SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number: 0-28082
KVH Industries, Inc.
(Exact name of Registrant as Specified in its Charter)
Delaware 05-0420589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Enterprise Center, Middletown, RI. 02842
(Address of principal executive offices)
(401) - 847 - 3327
(Registrant' telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Date Class Outstanding shares
July 27, 1998 Common Stock, par value $0.01 per, share 7,143,048
KVH INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for the three and
six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 9
Part I. Financial Information
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 1,670,853 4,757,614
Accounts receivable, net 4,500,870 4,338,992
Contract receivables 48,407 156,777
Costs and estimated earnings in excess
of billings on uncompleted contracts 877,683 406,014
Inventories 5,536,355 4,751,792
Prepaid expenses and other deposits 245,712 222,015
Deferred income taxes 1,214,350 387,567
----------------- --------------------
Total current assets 14,094,230 15,020,771
----------------- --------------------
Property and equipment, net 6,612,804 5,974,635
Other assets, less accumulated amortization
666,868 731,000
Deferred income taxes 78,535 78,535
----------------- --------------------
Total assets $ 21,452,437 21,804,941
================= ====================
Liabilities and stockholders' equity:
Current liabilities:
Current lease obligation 0 7,278
Accounts payable 2,451,532 1,618,295
Accrued expenses 872,528 960,488
Customer deposits 0 25,068
----------------- --------------------
Total current liabilities 3,324,060 2,611,129
----------------- --------------------
Stockholders' equity:
Common stock 71,386 70,860
Additional paid-in capital 15,376,599 15,298,558
Retained earnings 2,680,392 3,824,394
----------------- --------------------
Total stockholders' equity 18,128,377 19,193,812
----------------- --------------------
Total liabilities and stockholders' equity $ 21,452,437 21,804,941
================= ====================
See accompanying notes to consolidated financial statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
--------------------------------- -------------------------------
Net sales $6,470,240 5,770,505 10,598,841 11,686,838
Cost of sales 4,079,633 3,250,743 7,078,052 6,429,773
--------------------------------- -------------------------------
Gross profit 2,390,607 2,519,762 3,520,789 5,257,065
Operating expenses:
Research & development 1,181,868 635,275 2,032,920 1,241,221
Sales & marketing 1,172,569 950,641 2,275,223 1,729,740
Administration 631,615 369,672 1,263,952 846,223
--------------------------------- -------------------------------
(Loss) income from operations (595,445) 564,174 (2,051,306) 1,439,881
Other income (expense):
Other income (expense) 47,401 (3,080) 45,377 (10,119)
Interest income 17,738 99,789 47,673 186,275
Foreign currency gain 107,417 10,335 109,082 6,461
--------------------------------- -------------------------------
(Loss) income before income tax (422,889) 671,218 (1,849,174) 1,622,498
(benefit) expense
Provision for income tax (benefit) (175,560) 269,051 (705,173) 616,338
expense
================================= ===============================
Net (loss) income $ (247,329) 402,167 (1,144,001) 1,006,160
================================= ===============================
Per share information:
(Loss) income per share
Basic $ (0.03) 0.06 (0.16) 0.14
Diluted $ (0.03) 0.05 (0.16) 0.13
Number of shares used
in per share calculation:
Basic 7,109,856 7,044,717 7,098,107 7,028,644
Diluted 7,109,856 7,489,837 7,098,107 7,490,228
See the accompanying notes to consolidated financial statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
1998 1997
----------------- ---------------
Cash flow from operations:
Net (loss) income $ (1,144,001) 1,006,160
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 389,217 326,778
Provision for deferred taxes (826,783) 0
Decrease (increase) in accounts receivable (53,508) 4,371,988
Increase in costs and estimated earnings in
excess of billings on uncompleted contracts (471,669) (255,263)
Increase in inventories (784,563) (140,784)
Decrease in prepaid expenses and other deposits (23,697) (33,150)
Increase in accounts payables 833,236 329,726
Decrease in accrued expenses (87,960) (801,396)
Decrease in customer deposits (25,068) (2,527,500)
----------------- ---------------
Net operating cash provided by (used in) operating
activities (2,194,796) 2,276,560
----------------- ---------------
Cash flow from investing activities:
Capital expenditures (963,254) (908,420)
----------------- ---------------
Net cash used in investing activities (963,254) (908,420)
----------------- ---------------
Cash flow from financing activities:
Increase in bank line of credit 0 500,000
Repayments of obligations under capital lease (7,278) (28,271)
Proceeds from issuance of capital stock, exercise
of warrants and stock options 78,567 36,320
----------------- ---------------
Net cash provided by financing activities 71,289 508,050
Net increase (decrease) in cash and cash
equivalents (3,086,761) 1,876,190
----------------- ---------------
Cash and cash equivalents at beginning of period 4,757,614 7,005,682
Cash and cash equivalents at end of period $ 1,670,853 8,881,872
================= ===============
Supplement disclosure of cash flow information
Cash paid during the period for interest $ 4,565 1,154
Cash paid during the period for income tax $ 6,600 1,168,374
See the accompanying notes to consolidated financial statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
(1.) The accompanying consolidated financial statements of KVH Industries, Inc.
and subsidiary (the "Company") for the three and six month periods ended June
30, 1998 and 1997 have been prepared in accordance with generally accepted
accounting principles and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The consolidated financial statements presented have not been
audited by independent public accountants, but include all adjustments
(consisting of only normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial condition,
results of operations and cash flows for such periods. These consolidated
financial statements do not include all disclosures associated with annual
financial statements and accordingly should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K dated March 25, 1998 as filed with the Securities and
Exchange Commission, a copy of which is available from the Company upon request.
The results for the three and six months ended June 30, 1998 are not necessarily
indicative of the operating results for the remainder of the year.
(2.) Inventories at June 30, 1998 and December 31, 1997 include the costs of
material, labor and factory overhead. Inventories are stated at the lower of
cost (first-in, first-out) or market and consist of the following (in thousands
of dollars):
1998 1997
---- ----
Raw materials $ 3,628 $3,243
Work in process 384 356
Finished goods 1,524 1,153
----- -------
$5,536 $4,752
====== ======
Defense project inventories are included in the balance sheet caption "Costs and
estimated earnings in excess of billings on uncompleted contracts". Defense
project inventories amounted to $95,503 and $39,408 at June 30, 1998 and
December 31, 1997 respectively. Defense contracts provide for project costs
reimbursement as costs are incurred, through monthly invoicing of vouchers or
progress billings.
(3.) Income tax benefit has been calculated using an estimated year-to-date
income tax rate of 38%. The tax rate utilized in the calculation of income tax
benefit differs from the federal statutory rate of 34% primarily due to state
income taxes.
(4.) Net income (loss) per common share. The computation of the diluted loss per
share for the three and six month periods ended June 30, 1998 did not include
the conversion of common stock equivalents as the effect would be antidilutive.
See Exhibit 11 for a reconciliation of the weighted average number of shares
outstanding used in the computation of the basic and diluted earnings (loss) per
common share.
(5.) During the first quarter of 1998 the Company adopted two new accounting
pronouncements, SFAS No. 130 and No. 131. The Financial Accounting Standards
Board ("FASB") recently issued SFAS No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
This statement is effective for fiscal years beginning after December 15, 1997,
and requires classification of the financial statements for earlier periods
provided for comparative purposes. The effect of the adoption of SFAS No. 130
did not have a material impact on the Company's financial condition, results of
operations or cash flows. The Financial Accounting Standards Board recently
issued SFAS No. 131, "Disclosures about Segments of and Enterprise and Related
Information". This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement supercedes SFAS No. 14, "Financial Reporting for
Segments of a Business", but retains the requirement to report information about
major customers. This statement also amends SFAS No. 94, "Consolidation of
Majority-Owned Subsidiaries". This statement is effective for financial
statements for periods beginning after December 31, 1997 and requires that
comparative information for earlier years be restated for comparative purposes.
The effect of the adoption of SFAS No. 131 did not have a material impact on the
Company's financial condition, results of operations or cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995.
With the exception of historical information, the matters discussed in this
Quarterly Report on Form 10-Q include certain forward-looking statements that
involve risks and uncertainties. Among the risks and uncertainties to which the
Company is subject are the risks associated with managing the Company's
inventory in light of product life cycles and technological change, the
Company's relationship with its significant customers, market acceptance of new
product offerings in the emerging mobile satellite communications market,
reliance on satellite networks, reliance on a limited number of products and
customers, dependence on key personnel and fluctuations in annual and quarterly
performance. As a consequence of these factors 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 Quarterly Report on Form 10-Q. This
report should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K dated
March 25, 1998 as filed with the Securities and Exchange Commission, a copy of
which is available from the Company upon request.
Results of Operations
Overview - The Company develops, manufactures and markets digital
navigation, fiber optic sensor and mobile satellite communications products for
use in commercial, military and recreational marine applications. The Company's
digital navigation systems utilize the Company's proprietary autocalibration and
applications software along with advanced sensor technology to provide users
with accurate, real-time heading, orientation and position information. In 1993
the Company entered the mobile satellite communications market with the
introduction of an active-stabilized antenna-aiming system that incorporates the
Company's proprietary software and sensor technologies. To date the Company has
sold the majority of mobile satellite products to systems integrators such as
American Mobile Satellite Corporation ("AMSC"). In September 1997, the Company
began selling satellite communications systems bundled with air time services
directly to end-users as a part of a partnering agreement with PTT Telecom BV
("Station 12"), an INMARSAT air-time provider. In October of 1997 the Company
acquired the assets of Andrew Corporation's Fiber Optic Gyro ("FOG") Sensor
research group enabling the Company to expand its current offering of satellite
and land navigation products into market areas requiring a greater range of
operating performance. The additional personnel and operating costs associated
with the FOG group has and will continue to add significant costs to the
Company's 1998 operations.
Net (loss) income and diluted (loss) earnings per share - Net income (loss) and
diluted earnings (loss) per share for the three and six month periods ended June
30, 1998 and 1997 were $(247,329) and $(1,144,001) or $(0.03) and $(0.16) per
share in 1998 and $402,167 and $1,006,160 or $0.05 and $0.13 per share in 1997.
Net sales - Quarterly net sales were $6,470,240, a 12% increase when compared
with last year's second- quarter revenues of $5,770,505. Six-month 1998 sales
amounted to $10,598,841, a decrease of 9% from the comparable period of the
prior year. Second-quarter 1998 sales gains are due to strong defense sales and
rapid growth of direct sales of communications products. This year's six-month
sales decline reflects large one-time defense shipments included in the 1997
first-quarter revenue base that did not reoccur this year. Gross profit - Gross
profit is comprised of revenues less the cost of materials, direct labor,
manufacturing overheads and warranty costs. Gross profit decreased by $129,155
and $1,736,276 in the second quarter and for the first six months of 1998,
respectively, when compared with the three and six-month periods of 1997. Second
quarter 1998 gross profit as a percentage of net sales represented 37%, a
decrease from 44% in the second quarter of 1997. Six-month 1998 gross profit as
a percentage of net sales was 33% and in the comparable period of 1997 gross
profit represented 45% of net sales. Gross profit decreases as a percentage of
sales are the result of three factors: the impact of relatively fixed
manufacturing overhead spending spread over reduced net sales, rapid sales
growth in lower margin communication products and the addition of the FOG
manufacturing overhead spending.
Operating expenses - Research and development expense increased to $1,811,868
and $2,032,920 in the three and six-month periods ended June 30, 1998,
representing increases of 86% and 64%, respectively, over comparable periods of
the prior year. Research spending increases are primarily due to the addition of
engineering fiber optic research costs subsequent to the FOG acquisition. Sales
and marketing expense increased to $1,172,569 and $2,275,223 in the second
quarter and first six-months of 1998, respectively, a 23% and 32% increase from
comparable periods of 1997. The growth in marketing and sales costs are due to
the launch of new products, staffing increases to meet the requirements of the
FOG product line and international trade show costs. General and administrative
expense increased $261,943 and $417,729 in the second quarter and first
six-months of 1998, respectively, when compared with the same periods in 1997.
General and administrative cost increases reflect the addition of fiber optic
costs to the existing general and administrative cost base. Excluding the
addition of FOG costs, general and administrative costs decreased when compared
with the prior year.
Other income (expense) - Other income (expense) is made up of interest income
and expense, other income and expense and foreign currency translation gains and
losses.
Income tax expense (benefit) - Income tax expense in 1997 was replaced with
income tax benefits associated with the 1998 pre-tax
operating losses.
Liquidity and capital resources
Working Capital - Working capital decreased by approximately $1.6 million
dollars in the first six months of 1998 from December 31, 1997. Cash and cash
equivalents were $1,670,853 and $4,757,614 at June 30, 1998 and December 31,
1997 respectively. The decrease in capital resources reflects the net operating
loss experienced in the first six-months of 1998. The Company believes that cash
generated from operations in the second half of 1998 and amounts available under
its revolving bank borrowing facility will be sufficient to fund operations and
planned capital expenditures for the remainder of the year.
Capital expenditures - Fixed assets purchases amounted to $963,254 in the first
six months of 1998. Fixed asset acquisitions are primarily leasehold
improvements associated with the build-out of the Company's fiber optic
manufacturing facility located in Tinley Park, Illinois. The Company is in the
process of moving the FOG operation out of a temporary facility provided by
Andrew Corporation and into a new leased facility. The Company has entered into
a seven-year operating lease to occupy approximately 23,000 square feet at a
rate of $6.62 per square foot or approximately $152,000 per year. In order to
meet the specialized manufacturing and engineering demands of the FOG operation
the Company has committed to leasehold improvements estimated at $800,000. The
Company will expend these funds primarily in the second and third quarters of
this year. Partial occupancy of the new FOG facility began in June of this year.
Other Matters
Year 2000 - The Company is in the process of selecting a year 2000 compliant
enterprise resource planning ("ERP") software system to replace its current
software system. Computer consultants have been employed to assist the Company
select and implement a year 2000 compliant system. In addition the Company has
hired a Chief Operating Officer with significant experience in the
implementation of ERP systems to ensure that the full range of software and
hardware issues related to year 2000 issues are resolved in a timely and cost
effective manner. The estimated cost of consulting services, computer hardware,
training and software is anticipated to be less than $0.8 million dollars.
Inflation - The Company believes that inflation has not had a material effect on
the results of its operations.
Recent Accounting Pronouncements - The Financial Accounting Standards Board
("FASB") recently issued Statement of Financial Standards Number 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging, requiring recognition of all derivatives as either
assets or liabilities in the statement of financial position measured at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The effect of adopting SFAS 133 is not expected
to have a material impact on the Company's financial condition, results of
operations or cash flows.
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. Some of the important factors that could cause actual
results to differ materially from the results anticipated by the previous
statements are discussed below.
Dependence on New Products and the Marine Mobile Satellite Communications Market
- - The Company's future sales growth will depend to a considerable extent upon
the successful introduction of new mobile satellite communications products for
use in marine applications, and those introductions will be affected by a number
of variables including, but not limited to: market potential and penetration;
reliability of outside vendors; satellite communications service providers'
financial abilities and products; regulatory issues; maintaining appropriate
inventory levels; disparities between forecast and realized sales; and design
delays and defects. The occurrence of any of these factors would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Variability of Quarterly Operating Results - The Company's quarterly operating
results have varied in the past and may, in the future, vary significantly
depending upon a number of factors, including: the size and timing of
significant orders; increased competition; the viability of the marine mobile
satellite communications market; market acceptance of new mobile satellite
communications products; the ability of the Company to develop, introduce and
market new products in a timely fashion; the ability of the Company to acquire
specialized piece parts and product components in a timely fashion; the ability
of the Company to control costs; the Company's success in expanding its sales
and marketing programs; changes in sensor technology; changes in Company's
strategy; the Company's ability to attract and retain key personnel; U.S.
Department of Defense budget allocations and timeframes for placement of
production orders and general economic factors.
Possibility of Common Stock Price Volatility - The trading price of the
Company's Common Stock has been subject to wide fluctuations. The trading price
of the Company's Common Stock could be subject to wide fluctuations in the
future in response to quarterly variations in operating results, announcement of
new products by the Company or its competitors, changes in the financial
estimates by securities analysts and other events or factors. In addition, the
stock market has experienced volatility that has affected the market price of
many high technology companies that has often been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock.
Part II. Other Information
Item 1. Legal Proceedings.
None
Item 6. Exhibits and reports on Form 8-K.
1. Exhibit 11 - Computation of Earnings Per Common Share: Three and Six Months
Ended June 30, 1998 and 1997.
2. Exhibit 27 - Financial Data Schedule: Six Months Ended June 30, 1998.
3. No reports on Form 8-K were filed during the quarter for which this report
was filed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KVH Industries, Inc.
By: /s/ Richard C. Forsyth
Richard C. Forsyth
(Chief Financial and Accounting Officer)
Date: July 30, 1998
Exhibit 11.
Computation of net earnings per share, all data in thousands, except per share
data. This data is Unaudited.
For three months ended For six months ended
June 30, June 30,
1998 1997 1998 1997
------------ ----------- ----------- ----------
Calculation of earnings per share - basic
Net income (loss) $ (247) 402 (1,144) 1,006
============ =========== =========== ==========
Shares:
Weighted average common shares outstanding 7,110 7,045 7,098 7,028
============ =========== =========== ==========
Net income (loss) per common share - basic $ (0.03) 0.06 (0.16) 0.14
============ =========== =========== ==========
Calculation of earnings per share - diluted
Net income (loss) $ (247) 402 (1,144) 1,006
============ =========== =========== ==========
Shares:
Weighted average common shares outstanding 7,110 7,045 7,098 7,028
Additional shares assuming conversion of 445 462
stock options and warrants
============ =========== =========== ==========
Average common shares outstanding and equivalents
7,110 7,490 7,098 7,490
============ =========== =========== ==========
Net income (loss) per common share - diluted $ (0.03) 0.05 (0.16) 0.13
============ =========== =========== ==========
See the accompanying notes to consolidated financial statements.
5
6-MOS
DEC-31-1998
JUN-30-1998
1,670,853
0
4,574,778
(73,909)
5,536,355
14,094,230
9,338,022
(2,725,218)
21,452,437
3,324,060
0
0
0
71,386
0
21,452,437
10,598,841
10,598,841
7,078,052
7,078,052
5,572,095
0
4,565
(1,849,174)
(705,173)
(1,144,001)
0
0
0
(1,144,001)
(0.16)
(0.16)
