2
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, 2002
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 19, 2002 Common Stock, par value $0.01 per share 10,995,426
KVH INDUSTRIES, INC., AND SUBSIDIARY
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of March 31, 2002, and
December 31, 2001 3
Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 18
Part I. Financial Information
Item 1. Financial Statements.
KVH INDUSTRIES, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
(Unaudited) (Audited)
----------------- ---------------------
Assets:
Current assets:
Cash and cash equivalents $ 9,073,634 11,240,893
Accounts receivable, net 6,971,414 6,026,689
Costs and estimated earnings
In excess of billings on uncompleted contracts 395,092 482,486
Inventories 5,126,771 4,124,203
Prepaid expenses and other deposits 425,868 406,866
Deferred income taxes 603,299 637,799
------------- -------------
Total current assets 22,596,078 22,918,936
------------- -------------
Property and equipment, net 7,566,370 7,431,287
Other assets, less accumulated amortization 540,693 573,849
Deferred income taxes 2,238,430 2,238,430
------------- -------------
Total assets $ 32,941,571 33,162,502
============= =============
Liabilities and stockholders' equity:
Current liabilities:
Current portion long-term debt $ 86,974 86,974
Accounts payable 3,214,322 2,084,507
Accrued expenses 1,177,421 1,143,790
Customer deposits 587,165 903,853
------------- -------------
Total current liabilities 5,065,882 4,219,124
------------- -------------
Long-term debt 2,676,576 2,697,147
------------- -------------
Total liabilities 7,742,458 6,916,271
------------- -------------
Stockholders' equity:
Common stock 109,874 109,612
Additional paid-in capital 34,576,992 34,478,002
Accumulated deficit (9,487,753 ) (8,341,383 )
------------- -------------
Total stockholders' equity 25,199,113 26,246,231
------------- -------------
Total liabilities and stockholders' equity $ 32,941,571 33,162,502
============= =============
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,
2002 2001
------------------- -----------------
Net sales $ 9,641,513 8,132,671
Cost of sales 5,357,407 5,009,173
----------------- -----------------
Gross profit 4,284,106 3,123,498
Operating expenses:
Research and development 2,333,699 1,744,205
Sales and marketing 2,318,264 2,248,332
General and administrative 719,340 638,251
----------------- -----------------
Loss from operations (1,087,197) (1,507,290)
Other expense:
Other expense 2,024 22,335
Interest expense, net 22,649 7,741
----------------- -----------------
Loss before income taxes (1,111,870) (1,537,366)
Income taxes (note 4) 34,500 _
----------------- -----------------
Net loss $ (1,146,370) (1,537,366)
================= =================
Per share information:
Loss per share:
Basic $ (0.10) (0.18)
Diluted $ (0.10) (0.18)
Number of shares used in per share calculation:
Basic 10,973,616 8,626,470
Diluted 10,973,616 8,626,470
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,
2002 2001
------------- -------------
Cash flow from operations:
Net loss $ (1,146,370) (1,537,366)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 372,775 297,555
Decrease in deferred income taxes 34,500 --
(Increase) decrease in accounts and contract receivables, net (944,725) 1,802,264
Decrease in costs and estimated earnings in excess of
billings on uncompleted contracts 87,394 100,460
Increase in inventories (1,002,568) (490,968)
Increase in prepaid expenses and other deposits (19,002) (198,108)
Increase in accounts payable 1,129,815 978,646
Increase in accrued expenses 33,631 627,581
Decrease in customer deposits (316,688) (7,712)
------------- -------------
Net cash (used in) provided by operating activities (1,771,238) 1,572,352
------------- -------------
Cash flow from investing activities:
Capital expenditures (474,702) (366,974)
------------- -------------
Net cash used in investing activities (474,702) (366,974)
------------- -------------
Cash flow from financing activities:
Repayment of bank line of credit -- (598,865)
Repayments of long-term mortgage debt (20,571) (17,737)
Costs related to the sale of common stock -- (28,664)
Proceeds from exercise of stock options 99,252 10,452
------------- -------------
Net cash provided by (used in) financing activities 78,681 (634,814)
------------- -------------
Net (decrease) increase in cash and cash equivalents (2,167,259) 570,564
------------- -------------
Cash and cash equivalents at beginning of period 11,240,893 5,411,460
------------- -------------
Cash and cash equivalents at end of period $ 9,073,634 5,982,024
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 55,457 37,874
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, 2002 and 2001
(Unaudited)
(1) The accompanying consolidated financial statements of KVH Industries, Inc.
and subsidiary (the "Company") for the three-month periods ended March 31, 2002
and 2001 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 March 20, 2002, 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, 2002 are not necessarily indicative of operating results
for the remainder of the year.
(2) Inventories at March 31, 2002 and December 31, 2001 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,
2002 2001
Raw materials $ 3,336,188 2,675,890
Work in process 153,196 4,749
Finished goods 1,637,387 1,443,564
-------------- ------------
$ 5,126,771 4,124,203
============== ============
Defense project inventories are included in the balance sheet caption "Costs and
estimated earnings in excess of billings on uncompleted contracts." Defense
project inventory was $18,879 at December 31, 2001.
(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, 2002, $2,763,550
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, if we
elected to pay specified termination fees. As of March 31, 2002, $5,000,000 was
available to borrow under the line, with no balances outstanding.
(4) In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. In accordance with the
provisions of the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if there are
changes in the estimates of future taxable income during the carry-forward
period or in the feasibility of certain tax planning strategies.
Item 1. Financial Statements (continued).
The Company has established a valuation allowance for deferred tax assets for
the three month period ended March 31, 2002, in the amount of $477,595 based
upon an annual projected effective income tax rate of 39% and accumulated losses
through March 31, 2002. The Company does not believe, 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 it is more likely
than not that its operating income will be sufficient to fully utilize the net
operating loss generated in the three months ended March 31, 2002.
(5) Net loss per common share. The computation of the net loss per common share
for the three-month periods ended March 31, 2002 and 2001 excludes the effect of
potential common stock, as the effect would be anti-dilutive. The following is a
reconciliation of the weighted-average number of shares outstanding used in the
computation of the basic and diluted loss per common share:
Three months ended
March 31,
-----------------------------
(Amounts in thousands,
except per share data)
2002 2001
------------ ------------
Calculation of net loss per share - basic
Net loss $ (1,146) (1,537)
============ ============
Shares:
Common shares outstanding 10,974 8,626
============ ============
Net loss per common share - basic $ (0.10) (0.18)
============ ============
Calculation of net loss per share - diluted
Net loss $ (1,146) (1,537)
============ ============
Shares:
Common shares outstanding 10,974 8,626
------------ ------------
Average common and equivalent shares
outstanding 10,974 8,626
============ ============
Net loss per common share - diluted $ (0.10) (0.18)
============ ============
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 March 20, 2002. 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 designs and manufactures products that enable mobile
communication, defense navigation, and direction sensing through the use of its
proprietary mobile satellite antenna and fiber optic technologies. KVH is an
established company with existing product lines that drive consistent revenue
growth, positioning the Company as the leader in the marine and land mobile
satellite communications and defense land vehicle navigation markets. In late
2000 we began research into low-profile satellite antennas and in-fiber
modulators to extend our reach in mobile satellite communications and enter the
fiber optic infrastructure markets. To fund these efforts, the Company carried
out a series of private placements that raised $17.5 million, net of transaction
costs.
Principal Technologies and Products
KVH employs two key proprietary technologies - fiber optics and mobile satellite
antennas - in its products. These technologies allow KVH to address
opportunities across a wide spectrum of markets, including defense-related
navigation and stabilization, optical telecommunications, and mobile satellite
communications for moving platforms (e.g., vessels, recreation vehicles (RVs),
and automobiles).
Fiber Optics
Since acquiring the fiber optic assets of Andrew Corporation in 1997, KVH has
invested in and completed the development of its proprietary EoCore(R) line of
fiber optic gyros (FOGs), and successfully integrated them into the Company's
existing products. KVH produces both optical fiber and optical subassemblies for
integration with its products or for original equipment manufacturer's (OEM)
applications. Our integrated manufacturing process ensures the highest level of
quality, resulting in production yields that are significantly higher than the
industry average. Our fiber optic technology is being applied to an array of
applications in different markets and has enhanced the precision and durability
of our products.
Defense Applications
The military's evolving combat strategy places a premium on the precision
vehicle navigation critical for rapid deployments, high-speed maneuvers, and
digital battlefield coordination. KVH Industries' TACNAV(TM) integrated tactical
navigation systems offer every military vehicle and force commander - whether in
a command, support, or combat vehicle - 100% availability of position and other
tactical data, even if the Global Positioning System (GPS) is disrupted or
jammed. In addition to interfacing with the onboard GPS, TACNAV consolidates
onboard tactical data and transmits the data via digital Battlefield Management
Systems (BMS) to the force commander and the other units in the field, enhancing
operational efficiency and coordination. KVH is a leading supplier of integrated
navigation and targeting systems worldwide, with systems aboard more than 7,000
vehicles. KVH offers multiple variants of the TACNAV system using both KVH FOGs
and digital compasses, providing complete operational support for virtually the
entire spectrum of military vehicles through a low-cost, integrated solution.
KVH's fiber optic rotation rate sensors also meet the emerging need among
military forces for drone and unmanned aerial vehicle (UAV) navigation, and
turret stabilization. Our sensors offer improved precision and reliability over
existing systems at a lower cost, providing KVH a significant competitive
advantage.
Optical Telecommunication Applications
The same optical fiber technology that is integral to KVH FOGs and sensors is
also appropriate for use in high-speed optical telecommunication components.
Development is underway on our photonic fiber initiative, which combines our
patented D-shaped optical fiber with a new electro-optic polymer. Our intent is
to turn passive fiber into an active optical component for next-generation
high-speed optical networks. The first product that we anticipate bringing to
market using our ActiveFiber(TM) Technology is a high-speed external modulator
capable of speeds in excess of 40 gigabits per second (Gbps) that will meet the
needs of existing 10 Gbps and emerging 40 Gbps networks. We expect that KVH
ActiveFiber Technology, if successfully developed, may serve as a platform for
additional optical components that may be suitable for use in optical networking
as well as in our next-generation mobile satellite antennas. Subject to the
timely completion of this development effort, we anticipate that the ActiveFiber
optical modulator will be introduced to the market late in the second half of
2002.
Mobile Satellite Antennas
KVH's TracVision(R) and Tracphone(R) products connect people on the move to
satellite television, telephone, and high-speed Internet services. These
award-winning systems have established KVH as a market leader in both the marine
and land mobile markets. The core technology in KVH's family of satellite
television and communications systems is the Company's proprietary three-axis,
fully stabilized antenna, which maintains contact with specific geo-stationary
satellites when a vessel or vehicle is in motion. The antennas use a gyro and
inclinometer to precisely measure the pitch, roll, and yaw of an antenna
platform in relation to the earth. Based on that data, on-board microprocessors
and the Company's proprietary stabilization and control software compute the
antenna movement necessary for the antenna's motors to point the antenna
properly and maintain satellite contact. KVH antennas also carry out rapid
initial acquisition, continuous tracking, and reacquisition of the satellite
signal without operator intervention.
Marine and RV Applications
Since the introduction of the first TracVision satellite TV antenna in 1994, the
Company has continued to refine its TracVision products, resulting in smaller,
lower cost antennas with higher levels of performance. KVH's proprietary
integrated Digital Video Broadcast (DVB) technology allows its antennas to
receive signals from high-powered digital television services like DIRECTV(R),
as well as virtually any DVB satellite service worldwide, including the DISH
Network(TM) and ExpressVu in North America; DIRECTV Latin America in Central and
South America; Astra, Hotbird, Thor, Sirius, and Hispasat in Europe; and Arabsat
in Africa and the Middle East. Platforms using our TracVision satellite
television antennas include pleasure and commercial marine craft as well as
moving or stationary RVs, motor coaches, vans, and long-haul trucks.
KVH has an established distribution and service infrastructure that comprises
more than 3,000 dealers in the United States alone. The National Marine
Electronics Association (NMEA) has named the Company's TracVision family the
"Best Satellite Television Product" in 1998, 1999, 2000, and 2001. KVH is now
the dominant player in the existing mobile satellite market, with an estimated
70 percent market share in the marine and RV mobile satellite TV marketplaces.
In October 2001, KVH announced that it had signed an exclusive agreement with
Bell ExpressVu to distribute the DirecPC(R) satellite Internet service to mobile
customers in the United States. KVH then introduced its TracNet(TM) mobile
high-speed Internet system for the maritime and land mobile markets, making KVH
the only company to offer mobile, two-way access to high-speed Internet services
to vessels and vehicles in and around North America. TracNet shipments began in
the second quarter of 2002. TracNet is fully compatible with all of KVH's DVB
satellite TV antenna systems and allows mobile users to surf the Internet at
speeds up to 400 kilobits per second (Kbps).
Automotive Applications
The tremendous acceptance and expansion of multimedia systems aboard vehicles
has created a need for a system that will provide live programming and
high-speed Internet for these video systems. The KVH mobile broadband research
initiative is directed toward the development of a low-profile satellite TV
antenna that will provide in-motion access to high-speed, two-way Internet and
satellite television services for the video and computer systems aboard
automobiles and other vehicles. The first phase of the mobile broadband effort
is to build a low-profile satellite TV antenna suitable for use aboard SUVs and
minivans. Subject to the timely completion of this development effort, we
anticipate that the low-profile antenna will be introduced to the market late in
the second half of 2002.
Marine Satellite Communications Applications
KVH is also a leading provider of marine satellite communications systems. Our
fully stabilized Tracphone systems equip pleasure and commercial marine vessels
with two-way voice, fax, and e-mail with global coverage provided by the
satellite constellation operated by Inmarsat (the International Maritime
Satellite Organization). With more than 20 years experience, Inmarsat is the
largest and most successful mobile communications company, serving marine, land
mobile, and aeronautical customers worldwide. Inmarsat now supports links for
phone, fax, and data communications at up to 64 Kbps to more than 210,000 ships,
vehicles, aircraft, and portable terminals.
Results of Operations
Net loss per share - Losses for the three-month periods ended March 31 were $1.1
million or $0.10 per share in 2002 and $1.5 million or $.18 per share in 2001.
The first quarter 2002 net loss reduction of 25% from the prior year was made up
of three factors: increased defense and communications revenues; improvements in
cost of sales; and offsetting increases in research spending. Research spending
in the quarter included $1.1 million to support our photonic fiber and
low-profile satellite antenna programs; an amount slightly higher than the first
quarter's net loss. We believe that our revenues will begin to accelerate during
2002 resulting in profitable operations that could occur as early as the second
quarter of this year. Our ability to achieve profitability is dependent upon the
timing of defense orders, the continuation of favorable sales trends for our
communications products and the successful completion of our photonic fiber and
low-profile satellite antenna research.
Net sales - Net sales for the first quarter of 2002 were $9.6 million, an
increase of 19% over last year's first quarter sales of $8.1 million. Positive
results in our defense and communications products were offset by delayed
shipment of fiber optic products in the first quarter. Defense revenues doubled
from the prior year to $2.2 million, although we continued to experience timing
delays in the placement of defense orders. We are very encouraged by the
acceptance of our defense-related products and our order backlog for the second
quarter of 2002 is approximately $3.0 million. First quarter communications
sales increased to $5.9 million, a 29% increase from the prior year's result of
$4.6 million. Communications product volumes are growing in response to broader
distribution of our products by larger national distributors, a wider acceptance
of satellite products by consumers, and the general economic recovery. We
anticipate continued growth of our communications products throughout the
remainder of 2002 as we expand our product offerings, benefit from our stronger
distribution networks and broaden our market presence as an OEM supplier to
recreational vehicle manufacturers. Fiber optic sales in the first quarter
declined 51% to $0.5 million from $1.0 million in 2001. Scheduled first quarter
fiber optic shipments were delayed due to protracted negotiations related to a
product specification, resulting in the shipment of the order in the second
quarter of 2002. Fiber optic backlog for the second quarter of 2002 is roughly
$1.2 million, and we believe that fiber optic sales will accelerate throughout
2002. Our outlook for the remainder of 2002 is encouraging, and we continue to
forecast total 2002 revenue growth within a range of 30% to 40% above 2001
results.
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 37% in 2002 to $4.3 million from $3.1 million in 2001. Gross
profit as a percentage of net sales increased to 44% in 2002 from last year's
38% of sales. The 2002 first quarter gross profit improvement resulted from a
doubling of higher margin defense shipments, continued improvements in our
direct product costs and a decrease in manufacturing overhead spending that
dropped our overhead rate to 13% of sales from 17% in 2001. We anticipate that
the first quarter's gross margin percentage will continue throughout 2002,
contingent upon achievement of our current defense sales forecast, more
efficient utilization of our fiber optics manufacturing facility and projected
direct product cost improvements.
Operating expenses - Research and development expense increased by $0.6 million
or 34% in the first quarter of 2002 to $2.3 million from $1.7 million in the
first quarter of 2001. This R&D increase is due to significant research
investments in our photonic fiber and low-profile mobile broadband antenna
systems, which amounted to $1.1 million for the first quarter, and a reduction
in externally funded research. Project spending is estimated to continue at
current spending levels through the second quarter of this year and thereafter
begins to decline as we reduce our reliance upon outside consultants. We
anticipate that our funded engineering activities will gain momentum beginning
in the third quarter and continue for the remainder of the year, offsetting
internal research costs. Project spending decreases and external customer
funding are projected to reduce spending to roughly 16% of sales by year-end.
Sales and marketing expense grew 3% to $2.3 million from last year's first
quarter spending of $2.2 million. Spending increases were primarily related to
increased outside sales representative commissions that resulted from a doubling
of defense sales and a 29% increase in our communications revenues. We
anticipate that marketing and sales expense will grow in dollar terms as sales
volumes increase, but decline as a percentage of revenues to roughly 23% by the
end of 2002.
General and administrative first quarter 2002 expenses increased $0.1 million to
$0.7 million from the last year's first quarter spending of $0.6 million.
Spending growth was primarily due to increased wages, travel and office
supplies. Administrative costs are expected to rise slightly throughout the
year, but remain relatively stable at 7% of sales.
Income tax expense - Our quarterly domestic income tax benefit was fully
reserved and, accordingly, does not offset our domestic operating loss. As a
result, our quarterly domestic net loss increased by approximately $0.5 million
or $0.04 per share, which equals the amount of valuation allowance allocated to
our quarterly domestic loss. We have allocated income tax expense of $35
thousand to our non-domestic operating income. 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 domestic losses beyond the current
year, resulting in our decision to reserve the current year's domestic income
tax benefit associated with our domestic operating loss. In addition, the amount
of the deferred tax asset appearing on the balance sheet that is considered
realizable could be reduced in the near term if changes occur in the feasibility
of certain tax planning strategies.
Liquidity and capital resources
Working capital - Our cash balance was $9.1 million at March 31, 2002. Cash
decreased by $2.2 million in the first quarter of 2002 due to accounts
receivable growth of $0.9 million in response to a 19% sales increase and
inventories rose $1.0 million as we increased raw material purchases and ramped
up production to meet forecast sales growth in the second quarter. Our current
sales forecast provides for a return to profitability in the second half of this
year, however, our projection is predicated on the timing of defense orders, the
continuation of favorable sales trends in our communications products and the
successful completion of our photonic fiber and low-profile satellite antenna
research programs. Based upon the achievement of our profitability goals, we
anticipate that our cash burn rate will slow as our operations become profitable
and our inventory turns accelerate. We anticipate that existing cash balances
will be sufficient to meet our anticipated operating and capital requirements
for the remainder of 2002.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the periods presented. Actual results may differ from
these estimates under different assumptions and conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company's
significant accounting policies are included in Note 1 of the Notes to the
Consolidated Financial Statements of our Annual Report on Form 10-K dated March
20, 2002. The significant accounting policies which management believes are the
most critical to aid in fully understanding and evaluating the Company's
reported financial results include allowance for doubtful accounts, inventory
valuation, impairment of long-lived assets and recoverability of deferred tax
assets.
The Company's estimate for its allowance for doubtful accounts related to trade
receivables is based on specific and historical criteria that are combined to
determine the total amount reserved. The Company evaluates specific accounts
where we have information that the customer may have an inability to meet its
financial obligations. The Company uses its judgment, based on the best
available facts and circumstances, and records a specific reserve for that
customer against amounts due to reduce the receivable to the amount that is
expected to be collected. These specific reserves are reevaluated on a monthly
basis and adjusted as additional information is received that impacts the amount
reserved. An additional reserve is established for all customers based on a
range of percentages applied to aging categories. These percentages are based on
historical collection and write-off experience and are analyzed on a quarterly
basis. If circumstances change, the Company's estimates of the recoverability of
amounts due the company could be reduced by a material amount.
Inventory is valued at the lower of cost or market. The Company continually
ensures that slow-moving and obsolete inventory is written down to its net
realizable value by reviewing current quantities on hand, actual and projected
sales volumes and anticipated selling prices on products. Generally, the Company
does not experience issues with obsolete inventory due to the nature of its
products being interchangeable with various product offerings. If the Company is
not able to achieve its expectations of the net realizable value of the
inventory at its current value, the Company would have to adjust its reserves
accordingly.
Long-lived assets are reviewed for indications of impairment when events and
circumstances indicate that the assets might not be recoverable. Recoverability
of long-lived assets is measured by a comparison of the assets carrying value to
the estimated future undiscounted cash flows expected to be generated by the
asset. If such assets were considered to be impaired, the impairment would be
measured by the amount by which the carrying value of the asset exceeds its fair
value based on estimated discounted cash flows. The preparation of future cash
flows requires significant judgments and estimates with respect to future
revenues related to the respective asset and the future cash outlays related to
those revenues. Actual revenues and related cash flows or changes in anticipated
revenues and related cash flows could result in a change in this assessment and
result in an impairment charge. The preparation of discounted cash flows also
requires the selection of an appropriate discount rate. The use of different
assumptions would increase or decrease estimated discounted cash flows and could
increase or decrease the related impairment charge.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carry forwards. On a quarterly basis the Company assesses the
recoverability of the deferred tax assets by considering whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Based on the history of operating earnings in its ongoing business and
its expectations in the future, the Company has determined that a portion of the
deferred tax assets were not recoverable and a valuation allowance was
established. For the remaining deferred tax assets the recoverability of these
assets was deemed to be recoverable based on certain tax planning strategies.
The amount of the deferred tax asset considered realizable could be reduced in
the future if there are changes in the Company's feasibility of certain tax
planning strategies. Additionally, if the Company generates future earnings the
realizability of the deferred tax assets reserved by the valuation allowance
would be utilized.
Contractual Obligations and Other Commercial Commitments
Our contractual commitments consist of a mortgage note payable, facility and
equipment leases. The principal repayment of the mortgage note is based upon a
20-year amortization schedule, but the term is 10 years requiring a balloon
payment of $2,014,716, due on February 1, 2009. There are no loan to value
covenants in the loan that would require early pay-down of the mortgage if the
market value of the property should decline. We are also obligated under a
multi-year facility lease that terminates in 2005. Our present intention is to
renew the facility lease prior to its expiration in 2005. Our operating leases
represent vehicle and equipment operating leases. The schedule below reflects
our liabilities under these agreements.
Total 2002 - 2004 2005 - 2006 After 2006
---------------- ---------------- ----------------- -----------------
Mortgage loan $2,763,550 259,669 222,218 2,281,663
Facility lease $519,512 474,102 45,410 --
Operating leases $38,770 38,770 -- --
---------------- ---------------- ----------------- -----------------
Total contractual cash obligations $3,321,832 772,541 267,628 2,281,663
================ ================ ================= =================
We have not entered into any off-balance sheet commercial commitments such as
standby letters of credit, guarantees, and standby repurchase obligations or
other commercial commitments.
Other Matters
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144.
The Company adopted the provision of SFAS No. 142 as of January 1, 2002, and it
did not have a material impact on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. SFAS No. 144 requires companies
to separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. The Company adopted the provision of SFAS No. 144 on January 1,
2002 and it did not have a material impact on the consolidated 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.
We May Fail to Complete Our Mobile Broadband Development Initiative Successfully
Our mobile broadband project is in the development stage. The KVH mobile
broadband initiative is directed toward the development of a low-profile
satellite TV antenna that will provide in-motion access to high-speed, two-way
Internet and satellite television services for the video and computer systems
aboard automobiles and other vehicles.
The project involves significant technical advances and there can be no
assurance that we will achieve the form factor, performance, and cost parameters
necessary for successful commercialization of these products. A delay or failure
to create our ActiveFiber Technology could prevent the development of an
affordable flat panel, phased-array antenna. If we are delayed in our
development of our mobile broadband technology and/or are not first to market
with this technology, we may be unable to achieve significant market share in
the automotive mobile satellite communication market.
The success of the TracNet Mobile High-speed Internet Service Depends on the
Performance and Quality of Other service Providers The new TracNet service is
designed to provide mobile high-speed Internet access to vehicles and vessels
throughout North America and as far as 100 miles off the coast. TracNet's
successful operation depends on the use of KVH's antenna and other components
with services and equipment of other suppliers. Specifically, TracNet will rely
upon the service offered by the satellite Internet provider (Bell ExpressVu of
Canada), as well as the equipment and services of cellular and satellite return
link communications suppliers. Globalstar Satellite Communications Services,
which KVH intends to use as the satellite return link supplier for TracNet,
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code on
February 15, 2002, and currently is operating its business as a
debtor-in-possession. Should Globalstar or one of the other vendors integral to
TracNet's operation be unable to fulfill its obligations, KVH will seek an
alternate supplier and carry out any necessary hardware and software retrofits
or upgrades that may be required to ensure the continued operation of the
TracNet system. In such an event, KVH may not be able to identify and enter into
appropriate agreements with replacement suppliers.
Pricing of Our Mobile Satellite Communications Products is Critical to Product
Acceptance The success of our mobile broadband 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.
We May Fail to Complete Our Photonic Fiber Development Initiative Successfully
Our photonic fiber project is currently in the development stage. We are
developing our ActiveFiber Technology consisting of photonic fiber products that
we believe will replace electro-optic components and create an active-fiber
networking solution that would greatly enhance the speed of transmissions over
fiber optic networks. We may never complete the technological development
necessary to realize the full commercial potential of the project. Our current
approach utilizes a new electro-optic polymer and our D-fiber technology. The
photonic fiber initiative involves significant technical advances, and there can
be no assurance that we will achieve the form factor, performance, and cost
parameters necessary for successful commercialization of this technology.
If we are delayed in our development of our photonic fiber technology and/or are
not first to market with 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 communications services to
automobiles through the use of a flat panel, phased-array antenna.
Research and Development Expenditures Could Result in Continuing Operating
Losses For the past four years we have made significant investments in research
and development that have contributed to operating losses in each of those
years. In May 2001, we completed a series of private placements that raised
$17.5 million, net of transaction costs, to accelerate our research into two key
product areas, photonic fiber and mobile broadband. Project development
expenditures amounted to $4.5 million in 2001 and $1.1 million in the first
quarter of 2002, resulting in operating losses. Our expectation is that, as the
R&D efforts conclude, our R&D spending will decrease, positively impacting
operating results. If 2002 projected R&D project expenditures are extended
beyond our current projections of $2.9 million for the remainder of this year or
the introduction of these products is delayed, it will slow our anticipated
return to profitability. Should we continue to accelerate spending beyond
current budgeted levels for 2002 we could continue to experience operating
losses and negative cash flows.
Future Sales Growth Depends on the Continued Expansion of Satellite
Communications Revenues To date, the Company's growth has been sustained by a
consistent expansion of our satellite communications sales. Our future satellite
communications sales growth will be based to a considerable extent upon the
successful introduction of new mobile satellite communications products for use
in marine and land applications. Our success depends heavily on rapid completion
of new products, particularly for worldwide Internet and data applications.
However, poor consumer confidence and/or economic conditions could depress
product demand. Our success also depends on external variables such as
consumers' access to satellite communication services, which may be hindered
because satellite launches and new technology are expensive and subject to
failures, depressing demand for our products.
Defense-related Sales Could be Adversely Affected by Political and International
Events Recent world events and a shift in military planning to favor rapid
deployment and lighter vehicles put a premium on precision navigation, a feature
offered by KVH's integrated tactical navigation systems. Based on our shippable
backlog in 2002 and current military procurement schedules, we anticipate a
doubling of our defense-related revenues, which is required for a return to
profitability. However, this growth could be adversely affected by: delays in
the current military procurement schedule; an unexpected shift or reallocation
of anticipated funding for military programs; delays in the testing and
acceptance of our technological solutions by the military; and sales cycles that
are long and difficult to predict.
Our Operating Results are Variable
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.
Our Share Price has Displayed Volatility
The Company's stock has experienced substantial price volatility as a result of
variations between its actual and anticipated financial results and as a result
of announcements by the Company and its competitors. In addition, the stock
market has experienced extreme price and volume fluctuations that have affected
the market price of many technology companies in ways that have been unrelated
to the operating performance of these companies. These factors, as well as
general economic and political conditions, may materially adversely affect the
market price of the Company's common stock in the future.
Our Consumer Product Sales are Dependent on the Financial Strength and
Performance of Our Distribution Network Many of our consumer-oriented products
are marketed through a third-party worldwide network of value-added resellers,
distributors, and independent sales representatives. Many of the Company's
resellers operate on narrow product margins, and may distribute products from
competing manufacturers. The Company's business and financial results could be
adversely affected if the financial condition of these resellers weakened, if
resellers within consumer channels were to cease distribution of the Company's
products, or if uncertainty regarding demand for the Company's products caused
resellers to reduce their ordering and marketing of the Company's products.
If We Fail to Commercialize New Product Lines, Our Business Will Suffer
We intend to continue to develop new product lines and to improve existing
product lines to meet our customers' diverse and changing needs. However, our
development of new products and improvements to existing products may not be
successful, due to our failure to complete the development of a new product or
product improvement; or our failure to sell our new product or improved product
because, among other things, the product is too expensive, is defective in
design, manufacture or performance, is inferior to similar products on the
market, or has been superceded by a superior product or technology. Furthermore,
new products require increased sales and marketing, customer support, and
administrative functions to support anticipated increased levels of operations.
We may not be successful in creating this infrastructure, and we may not realize
a sufficient increase in gross profit to offset the expenses resulting from this
expanded infrastructure.
Our Success Depends to a Significant Degree 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 be 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.
Claims by Other Companies that We Infringe Their Copyrights or Patents Could
Adversely Affect Our Financial Condition If any of our products violate
third-party proprietary rights, we may be required to reengineer our products or
seek to obtain licenses from third parties to continue to offer 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 patents held
by third parties. In addition, product development is inherently uncertain in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies.
Although we are generally indemnified against claims that third-party technology
that 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 adversely affect our business, operating results and financial
condition.
In addition, any claim of infringement could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management from their business. 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.
Our Future Success Depends to a Significant Degree on the Skills, Experience,
and Efforts of the Company's CEO, Martin Kits Van Heyningen, and our Senior
Executives The loss of the services of Mr. Kits van Heyningen could have a
material adverse effect on our business, operating results and financial
condition. We also depend on 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.
General Economic Conditions and Current Economic and Political Uncertainty Could
Adversely Affect the Company The Company's operating performance depends
significantly on general economic conditions. Demand for some of the Company's
consumer-oriented products displayed slower-than-anticipated growth as a result
of worsening global economic conditions. Continued uncertainty about future
economic conditions has also made it increasingly difficult to forecast future
operating results. Should global and regional economic conditions fail to
improve or continue to deteriorate, demand for the Company's products could be
adversely affected, as could the financial health of its suppliers,
distributors, and resellers. The terrorist attacks that took place on September
11, 2001, have created many economic and political uncertainties and have had a
strong negative impact on the global economy. The long-term effects of the
September 11, 2001, attacks on the Company's future operating results and
financial condition are unknown.
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 Note
3.1 Restated Certificate of Incorporation of the Company (1)
3.5 Amended and Restated By-laws of the Company
10.01 1986 Executive Incentive Stock Option Plan (1)
10.02 Amended and Restated 1995 Incentive Stock Option Plan of the Company (1)
10.03 1996 Employee Stock Purchase Plan (1)
10.05 Credit Agreement dated September 8, 1993, between the Company and Fleet National Bank (1)
10.06 $500,000 Revolving Credit Note dated September 8, 1993, between the Company and Fleet
National Bank (1)
10.07 Security Agreement dated September 8, 1993, between the Company and Fleet National Bank (1)
10.08 Modification to Security Agreement dated May 30, 1994, between the Company and Fleet
National Bank (1)
10.09 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)
(Continued)
Number Description Note
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 (3)
10.36 Seventh Modification to Credit Agreement and Revolving Note dated July 30, 1999, between the
Company and Fleet National Bank (5)
10.37 Eighth Modification to Credit Agreement and Revolving Note dated October 29, 1999, between
the Company and Fleet National Bank (5)
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 the State of Wisconsin
Investment Board pursuant to a Common Stock Purchase Agreement dated April 16, 2001 (7)
10.41 Common Stock Purchase Agreement between KVH Industries, Inc. and the Massachusetts Mutual
Life Insurance Company dated May 25, 2001 (7)
10.42 Open End Mortgage, and Security Agreement (6)
10.43 Tinley Park, Illinois, lease (6)
10.44 Private Placement Share Purchase Agreement (4)
21.01 List of Subsidiaries of the Company (1)
23.01 Consent of KPMG LLP
(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 10.39 through 10.42 to the
Company's Current Reports on Form 8-K filed with the Securities and
Exchange Commission on April 19, 2001 and June 11, 2001.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for this reporting period.
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 26, 2002
KVH Industries, Inc.
By: /s/ Richard C. Forsyth
Richard C. Forsyth
(Duly Authorized Officer and
Chief Financial and Accounting Officer)
