
NOTE 5 - NOTES PAYABLE
MARCH 31,
-----------------------------
1998 1997
----------- -----------
Bank installment loans, with various
maturity dates through September
2001, total monthly payments of
$89,000 with interest rates ranging
between 8% and 12%, collateralized
by equipment $ 2,485,000 $ 2,232,000
Finance company installment loans, with
various maturity dates through
April 1999, total monthly payments
of $20,000 with interest rates
ranging between 10.23% and 11.81%,
collateralized by equipment 119,000 331,000
----------- -----------
2,604,000 2,563,000
Less current portion (1,060,000) (1,135,000)
----------- -----------
$ 1,544,000 $ 1,428,000
=========== ===========
Principal maturities of notes payable as of March 31, 1998 are
summarized as follows:
YEAR ENDING MARCH 31,
---------------------
1999 1,060,000
2000 873,000
2001 517,000
2002 154,000
-----------
$ 2,604,000
===========
NOTE 6 - COMMON STOCK AND OPTIONS
In July 1993, the Company adopted the 1993 Stock Option Plan (the
"Plan") which authorizes 733,500 shares to be granted no later than July 2003.
The Plan provides for the grant of both incentive stock options and
non-qualified stock options which are subject to a three year vesting period.
The exercise prices of the options represent the estimated fair value of the
Company's common stock as determined by the Company's Board of Directors. In
November 1996, the Plan was terminated and replaced by the 1996 Equity
Participation Plan. No options have been issued under the Plan since July 1996.
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, 1998, the Company has granted 438,000 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 in
acquiring a stock ownership interest in the Company and to encourage them to
remain in the employment of the Company. The Employee Stock Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code. A maximum of
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. As of March 31, 1998, the Company has issued 52,092 shares of common
stock under this plan.
F-10
55
Transactions under the Company's stock option plans are summarized as
follows:
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ---------
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
Options granted 269,450 12.25- 19.81
Options canceled (13,511) .48- 12.75
Options exercised (126,273) .34-4.09
-----------
Outstanding at March 31, 1998 656,684 $.34-19.81
===========
The Company also granted certain officers and employees the opportunity
to purchase at fair value 118,607 and 124,805 shares of the Company's common
stock in fiscal 1997 and 1996, respectively.
The following table summarizes all options outstanding and exercisable
by price range as of March 31, 1998:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
---------------- ------------ ----------- ----------- ----------- -----------
$ 0.34-1.50 119,812 1.99 $ 1.13 74,242 $ 1.07
4.09-4.50 98,031 3.25 4.17 25,936 4.19
9.00-12.75 355,341 9.01 11.31 40,002 9.77
14.03-15.31 54,500 9.37 14.42 -- --
17.13-19.81 29,000 9.50 17.89 -- --
---------- -----------
$ 0.34-19.81 656,684 6.92 $ 8.93 140,180 $ 4.13
========== ===========
NOTE 7 - SHARES USED IN EARNINGS PER SHARE CALCULATIONS
YEAR ENDED MARCH 31,
--------------------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
Weighted average common shares outstanding used in
calculating basic net income per share 7,801,212 4,810,472 3,267,141
Weighted average options to purchase common stock as
determined by application of the treasury stock method 360,118 226,840 101,958
Incremental shares for assumed conversion of
convertible preferred stock -- 1,600,788 2,365,538
Employee Stock Purchase Plan equivalents 13,664 3,705 --
--------------- ---------------- ---------------
Shares used in computing diluted net income per share 8,174,994 6,641,805 5,734,637
=============== ================ ===============
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56
All outstanding shares of the Company's preferred stock automatically
converted into shares of common stock upon the closing of the Company's initial
public offering on December 3, 1996. Shares used in computing diluted net income
per share for 1997 and 1996 assume the conversion of all outstanding shares of
the convertible preferred stock at the beginning of those years.
NOTE 8 - PRO FORMA EARNINGS PER SHARE
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.
As the Company continues to follow APB Opinion No. 25 it presents pro
forma information regarding net income and earnings per share as if the Company
had accounted for its employee stock options and shares issued under the
Employee Stock Purchase Plan (hereafter referred to as "options") granted
subsequent to March 31, 1995 using the fair value methodology.
The fair values of options granted during the years ended as reported
below were estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
EMPLOYEE EMPLOYEE STOCK
STOCK OPTIONS PURCHASE PLAN
------------------------------------------------ ------------------------
1998 1997 1996 1998 1997
------------- ------------- -------- -------- -------
Expected life (in years) 3.50 - 5.50 3.50 - 5.00 3.50 0.50 0.50
Risk-free interest rate 5.65 - 5.68% 6.45% 5.93% 5.54% 5.97%
Expected volatility 50.00% 50.00% 50.00% 50.00% 50.00%
Expected dividend yield 0.00% 0.00% 0.00% 0.00% 0.00%
The weighted average estimated fair value of employee stock options
granted during 1998, 1997 and 1996 was $6.30, $3.55 and $.57 per share,
respectively. The weighted average estimated fair value of shares granted under
the Employee Stock Purchase Plan during 1998 and 1997 was $4.00 and $2.78 per
share, respectively.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the 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, 1998, 1997 and 1996 are as follows:
1998 1997 1996
------------- ------------ -------------
Net income as reported $ 5,287,000 $3,172,000 $ 1,633,000
Pro forma net income 4,489,000 3,016,000 1,615,000
Pro forma basic earnings per share 0.58 0.63 0.49
Pro forma diluted earnings per share 0.56 0.46 0.28
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57
NOTE 9 - INCOME TAXES
The provision (benefit) for income taxes includes the following:
YEAR ENDED MARCH 31,
-------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Current tax provision
Federal $ 3,200,000 $ 1,954,000 $ 344,000
State 715,000 469,000 9,000
----------- ----------- -----------
3,915,000 2,423,000 353,000
----------- ----------- -----------
Deferred tax provision:
Federal (683,000) (563,000) (310,000)
State (128,000) (158,000) (93,000)
----------- ----------- -----------
(811,000) (721,000) (403,000)
----------- ----------- -----------
Total provision (benefit) for
income taxes $ 3,104,000 $ 1,702,000 $ (50,000)
=========== =========== ===========
Significant components of the Company's deferred tax assets and
liabilities are as follows:
MARCH 31,
--------------------------
1998 1997
----------- ----------
Deferred tax assets:
Warranty reserve $ 738,000 $ 528,000
Inventory reserve 383,000 280,000
Accrued vacation 328,000 247,000
State income taxes 243,000 58,000
Other 377,000 145,000
---------- ----------
Total deferred tax
assets $2,069,000 $1,258,000
========== ==========
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:
YEAR ENDED MARCH 31,
-------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Tax expense at statutory rate $ 2,853,000 $ 1,657,000 $ 538,000
State tax provision (benefit),
net of federal benefit 388,000 205,000 (60,000)
Research tax credit (179,000) (181,000) (480,000)
Other 42,000 21,000 (48,000)
----------- ----------- -----------
$ 3,104,000 $ 1,702,000 $ (50,000)
=========== =========== ===========
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 10 - 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
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58
during fiscal years 1998, 1997 and 1996 amounted to $671,000, $553,000 and
$444,000, respectively. The cost of administering the plan is not significant.
NOTE 11 - COMMITMENTS
The Company leases office facilities under noncancelable operating
leases with initial terms ranging from one to five years which expire between
December 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
$1,079,000, $793,000 and $608,000 in fiscal years 1998, 1997 and 1996,
respectively.
Future minimum lease payments are as follows:
YEAR ENDING MARCH 31,
1999 $ 1,041,000
2000 177,000
------------
$ 1,218,000
============
NOTE 12 - 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.
NOTE 13 - SUBSEQUENT EVENT
In April 1998, the Company entered into a long-term agreement to lease a
facility in Carlsbad, California which will house the Company's entire
California based operations. The facility is expected to be completed in
September 1999. The term of the lease is 10 years with two three-year option
periods. The initial minimum lease payments are $2,300,000 per year.
F-14