SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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
April 17, 1998 Common Stock, par value $0.01 per, share 7,093,648
<PAGE>
KVH INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the
three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 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
<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
PRELIMINARY CONSOLIDATED BALANCE SHEET
March 31, 1998 December 31,
(Unaudited) 1997 (Audited)
------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 3,722,126 4,757,614
Accounts receivable, net 2,939,861 4,338,992
Contract receivables 56,378 156,777
Costs and estimated earnings in excess
of billings on uncompleted contracts 376,493 406,014
Inventories 5,309,665 4,751,792
Prepaid expenses and other deposits 172,631 222,015
Deferred income taxes 984,960 387,567
----------------- ----------------
Total current assets 13,562,114 15,020,771
----------------- ----------------
Property and equipment, net 6,057,509 5,974,635
Other assets, less accumulated amortization
709,151 731,000
Deferred income taxes 78,535 78,535
----------------- ----------------
Total assets $ 20,407,309 21,804,941
================= ================
Liabilities and stockholders' equity:
Current liabilities:
Current lease obligation 5,119 7,278
Accounts payable 1,394,614 1,618,295
Accrued expenses 709,498 960,488
Customer deposits 0 25,068
----------------- ----------------
Total current liabilities 2,109,231 2,611,129
----------------- ----------------
Stockholders' equity:
Common stock 70,866 70,860
Additional paid-in capital 15,299,537 15,298,558
Retained earnings 2,927,675 3,824,394
----------------- ----------------
Total stockholders' equity 18,298,078 19,193,812
----------------- ----------------
Total liabilities and stockholders' equity $ 20,407,309 21,804,941
================= ================
<PAGE>
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended
March 31,
1998 1997
---------------- -------------------
Net sales $ 4,128,601 5,916,329
Cost of sales 2,998,419 3,179,029
---------------- -------------------
Gross profit 1,130,182 2,737,300
Operating expenses:
Research & development 851,052 605,946
Sales & marketing 1,102,654 779,099
Administration 632,337 476,551
---------------- -------------------
Income (loss) from operations (1,455,861) 875,704
Other income (expense):
Other expense (2,071) (7,040)
Interest income 29,935 86,486
Foreign currency gain (loss) 1,665 (3,874)
---------------- -------------------
Income (loss) before income taxes (1,426,332) 951,276
Income tax expense (benefit) (529,613) 347,287
================ ===================
Net earnings (loss) $ (896,719) 603,989
================ ===================
Per share information:
Income (loss) per share - basic $ (0.13) 0.09
================ ===================
Income (loss) per share - diluted $ (0.13) 0.08
================ ===================
Weighted average number of shares
outstanding:
Basic 7,086,228 7,014,312
================ ===================
7,086,228 7,492,614
Diluted ================ ===================
See accompanying notes to consolidated financial statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
----------------- ---------------
<S> <C> <C>
Cash flow from operations:
Net earnings (loss) $ (896,719) 603,989
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 184,357 157,393
Provision for deferred taxes (597,393)
0
Decrease in accounts and contract receivables 1,499,530 1,195,543
Decrease (increase) in costs and estimated
earnings in excess of billings on uncompleted
contracts 29,521 (159,042)
Increase in inventories (557,873) (105,299)
Decrease in prepaid expenses and other deposits 49,384 97,946
Increase in accounts payables (223,681) 342,000
Decrease in accrued expenses (250,990) (357,116)
Decrease in customer deposits (25,068) (552,087)
----------------- ---------------
Net cash provided by operating activities (788,932) 1,223,327
----------------- ---------------
Cash flow from investing activities:
Capital expenditures (245,382) (282,235)
----------------- ---------------
Net cash (used in) investing activities: (245,382) (282,235)
----------------- ---------------
Cash flow from financing activities:
Repayments of obligations under capital lease (2,159) (14,093)
Proceeds from issuance of capital stock, exercise
of warrants and stock options 985 34,899
Net cash provided by (used in) financing activities (1,174) 20,806
Net increase (decrease) in cash and cash
equivalents (1,035,488) 961,898
Cash and cash equivalents at beginning of period 4,757,614 7,005,682
----------------- ---------------
Cash and cash equivalents at end of period $ 3,722,126 7,967,580
================= ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,961 1,237
Cash paid during the period for income taxes $ 0 0
</TABLE>
See the accompanying notes to consolidated financial statements.
<PAGE>
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Unaudited)
(1.) The accompanying consolidated financial statements of KVH Industries, Inc.
and subsidiary (the "Company") for the three month periods ended March 31, 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 months ended March 31, 1998 are not necessarily indicative of the
operating results for the remainder of the year.
(2.) Inventories at March 31, 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 $3,546 $3,243
Work in process 356 356
Finished goods 1,407 1,153
----- -------
$5,310 $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 $18,577 and $39,408 at March 31, 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 37%. The tax rate utilized in the calculation of income tax
benefit differs from the federal statutory rate of 34% primarily due to state
income tax expense net of the associated federal tax benefit and tax credits.
(4.) Net income (loss) per common share. In computing first quarter 1998 diluted
loss per share the conversion of common stock equivalents was not assumed 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 Result
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 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 is anticipated to add significant costs to the Company's 1998
operations.
Net income (loss) and diluted earnings (loss) per share - Net income (loss) and
diluted earnings (loss) per share for the three month periods ended March 31,
1998 and 1997 were $(896,719) or $(0.13) per share and $603,989 or $0.08 per
share.
Net sales - Quarterly net sales were $4,128,601, a 30% decrease when compared
with last year's first quarter revenues of $5,916,329. This year's quarterly
sales decline reflects large one-time defense shipments included in the 1997
first quarter revenue base that did not reoccur in this quarter. Growth in
Communications and FOG products offset about a third of the decrease in prior
year defense revenues.
Gross profit - Gross profit is comprised of revenues less the cost of materials,
direct labor, manufacturing overheads and warranty costs. Gross profit decreased
by $1,607,118 or 59% in the first quarter of 1998 when compared with the first
quarter of 1997. First quarter gross profit as a percentage of net sales
represented 27% of net sales in first quarter 1998 and 46% of net sales in the
first quarter of 1997. The quarterly gross profit decrease as a percentage of
sales is the result of the three factors: the impact of a relatively fixed
manufacturing overhead pool spread over a lower sales base, a mix shift towards
lower margin communication products and the addition of the FOG manufacturing
overhead pool.
Operating expenses - Research and development expense increased to $851,052 or
40% in the first quarter of 1998 from $605,946 in the first quarter of 1997. The
increase in research and development costs is primarily due the addition of
engineering costs associated with the fiber optic research. Research and
development in non-fiber optic applications increased at a more modest rate of
4% or approximately $21,000. Sales and marketing expense increased to $1,102,654
in the first quarter of 1998, a 42% increase when compared with the first
quarter 1997. Two-thirds of the marketing and sales cost increase related to the
first quarter launch of the TracPhone-25. The remainder of the sales and
marketing expense increase reflects communications staffing and support costs.
General and administrative expense increased $155,786 or 33% in the first
quarter of 1998 when compared with the first quarter of 1997. First quarter
general and administrative cost increases are made up of 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 4% or
approximately $20,000 when compared with the first quarter of 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) - Quarterly income tax expense was replaced with a
tax benefit associated with the first quarter loss in 1998 versus tax expense
derived from taxable income in the comparable period of the prior year.
Liquidity and capital resources - Working capital decreased by $956,759 in the
first quarter of 1998 from December 31, 1997. Cash and cash equivalents were
$3,722,126 and $4,757,614 at March 31, 1998 and December 31, 1997 respectively.
The decrease in capital resources reflects the net loss experienced in the first
quarter amounting to $896,719. The Company believes that cash generated from
operations, amounts available under its revolving bank borrowing facility and
the net proceeds of the initial public offering will be sufficient to fund
operations and planned capital expenditures for the remainder of the year.
Capital expenditures - Fixed assets purchases amounted to $245,382 in the first
three months of 1998. Fixed asset acquisitions are primarily capital
improvements associated with the renovation of the Company's fiber optic group
new facility. 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. Occupancy of the
new FOG facility is planned for May of this year.
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; 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 Months Ended
March 31, 1998 and 1997.
2. Exhibit 27 - Financial Data Schedule: Three Months Ended March 31, 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: April 24, 1998
Exhibit 11.
KVH Industries, Inc.
Computation of net earnings per share
(in thousands, except per share data)
(Unaudited)
For three months ended
March 31,
1998 1997
Calculation of earnings per share - basic
Net income (loss) $(897) 604
Shares:
Common stock outstanding 7,086 7,014
Net income (loss) per common share - basic $(0.13) 0.09
====== ====
Calculation of earnings per share - diluted
Net income (loss) $(897) 604
===== ===
Shares:
Common stock outstanding 7,086 7,014
Additional shares assuming conversion of:
stock options and warrants 0 478
Average common shares outstanding and equivalents 7,086 7,492
Net income (loss) per common share - diluted $ (0.13) 0.08
====== ====
See the accompanying notes to consolidated financial statements.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
KVH Industries, Inc. Financial Data Schedule
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,722,126
<SECURITIES> 0
<RECEIVABLES> 3,013,770
<ALLOWANCES> 73,909
<INVENTORY> 5,309,665
<CURRENT-ASSETS> 13,562,114
<PP&E> 8,676,942
<DEPRECIATION> 2,619,433
<TOTAL-ASSETS> 20,407,309
<CURRENT-LIABILITIES> 2,109,231
<BONDS> 0
0
0
<COMMON> 70,866
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,407,309
<SALES> 4,128,601
<TOTAL-REVENUES> 4,128,601
<CGS> 2,998,419
<TOTAL-COSTS> 2,998,419
<OTHER-EXPENSES> 2,586,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,916
<INCOME-PRETAX> (1,455,861)
<INCOME-TAX> (529,613)
<INCOME-CONTINUING> (896,719)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (896,719)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
