United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year end December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
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 (IRS Employer
incorporation or organization) Identification No.)
50 Enterprise Center, Middletown, RI 02842
(Addressof principal executive offices) (Zip code)
(401) 847-3327
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act: Common Stock, $0.01
par value, per share. (Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ( ).
As of March 13, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $23,096,539 based upon a total of
5,599,161 shares held by non-affiliates and the last sale price on that date of
$4.125. As of March 13, 1998, the number of shares outstanding of the
Registrant's common stock was 7,086,648.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement relating to the 1998
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Report on Form 10-K. The Company anticipates that its definitive Proxy
Statement will be filed with the Securities and Exchange Commission within 120
days after the end of the Company's fiscal year end on December 31, 1997.
INDEX TO FORM 10-K
PART I Page
Item 1. Business ......................................................... 3
Item 2. Properties ....................................................... 11
Item 3. Legal Proceedings ................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders .............. 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters ....................................................... 11
Item 6. Selected Financial Data ......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... 13
Item 8. Financial Statements and Supplementary Data ..................... 16
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure .......................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant .............. 17
Item 11. Executive Compensation .......................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management .. 17
Item 13. Certain Relationships and Related Transactions .................. 17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 17
Safe Harbor statement under the Private Securities Litigation Reform Act of 1995
With the exception of historical information, the matters discussed in this
Annual Report on Form 10-K include certain forward-looking statements that
involve risks and uncertainties. Among the risks ands 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 satellite communications market, reliance on
satellite networks, reliance on a limited number of products, dependence on key
personnel and fluctuations in annual and quarterly performance. As a result 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 Annual Report on Form
10-K or in any document or statement referring to this Annual Report on Form
10-K. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Forward Looking Statements."
PART I
Item 1. Business.
Overview
KVH Industries, Inc. ("KVH or the "Company") was organized in Rhode Island
in 1978 and was reincorporated in Delaware on August 16, 1985. The Company's
executive offices are located at 50 Enterprise Center, Middletown, RI and its
telephone number is (401) 847-3327. Unless the context otherwise requires,
references to KVH or the Company include KVH Industries, Inc. and its
subsidiary.
KVH utilizes its proprietary fiber optic, autocalibration and fluxgate
sensor technologies to produce navigation and mobile satellite communications
systems for commercial, military and marine applications. KVH's digital
navigation systems utilize the Company's proprietary autocalibration and
applications software along with its advanced sensor technology to provide users
with accurate, real-time heading, orientation and position information. In 1993,
the Company entered the emerging market for mobile satellite communications by
introducing an active-stabilized antenna-aiming system that draws upon the
Company's proprietary software and sensor technology. In 1995 the Company
introduced TracVision, a complete system for receiving DIRECTV(R) and USSB
satellite television at sea. In 1997 the Company acquired the assets of the
fiber optic sensor group ("FOG") of the Andrew Corporation in order to enhance
the capabilities of its existing sensor systems.
The Company developed the first commercial digital fluxgate compass in 1982
and rapidly became the leading supplier of digital compass systems for the
marine market. KVH also developed an advanced line of marine instrument systems
that integrate its compass systems with other navigation devices and sensors. In
1988, the Company began to supply militarized versions of its digital compass
systems to the United States Navy. During the Persian Gulf War in 1991, KVH
combined its heading sensor expertise and its proprietary autocalibration
technology to develop its tactical navigation ("TACNAV") systems for use in
military land vehicles, such as armored personnel carriers and tanks, for which
there had previously been no practical, on-board method of navigation. The
United States and a number of foreign military services have now specified KVH's
TACNAV system as standard equipment in a variety of land vehicles.
The Company believes that the recent growth of the satellite communications
industry may represent a significant opportunity to apply the Company's core
technologies. Use of satellite communications systems on a moving vehicle or
vessel requires that a directional antenna be kept accurately pointed at a
geostationary satellite. KVH's software-driven sensor technology has enabled the
Company to develop compact, accurate and affordable antenna-aiming systems and
turnkey satellite communications systems that integrate real-time heading,
orientation and position data in order to maintain a continuous satellite link
by actively aiming an antenna to compensate for platform movement.
KVH sells digital compass and tactical navigation systems directly to the
United States Department of Defense and to the armed forces of other countries
in Europe and the Middle East. KVH systems are also incorporated by major
defense contractors, including United Defense and General Motors Corporation, in
the manufacture of military land vehicles. The Company sells its antenna-aiming
systems and mobile satellite communications systems to original equipment
manufacturers ("OEMs"), and as turnkey systems to end-users through its reseller
distribution channel.
Satellite Communications
Demand for mobile telecommunications services has grown rapidly in recent
years. Recent technological changes and increased competition have resulted in
lower air time charges, smaller and less expensive mobile communication
transceivers that offer enhanced features and functionality, and a greater range
of communication and information services and providers. These trends have both
encouraged and facilitated more widespread use of mobile communications, and
consumers have increasingly come to expect 24-hour worldwide mobile access to a
broad range of communications, information and entertainment services.
Mobile satellite communications serve markets, such as offshore marine use,
not capable of being addressed by cellular or other similar earth-based
communications services. In satellite communications services, satellites in
geostationary earth orbit provide continuous communications coverage over a wide
geographic area. Early satellite communications systems, employing analog
technology, were used primarily for voice communications. Mobile transceivers
for such systems were large and expensive, requiring an antenna dome four feet
in diameter, and typically selling for $40,000 or more. Usage of such services
was also expensive, with airtime rates ranging from $8.00 to $10.00 per minute.
As a result, use of satellite communications in the marine market historically
was limited to larger commercial vessels and luxury yachts. Recently, the advent
of more powerful satellites, as well as digital transmission and data
compression technologies, has enabled the development of a new generation of
mobile satellite communications services, making satellite communications
practical for a range of smaller vessels, such as work boats, fishing vessels
and recreational craft. These new services include the following:
Worldwide Voice and Data Services. Worldwide mobile communications
capabilities currently are offered principally by the International Maritime
Satellite Organization ("INMARSAT"), a consortium of 79 member countries that
operate a network of geostationary satellites providing worldwide communications
services through mobile terminals on air, sea and land. INMARSAT M service was
introduced in the early 1990s to provide worldwide digital voice, fax and data
communications, using an 18-inch antenna and mobile terminals costing $20,000 to
$25,000, and with airtime charges of approximately $5.00 per minute. INMARSAT
MINI-M service was introduced in 1997 to expand INMARSAT coverage by offering
smaller lower cost services, using a 10-inch antenna and mobile terminals
costing $7,000 to $8,000 and with airtime charges of $2.70 to $3.00 per minute.
Regional Voice and Data Services. Regional satellite voice, fax and data
communications systems offered by a number of providers have commenced or are
expected to commence operations in several areas of the world. AMSC has recently
introduced the SKYCELL regional mobile satellite communication service, which
uses a high-powered satellite and spot-beam technology to provide digital voice,
fax and data services to land, air and sea-based customers in a service area
consisting of up to 500 miles off the coast and the entire continental United
States, as far North as the Beijing Sea and South to the Panama Canal. AMSC's
license authorizes it to build, launch and operate three geostationary
satellites. Currently, only one such satellite, launched in April 1995, is
operational.
Regional DBS-TV Services. New satellite and digital compression
technologies have also enabled the development of regional direct broadcast
satellite television ("DBS-TV") services, in which up to 200 channels of laser
disk quality video and CD quality audio are broadcast by satellite to
subscribers who use dish antennas, compact receivers and decoders to receive and
process the signals. A number of providers of such DBS-TV services have
commenced operations in the last several years. These include DIRECTV, a
subsidiary of GM Hughes Electronics, and U.S. Satellite Broadcasting, Inc.
("USSB"). The current service area for DIRECTV and USSB is the continental
United States, and United States coastal waters up to 200 miles offshore.
Similar DBS-TV services are being offered by other service providers in the
United States, Central and South America, Japan and Europe, and are expected to
be offered elsewhere. The high-quality picture and sound, broad range of
programming alternatives, and compact size and cost of the DSS in-home system
have helped DBS-TV find rapid acceptance for home use in the United States
consumer market. The same attributes of DBS-TV have opened a new segment of the
marine market, and made the reception of high-quality television broadcasts at
sea practical for a range of smaller commercial and recreational vessels. Mobile
DBS-TV terminals for marine use are currently available for approximately $5,500
to $8,000. Subscriber fees range from $30 to $70 per month.
Satellite communications technologies generally require an earth-based
antenna to be kept precisely aimed at a geostationary satellite. On mobile
platforms, such as vessels at sea, the antenna platform may be subjected to
rapid acceleration in pitch, roll and yaw axes simultaneously, making it
difficult to keep the antenna precisely aimed. An early approach to antenna
aiming was passive stabilization, which incorporates a set of flywheels that
rely on gyroscopic inertia to keep the antenna stationary in relation to the
earth while the rest of the vessel moves. Their large size, high cost, and
difficulty of miniaturization have restricted use of passive stabilization
systems. More recently introduced active-stabilized systems detect platform
motion and actively point the antenna to compensate for it. However, some
active-stabilized systems are subject to inherent design limitations that result
in periodic signal loss and the need for time-consuming signal reacquisition and
have other operational constraints that reduce their ability to provide
on-demand, uninterrupted service.
ASAP. The KVH active-stabilized antenna pedestal system ("ASAP") uses the
KVH digital gyro compass and inclinometer to measure precisely the pitch, roll
and yaw of an antenna platform in relation to the earth. Utilizing the Company's
proprietary stabilization and control software and five on-board
microprocessors, the ASAP system computes the antenna movement necessary to keep
the antenna fixed on its target and transmits precise motor control instructions
to a pair of stepper-motors mounted on the antenna pedestal to aim the antenna.
The ASAP system is smaller, more reliable, lighter and substantially less
expensive than passive-stabilized systems enabling practical and affordable
satellite communications for a broad range of commercial and recreational users.
The ASAP uses a proprietary two-axis gimbal joint and a design that incorporates
fewer moving parts than competing active-stabilized systems. The design of the
KVH ASAP eliminates cable wrap and other causes of periodic signal loss common
to other active-stabilized systems. The system also permits rapid initial
acquisition of the satellite signal without operator intervention. OEM prices
for the Company's ASAP systems range from approximately $1,700 to approximately
$3,100.
TracVision. The Company's TracVision product is a complete mobile DBS-TV
receiver system for use by DBS-TV subscribers in the marine market. The
TracVision system includes an ASAP system, a 24-inch diameter carbon-fiber
antenna and 30-inch antenna dome and a DSS(R) digital receiver. TracVision is
sold as a turnkey system, including DIRECTV and USSB service activation.
TracVision enables commercial and recreational vessels to receive up to 200
channels of laser disc quality television, including all major networks,
subscription programming and pay-per-view services and up to 25 CD quality audio
channels, while underway or at anchor anywhere in United States coastal and
inland waters and up to 200 miles offshore. The list price of the Company's
TracVision system, exclusive of the DSS receiver, is $7,995. Typically,
TracVision systems are purchased with multiple DSS receivers to permit
independent viewing at more than one location on the vessel. DSS receivers are
available from the Company, as an authorized RCA distributor, at a
manufacturer's suggested retail price of $495.
TracVision II. The Company's TracVision II is the smallest fully stabilized
satellite television system available. Measuring under twenty-inches in
diameter, TracVision II's compact design is suitable for boats as small as
thirty-five feet. Using a three-axis digital gyro sensor and a new pedestal
design, TracVision II measures every movement of the vessel (turn, pitch and
roll) and moves the antenna in exactly the opposite direction to remain
locked-on the satellite signal. TracVision II is sold as a turnkey system,
including DIRECTV and USSB service activation. TracVision II enables commercial
and recreational vessels to receive up to 200 channels of laser disc quality
television, including all major networks, subscription programming and
pay-per-view services and up to 25 CD quality audio channels, while underway or
at anchor anywhere in United States coastal and inland waters and up to fifty to
one hundred miles offshore.
Tracphone. The Company's turnkey AMSC SKYCELL satellite telephone system,
incorporating an 11 1/2 inch high-gain antenna mounted on an ASAP system and a
Mitsubishi satellite transceiver and handset is sold in the marine market under
the Company's Tracphone brand. The KVH Tracphone system is intended to provide
affordable access to voice, fax and data communications for users in the
commercial and recreational marine markets through the AMSC service area. AMSC's
published manufacturer's suggested retail prices for a Tracphone system range
from approximately $5,000 to $6,500.
Tracphone 50. The Company's turnkey INMARSAT mini-M satellite telephone
system, incorporating an 11 1/2-inch high-gain antenna mounted on an ASAP system
and a Thrane and Thrane satellite transceiver and handset is sold in the global
marine market under the Company's Tracphone 50 brand. The Tracphone 50 system is
intended to provide affordable INMARSAT mini-M voice , fax and data
communications for users anywhere in the world. The Company markets the
Tracphone 50 jointly with Station 12, a member of the KPG Group of the
Netherlands. Station 12 provides all voice, fax and data services as well as a
wide variety of value added services on a global basis. Sataion 12 via one
access code offers all INMARSAT services from two land earth stations in Brum,
the Netherlands and Yamaguchi, Japan. The list price of the Tracphone 50 is
approximately $8,000 and Station 12 airtime ranges from $2.30 to $3.30 per
minute.
Navigation Systems
The Company's navigation products consist of its Azimuth and Sailcomp lines
of digital compass systems, its DataScope hand-held compass and rangefinder, its
Azimuth Gyro compass, its Quadro line of integrated marine instrumentation
systems, its TACNAV and TACNAV Light tactical navigation systems and its family
of fiber optic gyro sensors.
Digital Compass Systems. The Company's digital compass systems utilize
its digital fluxgate heading sensor to sample the surrounding magnetic field and
output precise heading data at rates up to ten times per second. These signals
are relayed to an on-board microprocessor, where sophisticated filtering and
averaging algorithms translate the output to stable heading information, and the
Company's proprietary autocalibration software continuously compensates for the
effects of magnetic interference without the need for operator intervention. In
highly dynamic applications where greater accuracy and fully stabilized heading
output is required, the Company's fluxgate heading sensor is integrated with one
or more of its angular rate gyros and inclinometers. Integration of the output
of multiple sensors through the Company's integration software and
error-correction algorithms is the key to this technology, enabling the Company
to combine a variety of inexpensive sensors to provide three-dimensional error
correction and stabilization capabilities previously available only from more
costly systems. This software-enabled integration of low-cost sensors forms the
basis of KVH's Azimuth Digital Gyro Compass, as well as the sensor system for
its active-stabilized antenna-aiming systems.
KVH adds application-specific software features to its basic compass
systems to provide particular functions appropriate for each of its market
segments. KVH compass systems interface with GPS receivers using
industry-standard protocols and provide accurate heading information to other
instruments. The Company's systems display complex navigation and performance
data in a variety of highly legible graphical formats. The compass display can
be used to report position information from the GPS and to compute and display
steering instructions or time, distance and bearing to a desired location.
Military versions of the Company's digital compass systems include ruggedized
housings, military type connectors and cables, improved shielding against
electromagnetic interference and other features designed to enhance them for the
military environment, including interfacing with the vehicles laser rangefinder,
odometer, and GPS.
DataScope Compass and Rangefinder. KVH's DataScope hand-held compass
and rangefinder combines a 5 x 30 monocular, a digital fluxgate compass, an
electronic rangefinder, a precise quartz crystal clock and a microprocessor in a
simple compact, lightweight unit. The DataScope's patented heads-up display
allows the user to take bearings, calculate the range to the target and record
the time of up to 9 bearings without ever taking his eye from the target. The
DataScope is used in a wide variety of marine, outdoor, military, technical,
sporting and commercial applications.
Quadro Network. The KVH Quadro system is a line of integrated
instrumentation systems for marine navigation. Quadro systems include a central
processing unit, a variety of sensors and multi-function displays, networked
through a single coaxial cable. The central processor integrates data from
multiple sensors, such as a digital compass, boat and wind speed instruments and
GPS, and permits the output to be viewed on remote system displays located
anywhere on the boat. The output of each instrument can be displayed
individually, or computed values based on integration of multiple inputs may be
selected. For example, digital heading, boat speed, and apparent wind velocity
and angle may be combined to calculate true wind speed and direction. Similarly,
digital heading, boat speed and GPS data may be used to calculate the bearing,
time and distance to a selected destination. Programmable multi-function
displays permit the desired output to be presented in alphanumeric or graphical
analog format on any system display. Quadro system output can also be interfaced
with electronic chart plotters, autopilots and other electronic navigation
systems. Remote control keypads permit operation from various positions in the
boat.
TACNAV. KVH's TACNAV system, an interactive, real-time tactical
navigation and targeting system for armored vehicles, has been selected for the
United States Army Bradley Fighting Vehicle, the Canadian Army LAV-25 fleet, the
Swedish Army CV90 fleet and other land vehicles used by the armed forces of
these and a number of other nations. The TACNAV system analyzes and displays
data from its digital heading and orientation sensors and an integrated GPS
system, as well as inputs from multiple other devices such as a vehicle
odometer, turret angle encoder and laser rangefinder. TACNAV's automatic
compensation software solves the problem of providing accurate heading in the
armored vehicle environment where conventional magnetic compasses cannot
operate. KVH's software also integrates GPS and compass data and provides
continuously updated steering instructions. TACNAV calculates the turret azimuth
by combining data from the vehicle's turret angle encoder with vehicle heading
information, which results in improved vehicle orientation and target
acquisition. When further integrated with the vehicle's laser rangefinder,
TACNAV calculates the grid position of the target and can be used for far target
location. By accepting input from the vehicle odometer, TACNAV also provides a
backup for GPS, which may be blocked, either accidentally or by jamming. If GPS
input is unavailable, KVH software seamlessly switches to dead reckoning
navigation from the vehicle's last known GPS location, using heading and
odometer measurements.
The Company's TACNAV systems enable armored crews to maneuver and
locate targets more rapidly and accurately. The ability to maintain accurate
battlefield orientation provides improved situational awareness and assists
crews in distinguishing friendly from hostile forces. The TACNAV system is
available in a variety of configurations, ranging from a simple GPS-compatible
compass system with a single commander's display, to a complete, integrated
system that provides full tactical navigation and targeting capabilities and
includes up to three separate commander's, gunner's and driver's displays.
Fiber Optic Sensors. On October 30, 1997 the Company acquired the assets of
the sensor products group of Andrew Corporation. This acquisition provided the
Company with a set of proprietary fiber optic gyroscopic sensors that will
extend the accuracy and performance range of the Company's existing fluxgate
based product offerings. A Fiber Optic Gyroscope ("FOG") sensor is a true
single-axis rotational rate sensor with no moving parts, resulting in long life,
stable operation, and lack of sensitivity to rotation or acceleration in other
axes. The FOG's excellent resolution, threshold and dynamic range combined with
resistance to shock and vibration solves a wide variety systems needs over the
wide range of operating conditions. The Company offers a variety of FOG systems
at various prices, offering OEM customers a range of cost and performance
options suitable to their applications.
Embedded Sensors. KVH offers a line of compact, intelligent sensors that can
be readily integrated into a wide variety of applications where accurate,
real-time heading and orientation information is required. The sensors' on-board
microprocessors and proprietary software, industry-standard digital output, low
power consumption and advanced functionality, such as autocompensation
capability, simplify the task of OEM system design, making them a cost-effective
solution in many challenging applications. The Company provides a variety of
digital heading sensors, stabilized gyro compasses, rate sensors, inclinometers,
sensing coils and other standard sensors and sensor systems at various prices,
thus offering OEM customers a range of cost and performance options suitable to
their applications.
Sales and Marketing; Customers
The Company sells its navigation and satellite communications products
through a variety of channels, including a direct sales force and a network of
dealers, value added resellers, distributors and sales representatives. KVH's
commercial and recreational marine navigation products are sold through a dealer
network of more than 250 catalog chain outlets, including West Marine, Boaters'
World and Boat U.S., more than 100 technical marine electronics value added
resellers, and independent sales representatives. KVH's military navigation
products are sold to the armed forces of the United States and other countries,
as well as to OEM manufacturers, by the Company's direct sales force,
distributors and sales representatives. KVH's embedded sensors and sensor
systems are sold by the Company's direct sales force, distributors and sales
representatives to a broad range of OEM manufacturers, such as Lockheed, Harris
and Raytheon. The Company's ASAP antenna-aiming systems are sold directly to
both OEM manufacturers of satellite telephone transceivers and as turnkey
systems directly to end-users through the Company's world-wide network of
technical dealers and distributors. FOG products are sold directly to OEM
customers through the same distribution system that the Company utilizes to sell
its commercial sensors. The Company's agreements with its dealers, value added
resellers, distributors and sales representatives generally are non-exclusive.
The Company's products are sold in Europe through the Company's KVH Europe
subsidiary, located in Hoersholm, Denmark, and elsewhere in the world through a
network of distributors.
A significant portion of the Company's sales depends on a small number
of customers. Sales to AMSC accounted for approximately 12% and 27% of net sales
in 1997 and 1996. Sales of TACNAV systems to General Motors Corporation
accounted for approximately 8%, 14% and 13% of the Company's net sales in 1997,
1996 and 1995, respectively, and sales of TACNAV systems to the Government of
Sweden accounted for approximately 13%, 14% and 25% of the Company's net sales
in 1997, 1996 and 1995. Revenues from sales of commercial navigation products,
including digital compass systems and other navigation products for
recreational, commercial and OEM markets, as a percentage of the Company's total
net sales, were 23%, 21% and 37%, respectively, in 1997, 1996 and 1995. Revenues
from combined sales of military navigation systems and related customer funded
research and development constituted 56%, 41% and 52% of the Company's total net
sales in 1997, 1996 and 1995, respectively. Revenues from sales of satellite
communications systems, including antenna-aiming systems sold to OEM customers
as well as complete satellite communications systems, represented 21%, 38% and
11% of the Company's total net sales in 1997, 1996 and 1995, respectively. Sales
of the recently acquired FOG sensors were not material in 1997.
Relationship with AMSC
Under an agreement with AMSC (the "AMSC Agreement"), the Company acts
as a systems integrator and manufactures, tests, and ships complete high-gain
AMSC SKYCELL satellite telephone terminals for AMSC. Pursuant to the AMSC
Agreement, AMSC agreed to purchase a minimum of 1,000 baseline telephone systems
and 4,000 deluxe systems, for an aggregate order price of $10.2 million. AMSC
may, at its option, purchase up to an additional 15,000 units on substantially
the same terms and conditions. AMSC's sales estimates have fallen well below
expectations. The Company does not anticipate that AMSC will exercise the
reorder option. AMSC is required to supply to KVH, at AMSC's expense, the
Mitsubishi telephone transceivers and handsets included in the system. KVH is
required to supply, at its expense, the ASAP system, antenna, baseplate and
antenna dome, and to assemble, test and package the completed system. Completed
Tracphone systems are delivered by KVH to its own warehouse, at which time title
passes to AMSC and the Company invoices AMSC for the full price of the products.
The AMSC Agreement provides that AMSC dealers and resellers will market the
Tracphone product through an AMSC dealer network, at AMSC's expense. The Company
drop ships completed units from its warehouse to the dealer's customer, is
responsible for billing and collecting from the customer the price specified by
the dealer and remits the full amount to AMSC on a bimonthly basis. AMSC has
made an advance payment to the Company of $2.5 million, which was applied to the
purchase price of the last of the 5,000 units originally covered by the AMSC
Agreement. The Company delivered the last of the 5,000 units in the second
quarter of 1997.
Backlog
The Company's backlog at December 31, 1997 and 1996 was $3.0 million
and $11.1 million, respectively. Of the Company's total backlog at December 31,
1997, approximately $3.0 million is expected to be shipped during 1998. The
Company's total backlog at December 31, 1997 includes $1.4 million attributable
to orders for military navigation systems and $1.6 million attributable to
orders for mobile satellite communication and FOG products. The Company's total
backlog at December 31, 1996 included $7.7 million attributable to orders for
military navigation systems and $3.1 million attributable to orders for the AMSC
mobile satellite communication product.
The Company includes in its backlog only firm orders for which it has
accepted a written purchase order. Many of the Company's orders are subject to
cancellation, generally without penalties. In particular, the Company's military
orders can generally be canceled at any time for the convenience of the
customer, without penalty other than recovery of the Company's actual costs
incurred through the date of cancellation.
The Company's revenue from commercial and recreational marine markets
is derived primarily from sales to nonstocking distributors, retail chains, OEMs
and other resellers who require short lead times for delivery of products to
end-users. The Company manufactures its products based on forecast commercial
and recreational marine orders. Customers may cancel or reschedule orders
without significant penalty and the prices of products may be adjusted between
the time the purchase order is booked into backlog and the time the product is
shipped to the customer. For these reasons, the Company believes that its
backlog in general, and its backlog of commercial and recreational marine orders
in particular, are not necessarily meaningful in predicting the Company's actual
revenue for any future period.
Research and Development
The Company's research and development efforts are focused on the
development of new products based on its core technologies that will have broad
application across its strategic markets, and on improving the performance and
reducing the manufacturing costs of its existing products. A substantial portion
of the Company's research and development expenditure is devoted to basic
research relating to specified core technology development projects.
The Company's research and development activities have historically
fallen into two categories: internally funded research and development and
customer funded research and development. The Company has financed virtually all
of the cost of developing the Company's marine navigation and satellite
communications products. However, much of the funding used to develop KVH's
products for the military navigation market, in which a significant engineering
effort to develop enhanced features requested by the customer is frequently
involved, has been derived from government sources. Development of the Company's
core sensor technology has also been subsidized to a large extent by grants
under the United States government's Small Business Innovative Research ("SBIR")
program. The Company's total expenditures for research and development during
1997, 1996 and 1995 were as follows:
Year ended December 31,
1997 1996 1995
------ ------ ------
(in thousands)
Internally funded research and $3,175 2,431 1,279
development
Customer funded research and 630 869 2,445
development ------ ------ ------
Total research and development $3,805 3,300 3,724
====== ====== ======
The Company's future success depends on its ability to achieve
technological advances and incorporate such advances into new products. Advances
in product technology will require continued substantial investment in research
and development. The amount of the Company's customer-funded research and
development has decreased as its military navigation systems have moved from the
development to the production stages. Accordingly, the Company expects to
increase substantially the amounts expended on its own internally funded
research and development. Even if the Company increases its internal funding of
research and development, its total expenditures for research and development
may decrease, due to the expected reduction in customer-funded research and
development. The timely availability of new products in volume and their
acceptance by customers are important to the future success of the Company.
Development and manufacturing schedules for technology products are difficult to
predict, and there can be no assurance that the Company will achieve timely
initial customer shipments of new products. From time to time, the Company or
its competitors may announce new products, capabilities or technologies that may
have the potential to replace or shorten life cycles of the Company's existing
products. No assurance can be given that announcements of currently planned or
other new products will not cause customers to defer purchasing existing Company
products.
Manufacturing
The Company's manufacturing operations consist primarily of final
assembly and testing of products, material and procurement management, and
quality assurance and manufacturing engineering. In addition, the Company
manufactures certain subassemblies and components, such as sensor coils. The
Company contracts with third parties for some services, such as the fabrication
and assembly of printed circuit boards, injection-molded plastic parts and
machined metal components.
The Company believes that there are a number of acceptable vendors for
most of the components and third-party services used in the manufacture of its
products. However, the Company procures certain of such components and services
from a sole source. In some instances the Company may select a single source,
despite the availability of multiple sources, in order to maintain quality
control or to develop a strategic relationship with the supplier. The Company
has in the past experienced delays in production as a result of insufficient
supply or delay in delivery of certain components, production or quality control
difficulties experienced by a sole supplier, or, in one instance, the failure of
a sole supplier to provide an application-specific integrated circuit designed
specifically for use by the Company in one of its products. Occurrence of
shortages, delays or other problems in the future could result in delay or
interruption of the Company's production, which could have a material adverse
effect on the Company's results of operations and damage customer relationships
until an alternative source of supply could be obtained.
Competition
The Company encounters intense competition in each of its markets. In
the commercial and recreational marine navigation market, the Company's
principal competitors include a large number of domestic and international
companies that manufacture and market stand-alone digital compasses, digital
heading sensors and integrated instrument systems. The Company believes that the
principal bases of competition in the commercial and recreational marine
navigation market include product design and performance; flexibility and
ease-of-use; product quality and the quality of customer support; and reputation
of the vendor in the marine market.
In the market for military land vehicle tactical navigation systems,
the Company competes with a large number of domestic and international companies
that produce dead-reckoning, inertial, GPS-based, or radio-based navigation
systems and systems that provide integrated magnetic heading and GPS navigation
capabilities. Most of these competitors have more experience than the Company in
manufacturing and marketing products for the military marketplace. The Company
believes that the principal bases of competition in the market for military land
vehicle navigation systems are product performance; field reliability; ease and
flexibility of installation, maintenance and field modification; size and weight
of the unit; size and stability of the vendor; and price.
In the mobile satellite antenna-aiming market, the Company faces
competition with its ASAP systems from one principal competitor Sea Tel, Inc.,
that manufactures and markets a broad line of marine satellite communications
and satellite tracking equipment, including antenna systems for INMARSAT and
DBS-TV applications. This competitor has greater experience than the Company in
marketing DBS-TV systems in the marine market and has a larger installed base of
such systems. A second competitor, Datron Systems, Inc. (DTSI), provides a
stabilized antenna design for RV and marine reception of DBS-TV which competes
with the company's turnkey DBS products. The Company also competes with
Westinghouse and a small number of other manufacturers of active stabilized
antenna-aiming systems and may in the future encounter competition from other
manufacturers of satellite communications equipment that may seek to develop
antenna-aiming systems or other mobile satellite communications systems or
equipment. The Company believes that the principal bases of competition in the
satellite communications market are system performance; reliability; antenna
size; cost and customer support.
The Company's fiber optic gyro and embedded sensors compete with
products of a large number of companies that produce magnetic sensors and
gyroscopic rate sensors for sale in the OEM market, as well as certain OEMs,
including some of the Company's own customers, that choose to produce their own
sensors for certain OEM applications. Some of the larger competitors in the
gyroscopic rate sensor market are Litton Corporation and Honeywell Corporation
in the United States, Hitachi Corporation of Japan and Fizoptica of Russia. Many
of the Company's competitors offer products that, while providing accuracy and
performance inferior to that of the Company's products, are substantially less
expensive.
Many of the Company's competitors are larger and better known than the
Company and have substantially greater research and development, engineering,
manufacturing, marketing and financial resources than does the Company. There
can be no assurance that the Company will be able to compete successfully in the
future, that the Company's products will achieve or maintain future market
acceptance, or that competition will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Intellectual Property
The Company's ability to compete effectively depends to a significant
extent on its ability to protect its proprietary information. The Company relies
primarily on trade secret laws, confidentiality procedures and licensing
arrangements to protect its intellectual property rights. The technology
licenses on which the Company relies include an angular rate gyro license from
Etak, Inc. and a license from Thomson Consumer Electronics, Inc. relating to
certain consumer electronic components. Some of these technology licenses may be
terminated upon short notice, and there can be no assurance that third-party
technology licenses will continue to be available to the Company on commercially
reasonable terms. The loss of or inability to maintain any of these technology
licenses could result in the discontinuation of, or delays or reductions in,
product shipments unless and until equivalent technology is identified, licensed
and integrated or bundled. Any such discontinuation, delay or reduction would
materially adversely affect the Company's business, financial condition and
results of operations. Most of the Company's technology licenses, including
those from Etak, Inc. and Thomson Consumer Electronics, are non-exclusive, and
there can be no assurance that the Company's competitors will not obtain
licenses to, and utilize such technology in competition with, the Company. The
Company also licenses the trademark "DSS" from DIRECTV.
Where appropriate, the Company seeks patent protection. The Company has
thirty issued United States patents covering the Company's core sensor and fiber
optic technologies. The Company intends to seek further patents on its
technology, if appropriate. In addition to patents, the Company registers its
product brand names and trademarks in the U.S. and other key markets where the
company does business around the world. Expiration of the Company's patents and
trade marks range from March 3, 2000 to April 7, 2015.
There can be no assurance that patents will issue from any of the
Company's pending or any future applications or that any claims allowed from
such applications will be of sufficient scope or strength, or be issued in all
countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. Also, competitors of the
Company may be able to design around the Company's patents. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and thus
make the possibility of piracy of the Company's technology and products more
likely.
The Company generally enters into confidentiality agreements with its
consultants, key employees and sales representatives and generally controls
access to and distribution of its technology, software and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. Also, the Company
has delivered certain technical data and information to the United States
government under procurement contracts, and the United States government may
have unlimited rights to use such technical data and information or to authorize
others to use such technical data and information. There can be no assurance
that the United States Government will not authorize others to use such
technical data for purposes competitive with those of the Company. Although the
Company intends to defend its intellectual property, there can be no assurance
that the steps taken by the Company to protect its proprietary information will
be adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology.
The Company is subject to the risk of alleged infringement of
intellectual property rights of others. Although the Company is not currently
aware of any pending or threatened infringement claims with respect to the
Company's current or future products, there can be no assurance that third
parties will not assert such claims or that any such claims will not require the
Company to enter into license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms. Furthermore,
litigation may be necessary to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, financial condition or results of operations.
Employees
As of December 31, 1997, the Company employed 191 full-time employees,
including 18 in sales and marketing, 42 in engineering, 114 in manufacturing,
and 17 in general administration and finance. Six of these employees are located
in the Company's European office in Hoersholm, Denmark, twenty-seven are located
in Orland Park, Illinois and four are located in Saint Petersburg, Florida. In
addition, the Company utilizes the services of temporary or contract personnel
within all functional areas to assist on project related activities. The number
of such personnel will vary depending on specific project activity. At December
31, 1996, the Company employed two temporary or contract engineers. In addition,
as of that date, three outside engineering firms were working for the Company on
various projects. The Company generally enters into non-disclosure agreements
with such temporary or contract personnel or firms with a view to protecting the
confidentiality of its proprietary technology.
The Company believes its future success will depend in large part upon
the continued service of its key technical and senior management personnel and
upon the Company's continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for highly qualified personnel
is intense, and there can be no assurance that the Company will be able to
retain its key managerial and technical employees or that it will be able to
attract and retain additional highly qualified technical and managerial
personnel in the future. None of the Company's employees are represented by a
labor union. The Company has not experienced any work stoppage and considers its
relationship with its employees to be good.
Government Regulation
The satellite communications industry is heavily regulated. Satellite
communications service providers in the United States such as AMSC must be
licensed by the Federal Communications Commission ("FCC") before they can
provide mobile voice and data services via satellite. The delays inherent in the
governmental approval process may in the future cause the cancellation,
postponement or rescheduling of the installation of satellite communications
systems. The FCC has granted ten year licenses to AMSC for three satellites.
There can be no assurance that such FCC licenses will be extended or that new
licenses will be granted for additional or replacement satellites. FCC licenses
are subject to numerous restrictions, including certain restrictions on foreign
ownership and prohibitions on the assignment or transfer of control of the
license without the prior consent of the FCC. Certain electronic devices must
comply with FCC regulations, including rules governing emission of
electromagnetic interference. The FCC and certain international agencies have
also enacted regulations or entered into international agreements regulating and
coordinating use of the L-band frequency spectrum, where the Tracphone product
will operate. There can be no assurance that a sufficient range of the L-band
spectrum will remain open to the Company or its customers. Changes in the
regulation of the frequency spectrum or other regulatory changes could
significantly restrict the Company's operations by restricting development
efforts by the Company's customers, making current products obsolete, or
increasing the opportunity for additional competition. The sale of the Company's
TracVision and Tracphone products may be materially and adversely affected by
governmental regulatory policies with respect to satellite communications,
international treaties governing use of the communications spectrum and orbital
location, the imposition of common carrier tariffs or taxation of
telecommunications services. There can be no assurance that the FCC or other
regulatory bodies will not promulgate new regulations that could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's manufacturing operations are subject to various laws
governing the protection of the environment. These laws and regulations are
subject to change, and such change may require the Company to improve technology
or incur expenditures to comply with such laws and regulation. The Company
believes that it complies in all material respects with applicable environmental
laws and regulations and does not expect that any costs incurred in connection
with complying with such laws or regulations will have a material effect on the
Company's results of operations, financial position or liquidity.
The Company is subject to compliance with the United States Export
Administration Regulations. Because some of the Company's products have military
or strategic applications, some products are on the Munitions List of the
International Trafficking in Arms Regulations ("ITAR") or are subject to a
requirement for an individual validated license from the Department of Commerce
in order to be exported to certain jurisdictions. There can be no assurance that
there will not be changes in the Export Administration Regulations or the ITAR
that restrict the Company's export of its products, and there can be no
assurance that the Company will continue to be able to procure export licenses
for its products under existing regulations. If the Company were restricted from
exporting a significant amount of its products, there could be a material
adverse effect on the Company's operating results and financial condition.
Under the Exon-Florio Amendment to the Defense Production Act of 1950,
the United States President has authority to investigate and unwind any
investment by foreign persons that could result in foreign control of an entity,
if the President determines that foreign control would threaten national
security. Because some of the Company's products are on the Munitions List,
there can be no assurance that the President would not conclude that foreign
control of the Company would affect national security. The prospect of the
application of the President's powers under the Exon-Florio Amendment could have
the effect of deterring transactions that would result in foreign control of the
Company, including transactions in which stockholders might otherwise receive a
premium for their shares over then current market prices.
Item 2. Properties.
The Company's executive offices, administration, product development
and manufacturing facilities are housed in two adjacent buildings in Middletown,
Rhode Island containing approximately 6,000 and 75,000 square feet respectively.
The Company occupies the smaller of the two facilities under a lease that
expires in September 1999, while the Company purchased the larger facility in
May 1996. The Company relocated operations into the larger facility in 1997.
Subsequent to the relocation of the Company's operations to the larger facility,
the smaller facility became excess capacity. The Company negotiated a reduction
of the leased space from approximately 30,000 square feet to 6,000 square feet
and in so doing paid a one-time payment of $210,000 to modify the facility
lease. The smaller facility will be utilized as a warehouse for the AMSC-owned
Tracphone inventory to the extent that the AMSC inventory is shipped, the space
in the smaller facility may become idle.
The Company utilized approximately $4.0 million dollars of the proceeds
of the initial public offering to purchase and build-out a 75,000 square foot
building adjacent to its existing 6,000 square foot leased facility in
Middletown, Rhode Island in order to accommodate its manufacturing capacity
requirements and relocate its operations.
On October 30, 1997 the Company purchased the assets of Andrew
Corporation's sensor products group. The sensor product group occupies
approximately 20,000 square feet within Andrew Corporation's Orland Park,
Illinois facility and a 4,756 square foot facility in Saint Petersburg, Florida.
The Saint Petersburg lease is renewable annually and expires on July 31, 1998.
The purchase agreement stipulates that the Company may, as a transitionary
expedient, occupy the space currently occupied within Andrew's, Orland Park
facility on a rent free basis until January 31, 1998 for the manufacturing and
administration facilities and until April 30, 1998 for the fiber drawing
facility. The Company may occupy these areas within the Andrew Orland Park
facility thereafter, at a rate of $1.25 per square-foot per month. The Company
is actively relocating the sensor products operations to a leased facility. In
January of 1998 the Company entered into a seven year a lease agreement
beginning in April 1, 1998, to lease approximately 23,000 square feet of space.
Prior to occupying the leased facility the Company is required to participate in
the build-out cost of the facility. The Company estimates the cost to build out
the facility at approximately $0.5 million dollars. The initial annual rent is
$152,121; annual rents thereafter will escalate by 3% each year.
Item 3. Legal Proceedings.
In the ordinary course of business, the Company is a party to legal
proceedings and claims. In addition, from time to time, the Company has
contractual disagreements with certain customers concerning the Company's
products and services. In the opinion of the Company's management, none of the
current matters or proceedings, when ultimately concluded, are likely to have a
material adverse effect on the results of operations or financial position of
the Company and its subsidiary taken as a whole.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock has traded on the NASDAQ National Market
under the symbol KVHI since April 8, 1996. As of March 13, 1998, there were 128
holders of record of the Company's Common Stock. The Company has never declared
or paid any cash dividends on its Common Stock and does not intend to pay cash
dividends on its Common Stock in the foreseeable future. The Company intends to
retain earnings for reinvestment in its business.
The Company's stock commenced trading on April 2, 1996 at $6.50. On
March 13, 1998 the closing sale price for the Company's Common Stock was $4.13.
1997 1996
------- -------
High Low High Low
------- ------- ------- -------
First quarter 8.00 6.25 -- --
Second Quarter 10.00 5.00 10.88 6.50
Third Quarter 9.50 7.13 11.00 7.25
Fourth Quarter 8.13 3.75 10.63 7.00
Item 6. Selected Consolidated Financial Data.
The following selected financial data is derived from the Company's
financial statements. This data should be read in conjunction with Item 8,
Financial Statements and Notes thereto, and with Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statement of Income Data:
Net sales $ 25,570 $ 25,687 14,150 8,565 7,149
Cost of goods sold 14,085 14,607 8,447 5,082 4,046
----------- ------------ --------- ------- ------
Gross profit
11,485 11,080 5,703 3,483 3,103
Operating expenses:
Research and development 3,175 2,431 1,279 727 695
Sales and marketing 3,738 3,040 2,494 1,652 1,621
General and administrative 1,895 1,624 1,058 763 705
----------- ------------ ------------ --------- -----
Operating profit
2,677 3,985 872 341 82
Other (income) deductions:
Interest (income) expense, net
(327) (278) 27 60 16
Other expense (income)
(95) 14 20 (172) 10
Loss (gain) on currency translation
(138) 50 (4) (44) (18)
----------- ------------ ------------ ------------ ----------
Income before income tax expense
(benefit) 3,237 4,199 829 497 74
Income tax expense (benefit) (114)
1,020 1,743 (365) (48)
----------- ------------ ------------ ------------ ----------
Net income $ $
2,217 2,456 1,194 545 188
=========== ============ ============ ============ ==========
Per share information (1):
Net income per common share - basic $ $
0.31 0.39 0.25 0.11 0.04
=========== ============ ============ ============ ===========
Net income per common share - diluted $ $
0.30 0.35 0.21 0.09 0.03
=========== ============ ============ ============ ===========
Weighted average number of shares outstanding:
Basic 7,049 6,370 4,862 4,970 4,970
=========== ============ ============ ============ ===========
Diluted 7,498 7,055 5,710 5,851 5,851
=========== ============ ============ ============ ===========
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands)
Consolidated Balance Sheet Data:
Working capital $ 12,410 12,570 3,214 2,110 1,553
Total assets 21,805 21,544 7,931 3,644 3,689
Long-term obligations (2) 7 61 113 579 433
Total shareholders' equity 19,194 16,563 3,654 2,451 1,906
(1) See note 1 of notes to consolidated financial statements for an explanation
of the method of calculation.
(2) Includes obligations under capital leases. See
note 6 of notes to consolidated financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Overview
KVH Industries, Inc. (the "Company") derives its revenues from the
communications and navigation industries. Stabilized antenna systems for mobile
satellite applications such as voice, fax and data transmission and television
reception are primary sources of communications revenues. Navigation revenues
are derived primarily from: positional and heading systems for tactical military
applications in amphibious and land vehicles and for commercial applications in
land vehicles; digital compasses and instrument systems for recreational,
commercial and military applications; and embedded fiber optic sensors for OEM
applications. The Company's in-house sales and marketing groups have established
a worldwide network of independent sales representatives and distributors to
market the Company's products. The majority of the Company's sales, product
distribution and customer service is conducted at the Company's headquarters in
Middletown, Rhode Island and the European market is managed through the
Company's subsidiary in Hoersholm, Denmark. The Company's manufacturing process
consists primarily of light assembly and final test, which is conducted at its
facilities in Middletown, Rhode Island, Orland Park, Illinois, and St.
Petersburg, Florida.
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
Year Ended December 31,
1997 1996 1995
100.0% 100.0% 100.0%
Net sales
Gross profit 45.0 43.2 40.3
Research and development 12.4 9.5 9.0
Sales and marketing 14.6 11.8 17.6
General and administrative 7.4 6.3 7.5
10.6 15.6 6.2
Operating profit
Interest (income) expense, net (1.3) (1.0) 0.2
Other expense (income), net (0.3) 0.0 0.1
(Gain) loss on currency
translation (0.5) 0.2 (0.0)
Income before income tax
(expense) benefit 12.7 16.4 5.9
(4.0) (6.8) 2.6
Income tax (expense) benefit
8.7% 9.6% 8.5%
Net income
Years Ended December 31, 1997 and 1996
Net Sales. Net sales decreased slightly to $25.6 million in 1997 from
$25.7 million in 1996. Product sales amounted to $24.6 million in both 1997 and
1996 while customer-funded research amounted to $1.0 and $1.1 million in 1997
and 1996 respectively. Navigation sales grew 28% to $20.3 million in 1997 from
$15.9 million in 1996. Navigation sales increases resulted primarily from a $3.8
million, 40%, increase in navigation defense shipments. Fiber optic sensor sales
resulting from the October 30, 1997 Andrew sensor products acquisition also
contributed $0.4 million to 1997 navigation revenues. Communications sales
amounted to $5.2 million in 1997, decreasing 47% from $9.8 million in 1996.
Anticipated decreases in communication revenues reflected a large non-recurring
OEM sale amounting to $5.6 million in 1996 that was somewhat off-set by direct
sales of turnkey mobile satellite communications systems that increased to just
under $1.0 million in 1997 from $0.1 million in 1996.
Cost of Goods Sold. The Company's cost of goods sold consists primarily
of direct labor and material, labor and material overhead, other direct costs.
Cost of goods sold includes costs of customer-funded research and development of
$0.6 million in 1997 and $0.9 million in 1996. Cost of goods sold decreased to
55% as a percentage of net sales in 1997 from 57% as a percentage of net sales
in 1996 resulting from a 17% sales mix shift to higher margin navigation
products. Manufacturing overheads increased to $2.8 million in 1997 from $1.9
million in 1996 somewhat off-setting the gains in product cost of sales. Factors
contributing to the manufacturing overhead increase included fiber optic sensor
start-up costs and a one time lease modification charge. The Company anticipates
that cost of goods sold will increase in 1998 as anticipated sales growth shifts
to lower-margin satellite communication and fiber optic gyro products.
Research and Development Expense. Research and development expense
consists primarily of direct labor and material, labor and material overhead and
other direct costs associated with the Company's internally funded product
development efforts. The Company expenses all of its software development costs
in the period that they are incurred. Research costs increased to $3.2 million
or 31% in 1997 from $2.4 million in 1996. Company-funded product developments
accounted for $0.6 million of the 1997 increase while fiber optic start-up costs
accounted for the remainder of the increase. Total research and development
expenditures, including customer-funded product development expenditures
included in cost of goods sold, were $3.8 million in 1997 and $3.3 million in
1996, reflecting the expected decline in customer-funded research. The Company
anticipates that company-funded research and development will continue to
increase as the result of further research to develop smaller,
broader-bandwidth, mobile satellite communication products.
Sales and Marketing Expense. Sales and marketing expense consists
primarily of salaries and related expenses for sales and marketing personnel,
sales commissions, travel expenses, cooperative advertising, sales literature,
advertising and trade shows. Sales and marketing costs grew to $3.7 million or
23% in 1997 from $3.0 million in 1996. Major factors contributing to the growth
of sales expenses were staffing, travel and new production introduction costs.
The Company anticipates that sales and marketing expense will increase, as the
Company continues to further penetrate international markets, introduce new
products in 1998 and aggressively promote fiber optic products.
General and Administrative Expense. General and administrative expense
consists primarily of salaries and related expenses and other costs attributable
to the Company's management, finance, accounting and human resources operations,
as well as legal and other professional services. Administrative costs increased
to $1.9 million or 17% from 1996 spending of $1.6 million, in response to fiber
optic start-up costs, increased professional fees and staffing costs.
Administration is anticipated to increase in 1998 due to the additive effect of
the fiber optic sensor group acquisition.
Interest income. Interest income reflects the interest earned by
investing the proceeds of the April 1996 public offering in Federal short-term
obligations. The proceeds of the public offering in April 1996 fully funded the
Company's operating and capital requirements in 1997.
Other (Income) Expense. Other income increased $0.1 million in 1997.
The additional income reflects the award of a new-hire training grant from
the state of Rhode Island.
Loss (Gain) on Foreign Currency Translation. The results of operations
of the Company's foreign subsidiary, KVH Europe, are determined by remeasuring
its foreign currency-denominated operations as if they had taken place in United
States dollars. Gains and losses resulting from this translation are included in
the Company's net income. The translation gain of $0.1 million and loss of $0.05
million in 1997 and 1996 respectively, reflects changes in the relative strength
of the United States dollar in relation to the Danish krone.
Income Tax Expense (Benefit). The Company's income tax expense
decreased to $1.0 million in 1997 from $1.7 million in 1996. The decrease in
income taxes was attributable to the utilization of state and federal research
and development and investment tax credits. The Company's effective tax rate in
1997 was 31.5% as a percentage of taxable income versus 41.5% in 1996. The
Company's effective tax rate is expected to increase in 1998 as research and
other tax credits will diminish in future years.
Years Ended December 31, 1996 and 1995
Net Sales. Net sales increased by 82% to $25.7 million in 1996, from
$14.2 million in 1995. Product sales amounted to $24.6 million and $10.5 million
in 1996 and 1995 respectively. Customer-funded research amounted to $1.1 million
and $3.7 million in 1996 and 1995 respectively. Product revenue growth in 1996
resulted primarily from a $5.4 million increase in sales of the Company's
military TACNAV systems and an $8.3 million increase in sales of OEM satellite
communication products. Product sales increases more than offset an anticipated
$2.6 million decrease in customer-funded research in 1996. Decreased
customer-funded research reflected the completion of the TACNAV development in
1995. Major customers responsible for 1996 product sales growth included the
United States military, various other foreign governments and AMSC.
Cost of Goods Sold. Cost of goods sold included costs of
customer-funded research and development of $0.9 million in 1996 and $2.4
million in 1995. Cost of goods sold as a percentage of net sales was 57% and 60%
in 1996 and 1995, respectively. Improved cost of sales resulted primarily from a
product mix shift away from lower margin, customer-funded research and
development sales to higher margin navigation product shipments.
Research and Development Expense. Research and development expense
increased to $2.4 million or 90% in 1996, from $1.3 million in 1995. The
increase resulted from new product development efforts associated with the
Company's long-term initiative to develop smaller, higher-bandwidth,
antenna-aiming technology to complement the Company's existing communication
products. Total research and development expenditures, including customer-funded
product development expenditures included in cost of goods sold, were $3.3
million in 1996 and $3.7 million in 1995. The year over year decline in total
research and development is due to the decline in customer-funded research from
1995 levels.
Sales and Marketing Expense. Sales and marketing expenses grew to $3.0
million or 22% in 1996 from $2.5 million in 1995, but decreased as a percentage
of net sales to 12% in 1996 from 18% in 1995. The dollar increase is
attributable to higher sales commissions associated with higher sales volumes
and marketing costs associated with new product introductions. The decrease as a
percentage of net sales reflects the leveraging of relatively fixed sales
support costs over a larger revenue base.
General and Administrative Expense. General and administrative expense
increased to $1.6 million or 54% in 1996, from $1.1 million in 1995, but
decreased as a percentage of net sales to 6% from 7% in such years,
respectively. The dollar increase is attributable primarily to the added costs
associated with becoming a public company, including directors and officers
insurance, legal, accounting and consulting fees and increased compensation
expense resulting from increases in management incentive payments. The decrease
as a percentage of net sales reflects the leveraging of administrative staff
support costs over a larger revenue base
Interest Income Interest income reflects the interest earned by
investing the proceeds of the April 1996 public offering in Federal short-term
obligations
Other (Income) Expense. Other (income) expense was not material in
both 1996 and 1995.
Loss (Gain) on Foreign Currency Translation. The results of operations
of the Company's foreign subsidiary, KVH Europe, are determined by remeasuring
its foreign currency-denominated operations as if they had taken place in United
States dollars. Gains and losses resulting from this translation are included in
the Company's net income. The translation loss of $50,587 in 1996 and gain of
$4,300 in 1995, reflect changes in the strength of the United States dollar in
relation to the Danish krone.
Income Tax Expense (Benefit). The Company's income tax expense
increased $2.1 million to $1.7 million in 1996, compared with an income tax
benefit of approximately $0.4 million in 1995. The increase was attributable to
the utilization of the Company's net operating loss carryforwards ("NOLs") from
prior years. The Company's effective tax rate in 1996 was 41.5%.
Liquidity and Capital Resources
Year ended December 31,
--------------------------------------------------------------------------------
1997 Change 1996 Change 1995
---- ------ ---- ------ ----
(in thousands)
Cash and cash equivalents $ 4,758 (32%) 7,006 682% 896
Working capital $12,410 (1%) 12,570 291% 3,214
The Company financed its operations, technology acquisitions and fixed
asset acquisitions of approximately $6.0 million dollars through a combination
of funds generated from operations, short-term bank revolving lines of credit
and proceeds from its public offering. The Company believes that existing cash
balances, short-term marketable securities, amounts available under its
revolving credit facility and funds generated from operations will be sufficient
to meet anticipated liquidity and working capital requirements for 1998. If the
Company determines to expand more rapidly, to broaden or enhance its products
more rapidly, to acquire businesses or technologies or to make other significant
expenditures to respond to competitive pressures, then the Company may need to
raise additional funds.
Other Matters
Recent Accounting Pronouncements
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 will 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 will not have a material impact on the Company's financial
condition, results of operations or cash flows.
Year 2000
The Company is in the process of selecting a replacement for its
existing computer system. The Company has engaged a consulting firm to advise
the Company regarding the selection and implementation of a Year 2000 compliant
computer system. The estimated cost of consulting services, computer hardware,
training and software is expected to be less than $0.5 million dollars. In
addition the Company has identified the need for a chief information officer and
is actively recruiting to fill this position.
Inflation
The Company believes that inflation has not had a material effect on
its results of operations.
Market Risk Disclosure
Not applicable.
Forward Looking Statements
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 future growth will depend to a considerable extent on the
expansion of sales of its marine antenna-aiming products. To date, the market
for mobile satellite communications products has been limited. The Company's
first satellite communications product, an antenna-aiming system for use with
satellites operated by the International Maritime Satellite Organization
("INMARSAT"), was introduced in late 1993. The Company's TracVision system for
mobile reception of direct broadcast satellite television services ("DBS-TV")
was introduced in late 1995, and the Tracphone mobile satellite telephone system
for use with the SKYCELL voice, fax and data services offered by AMSC was
introduced in the second quarter of 1996. The TracVision II a smaller and less
expensive version of the TracVision, was introduced in September of 1997 and the
TracPhone 50, a smaller, less expensive version of the ASAP line of products,
was introduced in September of 1997 as a turnkey system offering airtime
services provided by Station 12 with KVH hardware. The Company's business,
financial condition and results of operation could be adversely affected if any
of the INMARSAT, Station 12 or DBS-TV satellite networks experience operating,
financial or regulatory problems, if no significant maritime market develops for
these services, or if the Company's products do not achieve significant market
acceptance in these emerging markets. Also, if the Company builds inventory in
anticipation of potential sales in the marine satellite communications market,
the failure of that market to develop could result in inventory obsolescence.
The Company relies upon sales of new products under large contracts to
a small number of customers, and the sales cycles for some of the Company's
products are long and difficult to predict, resulting in variability of a
significant portion of its product revenues. The introduction of new products
involves the identification and qualification of new material and component
vendors. New products may contain undetected component, hardware, software or
mechanical defects or failures when first introduced or may develop defects or
failures after commencement of commercial production or shipments. Any such
delays, defects or failures could cause loss of goodwill with distributors and
with current or potential customers, impair or prevent the market acceptance of
the Company's products and result in lost revenue due to cancellations or
rescheduling of orders or shipments or to product recalls, returns or discounts.
The Company could also incur unexpected and significant costs, including product
redesign costs and costs associated with customer support. The Company's
products are generally sold with a limited warranty against defects in materials
and workmanship, generally for a period of one year but in certain cases for as
long as three to five years. If any of the Company's products were found within
the warranty period to contain such defects, the Company could be required to
repair, replace or refund the purchase price of the defective products. The
occurrence of any of the above risks could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company derives a substantial portion of its revenues from the
armed forces of the United States and of foreign governments and from
contractors that manufacture military land vehicles for such governments. 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 the United States or any foreign government would have a material
adverse effect on the Company's business, financial condition and results of
operations. Generally, the United States government and its contractors and
subcontractors may terminate their contracts with the Company for cause or for
convenience, upon certain terms and conditions. In many instances, the United
States government or its contractors purchase the Company's products on a
purchase-order basis, without firm commitments. Moreover, even under firm orders
by the United States government or its contractors, funding must nevertheless be
appropriated in the budget process in order for the government to complete the
contract. The Company experienced a significant growth in military contracts in
1997 and anticipates that these contracts will not reoccur in 1998. As a result,
the Company anticipates that product gross profits will decline in 1998 from
1997 levels.
Satellite communications technologies are changing rapidly as new
satellite systems are placed into service. The Iridium Low Earth Orbit ("LEO")
system is close to completion, offering handheld products that will compete with
larger, more costly actively stabilized antenna systems. Although LEO service
costs are anticipated to be more costly than Inmarsat services, there is no
assurance that this technology or other technologies will not reduce the
Inmarsat market share.
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements and supplementary data,
together with the report of KPMG Peat Marwick LLP, independent auditors, are
included in Part IV of this Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant.
Reference is made to the information set forth in the definitive Proxy
Statement relating to the 1997 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission within 120 days after December 31, 1997)
(the "Proxy Statement"), under the caption "Directors and Executive Officers".
Item 11. Executive Compensation.
Reference is made to the information set forth in the Proxy Statement
under the caption "Renumerature of Executive Officers and Directors".
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Reference is made to the information set forth in the Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management".
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this report: Page
1. Financial Statements:
Report of Independent Accountants 20
Consolidated Balance Sheets as of December 31, 1997, and 1996 21
Consolidated Statements of Income for the years ended December 31, 1997
1996 and 1994 22
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995
23
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 24
Notes to Consolidated Financial Statements 25
2. Financial Statement Schedule. See "Independent Auditors Report and
Schedule II - Valuation and Qualifying Accounts" included on pages 36
and 37. All other schedules have been omitted since the information is
not required to be presented, or because the information required is
included in the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K:
Report on Form 8-K was filed on November 14, 1997. The report contains
the asset purchase agreement between the Company and Andrew Corporation
and a Common Stock Warrant both dated October 30,1997.
(c) Exhibit Number Description Page
3.1 Restated Certificate of Incorporation of the Company (1)
3.5 Amended and Restated By-Laws of the Company
10.1 1986 Executive Incentive Stock Option Plan (1)
10.2 Amended and Restated 1995 Incentive Stock Option Plan of the Company (1)
10.3 1996 Employee Stock Purchase Plan (1)
10.5 Credit Agreement dated September 8, 1993 between the Company and
Fleet National Bank (1)
10.6 $500,000 Revolving Credit Note dated September 8,1993 between the Company
and Fleet National Bank (1)
10.7 Security Agreement dated September 8, 1993 between the Company and
Fleet National Bank (1)
10.8 Modification to Security Agreement dated May 30, 1994 between the Company
and Fleet National Bank (1)
10.9 Second Modification to Credit Agreement and Revolving Credit Note dated
May 30, 1994 between the Company and Fleet National Bank (1)
Exhibit No. Description Page
10.10 Second Modification to Security Agreement dated March 17, 1995 between
the Company and Fleet National Bank (1)
10.11 Third Modification to Credit Agreement and Revolving Credit Note dated
March 17, 1995 between the Company and Fleet National Bank (1)
10.12 Third Modification to Security Agreement dated December 12, 1995 between
the Company and Fleet National Bank (1)
10.13 Fourth Modification to Credit Agreement and Revolving Credit Note dated
December 12, 1995 between the Company and Fleet National Bank (1)
10.14 Lease dated February 27, 1989 between the Company and Middletown
Technology Associates IV (1)
10.17 Registration Rights Agreement dated May 20, 1986 by and among the
Company and certain stockholders of the Company (1)
10.18 Amendment to Registration Rights Agreement dated
January 25, 1988, by and among the Company, Fleet
Venture Resources, Inc., and Fleet Venture Partners I
and certain stockholders of the Company (1)
10.19 Amendment to Registration Rights Agreement dated
October 25, 1988 by and among the Company and certain
stockholders of the Company (1)
10.20 Amendment to Registration Rights Agreement dated July 21, 1989 by and
among the Company and certain stockholders of the Company (1)
10.21 Third Amendment to Registration Rights Agreement
dated November 3, 1989 by and among the Company and
certain stockholders of the Company (1)
10.28 Technology License Agreement dated December 22, 1992 between the
Company and Etak, Inc. (1)
10.29 Agreement dated September 28, 1995 between the Company and Thomson
Consumer Electronics, Inc. (1)
10.30 Agreement dated September 28, 1995 between the Company and Thomson
Consumer Electronics, Inc. (1)
10.31 Agreement regarding Technology Affiliates Program between Jet
Propulsion Laboratory and the Company (1)
10.32 Purchase and Sale Agreement dated March 18, 1996, 50 Enterprise Center,
Middletown, Rhode Island between the Company and SKW Real Estate
Limited Partnership (2)
10.33 Fifth Modification to Credit Agreement and Revolving Note dated
August 8, 1996 between the Company and Fleet National Bank
10.34 Andrew Corporation Asset Purchase and Warrant Agreement (3)
11.1 Computation of Earnings per Share (2) 38
21.1 List of Subsidiaries of the Company (1)
23.1 Consent of KPMG Peat Marwick LLP 39
27.1 Financial Data Schedule 40
(1) Incorporated by Reference to Exhibit Index on Form S-1 filed with the
Securities and Exchange Commission dated March 28, 1996, Registration
No. 333-01258.
(2) Filed by paper with the Securities and Exchange Commission..
(3) Incorporated by reference to Exhibits 1 & 2 on Form 8-K filed with the
Securities and Exchange Commission dated November 14, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 the registrant has the duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
KVH Industries, Inc.
DATE: March 25, 1998 By: /s/ Martin A. Kits van Heyningen
------------------------------
Martin A. Kits van Heyningen
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
/s/ Martin A. Kits van Heyningen President
Martin A. Kits van Heyningen (Chief Executive Officer) March 25, 1998
/s/ Richard C. Forsyth Chief Financial Officer
Richard C. Forsyth (Principal Financial and March 25, 1998
Accounting Officer)
/s/ Arent H. Kits van Heyningen Chairman of the Board March 25, 1998
Arent H. Kits van Heyningen
/s/ Robert W. B. Kits van Heyningen Director March 25, 1998
Robert W. B. Kits van Heyningen
/s/ Stanley K. Honey Director March 25, 1998
Stanley K. Honey
/s/ James A. Saalfield Director March 25, 1998
James A. Saalfield
/s/ Werner Trattner Director March 25, 1998
Werner Trattner
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
KVH Industries, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of KVH Industries,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KVH Industries, Inc.
and subsidiary at December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Providence, Rhode Island
February 3, 1998
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets (note 5) 1997 1996
--------------- ---- ----
Current assets:
Cash and cash equivalents $ 4,757,614 7,005,682
Accounts receivable, less allowance for doubtful accounts
of $73,909 in 1997 and $49,955 in 1996 (note 11) 4,338,992 6,130,567
Contract receivables 156,777 29,226
Costs and estimated earnings in excess of billings
on uncompleted contracts 406,014 835,720
Inventories (note 3) 4,751,792 3,242,270
Prepaid expenses and other deposits 222,015 179,705
Deferred income taxes (note 9) 387,567 134,552
------------ ------------
Total current assets 15,020,771 17,557,722
---------- ----------
Property and equipment, net (note 4) 5,974,635 3,881,088
Other assets, less accumulated amortization of
$194,837 in 1997 and $168,859 in 1996 731,000 25,978
Deferred income taxes (note 9) 78,535 88,862
------------- -------------
$ 21,804,941 21,553,650
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases (note 6) 7,278 57,676
Accounts payable 1,618,295 1,031,309
Accrued expenses (note 7) 960,488 1,371,193
Customer deposits (note 11) 25,068 2,527,500
------------- -----------
Total current liabilities 2,611,129 4,987,678
Obligations under capital leases, excluding current installments (note 6) - 3,341
------ -----------
Total liabilities 2,611,129 4,991,019
----------- -----------
Stockholders' equity (note 8):
Preferred stock, $.01 par value. Authorized 1,440,390 shares;
none issued. - -
Common stock, $.01 par value. Authorized 7,490,582 shares;
issued 7,086,046 shares in 1997 and 6,993,246 in 1996 70,860 69,932
Additional paid-in capital 15,298,558 14,884,806
Retained earnings 3,824,394 1,607,893
----------- -----------
Total stockholders' equity 19,193,812 16,562,631
---------- ----------
Commitment and other information (notes 6 and 10)
$ 21,804,941 21,553,650
========== ==========
See accompanying notes to consolidated financial statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Net sales (note 11) $ 25,570,347 25,687,495 14,150,147
Cost of goods sold 14,085,463 14,607,584 8,446,728
---------- ---------- ---------
Gross profit 11,484,884 11,079,911 5,703,419
Operating expenses:
Research and development 3,175,181 2,430,755 1,278,841
Sales and marketing 3,738,605 3,039,483 2,494,071
General and administrative 1,895,031 1,624,270 1,058,073
----------- ----------- -----------
Operating profit 2,676,067 3,985,403 872,434
Other deductions (income):
Interest income (336,157) (293,494) (23,761)
Interest expense 8,893 15,938 51,507
Other expense (income) (95,083) 14,303 20,385
Loss (gain) on foreign currency translation (138,272) 50,087 (4,300)
------------ ------------- --------------
Income before income tax expense (benefit) 3,236,686 4,198,569 828,603
Income tax expense (benefit) (note 9) 1,020,185 1,742,538 (364,995)
----------- ----------- ------------
Net income $ 2,216,501 2,456,031 1,193,598
=========== =========== ===========
Per share information (notes 8 and 13):
Net income per common share - basic $ 0.31 0.39 0.25
=============== ============== =============
Net income per common share - diluted $ 0.30 0.35 0.21
============== =============== =============
Weighted average number of shares outstanding:
Basic 7,049,125 6,370,272 4,862,450
=========== =========== ===========
Diluted 7,497,695 7,055,309 5,710,177
=========== =========== ===========
See accompanying notes to consolidated financial statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
Additional Retained Total
Preferred Common Paid-in Earnings Stockholders'
Stock Stock Capital (Deficit) Equity
Balances at December 31, 1994 $ 12,982 16,006 4,463,941 (2,041,736) 2,451,193
Net income - - - 1,193,598 1,193,598
Stock option transaction - 154 9,104 - 9,258
--- -------- -------------- --- --------------
Balances at December 31, 1995 12,982 16,160 4,473,045 (848,138) 3,654,049
Net income - - - 2,456,031 2,456,031
Exercise of stock options and
warrants - 3,274 457,203 - 460,477
Initial public offering of common stock, net
of issuance costs of $1,736,555 (note 8) - 18,000 9,945,445 - 9,963,445
Conversion of 1,298,182 shares of preferred
stock to 3,245,500 shares of common stock (12,982) 32,455 (19,473) - -
Issuance of common stock under
benefit plans - 43 28,586 - 28,629
--- --------- ------------- --- -------------
Balances at December 31, 1996 - 69,932 14,884,806 1,607,893 16,562,631
Net income - - - 2,216,501 2,216,501
Issuance of common stock under
benefit plan - 127 67,404 - 67,531
Exercise of stock options - 801 151,913 - 152,714
Issuance of warrants (notes 2 and 8) - - 194,435 - 194,435
--- --- ------------ --- ------------
Balances at December 31, 1997 $ - 70,860 15,298,558 3,824,394 19,193,812
=== ====== ============ ========= ==========
See accompanying notes to consolidated financial statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 2,216,501 2,456,031 1,193,598
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 797,761 285,049 143,080
Provision for doubtful accounts 284 (45,000) 39,816
Provision for deferred taxes (242,688) 315,381 (376,395)
Decrease (increase) in accounts and contract receivables 1,827,202 (2,932,821) (2,220,826)
Decrease (increase) in costs and estimated earnings in excess
of billings on uncompleted contracts 429,706 80,474 (53,698)
Increase in inventories (649,213) (1,489,098) (819,657)
Increase in prepaid expenses and other deposits (42,310) (23,030) (84,253)
Increase in accounts payable 586,986 72,802 551,586
(Decrease) increase in accrued expenses (554,922) 1,035,297 162,819
(Decrease) increase in customer deposits (2,502,432) (342,095) 2,835,600
--------- ------------ ---------
Net cash provided by (used in) operating activities 1,866,875 (587,010) 1,371,670
--------- ------------ ---------
Cash flows from investing activities:
Acquisition (note 2) (1,946,026) - -
Capital expenditures (2,335,423) (3,703,327) (210,801)
--------- ----------- ----------
Net cash used in investing activities (4,281,449) (3,703,327) (210,801)
--------- ----------- ----------
Cash flows from financing activities:
Repayments on note payable to bank - - (455,278)
Repayments of obligations under capital lease (53,739) (52,209) (10,610)
Stock option and benefit plan transactions 220,245 489,106 9,258
Proceeds from initial public offering (note 8) - 9,963,445 -
--- ----------- --
Net cash provided by (used in) financing activities 166,506 10,400,342 (456,630)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (2,248,068) 6,110,005 704,239
Cash and cash equivalents at beginning of year 7,005,682 895,677 191,438
--------- ------------ ----------
Cash and cash equivalents at end of year $ 4,757,614 7,005,682 895,677
========= =========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 8,589 15,938 51,507
============ ============= ===========
Cash paid during the year for income taxes $ 1,872,049 20,250 250
========= ============= =============
See accompanying notes to consolidated financial statements.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Description of Business
KVH Industries, Inc. (the "Company") develops, manufactures and markets
proprietary fiber optic, autocalibration and sensor technologies to
produce navigation and mobile satellite communications systems for
commercial, military and marine applications.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
KVH Industries, Inc. and its wholly-owned subsidiary, KVH Europe A/S
("KVH Europe"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity, at the
purchase date, of three months or less to be cash equivalents.
(d) Revenue Recognition
Revenue is recognized when a product is shipped and services are performed.
Revenues on long-term contracts are recognized using the percentage of
completion method. Under this method, income is recognized as work
progresses on the contracts. The percentage of work completed is
determined principally by comparing the accumulated costs incurred to
date with management's current estimate of total costs to be incurred at
contract completion. On certain contracts where the delivery of equipment
is separable from development and other aspects of the contract, the
Company segments the contract and recognizes revenue on each segment
individually. Revisions of costs and income estimates are reflected in
the period in which the facts that require the revisions become known. If
estimated total costs on a contract indicate a loss, the entire amount of
the estimated loss is provided for currently.
(e) Inventories
Inventories of finished goods for sale and raw materials are stated at the
lower of cost or market using the first-in first-out costing method. Work
in process is valued at production cost represented by material, labor
and overhead, and is not recorded in excess of net realizable values.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed on the straight-line method over the estimated useful lives of
the respective assets. The principal lives, in years, used in determining
the depreciation rates of various assets are: leasehold improvements, ten
years; machinery and equipment, five years; office and computer
equipment, five to seven years and motor vehicles, four years.
Amortization of property and equipment under capital lease is provided
using the straight-line method over the lease terms.
(g) Other Assets
Other assets consist of patents, capitalized costs of workforce resulting
from an acquisition and the organization costs incurred to KVH Europe.
These costs are being amortized on a straight-line basis over period
ranging from five year to twelve years. The Company continually reviews
intangible assets to assess recoverability from estimated future results
of operations and estimated future cash flows.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(h) Progress Payments
Progress payments received from customers are offset against inventories
associated with the contracts for which the payments were received. Under
contractual arrangements by which progress payments are received from the
United States Government, the United States Government has a lien on the
inventories identified with related contracts.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(j) Research and Development
Expenditures for research and development, including customer-funded
research and development, are expensed in the year incurred. Revenue from
customer-funded research and development is included in net sales, and
the related product development costs are included in cost of goods sold.
Revenues from customer-funded research and development totaled
approximately $957,000, $1,050,000 and $3,200,000, respectively, in 1997,
1996 and 1995, and related costs included in cost of goods sold totaled
approximately $630,000, $869,000 and $2,445,000 in such years,
respectively.
(k) Foreign Currency Transaction
The financial statements of the Company's foreign subsidiary are
re-measured into the United States dollar functional currency for
consolidation and reporting purposes. Current rates of exchange are used
to re-measure monetary assets and liabilities and historical rates of
exchange are used for nonmonetary assets and related elements of expense.
Revenue and other expense elements are re-measured at rates, which
approximate the rates in effect on the transaction dates. Gains and
losses resulting from this re-measurement process are recognized
currently in the consolidated statements of income.
(l) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(m) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(n)Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of The
Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived to be Disposed of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
(o) Net Income per Common Share
During 1997 the Company adopted the provisions of SFAS No. 128, Earnings Per
Share. Under the provisions of SFAS 128, basic earnings per share replaces
primary earnings per share and the dilutive effect of stock options and
warrants are excluded from the calculation. Fully diluted earnings per
share are replaced by diluted earnings per share and include the dilutive
effect of stock options and warrants, using the treasury stock method. All
prior period earnings per share data have been restated to conform to the
requirements of SFAS 128.
Areconciliation of the weighted average number of shares outstanding used in
the computation of the basic and diluted earnings per share for the three
years ended December 31, 1997 is as follows:
1997 1996 1995
---- ---- ----
Weighted average shares (basic) 7,049,125 6,370,272 4,862,450
Effect of dilutive stock options 448,570 685,037 847,727
------- ------- -------
Weighted average shares (diluted) 7,497,695 7,055,309 5,710,177
========= ========= =========
The net income used in the calculation for basic and diluted earnings per
share calculations agrees with the net income appearing in the financial
statements.
(p) Fair Value of Financial Instruments
The carrying amounts of accounts receivable, contracts receivable, costs and
estimated earnings in excess of billings on uncompleted contracts, accounts
payable, accrued expenses and obligations under capital leases approximate
fair value due to the short maturity of these instruments.
(2) Acquisition
OnOctober 30, 1997 the Company purchased certain operating assets and assumed
certain liabilities of the Sensor Products Group of the Andrew Corporation
for approximately $1.9 million of cash (including acquisition costs) and
warrants to purchase the Company's common stock, valued at approximately
$194,000. The assets acquired will provide the Company with the ability to
produce fiber optic rate sensors that will advance the Company's existing
product performance accuracy and range of operation. The acquisition has
been accounted for as a purchase. The allocation of the purchase price
resulted in intangibles, primarily patents and workforce, of approximately
$731,000 which are being amortized on a straight-line basis over periods of
5 - 12 years.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Inventories
Inventories at December 31, 1997 and 1996 consist of the following:
1997 1996
---------- ----------
Raw materials $3,242,580 1,887,634
Work in process 356,211 714,346
Finished goods 1,153,001 640,290
---------- ----------
$4,751,792 3,242,270
========== ==========
Project inventories totaling $39,408 and $385,748, respectively, in 1997
and 1996 have been offset against related progress payments and included as a
component of costs and estimated earnings in excess of billings on uncompleted
contracts.
(4) Property and Equipment
Property and equipment, net, at December 31, 1997 and 1996 consist of the
following:
1997 1996
---------- ----------
Land $ 806,774 806,774
Building and improvements 3,181,986 1,801,062
Leasehold improvements -- 39,543
Machinery and equipment 1,838,603 1,667,618
Office and computer equipment 2,455,057 1,155,750
Motor vehicles 92,348 68,949
---------- ----------
8,374,768 5,539,696
Less accumulated depreciation 2,400,133 1,658,608
---------- ----------
$5,974,635 3,881,088
========== ==========
Depreciation for the years ended December 31, 1997, 1996 and 1995
amounted to $771,783, $246,081 and $104,113, respectively.
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5) Notes Payable to Bank
OnAugust 10, 1993, the Company entered into a Secured Revolving Line of
Credit Agreement (the "Revolving Credit Agreement") with Fleet National
Bank which, as amended through August 8, 1996, provides for borrowings from
time to time of up to $2,500,000 at the bank's prime rate plus 1.25%.
Borrowings are payable upon demand by the bank or the expiration of the
Revolving Credit Agreement, which expires June 30, 1998. Borrowings are
secured by substantially all of the assets of the Company, except for land,
building and improvements. As of December 31, 1997 and 1996, the Company
had no borrowings outstanding. The Revolving Credit Agreement includes
financial and other restrictive covenants relating to the maintenance of or
attainment of certain financial criteria and prohibits the Company from
paying cash dividends. The company is in compliance with all covenants
related to the loan agreement.
(6) Leases
The Company has certain capital and operating leases for facilities,
automobiles, and various equipment. The following is a summary of future
minimum payments under capital leases and under operating leases that have
initial or remaining noncancelable lease terms in excess of one year at
December 31, 1997:
Capitalized Operating
Year ending December 31 Leases Leases
1998 $ 7,284 105,680
1999 - 58,500
--- --------
Total minimum lease payments 7,284 164,180
=======
Imputed interest (6)
Present value of minimum capital lease payment $ 7,278
=======
Total rent expense incurred under operating leases for the years ended
December 31, 1997, 1996 and 1995 amounted to, $433,908, $435,124 and
$412,085, respectively. In 1997 the Company reduced the amount of square
feet under a facility lease from 30,000 to 6,000. The Company paid $210,000
in the fourth quarter of 1997 to modify the lease agreement. As a
consequence of reducing the leased square footage the Company's lease
liability decreases to $78,000 and $56,000 in 1998 and 1999 respectively.
(7) Accrued Expenses
Accrued expenses for the period ended December 31, 1997 and 1996 consist of
the following:
1997 1996
---- ----
Accrued payroll, bonus and other
related expenses payable $ 709,544 529,471
Federal income tax payable - 478,567
State income tax payable 57,601 180,148
Professional fees 162,133 106,776
Other 31,210 76,231
-------- ---------
$ 960,488 1,371,193
======= =========
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) Stockholders Equity
(a) Sale of Common Stock
OnMarch 28, 1996, the Company's registration statement for an initial
public offering of common stock was declared effective. An aggregate of
1,800,000 shares of common stock were issued by the Company on April 8,
1996 at an initial public offering of $6.50 per share that resulted in
approximately $9.9 million in net proceeds.
(b) Employee's Stock Options and Warrants
The Company has a 1986 Executive Incentive Stock Option Plan, a 1995
Incentive Stock Option Plan, and a 1996 Incentive and Non-Qualified Stock
Option Plan (the "Plans").
The Company has reserved 915,000 shares of its common stock for issuance
upon exercise of options granted or to be granted under the Plans. These
options generally vest in equal annual amounts over four years beginning
on the date of the grant. The Plans provide that options be granted at
exercise prices not less than market value on the date the option is
granted and options are adjusted for such changes as stock splits and
stock dividends. No options are exercisable for periods of more than ten
years after date of grant.
The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $4.12, $1.80 and $0.28 on the date of grant using
the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield 0%,
risk-free interest rate 5.36%, expected volatility of 82.71% and expected
life of 2.56 - 3 years; 1996 - expected dividend yield 0%, risk-free
interest rate of 6.4%, expected volatility rate of 3% and an expected
life of 4 years; 1995 expected dividend yield 0%, risk-free interest rate
of 6.1%, expected volatility rate of 3% and an expected life of 2 years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net income As reported $ 2,216,501 2,456,031 1,193,598
Pro forma 1,942,467 2,109,142 1,143,211
Net income per common As reported $ 0.30 0.35 0.21
share-diluted Pro forma $ 0.26 0.30 0.20
Pro forma net income reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of 4 years and compensation cost for options
granted prior to January 1, 1995, is not considered.
(Continued)
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
At December 31, 1997, warrants, issued in conjunction with an acquisition of
the Sensor Products Group of the Andrew Corporation (note 2), to purchase
50,000 common shares were outstanding. Each warrant allows the holder
thereof to acquire one share of common stock for a purchase price of
$8.00. The warrants are exercisable from October 30,1997 through October
30, 2002.
The changes in outstanding employee stock options for the three years ended
December 31, 1997, 1996 and 1995 is as follows:
Number of Weighted-Average
Shares Exercise Price
Outstanding at December 31, 1994 469,884 $ 0.60
Granted 796,425 1.22
Exercised (15,430) 0.60
Forfeited - -
Expired and canceled (185,740) 1.60
---------- ----
Outstanding at December 31, 1995 1,065,139 1.11
Granted 362,000 7.91
Exercised (327,400) 0.75
Forfeited (66,080) 0.60
Expired and canceled (12,332) 5.72
----------- ----
Outstanding at December 31, 1996 1,021,327 3.83
Granted 66,250 7.13
Exercised (86,728) 0.76
Forfeited - -
Expired and canceled (70,446) 5.93
----------- ----
Outstanding at December 31, 1997 930,403 $ 4.28
========== ====
The following table summarizes information about employee stock options at
December 31, 1997:
Number
Number Average Weighted- Exercisable Weighted-
Range of Outstanding Remaining Average As of Average
Exercise Prices 12/31/97 Life Exercise Price 12/31/97 Exercise Price
$0.60 - $0.60 116,165 2.53 $0.60 95,962 $0.60
$1.70 - $1.70 400,000 2.82 $1.70 306,250 $1.70
$5.50 - $7.98 174,238 4.05 $7.17 96,364 $7.03
$8.00 - $9.13 240,000 3.49 $8.26 148,000 $8.42
------- -------
$0.60 - $9.13 930,403 3.19 $4.28 646,576 $3.87
======= =======
(Continued)
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
AtDecember 31, 1997, 1996 and 1995 the number of options exercisable was
646,576, 983,828 and 889,049, respectively and the weighted average
exercise price of those options was $3.87, $3.83 and $1.11 respectively.
(c) Employee's Stock Purchase Plan
The Employee Stock Purchase Plan (the "ESPP") covers substantially all
employees in the United States and Denmark. The ESPP allows eligible
employees the right to purchase common stock on a semi-annual basis at
the lower of 85% of the market price at the beginning or end of each
six-month offering period. During 1997 and 1996, 12,700 and 4,351 shares,
respectively, were issued under this plan. As of December 31, 1997,
132,949 shares were reserved for future issuance under the plan.
(9) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1997, 1996 and
1995 are presented below.
Current Deferred Total
----------- ----------- -----------
1997:
Federal $ 1,037,954 (212,586) 825,368
State 157,997 (30,102) 127,895
Foreign 66,922 -- 66,922
----------- ----------- -----------
$ 1,262,873 (242,688) 1,020,185
=========== =========== ===========
1996:
Federal $ 1,062,392 246,986 1,309,378
State 285,148 68,395 353,543
Foreign 79,617 -- 79,617
----------- ----------- -----------
$ 1,427,157 315,381 1,742,538
=========== =========== ===========
1995:
Federal $ 11,400 (293,253) (281,853)
State -- (83,142) (83,142)
Foreign -- -- --
----------- ----------- -----------
$ 11,400 (376,395) (364,995)
=========== =========== ===========
(Continued)
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The actual tax benefit differs from the "expected" tax expense computed by
applying the U.S. Federal corporate tax rate of 34% to income before income
taxes as follows:
1997 1996 1995
---- ---- ----
Computed "expected" tax expense $ 1,100,473 1,427,513 281,725
Increase (decrease) in income taxes resulting from:
Change in beginning of the year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense - - (661,854)
Non-deductible expenses 26,262 25,025 -
Utilization of tax credits (215,411) - -
State income tax expense, net of Federal
income tax benefit 84,411 233,674 12,562
Other 24,450 56,326 2,572
----------- ---------- ---------
Net income tax expense (benefit) $ 1,020,185 1,742,538 (364,995)
========= ========= =======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1997 and 1996 are as
follows:
1997 1996
---- ----
Accounts receivable, due to allowance for doubtful accounts $ 24,126 25,672
Inventories, due to valuation reserve 204,451 42,197
Inventories, due to differences in costing for tax purposes 4,334 3,050
Inventories, due to unrealized gain 130,416 42,627
Property, plant and equipment, due to differences in depreciation 5,812 25,841
Accrued warranty costs 96,963 84,027
-------- --------
Deferred tax asset $ 466,102 223,414
======= =======
The recognition of the deferred tax asset of $466,102 is supported by the
Company's expectation that it will have future taxable income in 1998 and
beyond in order to realize the benefit of these future tax deductions.
(10) 401(k) Profit Sharing Plan
The Company has a 401(k) Profit Sharing Plan (the Plan) for all eligible
employees. All employees with a minimum of one year of service who have
attained age 21 are eligible to participate. Participants can contribute up
to 15% of total compensation, subject to the annual IRS dollar limitation.
Participants become fully vested in Company contributions after 7 years of
continuous service. Company contributions to the plan are discretionary.
During 1997, 1996 and 1995, the Company did not make any contributions to
the Plan.
(Continued)
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Business and Credit Concentrations
InSeptember 1995 the Company entered into an agreement with AMSC for the
design and manufacture of mobile satellite telephone systems for use at
sea. The agreement provides for AMSC to purchase 5,000 systems, for a total
contract value of $10.2 million. The Company received an advance from AMSC
totaling $2.5 million to be applied to the purchase price of the last of
the systems covered by the agreement. The Company shipped approximately 70%
of the order in 1996 and the remainder in 1997.
The Company derives a substantial portion of its revenues from the armed
forces of the United States and foreign governments. The Company estimates
that approximately 52%, 37% and 52%, of the Company's revenues were derived
from United States and foreign military and defense related sources in
fiscal 1997, 1996 and 1995, respectively. Changes in procurement priorities
or significant reductions or delays in procurement of the Company's
products by the United States or any foreign government could have a
material adverse effect on the Company's business, financial condition and
results of operation. A significant portion of the Company's revenues are
also derived from customers outside the U.S. Revenues from foreign
customers accounted for 31%, 42% and 51% of total revenues in fiscal 1997,
1996, 1995, respectively.
Historically, a significant portion of the Company's sales in any particular
period has been attributable to sales to a limited number of customers.
Sales to AMSC accounted for approximately 12% and 27% of net sales in 1997
and 1996 respectively. Sales to the United States Army Tank and Automotive
Command accounted for approximately 28% of net sales in 1997. Sales to the
Government of Sweden accounted for approximately 13% and 14% of the
Company's net sales in 1997 and 1996 respectively. Sales to General Motors
Corporation of Canada accounted for approximately 14% and 13%, of the
Company's net sales in 1996 and 1995 respectively.
(12) Segment Reporting
(a) Geographic Information
The Company's operations are located in the United States and Europe.
Inter-region sales are not significant to total revenue of any geographic
region. Information about the Company's operations in different geographic
regions for each of the three-year periods ended December 31, 1997, 1996
and 1995 is as follows:
1997 1996 1995
---- ---- ----
Net revenues:
United States $ 23,258,557 23,809,807 12,609,029
Europe 2,311,790 1,877,688 1,541,118
--------- ----------- -----------
$ 25,570,347 25,687,495 14,150,147
========== ========== ==========
Operating profit:
United States $ 2,612,003 3,790,663 720,669
Europe 64,064 194,740 151,765
------------- ---------- ----------
$ 2,676,067 3,985,403 872,434
=========== ========= ==========
(Continued)
KVH INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
1997 1996 1995
---- ---- ----
Identifiable assets:
United States $ 21,003,039 20,941,403 7,267,604
Europe 801,902 612,247 663,669
------------ ------------ ----------
$ 21,804,941 21,553,650 7,931,273
========== ========== =========
(b) Export Sale Information
Export sales from the Company's United States operations to unaffiliated
customers, located primarily in Europe and Canada, totaled, $7,813,138,
$9,051,291 and $5,712,658, respectively, in 1997, 1996 and 1995.
(13) Selected Quarterly Financial Results (Unaudited) Financial information for
interim periods was as follows:
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
----- ------- ------- ------- -------
Net sales $ 5,916,329 5,770,505 7,025,976 6,857,537
Gross profit 2,737,300 2,519,762 3,546,897 2,680,925
Net income 603,989 402,167 1,018,799 191,546
Earnings per share (a):
Basic $ 0.09 0.06 0.14 0.03
============ ============ ============ ==========
Diluted 0.08 0.05 0.14 0.03
=========== ============ ============ ==========
1996
Net sales $ 4,780,659 5,113,602 7,147,270 8,645,964
Gross profit 2,088,270 2,284,354 2,918,469 3,788,818
Net income 187,568 320,099 920,513 1,027,851
Earnings per share (a):
Basic $ 0.04 0.05 0.13 0.15
============ ============ ============ ============
Diluted $ 0.03 0.04 0.12 0.14
============ ============ ============ ============
1995
Net sales $ 2,767,878 3,080,851 3,278,670 5,022,748
Gross profit 1,230,492 1,188,118 1,353,736 1,931,073
Net income 351,084 210,313 174,670 457,531
Earnings per share (a):
Basic $ 0.07 0.04 0.04 0.09
=========== ============ ============ ============
Diluted $ 0.06 0.04 0.03 0.08
=========== ============ ============ ============
(a) Earnings per share are computed independently for each of the quarters.
Therefore, the earnings per share for the four quarters may not equal the
annual earnings per share data.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
KVH Industries, Inc. and Subsidiary:
Under the date of February 3, 1998, we reported on the consolidated
balance sheets of KVH Industries, Inc., and subsidiary as of December 31,
1997 and December 31, 1996 and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the fiscal years
in the three-year period ended December 31, 1997, as contained in the
1997 annual report on Form 10-K for the year 1997. In connection with our
audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule listed in Item 14(a)(2).
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Providence, Rhode Island
February 3, 1998
Schedule II
KVH Industries, Inc.
Valuation and Qualifying Accounts
Balance at Additions
Beginning of Charged to Deductions Balance at
Description Year Cost or from Reserve End of Year
Expense
---------------------------------------------------------------------------------------
(in thousands)
Deducted from accounts
receivable for doubtful
accounts
1997 50 24 - 74
1996 95 - (45) 50
1995 55 40 - 95
Deducted from inventory
for estimated obsolescence
1997 105 556 (150) 511
1996 60 60 (15) 105
1995 54 6 - 60
Exhibit 11.1
KVH INDUSTRIES, INC.
COMPUTATION OF NET EARNINGS PER SHARE
(in thousands, except per share data)
Year Ended December 31,
1996 1996 1995
Calculation of earnings per share - basic
Net income $2,217 2,456 1,194
========== ========== =========
Shares:
Common stock outstanding 7,049 6,371 4,862
========== ========== =========
Net income per common share - basic $ 0.39
0.31 0.25
========== ========== =========
Calculation of earnings per share - diluted
Net income $ 2,217 2,456 1,194
========== ========== =========
Shares:
Common stock outstanding , beginning of period 6,993 1,601 1,601
Conversion of preferred stock - 3,260 -
Weighted average common stock issued during the period 52 1,509 15
Assumed conversion of convertible preferred stock - - 3,245
Assumed exercise of common stock options 561 852 1,015
Less:
Purchase of common stock under the treasury stock method (152) (167) (189)
========== ========== =========
Weighted average number of common and common stock equivalent
shares outstanding 7,497 7,055 5,710
========== ========== =========
Net income per common share - diluted $ 0.30 0.35 0.21
========== ========== =========
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
KVH Industries, Inc. and Subsidiary:
We consent to incorporation, by reference in the Registration
Statement No. 333-01258 on Form S-8, of our report dated February 3, 1998,
relating to the consolidated balance sheets of KVH Industries, Inc., and
subsidiary as of December 31, 1997 and December 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows and
related schedule for each of the fiscal years in the three-year period
ended December 31, 1997, which report on the consolidated financial
statements included herein and which report on the related schedule is
included in the Annual Report on Form 10-K of KVH Industries, Inc., for the
fiscal year ended December 31, 1997.
/s/ KPMG Peat Marwick LLP
Providence, Rhode Island
March 24, 1998
5
KVH Industries, Inc. Financial Data Schedule December 31, 1997
Year
DEC-31-1997
DEC-31-1997
4,757,614
0
4,412,901
73,909
4,751,792
15,020,771
8,374,768
2,400,133
21,804,941
0
0
0
0
70,860
19,122,952
21,804,941
25,570,347
25,570,347
14,085,463
14,085,463
8,808,817
0
8,589
3,236,686
1,020,185
1,020,185
0
0
0
1,020,185
.31
.30