UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
Commission File Number (0-21767)
ViaSat, Inc.
6155 El Camino Real, Carlsbad, California 92009(760) 476-2200
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 [ ]
The number of shares outstanding of the issuer’s common stock, $.0001 par value, as of February 12, 2002 was 25,892,433.
TABLE OF CONTENTS
VIASAT, INC.INDEX
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VIASAT, INC.CONDENSED CONSOLIDATED BALANCE SHEET
See accompanying notes to condensed consolidated financial statements.
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VIASAT, INC.CONDENSED CONSOLIDATED STATEMENT OF INCOME(UNAUDITED)
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VIASAT, INC.CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS(UNAUDITED)
Non-cash investing and financing activities — Notes payable issued for $6.5 million and accounts receivable credit of $3.5 million to seller in exchange for $10.0 million equity interest in U.S. Monolithics, LLC. See also Note 4
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VIASAT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
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VIASAT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
NOTE 1 — Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2001, the condensed consolidated statements of income for the three and nine month periods ended December 31, 2000 and 2001, the condensed consolidated statement of cash flows for the nine months ended December 31, 2000 and 2001, and the condensed consolidated statement of stockholders’ equity for the nine months ended December 31, 2001 have been prepared by the management of ViaSat, Inc., and have not been audited. These financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for all periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended March 31, 2001 included in our 2001 Annual Report on Form 10-K. Interim operating results are not necessarily indicative of operating results for the full year.
Our consolidated financial statements include the assets, liabilities and results of operations of TrellisWare Technologies, Inc., a majority owned subsidiary of ViaSat. All significant intercompany amounts have been eliminated.
In general, the functional currency of a foreign operation is deemed to be the local country’s currency. Consequently, assets and liabilities of operations outside the United States are generally translated into United States dollars, and the effects of foreign currency translation adjustments are included as a component of stockholders’ equity.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
NOTE 2 — Revenue Recognition
The majority of our revenues are derived from services performed under a variety of contracts including cost-plus-fixed fee, fixed-price, and time and materials type contracts. Generally, revenues are recognized as contracts are performed using the percentage of completion method, measured primarily by costs incurred to date compared with total estimated costs at completion or based on the number of units delivered. We provide for anticipated losses on contracts by a charge to income during the period in which they are first identified.
Contract costs with the U. S. Government and its prime contractors, including indirect costs, are subject to audit and negotiations with Government representatives. These audits have been completed and agreed upon through fiscal year 1998. Contract revenues and accounts receivable are stated at amounts which are expected to be realized upon final settlement.
NOTE 3 — Shelf Registration Statement
In September 2001, we filed a universal shelf registration statement with the Securities and Exchange Commission for the future sale of up to $75 million of debt securities, common stock, preferred stock, depositary shares, and warrants. The securities may be offered from time to time, separately or together, directly by us or through underwriters at amounts, prices, interest rates and other terms to be determined at the time of the offering. We currently intend to use the net proceeds from the sale of the securities under the shelf registration statement for general corporate purposes, including acquisitions, capital expenditures, working capital and the repayment or refinancing of our debt. See Note 10 — Subsequent Events
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NOTE 4 — Acquisitions
Comsat Laboratories
On July 27, 2001, we acquired 100% of the assets of Comsat Laboratories from Comsat Corporation, a Lockheed Martin Global Telecommunications company, for an aggregate purchase price of approximately $21.4 million (including acquisition costs and estimated post-closing adjustments). The purchase price consisted of approximately $11.4 million in cash, plus 478,217 shares of our common stock valued at approximately $10.0 million based on the average market price of our common stock. In addition, warrants to purchase up to 60,000 shares of our common stock may be issued as part of the purchase price contingent upon certain revenue and development award targets being achieved by Comsat Laboratories within a two-year period from the date of the acquisition. The value of the warrants will be measured once their contingency is resolved. The allocation of the purchase price is preliminary based on the completion of third-party valuations and the resolution of the contingency noted above.
Comsat Laboratories specializes in broadband satellite network terminals designed to extend the reach and functionality of networks using a variety of flexible, multi-protocol products. The terminals support high-speed voice, video, data, multimedia and Internet connections under the LINKWAY™ and LinkStar™ brand names. We expect the acquisition to augment our position in core satellite networks and communications systems business.
The following unaudited pro forma information presents a summary of consolidated results of operations for the three and nine month periods ended December 31, 2001 as if the acquisition had occurred at the beginning of fiscal year 2002, with pro forma adjustments to give effect to amortization of intangibles and certain other adjustments, together with related income tax effect. These pro forma results include $2.5 million of in-process research and development costs that are considered nonrecurring. The assets purchased from Comsat Corporation did not comprise a division or business unit of Comsat Corporation until October 2000. Therefore, accounting records are not available to prepare pro forma consolidated results for the year ended March 31, 2001. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred as of the beginning of the periods presented, or that may be obtained in the future.
U.S. Monolithics, LLC
On December 12, 2001, we acquired all outstanding preferred units of U.S. Monolithics, LLC (USM ), from Wildblue Communications, Inc. pursuant to a Unit Purchase Agreement dated December 12, 2001 (the Wildblue Agreement). The preferred units comprise approximately 35% of the outstanding equity interests of USM. In addition, on December 14, 2001 we entered into another Unit Purchase Agreement to acquire all outstanding common units of USM. The aggregate purchase price for the preferred and common units of USM is approximately $30 million. After the closing, we will become the sole equity holder of USM, which will continue its business as our wholly-owned subsidiary. See also Note 10 — Subsequent Events
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Under the terms of the Wildblue Agreement, we exchanged (a) a secured promissory note in the amount of $6,000,000, (b) an unsecured promissory note in the amount of $500,000 and (c) a credit of $3,500,000 against certain payment obligations of Wildblue under a commercial agreement that we entered into with Wildblue concurrently with the signing of the Wildblue Agreement, for all of the outstanding preferred units of USM. The secured note and the unsecured note bear interest at the rate of 5% per annum, with all principal and interest due on January 31, 2002. In addition, we entered into a security agreement with Wildblue pledging a portion of the preferred units of USM to secure our payment obligations under the secured note.
The total investment as of December 31, 2001 of $10.0 million in USM is recorded under the equity method of accounting and the investment is recorded as a portion of Other assets. A loss of $90,000 is included as part of Equity in loss of joint venture for the three and nine months ended December 31, 2001.
NOTE 5 — Earnings Per Share
Common stock equivalents of 1,039,559 and 805,569 shares for the three months ended December 31, 2000 and 2001, respectively, and 1,229,366 and 899,959 for the nine months ended December 31, 2000 and 2001 respectively, were used to calculate diluted earnings per share. Antidilutive shares excluded from the calculation were 1,933,405 and 2,462,025 shares for the three months ended December 31, 2000 and 2001, respectively. Antidilutive shares excluded from the calculation were 864,943 and 2,157,698 shares for the nine months ended December 31, 2000 and 2001, respectively. Common stock equivalents are primarily comprised of options granted under our stock option plan.
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NOTE 6 — Composition of Certain Balance Sheet Captions
The intangible assets are amortized using the straight-line method over their estimated useful lives ranging from two to nine years. The technology intangible asset has several components with estimated useful lives of six to nine years, contracts and relationships intangible asset has several components with estimated useful lives of three to nine years, acquired work force has an estimated useful life of five years, the non-compete agreement has an estimated useful life of three years and other intangibles have estimated useful lives from two years to nine years.
Goodwill related to the acquisition of the satellite networks business of Scientific-Atlanta, Inc. (Satellite Networks Business) in April 2000 of approximately $4.5 million has an estimated useful life of seven years. Goodwill acquired in conjunction with the Comsat Laboratories acquisition is not subject to amortization under SFAS 141. Goodwill of approximately $1.4 million related to the Comsat Laboratories acquisition will not be amortized, but will be periodically tested for impairment as required by SFAS 142. See Note 9 for further discussions.
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NOTE 7 — Contingencies
On September 15, 2000 ORBCOMM Global, L.P. (ORBCOMM) and seven of its subsidiaries filed a voluntary petition for Chapter 11 relief in the United States Bankruptcy Court for the District of Delaware as part of its efforts to restructure and reorganize its business. ORBCOMM has continued its efforts to maintain and operate its network of low-Earth orbit (LEO) satellites and related ground facilities while it restructures its operations. On April 23, 2001, International Licensees, LLC was approved by the bankruptcy court as the buyer of ORBCOMM. International Licensees is a consortium of current ORBCOMM licensees and other investors. There remain some conditions with respect to financing set in bankruptcy that the International Licensees must fulfill in the future. A failure to meet these conditions could result in the unwinding of the purchase by the International Licensees. On November 15, 2001 ORBCOMM formally rejected our contracts in bankruptcy. The following table summarizes our assets related to ORBCOMM at December 31, 2001.
Although we are continuing to negotiate with ORBCOMM on maintaining our business relationship, we cannot make assurances that the assets listed above will be fully recovered. If we are unable to reach an agreement with ORBCOMM, our rights as an unsecured creditor will entitle us to collect only a small percentage of our assets currently at risk. Further, if ORBCOMM is unable to successfully restructure its operations, it would substantially limit our ability to recover the assets listed above and would cause ViaSat to incur substantial losses, which would harm our business; however, we have not made any adjustments to the recorded amount for the assets as it is not possible at this time to reasonably estimate or determine what loss, if any, will be incurred.
On December 5, 2001 Astrolink International LLC terminated for convenience two of our ground segment contracts. These two contracts relate to the development and production of subscriber terminals and service provider gateways for the Astrolink satellite system. This termination requires Astrolink to pay ViaSat a termination amount that is based on a predetermined formula provided by the contracts. The contractual termination amounts, to the extent collectible, exceed our assets at risk. In addition, Telespazio SpA has terminated our contract for the production of dedicated gateways for the Astrolink system.
The assets at risk to Astrolink as of December 31, 2001 are accounts receivable due from Astrolink in the amount of approximately $6.3 million and $2.5 million for prepaid airtime on Astrolink satellites. We expect that our assets at risk will exceed $8.9 million, however, the additional amounts are at risk are not determinable at this time. Further, we expect to incur additional costs associated with winding down the program and terminating the contracts of our subcontractors on the program.
ViaSat is continuing discussions with Astrolink and other interested parties regarding potential alternatives for the Astrolink project. We cannot, however, make assurances that the assets or the contractual termination amounts will be fully recovered. If Astrolink is unable to successfully restructure its operations, or obtain additional funding, it would substantially limit our ability to recover the assets at risk and could cause ViaSat to incur losses which could harm our business; however, we have not made any adjustments to the recorded amount as it is not possible at this time to reasonably estimate or determine what loss, if any, will be incurred.
We are currently a party to various contracts which require us to meet performance covenants and project milestones. Under the terms of these contracts, failure by us to meet such performance covenants and milestones permits the other party to terminate the contract and, under certain circumstances, recover liquidated damages or other penalties. We are currently not in compliance, or in the past were not in compliance, with the performance or milestone requirements of certain of these contracts. Historically, our
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customers have not elected to terminate such contracts or seek liquidated damages from us and management does not believe that its existing customers will do so; therefore, we have not accrued for any potential liquidated damages or penalties.
We may be involved in legal proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.
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NOTE 8 — Segment Information
We are organized primarily on the basis of products with commercial and government (defense) communication applications. The following table summarizes revenues and operating profits by operating segment for the three and nine month periods ended December 31, 2000 and 2001. Certain corporate general and administrative costs, amortization of intangible assets and the charge of acquired in-process research and development are not allocated to either segment and accordingly, are shown as reconciling items from segment operating profit and consolidated operating profit. Assets are not tracked by operating segment. Consequently, it is not practical to show assets by operating segments.
Revenue information by geographic area for the three and nine month periods ended December 31, 2000 and 2001 is as follows:
We distinguish revenues from external customers by geographic areas based on customer location.
The net book value of long-lived assets located outside North America was $34,000 at December 31, 2001.
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NOTE 9 — New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 — Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, and for hedging activities. In June 1999, the FASB issued SFAS 137 — Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of SFAS 133, which delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. We were required to adopt SFAS 133 in the quarter ended June 30, 2001. SFAS 133 requires certain derivative instruments to be recorded at fair value. The adoption of SFAS 133 did not have a material effect on the consolidated financial statements.
In June 2001, the FASB issued SFAS No. 141 — Business Combinations. SFAS 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16 — Business Combinations,and FASB Statement 38 — Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. The statement is applicable for all business combinations occurring after June 30, 2001. The adoption of SFAS 141 did not have a material effect on the consolidated financial statements. However, for the Comsat Laboratories acquisition that was completed on July 27, 2001, we applied the provisions of SFAS 141. See Note 4 for further discussion.
In June 2001, the FASB issued SFAS No. 142 — Goodwill and Other Intangible Assets. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17 —Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. This accounting pronouncement will be adopted on April 1, 2002 for goodwill and intangible assets acquired prior to July 1, 2001. As the result of adopting SFAS 142 for our fiscal year ending March 31, 2003, we will no longer amortize the intangibles assets “Acquired workforce” of $5.5 million or “Goodwill” of $4.5 million acquired in the Satellite Networks Business acquisition. This will decrease amortization expense in that year by approximately $1.7 million. See Note 6 for further discussion.
In October 2001, the FASB issued SFAS No. 144 — Accounting for the Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121 — Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 resolves implementation issues previously experienced under SFAS No. 121 and broadens the reporting of discontinued operations. This statement becomes effective for financial statements issued for fiscal years beginning after December 15, 2001. Management is currently evaluating the effect that adoption of this standard will have on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143 — Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement becomes effective for financial statements issued for fiscal years beginning after June 15, 2002. Management is currently evaluating the effect that adoption of this standard will have on the consolidated financial statements.
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NOTE 10 — Subsequent Events
On January 4, 2002 we completed the acquisition of U.S. Monolithics, LLC, an Arizona limited liability company (USM). The acquisition was completed in two steps. We completed the first step on December 12, 2001 by acquiring 100% of the preferred units of USM (representing approximately 35% of USM outstanding units) held by WildBlue Communications pursuant to a Unit purchase Agreement dated December 12, 2001. We have now completed the second step by acquiring all of the outstanding common units of USM pursuant to a Unit Purchase Agreement dated December 14, 2001. The aggregate purchase price for the preferred and common units of USM was approximately $30 million. We issued 1,163,190 shares of common stock in acquiring the common units. See Note 4 - Acquisitions
Founded in 1998, USM is primarily focused on developing proprietary gallium arsenide (GaAs) millimeter wave Integrated Circuits (MMICs) for use in broadband communications. USM’s systems background and proprietary capabilities have also enabled it to design power amplifiers, frequency block upconverters, and entire transceivers for the high frequency, broadband markets. USM also has strong capabilities with respect to high frequency packaging.
On January 8, 2002 we completed a public stock offering under our universal shelf registration statement for the sale of 2,000,000 shares of common stock for net proceeds of approximately $27.1 million.
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When used in this discussion, the words “believes,” “anticipates,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made under Item 1. Business — “Factors That May Affect Future Performance” in our Annual Report on Form 10-K for our fiscal year ended March 31, 2001, filed with the Securities and Exchange Commission.
Results of Operations
The following table sets forth, as a percentage of total revenues, certain income data for the periods indicated.
Included in the above results are revenues related to Astrolink International LLC. On December 5, 2001 Astrolink terminated for convenience two of our ground segment contracts. These two contracts relate to the development and production of subscriber terminals and service provider gateways for the Astrolink satellite system. This termination requires Astrolink to pay ViaSat a termination amount that is based on a predetermined formula provided by the contracts. The contractual termination amounts, to the extent collectible, exceed our assets at risk. In addition, Telespazio SpA has terminated our contract for the production of dedicated gateways for the Astrolink system.
Revenues for all Astrolink related contracts were $4.2 million (9.8% of total revenues) and $6.7 million (13.4 % of total revenues) for the three months ended December 31, 2000 and 2001, respectively and $8.1 million (6.8% of total revenues) and $19.1 million (12.9% of total revenues) for the nine months ended December 31, 2000 and 2001, respectively. ViaSat has redeployed key personnel to other projects and has instituted staff reductions to manage its cost structure in a manner consistent with the change in Astrolink’s status.
See Note 7 to our Condensed Consolidated Financial Statements for further information regarding Astrolink.
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Three Months Ended December 31, 2000 vs. Three Months Ended December 31, 2001
Revenues. Revenues increased 16.2% from $43.1 million for the three months ended December 31, 2000 to $50.1 million for the three months ended December 31, 2001. This increase was mainly due to higher sales of commercial terminal products and certain government products partially offset by lower sales on certain government development programs.
Gross Profit. Gross profit increased 17.8% from $13.6 million (31.6% of revenues) for the three months ended December 31, 2000 to $16.0 million (32.0% of revenues) for the three months ended December 31, 2001. This increase was primarily due to higher volumes related to commercial terminal products and certain government products partially offset by lower gross profit on certain development programs.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses increased 20.8% from $7.7 million (17.8% of revenues) for the three months ended December 31, 2000 to $9.3 million (18.5% of revenues) for the three months ended December 31, 2001. The increase was primarily due to the additional costs from the operations of Comsat Laboratories, and efforts related to pursuing both commercial and government business. SG&A expenses consist primarily of personnel costs and expenses for business development, marketing and sales, bid and proposal, finance, contract administration and general management. Certain of these expenses are difficult to predict and vary based on specific government and commercial sales opportunities.
Independent Research and Development. Independent research and development (IR&D) expenses increased 59.4% from $1.6 million (3.7% of revenues) for the three months ended December 31, 2000, to $2.5 million (5.1% of revenues) for the three months ended December 31, 2001. This increase resulted from a higher level of effort in commercial areas.
Amortization of Intangible Assets. Amortizable intangible assets are being amortized over useful lives ranging from two to nine years. Amortization expense increased 87.6% from $967,000 (2.2% of revenues) for the three months ended December 31, 2000, to $1.8 million (3.6% of revenues) for the three months ended December 31, 2001. This increase resulted from the additional intangible assets acquired in the purchase of Comsat Laboratories and a completed allocation to the intangible assets as part of the purchase price of the Satellite Networks Business.
Interest Expense. Interest expense increased from $15,000 for the three months ended December 31, 2000 to $101,000 for the three months ended December 31, 2001. Interest expense relates to loans for the purchase of capital equipment, which are generally three year variable rate term loans, and to short-term borrowings under our line of credit to cover working capital requirements. Total outstanding equipment loans were $504,000 at December 31, 2000. At December 31, 2001 there were no outstanding equipment loans, $10.8 million in outstanding borrowings under our line of credit and $6.5 million in notes payable to Wildblue Communications. See Note 4 to our Condensed Consolidated Financial Statements for more details on the notes payable to Wildblue.
Interest Income. Interest income decreased from $304,000 for the three months ended December 31, 2000 to $75,000 for the three months ended December 31, 2001. This decrease resulted from a decrease in invested balances and lower rate of earnings. Interest income relates largely to interest earned on short-term deposits of cash.
Provision for Income Taxes. Our effective income tax rate changed from a 22.4% tax provision for the three months ended December 31, 2000 to a 53.4% tax benefit for the three months December 31, 2001. The decrease results primarily from a change in estimated research and development tax credit for the current and prior year. The change in estimate was made based upon historical detailed information received from Scientific-Atlanta, Inc. for calculating base period percentages.
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Nine Months Ended December 31, 2000 vs. Nine Months Ended December 31, 2001
Revenues. Revenues increased 24.3% from $119.4 million for the nine months ended December 31, 2000 to $148.4 million for the nine months ended December 31, 2001. This increase was primarily due to improvements in revenues generated by commercial development programs and terminal products including the acquisition of Comsat Laboratories.
Gross Profit. Gross profit increased 20.3% from $38.6 million (32.4% of revenues) for the nine months ended December 31, 2000 to $46.5 million (31.3% of revenues) for the nine months ended December 31, 2001. This increase was primarily due to a higher volume of commercial development and terminal product sales.
Selling, General and Administrative Expenses. SG&A expenses increased 27.8% from $20.1 million (16.8% of revenues) for the nine months ended December 31, 2000 to $25.6 million (17.3% of revenues) for the nine months ended December 31, 2001. The increase was primarily due to the additional costs from the operations of Comsat Laboratories, and efforts related to pursuing both commercial and government business.
Independent Research and Development. IR&D expenses increased 13.9% from $5.0 million (4.1% of revenues) for the nine months ended December 31, 2000 to $5.6 million (3.8% of revenues) for the nine months ended December 31, 2001.
Acquired In-Process Research and Development. Purchased in-process research and development charges result from two recently completed acquisitions. The acquisition of the Satellite Networks Business accounted for $2.3 million (2.0% of revenues) in the nine months ended December 31, 2000 and the acquisition of Comsat Laboratories accounted for $2.5 million (1.7% of revenues) in the nine months ended December 31, 2001.
An independent valuation was performed and used as an aid in determining the fair value of the purchased IPR&D projects. The product areas were identified in which there were research and development efforts underway where technological feasibility had not been reached.
The Satellite Networks Business is developing a next generation mobile subscriber communicator. This next generation product contains a new chipset, new connectors, added functionality, bigger programming space and a longer battery life than the legacy product and will be sold at a lower price. The estimated completion date at the time of the acquisition was November 2000. We estimated based on man hours incurred versus man hours required to complete the project that at the acquisition date the project was 77% complete and would require approximately $500,000 to complete. Using the income approach the value calculated for the IPR&D associated with the mobile subscriber communicator was $1.6 million. The market for this product has not materialized to the extent anticipated and as a result, the completion date has been delayed.
The Satellite Networks Business also has the SkyRelay and the SkyLynx products. The SkyRelay development of a next generation terminal included a terminal with newer interfaces, an additional IP port and consolidated functionality onto a single card. At the time of acquisition, the project completion was expected to be in June of 2001 and we estimated based on man hours incurred versus man hours required to complete the project that the project was estimated to be 15% complete and will require approximately $6.0 million to complete. Using the income approach the value calculated for the IPR&D associated with SkyRelay was $300,000. The production for this next generation SkyRelay product is expected to begin in fiscal 2002. The SkyLynx related IPR&D projects are the Mesh Working and 2mbps Channel Unit. Based on the same completion criteria as SkyRelay, it was estimated the SkyLynx related IPR&D was 60% complete at the date of acquisition and would require approximately $385,000 to complete. The estimated completion date at the time of acquisition was in fiscal 2002 for both projects. Also using the income approach, the value calculated for IPR&D associated with SkyLynx was $400,000. The IPR&D for the SkyRelay and SkyLynx products continue progress, in all material respects, consistently with our original assumptions that were provided to the independent appraiser and used to value the IPR&D.
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At the time of the acquisition, Comsat Laboratories was developing a satellite network terminal that expands the frequencies on which an existing terminal could operate. The date when the project was expected to reach technological feasibility at the time of the acquisition was September 2001. We estimated based on man hours incurred versus man hours required to complete the project that at the acquisition date the project was 80% complete and would require approximately $900,000 to complete. Using the income approach the value calculated for the IPR&D associated with the satellite network terminal was $2.5 million. The project has proceeded since the acquisition and has reached technological feasibility.
Amortization of Intangible Assets. Amortization of intangible assets increased 87.9% from $2.3 million (2.0% of revenues) for the nine months ended December 31, 2000 to $4.4 million (3.0% of revenues) for the nine months ended December 31, 2001. Amortizable intangible assets are being amortized over useful lives ranging from two to nine years. This increase resulted from the acquisition of Comsat Laboratories and a completed allocation of the intangible assets as part of the purchase price of the Satellite Networks Business.
Interest Expense. Interest expense increased from $80,000 for the nine months ended December 31, 2000 to $198,000 for the nine months ended December 31, 2001. Total outstanding equipment loans were $504,000 at December 31, 2000. At December 31, 2001 there were no outstanding equipment loans, $10.8 million in outstanding borrowings under our line of credit and $6.5 million in notes payable to Wildblue Communications. See Note 4 to our Condensed Consolidated Financial Statements for more details on the notes payable to Wildblue.
Interest Income. Interest income decreased from $1.3 million for the nine months ended December 31, 2000 to $481,000 for the nine months ended December 31, 2001. This decrease resulted from a decrease in invested balances and lower rate of earnings.
Provision for Income Taxes. Our effective income tax rate decreased from 30.0% for the nine months ended December 31, 2000 to 10.5% for the nine months ended December 31, 2001. The decrease results primarily from a change in estimated research and development tax credit for the current and prior year. The change in estimate was made based upon historical detailed information received from Scientific-Atlanta, Inc. for calculating base period percentages.
Backlog
At December 31, 2001 we had firm backlog of $162.5 million of which $142.2 million was funded. The firm backlog of $162.5 million does not include contract options of $81.1 million. Of the $162.5 million in firm backlog, approximately $32.3 million is expected to be delivered in the fiscal year ending March 31, 2002, and the balance is expected to be delivered in the fiscal year ending March 31, 2003 and thereafter. At March 31, 2001 we had firm backlog of $236.2 million, of which $212.3 million was funded, not including options of $55.4 million.
The backlog amounts as presented are comprised of funded and unfunded components. Funded backlog represents the sum of contract amounts for which funds have been specifically obligated by customers to contracts. Unfunded backlog represents future amounts that customers may obligate over the specified contract performance periods. Our customers allocate funds for expenditures on long-term contracts on a periodic basis. Our ability to realize revenues from contracts in backlog is dependent upon adequate funding for such contracts. Although funding of contracts is not within our control, our experience indicates that actual contract fundings have ultimately been approximately equal to the aggregate amounts of the contracts.
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Liquidity and Capital Resources
We have financed our operations to date primarily with cash flows from operations, bank line of credit financing, equity financing and loans for the purchase of capital equipment. Cash used in operating activities for the nine months ended December 31, 2000 was $9.4 million and cash provided by operating activities for the nine months ended December 31, 2001 was $3.2 million. Increases in accounts receivable and inventories were partially offset by a decrease in other liabilities.
Cash used in investing activities for the nine months ended December 31, 2000 was $60.0 million and cash used in investing activities for the nine months ended December 31, 2001 was $27.8 million. During the nine months ended December 31, 2001, we acquired Comsat Laboratories for cash of approximately $11.4 million, plus 478,217 shares of our common stock valued at approximately $10.0 million. In addition, warrants to purchase up to 60,000 shares of our common stock may be issued as part of the purchase price contingent upon certain revenue targets being achieved by Comsat Laboratories within a two-year period from the date of the acquisition. The value of the warrants will be measured once their contingency is resolved. We also acquired $14.0 million in equipment in the nine months ended December 31, 2001.
Cash provided by financing activities for the nine months ended December 31, 2000 was $74.4 million and cash provided by financing activities for the nine months ended December 31, 2001 was $12.1 million. This decrease was primarily the result of completing a public stock offering for $73.1 million in the nine months ended December 31, 2000, partially offset by draws on our line of credit of $10.7 and issuance of $6.5 million in notes payable to Wildblue in the nine months ended December 31, 2001.
In December 2001 we acquired the preferred units of U.S. Monolithics, LLC for $10.0 million, of which $3.5 million was applied to accounts receivable owed to us by Wildblue and $6.5 million consisted of notes payable to Wildblue with maturity dates no later than January 31, 2002.
In September 2001, we filed a universal shelf registration statement with the Securities and Exchange Commission for the future sale of up to $75 million of debt securities, common stock, preferred stock, depositary shares, and warrants. The securities may be offered from time to time, separately or together, directly by us or through underwriters at amounts, prices, interest rates and other terms to be determined at the time of the offering. We currently intend to use the net proceeds from the sale of the securities under the shelf registration statement for general corporate purposes, including acquisitions, capital expenditures, working capital and the repayment or refinancing of our debt. In January 2002, we issued 2,000,000 shares of our common stock under this registration statement for proceeds, net of offering costs, of approximately $27.1 million.
At December 31, 2001, we had $5.3 million in cash, cash equivalents and short-term investments and $64.5 million in working capital. On June 21, 2001 we executed a one year Revolving/Term Loan Agreement of $25.0 million from Union Bank of California, N.A. and Washington Mutual Bank, with Union Bank of California, N.A., as Administrative Agent. Under the revolving facility and the term loan facility, we have the option to borrow at the bank’s prime rate or at LIBOR plus, in each case, an applicable margin based on the ratio of our total debt to EBITDA (earnings before interest and taxes and depreciation and amortization). The agreement contains financial covenants that set maximum debt to EBITDA limits, minimum quarterly EBITDA limits, minimum quick ratio limit and a minimum tangible net worth limit. We had $10.8 million in outstanding borrowings under the revolving portion of the facility at December 31, 2001.
On September 15, 2000 ORBCOMM Global, L.P. (ORBCOMM) and seven of its subsidiaries filed a voluntary petition for Chapter 11 relief in the United States Bankruptcy Court for the District of Delaware as part of its efforts to restructure and reorganize its business. ORBCOMM has continued its efforts to maintain and operate its network of low-Earth orbit (LEO) satellites and related ground facilities while it restructures its operations. We have approximately $4.8 million worth of receivables and other assets currently at risk with ORBCOMM. We cannot make assurances that the assets will be fully recovered. If ORBCOMM is unable to successfully restructure its operations it could cause ViaSat to incur losses up to the amount of the assets at risk; however, we have not made any adjustments to the recorded amount as it is not possible at this time to reasonably estimate or determine what loss, if any, will be incurred. See Note 7 to our Condensed Consolidated Financial Statements for further discussion related to ORBCOMM.
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On December 5, 2001 Astrolink International LLC terminated for convenience two of our ground segment contracts. These two contracts relate to the development and production of subscriber terminals and service provider gateways for the Astrolink satellite system. This termination requires Astrolink to pay ViaSat a termination amount that is based on a predetermined formula provided by the contracts. The contractual termination amounts, to the extent collectible, exceed our assets at risk. In addition, Telespazio SpA has terminated our contract for the production of dedicated gateways for the Astrolink system. At December 31, 2001 we had accounts receivable due from Astrolink in the amount of approximately $6.3 million and $2.5 million for prepaid airtime on Astrolink satellites. We cannot make assurances that the assets at risk will be fully recovered. If Astrolink is unable to successfully restructure its operations or obtain additional financing it would substantially limit our ability to recover the assets at risk and could cause ViaSat to incur losses which could harm our business; however we have not made any adjustments to the recorded amount as it is not possible at this time to reasonably estimate or determine what loss, if any, will be incurred. See Note 7 to our Condensed Consolidated Financial Statements for further discussion related to Astrolink.
Our future capital requirements will depend upon many factors, including the progress of our research and development efforts, expansion of our marketing efforts, and the nature and timing of orders. We believe that our current cash balances and net cash expected to be provided by operating activities and borrowings from our revolving line of credit will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We invest our cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our risks have not changed since year-end and therefore, this item is not applicable.
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PART II — OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A Current Report on Form 8-K was filed with the Securities and Exchange Commission on December 19, 2001 and amended on December 20, 2001, regarding our acquisition of U.S. Monolithics, LLC.
(1) Certain portions of this exhibit have been requested to be redacted pursuant to a request for confidential treatment filed by ViaSat, Inc.
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SIGNATURES
Pursuant to the requirements 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.
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