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 September 30, 1997
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.)
110 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
October 24, 1997 Common Stock, par value $0.01 per, share 7,075,856
KVH INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income for the
three and nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
three and nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 11
Part I. Financial Information
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(Unaudited) (Audited)
----------------- ----------------
Assets:
Current assets:
Cash and cash equivalents .................. $ 7,905,205 7,005,682
Accounts receivable, net ................... 3,566,750 6,130,567
Contract receivables ....................... 51,282 29,226
Costs and estimated earnings in excess of
billings on uncompleted contracts ......... 682,801 835,720
Inventories ................................ 3,022,096 3,242,270
Prepaid expenses and other deposits ........ 217,915 179,705
Deferred income taxes ...................... 134,552 134,552
----------- -----------
Total current assets ................... 15,580,601 17,557,722
----------- -----------
Property and equipment, net ................ 5,156,492 3,881,088
Other assets, less accumulated amortization 0 25,978
Deferred income taxes ...................... 88,862 88,862
----------- -----------
Total assets ............................ $20,825,955 21,553,650
=========== ===========
Liabilities and stockholders' equity:
Current liabilities:
Current lease obligation ................... $ 18,337 $ 57,676
Accounts payable ........................... 1,025,623 1,031,309
Accrued expenses ........................... 1,117,675 1,371,193
Customer deposits .......................... 0 2,527,500
----------- -----------
Total current liabilities ............... 2,161,635 4,987,678
----------- -----------
Obligations under capital leases, excluding
current installments ....................... 0 3,341
----------- -----------
Total liabilities ........................ 2,161,635 4,991,019
----------- -----------
Stockholders' equity:
Common stock ............................... 70,751 69,932
Additional paid-in capital ................. 14,960,717 14,884,806
Accumulated earnings ....................... 3,632,852 1,607,893
----------- -----------
Total stockholders' equity ............... 18,664,320 16,562,631
----------- -----------
Total liabilities and stockholders' equity $20,825,955 21,553,650
=========== ===========
See accompanying notes to consolidated financial statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
---------- ---------- ---------- -----------
Net sales .................... $ 7,025,976 7,147,270 18,712,814 17,041,532
Cost of sales ................ 3,479,079 4,228,801 9,908,852 9,750,437
----------- ----------- ----------- -----------
Gross profit ................. 3,546,897 2,918,469 8,803,962 7,291,095
Operating expenses:
Research and development ..... 826,906 433,890 2,068,127 1,717,908
Sales and marketing .......... 866,709 628,249 2,596,449 2,272,171
Administration ............... 492,537 414,456 1,338,760 1,124,875
----------- ----------- ----------- -----------
Income from operations ....... 1,360,745 1,441,874 2,800,626 2,176,141
Other income (expense):
Other income (expense) ....... 102,897 (14,331) 92,778 (4,106)
Interest income, net ......... 84,156 93,201 270,431 195,861
Foreign currency gain (loss) . 47,664 (13,152) 54,125 (35,598)
----------- ----------- ----------- -----------
Income before income taxes ... 1,595,462 1,507,592 3,217,960 2,332,298
Income tax expense ........... 576,663 587,079 1,193,001 904,117
=========== =========== =========== ===========
Net income ................... $ 1,018,799 920,513 2,024,959 1,428,181
=========== =========== =========== ===========
Per share information:
Income per share ............. $ 0.14 0.12 0.27 0.21
=========== =========== =========== ===========
Number of shares used in per
share calculation ............ 7,523,790 7,574,037 7,457,987 6,892,793
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
1997 1996
----------- ------------
Cash flow from operations:
Net income ....................................... $ 2,024,959 1,428,181
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .................... 525,042 142,788
Decrease (increase) in accounts and contract
receivables ...................................... 2,541,761 (2,841,862)
Decrease (increase) in costs and estimated
earnings in excess of billings on uncompleted
contracts ........................................ 152,919 (465,465)
Decrease (increase) in inventories ............... 220,174 (1,410,602)
Increase in prepaid expenses and other
deposits ......................................... (12,232) (24,431)
(Decrease) increase in accounts payable .......... (5,686) 1,425,155
(Decrease) increase in accrued expenses .......... (253,518) 632,407
Decrease in customer deposits .................... (2,527,500) (248,500)
----------- -----------
Net operating cash provided by (used in)
operating activities ........................... 2,665,919 (1,362,329)
----------- -----------
Cash flow from investing activities:
Purchase of property and equipment ............... (1,800,446) (2,859,895)
----------- -----------
Net cash used in investing activities: ......... (1,800,446) (2,859,895)
----------- -----------
Cash flow from financing activities:
Repayments of obligations under capital lease .... (42,680) (35,209)
Proceeds from issuance of capital stock, exercise
of warrants and stock options .................... 76,730 10,335,907
----------- -----------
Net cash provided by financing activities ...... 34,050 10,300,698
Net increase in cash and cash equivalents ........ 899,523 6,078,474
----------- -----------
Cash and cash equivalents at beginning of period . 7,005,682 895,677
Cash and cash equivalents at end of period ....... $ 7,905,205 6,974,151
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ......... $ 6,972 8,916
Cash paid during the period for income taxes ..... $ 1,512,049 --
See the accompanying notes to consolidated financial statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(Unaudited)
(1.) The accompanying consolidated financial statements of KVH Industries,
Inc. and subsidiary (the "Company") for the three and nine month periods ended
September 30, 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. These financial statements 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, 1997 as filed with the Securities and Exchange Commission, a copy of which
is available from the Company upon request. The results for the nine months
ended September 30, 1997 are not necessarily indicative of the operating results
for the remainder of the year.
(2.) Inventories at September 30, 1997 and December 31, 1996 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): 1997 1996
Raw materials $2,332 $1,888
Work in process 533 714
Finished goods 157 640
----
$3,022 $3,242
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 $236,811 and $385,748 at September 30, 1997 and
December 31, 1996 respectively. Defense contracts provide for project costs
reimbursement as costs are incurred, through monthly invoicing of vouchers or
progress billings.
(3.) In May of 1996 the Company purchased a 75,000 square foot facility for
$2,000,000. Manufacturing operations were relocated to the new facility upon
completion of the first phase of facility renovations in January of 1997. The
Company completed the remainder of the facility renovations in September of 1997
and has moved all of its operations into the new facility. The cost of
renovation and refitting the new facility amounted to approximately $2,000,000.
The Company's former 27,000-square-foot, leased facility is currently utilized
as warehouse space. The Company is obligated under the lease agreement through
September 30, 1999. Remaining minimum lease payments total approximately
$835,000.
(4.) Income tax expense has been calculated using an estimated year-to-date
income tax rate of 37%. The tax rate utilized in the calculation of income tax
expense 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.
(5.) Concentration of credit risk, major customers and products
Historically, the Company derives a significant portion of its sales from a
limited number of customers. Year to date sales to the United States Government
Tank and Automotive Command amounted to 32 % of net sales and AMSC mobile
satellite product shipments amounted to 16% of total net sales. The Company
anticipates that no further shipments to AMSC will occur this year. Sales to the
armed forces of the United States, foreign governments and contractors that
supply these governments directly, represented 51% of total year-to-date net
sales.
(6.) Computation of net income per share is based upon the weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares are included in the per share calculations where the effect of their
inclusion would be dilutive. Dilutive common equivalent shares (using the
treasury stock method) consist of the incremental common shares issuable upon
conversion of stock options and warrants.
The Financial Accounting Standards Board ("FASB") recently issued Statement
Number 128, "Earnings Per Share". This statement replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires dual presentation of basic and diluted earnings per share on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator of the diluted
earnings per share computation. This statement is effective for periods ending
after December 15, 1997, including interim periods, and requires restatement of
all prior period earnings per share data presented after the effective date. The
effect of the adoption of FASB Statement Number 128 will 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.
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. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed under the heading "Forward Looking Statements" contained
herein and in the Company's other filings with the Securities and Exchange
Commission, including but not limited to those discussed under the heading
"Forward Looking Statements" in the Company's 1996 Report on Form 10-K. 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.
Net income and earnings per share - Net income and earnings per share for
the three and nine month periods ended September 30, 1997 and 1996 were
$1,018,799 or $0.14 per share and $920,513 or $0.12 per share for the three
month periods and $2,024,959 or $0.27 per share and $1,428,181 or $0.21 per
share for the nine month periods, respectively.
Net sales - Quarterly net sales were $7,025,976, a 1.7% decrease when
compared with last year's third quarter revenues of $7,147,270. As anticipated,
communications shipments slowed as new marine mobile satellite communication
product sales replaced AMSC sales realized in the third quarter 1996 revenue
base. The Company planned to replace last year's AMSC revenues by introducing
two new products: TracVision II, a mobile marine, satellite broadcast television
reception system and TracPhone 50, a mobile marine satellite based voice, data
and fax communications system. The new products began shipping in the third
quarter of 1997, but shipments were delayed until late in the quarter, limiting
the Company's ability to offset the non-recurring 1996 AMSC revenues. Management
decided to extend TracVision II product testing beyond the original requirement
which delayed the product release. Shipment of TracPhone 50 was delayed due to
component shortages resulting from a sole source supplier's inability to meet
the component delivery schedule it had established with the Company. Third
quarter 1997 TacNav military land navigation system shipments offset
substantially all of the non-recurring AMSC sales recorded in last year's third
quarter. Military land navigation systems represented 66% of third quarter 1997
sales, an increase of $2,060,638 or 81% over the third quarter of 1996.
Net sales grew to $18,712,814 in the first nine months of 1997, a 10%
increase over the first nine months 1996 sales total of $17,041,532.
Year-to-date sales growth resulted from military land navigation shipments that
grew to $9,459,200, a 36% increase over the prior years result of $6,965,443.
Navigation defense revenues increases are being driven by sales to the United
States Government Bradley Fighting Vehicle Program. (See "Forward Looking
Statements")
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Future revenue growth is largely dependent upon the Company's ability to
increase demand for its current marine mobile satellite communications products
and successfully design and market new products for the satellite market. The
Company anticipates that during the ramp-up of communications sales, revenues
from this sector may moderate. (See "Forward Looking Statements").
Gross profit - Gross profit is comprised of revenues less the cost of
materials, manufacturing and warranty costs. Gross profit increased to
$3,546,897 or 122% in the third quarter of 1997 when compared with the third
quarter of 1996. Third quarter gross profit as a percentage of net sales
represented 50% of net sales in 1997 and 41% of net sales in 1996. The quarterly
gross profit increase as a percentage of sales resulted from a larger mix of
higher margin military land navigation products. Gross profit for the first nine
months of 1997 increased to $8,803,962 or 21% over the comparable period of the
prior year. Year-to-date gross profit as a percentage of sales increased 4%,
reflecting the 1997 increased mix military of land navigation sales. Future
gross profit may decrease as a percentage of sales should the Company's sales
mix return to a more representative historical pattern.
Operating expenses - Research and development increased to $826,906 or 91%
in the third quarter of 1997 from $433,890 in the third quarter of 1996.
Year-to-date research and development costs increased to $2,068,127, 20% higher
than the first nine months of 1996. Research and development cost increases
resulted from the development of the new satellite communications products.
Research and development costs are anticipated to increase for the remainder of
the year as additional engineering resources are applied to fund new product
developments. Sales and marketing expense increased to $866,709 in the third
quarter of 1997, a 38% increase when compared with the third quarter 1996.
Year-to-date sales and marketing costs increased $324,278, growing 1% as a
percentage of net sales. Increased sales and marketing expense reflects staffing
expansion required to support current and future sales growth. Sales and
marketing expense is anticipated to increase throughout 1997 to support new
product introductions and manage expanded geographic markets. General and
administrative expense increased $78,081 or 19% in the third quarter of 1997
when compared with the third quarter of 1996. Year-to-date general and
administrative cost increased $213,885 or 19%, but remained constant as a
percentage of sales at 7%. General and administrative cost increases relate to
staffing increases, directors' and officers' insurance, legal fees and investor
relations costs. General and administrative costs are anticipated to increase
gradually throughout 1997.
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. The year-to-year change in other income reflects a State of
Rhode Island training grant awarded to the Company in the third quarter of 1997.
Income taxes - Quarterly income tax expense of $576,663 remained
approximately unchanged when compared with the third quarter of 1996.
Year-to-date income tax expense increased to $1,193,001 a 32% growth over the
comparable period of 1996. The current year tax rate has decreased due to
available tax credits.
Liquidity and capital resources - Working capital increased by $848,922 in
the third quarter of 1997 from December 31, 1996. Cash and cash equivalents were
$7,905,205 and $7,005,682 at September 30, 1997 and December 31, 1996
respectively. Cash and liquidity gains reflect the collection of several large
receivable balances and the liquidation of the $2.5 million dollar AMSC customer
deposit. 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 next twelve months.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Capital expenditures - Fixed assets purchases amounted to $1,800,446 in the
first nine months of 1997. Fixed asset acquisitions are primarily capital
improvements associated with the renovation of the Company's new
75,000-square-foot facility.
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.
Dependence on Government Customers Military Land Navigation Market - Year
to date military land navigation sales account for 51% of revenues. There can be
no assurance that government customers or their contractors will continue to
purchase the Company's products at historic levels. Changes in procurement
priorities or significant reductions or delays in procurement of the Company's
products by any government customer 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 and Nine
Months Ended September 30, 1997 and 1996.
2. Exhibit 27 - Financial Data Schedule: Nine Months Ended September 30,
1997.
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: October 23, 1997
Exhibit 11
KVH INDUSTRIES INC.
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
(unaudited)
For the three months For the nine months
ended September 30, ended September 30,
---------------------- -----------------------
1997 1996 1997 1996
--------- --------- ---------- ---------
Net earnings ............................ $1,019 921 2,025 1,428
====== ===== ===== =====
Shares:
Weighted average number of .............. 7,054 6,907 6,997 6,167
common shares outstanding
Additional shares assuming conversion of:
stock options and warrants ........... 470 667 461 726
------ ----- ----- -----
Average common shares
outstanding and equivalents .......... 7,524 7,574 7,458 6,893
====== ===== ===== =====
Net earnings per common share ......... $0.12 0.27 0.21 0.14
====== ===== ===== =====
See the accompanying notes to consolidated financial statements.
5
9-MOS
DEC-31-1997
SEP-30-1997
7,905,205
0
3,690,647
72,615
3,404,897
15,580,601
7,252,788
2,096,296
20,825,955
2,161,635
0
0
0
70,751
0
20,825,955
18,712,814
18,712,814
9,908,852
9,908,852
6,003,360
0
7,800
3,217,960
1,193,001
2,024,959
0
0
0
2,024,959
0.27
0.27
