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, 1999
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 ( ).
As of March 22, 2000, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $50,645,154 based upon a total of
5,829,658 shares held by non-affiliates and the last sale price on that date of
$8.69. As of March 22, 2000, the number of shares outstanding of the
Registrant's common stock was 7,597,339.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement relating to the
2000 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 the end of the Company's fiscal year end December 31, 1999.
<PAGE>
INDEX TO FORM 10-K
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PART I Page
Item 1. Business 1
Item 1a. Executive Officers and Directors of the Registrant as of December 31, 1999 8
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7A. Market Risk Disclosure 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 16
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"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."
<PAGE>
PART I
Item 1. Business.
Overview
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, RI, 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 Danish
sales subsidiary.
KVH utilizes its proprietary fiber optic, autocalibration and fluxgate
technologies to produce sensor systems with multiple market applications. The
Company currently sells its sensors as integrated components of navigation and
satellite communications systems for mobile marine and land applications in the
commercial, military and original equipment manufacturers ("OEM") markets. KVH's
digital navigation systems provide accurate, real-time heading, orientation,
position and pointing information. The Company's satellite communications
product line features stabilized antennas for in-motion marine and land
applications, and includes systems that provide two-way voice, fax and data
connections and systems that deliver television and certain data via direct
broadcast satellite ("DBS") services.
Since introducing the world's first commercial digital fluxgate compass in
1982, KVH has demonstrated an ability to continually advance the capabilities
and applications of its sensors and the systems into which they are integrated.
KVH first enhanced its stand-alone compass for sailing vessels by developing
proprietary software that automatically calibrated the system. The Company
further increased its marine product capabilities by incorporating Global
Positioning System ("GPS") compatibility for precise location data, adding
gyroscopes to measure pitch, roll and yaw, enhancing display readability and
designing compact, integrated systems that interface with other navigation
devices and sensors. By continually advancing product applications and designing
components to meet the needs of new customer groups, such as powerboat owners,
the Company broadened its reach in the marine market. To support its
international marketing of marine navigation products, the Company has
established a sales office, KVH Europe A/S in Hoersholm, Denmark, and a network
of distributors.
In its first foray into the land navigation market, KVH developed
militarized versions of its electronic compasses and began supplying them to the
United States Navy for amphibious vehicles in 1988. To expand its land
navigation product capabilities and market depth, the Company combined its
sensor and autocalibration technologies into fully integrated systems. In 1991,
the United States Marine Corps used KVH self-calibrating compasses for on-board
military land vehicle navigation during the Persian Gulf War. Subsequently, the
Company achieved increased accuracy and capabilities in its land mobile
navigation systems through GPS integration, incorporating navigation
capabilities for turreted armored vehicles and, ultimately, producing a fully
integrated tactical navigation system that provides heading, location and
targeting data to military vehicle commanders. In 1999, the Company advanced the
accuracy and durability of its military systems even more by introducing a
system that combined its proprietary fiber optic gyro with the proven
capabilities of its tactical navigation products. Tactical navigation and
digital compass systems are sold directly to the United States Department of
Defense and the armed forces of other countries in Europe and the Middle East.
Major defense contractors, including United Defense LP and General Motors
Corporation, also incorporate KVH navigation products in manufacturing military
land vehicles.
Sensor technologies were further leveraged when the Company created and
introduced in 1993 an active-stabilized antenna-aiming system that maintains a
continuous satellite link from moving platforms. KVH combined its sensors and
software to integrate real-time heading, orientation and position data and then
position the antenna to compensate for the ongoing, often severe directional
changes that vessels experience at sea. Initially, the antennas were used for
mobile marine voice transmission via Inmarsat M satellites. Ongoing advances in
satellite capabilities provide KVH with a continual flow of product
opportunities, as demonstrated by Inmarsat's launch of its mini-M satellite
constellation. The higher-powered mini-M satellites made it possible for the
Company to develop and in 1997 launch a system that is significantly smaller and
costs less per minute than earlier products while delivering mobile voice, fax
and data access worldwide. Further technological advances led to the 1998
introduction of one of the smallest and lowest-cost fully stabilized marine
telephony systems available for Inmarsat mini-M service.
<PAGE>
In a parallel expansion of its stabilized antenna technology, in 1994 the
Company introduced its first system to enable mobile television reception via
DBS providers. Additional development efforts led to the 1998 launch of the
world's smallest fully stabilized antenna for mobile marine television reception
with systems designed for reception in North America and Europe. Also in 1998,
the Company exploited its mobile antenna capabilities and took a major step in
enabling broadband data delivery by offering users access to real-time stock
market and weather information. With subsequent advances, the Company expanded
its television product line to include:
o a system that incorporates the Company's newest digital gyro compass to
provide vessel navigation capabilities in addition to antenna control;
o a low-profile, low-cost system particularly suited to hardtop vessels
and houseboats;
o the first mobile system in the world capable of evaluating a range of
DVB-compatible and DSS satellite signals and then precisely
identifying, acquiring and maintaining tracking of a selected service;
and
o a system for mobile television reception from land vehicles such as
recreational vehicles (RVs) and motor coaches.
KVH enhanced its sensor capabilities in 1997 by acquiring the assets of the
fiber optic sensor group of Andrew Corporation. With no moving parts, fiber
optic sensors offer the benefits of long and stable operation and a lack of
sensitivity to shock and acceleration that makes them valuable in a broad range
of environments. For example, integrated fiber optic gyroscopes (FOGs) have the
ability to significantly increase heading and location accuracy at a lower cost
than comparable tactical navigation systems. Combining FOGs with satellite
control systems can potentially enable highly accurate antenna pointing for the
impending X-, K- or Ka-band communication systems that will provide ultra-high
data rate transmissions. FOGs also have demonstrated applications in military
navigation, turret stabilization, robotics, merchant vessel navigation,
precision agriculture, measuring electrical power flow, aviation flight control
and positive train control. In 1999, the Company began receiving orders for one
of its FOG-integrated tactical navigation systems for the military. Fiber optic
products are manufactured at the Company's Tinley Park, Illinois, facility.
Sensor-based Products for Communications
KVH has determined that there are significant opportunities for its
sensor-based systems in the mobile communications market where the worldwide
growth in demand for audio, data and video accessibility is eliciting
significant growth in satellite availability. Advantages that satellites offer
over land-based communications technologies include rapid service
implementation, broad market reach that is independent of customer density,
global access for mobile travelers throughout the world and broadband
capabilities. Bandwidth on demand is required for delivering television,
high-speed data and multimedia (e.g., Internet access, corporate networking and
video conferencing) services. Recent studies project that the availability of
broad bandwidth required for two-way connections to the Internet and other
satellite services will grow exponentially to meet worldwide demands for
anytime, anywhere access.
KVH is using its core sensor, robotic and software technologies to develop
systems that are synergistic with the escalating demand for mobile
communications applications and that benefit from the ongoing growth in
satellite availability. The Company also recognizes that mobile users need, and
are seeking, integrated, simplified access to those capabilities. As a result,
the Company focuses on designing turnkey and OEM systems in the areas of
broadcast, datacast and telephony.
A key component of KVH communications products is the Company's proprietary
three-axis, fully stabilized antenna, which maintains satellite contact with
geostationary satellites when a vessel or vehicle platform is in motion. The
antennas use a KVH digital gyro compass and inclinometer to measure precisely
the pitch, roll and yaw of an antenna platform in relation to the earth. The
Company's proprietary stabilization and control software and on-board
microprocessors use that data to compute the antenna movement necessary to
maintain satellite contact and then transmit precise motor control instructions
to aim the antenna. KVH has designed its antennas to permit rapid initial
acquisition of the satellite signal without operator intervention.
KVH Tracphone(R) systems deliver voice, fax and data via the mini-M
satellite constellation operated by Inmarsat (the International Maritime
Satellite Organization), a consortium of 79 countries that operate a network of
geostationary satellites providing worldwide communications services through
mobile terminals on air, sea and land. Per-minute airtime rates for mini-M
service average more than 50 percent less than Inmarsat's A/B service rates,
which gives the Company an additional competitive edge. The telephony systems
being sold worldwide include:
o Tracphone 25, which was named Best Satellite Telephone System by the
National Marine Electronics Association ("NMEA") in both 1998, the year
the antenna was introduced, and 1999. Due to its compact size,
Tracphone 25 is suitable for boats as small as 35 feet in length. The
base price for Tracphone 25 is $6,295.
o Tracphone 50 was introduced in 1997 and is used primarily on larger
vessels such as fishing boats and bulk carrier fleets. The base price
for Tracphone 50 is $6,995.
<PAGE>
The Company has a DBS antenna system product line for mobile television and
data reception on boats and land vehicles. Marine systems include:
o TracVision G4 was introduced in Europe in 1999 and in North America in
early 2000 as the first single-antenna system designed to receive
broadcast signals from a range of satellites and transponders that are
compatible with Digital Video Broadcasting (DVB) and then accurately
identify, acquire and maintain tracking of the one a mobile user
selects. DVB service has become the international standard for digital
satellite transmission, and TracVision G4 represents an important
milestone in the Company's drive to provide global marine television
access. In North America, users can select from DISH(TM) Network and
Expressvu DVB services, and from DIRECTV(R)'s Digital Satellite System
(DSS) service. In Europe, service selections include Astra 1, Astra 2,
Hispasat, Hotbird, Sirius, Thor and Turksat. Users also can expand
their TracVision G4 library with two additional DVB satellite services
of their choice, a unique flexibility in digital entertainment
services. Service activation capabilities are built in by KVH and
costs depend upon which packages a user selects when establishing
service with the provider. TracVision G4, an upgrade to the TracVision
45 KVH introduced in Europe in 1998, significantly increases the reach
of mariners in the coastal waterways of Germany, The Netherlands,
Belgium, France and sections of the United Kingdom. The system also
features KVH's award-winning Azimuth(R)GyroTrac(TM), an
attitude/heading reference system that provides gyro data to the
TracVision G4 and other on-board electronics. The base price for
TracVision G4 is $6,495 ($6,995 if pre-configured for European
operation).
o TracVision 4 was introduced in February 2000 as the successor to
TracVision 3, winner of the 1999 NMEA Best Satellite Television System
Award. At a base price of $4,995, TracVision 4 receives and decodes
signals from a range of DVB-compatible and DSS satellites and
transponders in North America and Canada. TracVision 4 users can
subscribe to a variety of services from DIRECTV, a subsidiary of GM
Hughes Electronics, Expressvu, and DISH Network's EchoStar(R). Users
also can upgrade TracVision 4 to include the global features of the KVH
TracVision G4.
o TracVision Cruiser, the lowest-cost, lowest-profile mobile marine
television system available, was introduced in 1999. TracVision Cruiser
is particularly suited to hard-top vessels and houseboats where the
most-advanced, heavy-seas tracking features of TracVision 3 may not be
needed. At a low cost of $3,495, TracVision Cruiser expands the
potential market among mariners for mobile television systems.
KVH introduced TracVision LM, its first land mobile satellite communications
product, in February 1999. TracVision LM is designed to integrate with
television systems to deliver DBS channels to on-the-move recreational and
sports utility vehicles, motor coaches, vans, mini-vans and long-haul trucks at
an affordable cost of $2,995. Although the land mobile market was new to KVH in
1999, by the end of the year TracVision LM had secured a dominant position in
sales. In addition to establishing a third-party network of dealers and
distributors such as River Park, Inc., and Camping World to market TracVision
LM, KVH implemented OEM agreements with Marathon Coach, Inc., and other RV
manufacturers in 1999. Camping World, the world's largest retailer of RV
accessories and supplies, selected KVH's TracVision LM as the first in-motion
satellite television system to meet its standards for quality and affordability
and thus be offered through its 30 retail stores and catalog, which is mailed to
over 2 million people. Marathon Coach, the largest luxury bus conversion
manufacturer in the world, selected TracVision LM for installations on newly
built 2000 models and older models, and as a standard feature beginning with its
2001 models. A leading supplier of in-motion satellite systems to the United
States RV industry, River Park, is marketing TracVision LM to its OEM customers
and retail dealer network throughout the Midwest.
Analysts covering the RV industry in the United States have projected that
this market will experience significant, long-term growth, driven primarily by
an aging baby boomer population (45 and older) with expendable funds and
potentially many retirement years to fill. This age group has both higher
discretionary income levels and the highest RV ownership of any other age group,
and the United States Census Bureau estimates that by 2010 up to 78 million
Americans will have moved into their peak earnings and vacation years. Based on
these factors, the Company believes there is significant, long-term revenue
potential for its land mobile satellite systems.
<PAGE>
Sensor-based Products for Navigation
KVH also sells sensor-based products for navigation applications in the
marine and military markets. Compass systems utilize the Company's digital
fluxgate heading sensor to sample the surrounding magnetic field and output
precise heading data. These signals are relayed to an on-board microprocessor,
where filtering and averaging algorithms developed by the Company translate the
output to stable heading information. The Company's proprietary autocalibration
software continuously and automatically compensates for the effects of magnetic
interference. In highly dynamic applications where greater accuracy and fully
stabilized heading output is required, KVH integrates the sensor with one or
more angular rate gyros and inclinometers. This integration provides
three-dimensional error correction and stabilization capabilities previously
available only from more costly systems. The Company is integrating FOG sensors
into its navigation and communication product lines to create enhanced systems
with broader market potential.
Marine sensor systems include:
o The GyroTrac was introduced in 1998 as the successor to the Company's
Azimuth Digital Gyro Compass, and each has earned the NMEA Best Gyro
Compass award, in 1999 and 1998, respectively. The 1998 system
incorporated in one package multiple navigation capabilities that
previously were available as options, thereby reducing the overall cost
to customers and making installation easier and more efficient.
GyroTrac retails for $2,995, and in early 2000 it was further updated
with solid state components to increase its reliability and performance
capabilities.
o The Azimuth 1000, selected by NMEA as Best Electronic Compass in 1998
and 1999, which retails for $345.
o Sailcomp(R) digital fluxgate compass systems that feature a starting
timer and displays showing head/lift and off-course data. In addition,
Sailcomp interfaces with Loran or GPS to display alternates between
bearing to waypoint and go-to distance. Sailcomp retails for $795.
o DataScope(R), a hand-held compass and rangefinder that retails for $445
and is used in marine, outdoor, military, technical, sporting and
commercial applications.
For the military market, KVH has designed a variety of sensor products
ranging from a simple GPS-compatible compass system with a single commander's
display to a complete, integrated system that provides full tactical navigation
and targeting capabilities and includes up to three separate commander's,
gunner's and driver's displays. TACNAV(TM) systems are installed in a variety of
light-armored fleets, including the United States AAV-7, LAV-25 and Bradley
Fighting Vehicle, the Swedish Army's CV90 fleet and the Canadian Army's RECCE
and APC. Individual military system retail prices range from $5,000 to $20,000
and the product line includes:
o TACNAV Light is designed for support vehicles that provide the
emergency medical care, troop transport, gas, food, ammunition and
other supplies that forces in the field rely upon to keep functioning.
KVH created TACNAV Light to fill a previously unmet requirement for
affordable, precise navigation capabilities on military tactical
support vehicles. A basic TACNAV Light uses a smart electronic compass
that detects and compensates for any distorting magnetic effects of a
vehicle to provide continuous heading data to drivers. With optional
upgrades, TACNAV Light also can provide GPS integration for steer-to
and cross-track error navigation, dead-reckoning to back up GPS and
provide full-time position data, and commanders' displays that show
vehicle position.
o TACNAV TLS systems combine target-locating and turret-pointing
capabilities with the navigation features of a TACNAV Light to meet
the needs of mid-weight armored tanks. Through an interface with a
vehicle's turret angle encoder, TACNAV TLS provides an azimuth display
for target acquisition, target hand-off, friend-or-foe identification,
battlefield orientation and far-target location. TACNAV TLS
automatically acquires and reacquires targets through an interface
with the laser rangefinder, providing range and bearing, and target
grid coordinates. Widely used by the United States, Sweden and Canada,
TACNAV TLS's were selected in 1999 by the United Kingdom for targeting
and positional applications in its military fleets. The initial order
for nearly $500,000 was installed on vehicles the U.K. is using in
Europe. TACNAV TLS also has been selected by the United States Army
for testing as a key component in the Task Force XXI Battle Command
Brigade and Below program. The vehicle location data that TACNAV TLS
provides is key to the overall success of the Task Force XXI program
as it develops an integrated tactical computer system that provides
real-time digital information, electronic coordination and situational
awareness to battlefield commanders.
o TACNAV FOG combines the proven performance of TACNAV TLS systems with
the high accuracy of a KVH fiber optic sensor. For the most demanding
combat vehicles conducting rapid maneuvers, the increased accuracy in
a TACNAV FOG enables in-motion firing by precisely sensing azimuth
rotation of the vehicle and supplying data continuously to the system
for calculation. TACNAV FOG costs significantly less than competing
inertial systems, and the maintenance-free, solid-state design has a
longer lifespan than systems with mechanical gyros. Delfin systems, a
business unit of Titan Corporation, selected TACNAV FOG in 1999 to
meet highly precise heading and position specifications for a
vehicle-mounted signal intelligence system it is developing for the
United States Army. Delfin is integrating TACNAV FOGs with its radio
direction-finding systems for installation on HMMWVs.
<PAGE>
Under a Phase II Small Business Innovation Research (SBIR) grant awarded in
1999 by the United States Navy, the Company is developing GPFOG, an azimuth and
attitude sensing system that will increase system bandwidth, robustness and
accuracy while providing protection from GPS outages. GPFOG combines three
low-cost sensor technologies; a three-axis FOG, GPS technology and an
accelerometer. The inertial sensors (gyros and accelerometers) improve system
accuracy and, during GPS outages, maintain accurate azimuth and attitude data.
The potential market worldwide for tactical navigation products is
substantial. Particularly in the United States, there are increasing calls for
the military to transform itself from a conventional battlefield threat to a
more flexible and rapidly deployable force that can dominate in the changing
formats of international conflicts in the late Twentieth and early Twenty-first
centuries. Such a transformation requires consistent, highly accurate navigation
equipment that can be retrofit in existing vehicles and installed in new ones.
The Company believes it has developed a tactical navigation product line that is
broadly and highly competitive in this international market.
Commercial OEMs also use FOG sensors and a variety of digital heading
sensors, stabilized gyro compasses, rate sensors, inclinometers, sensing coils
and other standard sensors and sensor systems from KVH for applications such as
measuring electrical power flow, robotics, positive train control and precision
agriculture. The basic component of FOG sensors is EoCore(TM), a proprietary
optical fiber manufactured by KVH. Products sold to OEMs range in price from
$1,500 to $50,000 and include:
o EoCore 1000, an affordable commercial FOG for stabilization and
positioning applications; o EoCore 2000, a precision FOG for the most
demanding stabilization and positioning applications;
o An EoCore 4000 series that provides low-cost, high-performance
stabilization, positioning and fire control capabilities for military
applications;
o Autogyro(R) FOG, a sensor for integration into AVL navigation and
robotics systems; o CPS(TM), a continuous positioning system that
features GPS/FOG dead reckoning and a navigation system; o DCPS(TM), a
differential CPS for demanding dynamic positioning applications; and o
NoFOG(TM), a north-finding earth rate sensor with
military-specification precision.
Sales and Marketing
The Company sells its sensor products and systems through a variety of
channels, including a direct sales force and a network of dealers, value-added
resellers, distributors and sales representatives. KVH's commercial and
recreational marine navigation products are sold and supported through:
o a domestic dealer network of more than 400 catalog chain outlets,
including West Marine, Boaters' World and Boat U.S.; o more than 200
technical marine electronics value-added resellers; o over 60 overseas
distributors; and o an independent manufacturer's sales representative
network in all domestic sales regions.
A world-wide network of technical dealers and distributors established by
KVH sells the Company's antenna-aiming communications systems directly to both
manufacturers of satellite telephone transceivers and as turnkey systems to
end-users. Land mobile satellite television systems are sold through an
established network of RV, coach and other vehicle dealers, distributors and
manufacturers throughout North America.
KVH markets its military navigation products to the armed forces of the
United States and other countries and to OEM manufacturers through a direct
sales force, distributors and independent sales representatives. The Company
also uses its direct sales force, distributors and sales representatives to sell
embedded sensors and sensor systems to a broad range of OEM manufacturers,
including Lockheed Martin, Harris and Raytheon. FOG sensors are sold directly to
OEM customers through the same distribution system that the Company utilizes to
sell its commercial digital sensors. The Company's agreements with its dealers,
value added resellers, distributors and sales representatives generally are
non-exclusive. The Company's products are sold in Europe through KVH Europe A/S
and elsewhere in the world through a network of distributors.
Backlog
The Company includes in its backlog only firm orders for which it has
accepted a written purchase order. Many of the Company's orders are subject to
cancellation, generally without penalties. In particular, the Company's military
orders can be canceled at any time for the convenience of the customer. However,
the Company may recover actual costs incurred through the date of cancellation
as well as those costs incurred due to the termination.
<PAGE>
The Company's revenue from commercial and recreational marine markets is
derived primarily from sales to non-stocking distributors, retail chains, OEMs
and other resellers who require short lead times for delivery of products to
end-users. The Company manufactures its products on a just-in-time basis.
Customers may cancel or reschedule orders without significant penalty and the
prices of products may be adjusted between the time the purchase order is booked
into backlog and the time the product is shipped to the customer. For these
reasons, the Company believes that its backlog in general, and its backlog of
commercial and recreational marine orders in particular, are not necessarily
meaningful in predicting the Company's actual revenue for any future period.
The Company's backlog at December 31 was $0.7 million in 1999 and $3.0
million in 1998. The Company expects to ship all its backlog at December 31,
1999, during 2000. The Company's total backlog at December 31, 1999 included
$0.1 million in military navigation system orders, $0.5 million in mobile
satellite communication and $0.1 million in FOG product orders. The Company's
total backlog at December 31, 1998 included $2.0 million in military navigation
system orders and $1.0 million in mobile satellite communication and FOG product
orders.
Research and Development
The Company's research and development efforts are based on its core sensor
technologies and focused on developing new products that will have broad
application across existing and anticipated strategic markets while improving
performance and reducing manufacturing costs for products in the market. A
substantial portion of the Company's research and development expenditure is
devoted to basic research for core technology development projects.
The Company's research and development activities fall into two categories:
internally funded research and development and customer-funded research and
development. The Company has financed virtually all of the cost of developing
the Company's marine navigation and satellite communications products. Prior to
1999, development of the Company's core sensor technologies was subsidized to a
large extent by grants under the United States government's SBIR program. Much
of the funding used to develop KVH's products for the military navigation
market, in which a significant engineering effort to develop enhanced features
requested by the customer is frequently involved, also has been derived from
government sources. However, in 1999 the Company internally funded a large
percentage of its military and FOG research. Customer-funded research and
development is included in cost of sales.
The Company's total expenditures for research and development during 1999,
1998 and 1997 were as follows:
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Year ended December 31,
1999 1998 1997
---- ---- ----
(in thousands)
Internally funded research and development $ 4,199 3,991 3,175
Customer funded research and development 648 936 630
------- -------- --------
Total research and development $ 4,847 4,927 3,805
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Manufacturing
The Company's manufacturing operations consist primarily of final assembly
and test of products, materials procurement management and quality assurance.
The Company manufactures certain subassemblies and components, such as fluxgate
and fiber optic sensor coils, incorporating them into sensor-driven navigation
and communication systems. The Company contracts with third parties for services
such as the fabrication and assembly of printed circuit boards, injection-molded
plastic parts and machined metal components.
KVH believes there are a number of acceptable vendors for most components
and third-party services used in manufac-turing its products and the Company
actively evaluates and selects suppliers for quality, dependability and cost
effective-ness. In some instances where KVH has obtained certain components and
services from a sole source to maintain quality control or develop a strategic
supplier relationship, the Company has experienced production delays due to
insufficient supplies, delivery delays, poor quality control or failure to meet
design requirements. Future shortages, delays or other problems could adversely
affect production and, consequently, Company operating results. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Looking Statements-Risk Factors.")
<PAGE>
Competition
The Company encounters significant competition in each of its markets. In
the mobile satellite antenna-aiming market, KVH has determined that the
principal bases of competition are system performance, reliability, antenna
size, cost and customer support. Major competitors in this market include Sea
Tel, Datron and Nera corporations and Westinghouse Electric Company.
In the market for military vehicle tactical navigation systems, the Company
competes with a large number of domestic and international companies that
produce dead-reckoning, inertial, GPS-based, or radio-based navigation systems
and systems that provide integrated magnetic heading and GPS navigation
capabilities. While some competitors may have a longer history of manufacturing
and marketing military products, KVH has developed a comprehensive tactical
navigation product line with a breadth of vehicle applications that is unique
and highly beneficial to the military. The Company believes that the principal
bases of competition in the market for military land vehicle navigation systems
are: product performance; field reliability; ease and flexibility of
installation, maintenance and field modification; and price, size and weight of
the unit.
In the highly competitive commercial and recreational marine navigation
market, the Company's principal competitors include a large number of domestic
and international companies that manufacture and market stand-alone digital
compasses, digital heading sensors and integrated instrument systems. The
Company believes that the principal bases of competition in the commercial and
recreational marine navigation market include product design and performance;
flexibility and ease-of-use; product quality and the quality of customer
support; and vendor reputation.
The Company's fiber optic gyro and embedded sensors compete with products
of a large number of companies, including Murata and Hitachi Corporation, that
produce gyroscopic rate sensors for sale in the OEM market. A number of these
sensors are less accurate and substantially less expensive than the Company's
products. Other competitors in the gyroscopic rate sensor market include Litton
and Honeywell corporations.
Intellectual Property
The Company's ability to compete effectively depends to a significant extent
on its ability to protect its proprietary information. The Company relies
primarily on trade secret laws, confidentiality procedures and licensing
arrangements to protect its intellectual property rights. The technology
licenses on which the Company relies include an angular rate gyro license from
Etak, Inc. and a license from Thomson Consumer Electronics, Inc. relating to
certain consumer electronic components.
The Company has 26 issued United States patents covering the Company's core
sensor and fiber optic technologies. The Company will seek further patents on
its technology, if appropriate. In addition to patents, the Company 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 the
Company's patents and trademarks range from May 20, 2003, to March 5, 2016.
The Company generally enters into confidentiality agreements with its
consultants, key employees and sales representatives and generally controls
access to and distribution of its technology, software and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. Also, the Company
has delivered certain technical data and information to the United States
government under procurement contracts.
Employees
As of December 31, 1999, the Company employed 170 full-time employees. The
increase in total employees from 154 at December 31, 1998, resulted primarily
from a need to strengthen research and development, customer support and
marketing activities related to new products. KVH utilizes the services of
temporary or contract personnel within all functional areas to assist on
project-related activities.
The Company believes its future success will depend in large part upon the
continued service of its 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 the Company's employees are
represented by a labor union. The Company has not experienced any work stoppage
and considers its relationship with its employees to be good.
<PAGE>
Government Regulation
The Company's manufacturing operations are subject to various laws
governing the protection of the environment. These laws and regulations are
subject to change, and such change may require the Company to improve technology
or incur expenditures to comply with such laws and regulation. The Company
believes that it complies in all material respects with applicable environmental
laws and regulations and does not expect that any costs in connection with
complying with such laws or regulations will have a material effect on the
Company's results of operations, financial position or liquidity.
The Company is subject to compliance with the United States Export
Administration Regulations. Because some of the Company's products have military
or strategic applications, some products are on the Munitions List of the
International Trafficking in Arms Regulations or are subject to a requirement
for an individual validated license from the Department of Commerce in order to
be exported to certain jurisdictions. Under the Exon-Florio Amendment to the
Defense Production Act of 1950, the United States President has authority to
investigate and unwind any investment by foreign persons that could result in
foreign control of an entity, if the President determines that foreign control
would threaten national security.
Item 1a. Executive Officers and Directors of the Registrant as of December 31,
1999
The following is a list of all current executive officers and directors of KVH
Industries, Inc.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Held Officers' Previous Business Experience
Name Age Current Position Since (If current position held <5 years)
---- --- ---------------- ----- -----------------------------------
Martin A. Kits van Heyningen* 41 President 1982
Director** 1982
Chief Executive Officer 1990
Richard C. Forsyth 53 Chief Financial Officer 1988
Sid Bennett 61 Vice President, FOG Business 1997 1985-1997: Director, Sensor Products,
Development Andrew Corporation, and President,
Andrew-Thompson Broadcasting
Christopher T. Burnett 45 Vice President, Business 1994
Development
James S. Dodez 41 Vice President, Marketing 1998 1995-1998: Vice President of Marketing
and Sales Support and Reseller Sales, KVH
Robert W.B. Kits van Heyningen* 43 Vice President, Research and 1998 1982-1998: Vice President of
Development Engineering, KVH
Director** 1982
Mads E. Bjerre-Petersen 56 Managing Director, 1992
KVH Europe A/S
Arent H. Kits van Heyningen* 84 Chairman of the Board 1982
Mark S. Ain 56 Director** 1997
Stanley K. Honey 45 Director** 1997
Werner Trattner 47 Director** 1994
Charles R. Trimble 58 Director** 1999
</TABLE>
- ------------------------------------
* 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, the Company purchased a 75,000-square-foot building in
Middletown, Rhode Island. The building serves as headquarters for KVH executive
and administrative functions and as a development and manufacturing facility for
all products except fiber optics. The Company believes it is well positioned for
some time to quickly expand production in response to demand, as the Middletown
manufacturing facility is not yet at maximum capacity.
<PAGE>
KVH manufactures its 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. The annual rent was $152,121 during the first year with a 3%-per-year
escalation in subsequent years, and the build-out cost was approximately
$800,000. Substantial fixed costs for maintaining operations at the fiber optic
facility, which currently is not at full production due to slow sales, have
adversely affected the Company's financial results during 1998 and 1999. Over
the past two years, KVH accelerated its integration of fiber optic sensors into
its military products, and the first military sales occurred in 1999. Based upon
favorable acceptance of these products, the Company anticipates that the order
flow will accelerate, increasing the capacity utilization of the Tinley Park
facility. Product demand indicates that full utilization of the Tinley Park
facility is possible towards the latter part of 2000.
Item 3. Legal Proceedings.
In the ordinary course of business, the Company is a 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. In a complaint filed on February 14, 2000, (KVH
Industries, Inc. v. Datron/Transco, Inc., C.A. No. 00-067T [D.R.I.]), KVH has
alleged that Datron/Transco, Inc., breached a 1999 agreement between the parties
and infringed upon KVH's United States Letters Patent No. 5,835,057. For relief,
KVH is seeking contractual damages and treble compensatory damages for willful
infringement as well as preliminary and permanent injunctive relief. Datron
responded to the complaint on March 14, 2000. Datron has denied KVH's
allegations and is seeking a declaratory judgement that KVH's patent is invalid
and that Datron has not infringed the patent. Datron has also brought an
antitrust counterclaim, pursuant to which it seeks injunctive relief and treble
damages. The Company believes that it will prevail in this action and that the
lawsuit 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, through the
solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock has traded on the NASDAQ National Market under
the symbol KVHI since April 8, 1996. As of March 22, 2000, 167 stockholders of
record owned the Company's Common Stock. The Company has never declared or paid
any cash dividends on its Common Stock and does not intend to pay cash dividends
on its Common Stock in the foreseeable future. The Company intends to retain
earnings for reinvestment in its business.
The Company's stock commenced trading on April 2, 1996 at $6.50. On March
22, 2000, the closing sale price for the Company's Common Stock was $8.69.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1999 1998
----------------------- ----------------------
High Low High Low
First Quarter $ 2.063 1.000 $ 4.500 3.875
Second Quarter 3.188 2.000 3.250 3.125
Third Quarter 2.875 2.031 2.250 1.875
Fourth Quarter 3.500 2.125 1.625 1.219
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statement of Operations:
$
Net sales 22,822 20,630 25,570 25,687 14,150
Cost of goods sold 15,034 14,100 14,085 14,607 8,447
------------ ------------ ------------ ------------ ------------
Gross profit 7,788 6,530 11,485 11,080 5,703
Operating expenses:
Research and development 4,199 3,991 3,175 2,431 1,279
Sales and marketing 5,471 4,470 3,738 3,040 2,494
General and administrative 2,112 2,225 1,895 1,624 1,058
------------ ------------ ------------ ------------ ------------
Operating (loss) profit (3,994 ) (4,156 ) 2,677 3,985 872
Other (income) expense:
Interest expense (income), net 40 (57 ) (327 ) (278 ) 27
Other (income) expense (20 ) (27 ) (95 ) 14 20
(Gain) loss on currency translation (63 ) (198 ) (138 ) 50 (4)
------------ ------------ ------------ ------------ ------------
(Loss) income before income tax
(benefit) expense (3,951 ) (3,874 ) 3,237 4,199 829
Income tax (benefit) expense (1,254 ) (1,608 ) 1,020 1,743 (365)
------------ ------------ ------------ ------------ ------------
$
Net (loss) income (2,697 ) (2,266 ) 2,217 2,456 1,194
============ ============ ============ ============ ============
Per share information (1):
Net (loss) income per common share-
basic $ (0.37 ) (0.32 ) 0.31 0.39 0.25
============ ============ ============ ============ ============
Net (loss) income per common share-
diluted $ (0.37 ) (0.32 ) 0.30 0.35 0.21
============ ============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 7,235 7,124 7,049 6,370 4,862
============ ============ ============ ============ ============
Diluted 7,235 7,124 7,498 7,055 5,710
============ ============ ============ ============ ============
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands)
Consolidated Balance Sheet Data:
$
Working capital 7,733 8,486 12,410 12,570 3,214
Total assets 19,835 18,746 21,805 21,544 7,931
Long-term obligations (2) 2,870 0 7 61 113
Total shareholders' equity 14,502 17,070 19,194 16,563 3,654
</TABLE>
(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 notes 5 and 15 of Notes to Consolidated Financial Statements.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Result
of Operations.
Overview
The general financial condition and results of operations for KVH
Industries, Inc., which will be addressed in this discussion will include
information about:
o factors that affect our business; o what our earnings and costs were in
1999 and 1998; o why those earnings and costs were different from the years
before; o where our income came from; o how all these factors affected our
overall financial condition; o what we spent for capital projects from 1997
through 1999; and o how we will pay for future operations.
As you read Management's Discussion and Analysis, it may help to refer to our
Consolidated Statements of Operations on page 23, which presents the results of
our operations for 1999, 1998 and 1997. During the time period covered by this
discussion, we have undergone a number of significant changes. These changes
have resulted in notable variances in our revenues, expenses, debt and total
assets. In reading this discussion, please keep certain events in mind:
o Since 1997, we have been targeting the communications and military
navigation industries, where there are significant market
opportunities. This shift from our previous emphasis on the marine
navigation industry, with its many competitors and low margins, has
been a time-consuming and costly process.
o An important step in our new strategy, acquiring a fiber optic sensor
technology and the experienced staff to support and advance it, has
required a substantial investment of funds to date.
We derive revenues from sensor products and systems sold to a range of
commercial, military and OEM markets in the communications and navigation
industries. Our products include:
o stabilized antenna systems for mobile satellite applications such
as voice, fax and data transmission and televisionreception;
o positional and heading systems for tactical military applications in
amphibious and land vehicles and for commercial applications in land
vehicles;
o digital compasses and instrument systems for recreational, commercial and
military applications; and o embedded fiber optic sensors.
Our in-house sales and marketing groups have established a worldwide
network of independent sales representatives and distributors to market the
Company's products. The majority of sales, product distribution and customer
service is conducted at our headquarters in Middletown, Rhode Island, and the
European market is managed through our subsidiary in Hoersholm, Denmark. The
manufacturing process consists primarily of light assembly and final test, which
is conducted at our facilities in Middletown, Rhode Island, and Tinley Park,
Illinois.
During 1999, we had an increase in communications sales of more than 83
percent, primarily due to the new land mobile satellite system we launched in
February. This entry into a new market also was our most successful product
launch ever, and 1999 sales exceeded Company expectations. Initial sales have
been primarily to owners, manufacturers and distributors of RVs and luxury motor
coaches. RV and motor coaches together represent a potential market for us of
some 2.4 million existing vehicles and more than 500,000 new vehicles each year,
and statistics and reports compiled by industry analysts indicate that this
market will see considerable growth over the next 10 years. Continued growth in
sales of marine mobile satellite systems during 1999 also contributed to the
increase in communications revenues.
Our navigation sales were down during 1999 primarily because military
orders decreased. The military sales decline was principally due to longer sales
cycles than originally anticipated for projects that were awarded to us, and as
a result sales did not meet our expectations for the year. At the same time, the
increasing pressure within branches of the United States military during 1999 to
create new, more mobile forces was a strong validation of our product strategy
for this market. Transforming military forces from a conventional, open-terrain
threat to something more adaptable to the varied international crises that
currently occur requires the consistent, highly accurate navigation capabilities
that we believe is designed into our tactical navigation systems. Worldwide, the
market for military retrofits and new installations of tactical navigation
products is enormous and we are aggressively pursuing customers in many
countries. Also during 1999, integration of our tactical navigation systems and
fiber optic gyros (FOGs) advanced and we began taking orders for this new
addition to our product line. We also sell fiber optic sensors to OEM customers,
and in 1999 we strengthened our sales efforts in this area.
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Net sales 100.0 % 100.0 100.0
Gross profit 34.1 31.7 45.0
Research and development 18.4 19.3 12.4
Sales and marketing 24.0 21.7 14.6
General and administrative 9.3 10.8 7.4
Operating (loss) profit (17.6 ) (20.1) 10.6
Other expense (income), net (0.3 ) (1.4) (2.1)
(Loss) income before income tax
(benefit) expense (17.3 ) (18.7) 12.7
Income tax (benefit) expense (5.5 ) (7.8) 4.0
Net (loss) income (11.8 )% (10.9) 8.7
</TABLE>
Years Ended December 31, 1999 and 1998
Net Sales. Net sales increased to $22.8 million from $20.6 million in 1998,
primarily due to strong communications sales that offset lower-than-expected
navigation sales. Product sales were $22.0 million in 1999 and $19.6 million in
1998 with respective customer-funded research of $0.8 million and $1.0 million.
Communications revenues increased 73% in 1999 to $11.4 million from $6.6 million
in 1998 as strong sales of mobile television satellite systems for our new
market in land vehicles exceeded expectations and our marine mobile satellite
systems continued to sell well. Navigation revenues were $11.4 million in 1999
compared to $14.0 million in 1998, a decrease of more than 18% that is
attributable to unanticipated declines in high-margin military sales. While we
were selected for a number of high-margin military products, revenues were lower
than anticipated due to longer timeframes for completing contracts than we had
expected. Navigation products incorporating fiber optic sensors in 1999
decreased to $1.4 million from $1.7 million in 1998, reflecting the
discontinuance of bus navigation products in late 1998. The bus navigation
product was a legacy product acquired through acquisition. The decision to
withdraw the bus navigation product from the marketplace was based on
excessively high post sales support costs that made the economics of this
product unfeasible. Our acquisition of fiber optic technology in 1997 was driven
by our need to incorporate more accurate sensors into our existing product
offerings. The process of integrating FOG technology has taken longer than
anticipated, however, we received our first order for a tactical navigation
system with an integrated fiber optic sensor in 1999 and anticipate sales in
this product area will grow rapidly.
Cost of Goods Sold. The Company's cost of goods sold consists primarily of
direct labor, material and indirect manufacturing costs. Customer-funded
research and development costs of $0.6 million in 1999 and $0.9 million in 1998
are also included as costs of sales. As a percentage of net sales, cost of goods
sold decreased 2% in 1999 to 66% from 68% in 1998 due to two opposing factors.
The positive impact of decreases in labor and material costs were offset by
increases in manufacturing overheads, netting out to positive savings.
Manufacturing overheads increased to $5.2 million in 1999 from $3.8 million in
1998 due to costs associated with initiating and scaling up production of new
products and the under utilization of the Tinley Park manufacturing facility.
Fixed manufacturing overheads at our Tinley Park facility were not offset by
production volumes. In 1999, we completed the integration of fiber optic
technology into our navigation products and received our first orders for these
enhanced products. Based upon the market acceptance of our fiber optic-enhanced
sensor products, we anticipate that sales volumes will be sufficient to offset
manufacturing costs of the Tinley Park facility. Looking ahead, we believe our
production cost trends will continue in a positive direction.
<PAGE>
Research and Development Expense. Research and development expense consists
primarily of direct labor and material, associated overheads and other direct
costs associated with the Company's internally funded product development. All
software development costs are expensed in the period incurred. Internally
funded research costs increased slightly to $4.2 million in 1999 from $4.0
million in 1998. We directed most of our research funds in 1999 to developing
the new land mobile satellite television system and to integrating fiber optic
sensor technology into our tactical navigation products. We continued to
increase internal funding of product development, which allowed us to better
focus our research and decrease the amount of time required to bring a new
product to market in 1999. Total research and development expenditures,
including customer-funded product development expenditures included in cost of
goods sold, were $4.8 million in 1999 and $4.9 million in 1998. We anticipate
that customer funding of research and development will increase in 2000, which
will take some of the pressure off our capital resources by reducing overall
research and development costs.
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 costs grew more than 22% to
$5.5 million in 1999 from $4.5 million in 1998. Major factors contributing to
the growth of sales expenses were independent sales representative commissions,
staffing, travel and new-product-introduction costs. We expect sales and
marketing expense will continue to grow as we introduce new products.
General and Administrative Expense. General and administrative expense
consists primarily of costs attributable to the Company's management, finance,
accounting and human resources operations and legal and other professional
services. We decreased costs slightly to $2.1 million in 1999 from $2.2 million
in 1998 by improving cost controls.
Interest Income. Interest income reflects the interest earned by investin
excess cash in Federal short-term obligations.
Interest Expense. Mortgage costs and certain costs associated with
leases are included in interest expense. We anticipate significant increase in
interest expense.
Gain on Foreign Currency Translation. The results of operations of the
Company's foreign subsidiary, KVH Europe, are determined by re-measuring its
foreign currency-denominated operations as if they had taken place in United
States dollars. Gains and losses resulting from this translation are included in
the Company's net income. The translation gain decrease to $.06 million from
$0.2 million reflects changes in the strength of the United States dollar
relative to the Danish krone.
Income Tax (Benefit) Expense. Due to losses in both 1999 and 1998, we
realized a deferred income tax benefit of $1.3 million and a current income tax
benefit of $1.6 million, respectively. Our effective tax rate in 1999 decreased
by approximately 10% to 32% from 42% in 1998. The decrease reflects a write-down
of deferred tax assets related to research tax credits taken from 1996 to 1998.
We have taken this position based upon preliminary discussions with the Internal
Revenue Service, which is currently engaged in reviewing our tax returns filed
in those years. Based upon our interpretation of the research tax credit
provision, we believe the 1999 tax provision includes amounts that are
sufficient to offset any exposure we may have for the years under examination.
Years Ended December 31, 1998 and 1997
Net Sales. Net sales decreased to $20.6 million in 1998 from $25.6 million
in 1997. Product sales were $19.6 million in 1998 and $24.6 million in 1997 with
customer-funded research of $1.0 in both years. Navigation sales decreased to
$14.0 million in 1998 from $20.3 million in 1997, primarily due to a decline in
high-margin military sales. Communications sales increased to $6.6 million in
1998 from $5.2 million in 1997 as direct sales began replacing large
non-recurring OEM sales.
Cost of Goods Sold. Cost of goods sold includes customer-funded research
and development costs of $0.9 million in 1998 and $0.6 million in 1997. Cost of
goods sold as a percentage of net sales increased to 68% in 1998 from 55% in
1997 due to a proportional decrease in higher-margin military product sales.
Manufacturing overheads increased to $3.8 million in 1998 from $2.8 million in
1997 as we moved the fiber optic group from the former Andrew Corporation site
to a new facility in Tinley Park, Illinois. Excluding fiber optic facility and
manufacturing costs of $1.5 million, overhead would have decreased 11 percent in
1998 from 1997.
Research and Development Expense. Research costs increased to $4.0 million
in 1998 from $3.2 million in 1997 due to costs for developing new directional
antenna systems and $1.4 million for fiber optic sensor integration and
development. Internally funded product development accounted for $2.6 million of
the 1998 increase while fiber optic start-up costs accounted for the remainder.
Total research and development expenditures, including customer-funded product
development expenditures included in cost of goods sold, were $4.9 million in
1998 and $3.8 million in 1997.
<PAGE>
Sales and Marketing Expense. Sales and marketing costs grew to $4.5 million
in 1998 from $3.7 million in 1997. Major factors contributing to the growth of
sales expenses were staffing, travel and new product introduction costs.
General and Administrative Expense. Administrative costs increased to $2.2
million in 1998 from $1.9 million in 1997 due to staffing and increased
professional fees related to maintaining our patent portfolio.
Interest income. Interest income reflects the interest earned by investing
excess cash in Federal short-term obligations.
(Gain) Loss on Foreign Currency Translation. The translation gain increase
to $0.2 million in 1998 from $0.1 million in 1997 reflects changes in the
relative strength of the United States dollar in relation to the Danish krone.
Income Tax Expense. We realized an income tax benefit of $1.6 million in
1998 compared to an expense of $1.0 million in 1997 due to our 1998 operating
loss. Our effective tax rate in both years was positively affected by utilizing
state and Federal research and development and investment tax credits.
Liquidity and Capital Resources
Year ended December 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 Change 1998 Change 1997
---- ------ ---- ------ ----
(in thousands)
Cash and cash equivalents $2,048 65% 1,239 (74%) 4,758
Working capital 7,733 ( 9%) 8,486 (32%) 12,410
</TABLE>
Through the use of existing cash balances and mortgage financing, we
financed approximately $2.3 million in 1999 for the combined costs of operations
and fixed asset acquisitions. In January 1999, we borrowed approximately $3
million by mortgaging our facility at 50 Enterprise Center, Middletown, Rhode
Island (see note 5 of Notes to Consolidated Financial Statements). Looking ahead
we anticipate that our operating costs will decrease in proportion to our sales
volumes, generating positive cash from operations. We believe that fixed
manufacturing overhead spending will decline as a percent of revenues and we
plan to reduce research and development costs by offsetting these costs with
customer funding.
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. The company may terminate the
loan prior to the full term, however, we would become liable for certain
termination fees. (See Note 15 of Notes to Consolidated Financial Statements).
We believe that existing cash balances and funds available under our new
revolving credit facility will be sufficient to meet our anticipated working
capital requirements for 2000. 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.
Other Matters
Recent Accounting Pronouncements. In June 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133 -- an Amendment of FASB
Statement No. 133". The Statement amends SFAS No. 133 to defer its effective
date to all fiscal quarters of all fiscal years beginning after June 15, 2000.
We have not yet completed our analysis of the impact of adopting SFAS No. 133 on
the financial statements; however, it is not expected to have a material impact
on the Company's financial condition, results of operations or cash flows.
Year 2000 - After evaluating the impact of the year 2000 issue as it
relates to our navigation and communications products, we have concluded that
they are not affected by year 2000 operating issues. We also assessed our
software and computer systems to be sure they are year 2000 compliant. Based on
usage to date, our systems are year 2000 compliant.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
<PAGE>
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.
o Our products target two industries that are subject to volatility,
risks and uncertainties. The communications industry is experiencing
rapid growth fueled by strong worldwide demand and buffeted by
competing formats and rapid, unpredictable technology changes. The
defense industry historically experiences variability in supply and
demand related to international conditions, national politics, budget
decisions and technology changes, all of which are difficult or
impossible to predict. Factors in both industries could affect our
ability to effectively meet prevailing market conditions. To position
KVH in these uncertain industries, we have:
- acquired fiber optic technology and developed related new products;
- redesigned and reduced product costs; and
- improved operational efficiencies.
o Our future sales growth will depend 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
us rapidly completing product development that results in marketable
products, particularly for worldwide Internet and data applications.
Success in this industry also requires satellite broadband capabilities
that may not be available until 2001 or later and depends on other
external variables that could adversely affect us:
- satellite launches and new technology are expensive and experience
some failures; and - poor consumer confidence and/or economic
conditions could depress product demand.
o We also need to increase military sales over 1999 levels to achieve
overall profitability. Issues that can affect our success in the
military navigation industry include:
- funding, equipment and performance criteria are continually evolving;
- we are introducing new technological solutions such as FOGs that must
be proven and then accepted; - politics play a strong role in how
products are selected; and
- sales cycles are long and difficult to predict.
o A large portion of our product development strategy for the near future
relies upon FOGs. Expenses for FOG operations continue to add
significant costs to operations. As we continue the process of
integrating FOG sensors into current product offerings and pursuing OEM
markets for existing FOG products, we expect FOG-related costs to
increase. Our success with fiber optic products depends on our ability
to continue funding FOG development and marketing efforts, and progress
in increasing manufacturing capabilities.
o Major competitors pose risks throughout our target markets:
- Sea Tel Corporation manufactures and markets a broad line of
marine satellite communications and satellite tracking equipment,
including antenna systems for Inmarsat and DBS-TV applications.
For large dish marine satellite systems, Sea Tel has greater
marketing experience than the Company.
- Datron Corporation provides a stabilized antenna design for RV and
marine reception of DBS-TV that competes with the company's
turnkey DBS products.
- Hand-held worldwide satellite voice, data and fax services
provided by companies such as Iridium World Communications, Ltd.,
Globalstar Telecommunications Ltd. and ICO Global Communications
could compete with our phone systems, although we believe there
are mobile applications where our antennas will be required.
- FiberSense manufactures fiber optic gyros that compete in
price and performance with our FOG products.
o 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.
o The trading price of our Common Stock has been subject to
wide fluctuations, and this could continue due to:
- variations in operating results;
- development failures of our communications, navigation or FOG
products; and
- stock market volatility caused by industry events.
<PAGE>
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"
and "Executive Compensation" 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:
<TABLE>
<CAPTION>
<S> <C>
Page
1. Financial Statements:
Report of Independent Auditors 19
Consolidated Balance Sheets as of December 31, 1999, and 1998 20
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997 21
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999,1998 and 1997 22
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 23
Notes to Consolidated Financial Statements 24
2. Financial Statement Schedule. See "Independent Auditors Report"
and "Schedule II - Valuation and Qualifying Accounts" included on
pages 37 and 38. 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.
</TABLE>
(b) Reports on Form 8-K:
A Report on Form 8-K was filed on November 14, 1997. The report contains
the asset purchase agreement between the Company and Andrew Corporation and
a Common Stock Warrant both dated October 30, 1997.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(c) Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation of the Company (1)
3.5 Amended and Restated By-laws of the Company
10.1 1986 Executive Incentive Stock Option Plan (1)
10.2 Amended and Restated 1995 Incentive Stock Option Plan of the Company (1)
10.3 1996 Employee Stock Purchase Plan (1)
10.5 Credit Agreement dated September 8, 1993 between the Company and
Fleet National Bank (1)
10.6 $500,000 Revolving Credit Note dated September 8, 1993 between the Company
and Fleet National Bank (1)
10.7 Security Agreement dated September 8, 1993 between the Company and
Fleet National Bank (1)
10.8 Modification to Security Agreement dated May 30, 1994 between the Company
and Fleet National Bank (1)
10.9 Second Modification to Credit Agreement and Revolving Credit Note dated
May 30, 1994 between the Company and Fleet National Bank (1)
10.10 Second Modification to Security Agreement dated March 17, 1995 between
the Company and Fleet National Bank (1)
10.11 Third Modification to Credit Agreement and Revolving Credit Note dated
March 17, 1995 between the Company and Fleet National Bank (1)
10.12 Third Modification to Security Agreement dated December 12, 1995 between
the Company and Fleet National Bank (1)
10.13 Fourth Modification to Credit Agreement and Revolving Credit Note dated
December 12, 1995 between the Company and Fleet National Bank (1)
10.14 Lease dated February 27, 1989 between the Company and Middletown
Technology Associates IV (1)
10.17 Registration Rights Agreement dated May 20, 1986 by and among the
Company and certain stockholders of the Company (1)
10.18 Amendment to Registration Rights Agreement dated January 25, 1988, by
and among the Company, Fleet Venture Resources, Inc., and Fleet Venture
Partners I and certain stockholders of the Company (1)
10.19 Amendment to Registration Rights Agreement dated October 25, 1988 by
and among the Company and certain stockholders of the Company (1)
10.20 Amendment to Registration Rights Agreement dated July 21, 1989 by and
among the Company and certain stockholders of the Company (1)
10.21 Third Amendment to Registration Rights Agreement dated November 3, 1989
by and among the Company and certain stockholders of the Company (1)
10.28 Technology License Agreement dated December 22, 1992 between the
Company and Etak, Inc. (1)
10.29 Agreement dated September 28, 1995 between the Company and Thomson
Consumer Electronics, Inc. (1)
10.31 Agreement regarding Technology Affiliates Program between Jet
Propulsion Laboratory and the Company (1)
10.32 Purchase and Sale Agreement dated March 18, 1996, 50 Enterprise Center,
Middletown, Rhode Island between the Company and SKW Real Estate
Limited Partnership (2)
10.33 Fifth Modification to Credit Agreement and Revolving Note dated
August 8, 1996 between the Company and Fleet National Bank
10.34 Andrew Corporation Asset Purchase and Warrant Agreement (3)
10.35 Sixth Modification to Credit Agreement and Revolving Note
dated September 29, 1998, between the Company and Fleet National Bank
10.36 Seventh Modification to Credit Agreement and Revolving Note
dated July 30, 1999, between the Company and Fleet National Bank
10.37 Eighth Modification to Credit Agreement and Revolving Note
dated October 29, 1999, between the Company and Fleet National Bank
(continued)
<PAGE>
Exhibit Number Description
10.38 Loan and Security Agreement Dated March 27, 2000, between
the Company and Fleet Capital Corporation
11.1 Computation of (Loss) Earnings per Share (2)
21.1 List of Subsidiaries of the Company (1)
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
99.1 Open End Mortgage, and Security Agreement
99.2 Tinley Park, Illinois, lease
(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.
</TABLE>
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.
By: /s/ Martin A. Kits van Heyningen
-----------------------------------
Martin A. Kits van Heyningen, President
DATE: March 27, 2000
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.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Title Date
/s/ Martin A. Kits van Heyningen President (Chief Executive Officer) March 27, 2000
- ------------------------------------------
Martin A. Kits van Heyningen
/s/ Richard C. Forsyth Chief Financial Officer (Principal Financial and March 27, 2000
- ------------------------------------------
Richard C. Forsyth Accounting Officer)
/s/ Arent H. Kits van Heyningen Chairman of the Board March 27, 2000
- ------------------------------------------
Arent H. Kits van Heyningen
/s/ Robert W. B. Kits van Heyningen Director March 27, 2000
- ------------------------------------------
Robert W. B. Kits van Heyningen
/s/ Mark S. Ain Director March 27, 2000
- ------------------------------------------
Mark S. Ain
/s/ Stanley K. Honey Director March 27, 2000
- ------------------------------------------
Stanley K. Honey
/s/ Werner Trattner Director March 27, 2000
- ------------------------------------------
Werner Trattner
/s/ Charles R. Trimble Director March 27, 2000
- ------------------------------------------
Charles R. Trimble
</TABLE>
<PAGE>
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, 1999 and 1998, 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, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Providence, Rhode Island
January 28, 2000, except for Notes 5 and 15, as to which the date is March 27,
2000
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
1999 1998
---- ----
Assets (note 5)
Current assets:
Cash and cash equivalents $ 2,047,838 1,239,227
Accounts receivable, less allowance for doubtful accounts of
$101,259 in 1999 and $91,604 in 1998 (note 12) 3,362,390 3,106,414
Income taxes receivable (note 9) -- 1,062,494
Costs and estimated earnings in excess of billings on
uncompleted contracts 444,492 768,156
Inventories (note 3) 3,672,269 3,390,787
Prepaid expenses and other deposits 292,793 360,346
Deferred income taxes (note 9) 376,628 234,158
------------ ------------
Total current assets 10,196,410 10,161,582
------------ ------------
Property and equipment, net (notes 4 and 15) 7,227,778 7,186,539
Other assets, less accumulated amortization of $240,507
in 1999 and $107,254 in 1998 (note 2) 839,113 972,365
Deferred income taxes (note 9) 1,571,409 425,150
------------ ------------
Total assets $ 19,834,710 18,745,636
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,599,770 853,238
Current portion long-term debt (note 5) 75,643 --
Accrued expenses (note 7) 792,086 822,533
------------ ------------
Total current liabilities 2,467,499 1,675,771
------------ ------------
Long-term debt (note 5) 2,865,232 --
------------ ------------
Total liabilities 5,332,731 1,675,771
------------ ------------
Stockholders' equity (note 8):
Preferred stock, $0.01 par value. Authorized 1,440,390 shares;
none issued. -- --
Common stock, $.01 par value. Authorized 11,000,000 shares;
issued 7,296,892 shares in 1999 and 7,205,928 shares in 1998 72,969 72,059
Additional paid-in capital 15,567,880 15,439,421
(Accumulated deficit) retained earnings (1,138,870 ) 1,558,385
------------ ------------
Total stockholders' equity 14,501,979 17,069,865
------------ ------------
Commitment and other information (notes 6, 10 and 15)
Total liabilities and stockholders' equity $ 19,834,710 18,745,636
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Net sales (note 12) $ 22,822,429 20,630,648 25,570,347
Cost of goods sold 15,034,250 14,100,398 14,085,463
------------- ------------- -------------
Gross profit 7,788,179 6,530,250 11,484,884
Operating expenses:
Research and development 4,199,370 3,991,193 3,175,181
Sales and marketing 5,471,231 4,469,654 3,738,605
General and administrative 2,111,868 2,225,370 1,895,031
------------- ------------- -------------
Operating (loss) profit (3,994,290 ) (4,155,967 ) 2,676,067
------------- ------------- -------------
Other income (expense):
Interest income 147,631 58,735 336,157
Interest expense (187,867 ) (2,023 ) (8,893 )
Other income 19,805 27,392 95,083
Gain on foreign currency translation 63,644 197,663 138,272
------------- ------------- -------------
(Loss) income before income tax (benefit) expense (3,951,077 ) (3,874,200 ) 3,236,686
Income tax (benefit) expense (note 9) (1,253,822 ) (1,608,191 ) 1,020,185
------------- ------------- -------------
Net (loss) income $ (2,697,255 ) (2,266,009 ) 2,216,501
============= ============= =============
Per share information (notes 8 and 14):
Net (loss) income per common share - basic $ (0.37 ) (0.32 ) 0.31
============= ============= =============
Net (loss) income per common share - diluted $ (0.37 ) (0.32 ) 0.30
============= ============= =============
Weighted average number of shares outstanding:
Basic 7,234,961 7,124,023 7,049,125
============= ============= =============
Diluted 7,234,961 7,124,023 7,497,695
============= ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
Additional Retained Total
Preferred Common Paid-in Earnings Stockholders'
Stock Stock Capital (Deficit) Equity
------------ ------------ ------------- ------------ --------------
Balances at December 31, 1996 $ -- 69,932 14,884,806 1,607,893 16,562,631
------------ ------------ ------------- ------------ ------------
Net income -- -- -- 2,216,501 2,216,501
Common stock issued under benefit plan -- 127 67,404 -- 67,531
Exercise of stock options -- 801 151,913 -- 152,714
Issuance of warrants (notes 2 and 8) -- -- 194,435 -- 194,435
------------ ------------ ------------- ------------ ------------
Balances at December 31, 1997 $ -- 70,860 15,298,558 3,824,394 19,193,812
------------ ------------ ------------- ------------ ------------
Net (loss) -- -- -- (2,266,009 ) (2,266,009 )
Common stock issued under benefit plan -- 797 118,620 -- 119,417
Exercise of stock options -- 402 22,243 -- 22,645
------------ ------------ ------------- ------------ ------------
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
============ ============ ============= ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net (loss) income $ (2,697,255 ) (2,266,009 ) 2,216,501
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization 1,062,198 767,289 797,761
Provision for doubtful accounts 9,655 17,695 284
Provision for deferred taxes (1,288,729 ) (193,206 ) (242,688 )
(Increase) decrease in accounts and
contract receivables (note 11) (265,631 ) 1,208,198 1,827,202
Increase (decrease) in income taxes receivable 1,062,494 (1,062,494 ) --
Decrease (increase) in costs and estimated earnings
in excess of billings on uncompleted contracts 323,664 (362,142 ) 429,706
(Increase) decrease in inventories (note 11) (281,482 ) 923,345 (649,213 )
Decrease (increase) in prepaid expenses and other deposits 67,553 (138,331 ) (42,310 )
Increase (decrease) in accounts payable 746,532 (765,057 ) 586,986
Decrease in accrued expenses (30,447 ) (170,301 ) (554,922 )
Decrease in customer deposits -- -- (2,502,432 )
-------------- ------------- -------------
Net cash (used in) provided by operating activities (1,291,448 ) (2,041,013 ) 1,866,875
-------------- ------------- -------------
Cash flows from investing activities:
Acquisition (note 2) -- -- (1,946,026 )
Capital expenditures (note 11) (970,185 ) (1,619,436 ) (2,335,423 )
-------------- ------------- -------------
Net cash used in investing activities (970,185 ) (1,619,436 ) (4,281,449 )
-------------- ------------- -------------
Cash flows from financing activities:
Note payable 3,000,000 -- --
Repayment of note payable (59,125 )
Repayments of obligations under capital lease -- -- (53,739 )
Stock option and benefit plan transactions 129,369 142,062 220,245
-------------- ------------- -------------
Net cash provided by financing activities 3,070,244 142,062 166,506
-------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents 808,611 (3,518,387 ) (2,248,068 )
Cash and cash equivalents at beginning of year 1,239,227 4,757,614 7,005,682
-------------- ------------- -------------
Cash and cash equivalents at end of year $ 2,047,838 1,239,227 4,757,614
============== ============= =============
Supplemental disclosure of cash flow information (note 11):
Cash paid during the year for interest $ 187,867 2,023 8,589
============== ============= =============
Cash paid during the year for income taxes $ -- 137,785 1,872,049
============== ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Description of Business
KVH Industries, Inc. (the "Company") develops, manufactures and markets
proprietary fiber optic, autocalibration and sensor technologies to
produce navigation and mobile satellite communications systems for
commercial, military and marine applications.
(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 a maturity, at
the purchase date, of three months or less to be cash equivalents.
(d) Revenue Recognition
Revenue is recognized when a product is shipped and services are
performed. Revenues on long-term contracts are recognized using the
percentage of completion method. Under this method, income is
recognized as work progresses on the contracts. The percentage of work
completed is determined principally by comparing the accumulated costs
incurred to date with management's current estimate of total costs to
be incurred at contract completion. Revisions of costs and income
estimates are reflected in the period in which the facts that require
the revisions become known. If estimated total costs on a contract
indicate a loss, the entire amount of the estimated loss is provided
for currently.
(e) Inventories
Inventories of finished goods for sale and raw materials are stated at
the lower of cost or market using the first-in first-out costing
method. Work in process is valued at production cost represented by
material, labor and overhead, and is not recorded in excess of net
realizable values.
(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. Amortization of
property and equipment under capital lease is provided using the
straight-line method over the lease terms.
(g) Other Assets
Other assets consist of patents and capitalized costs of workforce
resulting from the Company's October 1997 acquisition (see note 2).
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.
<PAGE>
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 $811,000, $1,022,000 and $957,000, respectively, in 1999,
1998 and 1997, and related costs included in cost of goods sold totaled
approximately $648,000, $936,000 and $630,000 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 APB Opinion 25 and related interpretations in
accounting for its stock option plans. No compensation cost has been
recognized for these plans in the accompanying consolidated financial
statements.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities 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 reviews long-lived assets and certain identifiable
intangibles 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.
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(o) Net (Loss) Income per Common Share
In 1997 the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. Under the provisions of SFAS 128, basic earnings per share
replaces primary earnings per share and the dilutive effect of stock
options and warrants are excluded from the calculation. Fully diluted
earnings per share are replaced by diluted earnings per share and
include the dilutive effect of stock options and warrants, using the
treasury stock method. All prior period earnings per share data have
been restated to conform to the requirements of SFAS 128.
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, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 1998 1997
---- ---- ----
Weighted average shares (basic) 7,234,961 7,124,023 7,049,125
Effect of dilutive stock options -- -- 448,570
------------ ------------ -------------
Weighted average shares (diluted) 7,234,961 7,124,023 7,497,695
============ ============ =============
</TABLE>
The net (loss) income used in the calculation for basic and diluted
earnings per share calculations agrees with the net (loss) income
appearing in the financial statements.
(p) Comprehensive Income
In 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive
income consists of the net loss. SFAS No. 130 requires only
additional disclosures in the financial statements; it does not
affect the Company's financial position or results of operations.
(q) 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.
(2) Acquisition
On October 30, 1997 the Company purchased certain operating assets and
assumed certain liabilities of the Sensor Products Group of the Andrew
Corporation for approximately $1.9 million of cash (including acquisition
costs) and warrants to purchase the Company's common stock, valued at
approximately $0.2 million. The assets acquired provide the Company with
the ability to produce fiber optic rate sensors that will advance the
Company's existing product performance. The acquisition has been accounted
for as a purchase and the allocation resulted in intangibles, primarily
patents and workforce, of approximately $1.1 million that are being
amortized on a straight-line basis over periods of 5-12 years. In 1998 the
Company revalued certain current acquisition assets downward by $0.6
million, increasing the valuation of property and equipment and intangibles
by approximately $0.3 million each.
(3) Inventories
Inventories at December 31, 1999 and 1998 consist of the following:
1999 1998
---- ----
Raw materials $ 2,735,601 2,178,265
Work in process 350,128 461,798
Finished goods 586,540 750,724
----------- ----------
$ 3,672,269 3,390,787
=========== ==========
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Project inventories totaling $163,044 and $139,930, respectively, in 1999
and 1998 have been offset against related progress payments and included as
a component of costs and estimated earnings in excess of billings on
uncompleted contracts.
(4) Property and Equipment
Property and equipment, net, at December 31, 1999 and 1998 consist of the
following:
1999 1998
---- ----
Land $ 806,774 806,774
Building and improvements 3,228,381 3,227,336
Leasehold improvements 804,783 712,666
Machinery and equipment 3,337,910 2,912,705
Office and computer equipment 2,951,979 2,494,878
Motor vehicles 87,065 92,348
------------ ------------
11,216,892 10,246,707
Less accumulated depreciation 3,989,114 3,060,168
------------ ------------
$ 7,227,778 7,186,539
============ ============
Depreciation for the years ended December 31, 1999, 1998 and 1997 amounted
to $929,000, $660,000 and $772,000, respectively.
(5) Debt and Line of Credit
On January 11, 1999, the Company entered into a mortgage loan in the amount
of $3,000,000 with a life insurance company. The note term is 10 years,
with a principal amortization of 20 years at a fixed rate of interest of
7%. The mortgage loan is secured by land, building and improvements.
Monthly mortgage expense is $23,259, including interest and principal, and
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 1999 totaled $59,125, and as of December 31, 1999,
$2,940,875 was outstanding. The following is a summary of future principal
payments under the mortgage.
Year ending December Principal Payment
2000 75,643
2001 81,111
2002 86,974
2003 93,262
2004 100,004
Subsequent to 2004 2,503,881
-------------
Total outstanding at December 31, 1999 2,940,875
=============
After renegotiating the terms of the credit agreement, the Company entered
into a new revolving loan agreement on March 27, 2000, with its bank. The
new agreement allows for 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 the Company's
eligible accounts receivable and inventory. The availability formula sets
aside a fixed amount of qualified assets that may not be borrowed against.
The Company, prior to its full term, may terminate the loan agreement with
90 days notice to the bank; however, it would become liable for certain
termination fees (see Note 15).
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) 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, 1999:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31, Operating Leases
2000 $ 184,204
2001 189,010
2002 193,961
2003 175,066
Subsequent to 2004 45,410
-------------
Total outstanding at December 31, 1999 $ 967,969
=============
</TABLE>
Total rent expense incurred under operating leases for the years ended
December 31, 1999, 1998 and 1997 amounted to, $223,421, $196,780 and
$433,908, respectively. A facility lease term expired in 1999 and was not
renewed.
(7) Accrued Expenses
Accrued expenses at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
Accrued payroll, bonus and other related expenses payable $ 572,130 417,406
Professional fees 102,920 110,803
Accrued sales commissions 16,887 120,045
Other 100,149 174,279
--------- ---------
Total accrued expenses $ 792,086 822,533
========= =========
</TABLE>
(8) 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 1,415,000 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 1999, 1998 and 1997 were $1.07, $2.74 and $4.12, respectively,
on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
1999 1998 1997
---- ---- ----
Expected dividend yield 0% 0% 0%
Risk-free interest rate 6.25% 5.84% 5.36%
Expected volatility 98.05% 115.48% 82.71%
Expected life (years) 1.3 3.0 3.0
<PAGE>
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) income would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
Net (loss) income As reported $ (2,697,255 ) (2,266,009 ) 2,216,501
Pro forma $ (2,815,596 ) (3,013,785 ) 1,942,467
Net (loss) income per As reported $ (0.37 ) (0.32 ) 0.30
common share - diluted Pro forma $ (0.39 ) (0.42 ) 0.26
</TABLE>
Pro forma net (loss) income reflects only options granted in 1999, 1998
and 1997. The full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net (loss)
income amounts presented above because compensation cost is based upon
fair value at the grant date.
At December 31, 1999, warrants issued in conjunction with the
acquisition of the Sensor Products Group of the Andrew Corporation
(note 2), to purchase 50,000 common shares were outstanding. Each
warrant allows the holder thereof to acquire one share of common stock
for a purchase price of $8.00. The warrants are exercisable through
October 30, 2002.
The changes in outstanding employee stock options for the three years
ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Weighted-average
shares Exercise Price
------------- ----------------------
Outstanding at December 31, 1996 1,021,327 $ 3.83
Granted 66,250 7.13
Exercised (86,728 ) 0.76
Expired and canceled (70,446 ) 5.93
----------- ------
Outstanding at December 31, 1997 930,403 $ 4.28
Granted 687,950 3.97
Exercised (40,195 ) 0.60
Expired and canceled (383,525 ) 7.58
----------- ------
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
=========== ======
</TABLE>
On March 2, 1998, the Compensation Committee of the Board of Directors
approved a stock option repricing program in which all employees and
directors of the company could elect to exchange certain previously
granted incentive and non-qualifying stock options for a "New Option"
granted under the 1996 Plan. The Company repriced the options because
the exercise prices of such options were significantly higher than the
fair market value of the Company's common stock and therefore did not
provide the desired incentive to employees.
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Under the terms of the exchange, employees had the option to surrender
all outstanding previously granted options with exercise prices of
$5.00 per share or more for a New Option amounting to 80 percent of the
previously granted options at new exercise prices ranging from $4.125
to $4.538 per share. Options to purchase 361,500 shares of common
stock, with an average exercise price per share of $7.77, were
surrendered and exchanged for 289,200 shares repriced at exercise
prices ranging from $4.125 to $4.538 per share, based upon the fair
market closing price on March 2, 1998. The vesting schedule and all
other terms and conditions of the options remained unchanged.
The following table summarizes information about employee stock options
at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Range of Number Average Weighted- Exercisable Weighted-
Exercise Outstanding Remaining Average As of Average
Prices 12/31/99 Life Exercise 12/31/99 Exercise Price
Price
-------------- ------------- ------------ -------------- -------------- ---------------
$0.60-$1.17 154,668 2.65 $0.90 64,668 $0.60
$1.70-$1.70 399,000 0.82 $1.70 399,000 $1.70
$2.19-$3.50 110,600 4.37 $2.46 40,000 $2.89
$4.13-$4.13 448,316 2.30 $4.13 295,055 $4.13
$4.54-$9.13 148,784 2.68 $5.67 96,221 $6.29
------------- ------------ -------------- -------------- ---------------
$0.60-$9.13 1,261,368 2.10 $3.00 894,944 $2.97
============= ============ ============== ============== ===============
</TABLE>
At December 31, 1999, 1998 and 1997 the number of options exercisable
was 894,944, 782,548 and 646,576, respectively, and the weighted
average exercise price of those options was $2.97, $2.82 and $3.87,
respectively.
(c) 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
the lower of 85% of the market price at the beginning or end of each
six-month offering period. During 1999 and 1998, 85,201 and 80,510
shares, respectively, were issued under this plan. As of December 31,
1999, 257,238 shares were reserved for future issuance under the plan.
(9) Income Taxes
Income tax (benefit) expense for the years ended December 31, 1999, 1998
and 1997 are presented below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current Deferred Total
------------ -------------- --------------
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 )
============ ============== ==============
1998:
Federal $ (1,237,981 ) (233,226 ) (1,471,207 )
State (208,595 ) 40,020 (168,575 )
Foreign 31,591 -- 31,591
------------ -------------- --------------
$ (1,414,985 ) (193,206 ) (1,608,191 )
============ ============== ==============
1997:
Federal $ 1,037,954 (212,586 ) 825,368
State 157,997 (30,102 ) 127,895
Foreign 66,922 -- 66,922
------------ -------------- --------------
$ 1,262,873 (242,688 ) 1,020,185
============ ============== ==============
</TABLE>
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The actual tax (benefit) expense differs from the "expected" tax (benefit)
expense computed by applying the United States Federal corporate tax rate
of 34% to (loss) income before income taxes as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998 1997
------------- ----------- -----------
Computed "expected" tax (benefit) expense $ (1,343,366 ) (1,317,228 ) 1,100,473
Increase (decrease) in income taxes resulting from:
Non-deductible expenses 17,227 15,699 26,262
Utilization of tax credits (88,642 ) (176,982 ) (215,411 )
State income tax (benefit) expense, net of
Federal income tax benefit (101,412 ) (168,575 ) 84,411
Revaluation of tax credits 224,602 -- --
Other 37,769 38,895 24,450
------------- ----------- -----------
Net income tax (benefit) expense $ (1,253,822 ) (1,608,191 ) 1,020,185
============= =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
----------- ---------
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts $ 39,835 39,810
Inventories, due to valuation reserve 30,062 30,923
Inventories, due to differences in costing for tax purposes 2,359 2,138
Inventories, due to unrealized gain 107,950 48,315
Operating loss carryforwards 1,370,621 --
Intangibles due to differences in amortization 42,964 14,695
Dislodged tax credits from prior years 454,154 460,000
Accrued warranty costs 40,276 42,882
Accrued vacation 69,069 98,822
Affiliated foreign sub-operating tax carryforwards 114,974 --
----------- ---------
Gross deferred tax assets $ 2,272,264 737,585
----------- ---------
Deferred tax liability:
Property and equipment, due to differences in depreciation 324,227 78,277
----------- ---------
Net deferred tax asset $ 1,948,037 659,308
=========== =========
</TABLE>
At December 31, 1999, the Company had federal net operating loss
carryforwards available to offset future taxable income of approximately
$3,533,000. The Company also had state net operating loss carryforwards
available to offset future state taxable income of approximately
$2,261,000. These net operating loss carryforwards generated in 1999 expire
in 2019. Furthermore, the Company had foreign operating loss carryforwards
to offset future taxable income of approximately $338,000. These foreign
net operating loss carryforwards generated in 1999 expire in 2004.
At December 31, 1999, the Company had tax credit carryforwards available to
reduce future tax expense of approximately $454,000. Research and
development tax credit carryforwards in the amounts of $88,000, $99,000,
$82,000 and $87,000 relating to 1999, 1998, 1997 and 1996 expire in 2019,
2018, 2012 and 2011, respectively. Alternative Minimum Tax credits of
$49,000, $38,000 and $11,000 from 1997, 1996 and 1995, respectively, have
no expiration date.
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. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. In order to fully realize the deferred tax asset, the Company
will need to generate future taxable income of approximately $5,066,000
prior to the expiration of the net operating loss carryforwards in 2019 and
the portion of tax credits that expire in years 2012 and 2011. Taxable
income (loss) for the years ended December 31, 1999, 1998 and 1997 was
approximately ($3,533,000), ($4,814,000) and $3,236,000, respectively.
Based upon the level of projections for future taxable income over the
periods during which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the
benefits of these deductible differences. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
there are changes in the estimates of future taxable income during the
carryforward period.
Undistributed earnings/(deficit) of the Company's foreign subsidiary
amounted to approximately $54,000 and $247,000 at December 31, 1999 and
1998, respectively. Those earnings are considered to be indefinitely
reinvested and, accordingly, no related provision for United States federal
and state income taxes has been provided. Upon distribution of those
earnings in the form of dividends or otherwise, the Company may be subject
to both United States income taxes (subject to an adjustment for foreign
tax credits) and withholding taxes in the various foreign countries.
(10) 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.
Participants become fully vested in Company contributions after 7 years of
continuous service. Company contributions to the plan are discretionary.
During 1999, 1998 and 1997, the Company did not make any contributions to
the Plan.
(11) Supplemental Cash Flow Information
As discussed in Note 2, the Company purchased certain operating assets and
assumed certain liabilities of Andrew Corporation's Sensor Products Group
in 1997. During 1998 the Company revalued accounts receivable and inventory
to reflect actual fair values. As a consequence of the revaluation,
accounts receivable and inventory were reduced by $163,462 and $437,660,
respectively, while property and equipment and other assets were increased
by $252,503 and $348,619, respectively.
(12) Business and Credit Concentrations
The Company derives a substantial portion of its revenues from the armed
forces of the United States and foreign governments. The Company estimates
that approximately 27%, 38% and 52% of the Company's revenues were derived
from United States and foreign military and defense-related sources in
fiscal 1999, 1998 and 1997, respectively. A significant portion of the
Company's revenues are also derived from customers outside the United
States. Revenues from foreign customers accounted for 29%, 30% and 31% of
total revenues in fiscal 1999, 1998 and 1997, respectively.
Sales to the United States Army Tank and Automotive Command accounted for
approximately 14% and 17% of net sales in 1999 and 1998, respectively.
Sales to General Motors Corporation of Canada accounted for approximately
12% and 14% of the Company's net sales in 1999 and 1998, respectively.
(13) Segment Reporting
During 1998 the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards Number 131 ("SFAS 131"),
"Disclosures About Segments of an Enterprise and Related Information."
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:
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
------------ ------------ ------------
Navigation $ 11,448,340 13,985,623 20,328.191
Communication 11,374,089 6,645,025 5,242,156
------------ ------------ ------------
$ 22,822,429 20,630,648 25,570,347
============ ============ ============
</TABLE>
(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, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
------------ ------------ ------------
United States $ 18,957,235 17,461,608 23,258,557
Europe 3,865,194 3,169,040 2,311,790
------------ ------------ ------------
$ 22,822,429 20,630,648 25,570,347
============ ============ ============
</TABLE>
United States revenues include export sales to unaffiliated customers,
located primarily in Europe and Canada, and totaled $6,583,535,
$6,112,627 and $7,813,138, respectively, in 1999, 1998 and 1997.
(14) Selected Quarterly Financial Results (Unaudited) Financial information for
interim periods was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- -------------- ------------- -----------
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 )
=========== ============== ============= ===========
1998
Net sales $ 4,128,601 6,470,240 5,307,323 4,724,484
Gross profit 1,130,182 2,390,607 2,164,348 845,113
Net loss (896,719 ) (247,329 ) 258,089 (1,380,050 )
(Loss) earnings per share (a):
Basic $ (0.13 ) (0.03 ) 0.04 (0.19 )
=========== ============== ============= ===========
Diluted $ (0.13 ) (0.03 ) 0.04 (0.19 )
=========== ============== ============= ===========
1997
Net sales $ 5,916,329 5,770,505 7,025,976 6,857,537
Gross profit 2,737,300 2,519,762 3,546,897 2,680,925
Net loss 603,989 402,167 1,018,799 191,546
Earnings per share (a):
Basic $ 0.09 0.06 0.14 0.03
=========== ============== ============= ===========
Diluted $ 0.08 0.05 0.14 0.03
=========== ============== ============= ===========
</TABLE>
(a) Earnings (loss) per share are computed independently for each of the
quarters. Therefore, the earnings (loss) per share for the four quarters
may not equal the annual earnings (loss) per share data.
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Subsequent Events
The Company entered into a new revolving loan agreement on March 27, 2000,
with its bank after renegotiating the terms of the credit agreement. The
new agreement allows for 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 the Company's
eligible accounts receivable and inventory. The availability formula sets
aside a fixed amount of qualified assets that may not be borrowed against.
The company, prior to its full term, may terminate the loan agreement with
90 days notice to the bank; however, it would become liable for certain
termination fees.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
KVH Industries, Inc.:
Under the date of January 28, 2000, except for Notes 5 and 15, as to
which the date is March 27, 2000, we reported on the consolidated balance
sheets of KVH Industries, Inc., and subsidiary as of December 31, 1999
and 1998 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, 1999, as contained in the annual
report on Form 10-K for the year 1999. 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
January 28, 2000
<PAGE>
Schedule II
KVH INDUSTRIES, INC. AND SUBSIDIARY
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Additions
Balance at Charged to
Beginning of Cost or Deductions Balance at
Description Year Expense from Reserve End of Year
----------------------------------------------------------------------------------------
(in thousands)
Deducted from accounts
receivable for doubtful
accounts
1999 92 67 (58) 101
1998 74 26 (8) 92
1997 50 24 -- 74
Deducted from inventory
for estimated obsolescence
1999 77 76 (77) 76
1998 511 50 (484) 77
1997 105 556 (150) 511
</TABLE>
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
COMPUTATION OF NET (LOSS) EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Calculation of (loss) earnings per share - basic:
Net (loss) income $(2,697) (2,266) 2,217
========== =========== ===========
Shares:
Common stock outstanding 7,235 7,124 7,049
========== =========== ===========
Net (loss) earnings per common share - basic $(0.37) (0.32) 0.31
========== =========== ===========
Calculation of (loss) earnings per share - diluted:
Net (loss) income $(2,697) (2,266) 2,217
========== =========== ===========
Shares:
Common stock outstanding , beginning of period 7,235 7,124 6,993
Weighted average common stock issued during the period -- -- 52
Assumed exercise of common stock options -- -- 605
Less:
Purchase of common stock under the treasury stock method -- -- (152)
---------- ----------- -----------
Weighted average number of common and potential
common shares outstanding 7,235 7,124 7,498
========== =========== ===========
Net (loss) earnings per common share - diluted $(0.37) (0.32) 0.30
========== =========== ===========
</TABLE>
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
KVH Industries, Inc.:
We consent to incorporation, by reference in the Registration Statement No.
333-08491 on Form S-8, of our reports dated January 28, 2000, except for Notes 5
and 15, as to which the date is March 27, 2000, relating to the consolidated
balance sheets of KVH Industries, Inc., and subsidiary as of December 31, 1999
and 1998 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, 1999, 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,
1999.
/s/ KPMG LLP
Providence, Rhode Island
March 27, 2000
KVH INDUSTRIES, INC.
======================================================
LOAN AND SECURITY AGREEMENT
Dated: March 27, 2000
$5,000,000.00
======================================================
------------------------------------------------------
FLEET CAPITAL CORPORATION
------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1.1 Revolving Credit Loans.................................................................................1
1.1.1 Loans and Reserves............................................................................1
1.1.2 Use of Proceeds...............................................................................1
1.1.3 Changes to Advance Formula....................................................................1
2.1 Interest...............................................................................................3
2.1.1 Rates of Interest.............................................................................3
2.1.2 Default Rate of Interest......................................................................3
2.1.3 Maximum Interest..............................................................................3
2.2 Computation of Interest and Fees.......................................................................3
2.2 Computation of Interest and Fees.......................................................................3
2.3 Closing Fee............................................................................................3
2.4 Unused Line Fee........................................................................................3
2.5 Audit and Appraisal Fees...............................................................................3
2.6 Reimbursement of Expenses..............................................................................4
2.7 Bank Charges...........................................................................................4
3.1 Manner of Borrowing Revolving Credit Loans.............................................................4
3.1.1 Loan Requests.................................................................................4
3.1.2 Disbursement..................................................................................5
3.1.3 Authorization.................................................................................5
3.2 Payments...............................................................................................5
3.2.1 Principal.....................................................................................5
3.2.2 Interest......................................................................................5
3.2.3 Costs, Fees and Charges.......................................................................6
3.2.4 Other Obligations.............................................................................6
3.3 Intentionally Omitted..................................................................................6
3.4 Application of Payments and Collections................................................................6
3.5 All Loans to Constitute One Obligation.................................................................6
3.6 Loan Account...........................................................................................6
3.7 Statements of Account..................................................................................6
4.1 Term of Agreement......................................................................................6
4.2 Termination............................................................................................7
4.2.1 Termination by Lender.........................................................................7
4.2.2 Termination by Borrower.......................................................................7
4.2.3 Termination Charges...........................................................................7
4.2.4 Effect of Termination.........................................................................7
<PAGE>
5.1 Security Interest in Collateral........................................................................7
5.2 Lien Perfection; Further Assurances....................................................................8
6.1 General.
6.1.1 Location of Collateral........................................................................8
6.1.2 Insurance of Collateral.......................................................................8
6.1.3 Protection of Collateral......................................................................9
6.2 Administration of Accounts............................................................................10
6.2.1 Records, Schedules and Assignments of Accounts...............................................10
6.2.2 Discounts, Allowances, Disputes..............................................................10
6.2.3 Taxes........................................................................................10
6.2.4 Account Verification.........................................................................10
6.2.5 Maintenance of Dominion Account..............................................................11
6.2.6 Collection of Accounts, Proceeds of Collateral...............................................11
6.3 Administration of Inventory...........................................................................11
6.3.1 Records and Reports of Inventory.............................................................11
6.3.2 Returns of Inventory.........................................................................11
6.4 Administration of Equipment...........................................................................11
6.4.1 Records and Schedules of Equipment...........................................................11
6.4.2 Dispositions of Equipment....................................................................11
6.5 Payment of Charges....................................................................................12
7.1 General Representations and Warranties................................................................12
7.1.1 Organization and Qualification...............................................................12
7.1.2 Corporate Power and Authority................................................................12
7.1.3 Legally Enforceable Agreement................................................................12
7.1.4 Capital Structure............................................................................12
7.1.5 Corporate Names..............................................................................13
7.1.6 Business Locations; Agent for Process........................................................13
7.1.7 Title to Properties; Priority of Liens.......................................................13
7.1.8 Accounts.....................................................................................13
7.1.9 Equipment....................................................................................15
7.1.10 Financial Statements; Fiscal Year............................................................15
7.1.11 Full Disclosure..............................................................................15
7.1.12 Solvent Financial Condition..................................................................15
7.1.13 Surety Obligations...........................................................................15
7.1.14 Taxes........................................................................................15
7.1.15 Brokers......................................................................................16
7.1.16 Patents, Trademarks, Copyrights and Licenses.................................................16
7.1.17 Governmental Consents........................................................................16
7.1.18 Compliance with Laws.........................................................................16
7.1.19 Restrictions.................................................................................16
7.1.20 Litigation...................................................................................16
7.1.21 No Defaults..................................................................................16
<PAGE>
7.1.22 Leases.......................................................................................16
7.1.23 Pension Plans................................................................................17
7.1.24 Trade Relations..............................................................................17
7.1.25 Labor Relations..............................................................................17
7.1.26 Environmental Matters........................................................................17
7.2 Continuous Nature of Representations and Warranties...................................................18
7.3 Survival of Representations and Warranties............................................................18
8.1 Affirmative Covenants.................................................................................19
8.1.1 Visits and Inspections.......................................................................19
8.1.2 Notices......................................................................................19
8.1.3 Financial Statements.........................................................................19
8.1.4 Landlord and Storage Agreements..............................................................20
8.1.5 Intentionally Omitted........................................................................20
8.1.6 Projections..................................................................................20
8.1.7 Compliance with Laws.........................................................................20
8.1.8 Payment of Taxes, Charges....................................................................21
8.1.9 Business and Existence.......................................................................21
8.1.10 Maintain Properties..........................................................................21
8.1.11 ERISA Compliance.............................................................................22
8.2 Negative Covenants....................................................................................22
8.2.1 Mergers; Consolidations; Acquisitions........................................................23
8.2.2 Loans........................................................................................23
8.2.3 Total Indebtedness...........................................................................23
8.2.4 Affiliate Transactions.......................................................................23
8.2.5 Limitation on Liens..........................................................................23
8.2.6 Subordinated Debt............................................................................24
8.2.7 Distributions................................................................................24
8.2.8 Availability.................................................................................24
8.2.9 Disposition of Assets........................................................................24
8.2.10 Stock of Subsidiaries........................................................................24
8.2.11 Bill-and-Hold Sales, Etc.....................................................................24
8.2.12 Restricted Investment........................................................................24
8.2.13 Leases.......................................................................................24
8.2.14 Tax Consolidation............................................................................24
9.1 Conditions to Initial Loans...........................................................................24
9.1.1 Documentation................................................................................25
9.1.2 Other Loan Documents.........................................................................25
9.1.3 Availability.................................................................................25
9.1.4 No Litigation................................................................................25
9.1.5 Landlord Waivers.............................................................................25
9.1.6 Lien Filings.................................................................................25
9.1.7 Pay-off of Existing Secured Lenders..........................................................25
<PAGE>
9.1.8 Insurance....................................................................................25
9.1.9 Subordination Agreement......................................................................25
9.1.10 Solvency.....................................................................................25
9.1.11 No Material Adverse Change...................................................................25
9.1.12 Assignment of Claims Act.....................................................................26
9.2 Conditions to All Loans...............................................................................26
9.2.1 Representations..............................................................................26
9.2.2 No Material Adverse Change...................................................................26
9.2.3 No Default...................................................................................26
9.2.4 Additional Information.......................................................................26
10.1 Events of Default.....................................................................................26
10.1.1 Payment of Other Obligations.................................................................26
10.1.2 Misrepresentations...........................................................................26
10.1.3 Breach of Specific Covenants.................................................................26
10.1.4 Breach of Other Covenants....................................................................26
10.1.5 Default Under Security Documents/Other Agreements............................................27
10.1.6 Other Defaults...............................................................................27
10.1.7 Uninsured Losses.............................................................................27
10.1.8 Adverse Changes..............................................................................27
10.1.9 Insolvency and Related Proceedings...........................................................27
10.1.10 Business Disruption; Condemnation............................................................27
10.1.11 Change in Control............................................................................27
10.1.11 ERISA........................................................................................27
10.1.12 Challenge to Agreement.......................................................................28
10.1.13 Repudiation of or Default Under Guaranty Agreement...........................................28
10.1.14 Criminal Forfeiture..........................................................................28
10.1.15 Judgments....................................................................................28
10.1.16 Defaults of Equal Weight.....................................................................28
10.2 Acceleration of the Obligations.......................................................................28
10.3 Other Remedies........................................................................................28
10.3.1 Cumulative Rights............................................................................28
10.3.2 Possession of Collateral.....................................................................28
10.3.3 Sell or Dispose of Collateral................................................................29
10.3.4 License......................................................................................29
10.3.5 Intentionally Omitted........................................................................29
10.3.6 Security Interest in Deposits; Set-off.......................................................29
10.3.7 Receiver.....................................................................................29
10.4 Remedies Cumulative; No Waiver........................................................................30
11.1 Power of Attorney.....................................................................................30
11.1.1 Endorsements.................................................................................30
11.1.2 Other Actions................................................................................30
11.2 Indemnity.............................................................................................31
<PAGE>
11.3 Modification of Agreement; Sale of Interest...........................................................31
11.4 Severability..........................................................................................32
11.5 Successors and Assigns................................................................................32
11.6 Cumulative Effect; Conflict of Terms..................................................................32
11.7 Execution in Counterparts.............................................................................32
11.8 Notice. 32
11.9 Lender's Consent......................................................................................33
11.10 Credit Inquiries......................................................................................33
11.11 Time of Essence.......................................................................................33
11.12 Entire Agreement......................................................................................33
11.13 Interpretation........................................................................................33
11.14 Intentionally Omitted.................................................................................33
11.15 GOVERNING LAW; CONSENT TO FORUM.......................................................................33
11.16 WAIVERS BY BORROWER...................................................................................34
</TABLE>
<PAGE>
- -2-
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made this 27th day of March, 2000,
by and between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation
with an office at One Federal Street, Boston, MA 02110 and KVH INDUSTRIES, INC.
("Borrower"), a Delaware corporation with its chief executive office and
principal place of business at 50 Enterprise Center, Middletown, RI 02842.
Capitalized terms used in this Agreement have the meanings assigned to them in
Appendix A, General Definitions. Accounting terms not otherwise specifically
defined herein shall be construed in accordance with GAAP consistently applied.
SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the
representations, warranties and covenants made in this Agreement and the other
Loan Documents, Lender agrees to make a Total Credit Facility of up to
$5,000,000.00 available upon Borrower's request therefor, as follows:
1.1 Revolving Credit Loans.
1.1.1 Loans and Reserves. Lender agrees, for so long as no Default or
Event of Default exists, to make Revolving Credit Loans to Borrower from time to
time, as requested by Borrower in the manner set forth in subsection 3.1.1
hereof, up to a maximum principal amount at any time outstanding equal to the
Borrowing Base at such time minus the Permanent Availability Reserve and such
other reserves, if any as the Lender may establish from time to time. Lender
shall have the right to establish reserves in such amounts, and with respect to
such matters, as Lender shall deem necessary or appropriate, in its reasonable
credit judgment, against the amount of Revolving Credit Loans which Borrower may
otherwise request under this subsection 1.1.1, including, without limitation,
with respect to (i) sums chargeable against Borrower's Loan Account as Revolving
Credit Loans under any section of this Agreement; (ii) amounts owing by Borrower
to any Person to the extent secured by a Lien on, or trust over, any Property of
Borrower; and (iii) such other matters, events, conditions or contingencies as
to which Lender, in its reasonable credit judgment, determines reserves should
be established from time to time hereunder.
1.1.2 Use of Proceeds. The Revolving Credit Loans shall be used solely
for the satisfaction of existing Indebtedness of Borrower to Fleet National
Bank, and for Borrower's general operating capital needs in a manner consistent
with the provisions of this Agreement and all applicable laws.
1.1.3 Changes to Advance Formula. Lender may, in its reasonable good
faith discretion, from time to time, upon not less than ten (10) days prior
notice to Borrower, (i) reduce the lending formula with respect to Eligible
Accounts to the extent that Lender determines in good faith that: (A) the
dilution with respect to the Accounts for any period (based on the ratio of (1)
the aggregate amount of reductions in Accounts other than as a result of
payments in cash to (2) the aggregate amount of total sales) has increased in
any material respect or may be reasonably anticipated to increase in any
material respect above historical levels, or (B) the general creditworthiness of
Borrower's account debtors has materially declined or (ii) reduce the lending
formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (A) the number of days of the turnover of the Inventory for any
period has changed in any material respect or (B) the liquidation value of the
Eligible Inventory, or any category thereof, has materially decreased, or (C)
the nature and quality of the Inventory has materially deteriorated. In
determining whether to reduce the lending formula(s), Lender may consider
events, conditions, contingencies or risks which are also considered in
determining Eligible Accounts, Eligible Inventory or in establishing reserves.
<PAGE>
SECTION 2. INTEREST, FEES AND CHARGES
2.1 Interest.
2.1.1 Rates of Interest. Interest shall accrue on the principal amount
of the Revolving Credit Loans outstanding at the end of each day at a
fluctuating rate per annum equal to 1.00% plus the Prime Rate. The rate of
interest shall increase or decrease by an amount equal to any increase or
decrease in the Prime Rate, effective as of the opening of business on the day
that any such change in the Prime Rate occurs.
2.1.2 Default Rate of Interest. Upon and after the occurrence of an
Event of Default, and during the continuation thereof, the principal amount of
all Loans shall bear interest at a rate per annum equal to 2.0% above the
interest rate otherwise applicable thereto (the "Default Rate").
2.1.3 Maximum Interest. In no event whatsoever shall the aggregate of
all amounts deemed interest hereunder and charged or collected pursuant to the
terms of this Agreement exceed the highest rate permissible under any law which
a court of competent jurisdiction shall, in a final determination, deem
applicable hereto. If any provisions of this Agreement are in contravention of
any such law, such provisions shall be deemed amended to conform thereto.
2.2 Computation of Interest and Fees.
Interest, unused line fees, collection charges and other charges
hereunder shall be calculated daily and shall be computed on the actual number
of days elapsed over a year of 360 days. For the purpose of computing interest
hereunder, all items of payment received by Lender shall be deemed applied by
Lender on account of the Obligations (subject to final payment of such items)
one (1) Business Day after receipt by Lender of such items in Lender's account
located in Fleet National Bank.
2.3 Closing Fee.
Borrower shall pay to Lender a closing fee of $50,000.00 which shall be
fully earned and nonrefundable on the Closing Date and shall be paid
concurrently with the initial Loan hereunder.
2.4 Unused Line Fee.
Borrower shall pay to Lender a fee equal to .50% per annum of the
average monthly amount by which the Total Credit Facility exceeds the sum of the
outstanding principal balance of the Revolving Credit Loans. The unused line fee
shall be payable monthly in arrears on the first day of each calendar month
hereafter.
2.5 Audit and Appraisal Fees.
Borrower shall pay to Lender audit fees at the rate of $650 per person
per day and appraisal fees in accordance with Lender's current schedule of
appraisal fees in effect from time to time in connection with audits and
appraisals of Borrower's books and records and such other matters as Lender
shall deem appropriate, plus all out-of-pocket expenses incurred by Lender in
connection with such audits and appraisals. Audit and appraisal fees shall be
payable on the first day of the month following the date of issuance by Lender
of a request for payment thereof to Borrower.
2.6 Reimbursement of Expenses.
If, at any time or times regardless of whether or not an Event of Default
then exists, Lender incurs legal or accounting expenses or any other costs
or out-of-pocket expenses in connection with (i) the negotiation and
preparation of this Agreement or any of the other Loan Documents, any
amendment of or modification of this Agreement or any of the other Loan
Documents, or any sale or attempted sale of any interest herein to a
Participating Lender; (ii) the administration of this Agreement or any of
the other Loan Documents and the transactions contemplated hereby and
thereby; (iii) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by Lender, Borrower or any other Person) in any way
relating to the Collateral, this Agreement or any of the other Loan
Documents or Borrower's affairs; (iv) any attempt to enforce any rights of
Lender against Borrower or any other Person which may be obligated to
Lender by virtue of this Agreement or any of the other Loan Documents,
including, without limitation, the Account Debtors; or (v) any attempt to
inspect, verify, protect, preserve, restore, collect, sell, liquidate or
otherwise dispose of or realize upon the Collateral; then all such legal
and accounting expenses, other costs and out of pocket expenses of Lender
shall be charged to Borrower. All amounts chargeable to Borrower under this
Section 2.8 shall be Obligations secured by all of the Collateral, shall be
payable on demand to Lender and shall bear interest from the date such
demand is made until paid in full at the rate applicable to Revolving
Credit Loans from time to time. Borrower shall also reimburse Lender for
expenses incurred by Lender in its administration of the Collateral to the
extent and in the manner provided in Section 6 hereof.
Bank Charges.
Borrower shall pay to Lender, on demand, any and all fees, costs or expenses
which Lender pays to a bank or other similar institution (including, without
limitation, any fees paid by Lender to any Participating Lender) arising out of
or in connection with (i) the forwarding to Borrower or any other Person on
behalf of Borrower, by Lender, of proceeds of Loans made by Lender to Borrower
pursuant to this Agreement, (ii) the depositing for collection, by Lender of any
check or item of payment received or delivered to Lender on account of the
Obligations and (iii) the forwarding to Lender of any funds resulting from the
deposit of any check or item of payment.
SECTION 3. LOAN ADMINISTRATION.
Manner of Borrowing Revolving Credit Loans.
Borrowings under the credit facility established pursuant to Section 1 hereof
shall be as follows:
Loan Requests. A request for a Revolving Credit Loan shall be made, or
shall be deemed to be made, in the following manner: (i) Borrower may give
Lender notice of its intention to borrow, in which notice Borrower shall specify
the amount of the proposed borrowing and the proposed borrowing date, no later
than 11:00 a.m. Boston, Massachusetts time on the proposed borrowing date, and
(ii) the becoming due of any amount required to be paid under this Agreement,
whether as interest or for any other Obligation, shall be deemed irrevocably to
be a request for a Revolving Credit Loan on the due date in the amount required
to pay such interest or other Obligation. As an accommodation to Borrower,
Lender may permit telephonic requests for loans and electronic transmittal of
instructions, authorizations, agreements or reports to Lender by Borrower.
Unless Borrower specifically directs Lender in writing not to accept or act upon
telephonic or electronic communications from Borrower, Lender shall have no
liability to Borrower for any loss or damage suffered by Borrower as a result of
Lender's honoring of any requests, execution of any instructions, authorizations
or agreements or reliance on any reports communicated to it telephonically or
electronically and purporting to have been sent to Lender by Borrower and Lender
shall have no duty to verify the origin of any such communication or the
authority of the person sending it.
Disbursement. Borrower hereby irrevocably authorizes Lender to disburse
the proceeds of each Revolving Credit Loan requested, or deemed to be requested,
pursuant to this subsection 3.1.3 as follows: (i) the proceeds of each Revolving
Credit Loan requested under subsection 3.1.1(i) shall be disbursed by Lender in
lawful money of the United States of America in immediately available funds, in
the case of the initial borrowing, in accordance with the terms of the written
disbursement letter from Borrower, and in the case of each subsequent borrowing,
by wire transfer to such bank account as may be agreed upon by Borrower and
Lender from time to time or elsewhere if pursuant to a written direction from
Borrower; and (ii) the proceeds of each Revolving Credit Loan requested under
subsection 3.1.1(ii) shall be disbursed by Lender by way of direct payment of
the relevant interest or other Obligation.
Authorization. Borrower hereby irrevocably authorizes Lender, in
Lender's sole discretion, to advance to Borrower, and to charge to Borrower's
Loan Account hereunder as a Revolving Credit Loan, a sum sufficient to pay all
interest accrued on the Obligations during the immediately preceding month and
to pay all principal, costs, fees and expenses at any time owed by Borrower to
Lender hereunder. Borrower hereby irrevocably authorizes Lender and Bank to
debit the accounts maintained by Borrower at Bank to pay interest, principal and
all costs, fees and expenses at any time owed by Borrower to Lender hereunder or
under any other Loan Document.
Payments.
Except where evidenced by notes or other instruments issued or made by
Borrower to Lender specifically containing payment provisions which are in
conflict with this Section 3.2 (in which event the conflicting provisions of
said notes or other instruments shall govern and control), the Obligation shall
be payable as follows:
Principal. Principal payable on account of Revolving Credit Loans shall
be payable by Borrower to Lender immediately upon the earliest of (i) the
receipt by Lender or Borrower of any proceeds of any of the Collateral to the
extent of said proceeds, (ii) the occurrence of an Event of Default in
consequence of which Lender elects to accelerate the maturity and payment of the
Obligations, or (iii) termination of this Agreement pursuant to Section 4
hereof; provided, however, that if an Overadvance shall exist at any time,
Borrower shall, on demand, repay the Overadvance. Lender shall apply payments
received under subsection 3.2.1(i) to such of the Obligations, whether or not
then due, in such order and manner as Lender determines.
Interest. Interest accrued on the Revolving Credit Loans shall be due
on the earliest of (i) the first calendar day of each month (for the immediately
preceding month), computed through the last calendar day of the preceding month,
(ii) the occurrence of an Event of Default in consequence of which Lender elects
to accelerate the maturity and payment of the Obligations or (iii) termination
of this Agreement pursuant to Section 4 hereof.
Costs, Fees and Charges. Costs, fees and charges payable pursuant to
this Agreement shall be payable by Borrower as and when provided in Section 2
hereof, to Lender or to any other Person designated by Lender in writing.
Other Obligations. The balance of the Obligations requiring the payment
of money, if any, shall be payable by Borrower to Lender as and when provided in
this Agreement, the Other Agreements or the Security Documents, or on demand, if
not otherwise provided herein.
Intentionally Omitted.
Application of Payments and Collections.
All items of payment received by Lender by 12:00 noon, Boston Massachusetts
time, on any Business Day shall be deemed received on that Business Day.
All items of payment received after 12:00 noon, Boston, Massachusetts time,
on any Business Day shall be deemed received on the following Business Day.
Borrower irrevocably waives the right to direct the application of any and
all payments and collections at any time or times hereafter received by
Lender from or on behalf of Borrower, and Borrower does hereby irrevocably
agree that Lender shall have the continuing exclusive right to apply and
reapply any and all such payments and collections received at any time or
times hereafter by Lender or its agent against the Obligations, in such
manner as Lender may deem advisable, notwithstanding any entry by Lender
upon any of its books and records. If as the result of collections of
Accounts as authorized by subsection 6.2.6 hereof a credit balance exists
in the Loan Account, such credit balance shall not accrue interest in favor
of Borrower, but shall be available to Borrower at any time or times for so
long as no Default or Event of Default exists. Lender may, at its option,
offset such credit balance against any of the Obligations upon and after
the occurrence of an Event of Default.
All Loans to Constitute One Obligation.
The Loans shall constitute one general Obligation of Borrower, and shall
be secured by Lender's Lien upon all of the Collateral.
Loan Account.
Lender shall enter all Loans as debits to the Loan
Account and shall also record in the Loan Account all payments made by
Borrower on any Obligations and all proceeds of Collateral which are
finally paid to Lender, and may record therein, in accordance with
customary accounting practice, other debits and credits, including
interest and all charges and expenses properly chargeable to Borrower.
Statements of Account.
Lender will account to Borrower monthly with a statement of Loans, charges and
payments made pursuant to this Agreement, and such account rendered by
Lender shall be deemed final, binding and conclusive upon Borrower unless
Lender is notified by Borrower in writing to the contrary within 30 days of
the date each accounting is mailed to Borrower. Such notice shall only be
deemed an objection to those items specifically objected to therein.
SECTION 4. TERM AND TERMINATION
Term of Agreement.
Subject to Lender's right to cease making Loans to Borrower upon or after the
occurrence of any Default or Event of Default, this Agreement shall be in
effect for a period of three (3) years from the date hereof, through and
including March 27, 2003 (the "Original Term"), unless terminated as
provided in Section 4.2 hereof.
Termination.
Termination by Lender. This Agreement shall terminate, without notice
or demand by Lender, as of the last day of the Original Term and Lender may
terminate this Agreement without notice or demand upon or after the occurrence
of an Event of Default.
Termination by Borrower. Upon at least 90 days prior written notice to
Lender, Borrower may, at its option, terminate this Agreement; provided,
however, no such termination shall be effective until Borrower has paid all of
the Obligations in immediately available funds. Any notice of termination given
by Borrower shall be irrevocable unless Lender otherwise agrees in writing, and
Lender shall have no obligation to make any Loans on or after the termination
date stated in such notice. Borrower may elect to terminate this Agreement in
its entirety only. No section of this Agreement or type of Loan available
hereunder may be terminated singly.
Termination Charges. At the effective date of termination of this
Agreement for any reason, Borrower shall pay to Lender (in addition to the then
outstanding principal, accrued interest and other charges owing under the terms
of this Agreement and any of the other Loan Documents) as liquidated damages for
the loss of the bargain and not as a penalty, an amount equal to 2% of the
Average Loan Balance during the months, or portion thereof, that this Agreement
has been in effect if termination occurs during the first twelve-month period of
the Original Term (March 27, 2000 through March 27, 2001); and 1% of the Average
Loan Balance during the prior twelve (12) month period if termination occurs
during the second 12-month period of the Original Term (March 28, 2001 through
March 27, 2002). If termination occurs after the second anniversary of the
Closing Date, no termination charge shall be payable.
Effect of Termination. All of the Obligations shall be immediately due
and payable upon the termination date stated in any notice of termination of
this Agreement. All undertakings, agreements, covenants, warranties and
representations of Borrower contained in the Loan Documents shall survive any
such termination and Lender shall retain its Liens in the Collateral and all of
its rights and remedies under the Loan Documents notwithstanding such
termination until Borrower has paid the Obligations to Lender, in full, in
immediately available funds, together with the applicable termination charge, if
any. Notwithstanding the payment in full of the Obligations, Lender shall not be
required to terminate its security interests in the Collateral unless, with
respect to any loss or damage Lender may incur as a result of dishonored checks
or other items of payment received by Lender from Borrower or any Account Debtor
and applied to the Obligations, Lender shall, at its option, (i) have received a
written agreement in form and substance satisfactory to Lender, executed by
Borrower and by any Person whose loans or other advances to Borrower are used in
whole or in part to satisfy the Obligations, indemnifying Lender from any such
loss or damage; or (ii) have retained such cash collateral and Liens on such
cash collateral for such period of time as Lender, in its reasonable discretion,
may deem necessary to protect Lender from any such loss or damage and fees and
expenses.
SECTION 5. SECURITY INTERESTS
Security Interest in Collateral.
To secure the prompt payment and performance to Lender of the Obligations,
Borrower hereby grants to Lender a continuing Lien upon all of Borrower's
assets, including all of the following Property and interests in Property
of Borrower, whether now owned or existing or hereafter created, acquired
or arising and wheresoever located:
Accounts;
Inventory;
Equipment;
General Intangibles;
Investment Property;
Chattel Paper, Documents and Instruments;
All monies, credit balances, deposits, deposit accounts and other
Property of any kind now or at any time or times hereafter in the possession or
under the control of or in transit to Lender or a bailee or Affiliate of Lender
or at any other depository or other institution from or for the account of
Borrower and all liens, security interests, rights, remedies and interests in
respect of Accounts and other Collateral;
All accessions to, substitutions for and all replacements, products and
cash and non-cash proceeds of (i) through (vii) above, including, without
limitation, proceeds of and unearned premiums with respect to insurance policies
insuring any of the Collateral; and
All books and records (including, without limitation, customer lists,
credit files, computer programs, files, print-outs, and other computer materials
and records) of Borrower pertaining to any of (i) through (viii) above.
Lien Perfection; Further Assurances.
Borrower shall execute such UCC-1 financing statements as are required by the
Code and such other instruments, assignments or documents as are necessary
to perfect Lender's Lien upon any of the Collateral and shall take such
other action as may be required to perfect or to continue the perfection of
Lender's Lien upon the Collateral. Unless prohibited by applicable law,
Borrower hereby authorizes Lender to execute and file any such financing
statement on Borrower's behalf. The parties agree that a carbon,
photographic or other reproduction of this Agreement shall be sufficient as
a financing statement and may be filed in any appropriate office in lieu
thereof. At Lender's request, Borrower shall also promptly execute or cause
to be executed and shall deliver to Lender any and all documents,
instruments and agreements deemed necessary by Lender to give effect to or
carry out the terms or intent of the Loan Documents.
SECTION 6. COLLATERAL ADMINISTRATION
General.
Location of Collateral. All Collateral, other than Inventory in transit
and motor vehicles, will at all times be kept by Borrower and its Subsidiaries
at one or more of the business locations set forth in Exhibit B hereto and shall
not, without the prior written approval of Lender, be moved therefrom except,
prior to an Event of Default for (i) sales of Inventory in the ordinary course
of business; and (ii) removals in connection with dispositions of Equipment that
are authorized by subsection 6.4.2 hereof.
Insurance of Collateral. Borrower shall maintain and pay for insurance
upon all Collateral wherever located and with respect to Borrower's business,
covering casualty, hazard, public liability, product liability and such other
risks in such amounts and with such insurance companies with a Bests rating of A
or better and that are otherwise reasonably satisfactory to Lender. Borrower
shall deliver the originals of such policies to Lender with satisfactory
lender's loss payable endorsements, naming Lender as loss payee, assignee or
additional insured, as appropriate. Each policy of insurance or endorsement
shall contain a clause requiring the insurer to give not less than 30 days prior
written notice to Lender in the event of cancellation of the policy for any
reason whatsoever and a clause specifying that the interest of Lender shall not
be impaired or invalidated by any act or neglect of Borrower or the owner of the
Property or by the occupation of the premises for purposes more hazardous than
are permitted by said policy. If Borrower fails to provide and pay for such
insurance, Lender may, at its option, but shall not be required to, procure the
same and charge Borrower therefor. Borrower agrees to deliver to Lender,
promptly as rendered, true copies of all reports made in any reporting forms to
insurance companies.
Protection of Collateral. All expenses of protecting, storing,
warehousing, insuring, handling, maintaining and shipping the Collateral, any
and all excise, property, sales, and use taxes imposed by any state, federal, or
local authority on any of the Collateral or in respect of the sale thereof shall
be borne and paid by Borrower. If Borrower fails to promptly pay any portion
thereof when due, Lender may, at its option, but shall not be required to, pay
the same and charge Borrower therefor. Lender shall not be liable or responsible
in any way for the safekeeping of any of the Collateral or for any loss or
damage thereto (except for reasonable care in the custody thereof while any
Collateral is in Lender's actual possession) or for any diminution in the value
thereof, or for any act or default of any warehouseman, carrier, forwarding
agency, or other person whomsoever, but the same shall be at Borrower's sole
risk.
Administration of Accounts.
Records, Schedules and Assignments of Accounts. Borrower shall keep
accurate and complete records of its Accounts and all payments and collections
thereon and shall submit to Lender daily or on such periodic basis as Lender
shall request a sales and collections report for the preceding period, in form
satisfactory to Lender. On or before the fifteenth day of each month from and
after the date hereof, Borrower shall deliver to Lender, in form acceptable to
Lender, a detailed aged trial balance of all Accounts existing as of the last
day of the preceding month, specifying the names, addresses, face value, dates
of invoices and due dates for each Account Debtor obligated on an Account so
listed, and, with respect to all Accounts subject to the Assignment of Claims
Act of 1940, as amended, a listing of all contracts, contracting officers,
addresses, contract numbers and other information reasonably required by Lender
with respect thereto ("Schedule of Accounts"), and, upon Lender's request
therefor, copies of proof of delivery and the original copy of all documents,
including, without limitation, repayment histories and present status reports
relating to the Accounts so scheduled and such other matters and information
relating to the status of then existing Accounts as Lender shall reasonably
request. In addition, if Accounts in an aggregate face amount in excess of
$25,000.00 become ineligible because they fall within one of the specified
categories of ineligibility set forth in the definition of Eligible Accounts or
otherwise established by Lender, Borrower shall notify Lender of such occurrence
on the first Business Day following such occurrence and the Borrowing Base shall
thereupon be adjusted to reflect such occurrence. If requested by Lender,
Borrower shall execute and deliver to Lender formal written assignments of all
of its Accounts weekly or daily, which shall include all Accounts that have been
created since the date of the last assignment, together with copies of invoices
or invoice registers related thereto. On a monthly basis or more frequently as
may be requested by Lender, Borrower shall prepare, sign and file notices and
assignments with respect to all Accounts subject to the Assignment of Claims Act
of 1940, as amended.
Discounts, Allowances, Disputes. If Borrower grants any discounts,
allowances or credits that are not shown on the face of the invoice for the
Account involved, Borrower shall report such discounts, allowances or credits,
as the case may be, to Lender as part of the next required Schedule of Accounts.
If any amounts due and owing in excess of $25,000.00 are in dispute between
Borrower and any Account Debtor, Borrower shall provide Lender with written
notice thereof at the time of submission of the next Schedule of Accounts,
explaining in detail the reason for the dispute, all claims related thereto and
the amount in controversy. Upon and after the occurrence of an Event of Default,
Lender shall have the right to settle or adjust all disputes and claims directly
with the Account Debtor and to compromise the amount or extend the time for
payment of the Accounts upon such terms and conditions as Lender may deem
advisable, and to charge the deficiencies, costs and expenses thereof, including
attorney's fees, to Borrower.
Taxes. If an Account includes a charge for any tax payable to any
governmental taxing authority, Lender is authorized, in its sole discretion, to
pay the amount thereof to the proper taxing authority for the account of
Borrower and to charge Borrower therefor, provided, however that Lender shall
not be liable for any taxes to any governmental taxing authority that may be due
by Borrower.
Account Verification. Whether or not a Default or an Event of Default
has occurred, any of Lender's officers, employees or agents shall have the
right, at any time or times hereafter, in the name of Lender, any designee of
Lender or Borrower, to verify the validity, amount or any other matter relating
to any Accounts by mail, telephone, telegraph or otherwise. Borrower shall
cooperate fully with Lender in an effort to facilitate and promptly conclude any
such verification process.
Maintenance of Dominion Account. Borrower shall maintain a Dominion
Account pursuant to a lockbox arrangement acceptable to Lender with such banks
as may be selected by Borrower and be acceptable to Lender. Borrower shall issue
to any such banks an irrevocable letter of instruction directing such banks to
deposit all payments or other remittances received in the lockbox to the
Dominion Account for application on account of the Obligations. All funds
deposited in the Dominion Account shall immediately become the property of
Lender and Borrower shall obtain the agreement by such banks in favor of Lender
to waive any offset rights against the funds so deposited. Lender assumes no
responsibility for such lockbox arrangement, including, without limitation, any
claim of accord and satisfaction or release with respect to deposits accepted by
any bank thereunder.
Collection of Accounts, Proceeds of Collateral. To expedite collection,
Borrower shall endeavor in the first instance to make collection of its Accounts
for Lender. All remittances received by Borrower on account of Accounts,
together with the proceeds of any other Collateral, shall be held as Lender's
property by Borrower as trustee of an express trust for Lender's benefit and
Borrower shall immediately deposit same in kind in the Dominion Account. Lender
retains the right at all times after the occurrence of a Default or an Event of
Default to notify Account Debtors that Accounts have been assigned to Lender and
to collect Accounts directly in its own name and to charge the collection costs
and expenses, including attorneys' fees to Borrower.
Administration of Inventory.
Records and Reports of Inventory. Borrower shall keep accurate and
complete records of its inventory. Borrower shall furnish to Lender Inventory
reports in form and detail satisfactory to Lender at such times as Lender may
request, but at least once each month, not later than the fifteenth day of such
month for the preceding month. Borrower shall conduct a physical inventory no
less frequently than annually and shall provide to Lender a report based on each
such physical inventory promptly thereafter, together with such supporting
information as Lender shall request.
Returns of Inventory. If at any time or times hereafter any Account
Debtor returns any Inventory to Borrower the shipment of which generated an
Account on which such Account Debtor is obligated in excess of $25,000.00
Borrower shall immediately notify Lender of the same, specifying the reason for
such return and the location, condition and intended disposition of the returned
Inventory.
Administration of Equipment.
Records and Schedules of Equipment. Borrower shall keep accurate
records itemizing and describing the kind, type, quality, quantity and value of
its Equipment and all dispositions made in accordance with subsection 6.4.2
hereof, and shall furnish Lender with a current schedule containing the
foregoing information on at least an annual basis and more often if requested by
Lender. Immediately on request therefor by Lender, Borrower shall deliver to
Lender any and all evidence of ownership, if any, of any of the Equipment.
Dispositions of Equipment. Borrower will not sell, lease or otherwise
dispose of or transfer any of the Equipment or any part thereof without the
prior written consent of Lender; provided, however, that the foregoing
restriction shall not apply, for so long as no Default or Event of Default
exists, to (i) dispositions of Equipment which, in the aggregate during any
consecutive twelve-month period, has a fair market value or book value,
whichever is less, of $50,000.00 or less, provided that all proceeds thereof are
remitted to Lender for application to the Loans, or (ii) replacements of
Equipment that is substantially worn, damaged or obsolete with Equipment of at
least like kind, function and value, provided that the replacement Equipment
shall be acquired prior to or concurrently with any disposition of the Equipment
that is to be replaced, the replacement Equipment shall be free and clear of
Liens other than Permitted Liens that are not Purchase Money Liens, and Borrower
shall have given Lender at least 5 days prior written notice of such
disposition.
Payment of Charges.
All amounts chargeable to Borrower under Section 6 hereof shall be Obligations
secured by all of the Collateral, shall be payable on demand and shall bear
interest from the date such advance was made until paid in full at the rate
applicable to Revolving Credit Loans from time to time.
SECTION 7. REPRESENTATIONS AND WARRANTIES
General Representations and Warranties.
To induce Lender to enter into this Agreement and to make Loans hereunder,
Borrower warrants, represents and covenants to Lender that: Organization and
Qualification. Each of Borrower and its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Each of Borrower and its Subsidiaries is duly
qualified and is authorized to do business and is in good standing as a foreign
corporation in each state or jurisdiction listed on Exhibit C hereto and in all
other states and jurisdictions in which the failure of Borrower or any of its
Subsidiaries to be so qualified would have a material adverse effect on the
financial condition, business or Properties of Borrower or any of its
Subsidiaries.
Corporate Power and Authority. Each of Borrower and its Subsidiaries is
duly authorized and empowered to enter into, execute, deliver and perform this
Agreement and each of the other Loan Documents to which it is a party. The
execution, delivery and performance of this Agreement and each of the other Loan
Documents have been duly authorized by all necessary corporate action and do not
and will not (i) require any consent or approval of the shareholders of Borrower
or any of its Subsidiaries; (ii) contravene Borrower's or any of its
Subsidiaries' charter, articles or certificate of incorporation or by-laws;
(iii) violate, or cause Borrower or any of its Subsidiaries to be in default
under, any provision of any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award in effect having applicability to
Borrower or any of its Subsidiaries; (iv) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which Borrower or any of its Subsidiaries is a party or
by which it or its Properties may be bound or affected; or (v) result in, or
require, the creation or imposition of any Lien (other than Permitted Liens)
upon or with respect to any of the Properties now owned or hereafter acquired by
Borrower or any of its Subsidiaries.
Legally Enforceable Agreement. This Agreement is, and each of the other
Loan Documents when delivered under this Agreement will be, a legal, valid and
binding obligation of each of Borrower and its Subsidiaries enforceable against
it in accordance with its respective terms.
Capital Structure. Exhibit D hereto states (i) the correct name of each
of the Subsidiaries of Borrower, its jurisdiction of incorporation and the
percentage of its Voting Stock owned by Borrower, (ii) the name of each of
Borrower's corporate or joint venture Affiliates and the nature of the
affiliation, (iii) the number, nature and holder of all outstanding Securities
of Borrower and each Subsidiary of Borrower and (iv) the number of authorized,
issued and treasury shares of Borrower and each Subsidiary of Borrower. Borrower
has good title to all of the shares it purports to own of the stock of each of
its Subsidiaries, free and clear in each case of any Lien other than Permitted
Liens. All such shares have been duly issued and are fully paid and
non-assessable. Except as set forth on Exhibit D, there are no outstanding
options to purchase, or any rights or warrants to subscribe for, or any
commitments or agreements to issue or sell, or any Securities or obligations
convertible into, or any powers of attorney relating to, shares of the capital
stock of Borrower or any of its Subsidiaries. Except as set forth on Exhibit D,
there are no outstanding agreements or instruments binding upon any of
Borrower's shareholders relating to the ownership of its shares of capital
stock.
Corporate Names. Neither Borrower nor any of its Subsidiaries has been
known as or used any corporate, fictitious or trade names except those listed on
Exhibit E hereto. Except as set forth on Exhibit E, neither Borrower nor any of
its Subsidiaries has been the surviving corporation of a merger or consolidation
or acquired all or substantially all of the assets of any Person.
Business Locations; Agent for Process. Each of Borrower's and its
Subsidiaries' chief executive office and other places of business are as listed
on Exhibit B hereto. During the preceding one- year period, neither Borrower nor
any of its Subsidiaries has had an office, place of business or agent for
service of process other than as listed on Exhibit B. Except as shown on Exhibit
B, no inventory is stored with a bailee, warehouseman or similar party, nor is
any Inventory consigned to any Person.
Title to Properties; Priority of Liens. Each of Borrower and its
Subsidiaries has good, indefeasible and marketable title to and fee simple
ownership of, or valid and subsisting leasehold interests in, all of its real
Property, and good title to all of the Collateral and all of its other Property,
in each case, free and clear of all Liens except Permitted Liens. Borrower has
paid or discharged all lawful claims which, if unpaid, might become a Lien
against any of Borrower's Properties that is not a Permitted Lien. The Liens
granted to Lender under Section 5 hereof are first priority, perfected and valid
Liens, subject only to Permitted Liens.
Accounts. Lender may rely, in determining which Accounts are Eligible
Accounts, on all statements and representations made by Borrower with respect to
any Account or Accounts. Unless otherwise indicated in writing to Lender, with
respect to each Account:
It is genuine and in all respects what it purports to be, and it is not
evidenced by a judgment; It arises out of a completed, bona fide sale and
delivery of goods or rendition of services by Borrower in the ordinary course of
its business and in accordance with the terms and conditions of all purchase
orders, contracts or other documents relating thereto and forming a part of the
contract between Borrower and the Account Debtor;
It is for a liquidated amount maturing as stated in the duplicate
invoice covering such sale or rendition of services, a copy of which has been
furnished or is available to Lender;
Such Account, and Lender's security interest therein, is not, and will
not (by voluntary act or omission of Borrower) be in the future, subject to any
offset, Lien, deduction, defense, dispute, counterclaim or any other adverse
condition except for disputes resulting in returned goods where the amount in
controversy is deemed by Lender to be immaterial, and each such Account is
absolutely owing to Borrower and is not contingent in any respect or for any
reason;
Borrower has made no agreement with any Account Debtor thereunder for
any extension, compromise, settlement or modification of any such Account or any
deduction therefrom, except discounts or allowances which are granted by
Borrower in the ordinary course of its business for prompt payment and which are
reflected in the calculation of the net amount of each respective invoice
related thereto and are reflected in the Schedules of Accounts submitted to
Lender pursuant to subsection 6.2.1 hereof;
There are no facts, events or occurrences which in any way impair the
validity or enforceability of any Accounts or tend to reduce the amount payable
thereunder from the face amount of the invoice and statements delivered to
Lender with respect thereto;
To the best of Borrower's knowledge, the Account Debtor thereunder (1)
had the capacity to contract at the time any contract or other document giving
rise to the Account was executed and (2) such Account Debtor is Solvent; and
To the best of Borrower's knowledge, there are no proceedings or
actions which are threatened or pending against any Account Debtor thereunder
which might result in any material adverse change in such Account Debtor's
financial condition or the collectibility of such Account.
Equipment. The Equipment is in good operating condition and repair, and
all necessary replacements of and repairs thereto have been made so that the
value and operating efficiency of the Equipment has been maintained and
preserved, reasonable wear and tear excepted. Borrower will not permit any of
the Equipment to become affixed to any real Property leased to Borrower so that
an interest arises therein under the real estate laws of the applicable
jurisdiction unless the landlord of such real Property has executed a landlord
waiver or leasehold mortgage in favor of and in form acceptable to Lender, and
Borrower will not permit any of the Equipment to become an accession to any
personal Property other than Equipment that is subject to first priority (except
for Permitted Liens) Liens in favor of Lender.
Financial Statements; Fiscal Year. The Consolidated and consolidating
balance sheets of Borrower and such other Persons described therein (including
the accounts of all Subsidiaries of Borrower for the respective periods during
which a Subsidiary relationship existed) as of September 30, 1999, and the
related statements of income, changes in stockholder's equity, and changes in
financial position for the periods ended on such dates, have been prepared in
accordance with GAAP, and present fairly the financial positions of Borrower and
such Persons at such dates and the results of Borrower's operations for such
periods. Since September 30, 1999, there has been no material change in the
condition, financial or otherwise, of Borrower and such other Persons as shown
on the Consolidated balance sheet as of such date and no change in the aggregate
value of Equipment and real Property owned by Borrower or such other Persons,
except changes in the ordinary course of business, none of which individually or
in the aggregate has been materially adverse. The fiscal year of Borrower and
each of its Subsidiaries ends on December 31st of each year.
Full Disclosure. The financial statements referred to in subsection
7.1.10 hereof do not, nor does this Agreement or any other written statement of
Borrower to Lender, contain any untrue statement of a material fact or omit a
material fact necessary to make the statements contained therein or herein not
misleading. There is no fact which Borrower has failed to disclose to Lender in
writing which materially affects adversely or, so far as Borrower can now
foresee, will materially affect adversely the Properties, business, prospects,
profits or condition (financial or otherwise) of Borrower or any of its
Subsidiaries or the ability of Borrower or its Subsidiaries to perform this
Agreement or the other Loan Documents.
Solvent Financial Condition. Each of Borrower and each of its
Subsidiaries is now and, after giving effect to the Loans to be made and the
Letters of Credit and LC Guaranties to be issued hereunder, at all times will
be, Solvent.
Surety Obligations. Neither Borrower nor any of its Subsidiaries is
obligated as surety or indemnitor under any surety or similar bond or other
contract issued or entered into any agreement to assure payment, performance or
completion of performance of any undertaking or obligation of any Person.
Taxes. Borrower's federal tax identification and the federal tax
identification number of each of Borrower's Subsidiaries is shown on Exhibit F
hereto. Borrower and each of its Subsidiaries has filed all federal, state and
local tax returns and other reports it is required by law to file and has paid,
or made provision for the payment of, all taxes, assessments, fees, levies and
other governmental charges upon it, its income and Properties as and when such
taxes, assessments, fees, levies and charges that are due and payable, unless
and to the extent any thereof are being actively contested in good faith and by
appropriate proceedings and Borrower maintains reasonable reserves on its books
therefor. The provision for taxes on the books of Borrower and its Subsidiaries
are adequate for all years not closed by applicable statutes, and for its
current fiscal year.
Brokers. There are no claims for brokerage commissions, finder's fees or
investment banking fees in connection with the transactions contemplated by this
Agreement. Patents, Trademarks, Copyrights and Licenses. Each of Borrower and
its Subsidiaries owns or possesses all the patents, trademarks, service marks,
trade names, copyrights and licenses necessary for the present and planned
future conduct of its business without any known conflict with the rights of
others. All such patents, trademarks, service marks, tradenames, copyrights,
licenses and other similar rights are listed on Exhibit G hereto.
Governmental Consents. Each of Borrower and its Subsidiaries has, and
is in good standing with respect to, all governmental consents, approvals,
licenses, authorizations, permits, certificates, inspections and franchises
necessary to continue to conduct its business as heretofore or proposed to be
conducted by it and to own or lease and operate its Properties as now owned or
leased by it.
Compliance with Laws. Each of Borrower and its Subsidiaries has duly
complied with, and its Properties, business operations and leaseholds are in
compliance in all material respects with, the provisions of all federal, state
and local laws, rules and regulations applicable to Borrower or such Subsidiary,
as applicable, its Properties or the conduct of its business and there have been
no citations, notices or orders of noncompliance issued to Borrower or any of
its Subsidiaries under any such law, rule or regulation. Each of Borrower and
its Subsidiaries has established and maintains an adequate monitoring system to
insure that it remains in compliance with all federal, state and local laws,
rules and regulations applicable to it. No Inventory has been produced in
violation of the Fair Labor Standards Act (29 U.S.C. ss. 201 et seq.), as
amended.
Restrictions. Neither Borrower nor any of its Subsidiaries is a party
or subject to any contract, agreement, or charter or other corporate
restriction, which materially and adversely affects its business or the use or
ownership of any of its Properties. Neither Borrower nor any of its Subsidiaries
is a party or subject to any contract or agreement which restricts its right or
ability to incur Indebtedness, other than as set forth on Exhibit H hereto, none
of which prohibit the execution of or compliance with this Agreement or the
other Loan Documents by Borrower or any of its Subsidiaries, as applicable.
Litigation. Except as set forth on Exhibit I hereto, there are no
actions, suits, proceedings or investigations pending, or to the knowledge of
Borrower, threatened, against or affecting Borrower or any of its Subsidiaries,
or the business, operations, Properties, prospects, profits or condition of
Borrower or any of its Subsidiaries. Neither Borrower nor any of its
Subsidiaries is in default with respect to any order, writ, injunction,
judgment, decree or rule of any court, governmental authority or arbitration
board or tribunal.
No Defaults. No event has occurred and no condition exists which would,
upon or after the execution and delivery of this Agreement or Borrower's
performance hereunder, constitute a Default or an Event of Default. Neither
Borrower nor any of its Subsidiaries is in default, and no event has occurred
and no condition exists which constitutes, or which with the passage of time or
the giving of notice or both would constitute, a default in the payment of any
Indebtedness to any Person for Money Borrowed.
Leases. Exhibit J hereto is a complete listing of all capitalized
leases of Borrower and its Subsidiaries and Exhibit K hereto is a complete
listing of all operating leases of Borrower and its Subsidiaries. Each of
Borrower and its Subsidiaries is in full compliance with all of the terms of
each of its respective capitalized and operating leases.
Pension Plans. Except as disclosed on Exhibit L hereto, neither
Borrower nor any of its Subsidiaries has any Plan. Borrower and each of its
Subsidiaries is in full compliance with the requirements of ERISA and the
regulations promulgated thereunder with respect to each Plan. No fact or
situation that could result in a material adverse change in the financial
condition of Borrower or any of its Subsidiaries exists in connection with any
Plan. Neither Borrower nor any of its Subsidiaries has any withdrawal liability
in connection with a Multiemployer Plan.
Trade Relations. There exists no actual or threatened termination,
cancellation or limitation of, or any modification or change in, the business
relationship between Borrower or any of its Subsidiaries and any customer or any
group of customers whose purchases individually or in the aggregate are material
to the business of Borrower or any of its Subsidiaries, or with any material
supplier, and there exists no present condition or state of facts or
circumstances which would materially affect adversely Borrower or any of its
Subsidiaries or prevent Borrower or any of its Subsidiaries from conducting such
business after the consummation of the transaction contemplated by this
Agreement in substantially the same manner in which it has heretofore been
conducted.
Labor Relations. Except as described on Exhibit M hereto, neither
Borrower nor any of its Subsidiaries is a party to any collective bargaining
agreement. There are no material grievances, disputes or controversies with any
union or any other organization of Borrower's or any of its Subsidiaries'
employees, or threats of strikes, work stoppages or any asserted pending demands
for collective bargaining by any union or organization.
Environmental Matters. Each of the Borrower and its Subsidiaries has
obtained all permits, licenses and other authorizations required under all
Environmental Laws to carry on its business as now being conducted, except to
the extent failure to have any such permit, license or authorization would not
reasonably be expected (either individually or in the aggregate) to have a
material adverse effect on the business, operations, assets, prospects or
condition of the Borrower or any of its Subsidiaries. Each of such permits,
licenses and authorizations is in full force and effect, and each of the
Borrower and its Subsidiaries is in compliance with the terms and conditions
thereof, and is also in compliance with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in any applicable Environmental Law or in any regulation,
code, plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder, except to the extent any such
non-compliance would not reasonably be expected (either individually or in the
aggregate) to have a material adverse effect on the business, operations,
assets, prospects or condition of the Borrower or any of its Subsidiaries.
In addition, except as set forth in Exhibit P hereto:
No notice, notification, demand, request for information, citation, summons or
order has been issued, no complaint has been filed, no penalty has been assessed
and, to the knowledge of the Borrower, no investigation or review is pending or
threatened by any governmental or other entity with respect to any alleged
failure by the Borrower or any of its Subsidiaries to have any permit, license
or other authorization required under any Environmental Law in connection with
the conduct of the business of the Borrower or any of its Subsidiaries or with
respect to any generation, treatment, storage, recycling, transportation,
discharge or disposal, or any Release of any Hazardous Materials generated by
the Borrower or any of its Subsidiaries.
None of the Borrower or its Subsidiaries owns, operates or leases a treatment,
storage or disposal facility requiring a permit under the Resource Conservation
and Recovery Act of 1976, as amended, or under any comparable state or local
statute. No Hazardous Materials have been Released at, on or under any site or
facility now or previously owned, operated or leased by the Borrower or any of
its Subsidiaries that would (either individually or in the aggregate) have a
material adverse effect on the business, operations, assets, prospectus or
condition of the Borrower or any of its Subsidiaries. To the best knowledge of
the Borrower, none of the Borrower or its Subsidiaries has transported or
arranged for the transportation of any Hazardous Material to any location that
is (i) listed on the National Priorities List ("NPL") under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as mended
("CERCLA"), (ii) listed for possible inclusion on the NPL by the Environmental
Protection Agency in the Comprehensive Environmental Response and Liability
Information System, as provided for by 40 C.F.R. ss. 300.5 ("CERCLIS"), or on
any similar state or local list or (iii) the subject of Federal, state or local
enforcement actions or other investigations that may lead to Environmental
Claims against the Borrower or any of its Subsidiaries. No site or facility now
or previously owned, operated or leased by the Borrower or any of its
Subsidiaries is listed or, to the knowledge of the Borrower, proposed for
listing on the NPL, CERCLIS or any similar state list of sites requiring
investigation or clean-up.
No Liens have arisen under or pursuant to any Environmental Laws on any site or
facility owned, operated or leased by the Borrower or any of its Subsidiaries,
and no government action has been taken or is in process that could reasonably
be expected to subject any such site or facility to such Liens, and none of the
Borrower or any of its Subsidiaries would be required to place any notice or
restriction relating to the presence of Hazardous Materials at any site or
facility owned by it in any deed to the real property on which such site or
facility is located.
All environmental investigations, studies, audits, tests, reviews or other
analyses conducted by or that are in the possession of the Borrower or any of
its Subsidiaries in relation to facts, circumstances or conditions at or
affecting any site or facility now or previously owned, operated or leased by
the Borrower or any of its Subsidiaries and that could result in a material
adverse effect on the business, operations, assets, prospects or condition of
Borrower or any of its Subsidiaries have been made available to the Lender.
Continuous Nature of Representations and Warranties.
Each representation and warranty contained in this Agreement and the other
Loan Documents shall be continuous in nature and shall remain accurate, complete
and not misleading at all times during the term of this Agreement, except for
changes in the nature of Borrower's or its Subsidiaries' business or operations
that would render the information in any exhibit attached hereto either
inaccurate, incomplete or misleading, so long as Lender has consented to such
changes or such changes are expressly permitted by this Agreement.
Survival of Representations and Warranties.
All representations and warranties of Borrower contained in this Agreement
or any of the other Loan Documents shall survive the execution, delivery and
acceptance thereof by Lender and the parties thereto and the closing of the
transactions described therein or related thereto.
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS
Affirmative Covenants.
During the term of this Agreement, and thereafter for so long as there are
any Obligations to Lender, Borrower covenants that, unless otherwise consented
to by Lender in writing, it shall:
Visits and Inspections. Permit representatives of Lender, from time to
time, as often as may be reasonably requested, but only during normal business
hours, to visit and inspect the Properties of Borrower and each of its
Subsidiaries, inspect, audit and make extracts from its books and records, and
discuss with its officers, its employees and its independent accountants,
Borrower's and each of its Subsidiaries' business, assets, liabilities,
financial condition, business prospects and results of operations.
Notices. Promptly notify Lender in writing of the occurrence of any
event or the existence of any fact which renders any representation or warranty
in this Agreement or any of the other Loan Documents inaccurate, incomplete or
misleading.
Financial Statements. Keep, and cause each Subsidiary to keep, adequate
records and books of account with respect to its business activities in which
proper entries are made in accordance with GAAP reflecting all its financial
transactions; and cause to be prepared and furnished to Lender the following
(all to be prepared in accordance with GAAP applied on a consistent basis,
unless Borrower's certified public accountants concur in any change therein and
such change is disclosed to Lender and is consistent with GAAP): not later than
90 days after the close of each fiscal year of Borrower, unqualified audited
financial statements of Borrower and its Subsidiaries as of the end of such
year, on a Consolidated and consolidating basis, certified by a firm of
independent certified public accountants of recognized standing selected by
Borrower but acceptable to Lender (except for a qualification for a change in
accounting principles with which the accountant concurs); not later than 30 days
after the end of each month hereafter, including the last month of Borrower's
fiscal year, unaudited interim financial statements of Borrower and its
Subsidiaries as of the end of such month and of the portion of Borrower's
financial year then elapsed, on a Consolidated and consolidating basis,
certified by the principal financial officer of Borrower as prepared in
accordance with GAAP and fairly presenting the Consolidated financial position,
results of operations and cash flow of Borrower and its Subsidiaries for such
month and period subject only to changes from audit and year-end adjustments and
except that such statements need not contain notes; promptly after the sending
or filing thereof, as the case may be, copies of any proxy statements, financial
statements or reports which Borrower has made available to its shareholders and
copies of any regular, periodic and special reports or registration statements
which Borrower files with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or any national
securities exchange; promptly after the filing thereof, copies of any annual
report to be filed with ERISA in connection with each Plan; and such other data
and information (financial and otherwise) as Lender, from time to time, may
reasonably request, bearing upon or related to the Collateral or Borrower's and
each of its Subsidiaries' financial condition or results of operations.
Concurrently with the delivery of the financial statements described in clause
(i) of this subsection 8.1.3, Borrower shall forward to Lender a copy of the
accountants' letter to Borrower's management that is prepared in connection with
such financial statements and also shall cause to be prepared and shall furnish
to Lender a certificate of the Borrower's certified public accountants
certifying to Lender that, based upon their examination of the financial
statements of Borrower and its Subsidiaries performed in connection with their
examination of said financial statements, they are not aware of any Default or
Event of Default, or, if they are aware of such Default or Event of Default,
specifying the nature thereof, and acknowledging, in a manner satisfactory to
Lender, that they are aware that Lender is relying on such financial statements
in making its decisions with respect to the Loans. Concurrently with the
delivery of the financial statements described in clauses (i) and (ii) of this
subsection 8.1.3, or more frequently if requested by Lender, Borrower shall
cause to be prepared and furnished to Lender a Compliance Certificate in the
form of Exhibit N hereto executed by the Chief Financial Officer of Borrower.
Landlord and Storage Agreements. Provide Lender with copies of all agreements
between Borrower or any of its Subsidiaries and any landlord, processor or
warehouseman which owns, leases or controls any premises at which any Inventory
or Equipment may, from time to time, be kept. Obtain from each such landlord,
warehouseman or processor an agreement in form and substance satisfactory to
Lender, waiving or subordinating any Lien or claims in the Collateral to the
security interest of the Lender and permitting access by Lender to any such
premises to exercise the Lender's rights and remedies in any Collateral thereon.
Intentionally Omitted.
Projections. No later than 30 days prior to the end of each fiscal year
of Borrower, deliver to Lender Projections of Borrower for the forthcoming
fiscal year, month by month.
Compliance with Laws. Borrower and its Subsidiaries shall, at all
times, comply in all material respects with all laws, rules, regulations,
licenses, permits, approvals and orders applicable to it and duly observe all
requirements of any Federal, State or local governmental authority, including,
without limitation, the Employee Retirement Security Act of 1974, as amended,
the Occupational Safety and Hazard Act of 1970, as amended, the Fair Labor
Standards Act of 1938, as amended, and all statutes, rules, regulations, orders,
permits and stipulations relating to environmental pollution and employee health
and safety, including, without limitation, all Environmental Laws.
Borrower shall establish and maintain, at its expense, a system to assure and
monitor its continued compliance with all Environmental Laws in all of its and
its Subsidiaries' operations, which system shall include annual reviews of such
compliance by employees or agents of Borrower who are familiar with the
requirements of the Environmental Laws. Copies of all environmental surveys,
audits, assessments, feasibility studies and results of remedial investigations
shall be promptly furnished, or caused to be furnished, by Borrower to Lender.
Borrower and its Subsidiaries shall take prompt and appropriate action to
respond to any non-compliance with any of the Environmental Laws and shall
regularly report to Lender on such response.
Borrower shall give both oral and written notice to Lender immediately upon
Borrower's or any of its Subsidiaries' receipt of any notice of, or Borrower's
or any of its Subsidiaries' otherwise obtaining knowledge of, (i) the occurrence
of any event involving the release, spill or discharge, threatened or actual, of
any Hazardous Material or (ii) any investigation, proceeding, complaint, order,
directive, claims, citation or notice with respect to: (A) any non- compliance
with or violation of any Environmental Law by Borrower or any of its
Subsidiaries or (B) the release, spill or discharge, threatened or actual, of
any Hazardous Material or (C) the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any Hazardous
Materials or (D) any other environmental, health or safety matter, which affects
Borrower, any Subsidiary of Borrower or their business, operations or assets or
any properties at which Borrower or any Subsidiary of Borrower transported,
stored or disposed of any Hazardous Materials. Without limiting the generality
of the foregoing, whenever Lender reasonably determines that there is non-
compliance, or any condition which requires any action by or on behalf of
Borrower or any Subsidiary of Borrower in order to avoid any material
non-compliance, with any Environmental Law, Borrower shall, at Lender's request
and Borrower's expense: (i) cause an independent environmental engineer
acceptable to Lender to conduct such tests of the site where Borrower's and/or
its Subsidiary's non-compliance or alleged non-compliance with such
Environmental Laws has occurred as to such non-compliance and prepare and
deliver to Lender a report as to such non- compliance setting forth the results
of such tests, a proposed plan for responding to any environmental problems
described therein, and an estimate of the costs thereof and (ii) provide to
Lender a supplemental report of such engineer whenever the scope of such
non-compliance, or Borrower's and/or its Subsidiary's response thereto or the
estimated costs thereof, shall change in any material respect.
Borrower and each Subsidiary of Borrower shall indemnify and hold harmless
Lender, its directors, officers, employees, agents, invitees, representatives,
successors and assigns, from and against any and all losses, claims, damages,
liabilities, costs, and expenses (including attorneys' fees and legal expenses)
directly or indirectly arising out of or attributable to the use, generation,
manufacture, reproduction, storage, release, threatened release, spill,
discharge, disposal or presence of a Hazardous Material, including, without
limitation, the costs of any required or necessary repair, cleanup or other
remedial work with respect to any property of Borrower or any Subsidiary of
Borrower and the preparation and implementation of any closure, remedial or
other required plans. All representations, warranties, covenants and
indemnifications in this Section 8.1.7 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
Payment of Taxes, Charges. Pay and cause each of its Subsidiaries to
pay and discharge all taxes, assessments and governmental charges or levies
imposed on it or on its income or profits or on any of its Property prior to the
date on which penalties attached thereto, except for any such tax, assessment,
charge or levy the payment of which is being contested in good faith and by
proper proceedings and against which adequate reserves are being maintained in
accordance with GAAP.
Business and Existence. Preserve and not change its business from the
development, manufacture and marketing of digital navigation, fiber optic sensor
and mobile satellite communications products, preserve and maintain its separate
corporate existence and all rights, privileges, and franchises in connection
therewith, and maintain its qualification and good standing in all states in
which such qualification is necessary in order for Borrower and its Subsidiaries
to conduct business in such states or in which the failure of a Borrower or its
Subsidiary to be so qualified would have a material adverse effect on the
financial condition, business or Properties of Borrower and its Subsidiaries.
Maintain Properties. Maintain its Properties in good condition and
repair and make all necessary renewals, repairs, replacements, additions and
improvements thereto so as to maintain the value and operating efficiency
thereof, ordinary wear and tear excepted. Borrower will not permit any of the
Equipment to become affixed to any real Property leased to Borrower so that an
interest arises therein under the real estate laws of the applicable
jurisdiction unless the landlord of such real Property has executed a landlord
waiver or leasehold mortgage in favor of and in form acceptable to Lender, and
Borrower will not permit any of the Equipment to become an accession to any
personal Property other than Equipment that is subject to first priority (except
for Permitted Liens) Liens in favor of Lender.
ERISA Compliance. (i) At all times make prompt payment of contributions
required to meet the minimum funding standards set forth in ERISA with respect
to each Plan; (ii) furnish to Lender, promptly upon Lender's request therefor,
copies of any annual report required to be filed pursuant to ERISA in connection
with each Plan and any other employee benefit plan of it and its subject to said
Section; (iii) notify Lender as soon as practicable of any Reportable Event and
of any additional act or condition arising in connection with any Plan which
Borrower believes might constitute grounds for the termination thereof by the
Pension Benefit Guaranty Corporation or for the appointment by the appropriate
United States district court of a trustee to administer the Plan; and (iv)
furnish to Lender, promptly upon Lender's request therefor, such additional
information concerning any Plan or any other such employee benefit plan.
Negative Covenants.
During the term of this Agreement, and thereafter for so long as there are
any Obligations to Lender, Borrower covenants that, unless Lender has first
consented thereto in writing, it will not:
Mergers; Consolidations; Acquisitions. Merge or consolidate, or permit
any Subsidiary of Borrower to merge or consolidate, with any Person; nor
acquire, nor permit any of its Subsidiaries to acquire, all or any substantial
part of the Properties of any Person.
Loans. Make, or permit any Subsidiary of Borrower to make, any loans or
other advances of money (other than for salary, travel advances, advances
against commissions and other similar advances to employees of Borrower not to
exceed $50,000.00 in the aggregate at any time outstanding in the ordinary
course of business) to any Person.
Total Indebtedness. Create, incur, assume, or suffer to exist, or permit
any Subsidiary of Borrower to create, incur or suffer to exist, any
Indebtedness, except: Obligations owing to Lender; Subordinated Debt existing on
the date of this Agreement; Indebtedness of any Subsidiary of Borrower to
Borrower; accounts payable to trade creditors and current operating expenses
(other than for Money Borrowed) which are not aged more than 120 days from
billing date or more than 30 days from the due date, in each case incurred in
the ordinary course of business and paid within such time period, unless the
same are being actively contested in good faith and by appropriate and lawful
proceedings; and Borrower or such Subsidiary shall have set aside such reserves,
if any, with respect thereto as are required by GAAP and deemed adequate by
Borrower and its independent accountants; Obligations to pay Rentals permitted
by subsection 8.2.13; Permitted Purchase Money Indebtedness; contingent
liabilities arising out of endorsements of checks and other negotiable
instruments for deposit or collection in the ordinary course of business; and
Indebtedness not included in paragraphs (i) through (vii) above which does not
exceed at any time, in the aggregate, the sum of $50,000.00.
Affiliate Transactions. Enter into, or be a party to, or permit any
Subsidiary of Borrower to enter into or be a party to, any transaction with any
Affiliate of Borrower or any stockholder of Borrower including, without
limitation, transferring any property to, assuming any Indebtedness of or paying
any management fee or other amount to any Affiliate or any stockholder of
Borrower, except in the ordinary course of and pursuant to the reasonable
requirements of Borrower's or such Subsidiary's business and upon fair and
reasonable terms which are fully disclosed to Lender and are no less favorable
to Borrower than would obtain in a comparable arm's length transaction with a
Person not an Affiliate or stockholder of Borrower or such Subsidiary.
Limitation on Liens. Create or suffer to exist, or permit any
Subsidiary of Borrower to create or suffer to exist, any Lien upon any of its
Property, income or profits, whether now owned or hereafter acquired, except:
Liens at any time granted in favor of Lender; Liens for taxes (excluding
any Lien imposed pursuant to any of the provisions of ERISA) not yet due, or
being contested in the manner described in subsection 7.1.14 hereto, but only if
in Lender's judgment such Lien does not adversely affect Lender's rights or the
priority of Lender's Lien in the Collateral;
Liens arising in the ordinary course of Borrower's business by
operation of law or regulation, but only if payment in respect of any such Lien
is not at the time required and such Liens do not, in the aggregate, materially
detract from the value of the Property of Borrower or materially impair the use
thereof in the operation of Borrower's business;
Purchase Money Liens securing Permitted Purchase Money Indebtedness; Liens
securing Indebtedness of one of Borrower's Subsidiaries to Borrower or another
such Subsidiary; easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and encumbrances
consisting of zoning restrictions, easements, licenses and restrictions on the
use of real Property or other imperfections in title thereto that are not
material in amount and do not materially detract from the value or use of such
real Property or interfere with the ordinary conduct of the business of the
Borrower or any of its Subsidiaries; such other Liens as appear on Exhibit O
hereto; and such other Liens as Lender may hereafter approve in writing.
Subordinated Debt. Make, or permit any Subsidiary of Borrower to make, any
payment of any part or all of any Subordinated Debt or take any other action or
omit to take any other action in respect of any Subordinated Debt, except in
accordance with the Subordination Agreement relative thereto.
Distributions . Declare or make, or permit any Subsidiary of Borrower to
declare or make, any Distributions.
Availability. Allow the Availability of the Borrower to equal to or be less
than $0.
Disposition of Assets. Sell, lease or otherwise dispose of any of, or
permit any Subsidiary of Borrower to sell, lease or otherwise dispose any of,
its Properties, including any disposition of Property as part of a sale and
leaseback transaction, to or in favor of any Person, except (i) sales of
Inventory in the ordinary course of business for so long as no Event of Default
exists hereunder, (ii) a transfer of Property to Borrower by a Subsidiary of
Borrower, or (iii) dispositions otherwise expressly authorized by this Agreement
or the Loan Documents.
Stock of Subsidiaries. Permit any of its Subsidiaries to issue any
additional shares of its capital stock except director's qualifying shares.
Bill-and-Hold Sales, Etc. Make a sale to any customer on a bill-and-hold,
guaranteed sale, sale and return, sale on approval or consignment basis, or any
sale on a repurchase or return basis.
Restricted Investment. Make or have, or permit any Subsidiary of Borrower
to make or have, any Restricted Investment.
Leases. Become, or permit any of its Subsidiaries to become, a lessee under
any operating lease (other than a lease under which Borrower or any of its
Subsidiaries is lessor) of Property if the aggregate Rentals payable during any
current or future period of 12 consecutive months under the lease in question
and all other leases under which Borrower or any of its Subsidiaries is then
lessee would exceed $500,000.00. The term "Rentals" means, as of the date of
determination, all payments which the lessee is required to make by the terms of
any lease.
Tax Consolidation. File or consent to the filing of any consolidated income
tax return with any Person other than a Subsidiary of Borrower.
SECTION 9. CONDITIONS PRECEDENT
Conditions to Initial Loans.
Notwithstanding any other provision of this Agreement or any of the other
Loan Documents, and without affecting in any manner the rights of Lender under
the other sections of this Agreement, Lender shall not be required to make the
initial Loans under this Agreement unless and until each of the following
conditions has been and continues to be satisfied:
Documentation. Lender shall have received, in form and substance
satisfactory to Lender and its counsel, a duly executed copy of this Agreement
and the other Loan Documents, together with such additional documents,
instruments and certificates as Lender and its counsel shall require in
connection therewith from time to time, all in form and substance satisfactory
to Lender and its counsel.
Other Loan Documents. Each of the conditions precedent set forth in the
other Loan Documents shall have been satisfied.
Availability. Lender shall have determined that immediately after Lender
has made the initial Loans contemplated hereby, paid all closing costs incurred
in connection with the transactions contemplated hereby, and establish the
Permanent Availability Reserve and any other reserves hereunder, Availability
shall not be less than $1,000,000.00.
No Litigation. No action, proceeding, investigation, regulation or
legislation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of this
Agreement or the consummation of the transactions contemplated hereby.
Landlord Waivers. Landlord, warehouseman or other necessary agreements
satisfactory to Lender shall be furnished to Lender for all locations where
Collateral is located that are not owned by Borrower.
Lien Filings. Lender shall have received copies of all filing receipts
or acknowledgments issued to evidence all filings or recordations necessary to
perfect the Liens of Lender in the Collateral in a form acceptable to Lender to
ensure that such Liens constitute first and only priority valid and perfected
Liens.
Pay-off of Existing Secured Lenders. Lender shall have received a
pay-off letter from the Borrower's existing secured lenders setting forth the
full amount of all indebtedness and other liabilities owing to such lenders and
releasing all their rights, claims and liens in the Collateral upon payment of
such amount.
Insurance. Borrower shall deliver to Lender certified copies of
Borrower's casualty insurance policies, together with loss payable endorsements
on Lender's standard form of loss payee endorsement naming Lender as loss payee,
and certified copies of Borrower's liability insurance policies, together with
endorsements naming Lender as an additional insured.
Subordination Agreements. The holders of Subordinated Debt and Borrower
shall have duly executed and delivered to Lender a Subordination Agreement in
form and substance satisfactory to Lender.
Solvency. Lender shall have received such certificates and documents
demonstrating the Solvency of Borrower, including, without limitation, the
Solvency Certificate after giving effect to the transactions contemplated by
this Agreement in connection with Lender's exercise of its rights and remedies,
as Lender shall find acceptable, including, without limitation, the pro forma
balance sheet, forecasted financial statements consisting of balance sheets,
income statements and cash flow statements for Borrower covering at least the
three-year period commencing on the Closing Date, prepared by Borrower and a
fair valuation balance sheet for Borrower.
No Material Adverse Change. Since September 30, 1999 there shall not
have occurred any material adverse change in the business, financial condition
or results of operations of the Borrower, or the existence or value of any
Collateral, or any event, condition or state of facts which would reasonably be
expected materially and adversely to affect the business, financial condition or
results of operations of Borrower.
Assignment of Claims Act . Lender shall have received, in form and
substance satisfactory to Lender, Exhibit Q listing all Federal government
contracts of the Borrower including all contracting officers, contract
identification numbers, addresses and other information required by Lender
together with duly executed notices and assignments for each contract of the
Borrower that is subject to the Assignment of Claims Act of 1940, as amended,
for filing with the appropriate contract officers for such contracts.
Conditions to All Loans.
Notwithstanding any other provision of this Agreement or other Loan
Documents and without affecting in any manner the rights of Lender under the
other sections of this Agreement, Lender shall not be required to make any Loan
(including the initial Loans) unless each of the following conditions are
satisfied:
Representations. All representations and warranties contained herein and in
the other Loan Documents shall be true and correct in all respects.
No Material Adverse Change. No material adverse change in the business,
financial condition, results of operations or Properties of Borrower or its
Subsidiaries shall have occurred since the date of Lender's latest audit of
Borrower including, without limitation, that no material investigation,
litigation or other proceedings shall be pending or threatened against Borrower
or its Subsidiaries and no litigation or other proceedings shall be pending or
threatened with respect to the Loan Documents.
No Default. No Default or Event of Default shall exist.
Additional Information. Lender shall have received such additional
documents, statements, certificates, information and evidence as Lender may
reasonably request and all documents and all actions required to be taken on or
before the making of any Loan shall have been taken.
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
Events of Default.
The occurrence of one or more of the following events shall constitute an "Event
of Default":
Payment of Obligations. Borrower shall fail to pay any of the
Obligations when due (whether due at stated date, maturity, on demand, upon
acceleration or otherwise).
Misrepresentations. Any representation, warranty or other statement
made or furnished to Lender by or on behalf of Borrower, or any Subsidiary of
Borrower in this Agreement, any of the other Loan Documents or any instrument,
certificate or financial statement furnished in compliance with or in reference
thereto proves to have been false or misleading in any material respect when
made or furnished or when reaffirmed pursuant to Section 7.2 hereof.
Breach of Specific Covenants. Borrower shall fail or neglect to
perform, keep or observe any covenant contained in Sections 5.2, 5.3, 6.1, 6.2,
6.3, 6.4, 8.1 or 8.2 hereof on the date that Borrower is required to perform,
keep or observe such covenant.
Breach of Other Covenants. Borrower shall fail or neglect to perform,
keep or observe any covenant contained in this Agreement (other than a covenant
which is dealt with specifically elsewhere in Section 10.1 hereof) and the
breach of such other covenant is not cured to Lender's satisfaction within 10
days after the sooner to occur of Borrower's receipt of notice of such breach
from Lender or the date on which such failure or neglect first becomes known to
any officer of Borrower, provided that such 10 day period shall not apply to any
covenant not capable of being cured in such period, that is intentionally
breached by Borrower or that has been the subject of a breach within the prior 6
months.
Default Under Security Documents/Other Agreements. Any event of default
shall occur under, or Borrower or any Guarantor shall default in the performance
or observance of any term, covenant, condition or agreement contained in, any of
the Security Documents; or the Other Agreements and such default shall continue
beyond any applicable grace period.
Other Defaults. There shall occur any default or event of default on
the part of Borrower under any agreement, document or instrument to which
Borrower, any Subsidiary of Borrower or any Guarantor is a party or by which
Borrower or any of its Property is bound, creating or relating to any
Indebtedness (other than the Obligations) if the payment or maturity of such
Indebtedness is accelerated in consequence of such event of default or demand
for payment of such Indebtedness is made.
Uninsured Losses. Any material loss, theft, damage or destruction of
any of the Collateral not fully covered (subject to such deductibles as Lender
shall have permitted) by insurance.
Adverse Changes. There shall occur any material adverse change in the
business, financial condition, results of operations or business prospects of
Borrower, any Subsidiary of Borrower or any Guarantor, or in the Collateral.
Insolvency and Related Proceedings. Borrower, any Subsidiary of
Borrower or any Guarantor shall cease to be Solvent or shall suffer the
appointment of a receiver, trustee, custodian or similar fiduciary, or shall
make an assignment for the benefit of creditors, or any petition for an order
for relief shall be filed by or against Borrower, any Subsidiary of Borrower or
any Guarantor under the Bankruptcy Code (if against Borrower, any Subsidiary of
Borrower or any Guarantor, the continuation of such proceeding for more than 60
days), or Borrower, any Subsidiary of Borrower or any Guarantor shall make any
offer of settlement, extension or composition to their respective unsecured
creditors generally.
Business Disruption; Condemnation. There shall occur a cessation of a
substantial part of the business of Borrower, any Subsidiary of Borrower or any
Guarantor for a period which significantly affects Borrower's or such
Guarantor's capacity to continue its business, on a profitable basis; or
Borrower, any Subsidiary of Borrower or any Guarantor shall suffer the loss or
revocation of any license or permit now held or hereafter acquired by Borrower
or such Guarantor which is necessary to the continued or lawful operation of its
business; or Borrower, any Subsidiary of Borrower or any Guarantor shall be
enjoined, restrained or in any way prevented by court, governmental or
administrative order from conducting all or any material part of its business
affairs; or any material lease or agreement pursuant to which Borrower, any
Subsidiary of Borrower or any Guarantor leases, uses or occupies any Property
shall be canceled or terminated prior to the expiration of its stated term; or
any part of the Collateral shall be taken through condemnation or the value of
such Property shall be impaired through condemnation.
Change in Control. A Change in Control shall occur.
ERISA. A Reportable Event shall occur which Lender, in its sole
discretion, shall determine in good faith constitutes grounds for the
termination by the Pension Benefit Guaranty Corporation of any Plan or for the
appointment by the appropriate United States district court of a trustee for any
Plan, or if any Plan shall be terminated or any such trustee shall be requested
or appointed, or if Borrower, any Subsidiary of Borrower or any Guarantor is in
"default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments
to a Multiemployer Plan resulting from Borrower's, such Subsidiary's or such
Guarantor's complete or partial withdrawal from such Plan.
Challenge to Agreement. Borrower, any Subsidiary of Borrower or any
Guarantor, or any Affiliate of any of them, shall challenge or contest in any
action, suit or proceeding the validity or enforceability of this Agreement, or
any of the other Loan Documents, the legality or enforceability of any of the
Obligations or the perfection or priority of any Lien granted to Lender.
Repudiation of or Default Under Guaranty Agreement. Any Guarantor shall
revoke or attempt to revoke the Guaranty Agreement signed by such Guarantor, or
shall repudiate such Guarantor's liability thereunder or shall be in default
under the terms thereof.
Criminal Forfeiture. Borrower, any Subsidiary of Borrower or any
Guarantor shall be criminally indicted or convicted under any law that could
lead to a forfeiture of any Property of Borrower, any Subsidiary of Borrower or
any Guarantor.
Judgments. Any money judgment, writ of attachment or similar process is
filed against Borrower, any Subsidiary of Borrower or any Guarantor, or any of
their respective Property.
Defaults of Equal Weight. Borrower acknowledges and agrees that each
and every Default and Event of Default described above shall be of equal weight
and significance, and equally and fully shall allow Lender to exercise its
rights and remedies hereunder. Borrower acknowledges and agrees that each such
event of Default has been a material inducement for Lender to enter into this
Agreement and that Lender would be irreparably harmed if Lender, in any way,
were unable to exercise its rights and remedies on the basis that certain
Defaults or Events of Default (for example, Defaults or Events of Default not
relating to payment) were of less weight or significance than certain other
Defaults or Events of Default (for example, Defaults or Events of Default
relating to payment).
Acceleration of the Obligations.
Without in any way limiting the right of Lender to demand payment of any
portion of the Obligations payable on demand in accordance with Section 3.2
hereof, upon or at any time after the occurrence of an Event of Default, all or
any portion of the Obligations shall, at the option of Lender and without
presentment, demand protest or further notice by Lender, become at once due and
payable and Borrower shall forthwith pay to Lender, the full amount of such
Obligations, provided, that upon the occurrence of an Event of Default specified
in subsection 10.1.9 hereof, all of the Obligations shall become automatically
due and payable without declaration, notice or demand by Lender.
Other Remedies.
Upon and after the occurrence of an Event of Default, Lender shall have and
may exercise from time to time the following rights and remedies:
Cumulative Rights. All of the rights and remedies of a secured party
under the Code or under other applicable law, and all other legal and equitable
rights to which Lender may be entitled, all of which rights and remedies shall
be cumulative and shall be in addition to any other rights or remedies contained
in this Agreement or any of the other Loan Documents, and none of which shall be
exclusive.
Possession of Collateral. The right to take immediate possession of the
Collateral, and to (i) require Borrower to assemble the Collateral, at
Borrower's expense, and make it available to Lender at a place designated by
Lender which is reasonably convenient to both parties, and (ii) enter any
premises where any of the Collateral shall be located and to keep and store the
Collateral on said premises until sold (and if said premises be the Property of
Borrower, Borrower agrees not to charge Lender for storage thereof).
Sell or Dispose of Collateral. The right to sell or otherwise dispose
of all or any Collateral in its then condition, or after any further
manufacturing or processing thereof, at public or private sale or sales, with
such notice as may be required by law, in lots or in bulk, for cash or on
credit, all as Lender, in its sole discretion, may deem advisable. Borrower
agrees that 10 days written notice to Borrower of any public or private sale or
other disposition of Collateral shall be reasonable notice thereof, and such
sale shall be at such locations as Lender may designate in said notice. Lender
shall have the right to conduct such sales on Borrower's premises, without
charge therefor, and such sales may be adjourned from time to time in accordance
with applicable law. Lender shall have the right to sell, lease or otherwise
dispose of the Collateral, or any part thereof, for cash, credit or any
combination thereof, and Lender may purchase all or any part of the Collateral
at public or, if permitted by law, private sale and, in lieu of actual payment
of such purchase price, may set off the amount of such price against the
Obligations. The proceeds realized from the sale of any Collateral may be
applied, after allowing 2 Business Days for collection, first to the costs,
expenses and attorneys' fees incurred by Lender in collecting the Obligations,
in enforcing the rights of Lender under the Loan Documents and in collecting,
retaking, completing, protecting, removing, storing, advertising for sale,
selling and delivering any Collateral, second to the interest due upon any of
the Obligations; and third, to the principal of the Obligations. If any
deficiency shall arise, Borrower and each Guarantor shall remain jointly and
severally liable to Lender therefor.
License. Lender is hereby granted a license or other right to use,
without charge, Borrower's labels, patents, copyrights, rights of use of any
name, trade secrets, tradenames, trademarks and advertising matter, or any
Property of a similar nature, as it pertains to the Collateral, in advertising
for sale and selling any Collateral and Borrower's rights under all licenses and
all franchise agreements shall inure to Lender's benefit.
Intentionally Omitted
Security Interest in Deposits; Set-off. Borrower and any Guarantor
hereby grants to Lender, Bank and each Participating Lender a lien, security
interest and right of setoff as security for all Obligations to Lender or to
Bank, whether now existing or hereafter arising, upon and against all deposits,
credits, Collateral or other Property, now or hereafter in the possession,
custody, safekeeping or control of Lender, any Participating Lender, Bank or any
entity under the control of Fleet Financial Group, Inc., or in transit to any of
them. At any time upon and during the continuance of an Event of Default,
without demand or notice, Lender and each Participating Lender may set off the
same or any part thereof or cause such set off to occur and apply the same to
any liability or obligation of Borrower and any Guarantor even though unmatured
and regardless of the adequacy of any other Collateral securing the Obligations.
ANY AND ALL RIGHTS TO REQUIRE LENDER OR ANY PARTICIPATING LENDER TO EXERCISE ITS
RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE
OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH
DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER OR ANY GUARANTOR, ARE HEREBY
KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
Receiver. Lender may appoint, remove and reappoint or cause to be
appointed, removed and reappointed any person or persons, including an employee
or agent of Lender to be a receiver (the "Receiver") which term shall include a
receiver and manager of, or agent for, all or any part of the Collateral. Any
such Receiver shall, as far as concerns responsibility for his acts, be deemed
to be the agent of Borrower and not of Lender, and Lender shall not in any way
be responsible for any misconduct, negligence or non-feasance of such Receiver,
his employees or agents. Except as otherwise directed by Lender, all money
received by such Receiver shall be received in trust for and paid to Lender.
Such Receiver shall have all of the powers and rights of Lender described in
this Section 10. Lender may, either directly or through its agents or nominees,
exercise any or all powers and rights of a Receiver.
Remedies Cumulative; No Waiver.
All covenants, conditions, provisions, warranties, guaranties, indemnities, and
other undertakings of Borrower contained in this Agreement and the other
Loan Documents, or in any document referred to herein or contained in any
agreement supplementary hereto or in any schedule or in any Guaranty
Agreement given to Lender or contained in any other agreement between
Lender and Borrower, heretofore, concurrently, or hereafter entered into,
shall be deemed cumulative to and not in derogation or substitution of any
of the terms, covenants, conditions, or agreements of Borrower herein
contained. The failure or delay of Lender to require strict performance by
Borrower of any provision of this Agreement or to exercise or enforce any
rights, Liens, powers, or remedies hereunder or under any of the aforesaid
agreements or other documents or security or Collateral shall not operate
as a waiver of such performance, Liens, rights, powers and remedies, but
all such requirements, Liens, rights, powers, and remedies shall continue
in full force and effect until all Loans and all other Obligations owing or
to become owing from Borrower to Lender shall have been fully satisfied.
None of the undertakings, agreements, warranties, covenants and
representations of Borrower contained in this Agreement or any of the other
Loan Documents and no Event of Default by Borrower under this Agreement or
any other Loan Documents shall be deemed to have been suspended or waived
by Lender, unless such suspension or waiver is by an instrument in writing
specifying such suspension or waiver and is signed by a duly authorized
representative of Lender and directed to Borrower.
SECTION 11. MISCELLANEOUS
Power of Attorney.
Borrower hereby irrevocably designates, makes, constitutes and appoints Lender
(and all Persons designated by Lender) as Borrower's true and lawful
attorney (and agent-in-fact) and Lender, or Lender's agent, may, without
notice to Borrower and in either Borrower's or Lender's name, but at the
cost and expense of Borrower:
Endorsements. At such time or times as Lender or said agent, in its
sole discretion, may determine, endorse Borrower's name on any checks, notes,
acceptances, drafts, money orders or any other evidence of payment or proceeds
of the Collateral which come into the possession of Lender or under Lender's
control.
Other Actions. At such time or times upon or after the occurrence of an
Event of Default as Lender or its agent in its sole discretion may determine:
(i) demand payment of the Accounts from the Account Debtors, enforce payment of
the Accounts by legal proceedings or otherwise, and generally exercise all of
Borrower's rights and remedies with respect to the collection of the Accounts;
(ii) settle, adjust, compromise, discharge or release any of the Accounts or
other Collateral or any legal proceedings brought to collect any of the Accounts
or other Collateral; (iii) sell or assign any of the Accounts and other
Collateral upon such terms, for such amounts and at such time or times as Lender
deems advisable; (iv) take control, in any manner, of any item of payment or
proceeds relating to any Collateral; (v) prepare, file and sign Borrower's name
to a proof of claim in bankruptcy or similar document against any Account Debtor
or to any notice of lien, assignment or satisfaction of lien or similar document
in connection with any of the Collateral; (vi) receive, open and dispose of all
mail addressed to Borrower and to notify postal authorities to change the
address for delivery thereof to such address as Lender may designate; (vii)
endorse the name of Borrower upon any of the items of payment or proceeds
relating to any Collateral and deposit the same to the account of Lender on
account of the Obligations; (viii) endorse the name of Borrower upon any chattel
paper, document, instrument, invoice, freight bill, bill of lading or similar
document or agreement relating to the Accounts, Inventory and any other
Collateral; (ix) use Borrower's stationery and sign the name of Borrower to
verifications of the Accounts and notices thereof to Account Debtors; (x) use
the information recorded on or contained in any data processing equipment and
computer hardware and software relating to the Accounts, Inventory, Equipment
and any other Collateral; (xi) make and adjust claims under policies of
insurance; and (xii) do all other acts and things necessary, in Lender's
determination, to fulfill Borrower's obligations under this Agreement.
Indemnity.
Borrower hereby agrees to indemnify Lender and its directors, agents, employees,
subsidiaries, Affiliates and counsel (each an "Indemnified Person") and
hold each Indemnified Person harmless from and against any liability, loss,
damage, suit, action or proceeding ever suffered or incurred by any
Indemnified Person (including reasonable attorneys fees and legal expenses)
in connection with any litigation, investigation, claim or proceeding
commenced or threatened related to the negotiation, preparation, execution,
delivery, enforcement, performance or administration of this Agreement or
the Loan Documents or any undertaking or proceeding relating to or
attendant thereto. In addition, Borrower shall defend each Indemnified
Person against and save it harmless from all claims of any Person with
respect to the Collateral. Without limiting the generality of the
foregoing, these indemnities shall extend to any Environmental Claims
asserted against any Indemnified Person by any Person by reason of
Borrower's or any other Person's failure to comply with Environmental Laws
applicable to Hazardous Materials. Notwithstanding any contrary provision
in this Agreement, the obligation of Borrower under this Section 11.2 shall
survive the payment in full of the Obligations and the termination of this
Agreement.
Modification of Agreement; Sale of Interest.
This Agreement may not be modified, altered or amended, except by an agreement
in writing signed by Borrower and Lender. Borrower may not sell, assign or
transfer any interest in this Agreement, any of the other Loan Documents,
or any of the Obligations, or any portion thereof, including, without
limitation, Borrower's rights, title, interests, remedies, powers, and
duties hereunder or thereunder. Borrower hereby consents to Lender's
participation, sale, assignment, transfer or other disposition, at any time
or times hereafter, of this Agreement, any of the other Loan Documents, and
the Collateral or of any interest or portion hereof or thereof, including,
without limitation, Lender's rights, title, interests, remedies, powers,
and duties hereunder or thereunder. In the case of an assignment, the
assignee shall have, to the extent of such assignment, the same rights,
benefits and obligations as it would if it were "Lender" hereunder and
Lender shall be relieved of all obligations hereunder upon any such
assignments. Borrower agrees that it will use its best efforts to assist
and cooperate with Lender in any manner reasonably requested by Lender to
effect the sale of participations in or assignments of any of the Loan
Documents or any portion thereof or interest therein, including, without
limitation, assisting in the preparation of appropriate disclosure
documents. Borrower further agrees that Lender may disclose credit
information regarding Borrower and its Subsidiaries to any potential
participant or assignee.
Severability.
Wherever possible, each provision of this Agreement shall be interpreted in such
manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
Successors and Assigns.
This Agreement, the Other Agreements and the Security Documents shall be binding
upon and inure to the benefit of the successors and assigns of Borrower and
Lender permitted under Section 11.3 hereof.
Cumulative Effect; Conflict of Terms.
The provisions of the Other Agreements and the Security Documents are hereby
made cumulative with the provisions of this Agreement. Except as otherwise
provided in Section 3.2 hereof and except as otherwise provided in any of
the other Loan Documents by specific reference to the applicable provision
of this Agreement, if any provision contained in this Agreement is in
direct conflict with, or inconsistent with, any provision in any of the
other Loan Documents, the provision contained in this Agreement shall
govern and control.
Execution in Counterparts.
This Agreement may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which counterparts
taken together shall constitute but one and the same instrument.
Notice.
Except as otherwise provided herein, all notices, requests and demands to or
upon a party hereto, to be effective, shall be in writing and shall be sent
by certified or registered mail, return receipt requested, by personal
delivery against receipt, by overnight courier or by facsimile and, unless
otherwise expressly provided herein, shall be deemed to have been validly
served, given or delivered immediately when delivered against receipt, one
Business Day after deposit in the mail, postage prepaid, or with an
overnight courier or, in the case of facsimile notice, when sent, addressed
as follows:
If to Lender: Fleet Capital Corporation
One Federal Street
Boston, MA 02110
Attention: Northeast Loan Administration Manager
Facsimile: (617) 346-0575
With a copy to: Brown, Rudnick, Freed & Gesmer
One Financial Center
Boston, MA 02111
Attention: Jeffery L. Keffer, Esq.
Facsimile No.: (617) 856-8201
If to Borrower: KVH Industries, Inc.
50 Enterprise Center
Middletown, RI 02842
Attention: President
Facsimile No.: (401) 847-3327
With a copy to: Foley Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
Attention: Adam Sonnenschein, Esq.
Facsimile No.: (617) 832-7000
or to such other address as each party may designate for itself by notice given
in accordance with this Section 11.8; provided, however, that any notice,
request or demand to or upon Lender pursuant to subsection 3.1.1 or 4.2.2 hereof
shall not be effective until received by Lender.
Lender's Consent.
Whenever Lender's consent is required to be obtained under this Agreement, any
of the Other Agreements or any of the Security Documents as a condition to
any action, inaction, condition or event, unless otherwise provided herein
Lender shall be authorized to give or withhold such consent in its
reasonable discretion (except as otherwise specifically provided herein)
and to condition its consent upon the giving of additional collateral
security for the Obligations, the payment of money or any other matter.
Credit Inquiries.
Borrower hereby authorizes and permits Lender to respond to usual and customary
credit inquiries from third parties concerning Borrower or any of its
Subsidiaries.
Time of Essence.
Time is of the essence of this Agreement, the Other Agreements and the Security
Documents.
Entire Agreement.
This Agreement and the other Loan Documents, together with all other
instruments, agreements and certificates executed by the parties in
connection therewith or with reference thereto, embody the entire
understanding and agreement between the parties hereto and thereto with
respect to the subject matter hereof and thereof and supersede all prior
agreements, understandings and inducements, whether express or implied,
oral or written.
Interpretation.
No provision of this Agreement or any of the other Loan Documents shall be
construed against or interpreted to the disadvantage of any party hereto by
any court or other governmental or judicial authority by reason of such
party having or being deemed to have structured or dictated such provision.
Intentionally Omitted.
GOVERNING LAW; CONSENT TO FORUM.
THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE
DEEMED TO HAVE BEEN MADE IN BOSTON, MASSACHUSETTS. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH
OF MASSACHUSETTS, PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE
LOCATED IN ANY JURISDICTION OTHER THAN MASSACHUSETTS, THE LAWS OF SUCH
JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE
OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER
REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH
JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF
MASSACHUSETTS. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND
REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS
OF BORROWER OR LENDER, BORROWER HEREBY CONSENTS AND AGREES THAT THE
SUPERIOR COURT OF SUFFOLK COUNTY, MASSACHUSETTS, OR, AT LENDER'S OPTION,
THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS, SHALL
HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES
BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER
ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY
HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY
SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO
BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL
RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE
RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER
OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO
ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
WAIVERS BY BORROWER.
BORROWER WAIVES (i) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES)
IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF
OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL:
(ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST,
DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION
OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS,
DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY
LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND
CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (iii) NOTICE PRIOR TO
TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY
WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE
ANY OF LENDER'S REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT
AND EXEMPTION LAWS; AND (v) NOTICE OF ACCEPTANCE HEREOF. BORROWER
ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO
LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE
FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. BORROWER WARRANTS
AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL
COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as an instrument
under seal in Boston, Massachusetts on the day and year specified at the
beginning of this Agreement.
KVH INDUSTRIES, INC.
("Borrower")
By
Richard C. Forsyth, Chief Financial Officer
[CORPORATE SEAL]
FLEET CAPITAL CORPORATION
("Lender")
By
Title
<PAGE>
APPENDIX A
GENERAL DEFINITIONS
When used in the Loan and Security Agreement dated as of March 27, 2000, by and
between Fleet Capital Corporation and KVH Industries, Inc., the following
terms shall have the following meanings (terms defined in the singular to
have the same meaning when used in the plural and vice versa):
Account Debtor - any Person who is or may become obligated under or on account
of an Account.
Accounts - all accounts, contract rights, letters of credit, bankers'
acceptances and guaranties whether now owned or hereafter created or
acquired by Borrower or in which Borrower now has or hereafter acquired any
interest.
Affiliate - a Person (other than a Subsidiary): (i) which directly or indirectly
through one or more intermediaries controls, or is controlled by, or is
under common control with, a Person; (ii) which beneficially owns or holds
5% or more of any class of the Voting Stock of a Person; or (iii) 5% or
more of the Voting Stock (or in the case of a Person which is not a
corporation, 5% or more of the equity interest) of which is beneficially
owned or held by a Person or a Subsidiary of a Person.
Agreement - the Loan and Security Agreement referred to in the first sentence of
this Appendix A, all Exhibits thereto and this Appendix A.
Availability - the amount of money which Borrower is entitled to borrow from
time to time as Revolving Credit Loans, such amount being the difference
derived when (a) the sum of (i) the principal amount of Revolving Credit
Loans then outstanding (including any amounts which Lender may have paid
for the account of Borrower pursuant to any of the Loan Documents and which
have not been reimbursed by Borrower), (ii) the Permanent Availability
Reserve and other reserves and (iii) the amount of all trade payables and
other amounts due to creditors of Borrowers that are past due or beyond
agreed upon terms, is subtracted from (b) the Borrowing Base. If the amount
outstanding is equal to or greater than the Borrowing Base, Availability is
0.
Average Loan Balance - for any month or applicable period, the amount obtained
by adding the unpaid balance of the Revolving Credit Loans at the end of
each day for each day during the applicable month or period and by dividing
such sum by the number of the days in such month or period.
Bank - Fleet National Bank and its successors and assigns.
Borrowing Base - as at any date of determination thereof, an amount equal to the
lesser of:
(i) $5,000,000.00; or
(ii) an amount equal to:
(a) 85% of the net amount of Eligible Accounts outstanding
at such date; PLUS
(b) the lesser of (1) $3,000,000.00 or (2) the sum of 50% of
the value of finished goods Eligible Inventory plus 20% of the
value of raw materials Eligible Inventory, at such date, with the
value thereof calculated on the basis of the lower of cost or
market with the cost of raw materials and finished goods
calculated on a first-in, first-out basis;
For purposes hereof, the net amount of Eligible Accounts at
any time shall be the face amount of such Eligible Accounts less
any and all returns, rebates, discounts (which may, at Lender's
option, be calculated on shortest terms), credits, allowances or
excise taxes of any nature at any time issued, owing, claimed by
Account Debtors, granted, outstanding or payable in connection
with such Accounts at such time.
Business Day - any day excluding Saturday, Sunday and any day which is a legal
holiday under the laws of the Commonwealth of Massachusetts or the State of
Connecticut or is a day on which banking institutions located in either of
such states are closed.
Capital Expenditures - expenditures made or liabilities incurred for the
acquisition of any fixed assets or improvements, replacements,
substitutions or additions thereto which have a useful life of more than
one year, including the total principal portion of Capitalized Lease
Obligations.
Capitalized Lease Obligation - any Indebtedness represented by obligations under
a lease that is required to be capitalized for financial reporting purposes
in accordance with GAAP.
Change in Control - Chattel Paper - as defined in the Code.
Closing Date - the date on which all of the conditions precedent in Section 9 of
the Agreement are satisfied and the initial Loan is made under the
Agreement.
Code - the Uniform Commercial Code as adopted and in force in the Commonwealth
of Massachusetts, as from time to time in effect. Collateral - all of the
Property and interests in Property described in Section 5 of the Agreement, and
all other Property and
interests in Property that now or hereafter secure the payment and
performance of any of the Obligations. Consolidated - the consolidation in
accordance with GAAP of the accounts or other items as to which such term
applies. Current Assets - at any date means the amount at which all of the
current assets of a Person would be properly classified as current
assets shown on a balance sheet at such date in accordance with GAAP,
except that amounts due from Affiliates and investments in Affiliates shall
be excluded therefrom.
Current Liabilities - at any date means the amount at which all of the current
liabilities of a Person would be properly classified as current liabilities
on a balance sheet at such date in accordance with GAAP, excluding the
Loans and current maturities of any long-term Indebtedness.
Default - an event or condition the occurrence of which would, with the lapse of
time or the giving of notice, or both, become an Event of Default.
Default Rate - as defined in subsection 2.1.2 of the Agreement.
Distribution - in respect of any corporation means and includes: (i) the payment
of any dividends or other distributions on capital stock of the corporation
(except distributions in such stock) and (ii) the redemption or acquisition
of Securities unless made contemporaneously from the net proceeds of the
sale of Securities.
Documents - as defined in the Code.
Dominion Account - a special account of Lender established by Borrower pursuant
to the Agreement at a bank selected by Borrower, but acceptable to Lender
in its reasonable discretion, and over which Lender shall have sole and
exclusive access and control for withdrawal purposes.
Eligible Account - an Account arising in the ordinary course of Borrower's
business from the sale of goods or rendition of services which Lender, in
its reasonable credit judgment, deems to be an Eligible Account. Without
limiting the generality of the foregoing, no Account shall be an Eligible
Account if:
(i) it arises out of a sale made by Borrower to a Subsidiary
or an Affiliate of Borrower or to a Person controlled by an
Affiliate of Borrower; or
(ii) it is unpaid for more than 60 days after the original
due date shown on the invoice; or
(iii) it is due or unpaid more than 90 days after the
original invoice date; or
(iv) 50% or more of the Accounts from the Account Debtor are
not deemed Eligible Accounts hereunder; or
(v) the total unpaid Accounts of the Account Debtor exceed
20% of the net amount of all Eligible Accounts, to the extent of
such excess; or
(vi) any covenant, representation or warranty contained in
the Agreement with respect to such Account has been breached; or
(vii) the Account Debtor is also Borrower's creditor or
supplier, or the Account Debtor has disputed liability with
respect to such Account, or the Account Debtor has made any claim
with respect to any other Account due from such Account Debtor to
Borrower, or the Account otherwise is or may become subject to
any right of setoff by the Account Debtor; or
(viii) the Account Debtor has commenced a voluntary case
under the federal bankruptcy laws, as now constituted or
hereafter amended, or made an assignment for the benefit of
creditors, or a decree or order for relief has been entered by a
court having jurisdiction in the premises in respect of the
Account Debtor in an involuntary case under the federal
bankruptcy laws, as now constituted or hereafter amended, or any
other petition or other application for relief under the federal
bankruptcy laws has been filed against the Account Debtor, or if
the Account Debtor has failed, suspended business, ceased to be
Solvent, or consented to or suffered a receiver, trustee,
liquidator or custodian to be appointed for it or for all or a
significant portion of its assets or affairs; or
(ix) it arises from a sale to an Account Debtor outside the
United States unless the sale is on letter of credit, guaranty or
acceptance terms, in each case acceptable to Lender in its sole
discretion; or
(x) it arises from a sale to the Account Debtor on a
bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval,
consignment or any other repurchase or return basis; or
(xi) the Account Debtor is the United States of America or
any department, agency or instrumentality thereof, unless
Borrower assigns its right to payment of such Account to Lender
and notifies the contracting officer of such assignment, in a
manner satisfactory to Lender, so as to comply with the
Assignment of Claims Act of 1940 (31 U.S.C.ss.203 et seq., as
amended); or
(xii) the Account is subject to a Lien other than a Permitted Lien; or
(xiii) the goods giving rise to such Account have not been delivered to
and accepted by the Account Debtor or the services giving rise to
such Account have not been performed by Borrower and accepted by
the Account Debtor or the Account otherwise does not represent a
final sale; or
(xiv) the Account is evidenced by chattel paper or an
instrument of any kind, or has been reduced to judgment; or
(xv) Borrower has made any agreement with the Account Debtor
for any deduction therefrom, except for discounts or allowances
which are made in the ordinary course of business for prompt
payment and which discounts or allowances are reflected in the
calculation of the face value of each invoice related to such
Account; or
(xvi) Borrower has made an agreement with the Account Debtor
to extend the time of payment thereof.
Eligible Inventory - such Inventory of Borrower (other than packaging and
display materials, supplies, inventory used for marketing purposes and work
in process) which Lender, in its reasonable credit judgment, deems to be
Eligible Inventory. Without limiting the generality of the foregoing, no
Inventory shall be Eligible Inventory if:
(i) it is not raw materials or finished goods, that is, in
Lender's opinion, readily marketable in its current form; or
(ii) it is not in good, new and saleable condition; or
(iii) it is slow-moving, obsolete or unmerchantable; or
(iv) it does not meet all standards imposed by any
governmental agency or authority; or
(v) it does not conform in all respects to the warranties
and representations set forth in the Agreement; or
(vi) it is not at all times subject to Lender's duly
perfected, first priority security interest and no other Lien
except a Permitted Lien;
(vii) it is not situated at a location in compliance with
the Agreement or is in transit.
Environmental Claim shall mean, with respect to any Person, any written or oral
notice, claim, demand or other communication (collectively, a "claim") by
any other Person alleging or asserting such Person's liability for
investigatory costs, cleanup costs, governmental response costs, damages to
natural resources or other Property, personal injuries, fines or penalties
arising out of, based on or resulting from (a) the presence, or Release
into the environment, of any Hazardous Material at any location, whether or
not owned by such Person, or (b) circumstances forming the basis of any
violation, or alleged violation, of any Environmental Law. The term
"Environmental Claim" shall include, without limitation, any claim by any
governmental authority for enforcement, cleanup, removal, response,
remedial or other actions or damages pursuant to any applicable
Environmental Law, and any claim by any third party seeking damages,
contribution, indemnification, cost recovery, compensation or injunctive
relief resulting from the presence of Hazardous Materials or arising from
alleged injury or threat of injury to the environment.
Environmental Laws shall mean any and all present and future Federal, state,
local and foreign laws, rules or regulations, and any orders or decrees, in
each case as now or hereafter in effect, relating to the regulation or
protection of the environment or to emissions, discharges, releases or
threatened releases of pollutants, contaminants or toxic or hazardous
substances or wastes into the indoor or outdoor environment, including,
without limitation, ambient air, soil, surface water, ground water,
wetlands, land or subsurface strata, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or toxic or hazardous
substances or wastes.
Equipment - all machinery, apparatus, equipment, fittings, furniture, fixtures,
motor vehicles and other tangible personal Property (other than Inventory)
of every kind and description used in Borrower's operations or owned by
Borrower or in which Borrower has an interest, whether now owned or
hereafter acquired by Borrower and wherever located, and all parts,
accessories and special tools and all increases and accessions thereto and
substitutions and replacements therefor.
ERISA- the Employee Retirement Income Security Act of 1974, as amended, and all
rules and regulations from time to time promulgated thereunder.
Event of Default - as defined in Section 10.1 of the Agreement.
GAAP - generally accepted account principles in the United States of America in
effect from time to time.
General Intangibles - all personal property of Borrower (including, without
limitation, tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, applications for the
foregoing, trade secrets, good will, processes, licenses whether as
licensee or licensor, choses in action and other claims and existing and
future leasehold interests in equipment, real estate and fixtures and all
things in action) other than goods, Accounts, chattel paper, documents,
instruments and Investment Property, whether now owned or hereafter created
or acquired by Borrower.
Guarantors - each Subsidiary of the Borrower and any other Person who may
hereafter guarantee payment or performance of the whole or any part of the
Obligations.
Guaranty Agreements - the Continuing Guaranty Agreements which are to be
executed by each Guarantor in form and substance satisfactory to Lender.
Indebtedness - as applied to a Person means, without duplication
(i) all items which in accordance with GAAP would be
included in determining total liabilities as shown on the
liability side of a balance sheet of such Person as at the date
as of which Indebtedness is to be determined, including, without
limitation, Capitalized Lease Obligations,
(ii) all obligations of other Persons which such Person has
guaranteed,
(iii) all reimbursement obligations in connection with
letters of credit or letter of credit guaranties issued for the
account of such Person, and
(iv) in the case of Borrower (without duplication), the
Obligations.
Hazardous Material shall mean, collectively, (a) any petroleum or petroleum
products, explosives, radioactive materials, asbestos, urea formaldehyde
foam insulation, and transformers or other equipment that contain
polychlorinated biphenyls ("PCB's") in concentrations that are regulated
under the Toxic Substances Control Act, as amended, or any other
Environmental Law, (b) any chemicals or other materials or substances that
are now or hereafter become defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials",
"extremely hazardous wastes", "restricted hazardous wastes", "toxic
substances", "toxic pollutants", "contaminants", "pollutants" or words of
similar import under any Environmental Law and (c) any other chemical or
other material or substance, exposure to which is now or hereafter
prohibited, limited or regulated under any Environmental Law.
Instruments. - as defined in the Code.
Inventory - all of Borrower's inventory, whether now owned or hereafter acquired
including, but not limited to, all goods intended for sale or lease by
Borrower, or for display or demonstration; all work in process; all raw
materials and other materials and supplies of every nature and description
used or which might be used in connection with the manufacture, printing,
packing, shipping, advertising, selling, leasing or furnishing of such
goods or otherwise used or consumed in Borrower's business; and all
documents evidencing and General Intangibles relating to any of the
foregoing, whether now owned or hereafter acquired by Borrower.
Investment Property - all investment property, financial assets, certificated
and uncertified securities, securities accounts, securities entitlements,
commodities contracts and commodities accounts of the Borrower, whether now
owned or hereafter acquired or created by Borrower.
Lien - any interest in Property securing an obligation owed to, or a claim by, a
Person other than the owner of the Property, whether such interest is based
on common law, statute or contract. The term "Lien" shall also include
reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting Property. For the purpose of the Agreement, Borrower
shall be deemed to be the owner of any Property which it has acquired or
holds subject to a conditional sale agreement or other arrangement pursuant
to which title to the Property has been retained by or vested in some other
Person for security purposes.
Loan Account - the loan account established on the books of Lender pursuant to
Section 3.6 of the Agreement. Loan Documents - the Agreement, the Other
Agreements and the Security Documents. Loans - all loans and advances of any
kind made by Lender pursuant to the Agreement. Money Borrowed - means (i)
Indebtedness arising from the lending of money by any Person to Borrower; (ii)
Indebtedness, whether or
not in any such case arising from the lending by any Person of money to
Borrower, (A) which is represented by notes payable or drafts accepted that
evidence extensions of credit, (B) which constitutes obligations evidenced
by bonds, debentures, notes or similar instruments, or (C) upon which
interest charges are customarily paid (other than accounts payable) or that
was issued or assumed as full or partial payment for Property; (iii)
Indebtedness that constitutes a Capitalized Lease Obligation; (iv)
reimbursement obligations with respect to letters of credit or guaranties
of letters of credit and (v) Indebtedness of Borrower under any guaranty of
obligations that would constitute Indebtedness for Money Borrowed under
clauses (i) through (iii) hereof, if owed directly by Borrower.
Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of ERISA.
Obligations - all Loans and all other advances, debts, liabilities, obligations,
covenants and duties, together with all interest, fees and other charges
thereon, owing, arising, due or payable from Borrower to Lender of any kind
or nature, present or future, whether or not evidenced by any note,
guaranty or other instrument, whether arising under the Agreement or any of
the other Loan Documents or otherwise whether direct or indirect (including
those acquired by assignment), absolute or contingent, primary or
secondary, due or to become due, now existing or hereafter arising and
however acquired, including, without limitation, any and all amounts
arising after any bankruptcy or insolvency filing by or against Borrower
notwithstanding any provision of any law to the contrary.
Original Term - as defined in Section 4.1 of the Agreement.
OtherAgreements - any and all agreements, instruments and documents (other than
the Agreement and the Security Documents), heretofore, now or hereafter
executed by Borrower, any Subsidiary of Borrower or any other third party
and delivered to Lender in respect of the transactions contemplated by the
Agreement.
Overadvance - the amount, if any, by which the outstanding principal amount of
Revolving Credit Loans plus the LC Amount exceeds the Borrowing Base.
Participating Lender - each Person who shall be granted the right by Lender to
participate in any of the Loans described in the Agreement and who shall
have entered into a participation agreement in form and substance
satisfactory to Lender.
Permanent Availability Reserve - the reserve in the amount of $1,000,000
established by Lender on the Closing Date which shall be reduced
$500,000.00 upon the completion by Lender of a satisfactory audit of
Borrower demonstrating, among other things, to the Lender's satisfaction,
that Borrower has the capability of adequately tracking dilution on its
Accounts.
Permitted Liens - any Lien of a kind specified in subsection 8.2.5 of the
Agreement.
<PAGE>
Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of Borrower
incurred after the date hereof which is secured by a Purchase Money Lien
and which, when aggregated with the principal amount of all other such
Indebtedness and Capitalized Lease Obligations of Borrower at the time
outstanding, does not exceed $250,000.00. For the purposes of this
definition, the principal amount of any Purchase Money Indebtedness
consisting of capitalized leases shall be computed as a Capitalized Lease
Obligation.
Person - an individual, partnership, corporation, limited liability company,
joint stock company, land trust, business trust, or unincorporated
organization, or a government or agency or political subdivision thereof.
Plan - an employee benefit plan now or hereafter maintained for employees of
Borrower that is covered by Title IV of ERISA. Prime Rate - the rate of interest
announced or quoted by Bank from time to time as its prime rate for commercial
loans, whether or
not such rate is the lowest rate charged by Bank to its most preferred
borrowers; and, if such prime rate for commercial loans is discontinued by
Bank as a standard, a comparable reference rate designated by Bank as a
substitute therefor shall be the Prime Rate.
Projections - Borrower's forecasted Consolidated and consolidating (a) balance
sheets, (b) profit and loss statements, (c) cash flow statements, (d)
Availability and (e) capitalization statements, all prepared on a
consistent basis with Borrower's historical financial statements, together
with appropriate supporting details and a statement of underlying
assumptions.
Property - any interest in any kind of property or asset, whether real, personal
or mixed, or tangible or intangible. Purchase Money Indebtedness - means and
includes (i) Indebtedness (other than the Obligations) for the payment of all or
any part of
the purchase price of any fixed assets, (ii) any Indebtedness (other than
the Obligations) incurred at the time of or within 10 days prior to or
after the acquisition of any fixed assets for the purpose of financing all
or any part of the purchase price thereof, and (iii) any renewals,
extensions or refinancings thereof, but not any increases in the principal
amounts thereof outstanding at the time.
Purchase Money Lien - a Lien upon fixed assets which secures Purchase Money
Indebtedness, but only if such Lien shall at all times be confined solely
to the fixed assets the purchase price of which was financed through the
incurrence of the Purchase Money Indebtedness secured by such Lien.
Release shall mean any release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching or migration into the
indoor or outdoor environment, including, without limitation, the movement
of Hazardous Materials through ambient air, soil, surface water, ground
water, wetlands, land or subsurface strata.
Rentals - as defined in subsection 8.2.13 of the Agreement. Renewal Terms - as
defined in Section 4.1 of the Agreement. Reportable Event - any of the events
set forth in Section 4043(b) of ERISA.
Restricted Investment - any investment made in cash or by delivery of Property
to any Person, whether by acquisition of stock, Indebtedness or other
obligation or Security, or by loan, advance or capital contribution, or
otherwise, or in any Property except the following:
(i) investments in one or more Subsidiaries of Borrower to
the extent existing on the Closing Date;
(ii) Property to be used in the ordinary course of business;
(iii) Current Assets arising from the sale of goods and
services in the ordinary course of business of Borrower and its
Subsidiaries;
(iv) investments in direct obligations of the United States
of America, or any agency thereof or obligations guaranteed by
the United States of America, provided that such obligations
mature within one year from the date of acquisition thereof;
(v) investments in certificates of deposit maturing within
one year from the date of acquisition issued by a bank or trust
company organized under the laws of the United States or any
state thereof having capital surplus and undivided profits
aggregating at least $50,000,000; and
(vi) investments in commercial paper given the highest
rating by a national credit rating agency and maturing not more
than 270 days from the date of creation thereof.
Revolving Credit Loan - a Loan made by Lender as provided in Section 2.1 of the
Agreement. Schedule of Accounts - as defined in subsection 6.4.1 of the
Agreement. Security - shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
Security Documents - the Guaranty Agreements, Negative Pledge Agreements and all
other instruments and agreements now or at any time hereafter securing the
whole or any part of the Obligations.
Solvent - as to any Person, such Person (i) owns Property whose fair saleable
value is greater than the amount required to pay all of such Person's
Indebtedness (including contingent debts), (ii) is able to pay all of its
Indebtedness as such Indebtedness matures and (iii) has capital sufficient
to carry on its business and transactions and all business and transactions
in which it is about to engage.
Subordinated Debt - Indebtedness of Borrower that is subordinated to the
Obligations in a manner satisfactory to Lender. Subordination Agreement - the
Subordination Agreement to be dated on or about the Closing Date among Borrower,
Lender and the holders
of Subordinated Debt.
Subsidiary - any corporation of which a Person owns, directly or indirectly
through one or more intermediaries, more than 50% of the Voting Stock at
the time of determination.
Total Credit Facility - $5,000,000.00.
Voting Stock - Securities of any class or classes of a corporation the holders
of which are ordinarily, in the absence of contingencies, entitled to elect
a majority of the corporate directors (or Persons performing similar
functions).
Working Capital - at any date means Current Assets minus Current Liabilities.
OtherTerms. All other terms contained in the Agreement shall have, when the
context so indicates, the meanings provided for by the Code to the extent
the same are used or defined therein.
Certain Matters of Construction. The terms "herein", "hereof" and "hereunder"
and other words of similar import refer to the Agreement as a whole and not
to any particular section, paragraph or subdivision. Any pronoun used shall
be deemed to cover all genders. The section titles, table of contents and
list of exhibits appear as a matter of convenience only and shall not
affect the interpretation of the Agreement. All references to statutes and
related regulations shall include any amendments of same and any successor
statutes and regulations. All references to any of the Loan Documents shall
include any and all modifications thereto and any and all extensions or
renewals thereof.
<PAGE>
Q-1
LIST OF EXHIBITS
Exhibit A Intentionally Omitted
Exhibit B Borrower's and each Subsidiary's Business Locations
Exhibit C Jurisdictions in which Borrower and each Subsidiary is
Authorized to do Business
Exhibit D Capital Structure of Borrower
Exhibit E Corporate Names
Exhibit F Tax Identification Numbers of Subsidiaries
Exhibit G Patents, Trademarks, Copyrights and Licenses
Exhibit H Contracts Restricting Borrower's Right to Incur Debts
Exhibit I Litigation
Exhibit J Capitalized Leases
Exhibit K Operating Leases
Exhibit L Pension Plans
Exhibit M Labor Contracts
Exhibit N Compliance Certificate
Exhibit O Permitted Liens
Exhibit P Environmental
Exhibit Q Federal Government Contracts
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
KVH Industries, Inc., December 31, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,047,838
<SECURITIES> 0
<RECEIVABLES> 3,463,649
<ALLOWANCES> 101,259
<INVENTORY> 3,672,269
<CURRENT-ASSETS> 10,196,410
<PP&E> 11,216,892
<DEPRECIATION> (3,989,114)
<TOTAL-ASSETS> 19,834,710
<CURRENT-LIABILITIES> 2,467,499
<BONDS> 0
0
0
<COMMON> 72,969
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,834,710
<SALES> 22,822,429
<TOTAL-REVENUES> 22,822,429
<CGS> 15,034,250
<TOTAL-COSTS> 15,034,250
<OTHER-EXPENSES> 11,551,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187,867
<INCOME-PRETAX> (3,951,077)
<INCOME-TAX> (1,253,822)
<INCOME-CONTINUING> (2,697,255)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,697,255)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
