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, 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
July 21, 1997 Common Stock, par value $0.01 per, share 7,051,156
KVH INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income for the
three and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
three and six months ended June 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 7
PART II. OTHER INFORMATION 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 10
Part I. Financial Information
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(Unaudited) (Audited)
----------- -----------
Assets:
Current assets:
Cash and cash equivalents ........................ $ 8,881,872 7,005,682
Accounts receivable, net ......................... 1,699,060 6,130,567
Contract receivables ............................. 88,745 29,226
Costs and estimated earnings in excess of
billings on uncompleted contracts ................ 1,090,983 835,720
Inventories ...................................... 3,383,054 3,242,270
Prepaid expenses and other deposits .............. 232,338 179,705
Deferred income taxes ............................ 134,552 134,552
----------- -----------
Total current assets ......................... 15,510,604 17,557,722
----------- -----------
Property and equipment, net ...................... 4,462,729 3,881,088
Other assets, less accumulated amortization ...... 6,495 25,978
Deferred income taxes ............................ 88,862 88,862
----------- -----------
Total assets ................................... $20,068,690 21,553,650
=========== ===========
Liabilities and stockholders' equity:
Current liabilities:
Current lease obligation ......................... $ 32,747 $ 57,676
Borrowings under bank line of credit ............. 500,000 0
Accounts payable ................................. 1,361,034 1,031,309
Accrued expenses ................................. 569,797 1,371,193
Customer deposits ................................ 0 2,527,500
----------- -----------
Total current liabilities ..................... 2,463,578 4,987,678
----------- -----------
Obligations under capital leases, excluding
current installments ............................. 0 3,341
----------- -----------
Total liabilities .............................. 2,463,578 4,991,019
----------- -----------
Stockholders' equity:
Common stock ..................................... 70,457 69,932
Additional paid-in capital ....................... 14,920,602 14,884,806
Accumulated earnings ............................. 2,614,053 1,607,893
----------- -----------
Total stockholders' equity ..................... 17,605,112 16,562,631
----------- -----------
Total liabilities and stockholders' equity ..... $20,068,690 21,553,650
=========== ===========
See accompanying notes to 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,
1997 1996 1997 1996
---------- ----------- ------------ ----------
Net sales ............... $ 5,770,505 5,113,602 $ 11,686,838 9,894,261
Cost of sales ........... 3,250,743 2,829,248 6,429,773 5,521,637
---------- ------------ ----------- ----------
Gross profit .......... 2,519,762 2,284,354 5,257,065 4,372,624
Operating expenses:
Research and development 635,275 674,297 1,241,221 1,284,018
Sales and marketing ..... 950,641 785,701 1,729,740 1,643,923
Administration .......... 369,672 394,284 846,223 710,419
--------- ----------- ----------- ----------
Income from operations 564,174 430,072 1,439,881 734,264
Other income(expense):
Other income (expense) .. (3,080) 8,975 (10,119) 10,226
Interest income, net .... 99,789 102,660 186,275 102,660
Foreign currency
gain (loss) ............ 10,335 (29,612) 6,461 (22,446)
--------- ---------- ----------- ----------
Income before
income taxes ...... 671,218 512,095 1,622,498 824,704
Income tax expense ...... 269,051 191,996 616,338 317,038
========= =========== =========== ==========
Net income
$ 402,167 320,099 $ 1,006,160 507,666
========== ========== ========== ==========
Per share information:
Income per share ........ $ 0.05 0.04 $ 0.13 0.08
========== ========== ========== ==========
Number of shares used in per
share calculation ....... 7,489,837 7,404,464 7,490,228 6,470,208
========== ========== ========== ==========
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,
1997 1996
--------------- --------------
Cash flow from operations:
Net income ...................................... $ 1,006,160 507,666
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 326,778 90,207
Decrease (increase) in accounts and contract
receivables ..................................... 4,371,988 (473,664)
Decrease (increase) in costs and estimated
earnings in excess of billings on uncompleted
contracts ....................................... (255,263) 621,067
Increase in inventories ......................... (140,785) (907,747)
Increase in prepaid expenses and other
deposits ........................................ (33,149) (106,598)
Increase in accounts payable .................... 329,725 284,165
Increase (decrease) in accrued expenses ......... (801,396) 242,592
Decrease in customer deposits ................... (2,527,500) (248,500)
----------- -----------
Net operating cash provided by
operating activities .......................... 2,276,558 9,188
----------- -----------
Cash flow from investing activities:
Purchase of property and equipment .............. (908,419) (2,566,576)
----------- -----------
Net cash used in investing activities: ........ (908,419) (2,566,576)
----------- -----------
Cash flow from financing activities:
Increase in bank line of credit ................. 500,000 0
Repayments of obligations under capital lease ... (28,270) (25,526)
Proceeds from issuance of capital stock, exercise
of warrants and stock options ................... 36,321 10,098,865
----------- -----------
Net cash provided by financing activities ..... 508,051 10,073,339
Net increase in cash and cash equivalents ....... 1,876,190 7,515,951
----------- -----------
Cash and cash equivalents at beginning of period 7,005,682 895,677
Cash and cash equivalents at end of period ...... $ 8,881,872 8,411,628
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ........ $ 1,154 5,176
Cash paid during the period for income taxes .... $ 1,168,374 --
See the accompanying notes to consolidated financial
statements.
Item 1. Financial Statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
(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, 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 six months ended
June 30, 1997 are not necessarily indicative of the operating results for the
remainder of the year.
(2.) Inventories at June 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 $2,293 $1,888
Work in process 751 714
Finished goods 339 640
---- ------
$3,383 $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 $666,338 and $385,748 at June 30, 1997 and
December 31, 1996 respectively. Under the terms of the defense contracts the
costs associated with these inventories is reimbursed by the customer as these
costs are incurred on a progress billing basis.
(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
manufacturing renovation phase cost approximately $700,000. The Company is in
the process of completing the remaining facility renovations that are estimated
to cost approximately $1,000,000. When the second phase of renovations is
completed in the second half of 1997, the remainder of the Company's operations
will be relocated to the new facility. Upon relocation of operations to the new
facility, the Company's 27,000 square foot existing, leased facility will be
utilized as warehouse space. The Company is obligated under the facility lease
through September 30, 1999.
(4.) Income tax expense has been calculated using an estimated tax rate of 38%
comparable with 1996. The tax rates utilized in the calculation of income tax
expense differ from the federal statutory rate of 34% primarily due to state
income tax expense net of the associated federal tax benefit.
(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 include AMSC mobile satellite product shipments
amounting to 27% of total sales, United States Government TACNAV shipments
amounting to 18% of sales and TACNAV shipments to the Government of Sweden
amounting to 12% of sales. The Company anticipates that no further shipments to
AMSC will occur this year and that shipments to the governments of the United
States and Sweden will continue to ship throughout the remainder of 1997. Sales
to the armed forces of the United States, foreign governments and contractors
that supply these governments directly, represent a substantial portion of the
Company's sales. For the first six months of 1997 defense sales represented 41%
of total net sales. There can be no assurance that such governments or their
contractors will continue to purchase the Company's products in similar amounts.
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.
(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"). As the Company expands its presence in
the marine mobile satellite communications market, complete satellite
communications systems will be marketed directly to end-users, individually by
the Company and jointly with air-time providers.
Net income and earnings per share - Net income and earnings per share for the
three and six month periods ended June 30, 1997 and 1996 were $402,167 or $0.05
per share and $320,099 or $0.04 per share for the three month periods and
$1,006,160 or $0.13 per share and $507,666 or $0.08 per share for the six month
periods, respectively.
Net sales - Quarterly net sales grew to $5,770,505, a 13% increase when compared
with second quarter 1996 revenues of $5,113,602. Quarterly sales growth resulted
primarily from the completion of the AMSC order that accounted for a sales
increase of $1,294,249 or a 188% increase over second quarter 1996 AMSC
shipments. The Company has successfully completed the AMSC ten million dollar
order and does not anticipate follow-on orders for the foreseeable future. Sales
gains were offset by a decline in navigation defense shipments in the amount of
$693,644 or 29% when compared with 1996 second quarter defense revenues in the
amount of $2,380,902. Navigation defense orders are typically millions of
dollars and the revenues resulting from them may cause considerable variability
between reporting periods. Net sales grew to $11,686,838 in the first six months
of 1997, an 18% increase over the first six month 1996 sales total of
$9,894,261. AMSC shipments year to date amounted to $3,189,234 representing 85%
of year to date sales growth. The remainder of this year's sales increase
resulted from shipments of the TACNAV military land navigation system to the
United Sates Government. Navigation defense revenues increased 10% from 1996
first half levels and are anticipated to continue to increase over the remainder
of 1997. Satellite communications shipments are anticipated to slow as new
marine mobile satellite communication product revenues replace AMSC sales in the
1996 revenue base. Future revenue growth is largely dependent upon successfully
designing and marketing new products for the marine mobile satellite
communications market and securing additional defense orders. (See "Forward
Looking Statements").
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Gross profit - Gross profit is comprised of revenues less the cost of materials,
manufacturing and warranty costs. Gross profit increased to $2,519,762 or 10% in
the second quarter of 1997 when compared with the second quarter of 1996. Second
quarter gross profit as a percentage of net sales represented 44% of net sales
in 1997 and 45% of net sales in 1996. The quarterly gross profit decline as a
percentage of sales results from a larger mix of lower margin communications
products. Gross profit for the first six months of 1997 increased to $5,257,065
or 20% over the comparable period of the prior year. Year to date gross profit
as a percentage of sales increased one percent, reflecting navigation product
cost improvements. The Company anticipates a higher mix of navigation products
for the remainder of 1997, accordingly the Company anticipates that this will
cause modest gross profit improvements.
Operating expenses - Research and development declined to $635,275 or 6% in the
second quarter of 1997 from $674,297 in the second quarter of 1996. Year to date
research and development costs decreased to $1,241,221 or 3% from the first six
months of 1996. The decline in research and development costs reflects a
reduction in external engineering consultant costs associated with a joint
satellite antenna design project with the National Aeronautical and Space Agency
Jet Propulsion Laboratory. Research and development costs are anticipated to
increase for the remainder of the year as additional engineering resources are
applied to new product developments. Sales and marketing expense increased to
$950,641 or 21% in the second quarter of 1997 when compared with the second
quarter 1996. Year to date sales and marketing costs have increased $85,817, but
declined as a percentage of net sales by 2%. Increased sales and marketing
expense reflects staffing increases required to support future sales growth.
Sales and marketing expense is anticipated to increase throughout 1997 in
response to new product introductions and broader geographic markets. General
and administrative expense decreased to $369,672 or 6% in the second quarter of
1997 when compared with the second quarter of 1996. Year to date general and
administrative cost increased to $846,223 or 19%, but remained constant as a
percentage of sales at 7% of net sales. 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 (expense) is immaterial. The
increase in year to date interest income resulted from the investment of the
proceeds of the initial public offering in fully-guaranteed, government
short-term securities.
Income taxes - Quarterly income tax expense increased to $269,051 a 40% increase
when compared with the second quarter of 1996. Year to date income tax expense
increased to $616,338 a 94% growth over the comparable period of 1996. The
increase in the year to date income tax expense scales with the 96% growth in
operating income.
Liquidity and capital resources - Working capital increased by $476,982 in the
second quarter of 1997 from December 31, 1996. Cash and cash equivalents were
$8,881,872 and $7,005,682 at June 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 at least 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 $908,419 in the first
six months of 1997. Fixed asset acquisitions are primarily capital improvements
associated with the renovation of the Company's new 75,000 square foot facility.
The Company believes the remaining renovations related to the new facility will
cost approximately $1,000,000.
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.
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 Six Months
Ended June 30, 1997 and 1996.
2. Exhibit 27 - Financial Data Schedule: Six Months Ended June 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: July 23, 1997