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, 1999
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's 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 14, 1999 Common Stock, par value $0.01 per, share 7,262,159
KVH INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the three and
six months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 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 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 10
Part I. Financial Information
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1999 December 31, 1998
(Unaudited) (Audited)
---------------- --------------------
Assets:
Current assets:
Cash and cash equivalents $ 3,906,950 1,239,227
Accounts receivable, net 4,713,175 3,106,414
Income taxes receivable 1,062,494
Costs and estimated earnings in excess of
billings on uncompleted contracts 232,606 768,156
Inventories 3,832,117 3,390,787
Prepaid expenses and other deposits 380,694 360,346
Deferred income taxes 382,905 234,158
------------- -------------
Total current assets 13,448,447 10,161,582
------------- -------------
Property and equipment, net 7,400,838 7,186,539
Other assets, less accumulated amortization 904,308 972,365
Deferred income taxes 689,932 425,150
------------- -------------
Total assets $ 22,443,525 18,745,636
============= =============
Liabilities and stockholders' equity:
Current liabilities:
Current portion long term debt $ 71,368
Accounts payable 1,843,513 853,238
Accrued expenses 942,922 822,533
------------- -------------
Total current liabilities 2,857,803 1,675,771
------------- -------------
Long term debt 2,904,982
------------- -------------
Total liabilities 5,762,785 1,675,771
------------- -------------
Stockholders' equity:
Common stock 72,622 72,059
Additional paid-in capital 15,502,470 15,439,421
Retained earnings 1,105,648 1,558,385
------------- -------------
Total stockholders' equity 16,680,740 17,069,865
------------- -------------
Total liabilities and stockholders'equity $ 22,443,525 18,745,636
============= =============
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,
---------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- ----------------
Net sales $ 6,525,644 6,470,240 12,498,814 10,598,841
Cost of sales 4,283,824 4,079,633 8,053,582 7,078,052
------------- ------------- ------------- -------------
Gross profit 2,241,820 2,390,607 4,445,232 3,520,789
Operating expenses:
Research & development 1,040,299 1,181,868 1,909,840 2,032,920
Sales & marketing 1,241,469 1,172,569 2,394,200 2,275,223
Administration 482,776 631,615 1,051,959 1,263,952
------------- ------------- ------------- -------------
Loss from operations (522,724 ) (595,445 ) (910,767 ) (2,051,306 )
Other income (expense):
Other income 904 47,401 5,450 45,377
Interest (expense) income, net (14,173 ) 17,738 (14,273 ) 47,673
Foreign currency gain 45,308 107,417 56,478 109,082
------------- ------------- ------------- -------------
Loss before income tax benefit (490,685 ) (422,889 ) (863,112 ) (1,849,174 )
Income tax benefit 183,565 175,560 410,375 705,173
============= ============= ============= =============
Net loss $ (307,120 ) (247,329 ) (452,737 ) (1,144,001 )
============= ============= ============= =============
Per share information:
Loss per share
Basic $ (0.04 ) (0.03 ) (0.06 ) (0.16 )
Diluted $ (0.04 ) (0.03 ) (0.06 ) (0.16 )
Number of shares used in per share calculation:
Basic 7,207,007 7,109,856 7,206,474 7,098,107
Diluted 7,207,007 7,109,856 7,206,474 7,098,107
See 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,
-------------------------------------
1999 1998
-------------- --------------
Cash flow from operations:
Net loss $ (452,737 ) (1,144,001 )
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 460,562 389,217
Provision for deferred taxes (413,529 ) (826,783 )
Increase in accounts receivable, net (1,606,761 ) (53,508 )
Decrease in income taxes receivable 1,062,494 -
Decrease (increase) in costs and estimated earnings in
excess of billings on uncompleted contracts 535,550 (471,669 )
Increase in inventories (441,330 ) (784,563 )
Increase in prepaid expenses and other deposits (20,348 ) (23,697 )
Increase in accounts payable 990,275 833,236
Increase (decrease) in accrued expenses 120,389 (87,960 )
Decrease in customer deposits - (25,068 )
-------------- --------------
Net cash provided by (used in) operating activities 234,565 (2,194,796 )
-------------- --------------
Cash flow from investing activities:
Capital expenditures (606,804 ) (963,254 )
-------------- --------------
Cash flow from financing activities:
Proceeds from long term debt 3,000,000 -
Repayments of long term debt (23,650 ) -
Repayments of obligations under capital lease - (7,278 )
Proceeds from exercise of stock options 63,612 78,567
-------------- --------------
Net cash provided by financing activities 3,039,962 71,289
-------------- --------------
Net increase (decrease) in cash and cash equivalents 2,667,723 (3,086,761 )
-------------- --------------
Cash and cash equivalents beginning of period 1,239,227 4,757,614
-------------- --------------
Cash and cash equivalents end of period $ 3,906,950 1,670,853
============== ==============
Supplement disclosure of cash flow information:
Cash paid during the period for interest $ 14,173 4,565
Cash paid during the period for income tax $ - 6,600
See accompanying Notes to Consolidated Financial Statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(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, 1999 and 1998 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 24, 1999 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, 1999 are not necessarily
indicative of the operating results for the remainder of the year.
(2) Inventories at June 30, 1999 and December 31, 1998 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.
1999 1998
--------------- -------------
Raw materials $ 2,689,968 2,178,265
Work in process 317,554 461,798
Finished goods 824,595 750,724
============ =============
$ 3,832,117 3,390,787
============ =============
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 $125,437 and $139,930 at June 30, 1999
and December 31, 1998, respectively. Defense contracts provide for project costs
reimbursement as costs are incurred, through monthly invoicing of vouchers or
progress billings.
(3) 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%. Due
to the difference in the term of the note and the amortization of principal, a
balloon payment is due on February 1, 2009, in the amount of $2,014,716.
(4) The first quarter provision for income taxes included a tax benefit of
$79,443 resulting from the realization of the difference between the 1998
estimated income tax refund and the actual refund. Excluding the effect of this
benefit, the Company's effective tax rate for the six months ended June 30,
1999, is approximately 38%. The difference between the Company's effective tax
rate and the statutory tax rate is due primarily to state income taxes.
(5) Net loss per common share. The computation of the loss per share for
the six-month periods ended June 30, 1999 and 1998 excludes the effect of
potential common stock, 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 loss per common share.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Safe Harbor statement under the Private Securities Litigation Reform Act of 1995
With the exception of historical information, the matters discussed in this
Quarterly Report on Form 10-Q include certain forward-looking statements that
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those stated. These forward-looking statements reflect
management's opinions only as of the date hereof, and KVH Industries, Inc.
assumes no obligation to update this information. Risks and uncertainties
include, but are not limited to, those discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Looking Statements - Risk Factors." Shareholders of the
Company are cautioned not to place undue reliance on forward-looking statements
made in the Quarterly Report on Form 10-Q. This report should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K dated March 24, 1999, and
the Quarterly Report on Form 10-Q dated April 22, 1999. These reports are filed
with the Securities and Exchange Commission and copies are available from the
Company upon request or through the Company's web site at http://www.kvh.com.
Results of Operations
Overview - The Company develops, manufactures and markets digital
navigation, fiber optic sensor and mobile satellite communications products for
commercial, military and recreational marine applications. Products developed by
the Company provide accurate, real-time heading, orientation and position data
and are based on the Company's proprietary sensor technology, robotics, and
autocalibration and applications software. In 1982, the Company introduced the
world's first commercial digital fluxgate compass and focused primarily on
commercial marine navigation product development until 1985, when the U.S.
military first used its compasses. A tactical navigation system KVH developed in
1991 for U.S. land military vehicles in the Persian Gulf War combined the
Company's sensor and autocalibration technologies, and subsequently the Company
developed a tactical navigation product line that is marketed to militaries
throughout the world. The Company entered the mobile satellite communications
market in 1993 by introducing an active-stabilized antenna-aiming system and
subsequently creating a marine product line that delivers mobile television
reception in North America and Europe and fax, voice and data communications
worldwide via Inmarsat-3 mini-M satellites. In February 1999, the Company
further expanded its mobile satellite communications product line by introducing
a system that delivers mobile television reception to land vehicles such as RVs,
motor coaches, SUVs, vans, buses and long-haul trucks. The Company markets its
integrated communications systems directly to end-users through an established
international dealer network. To advance its technological capabilities and
expand its markets, in 1997 the Company acquired the assets of Andrew
Corporation's fiber optic research group. The Company is integrating its fiber
optic gyroscopes (FOGs) with existing product lines, particularly in defense
navigation, and marketing FOGs to OEM customers.
Net loss results - For the three-month periods ended June 30, net losses
were $307,120 or $.04 a share in 1999 and $247,329 or $.03 a share in 1998.
Second-quarter 1999 losses are attributable primarily to the combined effect of
fixed overhead costs and reduced revenues for FOGs, plus a decline in
high-margin defense sales. Net losses for the six-month periods ended June 30,
1999 and 1998, were $452,737 or $.06 a share and $1,144,001 or $.16 a share,
respectively. The improvement in the six-month period resulted from a 53%
increase in communications revenues and a 4% reduction in operating expenses.
Net sales - Net sales of $6,525,644 for the 1999 second quarter were up
slightly compared to $6,470,240 in the 1998 quarter. A 48% growth in
communications sales offset a 23% decline in navigation sales from the 1998
quarter. Communications and navigation sales comprised 49% and 51%,
respectively, of total revenues in the 1999 second quarter compared to 1998 when
communications contributed 33% and navigation 67% to the revenue mix. Sales of
TracVision LM, TracVision 3 and the TracVision Cruiser that was introduced in
the second quarter were primary contributors to communications revenue growth.
Overall TracVision orders increased more than two-fold over the 1998 quarter.
The decline in navigation orders is due primarily to fluctuations in high-margin
military orders, which had an overall adverse impact on profit of $0.4 million.
Second-quarter FOG sales decreased 57% in 1999 from 1998 due to a shift in focus
to more promising markets from bus navigation.
Total revenues for the 1999 six-month period grew 18% to $12,498,814 from
$10,598,841 in 1998. The increase is attributable to strong sales of two new
communications products introduced in the first quarter, TracVision LM,
TracVision 3 and strong first-quarter military sales. Six-month revenues were
also adversely affected by an anticipated variation in FOG sales.
Gross profit - Gross profit is comprised of revenues less the cost of
materials, direct labor, manufacturing overheads and warranty costs.
Second-quarter gross profit declined 6% to $2,241,820 in 1999 from $2,390,607 in
1998. As a percentage of sales, gross profit declined to 34% in 1999 from 37% in
1998. Adverse effects on gross profit from manufacturing overhead spending
increases and changes in the product mix from high-margin military sales to
lower-margin communications sales were offset to some degree by reductions in
direct product cost of sales. Gross profit for the six-month periods increased
to $4,445,232 in 1999 from $3,520,789 in 1998, or 36% and 33%, respectively, as
a percentage of sales, as strong military sales in the 1999 first quarter and
reductions in direct product cost of sales helped offset the impact of high FOG
manufacturing costs and the impact of a 16% revenue shift to lower margin
communication products.
Operating expenses - Operating expenses decreased 7% in the 1999 quarter to
$2,764,544 from $2,986,052 in 1998. Expenses for research and development and
for administration decreased 12% and 24%, respectively, and sales and marketing
expense increased 6% during the quarter. In the six-month periods ended June 30,
1999 and 1998, operating expenses were $5,355,999 and $5,572,095, respectively.
For the six months, research and development expenses declined 6%,
administration costs decreased 17% and sales and marketing increased 5%. In both
the second-quarter and six-month periods for 1999, decreases in research and
development and administration were attributable primarily to cost reductions
begun in July 1998. Sales and marketing increases during the three- and
six-month periods were due to costs for introducing new products and building
new distribution networks for the land mobile market, which the company just
entered in the first quarter of 1999.
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 benefit - The second-quarter income tax benefit reflects the net
operating loss carryforward associated with the second quarter operating loss.
The 1999 six-month period includes a tax benefit associated with the
year-to-date loss and the recognition of the difference between the estimated
1998 tax refund and the actual tax refund.
Liquidity and capital resources
Working Capital - Working capital increased $2,104,833 in the first six
months of 1999 from December 31, 1998. Cash and cash equivalents were $3,906,950
and $1,239,227 at June 30, 1999 and December 31, 1998, respectively. The
increase in working capital resulted from the mortgage financing of the
Company's headquarters in Middletown, Rhode Island, in the amount of $3,000,000
(see Note 3, "Notes to Consolidated Financial Statements").
On July 30, 1999, the Company renewed a $2,500,000 revolving credit
agreement with its bank for a period of one year. The credit agreement expires
on July 30, 2000. Borrowings are secured by substantially all of the assets of
the Company, except for land, building and improvements. At June 30, 1999, the
Company had $2,500,000 of unused borrowings with its bank to be drawn upon as
needed.
Capital expenditures - Fixed assets purchases amounted to $606,804 in the
1999 second quarter. The acquired fixed assets included purchase of a year
2000-compliant computer system and tooling associated with new products.
The Company believes that existing cash balances amounts available under
its revolving credit facility and funds generated from the mortgage will be
sufficient to meet anticipated liquidity and working capital requirements for
1999. If the Company decides to expand more rapidly, to broaden or enhance its
products more rapidly, to acquire businesses or technologies or to make other
significant expenditures to remain competitive, then it may need to raise
additional funds.
Other Matters
Year 2000 - The Company has evaluated the impact of the year 2000 issue as
it relates to its navigation and communications products, both sold or intended
to sell, and has concluded that the Company's products are not affected by year
2000 operating issues. After assessing its software and computer systems for
year 2000 compliance, the company instituted an upgrade of its enterprise
resource planning system at a cost of approximately $0.8 million, of which
approximately $0.7 million has been spent to date. Implementation of the new
system occurred in July 1999 and the Company believes it is now fully year 2000
compliant. The Company is contacting its customers, suppliers, and financial
institutions, with which it does business, to ensure that any year 2000 issue is
resolved. While there can be no assurance that the systems of other companies
will be year 2000 compliant, the Company has no knowledge of any such third
party year 2000 issues that would result in a material adverse affect on its
operations. Should the Company become aware of any such situation, contingency
plans will be developed. The Company could be adversely affected should the
Company or other entities with whom the Company conducts business be
unsuccessful in resolving year 2000 issues in a timely manner. The Company
believes the cost of becoming year 2000 compliant will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
Inflation - The Company believes that inflation has not had a material
effect on the results of its operations.
Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
Number 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging. It requires that all derivatives be
recognized as either assets or liabilities at fair value and establishes
specific criteria for the use of hedge accounting. The Company's required
adoption date is January 1, 2001. SFAS No. 133 is not to be applied
retroactively to financial statements of prior periods. The Company expects no
material adverse effect on consolidated results of operations, financial
position or cash flows upon adoption of SFAS No. 133, but does expect a small
reduction in stockholders' equity.
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. Among the important factors that could cause
actual results to differ materially from those anticipated by the statements
above are the following:
The Company's 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 the Company's ability to effectively meet prevailing market conditions.
To position itself in these uncertain industries, the Company has taken a number
of steps that include, but are not limited to: acquisition of the fiber optic
technology and development of new related products; ongoing analysis of
potential technology advances; staff reductions and reallocations; improved
operational efficiencies; inventory reduction; recruiting key personnel; and
implementing cost controls. There can be no assurance that the objectives of
these development and cost-reduction activities will be achieved.
Other factors that could cause actual results to differ materially from the
results anticipated by management include:
FOG Acquisition. The additional personnel and operating expenses associated
with the acquisition of FOG technology and assets from Andrew Corporation in
October 1997 added significant costs to the Company's operations. As the Company
continues the process of integrating FOG sensors into current product offerings
and identifying new, untapped markets for existing FOG products, it expects
FOG-related costs to remain level or increase. Although the Company believes FOG
sensor technology shows great promise, to date the Company has been successful
in marketing only small quantities of products and it does not anticipate that
FOG-enhanced products will provide significant revenues for the next six months
or longer. The Company is designing its FOG-enhanced products to meet what it
believes are customer performance and price criteria; however, at this early
stage of product development and market introduction the Company can provide no
assurance that these objectives will be met or that competing technologies will
not be developed that may supercede FOG technology. The occurrence of any of
these factors could have a material adverse effect on the Company's business,
financial condition and results of operations.
Sales cycles for the Company's TACNAV and TACNAV Light systems for military
navigation applications are long and difficult to predict, resulting in a
variable revenue stream from this market. Military revenues decreased in 1998
from 1997 and the Company anticipates that 1999 defense revenues will remain
relatively flat.
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, 1999 and 1998.
2. Exhibit 27 - Financial Data Schedule: Six Months Ended June 30, 1999.
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, 1999
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,
1999 1998 1999 1998
------------ ----------- ----------- -----------
Calculation of earnings per share - basic
Net loss $ (307 ) (247 ) (453 ) (1,144 )
============ =========== =========== ===========
Shares:
Common shares outstanding 7,207 7,110 7,206 7,098
============ =========== =========== ===========
Net loss per common share - basic $ (0.04 ) (0.03 ) (0.06 ) (0.16 )
============ =========== =========== ===========
Calculation of earnings per share - diluted
Net loss $ (307 ) (247 ) (453 ) (1,144 )
============ =========== =========== ===========
Shares:
Common shares outstanding 7,207 7,110 7,206 7,098
Additional shares assuming conversion of
stock options and warrants - - - -
Average common and equivalent shares
outstanding 7,207 7,110 7,206 7,098
============ =========== =========== ===========
Net loss per common share - diluted $ (0.04 ) (0.03 ) (0.06 ) (0.16 )
============ =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
5
6-MOS
DEC-31-1999
JUN-30-1999
3,906,950
0
4,757,503
44,328
3,832,117
13,448,447
10,853,511
3,452,673
22,443,525
2,857,803
0
0
0
72,622
0
22,443,525
12,498,814
12,498,814
8,053,582
8,053,582
5,355,999
0
14,173
(863,112)
(410,375)
(452,737)
0
0
0
(452,737)
(0.04)
(0.04)
