United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year end December 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___ to ___
Commission file number: 0-28082
KVH Industries, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 05-0420589
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
50 Enterprise Center, Middletown, RI 02842
(Address of principal executive offices) (Zip code)
(401) 847-3327
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act: Common Stock,
$0.01 par value, per share. (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X ).
As of February 8, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $38,363,896 based upon a total of 5,632,319
shares held by non-affiliates and the last sale price on that date of $7.20. As
of February 8, 2002, the number of shares outstanding of the Registrant's common
stock was 10,961,191.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement relating to the 2002 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report on Form 10-K. The Company anticipates that its definitive Proxy Statement
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001, the end of the Company's fiscal year.
INDEX TO FORM 10-K
PART I Page
Item 1. Business 1
Item 1a. Executive Officers and Directors of the Registrant as of December 31, 2001 5
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 7a. Market Risk Disclosure 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and Management 17
Item 13. Certain Relationships and Related Transactions 17
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 18
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995
With the exception of historical information, the matters discussed in this
Annual Report on Form 10-K include certain forward-looking statements that
involve risks and uncertainties. Among the risks and uncertainties to which the
Company is subject are product life cycles, technological change, the Company's
relationship with its significant customers, market acceptance of new product
offerings, reliance on outside resources such as satellite networks, dependence
on key personnel, fluctuations in annual and quarterly performance and worldwide
economic conditions. As a result the actual results realized by the Company
could differ materially from the statements made herein. Shareholders of the
Company are cautioned not to place undue reliance on forward-looking statements
made in the Annual Report on Form 10-K or in any document or statement referring
to this Annual Report on Form 10-K. For a more detailed discussion of risks and
uncertainties, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Forward Looking Statements."
PART I
Item 1. Business.
General
KVH Industries, Inc. ("KVH" or the "Company") was organized in Rhode Island in
1978 and was reincorporated in Delaware on August 16, 1985. The Company
completed its initial public offering in April 1996. The Company's executive
offices are located at 50 Enterprise Center, Middletown, Rhode Island, 02842,
and its telephone number is (401) 847-3327. Unless the context otherwise
requires, references to KVH or the Company include KVH Industries, Inc., and KVH
Europe A/S, its wholly owned European sales subsidiary based in Denmark.
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 the 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 E-Core(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 it via digital Battlefield Management
Systems (BMS) to the force commander and the other units in the field, enhancing
operational efficiency and coordination. KVH is the 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, turret stabilization, and missile and smart munitions guidance. 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, 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 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 is expected to
enter production in the first 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
mini-vans. 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 Communication 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.
Sales and Marketing
We market our products through a third-party worldwide network of value-added
resellers, distributors, and independent sales representatives as well as on a
government-to-government basis and directly with prime government contractors.
In addition, we are a leading supplier of satellite equipment on an OEM basis in
both the marine and RV markets. We manage our European sales through our sales
subsidiary, KVH Europe A/S, located in Denmark. Other international sales are
managed through our world headquarters in Middletown, Rhode Island.
Intellectual Property
Our ability to compete effectively depends to a significant extent on our
ability to protect our proprietary information. The Company relies primarily on
patents and trade secret laws, confidentiality procedures, and licensing
arrangements to protect its intellectual property rights. We have 75 issued and
27 pending patents covering KVH's core technologies. In addition to patents, KVH
registers its product brand names and trademarks in the United States and other
key markets where the Company does business around the world. Expiration of
KVH's patents and trademarks range from May 20, 2003, to March 5, 2016.
We enter into confidentiality agreements with our consultants, key employees,
and sales representatives, and generally control access to and distribution of
our technology, software, and other proprietary information.
Manufacturing
Our navigation and communications products manufacturing operations consist of
light manufacture, final assembly, and test. Our fiber optic manufacturing
activities consist of producing specialized optical fiber, fiber optic
components, and sensing coils that are combined with components purchased from
outside vendors for assembly into finished goods. KVH owns its own optical fiber
drawing towers where it produces specialized polarization maintaining fiber used
in all of its fiber optic products.
KVH contracts with third parties for fabrication and assembly of printed circuit
boards, injection-molded plastic parts, machined metal components, connectors,
and housings. We believe there are a number of acceptable vendors for the
components we purchase. We actively evaluate suppliers for quality,
dependability, and cost effectiveness. In some instances we utilize sole source
suppliers to develop strategic relationships to enhance material quality and
improve cost. An ISO 9001-certified quality standards program controls KVH
manufacturing processes.
Backlog
Backlog consists of orders evidenced by written agreements and specified
delivery dates for customers who are acceptable credit risks. Military orders
included in backlog are generally subject to cancellation for the convenience of
the customer. When orders are cancelled, we recover actual costs incurred
through the date of the contract cancellation as well as the additional costs
resulting from termination. Commercial backlog is not a meaningful indicator for
predicting commercial revenue in future periods. Commercial resellers do not
carry inventories and rely upon KVH to ship products ordered within three days.
The short period of time between order and delivery does not result in backlogs.
Our backlog at December 31, was $8.4 million in 2001 and $11.7 million in 2000.
We expect to ship $8.2 million of our backlog at December 31, 2001, during 2002.
Backlog consists primarily of long-lead military navigation and OEM orders.
Competition
We encounter significant competition with all of our products. Many of our
competitors are much larger companies. We stress system performance,
reliability, product features, price, and customer support to differentiate our
products from competitors. Major competitors include Litef, Leica, Smiths
Industries, Kearfott, Litton, Honeywell, Datron, SeaTel, and Nera corporations.
Research and Development
Our research and development efforts are focused on products with broad
application over a wide range of markets. Our research goals are to improve the
performance and reduce the product cost of existing products and to sustain our
technology leadership position by introducing state-of-the-art products ahead of
our competitors.
Research and development consists of KVH-funded projects and customer-funded
contract research. Prior to 1997, much of the development of our core
technologies was subsidized by grants under the Small Business Innovative
Research (SBIR) program and customer-funded contracts. Since 1997 we have
financed virtually all of our commercial research. Military contracts continue
to provide customer-funded research and development opportunities that are
accounted for as revenue and costs of sales.
The Company's total expenditures for research and development during 2001, 2000,
and 1999 were as follows:
Year ended December 31,
2001 2000 1999
---- ---- ----
(in thousands)
Internally funded research and development $ 7,885 3,902 4,199
Customer funded research and development 1,342 1,101 648
------ ------- -------
Total research and development $ 9,227 5,003 4,847
====== ======= =======
During 2001, KVH expended $4.5 million for research in developing its mobile
broadband, low profile antenna and photonic fiber optical modulator products. We
have budgeted an additional $3.7 million in 2002 to complete the research phase
of these product developments. We expect our research expenditures to return to
historical levels during 2002 as these initiatives are completed. Subject to the
successful completion of our development efforts, we anticipate that the
low-profile antenna and an ActiveFiber optical modulator will be introduced to
the market in the second half of 2002, with volume production to begin in 2003.
All our research projects are in the development stage and carry significant
completion risks. Our research initiatives involve significant technical
advances that may be beyond our capability and there can be no assurance that we
will achieve the form factor, performance, and cost parameters necessary for
successful commercialization of these technologies. If we are delayed in the
completion of our new products and/or are not first to market with these
technologies, we may be unable to achieve significant market share in our
targeted markets. This would result in our inability to recover the research
funds expended to develop these products and greatly reduce our ability to grow
our revenues in the future. (A further discussion of risk factors is contained
in the "Risk Factors" section, located on page 13 of this document).
Government Regulation
Our manufacturing operations are subject to various laws governing the
protection of the environment and our employees. These laws and regulations are
subject to change, and such change may require KVH to improve technology or
incur expenditures to comply with such laws and regulation. We believe that we
comply in all material respects with all applicable laws and regulations.
We are subject to compliance with the United States Export Administration
Regulations. Some of our products have military or strategic applications, and
are on the Munitions List of the International Trafficking in Arms Regulations,
or are subject to a requirement for an individual export license from the
Department of Commerce.
Employees
As of December 31, 2001, we employed 224 employees full-time. The increase in
total employees from 191 at December 31, 2000, resulted primarily from a need to
strengthen research and development, customer support, and marketing activities
related to new products. We utilize the services of temporary or contract
personnel within all functional areas to assist on project-related research
programs.
We believe our future success will depend upon the continued service of our key
technical and senior management personnel and upon the Company's continuing
ability to attract and retain highly qualified technical and managerial
personnel. None of our employees are represented by a labor union. KVH has never
experienced a work stoppage, and we consider our relationship with our employees
to be good.
Item 1a. Executive Officers and Directors of the Registrant as of
December 31, 2001
The following is a list of all current executive officers and directors of KVH
Industries, Inc.
Held Officers' Previous Business Experience
Name Age Current Position Since (If current position held <5 years)
---- --- ---------------- ----- -----------------------------------
Martin A. Kits van Heyningen* 42 President 1982
Director** 1982
Chief Executive Officer 1990
Richard C. Forsyth 55 Chief Financial Officer 1988
Sid Bennett 63 Vice President, FOG Business 1997 1985-1997: Director, Sensor Products,
Development Andrew Corporation, and President,
Andrew-Thompson Broadcasting
Christopher T. Burnett 47 Vice President, Business 1994
Development
James S. Dodez 43 Vice President, Marketing 1998 1995-1998: Vice President, Marketing and
Reseller Sales, KVH
Ian C. Palmer 36 Vice President, Sales and 2000 1996-1999 Director, Reseller Sales
Customer Support
Robert W.B. Kits van Heyningen* 46 Vice President, Research and 1998 1982-1998: Vice President, Engineering, KVH
Development
Director** 1982
Mads E. Bjerre-Petersen 58 Managing Director, 1992
KVH Europe A/S
Arent H. Kits van Heyningen* 86 Chairman of the Board 1982
Mark S. Ain 58 Director** 1997
Stanley K. Honey 47 Director** 1997
Werner Trattner 49 Director** 1994
Charles R. Trimble 60 Director** 1999
- ------------------------------------
* Arent H. Kits van Heyningen is the father of Martin A. Kits van Heyningen and
Robert W.B. Kits van Heyningen. ** For detailed information about KVH directors,
see "Board of Directors" in the Proxy Statement, which is incorporated by
reference.
Item 2. Properties.
In May 1996, we purchased a 75,000-square-foot building in Middletown, Rhode
Island. The building serves as headquarters for KVH executive and administrative
staffs and as a development and manufacturing facility for all products except
fiber optics. The Company believes it is well positioned to quickly expand
production and operations at the Middletown facility, which is zoned and
approved for an additional 45,000 square foot expansion of the existing
building.
We manufacture our fiber optic products in a 23,000-square-foot facility in
Tinley Park, Illinois, under a seven-year, renewable lease that expires March
31, 2005. Historically, our Tinley Park facility has operated at less than 50%
of capacity, and the costs associated with under utilization of the facility
have adversely affected the Company's financial results during 2000 and 1999. We
completed the integration of fiber optic sensors into our navigation products
during 2001 increasing our production volume by 164% and, for the first time,
achieved positive gross margin for the year. Our current sales forecast projects
full utilization of the Tinley Park facility during 2002.
Item 3. 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 contractual disagreements
with certain customers concerning the Company's products and services, which
will not have a material effect on operations or capital resources.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of fiscal 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock has traded on the Nasdaq National Market under the symbol KVHI
since April 8, 1996. As of February 8, 2002, 145 stockholders of record owned
the Company's Common Stock. We have never declared or paid any cash dividends on
our Common Stock and do not intend to pay cash dividends in the foreseeable
future. The Company intends to retain earnings for reinvestment in its business.
Our stock commenced trading on April 2, 1996 at $6.50. On February 8, 2002, the
closing sale price for our Common Stock was $7.20.
The following table sets forth, for the periods indicated, the high and low
prices for our Company's stock as reported on the Nasdaq National Market.
2001 2000
------------------ -----------------
High Low High Low
First Quarter $ 9.81 5.81 $ 9.31 2.87
Second Quarter 8.35 6.35 6.87 3.37
Third Quarter 6.95 4.25 7.81 5.03
Fourth Quarter 7.50 4.25 10.43 5.50
Item 6. Selected Financial Data.
The following selected financial data is derived from the Company's financial
statements. This data should be read in conjunction with Item 8, Financial
Statements and Supplementary Data, and with Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statements of Operations:
Net sales $ 32,707 29,954 22,822 20,630 25,570
Cost of goods sold 20,255 18,621 15,034 14,100 14,085
------------ ------------ ------------ ------------ ------------
Gross profit 12,452 11,333 7,788 6,530 11,485
Operating expenses:
Research and development 7,885 3,902 4,199 3,991 3,175
Sales and marketing 8,412 6,322 5,471 4,470 3,738
General and administrative 2,514 2,221 2,112 2,225 1,895
------------ ------------ ------------ ------------ ------------
Operating (loss) income (6,359 ) (1,112 ) (3,994 ) (4,156 ) 2,677
Other (income) expense:
Interest (income) expense, net (2) (140 ) 192 40 (57 ) (327 )
Other expense (income) 42 197 (83 ) (225 ) (233 )
------------ ------------ ------------ ------------ ------------
(Loss) income before income tax (6,261 ) (1,501 ) (3,951 ) (3,874 )
(benefit) expense 3,237
Income tax (benefit) expense -- (560 ) (1,254 ) (1,608 ) 1,020
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (6,261 ) (941 ) (2,697 ) (2,266 ) 2,217
============ ============ ============ ============ ============
Per share information (1):
Net (loss) income per common share-
basic $ (0.61 ) (0.12 ) (0.37 ) (0.32 ) 0.31
============ ============ ============ ============ ============
Net (loss) income per common share-
diluted $ (0.61 ) (0.12 ) (0.37 ) (0.32 ) 0.30
============ ============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 10,217 7,628 7,235 7,124 7,049
============ ============ ============ ============ ============
Diluted 10,217 7,628 7,235 7,124 7,498
============ ============ ============ ============ ============
December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in thousands)
Consolidated Balance Sheet Data:
Working capital $ 18,700 12,452 7,733 8,486 12,410
Total assets $ 33,163 26,495 19,835 18,746 21,805
Long-term obligations (2) $ 2,697 2,784 2,870 -- 7
Total shareholders' equity $ 26,246 19,193 14,502 17,070 19,194
(1) See note 1 of Notes to Consolidated Financial Statements for an explanation of the method of calculation.
(2) Includes obligations under mortgage note payable. See note 4 of Notes to Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
As you read Management's Discussion and Analysis, please refer to our
Consolidated Statements of Operations on page 22, which presents the results of
our operations for 2001, 2000, and 1999. The following discussion should be read
with an understanding of the risk factors on pages 12 through 16, which describe
events that could influence our forward-looking projections.
During the period covered by this discussion, we have made significant
investments in research and development allocating significant funding for
low-profile satellite antennas, fiber optic gyroscopes (FOGs), and photonic
fiber modulators. Our strategy has been to accelerate our research efforts in
order to reach the market with products as quickly as possible, and in making
these decisions, we planned to incur operating losses. The products in
development provide significant price performance benefits that may lead to a
market leadership position in these potentially very large markets.
Our investment in FOG technology began in October 1997, when we purchased the
intellectual property and assets of Andrew Corporation's fiber optic research
group. Over the past four years, we completed the development, begun by Andrew
Corporation, of open-loop fiber optic gyroscopes, established a vertically
integrated fiber optic manufacturing process and integrated fiber optic
technology into our existing product lines. We began selling modest quantities
of FOGs in 1998, and subsequently increased our sales volumes as we improved our
product designs. In 2001 we achieved positive gross margin for the first year
since our investment began. Our outlook for accelerated FOG growth is very
positive as we begin to establish fiber optic products in the defense, optical
telecommunications infrastructure, and power management markets. We are
encouraged by the 2001 growth of FOG sales, which rose to $4.4 million or 164%
from 2000 results of $1.7 million, and we believe our FOG sales will continue to
accelerate in 2002.
In the second half of 2000, we began research into both low-profile satellite
antenna systems and photonic fiber modulators. In order to fund our development
initiatives we raised $17.5 million net of investment fees, through a series of
private stock offerings that were concluded in May 2001. Our strategy in
carrying out our research has been to make extensive use of outside consultants
in combination with existing in-house scientists, an approach that minimizes our
fixed costs, which allows us to reduce research and development expense rapidly
as we conclude our research efforts. Our goal is to complete our new product
research in 2002 and bring our new products to market in the second half of
year. We believe that forecast 2002 revenue increases and the conclusion of our
project research will result in a return to profitable operations in late 2002.
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data expressed as a percentage of revenues:
Years Ended December 31,
2001 2000 1999
---- ---- ----
Net sales 100.0 % 100.0 % 100.0 %
------- ------ ------
Gross profit 38.1 37.8
34.1
Research and development 24.1 13.0 18.4
Sales and marketing 25.7 21.1 24.0
General and administrative 7.7 7.4 9.3
------- ------ ------
Operating loss (19.4 ) (3.7 ) (17.6 )
Other expense (income), net (0.3 ) 1.3 (0.3 )
------- ------ ------
Loss income before income tax benefit (19.1 ) (5.0 ) (17.3 )
Income tax benefit -- (2.1 ) (5.5 )
------- ------ ------
Net loss (19.1 )% (2.9 )% (11.8 )%
------- ------ ------
Years Ended December 31, 2001 and 2000
Net Sales
Net sales increased by 9% to approximately $32.7 million from roughly $30.0
million in 2000. Communication product revenues made up 33% of our sales growth,
increasing by 5% to $17.7 million from $16.4 million in 2000. The slowdown of
communication sales growth was triggered by increases in fuel prices and
economic uncertainties that had a negative impact on RV sales, which is one of
the largest applications for our land mobile communications products. Towards
the end of 2001 gasoline prices fell, and the RV market began to recover its
strength, stimulating renewed sales growth. We steadily grew our reseller
distribution network during 2001, entering into agreements with major RV
distributors and manufacturers, positioning KVH for renewed growth in 2002. We
are optimistic that domestic 2002 communication sales could grow at double the
rate experienced in 2001, led by revitalized RV growth, the potential for
significant OEM sales, and new product releases.
Navigation sales increased 14% in 2001 to $15.0 million from $13.6 million in
2000. This sales increase was the result of three factors: defense shipments
declined by $1.6 million from $7.0 million in 2000; fiber optic revenues grew to
$4.4 million from $1.7 million in 2000; and OEM shipments doubled in 2001 to
$1.7 million from $0.8 million in 2000. Recent events have created a significant
demand for tactical navigation systems, such as our TACNAV Light system, which
is deployed on light armored vehicles. Although our defense shipments declined
in 2001, we were able to demonstrate our products to a wide range of defense
customers and have a record number of quotations in our customers' hands. As a
result of these efforts our TACNAV products have won wide acceptance within the
U.S. military and allied military circles. We forecast significant growth in the
defense market that could double defense revenues in 2002.
Overall, we anticipate that the rate of combined sales growth in 2002 will
accelerate, and we anticipate increases in net sales of 30% to 40%. However, a
prolonged economic downturn or delays within the military procurement process
could weaken our current growth outlook.
Cost of Goods Sold
The Company's cost of goods sold consists of direct labor, materials,
manufacturing overheads and engineering costs associated with customer-funded
engineering. Customer-funded research and development costs included in cost of
goods sold were approximately $1.3 million in 2001 and $1.1 million in 2000.
During 2001 we realized material and labor cost savings that were sufficient to
offset price reductions that were planned in 2001. Cost reductions resulted from
the redesign of existing products and improvements in our manufacturing process.
Our supply-chain materials management system continued to provide us with
stronger control over our manufacturing inventories and provided the tools
required to better manage our procurement process. This resulted in more
favorable material purchase agreements and better pricing. Manufacturing
overheads decreased by 1% in 2001 and overheads fell as a percentage of sales to
16% from 18% in the prior year. Improved manufacturing overheads reflect
increased FOG capacity utilization and better management of Rhode Island
manufacturing resources. Looking ahead we believe that costs of goods sold will
decline modestly as a percentage of sales from 2001 levels, resulting from
higher levels of facility utilization and a continuation of manufacturing
improvements.
Research and Development Expense
Research and development expense consists of direct labor, materials, associated
overheads, and other direct costs resulting from the Company's internally funded
product development activities. All internal research and development costs are
expenses in the period they are incurred. Internally funded development costs
increased approximately $4.0 million or 102% in 2001 from $3.9 million in 2000.
The cost increase is the result of the acceleration of two development projects,
a high-speed in-fiber modulator and a low-profile satellite antenna. The
combined costs of these two projects amounted to $4.5 million dollars in 2001.
Non-project R&D decreased slightly as a result of increased customer funding of
defense programs in 2001, a trend that should accelerate in 2002. Almost
one-third of 2001 R&D spending reflects the use of outside consultants and
university researchers to support our project developments. We are optimistic
that we will conclude our projects late in 2002 and our outside costs will
decline quickly once our research is completed. Our current outlook forecasts a
decline in R&D spending of roughly $1.3 million dollars in 2002.
Sales and Marketing Expense
Sales and marketing expense consists primarily of salaries and related expenses
for sales and marketing personnel, sales commissions, travel expenses,
cooperative advertising, sales literature, advertising, and trade shows. Sales
and marketing expense increased by $2.1 to $8.4 million in 2001 from $6.3
million in 2000. The majority of the cost increase was related to variable
selling expenses such as commissions, trade shows, media, and new product
introductions. In addition, roughly 14% of the 2001 increase related to the
reorganization of the post-sales customer support group into a new customer
service team that provides comprehensive support to the customer, including
order placement, product shipment, repair service, and a customer help desk.
We have broadened our product offerings to include high-speed broadband Internet
capability, and we have begun the process of staffing that function. Products
requiring 24-hour a day, 7-day a week customer support will continue to drive
support cost increases in 2002. Our 2002 sales forecast includes a significant
number of high-commission defense sales to foreign militaries. We will also
strengthen our presence in defense and FOG markets with the hiring of KVH direct
sales representatives. Overall, we believe 2002 selling expense will increase by
roughly 27% in absolute terms, but will decline as a percentage of sales to the
low 20's from 26% of sales in 2001.
General and Administrative Expense
General and administrative expense consists of costs attributable to the
Company's management, finance, accounting, management information systems, human
resources, facility management, and outside professional services. General and
administrative costs increased $0.3 million to $2.5 million or 13% in 2001 over
2000 and increased slightly as a percentage of sales to 8% from 7% in 2000. Cost
increases reflect annual salary increases, and rising professional fees. Looking
ahead into 2002 we anticipate that general and administrative costs will
increase roughly 12% over 2001 results. Cost drivers include insurance premium
increases resulting from the insurance industry's reaction to losses incurred as
a result of the events of September 11, 2001, and staffing increases. We
forecast that administration expense will increase between 10% and 15% from 2001
results but decline as a percentage of revenues from 2001 levels of 8%.
Interest Income
Interest income reflects the interest earned by investing excess cash from our
private offering in fully insured, federal short-term obligations.
Interest Expense
Interest expense is made up of interest charges related to our mortgage loan and
equipment leases.
Income Tax Benefit
Total income tax benefit for the year ended December 31, 2001 was allocated to
income from continuing operations and stockholders' equity, but was fully
reserved with a valuation allowance and therefore zero income tax benefit was
accounted for in our statement of operations, or additional paid-in capital for
stock-based compensation income tax benefits (e.g., from current year
disqualifying dispositions of incentive stock options and exercise of
non-qualified stock options). In 2000, as a consequence of an Internal Revenue
Service tax return examination, we made adjustments to income tax credits
recorded in prior years. No further adjustments to financial statement income
tax benefit have been made in connection with the ongoing tax return
examination. For a further discussion of income taxes see note 8 to the
financial statements.
Years Ended December 31, 2000 and 1999
Net Sales
Net sales increased by 31% to approximately $30.0 million from $22.8 million in
1999. Communication product revenues made up 56% of our sales growth, increasing
47% to $16.4 million from $11.4 million in 1999. Domestic communication sales
grew by 49% while international sales increased 28% from 1999 levels.
Navigation sales increased 16% to $13.6 million from $11.4 million in 1999. The
growth in navigation sales reflects the acceptance of our TACNAV products by
international military forces where sales of our TACNAV products were
particularly strong. We anticipate that navigation sales growth will accelerate
in 2001 as the United States military begins to deploy vehicles that are
equipped for the "Digital Battlefield," a market that we believe holds
significant promise for our tactical navigation products. Fiber optic navigation
products began shipping in volume in 2000.
Cost of Goods Sold
The Company's cost of goods sold consists of direct labor, materials,
manufacturing overhead, and engineering costs associated with customer-funded
engineering. Customer-funded research and development costs included in cost of
goods sold were approximately $1.1 million in 2000 and $0.6 million in 1999.
During 2000 we realized material and labor cost savings amounting to 1% of
sales. Product cost reductions resulted from redesign of existing product and
improvements in our manufacturing process. We made significant efficiency gains
in our procurement process by implementing supply-chain management in the last
half of the year allowing us to better plan inventories and negotiate lower
material prices. Although manufacturing overheads increased in absolute dollars
by approximately $0.3 million in 2000, overheads fell as a percentage of sales
by 5% from the prior year, reflecting increased capacity utilization. Total cost
of goods sold decreased as a percentage of sales by 4% despite a 5% sales shift
towards lower margin communication sales.
Research and Development Expense
Research and development expense consists of direct labor, materials, associated
overhead, and other direct costs resulting from the Company's internally funded
product development activities. All internal development costs, including
software development, are expensed in the period incurred. Internally funded
development costs decreased approximately $0.3 million or 6% in 2000 from $4.2
million in 1999. The 2000 decrease in internal product development costs
resulted from a doubling of customer-funded research. Costs associated with
customer-funded research are transferred out of the R&D line into cost of goods
sold. A comparison of combined internal and external development costs reflects
increased total research and development costs of $0.2 million or a 3% increase
above 1999 levels.
Sales and Marketing Expense
Sales and marketing expense consists primarily of salaries and related expenses
for sales and marketing personnel, sales commissions, travel expenses,
cooperative advertising, sales literature, advertising, and trade shows. Sales
and marketing expense increased by $0.9 million in 2000 from $5.5 million in
1999. The majority of the cost increase was related to variable selling expenses
such as commissions, trade shows, media, and new product introductions. The 16%
cost increase over the prior year was roughly half our 31% annual sales increase
and although spending increased in absolute terms, it decreased as a percentage
of revenues by 3% of sales to 21% of revenues from 24% in 1999. KVH utilizes
independent, third-party distribution channels including dealers, distributors,
and sales representatives. Third-party distribution allows us to grow rapidly
without adding the fixed costs associated with a direct sales force.
General and Administrative Expense
General and administrative expense consists of costs attributable to the
Company's management, finance, accounting, management information systems, human
resources, facility management, and outside professional services. General and
administrative costs increased $0.1 million or 5% in 2000 over 1999, but
decreased as a percentage of sales to 7% from 9% in the previous year. Cost
increases reflect annual salary increases, and rising professional fees.
Interest Income
Interest income reflects the interest earned by investing excess cash in federal
short-term obligations.
Interest Expense
Interest expense is made up of interest charges related to our mortgage loan,
our revolving bank credit facility, and equipment leases.
Income Tax Benefit
As a result of generating operating losses for the past three years (2000, 1999,
1998), the Company has recorded additional deferred tax assets with associated
deferred tax benefits. The operating loss and tax credit items giving rise to
deferred tax assets are carried forward and may offset future taxable income and
tax expense, before expiration beginning in 2019 and 2003, respectively. The
Company's effective income tax rates were 37% for 2000 and 32% for 1999. The
increase in the rate and related income tax benefit is principally due to
certain 1999 reductions to deferred tax assets. The 1999 tax rate of 32% is the
result of re-evaluating the realizability of certain income tax credits
previously established and made part of the Company's deferred tax assets.
Certain income tax credits were reduced in connection with the progress of an
existing Internal Revenue Service tax return examination.
Liquidity and Capital Resources
On January 11, 1999, the Company entered into a mortgage loan in the amount of
$3,000,000. The note term is 10 years, with a principal amortization of 20 years
at a fixed rate of interest of 7%. Land, building and improvements secure the
mortgage loan. The monthly mortgage payment is $23,259, including interest and
principal. Due to the difference in the term of the note and amortization of the
principal, a balloon payment of $2,014,716 is due on February 1, 2009. The
principal paid in 2001 totaled $81,111, and as of December 31, 2001, $2,784,121
was outstanding.
On March 27, 2000 we entered into a $5.0 million asset-based, three-year,
revolving loan facility at an interest rate of the prime bank lending rate plus
1%. Any unused portion of the revolving credit facility accrues interest at an
annual rate of 50 basis points. The loan facility provides for advancing funds
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 should we do so.
In December 2000 we received a $1,195,000 customer deposit to fund expenditures
we are incurring to design and manufacture an order that was partially shipped
in 2001, and the remainder of the order is anticipated to ship during first two
quarters of 2002. The customer deposit is being amortized against customer
receivables on a pro-rata basis as we invoice our customer. At December 31,
2001, $903,853 of the customer deposit remains unamortized and will be applied
to 2002 shipments.
On December 29, 2000 we sold 800,000 common shares to the State of Wisconsin
Investment Board at $6.25 per share. 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 also 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. On May 1, 2001, we issued and
sold 76,923 shares of our common stock, at a purchase price of $6.50 per share,
to Mr. Austin Marxe. We concluded our private financing on May 25, 2001, with
the issuance and sale of 615,384 shares of our common stock, at a purchase price
of $6.50 per share, to the Massachusetts Mutual Life Insurance Company. In total
we realized net proceeds of $17.5 million, that is being used to fund operations
and advanced research into photonics and mobile broadband satellite
communications.
We believe that existing cash balances and funds available under our revolving
credit facility will be sufficient to meet our anticipated working capital
requirements for 2002. If we decide to expand more rapidly, to broaden or
enhance products more rapidly, to acquire businesses or technologies or to make
other significant expenditures to remain competitive, then we may need to raise
additional funds.
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. The significant accounting policies which
management believe 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.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS No.
141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations. SFAS No. 141 specifies criteria that intangible assets acquired in
a business combination must meet to be recognized and reported separately from
goodwill. SFAS No. 142 will require 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. 121 and
subsequently, SFAS No. 144 after its adoption. The Company adopted the provision
of SFAS No. 141 as of July 1, 2001, and it did not have a material impact on the
consolidated financial statements. SFAS No. 142 is effective January 1, 2002.
and is not expected to have a material impact on the consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or normal
use of the assets. The Company would also record a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on January 1, 2003 and it does not expect to 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). 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 expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future 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 is
required to adopt SFAS No. 144 on January 1, 2002 and it does not expect to have
a material impact on the consolidated financial statements.
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 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 $2,784,121 280,240 222,218 2,281,663
Facility Lease $570,761 525,351 45,410 --
Operating leases $38,770 38,770 -- --
----------------- ---------------- ----------------- ----------------
Total contractual cash obligations $2,822,891 319,010 222,218 2,281,663
================= ================ ================= ================
We have not entered into any off-balance sheet commercial commitments such as
standby letters of credit, guarantees, and standby repurchase obligation or
other commercial commitments.
Other Matters
None.
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 event, KVH may not be able to identify and enter into
appropriate agreements with replacement suppliers.
Pricing of Our Mobile Satellite Communication 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 Adversely Affect the Company's
Operating Results 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. Through 2001, our
product development expenditures of $4.5 million in these areas contributed
significantly to operating losses. Our expectation is that as the R&D efforts
conclude, our R&D spending will rapidly return to historical levels. If product
development and the corresponding R&D expenditures have to be extended beyond
our current projections of $3.7 million this year or the entry to market of the
resulting products is delayed, it may slow our anticipated return to
profitability.
In 2001, we increased our operating expenses by $4.5 million to accelerate the
development and take advantage of anticipated revenue opportunities related to
our photonic fiber and mobile broadband initiatives. Our decision to increase
spending resulted from our desire to bring these products to market as quickly
as possible. 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
Communication 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 entering 2002 and current military procurement schedules, we anticipate
a doubling of our defense-related revenues during 2002, which will be critical
to our return to overall 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 in military markets.
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.
Gneral 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.
Item 7a. Market Risk Disclosure.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements and supplementary data, together
with the report of KPMG LLP, independent auditors, are included in Part IV of
this Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information in the Proxy Statement under the captions "Board of Directors,"
"Executive Compensation" and compliance with Rule 144, Section 16(a) reporting
is incorporated by reference.
Item 11. Executive Compensation.
Information in the Proxy Statement under the caption "Executive Compensation" is
incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information in the Proxy Statement under the caption "Stock Ownership
Information" is incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) Documents filed as part of this report:
Page
1. Financial Statements
Report of Independent Auditors 21
Consolidated Balance Sheets as of December 31, 2001, and 2000 22
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 23
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001,
2000 and 1999 24
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 25
Notes to Consolidated Financial Statements 26
2. Financial Statement Schedule. See "Independent Auditors Report"
and "Schedule II - Valuation and Qualifying Accounts" included
on pages 38 and 39. All other schedules have been omitted since
the information is not required, or because the information
required is included in the consolidated financial statements or
notes.
(b) Reports on Form 8-K:
None
(c) Exhibits:
NumberDescription 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
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 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.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KVH Industries, Inc.
DATE: March 20, 2002 By: /s/ Martin A. Kits van Heyningen
---------------------------------
Martin A. Kits van Heyningen
President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
Name Title Date
/s/ Martin A. Kits van Heyningen President (Chief Executive Officer) March 20, 2002
- ------------------------------------------
Martin A. Kits van Heyningen
/s/ Richard C. Forsyth Chief Financial Officer (Principal Financial and March 20, 2002
- ------------------------------------------
Richard C. Forsyth Accounting Officer)
/s/ Arent H. Kits van Heyningen Chairman of the Board March 20, 2002
- ------------------------------------------
Arent H. Kits van Heyningen
/s/ Robert W. B. Kits van Heyningen Director March 20, 2002
- ------------------------------------------
Robert W. B. Kits van Heyningen
/s/ Mark S. Ain Director March 20, 2002
- ------------------------------------------
Mark S. Ain
/s/ Stanley K. Honey Director March 20, 2002
- ------------------------------------------
Stanley K. Honey
/s/ Werner Trattner Director March 20, 2002
- ------------------------------------------
Werner Trattner
Director March 20, 2002
- ------------------------------------------
Charles R. Trimble
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
KVH Industries, Inc.:
We have audited the accompanying consolidated balance sheets of KVH Industries,
Inc. and subsidiary as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KVH Industries, Inc.
and subsidiary at December 31, 2001 and 2000, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
Providence, Rhode Island
February 7, 2002
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2001 and 2000
2001 2000
---- ----
Assets (note 4)
Current assets:
Cash and cash equivalents $ 11,240,893 5,411,460
Accounts receivable, less allowance for doubtful accounts of
$68,037 in 2001 and $84,163 in 2000 (note 10) 6,026,689 6,553,976
Costs and estimated earnings in excess of billings on
uncompleted contracts 482,486 419,145
Inventories (note 2) 4,124,203 3,600,660
Prepaid expenses and other deposits 406,866 346,518
Deferred income taxes (note 8) 637,799 637,799
------------ -------------
Total current assets 22,918,936 16,969,558
------------ -------------
Property and equipment, net (note 3) 7,431,287 6,580,375
Other assets, less accumulated amortization of $505,812
in 2001 and $373,188 in 2000 573,849 706,473
Deferred income taxes (note 8) 2,238,430 2,238,430
------------ -------------
Total assets $ 33,162,502 26,494,836
============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Bank line of credit (note 4) $ -- 598,865
Current portion long-term debt (note 4) 86,974 81,111
Accounts payable 2,084,507 1,478,198
Accrued expenses (note 6) 1,143,790 1,164,790
Customer deposits 903,853 1,195,091
------------ -------------
Total current liabilities 4,219,124 4,518,055
------------ -------------
Long-term debt (note 4) 2,697,147 2,784,121
------------ -------------
Total liabilities 6,916,271 7,302,176
------------ -------------
Stockholders' equity (notes 7 and 13):
Preferred stock, $0.01 par value. Authorized 1,000,000 shares;
none issued. -- --
Common stock, $.01 par value. Authorized 20,000,000 shares;
issued 10,961,191 shares in 2001 and 8,619,075 shares in 2000 109,612 86,191
Additional paid-in capital 34,478,002 21,186,459
Accumulated deficit (8,341,383 ) (2,079,990 )
------------ -------------
Total stockholders' equity 26,246,231 19,192,660
------------ -------------
Commitments (notes 5 and 9)
Total liabilities and stockholders' equity $ 33,162,502 26,494,836
============ =============
See accompanying Notes to Consolidated Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Net sales (note 10) $ 32,707,123 29,953,727 22,822,429
Cost of goods sold 20,255,238 18,620,438 15,034,250
------------- ------------- -------------
Gross profit 12,451,885 11,333,289 7,788,179
Operating expenses:
Research and development 7,885,374 3,902,154 4,199,370
Sales and marketing 8,411,910 6,322,181 5,471,231
General and administrative 2,514,178 2,220,471 2,111,868
------------- ------------- -------------
Operating loss (6,359,577 ) (1,111,517 ) (3,994,290 )
------------- ------------- -------------
Other income (expense):
Interest income 364,212 54,056 147,631
Interest expense (224,039 ) (246,493 ) (187,867 )
Other (expense) income (41,989 ) (196,803 ) 83,449
------------- ------------- -------------
Loss before income tax benefit (6,261,393 ) (1,500,757 ) (3,951,077 )
Income tax benefit (note 8) -- (559,637 ) (1,253,822 )
------------- ------------- -------------
Net loss $ (6,261,393 ) (941,120 ) (2,697,255 )
============= ============= =============
Per share information (notes 7 and 12):
Net loss per common share - basic $ (0.61 ) (0.12 ) (0.37 )
============= ============= =============
Net loss per common share - diluted $ (0.61 ) (0.12 ) (0.37 )
============= ============= =============
Weighted average number of shares outstanding:
Basic 10,217,305 7,628,166 7,234,961
============= ============= =============
Diluted 10,217,305 7,628,166 7,234,961
============= ============= =============
See accompanying Notes to Consolidated Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999
Additional Retained Total
Preferred Common Paid-in Earnings Stockholders'
Stock Stock Capital (Accumulated Equity
Deficit)
------------ ------------ ------------- ---------------- --------------
Balances at December 31, 1998 $ -- 72,059 15,439,421 1,558,385 17,069,865
------------ ------------ ------------- ---------------- ------------
Net loss -- -- -- (2,697,255 ) (2,697,255 )
Common stock issued under benefit plan -- 852 124,995 -- 125,847
Exercise of stock options -- 58 3,464 -- 3,522
------------ ------------ ------------- ---------------- ------------
Balances at December 31, 1999 -- 72,969 15,567,880 (1,138,870 ) 14,501,979
------------ ------------ ------------- ---------------- ------------
Net loss -- -- -- (941,120 ) (941,120 )
Sale of common stock (notes 7 and 13) -- 8,000 4,316,608 -- 4,324,608
Common stock issued under benefit plan -- 490 163,157 -- 163,647
Issuance of warrants (notes 7 and 13) -- -- 173,688 -- 173,688
Exercise of stock options -- 4,732 965,126 -- 969,858
------------ ------------ ------------- ---------------- ------------
Balances at December 31, 2000 -- 86,191 21,186,459 (2,079,990 ) 19,192,660
------------ ------------ ------------- ---------------- ------------
Net loss -- -- -- (6,261,393 ) (6,261,393 )
Sale of common stock (notes 7 and 13) -- 22,138 12,211,539 -- 12,233,677
Common stock issued under benefit plan -- 347 173,170 -- 173,517
Issuance of warrants (notes 7 and 13) -- -- 777,770 -- 777,770
Exercise of stock options -- 936 129,064 -- 130,000
------------ ------------ ------------- ---------------- ------------
Balances at December 31, 2001 $ -- 109,612 34,478,002 (8,341,383 ) 26,246,231
============ ============ ============= ================ ============
See accompanying Notes to Consolidated Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net loss $ (6,261,393 ) (941,120 ) (2,697,255 )
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,366,392 1,190,316 1,062,198
Provision for doubtful accounts (16,126 ) (17,096 ) 9,655
Provision for deferred income taxes -- (928,192 ) (1,288,729 )
Decrease (increase) in accounts and
contract receivables 543,413 (3,174,490 ) (265,631 )
Decrease in income taxes receivable -- -- 1,062,494
(Increase) decrease in costs and estimated earnings
in excess of billings on uncompleted contracts (63,341 ) 25,347 323,664
(Increase) decrease in inventories (523,543 ) 71,609 (281,482 )
(Increase) decrease in prepaid expenses and other deposits (60,348 ) (53,725 ) 67,553
Increase (decrease) in accounts payable 606,309 (121,572 ) 746,532
(Decrease) increase in accrued expenses (21,000 ) 372,704 (30,447 )
(Decrease) increase in customer deposits (291,238 ) 1,195,091 --
-------------- ------------- -------------
Net cash used in operating activities (4,720,875 ) (2,381,128 ) (1,291,448 )
-------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (2,084,680 ) (410,273 ) (970,185 )
-------------- ------------- -------------
Net cash used in investing activities (2,084,680 ) (410,273 ) (970,185 )
-------------- ------------- -------------
Cash flows from financing activities:
Proceeds from mortgage note payable -- -- 3,000,000
Repayment of mortgage note payable (81,111 ) (75,643 ) (59,125 )
(Repayment) borrowings against bank line of credit (598,865 ) 598,865 --
Proceeds from sale of common stock 13, 011,447 4,498,296 --
Stock option and benefit plan transactions 303,517 1,133,505 129,369
-------------- ------------- -------------
Net cash provided by financing activities 12,634,988 6,155,023 3,070,244
-------------- ------------- -------------
Net increase in cash and cash equivalents 5,829,433 3,363,622 808,611
Cash and cash equivalents at beginning of year 5,411,460 2,047,838 1,239,227
-------------- ------------- -------------
Cash and cash equivalents at end of year $ 11,240,893 5,411,460 2,047,838
============== ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 224,039 246,493 187,867
============== ============= =============
Cash paid during the year for income taxes $ -- -- --
============== ============= =============
See accompanying Notes to Consolidated Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Summary of Significant Accounting Policies
(a) Description of Business
KVH is an international leader in developing and manufacturing
innovative, mobile, high-bandwidth satellite communications systems,
navigation systems, and fiber optic products. KVH has become a leader
in connecting people on the move with vital data through channels like
the Internet and the military's "digital battlefield." KVH has
accomplished important milestones in achieving this position, beginning
with the invention of the digital compass to the development of
breakthrough satellite communications products and the integration of
the Company's fiber optic technology throughout its product lines.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements
of KVH Industries, Inc. and its wholly-owned subsidiary, KVH Europe A/S
("KVH Europe"). All significant inter-company accounts and transactions
have been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity, at
the purchase date, of three months or less to be cash equivalents.
(d) Revenue Recognition
Revenue is recognized generally upon shipment, and as engineering
contract services are performed under long-term contracts. In certain
cases, our customer may request that we retain custody of the product
until they are ready to receive it. We recognize revenue in such
instances when title has passed and the transaction meets the revenue
recognition criteria as defined in SEC Staff Accounting Bulletin Number
101 "Revenue Recognition in Financial Statements", specified for when
goods have not yet shipped. Revenue recognized in such instances has
not been material to our financial statements, and amounted to
approximately $676,000 for fiscal 2001.
Contract service revenues recorded under long-term engineering
contracts are recognized using the percentage of completion method.
Under this method, income is recognized as work progresses. The
percentage of work completed is determined principally by comparing the
accumulated costs incurred to date with management's estimate of total
cost to complete the contracted work. Revisions of costs and income
estimates are reflected in the periods in which the facts that require
revision become known. If estimated total costs under a contract
indicate a loss, the estimated amount of the loss is provided for in
the period in which the loss becomes known.
(e) Inventories
Inventories are stated at the lower of cost or market using the
first-in first-out costing method.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization is computed on the straight-line method over the estimated
useful lives of the respective assets. The principal lives, in years,
used in determining the depreciation rates of various assets are:
buildings and improvements, 40 years; leasehold improvements, over term
of lease; machinery and equipment, 5 years; office and computer
equipment, 5-7 years; and motor vehicles, 4 years.
(g) Other Assets
Other assets consist of patents and capitalized costs of workforce
resulting from the Company's October 1997 acquisition. These costs are
being amortized on a straight-line basis over periods ranging from 5-12
years. The Company continually reviews intangible assets to assess
recoverability from estimated future results of operations and
estimated future cash flows.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(h) Progress Payments
Progress payments received from customers are offset against
inventories associated with the contracts for which the payments were
received. Under contractual arrangements by which progress payments are
received from the United States Government, the United States
Government has a lien on the inventories identified with related
contracts.
(i) Income Taxes
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 and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(j) Research and Development
Expenditures for research and development, including customer-funded
research and development, are expensed in the year incurred. Revenue
from customer-funded research and development is included in net sales,
and the related product development costs are included in cost of goods
sold. Revenues from customer-funded research and development totaled
approximately $1,715,000, $1,594,000 and $811,000, respectively, in
2001, 2000 and 1999, and related costs included in cost of goods sold
totaled approximately $1,342,000, $1,101,000 and $648,000 in such
years, respectively.
(k) Foreign Currency Translation
The financial statements of the Company's foreign subsidiary are
re-measured into the United States dollar functional currency for
consolidation and reporting purposes. Current exchange rates are used
to re-measure monetary assets and liabilities. Historical exchange
rates are used for non-monetary assets and related elements of expense.
Revenue and other expense elements are re-measured at rates, which
approximate the rates in effect on the transaction dates. Gains and
losses resulting from this re-measurement process are recognized
currently in the consolidated statements of operations.
(l) Stock-based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25" issued in March 2000, to account for its fixed plan
stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying
stock exceeded the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure
requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123,
the Company has elected to continue to apply the intrinsic value-based
method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
(m) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the Untied States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(n) Long-lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
Statement requires that long-lived assets and certain identifiable
intangibles 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 expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(o) Net loss per Common Share
A reconciliation of the weighted average number of shares outstanding
used in the computation of the basic and diluted earnings per share for
the three years ended December 31, 2001 is as follows:
2001 2000 1999
---- ---- ----
Weighted average shares (basic) 10,217,305 7,628,166 7,234,961
Effect of dilutive stock options -- -- --
--------------- ------------- -------------
Weighted average shares (diluted) 10,217,305 7,628,166 7,234,961
=============== ============= =============
(p) Fair Value of Financial Instruments
The carrying amounts of accounts receivable, contracts receivable,
costs and estimated earnings in excess of billings on uncompleted
contracts, accounts payable and accrued expenses approximate fair value
due to the short maturity of these instruments.
(q) New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). 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 expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future 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
SFAS No. 144 on January 1, 2002 and it did not have a material impact
on the consolidated financial statements.
(2) Inventories
Inventories at December 31, 2001 and 2000 consist of the following:
2001 2000
---- ----
Raw materials $ 2,675,891 3,039,310
Work in process 4,749 97,750
Finished goods 1,443,563 463,600
------------ ------------
$ 4,124,203 3,600,660
============ ============
Project inventories totaling $18,879 and $249,173, respectively, in 2001
and 2000 have been offset against related progress payments and included as
a component of costs and estimated earnings in excess of billings on
uncompleted contracts.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Property and Equipment
Property and equipment, net, at December 31, 2001 and 2000 consist of the
following:
2001 2000
---- ----
Land $ 806,774 806,774
Building and improvements 3,258,864 3,234,550
Leasehold improvements 1,270,214 807,553
Machinery and equipment 4,660,357 3,541,702
Office and computer equipment 3,628,843 3,149,522
Motor vehicles 87,065 87,065
------------- ------------
13,712,117 11,627,166
Less accumulated depreciation 6,280,830 5,046,791
------------- ------------
$ 7,431,287 6,580,375
============= ============
Depreciation for the years ended December 31, 2001, 2000 and 1999 amounted
to $1,234,000, $1,058,000 and $929,000, respectively.
(4) Debt and Line of Credit
On January 11, 1999, the Company entered into a mortgage loan in the amount
of $3,000,000. The note term is 10 years, with a principal amortization of
20 years at a fixed rate of interest of 7%. Land, building and improvements
secure the mortgage loan. The monthly mortgage payment is $23,259,
including interest and principal. Due to the difference in the term of the
note and amortization of the principal, a balloon payment of $2,014,716 is
due on February 1, 2009. The principal paid in 2001 totaled $81,111, and as
of December 31, 2001, $2,784,121 was outstanding. The following is a
summary of future principal payments under the mortgage:
Year ending December 31, Principal Payment
2002 $ 86,974
2003 93,262
2004 100,004
2005 107,233
2006 114,985
Subsequent to 2006 2,281,663
-------------
Total outstanding at December 31, 2001 $ 2,784,121
=============
The Company entered into a revolving loan agreement on March 27, 2000, with
its bank. The loan agreement allows for a $5.0 million asset-based,
three-year, revolving loan facility at an interest rate equal to the prime
bank lending rate plus 1%. Any unused portion of the revolving credit
facility accrues interest at an annual rate of 50 basis points. The loan
facility provides for advancement of funds based upon an asset availability
formula based upon the Company's eligible accounts receivable and inventory
balances. The availability formula sets aside a fixed amount of qualified
assets that may not be borrowed against. The Company may terminate the loan
agreement prior to its full term, with 90 days notice to the bank; upon
payment of termination fees. The amount of borrowing available to the
Company under the line of credit at December 31, 2001 was $5,000,000.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5) Leases
The Company has certain operating leases for facilities, automobiles, and
various equipment. The following is a summary of future minimum payments
under operating leases that have initial or remaining non-cancelable lease
terms in excess of one year at December 31, 2001:
Year ending December 31, Operating Leases
2002 $ 194,375
2003 182,247
2004 187,499
2005 45,410
------------
Total minimum lease payments $ 609,531
============
Total rent expense incurred under operating leases for the years ended
December 31, 2001, 2000 and 1999 amounted to, $165,016, $166,185 and
$223,421, respectively.
(6) Accrued Expenses
Accrued expenses at December 31, 2001 and 2000 consist of the following:
2001 2000
---- ----
Accrued payroll, bonus and other related expenses payable $ 789,782 628,388
Professional fees 120,743 61,844
Accrued sales commissions 70,175 33,193
Accrued investment banking fees -- 350,000
Other 163,090 91,365
----------- -----------
Total accrued expenses $ 1,143,790 1,164,790
=========== ===========
(7) Stockholders' Equity
(a) Employee Stock Options and Warrants
The Company has a 1986 Executive Incentive Stock Option Plan, a 1995
Incentive Stock Option Plan, and a 1996 Incentive and Non-Qualified
Stock Option Plan (the "Plans").
The Company has reserved 1,660,508 shares of its common stock for
issuance upon exercise of options granted or to be granted under the
Plans. These options generally vest in equal annual amounts over four
years beginning on the date of the grant. The Plans provide that
options be granted at exercise prices not less than market value on the
date the option is granted and options are adjusted for such changes as
stock splits and stock dividends. No options are exercisable for
periods of more than 10 years after date of grant.
The per share weighted-average fair values of stock options granted
during 2001, 2000 and 1999 were $3.68, $3.33 and $1.07, respectively,
on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
2001 2000 1999
---- ---- ----
Expected dividend yield 0% 0% 0%
Risk-free interest rate 3.42% 4.84% 6.25%
Expected volatility 68.46% 109.64% 98.05%
Expected life (years) 2.85 1.05 1.30
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss would have
increased to the pro forma amounts indicated below:
2001 2000 1999
---- ---- ----
Net loss As reported $ (6,261,393 ) (941,120 ) (2,697,255 )
Pro forma $ (7,681,148 ) (1,353,836 ) (2,815,596 )
Net loss per As reported $ (0.61 ) (0.12 ) (0.37 )
common share - diluted Pro forma $ (0.72 ) (0.17 ) (0.39 )
At December 31, 2001, there were 201,538 warrants outstanding to
purchase common stock. Outstanding warrants were made up of warrants
issued in 1997 to Andrew Corporation, to purchase 50,000 shares of
common stock at $8.00 per share, warrants issued in 2000 to Needham &
Company (note 13) to purchase 40,000 shares of common stock at $6.25
per share and warrants issued in 2001 to Needham & Company (note 13) to
purchase 111,538 shares at $6.50 per share. Warrants are exercisable
through October 30, 2002, December 28, 2010 and May 25, 2010
respectively.
The changes in outstanding employee stock options for the three years
ended December 31, 2001, 2000 and 1999 are as follows:
Number of Weighted-average
shares Exercise Price
------------- ---------------------
Outstanding at December 31, 1998 1,194,633 $ 3.14
Granted 181,140 1.52
Exercised (6,410 ) 0.77
Expired and canceled (107,995 ) 2.50
----------- ------
Outstanding at December 31, 1999 1,261,368 $ 3.00
Granted 196,700 5.14
Exercised (508,847 ) 1.70
Expired and canceled (41,861 ) 4.31
----------- ------
Outstanding at December 31, 2000 907,360 $ 4.08
Granted 386,134 6.32
Exercised (76,627 ) 4.11
Expired and canceled (185,609 ) 6.60
----------- ------
Outstanding at December 31, 2001 1,031,258 $ 4.78
=========== ======
The following table summarizes information about employee stock options at
December 31, 2001:
Range of Number Average Weighted- Exercisable Weighted-
Exercise Outstanding Remaining Average As of Average
Prices 12/31/01 Life Exercise 12/31/01 Exercise Price
Price
--------------- ------------- ------------ -------------- -------------- ---------------
$1.06 - $3.50 174,771 2.31 $1.73 99,777 $1.87
$3.56 - $3.56 35,400 3.28 $3.56 8,659 $3.56
$4.13 - $4.13 215,153 1.02 $4.13 178,123 $4.13
$4.54 - $5.02 172,600 2.46 $4.70 71,250 $4.63
$5.90 - $5.90 201,734 4.55 $5.90 20,512 $5.90
$6.88 - $7.50 231,600 4.05 $6.96 46,450 $7.18
------------- ------------ -------------- -------------- ---------------
$1.06 - $7.50 1,031,258 2.93 $4.78 424,771 $4.09
============= ============ ============== ============== ===============
At December 31, 2001, 2000 and 1999 the number of options exercisable
was 424,771, 509,359 and 894,944, respectively, and the weighted
average exercise price of those options was $4.09, $4.33 and $2.97,
respectively.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(b) Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the "ESPP") covers substantially all
employees in the United States and Denmark. The ESPP allows eligible
employees the right to purchase common stock on a semi-annual basis at 85%
of the market price. During 2001 and 2000, 34,720 and 48,974 shares,
respectively, were issued under this plan. As of December 31, 2001, 134,334
shares were reserved for future issuance under the plan.
(8) Income Taxes
Total income tax benefit for the year ended December 31, 2001 was allocated
to income from continuing operations and stockholders' equity, but was
fully reserved with a valuation allowance and therefore zero income tax
benefit was accounted for in our statement of operations, or additional
paid-in capital for stock-based compensation income tax benefits (e.g.,
from current year disqualifying dispositions of incentive stock options and
exercise of non-qualified stock options.
Income tax (benefit) expense for the years ended December 31, 2001, 2000
and 1999 attributable to (loss) income from continuing operations is
presented below.
Current Deferred Total
------------ -------------- --------------
2001
Federal $ -- -- --
State -- -- --
Foreign -- -- --
------------ -------------- --------------
$ -- -- --
============ ============== ==============
2000
Federal $ -- (287,641 ) (287,641 )
State -- (189,535 ) (189,535 )
Foreign -- (82,461 ) (82,461 )
------------ -------------- --------------
$ -- (559,637 ) (559,637 )
============ ============== ==============
1999
Federal $ 34,907 (1,020,100 ) (985,193 )
State -- (153,655 ) (153,655 )
Foreign -- (114,974 ) (114,974 )
------------ -------------- --------------
$ 34,907 (1,288,729 ) (1,253,822 )
============ ============== ==============
The income tax benefits derived from non-qualified and disqualified
dispositions of employee stock options amounting to $108,056 and $368,555
in 2001 and 2000, respectively, were not included in the Statement of
Operations. The tax benefit of $108,056 generated for the year ended
December 31, 2001 has been reserved with a valuation allowance. The tax
benefit of $368,555 for the year ended December 31, 2000 was recorded
through additional paid-in capital.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The actual tax benefit differs from the "expected" income tax benefit computed
by applying the United States Federal corporate income tax rate of 34% to (loss)
before income taxes as follows:
2001 2000 1999
------------- ------------ ---------------
Computed "expected" tax (benefit) expense $ (2,128,874 ) (510,257 ) (1,343,366 )
Increase (decrease) in income taxes resulting from:
State income tax benefit, before valuation allowance,
net of Federal benefit (323,870) ) (125,093 ) (101,412 )
Non-deductible expenses 16,831 30,762 17,227
Foreign tax rate and regulation differential (15,063 ) 6,309 --
Utilization of tax credits -- -- (88,642 )
Revaluation of tax credits -- 38,911 224,602
Tax credits and other future benefits generated during
the current year (151,709 ) -- --
Change in valuation allowance (federal and state) 2,602,685 (269 ) 37,769
------------- ------------ ---------------
Net income tax (benefit) $ -- (559,637 ) (1,253,822 )
============= ============ ===============
The components of results of operations before income taxes, determined by tax
jurisdiction, are as follows:
2001 2000 1999
------------ ------------- -------------
United States $ (6,305,695) (1,225,887) (3,612,919)
Denmark 44,302 (274,870) (338,158)
------------ ------------- -------------
Total $ (6,261,393) (1,500,757) (3,951,077)
============ ============= =============
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 2001 and 2000 are as
follows:
2001 2000
----------- ----------
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts $ 28,312 35,347
Inventories, due to valuation reserve 43,666 79,028
Inventories, due to differences in costing for tax purposes 2,806 2,955
Inventories, due to unrealized gain 39,804 103,108
Operating loss carry forwards 5,068,892 2,362,303
Intangibles due to differences in amortization 42,170 74,381
Research and alternative minimum tax credit carry forwards 441,728 415,243
State tax credit carry forwards 58,696 --
Accrued warranty costs 21,141 16,383
Accrued vacation 39,668 5,640
Foreign operating loss carry forwards 197,435 197,435
----------- ----------
Gross deferred tax assets 5,984,318 3,291,823
Less valuation allowance (2,710,741 ) --
----------- ----------
Net deferred tax assets 3,273,577 3,291,823
----------- ----------
Deferred tax liability:
Property and equipment, due to differences in depreciation (397,348 ) (415,594 )
----------- ----------
Net deferred tax asset $ 2,876,229 2,876,229
=========== ==========
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
At December 31, 2001, the Company had federal net operating loss carry
forwards available to offset future taxable income of approximately
$12,215,000. The Company also had state net operating loss carry forwards
available to offset future state taxable income of approximately
$7,249,000. These net operating loss carry forwards generated in years
1999, 2000 and 2001 expire in years 2019, 2020 and 2021, respectively.
Furthermore, the Company had foreign operating loss carry forwards to
offset future taxable income of approximately $568,000. These foreign net
operating loss carry forwards generated in 1999 and 2000 expire in years
2004 and 2005, respectively.
At December 31, 2001, the Company had federal tax credit carry forwards
available to reduce future tax expense of approximately $442,000. Research
and development tax credit carry forwards in the amounts of $31,000
$91,000, $99,000 and $96,000 relating to 1998, 1997, 1996 and pre-1996
expire in 2018, 2012, 2011 and 2003, respectively. Alternative Minimum Tax
credits of $76,000, $38,000 and $11,000 from 1997, 1996 and 1995,
respectively, have no expiration date. At December 31, 2001, the Company
also had state tax credit carry forwards available to reduce future state
tax expense of approximately $58,000. State investment tax credit carry
forwards in the amounts of $8,500, $36,000, $5,500 and $8,000 from 1998,
1999, 2000 and 2001 expire in 2005, 2006, 2007 and 2008, respectively.
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. The Company
has recorded a valuation allowance against its deferred tax assets because
management believes that, after considering all of the available objective
evidence, historical and prospective, with greater weight given to
historical evidence, it is more likely than not that a portion of the asset
will not be realized.
The total valuation allowance for deferred tax assets as of December 31,
2001 was $2,710,741 of which $2,602,685 was charged against income tax
expense while $108,056 was charged against stockholder's equity directly
against current year compensation expense credited to stockholder's equity.
The total valuation allowance increased by $2,710,741 from December 31,
2000, as a result of an increase of temporary differences for certain carry
forward items, including originating 2001 net operating losses.
(9) 401(k) Profit Sharing Plan
The Company has a 401(k) Profit Sharing Plan (the Plan) for all eligible
employees. All employees with a minimum of one year of service who have
attained age 21 are eligible to participate. Participants can contribute up
to 15% of total compensation, subject to the annual IRS dollar limitation.
Company contributions to the plan are discretionary. Participants become
fully vested in Company contributions once they enroll in the plan;
however, the Company has not made contributions to the plan since its
inception.
(10) Business and Credit Concentrations
The Company derives a substantial portion of its revenues from the armed
forces of the United States and foreign governments. Approximately 17%, 23%
and 27% of the Company's revenues were derived from United States and
foreign military and defense-related sources in fiscal 2001, 2000 and 1999,
respectively. Significant portions of the Company's revenues are also
derived from customers outside the United States. Revenues from foreign
customers accounted for 15%, 16% and 29% of total revenues in fiscal 2001,
2000 and 1999, respectively.
Sales to the United States Army Tank and Automotive Command accounted for
approximately 6% and 9% of net sales in 2001 and 2000, respectively. Sales
to General Motors Corporation of Canada accounted for approximately 3% and
6% of the Company's net sales in 2001 and 2000, respectively.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Segment Reporting
Under SFAS 131, the Company's operations are classified into one reportable
segment. The Company designs, manufactures and markets sensor systems for a
wide variety of applications under common management, which oversees the
Company's marketing, production and technology strategies.
(a) Products and Services
The Company's sensor systems are primarily marketed in the communication
and navigation industries. Revenues attributed to each of these industries
is as follows:
2001 2000 1999
------------ ------------- -------------
Navigation $ 15,008,381 13,578,708 11,448,340
Communication 17,698,742 16,375,019 11,374,089
------------ ------------- -------------
$ 32,707,123 29,953,727 22,822,429
============ ============= =============
(b) Geographic Information
The Company's operations are located in the United States and Europe, and
substantially all long-lived assets reside in the United States.
Inter-region sales are not significant to total revenue of any geographic
region. Revenues in geographic regions for each of the three-year periods
ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
------------ ------------ -------------
United States $ 28,536,566 25,475,031 18,975,235
Europe 4,170,557 4,478,696 3,865,194
------------ ------------ -------------
$ 32,707,123 29,953,727 22,822,429
============ ============ =============
United States revenues include export sales to unaffiliated customers,
located primarily in Europe and Canada, and totaled $5,028,440, $4,914,381
and $6,583,535, respectively, in 2001, 2000 and 1999.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Selected Quarterly Financial Results (Unaudited) Financial information for
interim periods was as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ---------------- ------------- -----------
2001
Net sales $ 8,132,671 7,829,217 7,939,402 8,805,833
Gross profit 3,123,498 2,821,944 2,812,683 3,693,760
Net loss (1,537,365) (1,993,896) (1,567,244 ) (1,162,887 )
Loss per share (a):
Basic $ (0.18) (0.19) (0.14 ) (0.11 )
============= ================ ============= ===========
Diluted $ (0.18) (0.19) (0.14 ) (0.11 )
============= ================ ============= ===========
2000
Net sales $ 5,696,515 7,951,254 7,461,492 8,844,466
Gross profit 1,878,239 2,900,220 3,007,356 3,547,474
Net loss (866,247) (169,642) 18,238 76,531
(Loss) income per share (a):
Basic $ (0.12) (0.02) 0.00 0.01
============= ================ ============= ===========
Diluted $ (0.12) (0.02) 0.00 0.01
============= ================ ============= ===========
1999
Net sales $ 5,973,170 6,525,644 4,781,389 5,542,226
Gross profit 2,203,412 2,241,820 1,485,783 1,857,164
Net loss (145,617 ) (307,120 ) (1,041,584 ) (1,202,934 )
Loss per share (a):
Basic $ (0.02 ) (0.04 ) (0.14 ) (0.17 )
============= ================ ============= ===========
Diluted $ (0.02 ) (0.04 ) (0.14 ) (0.17 )
============= ================ ============= ===========
(a) Income (loss) per share is computed independently for each of the
quarters. Therefore, the income (loss) per share for the four quarters
may not equal the annual income (loss) per share data.
(13) Private Placements
On December 29, 2000, the Company sold 800,000 shares of its Common Stock
to the State of Wisconsin Investment Board for the sum of approximately
$4.5 million dollars, net of investment offering costs. The shares sold at
$6.25 per share, a premium of $0.75 to the market.
On April 2, 2001 and April 17, 2001, the Company sold an aggregate of
1,230,770 shares of its 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. The April 2, shares were sold at a $0.81 per share
discount, while the shares issued on April 17, sold at a $0.11 premium to
market.
On April 17, 2001, the Company sold an aggregate of 307,692 shares of its
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 shares sold at a $0.11 premium to market.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
On May 1, 2001, the Company sold 76,923 shares of its common stock, at a
purchase price of $6.50 per share, to Mr. Austin Marxe. The shares sold at
a $0.35 discount to market.
The Company concluded its private financing on May 25, 2001, with the
issuance and sale of 615,384 shares of its common stock, at a purchase
price of $6.50 per share, to the Massachusetts Mutual Life Insurance
Company. The shares sold at a $1.46 discount to market.
In total, the Company realized net proceeds of $17.5 million, to fund
advanced research into photonics and mobile satellite communications and
operations. The investment banking fee-included issuance of 151,538
warrants to purchase common shares at the purchase price of each private
placement.
Schedule II
KVH INDUSTRIES, INC.
Valuation and Qualifying Accounts
Description Balance at Beginning Additions Charged Deductions from Balance at End of
of Year to Cost or Expense Reserve Year
- ------------------------------------------------------------------------------------------------------------------------
Deducted from accounts receivable for doubtful accounts, (dollar amounts in
thousands).
2001 $ 84 25 (41) 68
2000 $ 101 18 (35) 84
1999 $ 92 67 (58) 101
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
KVH Industries, Inc.:
Under the date of February 7, 2002, we reported on the consolidated balance
sheets of KVH Industries, Inc., and subsidiary as of December 31, 2001 and
2000 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2001, as contained in the annual report on Form 10-K for the
year 2001. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement
schedule listed in Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Providence, Rhode Island
February 7, 2002
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
KVH Industries, Inc.:
We consent to incorporation by reference in the Registration Statement Nos.
333-08491 and 333-67556 on Form S-8 and Nos. 333-63098, 333-62064,
333-60026 and 333-55300 on Form S-3, of our reports dated February 7, 2002,
relating to the consolidated balance sheets of KVH Industries, Inc., and
subsidiary as of December 31, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity, and cash flows and related
schedule for each of the years in the three-year period ended December 31,
2001, which reports on the consolidated financial statements and on the
related schedule are included in the Annual Report on Form 10-K of KVH
Industries, Inc., for the year ended December 31, 2001.
/s/ KPMG LLP
Providence, Rhode Island
March 19, 2001