ITEM 1.
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LEGAL PROCEEDINGS
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We are a defendant in a class action lawsuit in
the U.S. District Court for the District of Rhode Island in which we and certain of our officers are named as defendants. The suit asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 under that
statute, as well as claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, on behalf of purchasers of our securities in the period from October 1, 2003 to July 2, 2004 and seeks certain legal remedies, including
compensatory damages. The Teamsters Affiliates Pension Plan has been appointed lead plaintiff. This matter consolidates into one action eight separate complaints filed between July 24, 2004 and September 15, 2004. On January 14, 2005,
the defendants filed a motion to dismiss the consolidated complaint for failure to state a claim upon which relief can be granted. The court denied this motion in part and granted it in part.
On October 14, 2005, the defendants answered the consolidated complaint and denied liability and all allegations of wrongdoing. Subsequently, on December 13,
2005, plaintiffs filed a motion for class certification. The motion is pending.
On August 16, 2004, Hamid Mehrvar filed a shareholders
derivative action in the Rhode Island State Superior Court for Newport County against us and certain of our officers and directors. The amended complaint asserts state law claims on our behalf arising between October 1, 2003 and the present in
connection with the allegations set forth in the class action consolidated complaint in the U.S. District Court described above. On October 7, 2005, the court dismissed Mehrvars amended complaint without prejudice. By letter dated
October 14, 2005, Mehrvar delivered a demand that we commence litigation for the same acts alleged in his complaint against the directors and senior officers who served during the period from October 1, 2003 to the present. On
March 1, 2006, Mehrvar filed a shareholders derivative action in the Rhode Island State Superior Court for Providence County against us and certain of our officers and directors. The complaint asserts state law claims on our behalf
arising between October 1, 2003 and the present in connection with the allegations set forth in the class action consolidated complaint in the U.S. District Court described above and seeks certain legal and equitable remedies, including
restitution from our directors and officers and corporate governance changes. On June 30, 2006, the defendants moved to dismiss the complaint on the basis that the plaintiffs complaint failed to adequately allege that demand was
wrongfully refused. The motion to dismiss has been voluntarily withdrawn without prejudice to its refiling at a later date.
On June 20, 2005, Yemin
Ji filed a shareholders derivative action in the U.S. District Court for the District of Rhode Island against us and certain of our officers and directors, asserting certain federal and state law claims on our behalf arising between
October 1, 2003 and the present in connection with the same allegations set forth in the class action consolidated complaint in the U.S. District Court and the Mehrvar complaint described above and seeks certain legal and equitable remedies,
including restitution from our directors and officers and corporate governance changes. On August 23, 2005, we moved the Court to abstain from exercising jurisdiction and dismiss the action as duplicative of the Mehrvar case. The Court denied
this motion. On January 5, 2006, the defendants moved to dismiss the complaint on the same grounds on which the Rhode Island state court dismissed the derivative complaint in Mehrvar that was filed on August 16, 2004. The Court granted
this motion and dismissed the complaint on August 29, 2006. In late September 2006, Ji filed an appeal of the dismissal with the U.S. Court of Appeals for the First Circuit. The appeal is pending.
On July 26, 2007, we entered into agreements to settle each of these three matters. Pursuant to the terms of the settlements, plaintiffs and their attorneys
will receive an aggregate cash payment of $5.3 million, all of which will be paid by our insurance carrier. We also agreed to adopt, formalize, or reconfirm adherence to certain corporate governance policies and practices. The settlements
are subject to notice to shareholders and approval by the U.S. District Court for the District of Rhode Island and the Rhode Island State Superior Court. On August 28, 2007, the Rhode Island State Superior Court entered an order preliminarily
approving settlement and providing for notice in the Mehrvar shareholder derivative action; the court has set a final settlement hearing in the matter for November 19, 2007. On September 7, 2007, the U.S. District Court for the District of
Rhode Island entered an order with respect to the class action lawsuit preliminarily approving the settlement and providing for notice to shareholders; the court has set a final settlement hearing in the matter for January 25, 2008.
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In May 2005, Electronic Controlled Systems, Inc., d/b/a King Controls, filed a patent infringement suit against us in the
U.S. District Court for the District of Minnesota. The three asserted patents relate generally to controlling a satellite dish to acquire a satellite signal. The complaint alleges that we willfully infringe the patents and seeks injunctive relief,
enhanced damages and attorneys fees. We have denied the allegations and asserted counterclaims, including claims for false advertising. In January 2006, Electronic Controlled Systems, Inc., d/b/a/ King Controls, filed a second patent
infringement suit against us in the U.S. District Court for the District of Minnesota. The second suit concerns one of the same three patents asserted in the original suit filed in May 2005, alleges that we willfully infringe the patent and seeks
both preliminary and permanent injunctive relief, enhanced damages and attorneys fees. We have denied the allegations and asserted counterclaims. The court denied the plaintiffs motion for a preliminary injunction after a hearing on
May 30, 2006. These two cases were consolidated. The parties stipulated to the dismissal of the false advertising counterclaims. A jury trial was conducted in August 2007, and the jury returned a verdict in favor of KVH finding that KVH was not
liable for infringing King Controls U.S. Patent 6,864,846. The jury specifically found that claim 5 of the patent, the only claim at issue, was invalid due to the existence of prior art as well as the obviousness of the technology.
Additionally, in the ordinary course of business, we are party to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and
customers.
An investment in our common stock involves a high
degree of risk. You should carefully consider the following risk factors in evaluating our business. If any of these risks, or other risks not presently known to us or that we currently believe are not significant, develops into an actual event,
then our business, financial condition and results of operations could be adversely affected. If that happens, the market price of our common stock could decline.
We have a history of variable operating results and may not be profitable in the future.
Although we generated net
income during 2005 and 2006, and in fourteen of the last nineteen fiscal quarters, we incurred net losses of $6.1 million in 2004 and at times our profitability has fluctuated significantly on both a sequential and comparable quarter-to-quarter
basis. For example, our net results in each of the first and third quarters of 2007 was essentially breakeven. As of September 30, 2007, we had an accumulated deficit of $9.3 million.
Shifts in our product sales mix toward our mobile communications products may continue to reduce our overall gross margins.
Our mobile communications products historically have had lower product gross margins than our defense products. During 2006, and in the first nine months of 2007, sales
of our defense products either declined or grew at a substantially lower rate than our overall sales growth. A continuing shift in our product sales mix toward mobile communications products would likely cause lower gross margins in the future.
Competition may limit our ability to sell our mobile communications products and defense products.
The mobile communications markets and defense navigation, guidance and stabilization markets in which we participate are very competitive, and we expect this competition
to persist and intensify in the future. We may not be able to compete successfully against current and future competitors, which could impair our ability to sell our products. For example, improvements in the performance of lower cost gyros could
potentially jeopardize sales of our fiber optic gyros.
In the defense navigation, guidance and stabilization markets, we compete primarily with Honeywell
International Inc., Kearfott Guidance & Navigation Corporation, Northrop Grumman Corporation, Smiths Group plc, Tamam, and Fizoptica.
In the
market for land mobile satellite TV communications equipment, we compete with King Controls, MotoSAT, TracStar Systems, Inc., Winegard Company, RaySat, Audiovox, Sirius Satellite Radio, and Delphi.
In the market for marine satellite TV communications equipment, we compete with NaviSystem Marine Electronic Systems Srl, King Controls, Sea Tel, Inc., Raymarine, and
potentially Thrane & Thrane. In the marine market for satellite communications equipment, we compete with Sea Tel, Inc., Furuno Electric Co., Ltd., Globalstar LP, Iridium Satellite LLC, EMS and Japan Radio Company.
Among the factors that may affect our ability to compete in our markets are the following:
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many of our primary competitors are well-established companies that could have substantially greater financial, managerial, technical, marketing, personnel and
other resources than we do;
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product improvements, new product developments or price reductions by competitors may weaken customer acceptance of, and reduce demand for, our products;
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new technology or market trends may disrupt or displace a need for our products; and
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our competitors may have lower production costs than we do, which may enable them to compete more aggressively in offering discounts and other promotions.
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The emergence of a competing small maritime VSAT antenna and complementary service or other, similar service could reduce the
competitive advantage we believe we currently enjoy with our new 24 diameter TracPhone V7 antenna and integrated mini-VSAT Broadband service.
Our
TracPhone V7 system offers customers a range of benefits due to its integrated design, hardware costs that are lower than existing maritime VSAT systems, and spread spectrum technology. We anticipate competition from companies like Sea Tel and MTN,
both of which have recently announced similar systems and service. We also compete against companies like Sea Tel that offer established maritime VSAT service using antennas 1 meter in diameter or larger. In addition other companies could replicate
the distinguishing features of our TracPhone V7, which could potentially reduce the appeal of our solution and adversely affect sales. Moreover, consumers may choose other services such as Inmarsat Fleet or Fleet Broadband (when available), for
their global service coverage and potentially lower hardware costs despite higher service costs and slower data rates.
Customers for our fiber optic
gyro products and TACNAV include the U.S. military and foreign governments, whose purchasing and delivery schedules and priorities are often unpredictable.
We sell our fiber optic gyro systems as well as vehicle navigation products to U.S. and foreign military and government customers, either directly or as a subcontractor to other manufacturers. These customers often use a competitive bidding
process and have unique purchasing and delivery requirements, which often make sales to these customers unpredictable. Factors that affect their purchasing and delivery decisions include:
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changes in modernization plans for military equipment;
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changes in tactical navigation requirements;
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global conflicts impacting troop deployment;
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priorities for current battlefield operations;
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allocation of funding for military programs;
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new military and operational doctrines that affect military equipment needs;
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sales cycles that are long and difficult to predict;
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shifting response time and/or delays in the approval process associated with the export licenses we must obtain prior to the international shipment of certain of
our military products;
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delays in military procurement schedules; and
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delays in the testing and acceptance of our products, including delays resulting from changes in customer specifications.
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These factors can cause substantial fluctuations in sales of fiber optic gyros and TACNAV products from period to period. For example, sales of our TACNAV products
declined in 2006 and in the first nine months of 2007, compared with sales in 2005 and the first nine months of 2006, respectively. Moreover, government customers and their contractors can generally cancel orders for our products for convenience or
decline to exercise previously disclosed contract options. Even under firm orders with government customers, funding must usually be appropriated in the budget process in order for the government to complete the contract. The cancellation of or
failure to fund orders for our products could substantially reduce our net sales and results of operations.
Sales of our fiber optic gyro systems and
TACNAV products generally consist of a few large orders, and the delay or cancellation of a single order could substantially reduce our net sales.
KVH
products sold to customers in the defense industry are purchased through orders that can generally range in size from several hundred thousand dollars to more than one million dollars. As a result, the delay or cancellation of a single order could
materially reduce our net sales and results of operations. We continue to experience unanticipated delays in defense orders, which make our revenues and operating results less predictable. Because our defense products typically have relatively
higher product gross margins than our mobile communications products, the loss of an order for defense products could have a disproportionately adverse effect on our results of operations.
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Only a few customers account for a substantial portion of our defense revenues, and the loss of any of these customers
could substantially reduce our net sales.
We derive a significant portion of our defense revenues from a small number of customers, including the U.S.
Government. The loss of business from any of these customers could substantially reduce our net sales and results of operations and could seriously harm our business. Since we are often awarded a contract as a subcontractor to a major defense
supplier that is engaged in a competitive bidding process as prime contractor for a major weapons procurement program, our revenues depend significantly of the success of the prime contractors with which we align ourselves.
The market for our mobile TV products for minivans, SUVs and other passenger vehicles is still emerging, and our business may not grow as we expect.
The market for our low profile automotive TracVision product is still in a relatively early stage of development, which continues to make it difficult for us to
predict customer demand accurately. For example, sales of the automotive TracVision system have generally been below our expectations.
We believe the
success of our low profile TracVision systems will depend upon consumers assessment of whether these products meet their expectations for performance, quality, price and design. For example, the TracVision A7 is designed for use on open roads
in the continental United States where there is a clear view of the transmitting satellite in the southern sky, and it may not perform satisfactorily under other conditions. Among the factors that could affect the success of the low profile
TracVision systems are:
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the performance, price and availability of competing or alternative products and technology relative to the automotive TracVision;
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the extent to which customers prefer live TV over recorded media;
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the extent to which customers perceive mobile satellite TV services as a luxury or a preferred convenience;
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the extent to which TracVision gains the acceptance of the automotive OEMs;
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customers willingness to pay monthly fees for satellite television service in automobiles; and
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the adoption of laws or regulations that restrict or ban television or other video technology in vehicles.
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Our mobile satellite products currently depend on satellite services provided by third parties, and any disruption in those services could adversely affect sales.
Our satellite products include only the equipment necessary to receive satellite services; we do not broadcast satellite television programming or own
the satellites to directly provide two- way satellite communications. We currently offer satellite television products compatible with the DIRECTV and DISH Network services in the United States, the ExpressVu service in Canada, the Sky Mexico
service and various other regional services in other parts of the world.
We rely on Inmarsat for satellite communications services for our mini-M, Fleet
and Fleet Broadband compatible TracPhone products. SES AMERICOM provides the satellite network to support the mini-VSAT Broadband service and our TracPhone V7.
If customers become dissatisfied with the programming, pricing, service, availability or other aspects of any of these satellite television services, or if any one or more of these services becomes unavailable for any reason, we could
suffer a substantial decline in sales of our satellite products. There may be no alternative service provider available in a particular geographic area, and our technology may not be compatible with that of any alternative service provider that may
be available. The companies that operate these services have no obligation to inform us of technological or other changes, including discontinuation of the service, which could impair the performance of our satellite products or render them
inoperable. In addition, the unexpected failure of a satellite could disrupt the availability of programming and services, which could reduce the demand for, or customer satisfaction with, our products.
We rely upon spread spectrum communications technology developed by ViaSat and fielded by SES AMERICOM to permit two-way broadband Internet via our 24 diameter
TracPhone V7, and any disruption in the availability of this technology could adversely affect sales.
Our new mini-VSAT Broadband service relies on
spread spectrum technology developed with ViaSat, Inc. for use with SES AMERICOMs satellite network. Our TracPhone V7 two-way broadband satellite terminal combines our stabilized antenna technology with ViaSats ArcLight spread spectrum
mobile broadband technology, along with a new maritime version of ViaSats ArcLight spread spectrum modem. The ArcLight technology is also integrated within the SES AMERICOM satellite hubs that
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support this service. Sales of the TracPhone V7 and our mini-VSAT Broadband service could be disrupted if SES AMERICOM were to transition to a different
spread spectrum technology or if there were issues with the availability of the ArcLight maritime modems.
Our right to continue offering mini-VSAT
Broadband service using SES AMERICOMs satellite network on an exclusive basis in certain geographic markets depends on our reaching certain annual revenue targets over each of the next five years, and either party may terminate the
relationship if revenues in the first year of service do not meet certain minimum goals.
Under our agreement with SES AMERICOM, we cannot offer a
mini-VSAT Broadband service utilizing technology that competes with SES AMERICOMs technology in areas where they offer service. If another party has or introduces technology superior to that of SES AMERICOM, our sales might suffer, and we
would not be able to offer a service using that alternative technology.
High fuel prices, high interest rates and environmental concerns may adversely
affect sales of our mobile communications products.
Factors such as fuel prices, interest rates and environmental protection laws could adversely
affect sales or use of larger vehicles and vessels for which our mobile satellite communications products are designed. For example, high fuel prices and environmental concerns tend to have a disproportionate impact on large vehicles and vessels
because they consume relatively large quantities of fuel. In addition, many customers finance their purchases of these vehicles and vessels, and higher interest rates would likely reduce demand for both these vehicles and vessels and our mobile
communications products.
We may continue to increase the use of international suppliers to source components for our manufacturing operations, which
could disrupt our business.
Although we have historically manufactured and sourced raw materials for the majority of our products in the U.S., in order
for us to compete with lower priced competitive products while also improving our profitability, we have found it desirable to source raw materials and manufactured components from foreign countries such as China and Mexico. Our increased reliance
on foreign manufacturing and/or raw material supply has lengthened our supply chain and increased the risk that a disruption in that supply chain will have a material adverse affect on our operations and financial performance.
We have single dedicated manufacturing facilities for each of our mobile communications and defense product categories, and any significant disruption to a facility
could impair our ability to deliver our products.
We currently manufacture all of our mobile communications products at our headquarters in Middletown,
Rhode Island and all of our defense products at our facility in Tinley Park, Illinois. Some of our production processes are complex, and we may be unable to respond rapidly to the loss of the use of either production facility. For example, our
production facilities use some specialized equipment that may take time to replace if they are damaged or become unusable for any reason. In that event, shipments would be delayed, which could result in customer or dealer dissatisfaction, loss of
sales and damage to our reputation. Finally, we have only a limited capability to increase our manufacturing capacity in the short term. If short-term demand for our products exceeds our manufacturing capacity, our inability to fulfill orders in a
timely manner could also lead to customer or dealer dissatisfaction, loss of sales and damage to our reputation.
We depend on sole or limited source
suppliers, and any disruption in supply could impair our ability to deliver our products on time or at expected cost.
We obtain many key components for
our products from third-party suppliers, and in some cases we use a single or a limited number of suppliers. Any interruption in supply could impair our ability to deliver our products until we identify and qualify a new source of supply, which
could take several weeks, months or longer and could increase our costs significantly. Suppliers might change or discontinue key components, which could require us to modify our product designs. For example, we have experienced changes in the
chemicals used to coat our optical fiber, which changed its characteristics and thereby necessitated design modifications. In general, we do not have written long-term supply agreements with our suppliers but instead purchase components through
purchase orders, which expose us to potential price increases and termination of supply without notice or recourse. We do not generally carry significant inventories of product components, and this could magnify the impact of the loss of a supplier.
If we are required to use a new source of materials or components, it could also result in unexpected manufacturing difficulties and could affect product performance and reliability.
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Any failure to maintain and expand our third-party distribution relationships may limit our ability to penetrate
markets for mobile communications products.
We market and sell our mobile communications products through an international network of independent
retailers, chain stores and distributors, as well as to manufacturers of marine vessels and recreational vehicles. If we are unable to maintain or improve our distribution relationships, it could significantly limit our sales. In addition, our
distribution partners may sell products of other companies, including competing products, and are not required to purchase minimum quantities of our products.
Our net sales and operating results could decline due to general economic trends or declines in consumer spending.
Our operating
performance depends significantly on general economic conditions. Net sales of our mobile communications products are largely generated by discretionary consumer spending, and demand for these products could demonstrate slower growth than we
anticipate as a result of regional and global economic conditions. Consumer spending tends to decline during recessionary periods and may decline at other times. Consumers may choose not to purchase our mobile communications products due to a
perception that they are luxury items. As global and regional economic conditions change, including the general level of interest rates, fluctuating oil prices and demand for durable consumer products, demand for our products could be adversely
affected.
If we are unable to improve our existing mobile communications and defense products and develop new, innovative products, our sales and
market share may decline.
The markets for mobile communications products and defense navigation, guidance and stabilization products are each
characterized by rapid technological change, frequent new product innovations, changes in customer requirements and expectations and evolving industry standards. If we fail to make innovations in our existing products and reduce the costs of our
products, our market share may decline. Products using new technologies, or emerging industry standards, could render our products obsolete. If our competitors successfully introduce new or enhanced products that eliminate technological advantages
our products may have in a certain market or otherwise outperform our products, or are perceived by consumers as doing so, we may be unable to compete successfully in the markets affected by these changes.
If we cannot effectively manage our growth, our business may suffer.
We have previously expanded our operations to pursue existing and potential market opportunities. This growth placed a strain on our personnel, management, financial and other resources. If we grow more rapidly than we anticipate and fail
to manage that growth properly, we may incur unnecessary expenses, and the efficiency of our operations may decline. To manage any growth effectively, we must, among other things:
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upgrade, expand or re-size our manufacturing facilities and capacity in a timely manner;
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successfully attract, train, motivate and manage a larger number of employees for manufacturing, sales and customer support activities;
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control higher inventory and working capital requirements; and
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improve the efficiencies within our operating, administrative, financial and accounting systems, and our procedures and controls.
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We may be unable to hire and retain the skilled personnel we need to expand our operations.
To meet our growth objectives, we must attract and retain highly skilled technical, operational, managerial and sales and marketing personnel. If we fail to attract and retain the necessary personnel, we may be unable
to achieve our business objectives and may lose our competitive position, which could lead to a significant decline in net sales. We face significant competition for these skilled professionals from other companies, research and academic
institutions, government entities and other organizations.
Our success depends on the services of our executive officers and key employees.
Our future success depends to a significant degree on the skills and efforts of Martin Kits van Heyningen, our co-founder, president, chief executive
officer, and chairman of the board. If we lost the services of Mr. Kits van Heyningen, our business and operating results could be seriously harmed. We also depend on the ability of our other executive officers and members of senior management
to work effectively as a team. None of our senior management or other key personnel is bound by an employment agreement. The loss of one or more of our executive officers or senior management members could impair our ability to manage our business
effectively.
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Our international business operations expose us to a number of difficulties in coordinating our activities abroad and
in dealing with multiple regulatory environments.
Historically, sales to customers outside the United States and Canada have accounted for a
significant portion of our net sales. We have only one foreign sales office, which is located in Denmark, and we otherwise support our international sales from our operations in the United States. Our limited operations in foreign countries may
impair our ability to compete successfully in international markets and to meet the service and support needs of our customers in countries where we have no infrastructure. We are subject to a number of risks associated with our international
business activities, which may increase our costs and require significant management attention. These risks include:
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technical challenges we may face in adapting our mobile communication products to function with different satellite services and technology in use in various
regions around the world;
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satisfaction of international regulatory requirements and delays and costs associated with procurement of any necessary licenses or permits;
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restrictions on the sale of certain defense products to foreign military and government customers;
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increased costs of providing customer support in multiple languages;
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potentially adverse tax consequences, including restrictions on the repatriation of earnings;
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protectionist laws and business practices that favor local competitors, which could slow our growth in international markets;
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potentially longer sales cycles, which could slow our revenue growth from international sales;
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potentially longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
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losses arising from foreign currency exchange rate fluctuations; and
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economic and political instability in some international markets.
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Exports of certain defense products are subject to the International Traffic in Arms Regulations and require a license from the U.S. Department of State prior to shipment.
We must comply with the United States Export Administration Regulations and the International Traffic in Arms Regulations, or ITAR. Our products that have military or
strategic applications are on the munitions list of the ITAR and require an individual validated license in order to be exported to certain jurisdictions. Any changes in export regulations may further restrict the export of our products, and we may
cease to be able to procure export licenses for our products under existing regulations. The length of time required by the licensing process can vary, potentially delaying the shipment of products and the recognition of the corresponding revenue.
Any restriction on the export of a significant product line or a significant amount of our products could cause a significant reduction in net sales.
Our business may suffer if we cannot protect our proprietary technology.
Our ability to compete depends significantly upon our patents, our
source code and our other proprietary technology. The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. Our patents could be challenged, invalidated or
circumvented, and the rights we have under our patents could provide no competitive advantages. Existing trade secrets, copyright and trademark laws offer only limited protection. In addition, the laws of some foreign countries do not protect our
proprietary technology to the same extent as the laws of the United States, which could increase the likelihood of misappropriation. Furthermore, other companies could independently develop similar or superior technology without violating our
intellectual property rights. Any misappropriation of our technology or the development of competing technology could seriously harm our competitive position, which could lead to a substantial reduction in net sales.
If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, distract the attention of
management, and there can be no assurance that we would prevail.
Also, we have delivered certain technical data and information to the U.S. government
under procurement contracts, and it may have unlimited rights to use that technical data and information. There can be no assurance that the U.S. government will not authorize others to use that data and information to compete with us.
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Claims by others that we infringe their intellectual property rights could harm our business and financial condition.
Our industries are characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other
intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, or other intellectual property rights of others.
We do not generally conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition,
product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies.
From time to time we have faced claims by third parties that our products or technology infringe their patents or other intellectual property rights, and we may face
similar claims in the future. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. If any of our products are found to
violate third-party proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer
our products or obtain licenses on commercially reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially increase our costs and have a material adverse effect on our business,
financial condition and results of operations.
Pending securities class action lawsuits could have a material adverse effect on our financial condition
and results of operations.
We and certain of our officers are defendants in a class action lawsuit in the U.S. District Court for the District of Rhode
Island. The suit asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, on behalf of purchasers of our
securities between October 1, 2003 and July 2, 2004. We and certain of our directors and officers are also defendants in a shareholders derivative action in the Rhode Island State Superior Court for Providence County. This suit
asserts state law claims on our behalf between October 1, 2003 and the present arising from the allegations set forth in the class action complaint in the U.S. District Court described above. We and certain of our directors and officers are
also appellees in an appeal of a dismissal of a shareholders derivative action by the U.S. District Court for the District of Rhode Island. This suit asserted federal and state claims on our behalf between October 1, 2003 and the present
arising from the same allegations set forth in the class action complaint described above. We intend to vigorously defend ourselves against these claims. There can be no assurance, however, that we will not have to pay significant damages or amounts
in settlement. An unfavorable outcome or prolonged litigation could materially harm our business. Litigation of this nature is expensive and time-consuming and diverts the time and attention of our management.
On July 27, 2007, we entered into agreements to settle each of these three matters. Pursuant to the terms of the settlements, plaintiffs and their attorneys
will receive an aggregate cash payment of $5.3 million, all of which will be paid by our insurance carrier. We also agreed to adopt, formalize, or reconfirm adherence to certain corporate governance policies and practices. The settlements
are subject to notice to shareholders and final approval by the U.S. District Court for the District of Rhode Island and the Rhode Island State Superior Court.
In the event the settlements are not approved by the U.S. District Court for the District of Rhode Island and the Rhode Island State Superior Court, we will vigorously defend ourselves in further proceedings related these claims. An
unfavorable outcome or prolonged litigation could materially harm our business. Litigation of this nature is expensive and time-consuming and diverts the time and attention of our management. There can be no assurance that we will not have to pay
significant damages or amounts in settlement if the litigations continue.
Fluctuations in our quarterly net sales and results of operations could
depress the market price of our common stock.
We have at times experienced significant fluctuations in our net sales and results of operations from one
quarter to the next. Our future net sales and results of operations could vary significantly from quarter to quarter due to a number of factors, many of which are outside our control. Accordingly, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of future performance. It is possible that our net sales or results of operations in a quarter will fall below the expectations of securities analysts or investors. If this occurs, the market
price of our common stock could fall significantly. Our results of operations in any quarter can fluctuate for many reasons, including:
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changes in demand for our mobile communications products and defense products;
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the timing and size of individual orders from military customers;
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the mix of products we sell;
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our ability to manufacture, test and deliver products in a timely and cost-effective manner, including the availability and timely delivery of components from our
suppliers;
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our success in winning competitions for orders;
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the timing of new product introductions by us or our competitors;
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expense incurred in pursuing acquisitions, such as during the third quarter of 2006;
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market and competitive pricing pressures;
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general economic climate; and
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seasonality of pleasure boat and recreational vehicle usage.
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A large portion of our expenses, including expenses for facilities, equipment, and personnel, are relatively fixed. Accordingly, if our net sales decline or do not grow as much as we anticipate, we might be unable to maintain or improve our
operating margins. Any failure to achieve anticipated net sales could therefore significantly harm our operating results for a particular fiscal period.
Our tax planning strategy involves assumptions that may cause our annual provision for income tax expense or benefit to fluctuate materially. Moreover, our tax planning strategy is based upon our ability to sell our manufacturing and
corporate headquarters facility located in Middletown, Rhode Island, as may be necessary.
We utilize a tax planning strategy as provided for under
accounting principles generally accepted in the United States as a means of supporting the realizability of certain of our deferred tax assets. The strategy involves our ability to sell our Middletown, Rhode Island headquarters facility in order to
generate taxable income for the sole purpose of utilizing our U.S. net operating tax loss carryforwards before they expire. The determination of taxable income, and therefore supportable deferred tax asset value, is based upon the difference between
the propertys estimated fair market value and our book basis. Accordingly, the estimated net realizable value of our deferred tax asset is highly correlated to property values in and around the Middletown, Rhode Island area and therefore
subject to changes in property value and or assumptions used in the valuation process. This fair market value subjectivity may cause us to record significant increases or decreases to our deferred tax assets during the year.
The strategy represents an action that we ordinarily would not take, but would take, if necessary, to realize an estimated $3.3 million in U.S. deferred tax assets based
on approximately $8.5 million in estimated taxable gain from the sale of the building as of September 30, 2007.
The market price of our common
stock may be volatile.
Our stock price has historically been volatile. From January 1, 2004 to September 30, 2007, the trading price of our
common stock ranged from $27.75 to $6.61. Many factors may cause the market price of our common stock to fluctuate, including:
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variations in our quarterly results of operations;
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the introduction of new products by us or our competitors;
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changing needs of military customers;
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changes in estimates of our performance or recommendations by securities analysts;
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the hiring or departure of key personnel;
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acquisitions or strategic alliances involving us or our competitors;
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market conditions in our industries; and
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the global macroeconomic and geopolitical environment.
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In addition, the stock market can experience extreme price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market
price of our common stock. When the market price of a companys stock drops significantly, stockholders often institute securities litigation against that company. Any such litigation could cause us to incur significant expenses defending
against the claim, divert the time and attention of our management and result in significant damages.
Acquisitions may disrupt our operations or
adversely affect our results.
We evaluate strategic acquisition opportunities to acquire other businesses as they arise. The expenses we incur
evaluating and pursuing acquisitions, such as during the third quarter of 2006, could have a material adverse effect on our results of operations. If
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we acquire a business, we may be unable to manage it profitably or successfully integrate its operations with our own. Moreover, we may be unable to realize
the financial, operational and other benefits we anticipate from any acquisition. Competition for acquisition opportunities could increase the price we pay for businesses we acquire and could reduce the number of potential acquisition targets.
Further, our approach to acquisitions may involve a number of special financial and business risks, such as:
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charges related to any potential acquisition from which we may withdraw;
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diversion of our managements time, attention, and resources;
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loss of key acquired personnel;
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increased costs to improve or coordinate managerial, operational, financial, and administrative systems including compliance with the Sarbanes-Oxley Act of 2002;
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dilutive issuances of equity securities;
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the assumption of legal liabilities; and
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amortization of acquired intangible assets.
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Our
charter and by-laws and Delaware law may deter takeovers.
Our certificate of incorporation, by-laws and Delaware law contain provisions that could have
an anti-takeover effect and discourage, delay or prevent a change in control or an acquisition that many stockholders may find attractive. These provisions may also discourage proxy contests and make it more difficult for our stockholders to take
some corporate actions, including the election of directors. These provisions relate to:
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the ability of our board of directors to issue preferred stock, and determine its terms, without a stockholder vote;
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the classification of our board of directors, which effectively prevents stockholders from electing a majority of the directors at any one annual meeting of
stockholders;
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the limitation that directors may be removed only for cause by the affirmative vote of the holders of two-thirds of our shares of capital stock entitled to vote;
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the prohibition against stockholder actions by written consent;
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the inability of stockholders to call a special meeting of stockholders; and
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advance notice requirements for stockholder proposals and director nominations.
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