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, 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' 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 22, 1999 Common Stock, par value $0.01 per, share 7,205,928
KVH INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 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 1. LEGAL PROCEEDINGS 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
March 31, 1999 December 31, 1998
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 2,991,339 1,239,227
Accounts receivable, net 4,646,673 3,106,414
Income taxes receivable 1,141,9377 1,062,494
Costs and estimated earnings in excess of billings
on uncompleted contracts 221,641 768,156
Inventories 3,558,915 3,390,787
Prepaid expenses and other deposits 380,337 360,346
Deferred income taxes 382,906 234,158
--------------- -------------
Total current assets 13,323,748 10,161,582
--------------- -------------
Property and equipment, net 7,445,575 7,186,539
Other assets, less accumulated amortization 938,046 972,365
Deferred income taxes 425,150 425,150
------------- ------------
Total assets $ 22,132,519 18,745,636
============= =============
Liabilities and stockholders' equity:
Current liabilities:
Current portion long term debt $ 71,368 --
Accounts payable 1,309,752 853,238
Accrued expenses 904,432 822,533
-------------- -------------
Total current liabilities 2,285,552 1,675,771
-------------- -------------
--
Long term debt 2,922,719
--------------- -------------
Total liabilities 5,208,271 1,675,771
--------------- -------------
Stockholders' equity:
Common stock 72,059 72,059
Additional paid-in capital 15,439,421 15,439,421
Retained earnings 1,412,768 1,558,385
--------------- -------------
Total stockholders' equity 16,924,248 17,069,865
--------------- -------------
Total liabilities and stockholders' equity $ 22,132,519 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
March 31,
1999 1998
------------------- -----------------
Net sales $ 5,973,170
4,128,601
Cost of sales
3,769,758 2,998,419
------------------- -----------------
Gross profit 2,203,412 1,130,182
Operating expenses:
Research & development
869,541 851,052
Sales and marketing 1,152,731 1,102,654
Administration 632,337
569,183
------------------- -----------------
Loss from operations (388,043) (1,455,861)
Other income (expense):
Other income (expense) 4,546 (2,071)
Interest (expense) income, net (100)
29,935
Foreign currency gain
11,170 1,665
------------------- -----------------
(372,427) (1,426,332)
Loss before income tax benefit
Income tax benefit 226,810 529,613
=================== =================
Net loss $ (145,617) (896,719)
=================== =================
Per share information:
Loss per share
Basic $ (0.02) (0.13)
Diluted $ (0.02) (0.13)
Number of shares used in per share calculation:
Basic 7,205,928 7,086,228
Diluted 7,205,928 7,086,228
See accompanying Notes to Consolidated Financial Statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
1999 1998
----------------- ------------------
Cash flow from operations:
Net loss $ (145,617) (896,719)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 203,080 184,357
Provision for deferred taxes (148,748) (597,393)
(Increase) decrease in accounts receivable, net (1,540,259) 1,499,530
Increase in income taxes receivable (79,443) --
Decrease in costs and estimated earnings in
excess of billings on uncompleted contracts 546,515 29,521
Increase in inventories (168,128) (557,873)
(Increase) decrease in prepaid expenses and other deposits (19,991) 49,384
Increase (decrease) in accounts payables 456,514 (223,681)
Increase (decrease) in accrued expenses 81,899 (250,990)
Decrease in customer deposits (25,068)
--
----------------- ------------------
Net cash used in operating activities (814,178) (788,932)
----------------- ------------------
Cash flow from investing activities:
Capital expenditures (427,797) (245,382)
----------------- ------------------
Cash flow from financing activities:
Proceeds from long term debt 3,000,000 --
Repayments of long term debt (5,913) --
Repayments of obligations under capital lease -- (2,159)
Proceeds from exercise of stock options -- 985
----------------- ------------------
Net cash provided by (used in) financing activities 2,994,087 (1,174)
----------------- ------------------
Net increase (decrease) in cash and cash equivalents 1,752,112
(1,035,488)
----------------- ------------------
Cash and cash equivalents beginning of period 1,239,227 4,757,614
Cash and cash equivalents end of period $ 2,991,339 3,722,126
================= ==================
Supplement disclosure of cash flow information
Cash paid during the period for interest
$ 30,108 2,961
Cash paid during the period for income tax
$ 1,130 --
See accompanying Notes to Consolidated Financial Statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(Unaudited)
(1) The accompanying consolidated financial statements of KVH Industries,
Inc. and subsidiary (the "Company") for the three-month periods ended
March 31, 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 months ended March 31, 1999 are not necessarily indicative
of the operating results for the remainder of the year.
(2) Inventories at March 31, 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 $ 2,220,019 $2,178,265
Work in process 774,264 461,798
Finished goods 564,632 750,724
$3,558,915 $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 $44,327 and $139,930
at March 31, 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 includes 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 three
months ended March 31, 1999 is approximately 40%. 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 three-month periods ended March 31, 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. 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 per share - Net loss and loss per share for the three-month
periods ended March 31 were $145,617 or $.02 per share in 1999 and
$896,719 or $0.13 per share in 1998. Operating losses in 1999 were
attributable primarily to ongoing expenses related to FOG integration and
development. The Company believes that there is a strong demand for
high-accuracy, FOG-based products in the military sector and is continuing
to spend research and development funds to accelerate the integration of
fiber optic technology into its defense product offerings. The Company
anticipates that reduced FOG revenue and fixed FOG operating costs over
the next 9 to 12 months will continue to adversely affect financial
results. The Company forecasts that it will continue to experience losses
for the remainder of the year due to the FOG investment and continuing new
product development and selling expenses as new products are introduced
into the marketplace.
Net sales - Net sales for the 1999 first quarter were $5,973,170, a 45%
increase over first-quarter 1998 revenues of $4,128,601. The increase is
due primarily to a $1.8 million order that increased overall
quarter-to-quarter military navigation sales by $1.5 million. Total
navigation sales increased 35 percent in the 1999 first quarter to $3.5
million from $2.6 million in 1998. Communication sales grew to $2,433,209
or 60% above $1,520,008 in last year's first quarter, fueled by sales of
two new communications products introduced in this year's first quarter.
Fiber optic sales declined by $281,885 or 43% below last year's first
quarter, reflecting the withdrawal from the bus navigation market. The
Company anticipates that communications sales will continue to accelerate,
while defense sales will moderate.
Gross profit - Gross profit is comprised of revenues less the cost of
materials, direct labor, manufacturing overheads and warranty costs.
First-quarter gross profit increased 95% to $2,203,412 in 1999 from
$1,130,182 in 1998. Gross profit as a percentage of net sales increased to
37% in 1999 from 27% of net sales in the prior year. Gross profit
improvement reflects the decrease of manufacturing overheads as a
percentage of sales of 6% and improved product costs amounting to 4% of
net sales. Product cost improvements resulted from the introduction of new
communication product offerings as well as the positive impact of
increased sales volumes of higher margin defense products. The Company
anticipates that gross profit will decrease as the mix of product revenues
begins to shift away from higher margin navigation products towards lower
margin communications products. Additional negative pressure will be
placed on gross profit due to fiber optic sales volumes that to date have
failed to offset manufacturing spending.
Operating expenses - Research and development expense increased 2% in the
1999 quarter to $869,541 from $851,052 in 1998 due to continued costs for
fiber optic integration and development. The Company's present fiber optic
emphasis is in defense applications, a market that the Company feels can
provide significant sales volumes over a number of years. The 5% increase
in sales and marketing expense to $1,152,731 in 1999 from $1,102,654 in
1998 was due to the costs of launching new communication products. General
and administrative expenses decreased 10% to $569,183 from $632,337 due to
staffing reallocations to operating departments. The Company anticipates
that R&D and sales and marketing expenses will increase as the year
progresses as new products are developed and released into the
marketplace. Administrative costs are anticipated to remain at current
levels throughout the remainder of the 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 benefit - The first-quarter income tax benefit reflects the
realization of the tax benefit associated with the current quarter's loss
and the recognition of the difference between the estimated 1998 tax
refund and the actual tax refund per the 1998 income tax filing.
Liquidity and capital resources
Working Capital - Working capital increased by $2,552,385 in the first
three months of 1999 from December 31, 1998. Cash and cash equivalents
were $2,991,339 and $1,239,227 at March 31, 1999 and December 31, 1998,
respectively. The increase in capital resources reflects the mortgage
financing of the Company's headquarters in Middletown, Rhode Island, in
the amount of $3,000,000.
On September 29, 1998, the Company renewed a $2,500,000 revolving credit
agreement with its bank. The credit agreement expires on June 30, 1999.
Borrowings are secured by substantially all of the assets of the Company,
except for land, building and improvements. At March 31, 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 $427,797 in the
first three months of 1999. Fixed asset acquisitions are primarily the
purchases of a year 2000-compliant computer system, leasehold improvements
to meet the specialized demands of FOG manufacturing 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. The Company has also assessed its
software and computer systems, ensuring that its computer software and
hardware are year 2000 compliant. The most significant element of this
process is the upgrading of its enterprise resource planning system at a
cost of approximately $0.8 million, of which approximately $0.6 million
has been spent to date. 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 estimates that
it was 90% complete at March 31, 1999, in implementing its new system and
believes it will be year 2000 compliant by the first half of 1999. 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.
Recent Accounting Pronouncements - The Financial Accounting Standards
Board ("FASB") recently issued Statement of Financial Accounting Standards
Number 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 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. Among the important
factors that could cause actual results to differ materially from those
anticipated by the statements made 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 9 to
12 months. 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 Loss Per Common Share: Three
Months Ended March 31, 1999 and 1998.
2. Exhibit 27 - Financial Data Schedule: Three Months Ended
March 31, 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: April 22, 1999
Exhibit 11.
Computation of net loss per share, all data in thousands, except per
share data. This data is unaudited.
For the three months
ended March 31,
--------------------------
1999 1998
----------- -----------
Calculation of loss per share - basic
Net loss $ (146) (897)
=========== ===========
Shares:
Common shares outstanding 7,206 7,086
=========== ===========
Net loss per common share - basic $ (0.02) (0.13)
=========== ===========
Calculation of loss per share - diluted
Net loss $ (146) (897)
=========== ===========
Shares:
Common shares outstanding 7,206 7,086
Additional shares assuming conversion of: stock
options and warrants 0 0
Average common and equivalent shares outstanding 7,206 7,086
=========== ===========
Net loss per common share - diluted $ (0.02) (0.13)
=========== ===========
See the accompanying notes to consolidated financial statements.
5
3-MOS
DEC-31-1999
MAR-31-1999
2,991,339
0
4,726,086
79,413
3,558,915
13,323,748
10,674,504
3,228,929
22,132,519
2,285,552
0
0
0
72,059
0
22,132,519
5,973,170
5,973,170
3,769,758
3,769,758
2,591,455
0
100
(372,427)
226,810
(145,617)
0
0
0
(145,617)
(0.02)
(0.02)
