SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
Commission file number: 0-28082
KVH Industries, Inc.
(Exact name of Registrant as Specified in its Charter)
Delaware 05-0420589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Enterprise Center, Middletown, RI 02842
(Address of principal executive offices)
(401) - 847 - 3327
(Registrant' telephone number, including area code)
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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Date Class Outstanding shares
April 17, 2001 Common Stock, par value $0.01 per share 10,182,655
KVH INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000 3
Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
Part I. Financial Information
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 2001 December 31, 2000
(Unaudited) (Audited)
----------------- ---------------------
Assets:
Current assets:
Cash and cash equivalents $ 5,982,024 5,411,460
Accounts receivable, net 4,751,712 6,553,976
Costs and estimated earnings
In excess of billings on uncompleted contracts 318,685 419,145
Inventories 4,091,628 3,600,660
Prepaid expenses and other deposits 544,626 346,518
Deferred income taxes 637,799 637,799
------------- -------------
Total current assets 16,326,474 16,969,558
------------- -------------
Property and equipment, net 6,682,950 6,580,375
Other assets, less accumulated amortization 673,317 706,473
Deferred income taxes 2,238,430 2,238,430
------------- -------------
Total assets $ 25,921,171 26,494,836
============= =============
Liabilities and stockholders' equity:
Current liabilities:
Bank line of credit $ - 598,865
Current portion long-term debt 81,111 81,111
Accounts payable 2,456,844 1,478,198
Accrued expenses 1,792,371 1,164,790
Customer deposits 1,187,379 1,195,091
------------- -------------
Total current liabilities 5,517,705 4,518,055
------------- -------------
Long-term debt 2,766,384 2,784,121
------------- -------------
Total liabilities 8,284,089 7,302,176
------------- -------------
Stockholders' equity:
Common stock 86,442 86,191
Additional paid-in capital 21,167,996 21,186,459
Accumulated deficit (3,617,356 ) (2,079,990 )
------------- -------------
Total stockholders' equity 17,637,082 19,192,660
------------- -------------
Total liabilities and stockholders' equity $ 25,921,171 26,494,836
============= =============
See accompanying Notes to Consolidated Financial Statements.
Item 1. Financial Statements (continued).
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
2001 2000
------------------- -----------------
Net sales $ 8,132,671 5,696,515
Cost of sales 5,009,173 3,818,276
----------------- -----------------
Gross profit 3,123,498 1,878,239
Operating expenses:
Research and development 1,744,205 1,074,442
Sales and marketing 2,248,332 1,418,388
General and administrative 638,251 527,734
----------------- -----------------
(1,507,290 (1,142,325)
Loss from operations )
Other expense (income):
Other expense 22,335 127,787
Interest expense, net 7,741 2,763
Foreign currency loss - 76,991
----------------- -----------------
Loss before income tax benefit (1,537,366) (1,349,866)
Income tax benefit (note 4) - 483,619
----------------- -----------------
Net loss $ (1,537,366) (866,247)
================= =================
Per share information:
Loss per share:
Basic $ (0.18) (0.12)
Diluted $ (0.18) (0.12)
Number of shares used in per share calculation:
Basic 8,626,470 7,435,915
Diluted 8,626,470 7,435,915
See accompanying Notes to Consolidated Financial Statements.
Item 1. Financial Statements (continued).
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
2001 2000
------------- -------------
Cash flow from operations:
Net loss $ (1,537,366 ) (866,247 )
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 297,555 262,203
Provision for deferred taxes - (483,692 )
Decrease (increase) in accounts and contract receivables, net 1,802,264 (703,641 )
Decrease (increase) in costs and estimated earnings in excess of
billings on uncompleted contracts 100,460 (28,173 )
(Increase) decrease in inventories (490,968 ) 414,526
Increase in prepaid expenses and other deposits (198,108 ) (94,185 )
Increase in accounts payable 978,646 200,653
Increase in accrued expenses 627,581 360,877
Decrease in customer deposits (7,712) -
------------- -------------
Net cash provided by (used in) operating activities 1,572,352 (937,679 )
------------- -------------
Cash flow from investing activities:
Capital expenditures (366,974 ) (65,212 )
------------- -------------
Net cash used in investing activities (366,974 ) (65,212 )
------------- -------------
Cash flow from financing activities:
Repayment of bank note (598,865 ) -
Repayments of long-term debt (17,737 ) (11,728 )
Costs related to the sale of common stock (28,664 ) -
Proceeds from exercise of stock options 10,452 491,096
------------- -------------
Net cash (used in) provided by financing activities (634,814) 479,368
------------- -------------
Net increase (decrease) in cash and cash equivalents 570,564 (523,523 )
------------- -------------
Cash and cash equivalents at beginning of period 5,411,460 2,047,838
------------- -------------
Cash and cash equivalents at end of period $ 5,982,024 1,524,315
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 37,874 52,039
Cash paid during the period for income tax $ - -
See accompanying Notes to Consolidated Financial Statements.
Item 1. Financial Statements (continued).
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(1) The accompanying consolidated financial statements of KVH Industries, Inc.
and subsidiary (the "Company") for the three-month periods ended March 31, 2001
and 2000 have been prepared in accordance with generally accepted accounting
principles and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. The consolidated financial statements presented have not been audited by
independent public accountants, but they include all adjustments (consisting of
only normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial condition, results of
operations, and cash flows for such periods. These consolidated financial
statements do not include all disclosures associated with annual financial
statements and accordingly should be read in conjunction with our consolidated
financial statements and notes included in the Company's Annual Report on Form
10-K dated January 26, 2001, as filed with the Securities and Exchange
Commission. Copies of our Form 10-K are available upon request. Our results for
the three months ended March 31, 2001 are not necessarily indicative of
operating results for the remainder of the year.
(2) Inventories at March 31, 2001 and December 31, 2000 include the costs of
material, labor, and factory overhead. Inventories are stated at the lower of
cost (first-in, first-out) or market and consist of the following:
March 31, December 31,
2001 2000
Raw materials $ 3,225,657 3,039,310
Work in process 155,556 97,750
Finished goods 710,415 463,600
-------------- ------------
$ 4,091,628 3,600,660
============== ============
Defense project inventories are included in the balance sheet caption "Costs and
estimated earnings in excess of billings on uncompleted contracts." Defense
project inventories amounted to $108,549 and $249,173 at March 31, 2001 and
December 31, 2000, respectively. Monthly invoicing of defense contracts, using
vouchers or progress billings, allows us to recover project costs as we incur
them.
(3) On January 11, 1999, we entered into a mortgage loan in the amount of
$3,000,000 with a life insurance company. The note term is 10 years, with a
principal amortization of 20 years at a fixed interest rate of 7%. Land,
building, and improvements secure the mortgage loan. The monthly mortgage
obligation is $23,259, including interest and principal. Due to the difference
in the term of the note and the amortization of the principal, a balloon payment
of $2,014,716 is due on February 1, 2009. As of March 31, 2001, $2,847,495
remained outstanding.
On March 27, 2000, we entered into a $5,000,000 asset-based, three-year,
revolving loan facility with interest at the prime bank lending rate plus 1%.
Unused portions of the revolving credit facility accrue interest at an annual
rate of 50 basis points. Funds are advanced based upon an asset availability
formula that includes our eligible accounts receivable and inventory. The
availability formula sets aside a fixed amount of qualified assets that may not
be borrowed against. We may terminate the loan prior to the full term, however
we would become liable for certain termination fees. As of March 31, 2001 no
amounts were outstanding against the line of credit.
(4) The Company has established a valuation allowance for deferred tax assets in
the amount of $602,312, based upon an annual projected effective income tax rate
of 39%, for the first quarter loss ended March 30, 2001. The Company has
determined, based upon historical losses and its expectations for lack of
profitability in the near term due to increased spending on research and
development projects, that its operating income will more likely than not be
sufficient to fully utilize the net operating loss generated in the quarter
ended, March 30, 2001.
Item 1. Financial Statements (continued).
(5) On April 2, 2001 and April 17, 2001, we issued and sold an aggregate of
1,230,770 shares of our common stock at a purchase price of $6.50 per share to
Special Situations Fund III, LP, Special Situations Cayman Fund, LP, Special
Situations Private Equity Fund, LP, and Special Situations Technology Fund, LP,
pursuant to a Common Stock Purchase Agreement dated March 30, 2001.
On April 17, 2001, we issued and sold an aggregate of 307,692 shares of our
Common Stock at a purchase price of $6.50 per share to the State of Wisconsin
Investment Board, pursuant to a Common Stock Purchase Agreement dated April 16,
2001.
The Common Stock Purchase Agreements described above provide, among other
matters, that, in the event we sell additional shares of common stock at a price
lower than $6.50 per share (subject to certain exceptions) within ninety (90)
days after the sale of the common stock described above, the purchasers will be
entitled to receive from us a cash amount equal to the number of shares of
common stock purchased by each purchaser multiplied by the difference between
$6.50 and the sale price of the additional shares.
(6) Net loss per common share. The computation of the net loss per common share
of the three-month periods ended March 31, 2001 and 2000 excludes the effect of
potential common stock, as the effect would be anti-dilutive. Following is a
reconciliation of the weighted-average number of shares outstanding used in the
computation of the basic loss per common share:
Three months ended
March 31,
-------------------------------
(Amounts in thousands,
except per share data)
2001 2000
------------ ------------
Calculation of net loss per share - basic
Net income (loss) $ (1,537 ) (866 )
============ ============
Shares:
Common shares outstanding 8,626 7,436
============ ============
Net loss per common share - basic $ (0.18 ) (0.12 )
============ ============
Calculation of net loss per share - diluted
Net loss $ (1,537 ) (866 )
============ ============
Shares:
Common shares outstanding 8,626 7,436
------------ ------------
Average common and equivalent shares
outstanding 8,626 7,436
============ ============
Net loss per common share - diluted $ (0.18 ) (0.12 )
============ ============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995. With the exception of historical information, the matters discussed in
this Quarterly Report on Form 10-Q include certain forward-looking statements
that are subject to certain risks and uncertainties that could cause actual
results to differ materially from those stated. These forward-looking statements
reflect management's opinions only as of the date hereof, and KVH Industries,
Inc. assumes no obligation to update this information. Risks and uncertainties
include, but are not limited to, those discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Looking Statements - `Risk Factors.'" Shareholders of the
Company are cautioned not to place undue reliance on forward-looking statements
made in the Quarterly Report on Form 10-Q. This report should be read in
conjunction with the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K dated January 26, 2001. These reports are
filed with the Securities and Exchange Commission and copies are available from
the Company upon request or through the Company's web site at www.kvh.com.
Company Overview
KVH Industries, Inc., is an international leader in developing and manufacturing
innovative, mobile, high-bandwidth satellite communications systems, navigation
products, and fiber optic sensors.
Mobile Broadband Satellite Communications
The Company's award-winning mobile satellite communications systems have
established KVH as a market leader. Our TracVision(R) and Tracphone(R) product
families connect people on the move to satellite television, telephone, and
Internet data services. Platforms using our TracVision satellite television
antennas include moving or stationary pleasure and commercial marine craft, as
well as recreational and sport utility vehicles, motor coaches, vans, and
long-haul trucks. Our Tracphone systems equip pleasure and commercial marine
vessels with two-way voice, fax, and e-mail with almost worldwide coverage via
the mini-M satellite constellation operated by Inmarsat (the International
Maritime Satellite Organization).
Tactical Navigation
In addition to a line of digital marine compasses for the commercial and
recreational markets, we supply tactical land navigation systems to U.S. and
allied armed forces around the globe. Our TACNAV(TM) product family is the most
widely fielded, GPS-assisted military navigation system in the world, providing
a critical link to digital battlefield management and tactical Internet systems
for virtually every vehicle in the modern mobile military.
Fiber Optic Products
Over the past three years, we have completed the development of an array of
fiber optic sensors and successfully brought them to market. In addition to
enhancing the precision and durability of our own systems, our proprietary fiber
optic technology is now being used to meet the growing demand for precise,
cost-effective sensors in robotics, high-voltage current sensors,
telecommunications networks, and other OEM applications.
New Technology in Mobile Broadband Communications and Fiber Optics We are
currently developing two new technologies that complement and expand our
existing product lines and target markets. The first of these projects is the
creation of photonic fiber and next-generation optical networking components.
Our photonic fiber will enable us to build external modulators capable of speeds
in excess of 100 GHz and costing substantially less to manufacture than optical
chip-based solutions. This same photonic fiber technology may also serve as the
platform for a variety of other new optical networking components, such as
amplifiers, tunable Bragg fiber gratings, and simple optical switches.
The second project is the development of ultra-low profile satellite antennas
that will provide access to high-speed, two-way Internet services and satellite
television signals aboard automobiles and other vehicles. While we intend to
first build a low-profile antenna suitable for use aboard sport utility
vehicles, mini-vans, and other similar vehicles, our long-term objective is to
develop a photonic phased-array antenna that will be suitable in form, fit,
function, and cost for mass-market automotive applications.
In both of these cases, we are still in the early stages of development, and
both projects carry a significant risk of failure. We estimate that we will not
know if our photonic fiber approach has merit until we achieve various
development milestones. We also estimate that we will require at least six
months of design effort to develop the first prototype of our low-profile
antenna, and a minimum of an additional year beyond that project's completion to
finish the design of our flat-panel fiber optic antenna.
Results of Operations
Net loss per share - Net losses for the three-month periods ended March 31 were
$1,537,366 or $.18 per share in 2001 and $866,247 or $.12 per share in 2000. The
first quarter 2001 net loss reflects a $669,763 or 62% increase in R&D expense
from the first quarter of the prior year and a $483,692 or 100% decrease in the
income tax benefit associated with the quarterly taxable loss. R&D spending
growth represents amounts expended for photonic fiber and mobile broadband
research initiatives, while the reduction in quarterly tax benefit reflects our
decision to fully reserve the tax benefit that resulted from the quarterly
taxable loss.
Net sales - Net sales for the 2001 first quarter were $8,132,671, an increase of
43% over last year's sales of $5,696,515. Quarterly navigation sales increased
to $3,589,966 from $1,547,203 in the last year's first quarter due to
substantial sales increases in both military and fiber optic products.
Communications sales increased 9% in 2001 to $4,542,705 from $4,149,312 in 2000,
reflecting the economy's overall slowdown in the first quarter. Although we
predict a slowing in our communications products for the remainder of the year,
our outlook is for strong growth in our military and fiber optic products. As a
result, we feel the combined sales growth for 2001 will be in the 30% range.
Gross profit - Gross profit is comprised of revenues less the cost of materials,
direct labor, manufacturing overheads, and warranty costs. First quarter gross
profit increased 66% in 2001 to $3,123,498 from $1,878,239 in 2000. Gross profit
as a percentage of net sales increased to 38% in 2001 from 33% in the prior
year. This increase in gross profit consists of the shift in our product revenue
mix toward higher-margin military and fiber optic products as well as to the
increased utilization of our fiber optic manufacturing facility. Further
improvement in gross margin resulted from steadily declining direct product
costs as a percentage of net sales during the quarter. Navigation products
declined by 4% when measured as a percentage of net sales. Product cost
improvements resulted primarily from engineering redesigns and labor
efficiencies. The Company anticipates that gross profit will increase gradually
as shipping volume increases and our sales mix continues to shift toward
higher-margin military and fiber optic products, which we expect to occur in the
latter half of the year.
Operating expenses - Research and development expense increased by $669,763 or
62% in the first quarter of 2001 to $1,744,205 from $1,074,442 in the first
quarter of 2000. This R&D increase is due to significant project investments in
photonic fiber and low-profile mobile broadband antenna systems that amounted to
$871,069 during the quarter. We have secured additional funding to continue the
acceleration of both projects and anticipate that R&D will increase at over 120%
for the year as a result. If our R&D initiatives are successful, KVH will gain
access to substantial markets that we believe are measured in the billions of
dollars.
Sales and marketing expense grew to $2,248,332, a 59% increase from last year's
first quarter spending of $1,418,388. Spending increases resulted from the
promotion of our new communications products and the accelerated marketing of
our fiber optic products. We anticipate that marketing and sales expense will
grow proportionately with sales volumes over the year as we begin to promote our
new photonic fiber and mobile broadband products.
General and administrative first quarter expenses increased to $638,251, a 21%
increase from the last year's spending that totaled $527,734. Spending growth
was primarily due to increased investor relations activities and higher outside
professional fees. We believe that administration expense will increase over the
year as we incur costs associated with supporting our new products and
increasing administrative staff to meet the demands of increased sales volumes.
Other (income) expense - Other (income) expense consists of interest income and
expense, other income and expense and foreign currency translation gains and
losses.
Income tax benefit - The first quarter income tax benefit was fully reserved
and, accordingly, does not offset our first quarter operating loss. As a
consequence, our net loss increased by approximately $602,000 or $0.07 per
share. Utilizing the guidelines in the Financial Accounting Standards Board's
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," we weighed the operating risks that, should our
new product initiatives fail, take longer to complete, or do not generate the
anticipated sales volumes necessary to achieve profitability, we could continue
to incur losses beyond the current year.
Liquidity and capital resources
Working Capital - Cash and cash equivalents were $5,982,024 and $5,411,460 at
March 31, 2001, and December 31, 2000, respectively. Working capital decreased
by $1,642,734 in the first three months of 2001 from December 31, 2000. This
decrease in working capital consisted of: a 27% accounts receivable decline that
drove DSO from 57 days at the end of the year to 44 days at the end of the first
quarter; a 14% increase in manufacturing inventories, although we experienced a
slight improvement in inventory turnover from 5.1 turns per year to 5.2 turns
per year; the repayment of our bank line of credit amounting to $598,865; and an
increase in trade payables and accrued expenses of $1,606,227 or 61%.
On December 29, 2000, we sold 800,000 shares of common stock at $6.25 per share
and realized gross proceeds from the sale of $5,000,000. In April 2001, we sold
an additional 1,538,460 shares of common stock to institutional investors at
$6.50 per share, realizing gross proceeds of $10,000,000. We will seek approval
from our shareholders to sell approximately 700,000 additional shares of common
stock at $6.50 per share. This sale of common stock will conclude our
fund-raising for the development of our photonic fiber and mobile broadband
low-profile antennas.
We believe that existing cash balances, proceeds from our recent sales of common
stock, and funds available under our bank line of credit will be sufficient to
meet our anticipated working capital requirements for the foreseeable future.
Once we complete the final sales of common stock, we do not intend to pursue any
additional financing.
Other Matters
Recent Accounting Pronouncements - In June 2000, the FASB issued SFA No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities --
an Amendment of SFAS No. 133." The Statement addresses a number of issues,
including the Derivatives Implementation Group process, causing implementation
difficulties for numerous entities that apply SFAS No. 133. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company has adopted this new
accounting standard effective January 1, 2001, and it did not have a significant
effect on the financial statements.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Forward Looking Statements - "Risk Factors"
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains forward-looking statements that are subject to a number of
risks and uncertainties. There are important factors that could cause actual
results to differ materially from those anticipated by our previous statements.
Impact of Research and Development Expenditures on Operating Results. For the
past three years, we have made significant investments in research and
development that have contributed to operating losses in each of those years.
Since December of 2000 we raised fifteen million dollars to accelerate our
research into two key product areas, photonic fiber and mobile broadband/TV. Our
product development expenditures in these areas may result in a continuation of
operating losses.
Impact of New Products on Sales Results. Our future sales growth will depend
considerably upon the successful introduction of new mobile satellite
communications products for use in marine and land applications. Our success
depends heavily upon the rapid completion of these new products, particularly
for worldwide Internet and data applications, and depends upon other external
variables that could adversely affect us:
- - satellite launches and new technology are expensive and subject to failures;
and - poor consumer confidence and/or economic conditions could depress product
demand.
Dependence on Military Sales. We need to increase navigation sales over 2000
levels to achieve overall profitability. Issues that could affect our success
include:
- - funding for military programs may be postponed;
- - we are introducing new technological solutions that must be proven and then
accepted; and - sales cycles are long and difficult to predict in military
markets.
Continuing Investment in Fiber Optics. A large portion of our product
development strategy for the near future relies upon advanced fiber optic
product concepts. Expenses for fiber optic operations will add significant costs
to operations. As with any research and development project, there can be no
assurance that we will succeed with our development concept and produce a
product that has market acceptance.
Variability of Our Operating Results. Our quarterly operating results have
varied in the past and may vary significantly in the future depending upon all
the foregoing risk factors and how successful we are in improving our ratios of
revenues to expenses.
Volatility of Our Share Price. The trading price of our Common Stock has been
subject to wide fluctuations, and this could continue due to: - variations in
operating results; - development delays of our proposed new products that could
result in decreased sales; and - stock market volatility caused by industry
events.
Hiring and Retention of Skilled Personnel. Qualified personnel are in great
demand throughout the photonics industry. Our success depends in large part upon
our ability to attract, train, motivate, and retain highly skilled employees,
particularly engineers and other senior personnel. A failure to attract and
retain the highly trained technical personnel that are integral to our product
development, sales, service, and support teams may limit the rate at which we
can generate sales and develop new products or product enhancements. This could
have a material adverse effect on our business, operating results, and financial
condition.
Protection of Our Proprietary Technology, Potential Patent Litigation. Our
success depends significantly upon the protection of our proprietary technology.
The unauthorized reproduction or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it. This could have a material adverse effect on our business,
operating results, and financial condition. If we resort to legal proceedings to
enforce our intellectual property rights, the proceedings could become
burdensome and expensive and could involve a high degree of risk. Moreover, the
laws of other countries in which we market our products may afford little or no
effective protection of our intellectual property.
Potential Claims by Other Companies That We Infringe Their Copyrights or
Patents. If any of our products violate third-party proprietary rights, we may
be required to reengineer our products or seek licenses from third parties to
continue offering our products. Any efforts to reengineer our products or obtain
licenses on commercially reasonable terms may not be successful and, in any
case, would substantially increase our costs and have a material adverse effect
on our business, operating results, and financial condition. We do not conduct
comprehensive patent searches to determine whether the technology used in our
products infringes on patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technological
environment in which numerous patent applications regarding similar technologies
may be pending, many of which are confidential when filed.
Although we are generally indemnified against claims that the third-party
technology we license infringes the proprietary rights of others, this
indemnification is not always available for all types of intellectual property
rights (for example, patents may be excluded), and, in some cases, the scope of
such indemnification is limited. Even if we receive broad indemnification,
third-party indemnitors are not always well capitalized and may not be able to
indemnify us in the event of infringement, resulting in substantial exposure to
us. There can be no assurance that infringement or invalidity claims arising
from the incorporation of third-party technology in our products and claims for
indemnification from our customers resulting from these claims will not be
asserted or prosecuted against us. These claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources, in
addition to potential product redevelopment costs and delays, all of which could
materially affect our business, operating results, and financial condition.
In addition, any claim of infringement could cause us to incur substantial costs
in defending ourselves against the claim, even if the claim is invalid. A party
making a claim also could secure a judgment that requires us to pay substantial
damages. A judgment could also include an injunction or other court order that
could prevent us from selling our products. Any of these events could have a
material adverse effect on our business, operating results, and financial
condition.
Increasing Operating Expenses, Acceleration of Research and Development
Activities. We have recently increased our operating expenses to take advantage
of anticipated revenue opportunities related to our Photonics and Mobile
Broadband/TV projects. Our decision to increase spending resulted from our
desire to bring these products to market as quickly as possible in order to take
advantage of strong market conditions. Should we continue to accelerate spending
beyond current levels, we could experience operating losses and negative cash
flows.
Ability to Fund Engineering Projects. The funding needed to complete the
development of our new products might not be available when required. Working
capital generated by operations may be substantially less than we require to
fund both our Photonic Fiber and Mobile Broadband/TV projects. Under such
circumstances, we may not be able to obtain additional funding on reasonable
terms and, as a result, one or both of these projects could be terminated prior
to completion.
Start-up Phase of Our Photonic Fiber Project. Our Photonic Fiber project is
currently in the initial development stage. We may never complete the
technological development necessary to realize the full commercial potential of
this project. We are developing photonic fiber products to replace electro-optic
components in order to create an active-fiber networking solution that would
greatly enhance the speed and power of transmissions over fiber optic networks.
Our current approach utilizes advanced polymers and our D-fiber technology. The
electro-optic polymer we plan to use has not been tested in the core of an
optical fiber and may not function as it does in tests outside the fiber. In
addition, we may not be able to successfully replace the core of a standard
optical fiber with the electro-optic polymer, or the process may become
prohibitively expensive. If we are delayed in the development of our photonic
fiber technology and/or are not first to market this technology, we may be
unable to achieve significant market share in the fiber optic networking market.
Failure to complete development of our photonic fiber technology will also
prevent us from developing a phase shifter based on that technology, which may
impair our ability to effectively provide mobile broadband/TV communications
services to automobiles.
Pricing of Mobile Satellite Communication Products. The success of our Mobile
Broadband/TV project depends upon our ability to develop a technologically
advanced antenna at an acceptable price for the automotive marketplace. To date,
phased array antennas have been developed at prices far in excess of what is
practical in the automotive marketplace. There can be no assurance that we can
engineer a phased array solution within the pricing and technical parameters
necessary to be successful in the automotive marketplace.
Services of Our CEO Martin Kits van Heyningen. Our future success depends
significantly upon the skills, experience, and efforts of Martin Kits van
Heyningen. The loss of Mr. Kits van Heyningen's services could have a material
adverse effect on our business, operating results, and financial condition. We
also depend upon the ability of our executive officers and other members of
senior management to work effectively as a team. We do not have employment
agreements with any of our executive officers.
Part II. Other Information
Item 1. Legal Proceedings.
In the ordinary course of business, we are party to legal proceedings and
claims. In addition, from time to time, the Company has had contractual
disagreements with certain customers concerning the Company's products and
services, which will not have a material affect on operations or capital
resources.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
3.1 Restated Certificate of Incorporation of the Company (1)
3.5 Amended and Restated By-laws of the Company
10.1 1986 Executive Incentive Stock Option Plan (1)
10.2 Amended and Restated 1995 Incentive Stock Option Plan of the Company (1)
10.3 1996 Employee Stock Purchase Plan (1)
10.5 Credit Agreement dated September 8, 1993 between the Company and Fleet
National Bank (1) 10.6 $500,000 Revolving Credit Note dated September 8,
1993 between the Company and Fleet
National Bank (1)
10.7 Security Agreement dated September 8, 1993 between the Company and
Fleet National Bank (1) 10.8 Modification to Security Agreement dated May
30, 1994 between the Company and Fleet
National Bank (1)
10.9 Second Modification to Credit Agreement and Revolving Credit Note dated May 30, 1994
between the Company and Fleet National Bank (1)
10.10 Second Modification to Security Agreement dated March 17, 1995
between the Company and Fleet National Bank (1)
10.11 Third Modification to Credit Agreement and Revolving Credit Note dated March 17, 1995
between the Company and Fleet National Bank (1)
10.12 Third Modification to Security Agreement dated December 12, 1995
between the Company and Fleet National Bank (1)
10.13 Fourth Modification to Credit Agreement and Revolving Credit Note dated December 12, 1995
between the Company and Fleet National Bank (1)
10.14 Lease dated February 27, 1989 between the Company and Middletown
Technology Associates IV (1) 10.17 Registration Rights Agreement dated May
20, 1986 by and among the Company and certain
stockholders of the Company (1)
10.18 Amendment to Registration Rights Agreement dated January 25, 1988, by and among the
Company, Fleet Venture Resources, Inc., and Fleet Venture Partners I and certain stockholders of
the Company (1)
10.19 Amendment to Registration Rights Agreement dated October 25, 1988
by and among the Company and certain stockholders of the Company
(1)
10.20 Amendment to Registration Rights Agreement dated July 21, 1989 by
and among the Company and certain stockholders of the Company (1)
10.21 Third Amendment to Registration Rights Agreement dated November 3,
1989 by and among the Company and certain stockholders of the
Company (1)
10.28 Technology License Agreement dated December 22, 1992 between the
Company and Etak, Inc.
(1)
10.29 Agreement dated September 28, 1995 between the Company and Thomson Consumer Electronics, Inc. (1)
10.31 Agreement regarding Technology Affiliates Program between Jet Propulsion Laboratory and the
Company (1)
10.32 Purchase and Sale Agreement dated March 18, 1996, 50 Enterprise Center, Middletown, Rhode
Island between the Company and SKW Real Estate Limited Partnership (2)
10.33 Fifth Modification to Credit Agreement and Revolving Note dated August 8, 1996 between the
Company and Fleet National Bank
10.34 Andrew Corporation Asset Purchase and Warrant Agreement (3)
10.35 Sixth Modification to Credit Agreement and Revolving Note dated September 29, 1998 between
the Company and Fleet National Bank
10.36 Seventh Modification to Credit Agreement and Revolving Note dated July 30, 1999 between the
Company and Fleet National Bank
10.37 Eighth Modification to Credit Agreement and Revolving Note dated October 29, 1999 between
the Company and Fleet National Bank
10.38 Loan and Security Agreement dated March 27, 2000 between the
Company and Fleet Capital Corporation (5)
10.39 Common Stock Purchase Agreement between KVH Industries, Inc. and Special Situations Fund,
III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P. and
Special Situations Technology Fund, L.P. dated March 30, 2001. (7)
10.40 Common Stock Purchase Agreement between KVH Industries, Inc. and State of Wisconsin
Investment Board dated April 16, 2001. (7)
99.1 Open End Mortgage, and Security Agreement (6)
99.2 Tinley Park, Illinois, lease (6)
99.3 Private Placement Share Purchase Agreement (4)
(1) Incorporated by Reference to Exhibit Index on Form S-1 filed with the
Securities and Exchange Commission dated March 28, 1996, Registration No.
333-01258.
(2) Filed by paper with the Securities and Exchange Commission. (3) Incorporated
by reference to Exhibits 1 & 2 on Form 8-K filed with the Securities and
Exchange Commission dated November 14, 1997. (4) Incorporated by reference to
Exhibit 10.39 on Form 8-K filed with the Securities and Exchange Commission
dated January 5, 2001. (5) Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
(6) Incorporated by reference to Exhibits 99.1 and 99.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998. (7)
Incorporated by reference to Exhibits 10.40 and 10.41 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on April
19, 2001.
(b) Reports on Form 8-K
On April 19, 2001 the Company filed a current report on form 8-K describing the
private sale of 1,538,462 shares of common stock at a price of $6.50 per share.
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.
Date: April 25, 2001
KVH Industries, Inc.
By: /s/ Richard C. Forsyth
Richard C. Forsyth
(Duly Authorized Officer and
Chief Financial and Accounting Officer)