PART I
Cautionary Statement Regarding Forward-Looking Information
In addition to historical facts, this annual report contains forward-looking statements. Forward-looking statements are merely our current predictions of
future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed in this annual report
under the headings Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations, and Item 1A. Risk Factors. We assume no obligation to update our forward-looking statements to reflect new
information or developments. We urge readers to review carefully the risk factors described in this annual report and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at
www.sec.gov
.
Additional Information Available
Our principal Internet address is
www.kvh.com
. Our website provides a
hyperlink to a third-party website through which our annual, quarterly, and current reports, as well as amendments to those reports, are available free of charge. We believe these reports are made available as soon as reasonably practicable after we
electronically file them with, or furnish them to, the SEC. We do not provide any information regarding our SEC filings directly to the third-party website, and we do not check its accuracy or completeness.
Introduction
We develop, manufacture and market mobile communications products for the land and marine markets, and navigation, guidance
and stabilization products for defense and commercial markets. Our expertise in mobile satellite antenna, digital compass and fiber optic gyro technologies has enabled us to lower the cost, decrease the size and improve the performance of our
products. Our research and development, manufacturing and quality control capabilities have enabled us to meet the demanding standards of our military, consumer and commercial customers for performance and reliability. This combination of factors
has allowed us to create products offering important differentiating advantages to our customers.
We are a leading provider of mobile communications products, such as our TracVision and TracPhone systems, that enable customers to receive live digital
television, telephone and Internet services in their vehicles, vessels and airplanes while in motion via satellite services. We sell our mobile communications products through an extensive international network of distributors and retailers
worldwide. In February 2008, we entered the aviation market with a development and production contract for a satellite TV antenna that will be sold on an OEM basis to a leading provider of entertainment systems on commercial aircraft. We anticipate
the first products developed under this contract will be delivered in late 2008, for use on domestic narrow body commercial airliners.
Our guidance and stabilization products include tactical navigation systems for a broad range of military vehicles and precision fiber optic gyro-based
systems that help stabilize platforms, such as gun turrets, remote weapon stations turrets, and radar units, and provide guidance for munitions. In addition, we are continuing to investigate opportunities to apply our mobile communications expertise
to military applications that require affordable, high-bandwidth mobile connections. We sell our guidance and stabilization products directly to U.S. and allied governments and government contractors, as well as through an international network of
authorized independent sales representatives. Our fiber optic products are also used in such commercial applications as train track geometry measurement systems, industrial robotics, optical stabilization, autonomous vehicles, and undersea remotely
operated submersibles.
Our Solutions
Mobile Communications
We believe that there is an increasing demand for mobile access to
television and the Internet on the move. Our objective is to connect mobile users to the satellite TV, communications, and Internet services they wish to
3
use, primarily by utilizing satellite broadcasts. We have developed a comprehensive family of products marketed under the TracVision and TracPhone brand
names to address the unique needs of our communications markets. Our products use sophisticated robotics, stabilization and control software, sensing technologies, transceiver integration, and advanced antenna designs to offer the following
benefits:
Consistent and reliable mobile satellite
communications
. Our mobile satellite communications products can automatically search for, identify and point directly at the satellite, whether a vehicle or vessel is in motion or stationary. Our antennas use gyros and inclinometers to measure
the pitch, roll and yaw of an antenna platform in relation to the earth. Microprocessors and our proprietary stabilization and control software use that data to compute the antenna movement necessary for the antennas motors to point the
antenna properly and maintain contact with the satellite. If an obstruction temporarily blocks the satellite signal, our products continue to track the satellites location according to the movement of the antenna in order to carry out
automatic, rapid reacquisition of the signal when a direct line of sight to the satellite is restored.
Wide range of products for the mobile user
. We provide mobile communications products for a variety of vehicles in the land mobile market, which
includes luxury motor coaches, buses, recreational vehicles, trucks, and automobiles, as well as a variety of vessels in the marine market, which includes commercial shipping vessels, commercial fishing vessels, merchant ships, and yachts. We
developed our earliest products for the luxury yacht market and have succeeded in reducing the size and cost of our products for introduction into the land market. Initially we focused on larger vehicles like motor coaches, but we subsequently added
support for passenger vehicles. Our TracVision A7 brings satellite television to automobiles using a patented, low-profile antenna system that currently provides in-motion satellite television in most of the continental United States using the
DIRECTV service and an in-vehicle receiver developed in collaboration with DIRECTV. Our entry into the automotive arena was facilitated by our hybrid phased-array antenna technology. We are currently investigating opportunities to transfer our
commercial mobile satellite antenna technology into military applications, including small, affordable, high-bandwidth antennas suitable for military vehicles. We recently entered the aviation market with a development and production contract for a
satellite TV antenna that will be sold on an OEM basis to a leading provider of entertainment systems on commercial aircraft.
Access to mobile, two-way Internet, e-mail, and voice communication.
We currently support global broadband Internet access in the marine
marketplace through the use of our TracPhone satellite communication antennas and the Inmarsat, SES AMERICOM, and Eutelsat satellite services. In October 2007, we began shipping our TracPhone V7, a 24 inch diameter maritime satellite communication
system, that uses the new mini-VSAT Broadband airtime service. The system and service utilize spread spectrum technology developed by ViaSat. The resulting efficiencies allow the antenna to be 85% smaller by volume and 75% lighter than existing
1 meter VSAT antennas. In addition, mariners are able to use Internet data connections with ship-to-shore data rates as fast as 512 kilobits per second and shore-to-ship data rates as fast as 2 megabits per second. Service is currently offered
in the Americas, Caribbean, North Atlantic, and Europe.
Commitment to customer support.
Our Certified Support Network (CSN) offers our TracVision and TracPhone customers an international network of skilled technical dealers and support centers in many locations where our customers are
likely to travel. We have selected distributors based on their technical expertise, professionalism and commitment to quality and regularly provide them with extensive training in the sale, installation and support of our products.
Guidance and Stabilization
We offer a portfolio of digital compass and fiber optic gyro-based systems
that address the rigorous requirements of military customers for precision navigation, guidance and stabilization. Our systems offer:
Reliable, continuously available navigation and guidance.
Our systems provide an unjammable source of reliable, easy-to-use and continuously
available navigation and pointing data. For example, our fiber optic gyro-based
4
inertial measurement unit product (IMU) enhances the accuracy of guided underwater munitions. This IMU, along with our core fiber optic technology, also has
potential commercial and industrial applications. Our TACNAV system can tell a vehicle driver in which direction to steer to reach a certain target, how much farther to the destination, and whether or not the vehicle is on course. Because our
digital compass products measure the earths magnetic field rather than detect satellite signals from the global positioning system (GPS), they are not susceptible to GPS jamming devices.
Compatibility with a wide range of vehicles and platforms
. We offer
several fiber optic gyro-based products that support stabilization applications, such as stabilization of remote weapons stations turrets, optical targeting systems, radar and communication antennas in both the military and commercial markets. We
also offer variants of our TACNAV system using both our fiber optic gyros and digital compasses, providing low-cost, integrated tactical navigation solutions for military vehicles ranging from tactical trucks to combat vehicles. TACNAV systems
address the varying operational requirements of different vehicles, such as turret pointing on a tank and vehicle navigation on a combat support vehicle.
Integration and aggregation of data from on-board systems.
Our navigation systems function as standalone tools and also aggregate, integrate and
communicate critical information from a variety of on-board systems. TACNAV can receive data from systems such as the vehicles odometer, military and commercial GPS devices, laser rangefinders, turret angle indicators and laser warning
systems. TACNAV can also output this data to an on-board computer for retransmission through the vehicles communications systems to a digital battlefield management application. We have also previously demonstrated to the U.S. Army an early
prototype of a new TACNAV system that successfully combined TACNAV with satellite communication technology, potentially enabling TACNAV to communicate directly with digital battlefield management applications.
Our Products
We offer a broad array of products to address the needs of a variety of customers in the markets for mobile communications
and defense navigation, guidance and stabilization.
Mobile
Communications Products
Our mobile communications
products include our TracVision and TracPhone products, which provide satellite television and voice, fax, data and Internet communications to customers in the land mobile and marine markets.
Land.
We design, manufacture, and sell a range of TracVision satellite
TV antenna systems for use on a broad array of vehicles, including recreational vehicles, trucks, conversion vans, and automobiles.
In the RV/truck market, we offer a line-up of our TracVision satellite TV products, including products intended for both stationary and in-motion use. Our
RV product line, known as the TracVision SlimLine series, offer automatic satellite switching and integrated compatibility with the international DVB (Digital Video Broadcast) standard. The 12.5 inch high in-motion TracVision R5SL and stationary
automatic TracVision R4SL, which began shipping in March 2007, use an elliptical parabolic antenna to reduce the antennas profile to address height restrictions on the road. The in-motion 12.5 inch high TracVision R6, which began shipping in
April 2006, is the flagship product of our RV-specific offerings. This system incorporates a number of innovations, including a high-efficiency antenna, integrated GPS for faster satellite acquisition, and our DewShield electronic dew elimination
technology. In addition to sales through aftermarket dealers, we sell our TracVision products to original equipment manufacturers for factory installation on new vehicles. Each of these systems works with a range of service providers, including
DIRECTV, DISH Network, and other regional service providers. Although initially designed for automotive applications, the TracVision A7 is now also sold within the RV marketplace to provide access to DIRECTV programming in in-motion applications and
for vehicles with height restrictions that could prevent them from safely using a satellite TV antenna based on parabolic technology, and/or where the accumulation of moisture on the outer surface of the antennas radome is not a concern.
5
The innovative TracVision A7 uses hybrid phased-array antenna technology to provide in-motion reception
of satellite TV programming in the continental United States using the DIRECTV service. Our TracVision A7 product includes a mobile satellite television antenna and an integrated 12V mobile DIRECTV receiver designed specifically for the automotive
environment by KVH and DIRECTV to convert the satellite signal into a video stream. The TracVision A7 stands approximately five inches high and mounts either to a vehicles roof rack or directly to the vehicles roof, making it
practical for use aboard minivans, SUVs and other passenger vehicles. The TracVision A7 is also popular for tall motor coaches and buses. The antennas hybrid phased-array technology integrates 260 small antenna elements across a flat surface,
mechanically rotates that surface and bends the satellite signal so that the broadcast energy strikes each of the individual elements at closer to a perpendicular angle. The separate signals from each small antenna element are then combined to
create a single data stream. Automotive customers subscribe to DIRECTVs TOTAL CHOICE MOBILE satellite TV programming package, which is specifically promoted for automotive applications. Local channels and network programming are also available
for the first time as an option for TracVision A7 users as a result of the systems integrated GPS and new mobile receiver. At this time, we are the only company authorized by DIRECTV to sell, promote, and activate mobile users for the TOTAL
CHOICE MOBILE programming package.
Marine
. In the
marine market, we offer a range of mobile satellite TV and communications products. Our marine TracVision satellite TV antennas vary in size from a lower-profile elliptical parabolic system similar to those offered for use on RVs to the 14.5 inch
TracVision M3, 18 inch TracVision M5, 24 inch TracVision M7, and 32 inch diameter TracVision M9, each of which employs a high-efficiency round antenna. Each of these products is compatible with HDTV programming as well as high-powered regional
satellite TV services.
Our TracPhone products provide
in-motion access to global satellite communications. Several of our products are compatible with Inmarsat, a satellite service provider that supports links for phone, fax and data communications as fast as 432 Kbps, or kilobits per second. The
TracPhone F33, F55, F77, FB250 and FB500 antennas use the Inmarsat Fleet and Fleet Broadband service to offer voice as well as high-speed Internet service, while our TracPhone 252 antenna offers lower-cost voice and low-speed data services via the
Inmarsat mini-M service. The TracPhone F33, F55, F77, FB250 and FB500 are manufactured by Thrane & Thrane A/S of Denmark and distributed exclusively by us in North America under the KVH TracPhone brand and distributed in other markets on a
non-exclusive basis.
Broadband Internet.
In addition to
the global voice and data access offered by our Inmarsat-compatible TracPhone systems, we have also introduced a new maritime communications product, the TracPhone V7, and supporting airtime service, mini-VSAT Broadband. The TracPhone V7 is a 24
inch diameter maritime satellite communication system that is 85% smaller by volume and 75% lighter than competing 1 meter VSAT systems for vessels. This smaller size is possible due to the use of spread spectrum technology developed by ViaSat and
integrated into the TracPhone system and network hubs. This spread spectrum approach reduces the broadcast power requirements and the pointing accuracy necessary to track the high-bandwidth Ku-band satellites that carry the service.
The high bandwidth offered by the Ku-band satellites also permits faster data
rates than those supported by Inmarsats L-band satellites. TracPhone V7 subscribers may select service packages with Internet data connections offering ship-to-shore data rates as fast as 512 kilobits per second and shore-to-ship data rates as
fast as 2 megabits per second. In addition, subscriptions also include two Voice over Internet Protocol (VoIP) telephone lines optimized for use over satellite connections. Service is currently offered in the Americas, Caribbean, North Atlantic, and
Europe. Our goal is to ultimately support vessels in the Pacific Ocean, throughout Asia, the Indian Ocean, including shipping routes to the Persian Gulf, and the Middle East by collaborating with satellite providers, such as SES AMERICOM, Eutelsat,
and others.
The TracPhone V7 also offers a different business
model for KVH. Unlike our Inmarsat-compatible products, where we purchase airtime from a distributor and resell it to our customers, we control the mini-VSAT Broadband service. As a result, we generate revenue from hardware sales as well as
recurring monthly revenue
6
derived from subscription packages. We offer both fixed-rate, all you can eat subscription packages ranging from $1,200 to $5,000 per month and
per-megabyte service plans that we believe are significantly more affordable than competing legacy VSAT and Inmarsat offerings.
Guidance and Stabilization Products
Our guidance and stabilization products include our inertial measurement unit for precision guidance of torpedoes and unmanned aerial vehicles, fiber
optic gyros for tactical navigation and stabilization, and digital compasses for tactical navigation.
Our fiber optic gyro products use an all-fiber design without moving parts, which provides precision, accuracy and durability. Fiber optic gyros can be
used for precision tactical navigation systems for military vehicles for stabilizing remote weapons stations, antennas, radar, optical devices or turrets, and image stabilization and synchronization for shoulder- or tripod-mounted weapon simulators.
Our fiber optic products also support a broad range of commercial and industrial applications.
Our TACNAV digital compass products have been sold for use aboard U.S. Army, Marine Corps, and Navy vehicles as well as to many allied countries, including Australia, the United Kingdom, Canada, Germany, Italy, New
Zealand, Saudi Arabia, Spain, Sweden, Taiwan, Malaysia and Switzerland. We believe that we are among the leading manufacturers of such systems. Our standard TACNAV products can be customized to our customers specifications. At customer
request, we offer training and other services on a time-and-materials basis.
Guidance and Stabilization.
Our TG-6000 Inertial Measurement Unit, introduced in October 2003, is a guidance system that provides precise measurement of motion and acceleration in three dimensions. It uses a
three-axis configuration of our high-performance DSP-based (digital signal processing) fiber optic gyros integrated with three accelerometers. We believe that this configuration provides outstanding performance, high reliability, low maintenance and
easy system integration. The TG-6000 IMU is in full production as a component in the U.S. Navys MK54 lightweight torpedo and is suitable for use in other applications that involve flight control, orientation, instrumentation and navigation,
such as unmanned aerial vehicles.
Our open-loop DSP-3000 and
DSP-4000 fiber optic gyros provide tactical-grade precision measurement of the rate and angle of a platforms turning motion for significantly less cost than competing closed-loop gyros. These DSP-based products deliver performance superior to
analog signal processing devices, which experience greater temperature-sensitive drift and rotation errors. Applications for these products include inertial measurement units, integrated navigation systems, attitude/heading/reference systems, and
stabilization of antenna, radar and optical equipment.
The
DSP-3000 is slightly larger than a deck of cards and offers a variety of interface options to support a range of applications. High-performance 2-axis and 3-axis configurations can be realized by integrating multiple DSP-3000 units. Currently, the
DSP-3000 is used in an array of pointing and stabilization applications, including the U.S. Armys Common Remotely Operated Weapon Station (CROWS) to provide the image and gun stabilization necessary to ensure that the weapon remains aimed at
its target. More than 20 other companies are apparently developing stabilized remote weapons stations that we believe will require similar fiber optic gyro stabilization capabilities. The larger, militarized DSP-4000 uses the core DSP-3000
technology in 2-axis configurations and is designed for use in high-shock and highly dynamic environments, such as gun turret stabilization. Our fiber optic products are also used in numerous commercial applications, such as train location control
and track geometry measurement systems, industrial robotics, optical stabilization, autonomous vehicles, and undersea remotely operated submersibles.
Tactical Navigation
. Our TACNAV tactical navigation product line employ digital compass sensors and KVH fiber optic gyros to offer vehicle-based
navigation and pointing systems with a range of capabilities, including GPS backup and enhancement, vehicle position, hull azimuth and navigation displays. The systems
7
vary in size and complexity to suit a wide range of vehicles. The TACNAV M100 GMENS, which is sold outside the United States under the name TACNAV Light, is
a low-cost, digital compass-based battlefield navigation system specifically designed for non-turreted vehicles, such as high mobility multi-wheeled vehicles (HMMWVs) and trucks. Turreted vehicles, including reconnaissance vehicles, armored
personnel carriers and light armored vehicles, are supported by the TACNAV TLS, a digital compass-based tactical navigation and targeting system that offers a fiber optic gyro upgrade for enhanced accuracy. We also manufacture the TACNAV II Fiber
Gyro Navigation system, which offers a compact design, continuous output of heading and pointing data, and a flexible architecture that allows it to function as either a stand-alone navigation module or as the central component of an expanded,
multifunctional navigation system.
Sales and Marketing
Our sales and marketing efforts target markets that are substantial and
require dedicated dealers and distributors to reach end customers. These channels vary from time to time, but currently include targeted efforts to reach the RV and high-end automotive markets, the leisure and commercial maritime markets, and the
industrial and government markets. We believe our brands are well known and well respected by consumers within their respective niches. These brands include:
TracVisionsatellite television systems for vessels and vehicles
TracPhonetwo-way satellite communications systems
TracNetbroadband Internet systems using hybrid satellite/cellular transmit/return links
Azimuthdigital compass for powerboats
Sailcompdigital compass for sailboats
DataScopehandheld digital compass/rangefinder
TACNAVtactical navigation systems for military vehicles
Our fiber optic gyros and digital compass sensors use an alphanumeric model
numbering sequence such as C-100, DSP-3000, DSP-4000, and TG-6000 IMU.
We sell our mobile satellite communications products through an international network of independent retailers, chain stores and distributors, as well as to manufacturers of vessels and vehicles. We currently market and sell the TracVision
A7 in the continental United States through consumer electronic chain stores and a large number of retailers specializing in automotive electronics, as well as a variety of specialty distributors of automotive after-market products and auto
dealership expediters. We intend to continue the consideration of opportunities to expand our distribution network to include additional retailers and distributors in the continental United States.
Our European sales subsidiary located in Denmark, KVH Europe A/S, coordinates
our sales, marketing and support efforts for our mobile satellite communications products in Europe, the Middle East, Africa, and Asia.
We sell our guidance and stabilization products directly to U.S. and allied governments and government contractors, as well as through an international
network of authorized independent sales representatives. This same network also sells our fiber optic products to commercial/industrial entities.
8
Backlog
Our backlog was approximately $9.1 million on December 31, 2007, $5.6 million on December 31, 2006, and $9.5 million on
December 31, 2005.
Backlog consists of orders evidenced
by written agreements and specified delivery dates for customers who are acceptable credit risks. Military orders included in backlog are generally subject to cancellation for the convenience of the customer. When orders are cancelled, we generally
recover actual costs incurred through the date of cancellation and the costs resulting from termination. Individual orders for guidance and stabilization products are often large and may require procurement of specialized long-lead components and
allocation of manufacturing resources. The complexity of planning and executing larger orders requires customers to order well in advance of the required delivery date, resulting in backlog.
Backlog is not a meaningful indicator for predicting revenue in future
periods. Commercial resellers for our mobile satellite communications products and legacy products do not carry extensive inventories and rely on us to ship products quickly. Generally due to the rapid delivery of our commercial products, our
backlog for those products is not significant.
Intellectual Property
Our ability to compete effectively depends to a significant
extent on our ability to protect our proprietary information. We rely primarily on patents and trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We own more than 50 U.S. and foreign
patents and have additional patent applications that are currently pending. In January 2006, we entered into a licensing agreement with Litton Systems, Inc., a wholly owned subsidiary of Northrop Grumman Systems Corporation, with respect to certain
of its fiber optic gyroscope-related patents. We also register our trademarks in the United States and other key markets where we do business. Our patents and trademarks will expire at various dates between May 2008 and July 2028. We enter into
confidentiality agreements with our consultants, key employees and sales representatives, and maintain controls over access to and distribution of our technology, software and other proprietary information. 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.
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 technologies 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 is 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 seek to 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.
Manufacturing
Manufacturing operations for our mobile satellite communications and navigation products consist of light manufacture, final assembly and testing.
Manufacturing operations for our fiber optic gyro products are more complex. We produce specialized optical fiber, fiber optic components and sensing coils and combine them with
9
components purchased from outside vendors for assembly into finished goods. We own optical fiber drawing towers where we produce the specialized optical
fiber that we use in all of our fiber optic products. We manufacture our mobile satellite communications products at our headquarters in Middletown, Rhode Island, and utilize a nearby leased facility for warehousing and distribution purposes. We
manufacture our navigation and fiber optic gyro products in a leased facility located in Tinley Park, Illinois.
We contract with third parties for fabrication and assembly of printed circuit boards, injection-molded plastic parts, machined metal components,
connectors and housings. We believe there are a number of acceptable vendors for the components we purchase. We regularly evaluate both domestic and foreign suppliers for quality, dependability and cost effectiveness. In some instances we utilize
sole-source suppliers to develop strategic relationships to enhance the quality of materials and save costs. Our manufacturing processes are controlled by an ISO 9001:2000-certified quality standards program.
Competition
We encounter significant competition in all of our markets, and we expect this competition to intensify in the future. Many
of our primary competitors are well-established companies and some have substantially greater financial, managerial, technical, marketing, operational and other resources than we do.
In the market for mobile satellite communications products, we compete with a variety of companies. We believe the principal
competitive factors in this market are product size, design, performance, reliability, and price. In the recreational vehicle markets, we compete primarily with King Controls, TracStar Systems, Inc., MotoSAT, and Winegard Company.
Our TracVision A7 and our original TracVision A5 were the first commercially
available, low-profile mobile satellite TV antenna for use on minivans, SUVs and other passenger vehicles. At this time, we are not aware of any competing products in full production and available for widespread sale to consumers. A number of other
companies have from time to time announced that they intend to compete in this market, including: RaySat, Winegard, Sirius Satellite Radio, and certain other suppliers of automotive parts.
In the marine market for satellite TV equipment, we compete primarily with
NaviSystem Marine Electronics Systems Srl, King Controls, Sea Tel, Inc., Intellian, and Raymarine. In the marine market for telephone, fax, data and Internet communications equipment and services, we compete with Thrane & Thrane A/S, Furuno
Electric Co., Ltd., Globalstar LP, Iridium Satellite LLC, and Japan Radio Company. We also face competition from providers of marine satellite data services and maritime VSAT solutions, including SeaMobile, CapRock, Schlumburger, Ship Equip, Vizada,
Stratos, and Sea Tel.
Foreign competition for our mobile
satellite communications products has continued to intensify, most notably from companies based in South Korea that seek to compete primarily on price. We anticipate that this trend will continue.
In the guidance and stabilization markets, we compete primarily with
Honeywell International Inc., Kearfott Guidance & Navigation Corporation, Leica Microsystems AG, Northrop Grumman Corporation and Smiths Group plc. We believe the principal competitive factors in these markets are performance, size,
reliability, durability and price.
Research and Development
Focused investments in research and development are critical to our
future growth and competitive position in the marketplace. Our research and development efforts are directly related to timely development of new and enhanced products that are central to our core business strategy. The industries in which we
compete are subject to rapid technological developments, evolving industry standards, changes in customer requirements, and new
10
product introductions and enhancements. As a result, our success depends in part upon our ability, on a cost-effective and timely basis, to continue to
enhance our existing products and to develop and introduce new products that improve performance and meet customers operational and cost requirements. Our current research and development efforts include projects to achieve additional cost
reductions in our products and the development of new products for our existing marine and land mobile communications markets, and navigation, guidance and stabilization application markets.
Our research and development activities consist of projects funded by us,
projects funded with the assistance of Small Business Innovative Research (SBIR) grants, and customer-funded contract research. SBIR projects are generally directed towards the discovery of specific information requested by the government research
sponsor. Many of these grants have enhanced our technologies, resulting in new or improved product offerings. Our customer-funded research efforts are made up of contracts with defense and OEM customers, whose performance specifications are unique
to their product applications. Defense and OEM research often results in new product offerings. We strive to be the first company to bring a new product to market, and we use our own funds to accelerate new product development efforts.
Government Regulation
Our manufacturing operations are subject to various laws governing the
protection of the environment and our employees. These laws and regulations are subject to change, and any such change may require us to improve our technologies, incur expenditures, or both, in order to comply with such laws and regulations.
We are subject to compliance with the U.S. Export
Administration Regulations. Some of our products have military or strategic applications, and are on the Munitions List of the U.S. International Traffic in Arms Regulations. These products require an individual validated license to be exported to
certain jurisdictions. The length of time involved in the licensing process varies and can result in delays of the shipping of the products. Sales of our products to either the U.S. government or its prime contractors are subject to the U.S. Federal
Acquisition Regulations.
We are also subject to the laws and
regulations of the various foreign jurisdictions in which we offer and sell our products, including those of the European Union.
Employees
On December 31, 2007, we employed 314 full-time employees. We also employ temporary or contract personnel, when necessary, to provide short-term
and/or specialized support for production and other functional projects.
We believe our future success will depend upon the continued service of our key technical and senior management personnel and upon our continued ability to attract and retain highly qualified technical and managerial
personnel. None of our employees is represented by a labor union. We have never experienced a work stoppage and consider our relationship with our employees to be good.
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, 2006, and 2007 and in fifteen of the last twenty 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 during 2006 and 2007. As of December 31, 2007, we had an accumulated deficit of $8.3 million.
11
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 guidance and stabilization products. During 2006 and 2007, sales of our guidance and stabilization 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 guidance and stabilization 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 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 equipment, we compete with King Controls, MotoSAT, TracStar Systems, Inc., Winegard Company, and Sirius Satellite Radio.
In the market for marine satellite TV equipment, we compete with NaviSystem Marine Electronic Systems Srl, King Controls,
Sea Tel, Inc., Raymarine, and Intellian. In the market for maritime broadband service we compete with SeaMobile, CapRock, Schlumberger, Thrane & Thrane A/S, Ship Equip, Vizada, Stratos, and Sea Tel. 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:
|
|
|
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;
|
|
|
|
product improvements, new product developments or price reductions by competitors may weaken customer acceptance of, and reduce demand for, our products;
|
|
|
|
new technology or market trends may disrupt or displace a need for our products; and
|
|
|
|
our competitors may have lower production costs than we do, which may enable them to compete more aggressively in offering discounts and other promotions.
|
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 inch 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 FleetBroadband for their global service coverage and potentially lower hardware costs despite higher
service costs and slower data rates.
12
Our ability to compete in the maritime airtime services market may be impaired if we are unable to expand the coverage
of our mini-VSAT Broadband service to new regions.
The
TracPhone V7 and mini-VSAT Broadband service offer a range of benefits to mariners, especially in commercial markets, due to the smaller size antenna and faster, more affordable airtime. However, to support these customers, we need to expand the
coverage areas of the mini-VSAT Broadband service, which is currently offered in parts of North, South, and Central America; the Caribbean; North Atlantic; and Europe. If we are unable to reach agreement with third-party satellite providers to
support the mini-VSAT Broadband service and its spread spectrum technology, our ability to support vessels in the Pacific Ocean; throughout Asia; the Indian Ocean, including shipping routes to the Persian Gulf; and the Middle East will be at risk
and reduce the attractiveness of the product and service to these customers.
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 makes the
timing of sales to these customers unpredictable. Factors that affect their purchasing and delivery decisions include:
|
|
|
changes in modernization plans for military equipment;
|
|
|
|
changes in tactical navigation requirements;
|
|
|
|
global conflicts impacting troop deployment;
|
|
|
|
priorities for current battlefield operations;
|
|
|
|
allocation of funding for military programs;
|
|
|
|
new military and operational doctrines that affect military equipment needs;
|
|
|
|
sales cycles that are long and difficult to predict;
|
|
|
|
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;
|
|
|
|
delays in military procurement schedules; and
|
|
|
|
delays in the testing and acceptance of our products, including delays resulting from changes in customer specifications.
|
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 from 2005 to 2006 and again from 2006 to 2007. 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
13
experience unanticipated delays in defense orders, which make our revenues and operating results less predictable. Because our guidance and stabilization
products typically have relatively higher product gross margins than our mobile communications products, the loss of an order for guidance and stabilization products could have a disproportionately adverse effect on our results of operations.
Only a few customers account for a substantial portion of our guidance and
stabilization revenues, and the loss of any of these customers could substantially reduce our net sales.
We derive a significant portion of our guidance and stabilization 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 on the success of the prime contractors with which we align ourselves.
The market for mobile TV products for minivans, SUVs and other passenger vehicles is still
emerging, and our business in this market may continue to fall below expectations.
The market for live TV in automobiles is still in a relatively early stage of development, which continues to make it difficult for us to predict customer demand for our low-profile automotive TracVision product
accurately. Historically, 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:
|
|
|
the performance, price and availability of competing or alternative products and technology relative to the automotive TracVision;
|
|
|
|
the extent to which customers prefer live TV over recorded media;
|
|
|
|
the extent to which customers perceive mobile satellite TV services as a luxury or a preferred convenience;
|
|
|
|
the extent to which TracVision gains the acceptance of the automotive OEMs;
|
|
|
|
customers willingness to pay monthly fees for satellite television service in automobiles; and
|
|
|
|
the adoption of laws or regulations that restrict or ban television or other video technology in vehicles.
|
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 FleetBroadband compatible TracPhone products. SES AMERICOM and Eutelsat currently provide the satellite network to support the mini-VSAT Broadband service and our TracPhone V7.
14
If customers become dissatisfied with the programming, pricing, service, availability or other aspects of
any of these satellite 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 third-party satellite providers to permit two-way broadband Internet via our 24 inch 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 satellite networks controlled by SES AMERICOM and Eutelsat. 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 satellite hubs that
support this service. Sales of the TracPhone V7 and our mini-VSAT Broadband service could be disrupted if these satellite providers elected not to support ViaSats 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 historically high 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. 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.
15
We have single dedicated manufacturing facilities for each of our mobile communications and guidance and stabilization
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 guidance and
stabilization 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.
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 or decline 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.
16
If we are unable to improve our existing mobile communications and guidance and stabilization products and develop
new, innovative products, our sales and market share may decline.
The markets for mobile communications products and 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:
|
|
|
upgrade, expand or re-size our manufacturing facilities and capacity in a timely manner;
|
|
|
|
successfully attract, train, motivate and manage a larger number of employees for manufacturing, sales and customer support activities;
|
|
|
|
control higher inventory and working capital requirements; and
|
|
|
|
improve the efficiencies within our operating, administrative, financial and accounting systems, and our procedures and controls.
|
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.
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
17
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:
|
|
|
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;
|
|
|
|
satisfaction of international regulatory requirements and delays and costs associated with procurement of any necessary licenses or permits;
|
|
|
|
restrictions on the sale of certain guidance and stabilization products to foreign military and government customers;
|
|
|
|
increased costs of providing customer support in multiple languages;
|
|
|
|
potentially adverse tax consequences, including restrictions on the repatriation of earnings;
|
|
|
|
protectionist laws and business practices that favor local competitors, which could slow our growth in international markets;
|
|
|
|
potentially longer sales cycles, which could slow our revenue growth from international sales;
|
|
|
|
potentially longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
|
|
|
|
losses arising from foreign currency exchange rate fluctuations; and
|
|
|
|
economic and political instability in some international markets.
|
Exports of certain guidance and stabilization 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.
18
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.
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.
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:
|
|
|
changes in demand for our mobile communications products and guidance and stabilization products;
|
|
|
|
the timing and size of individual orders from military customers;
|
|
|
|
the mix of products we sell;
|
|
|
|
our ability to manufacture, test and deliver products in a timely and cost-effective manner, including the availability and timely delivery of components and
subassemblies from our suppliers;
|
|
|
|
our success in winning competitions for orders;
|
|
|
|
the timing of new product introductions by us or our competitors;
|
|
|
|
expense incurred in pursuing acquisitions, such as during the third quarter of 2006;
|
|
|
|
market and competitive pricing pressures;
|
|
|
|
general economic climate; and
|
|
|
|
seasonality of pleasure boat and recreational vehicle usage.
|
19
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 carry-forwards 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 tax 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
December 31, 2007.
The market price of our common stock may be
volatile.
Our stock price has historically been volatile.
From January 1, 2004 to December 31, 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:
|
|
|
variations in our quarterly results of operations;
|
|
|
|
the introduction of new products by us or our competitors;
|
|
|
|
changing needs of military customers;
|
|
|
|
changes in estimates of our performance or recommendations by securities analysts;
|
|
|
|
the hiring or departure of key personnel;
|
|
|
|
acquisitions or strategic alliances involving us or our competitors;
|
|
|
|
market conditions in our industries; and
|
|
|
|
the global macroeconomic and geopolitical environment.
|
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.
20
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 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:
|
|
|
charges related to any potential acquisition from which we may withdraw;
|
|
|
|
diversion of our managements time, attention, and resources;
|
|
|
|
loss of key acquired personnel;
|
|
|
|
increased costs to improve or coordinate managerial, operational, financial, and administrative systems including compliance with the Sarbanes-Oxley Act of 2002;
|
|
|
|
dilutive issuances of equity securities;
|
|
|
|
the assumption of legal liabilities; and
|
|
|
|
amortization of acquired intangible assets.
|
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:
|
|
|
the ability of our Board of Directors to issue preferred stock, and determine its terms, without a stockholder vote;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
the prohibition against stockholder actions by written consent;
|
|
|
|
the inability of stockholders to call a special meeting of stockholders; and
|
|
|
|
advance notice requirements for stockholder proposals and director nominations.
|
ITEM 1B.
|
Unresolved Staff Comments
|
None.
21
The following table provides information about our current facilities.
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Type
|
|
Principal Uses
|
|
Approximate
Square
Footage
|
|
Ownership
|
|
Lease
Expiration
|
Middletown, Rhode Island
|
|
Office, plant and warehouse
|
|
Corporate headquarters, research and development, sales and service, manufacturing (mobile communications products), marketing and administration
|
|
75,000
|
|
Purchased
with
mortgage
loan
|
|
|
|
|
|
|
|
|
Middletown, Rhode Island
|
|
Warehouse
|
|
Warehousing (mobile communications products)
|
|
39,000
|
|
Leased
|
|
March 2008
|
|
|
|
|
|
|
Tinley Park, Illinois
|
|
Plant and warehouse
|
|
Manufacturing, research and development (guidance and stabilization products)
|
|
40,000
|
|
Leased
|
|
December
2013
|
|
|
|
|
|
|
Kokkedal, Denmark
|
|
Office and warehouse
|
|
European headquarters, sales and service, marketing and administration
|
|
11,000
|
|
Leased
|
|
May 2014
|
We anticipate that any
substantial increase in demand for our products would require us to expand our production capacity. Although we can expand production by adding additional shifts to our operations, we may need to identify and acquire or lease additional
manufacturing facilities. We believe that suitable additional or substitute facilities will be available as required.
ITEM 3.
|
Legal Proceedings
|
We were 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 were
named as defendants. The suit asserted 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 sought certain legal remedies, including compensatory damages. The Teamsters Affiliates Pension Plan was appointed lead plaintiff. This matter
consolidated 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. On January 25, 2008, the U.S. District Court for the District of Rhode Island, for purposes of effecting a settlement, certified a settlement class, granted final approval of the settlement and entered an order dismissing with
prejudice all claims that were or could have been brought against us and our officers in the action.
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 asserted state law claims on our behalf arising between October 1, 2003 and the then-current time 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 then-current time. 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 asserted
22
state law claims on our behalf arising between October 1, 2003 and the then-current time in connection with the allegations set forth in the class
action consolidated complaint in the U.S. District Court described above and sought 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 November 19, 2007, the Rhode Island State Superior Court for Providence County granted final approval of the settlement of this action and entered an order dismissing with prejudice all claims that were brought in this action.
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 then-current time 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 sought 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. On January 25, 2008, after agreeing with Ji to settle the action, we stipulated with Ji to a dismissal of
the appeal with prejudice; on January 29, 2008, the U.S. Court of Appeals for the First Circuit ordered that the appeal be dismissed and entered final judgment.
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 received an aggregate cash payment of $5.3 million, all of which has been paid by our insurance carrier. We also agreed to adopt, formalize, or reconfirm adherence to certain corporate governance
policies and practices. 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; on November 19, 2007, the
court granted final approval of the settlement of the Mehrvar shareholder derivative action and entered an order dismissing with prejudice all claims that were brought in the action. 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; on January 25, 2008, the U.S. District Court for the District of Rhode Island
granted final approval of the settlement of the class action lawsuit and entered an order dismissing with prejudice all claims that were or could have been brought against us and our officers in the action.
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.
ITEM 4.
|
Submission of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of our stockholders during the fourth
quarter of the fiscal year ended December 31, 2007.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(1)
|
Summary of Significant Accounting Policies
|
(a)
|
Description of Business
|
KVH Industries, Inc. (the Company or KVH) develops, manufactures and markets mobile communications products for the land mobile and marine markets, and
navigation, guidance and stabilization products for both defense and commercial markets.
KVHs mobile communications products enable customers to receive live digital television, telephone and Internet services in their automobiles, recreational vehicles and marine vessels while in motion via
satellite and wireless services. KVH sells its mobile communications products through an extensive international network of retailers, distributors and dealers.
KVHs guidance and stabilization products include tactical navigation systems that provide uninterrupted access to navigation and pointing
information in a spectrum of military vehicles, including tactical trucks and light armored vehicles. KVH also offers precision fiber optic gyro-based systems that enable platform stabilization and munitions guidance. KVHs guidance and
stabilization products are sold directly to United States (U.S.) and allied governments and government contractors, as well as through an international network of authorized independent sales representatives. In addition, KVHs guidance and
stabilization products have numerous commercial applications such as train location control and track geometry measurement systems, industrial robotics and optical stabilization.
(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). Given that KVH Europe operates as the Companys European and international distributor, all of its operating expenses are reflected within sales, marketing and support within the accompanying consolidated statements of
operations. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year presentation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates and assumptions by management affect the Companys revenue recognition, valuation of accounts receivable, valuation of inventory, deferred tax assets, certain accrued expenses and accounting for
contingencies.
Although the Company regularly assesses these
estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it
believes to be reasonable under the circumstances.
(d)
|
Concentration of Credit Risk
|
Cash, cash equivalents and marketable securities.
The Company is potentially subject to financial instrument concentration of credit risk through
its cash, cash equivalent and marketable securities investments.
52
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(1)
|
Summary of Significant Accounting Policies
(continued)
|
To mitigate these risks the Company maintains cash, cash equivalents and marketable securities with reputable and nationally recognized financial
institutions. As of December 31, 2007, $41.0 million classified as marketable securities was held by Wachovia Securities, LLC, and substantially all of the cash and cash equivalents was held by Bank of America, Inc. See note 2 for a description
of marketable securities.
Trade accounts receivable.
Concentrations of risk with respect to trade accounts receivable are generally limited due to the large number of customers and their dispersion across several geographic areas. Although the Company does not foresee credit risk associated with these
receivables to deviate from historical experience, repayment is dependent upon the financial stability of those individual customers. The Company establishes reserves for potential bad debt and evaluates, on a monthly basis, the adequacy of those
reserves based upon historical experience and its expectations for future collectibility concerns. Activity within the Companys reserve for bad debt for the periods presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
693
|
|
|
$
|
626
|
|
|
$
|
677
|
|
Additions charged to expense
|
|
|
87
|
|
|
|
138
|
|
|
|
68
|
|
Deductions (write-offs/recoveries) from reserve
|
|
|
(524
|
)
|
|
|
(71
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
256
|
|
|
$
|
693
|
|
|
$
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the
beginning reserve balance as of December 31, 2004 was a $556,000 specific reserve resulting from a voluntary liquidation under local law of a European distributor during 2004. As the liquidation was finalized in 2007, the Company wrote-off the
entire remaining reserve of $492,000 related to this distributor in 2007.
Product sales.
Revenue from product sales is recognized when persuasive evidence of an arrangement exists, goods are shipped, title has passed and
collectibility is reasonably assured. The Companys standard sales terms require that:
|
|
|
Terms are generally either Net 30 or Net 45;
|
|
|
|
Shipments are tendered and shipped FOB (or as may be applicable, FCA, or EXW) the Companys plant or warehouse; and
|
|
|
|
Title and risk of loss or damage passes to the dealer or distributor at the point of shipment when delivery is made to the possession of the carrier.
|
For certain guidance and stabilization
product sales, customer acceptance or inspection may be required before title and risk of loss transfers. For those sales, revenue is recognized after transfer of title and risk of loss and after notification of customer acceptance.
Under certain limited conditions, the Company, at its sole discretion,
provides for the return of goods. No product is accepted for return and no credit is allowed on any returned product unless the Company has granted
53
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(1)
|
Summary of Significant Accounting Policies
(continued)
|
and confirmed prior written permission by means of appropriate authorization. The Company establishes reserves for potential sales returns, credits, and
allowances, and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and expectations for the future.
Contracted service revenue.
Customer and government-agency contracted engineering service and grant revenue under development contracts is
recognized during the period in which the Company performs the service or development efforts in accordance with the agreement. Services performed under these types of contracts include engineering studies, surveys, prototype development and program
management. Performance is determined principally by comparing the accumulated costs incurred to date with managements estimate of the total cost to complete the contracted work. Costs and recognized proportionate income not yet billed are
recognized within the accompanying consolidated balance sheets in the caption costs and estimated earnings in excess of billings on uncompleted contracts.
Revenue related to customer contracts that call for standard product modification or enhancement are recognized upon the
complete delivery and title transfer of all customer-approved products. Costs of contracts in progress are accumulated within the accompanying consolidated balance sheets in the caption costs and estimated earnings in excess of billings on
uncompleted contracts and relieved upon product delivery or when billed.
Revisions to costs and income estimates are reflected in the period in which the facts that require revision become known. Any advance payments arising from such extended-term development contracts are recorded as
deposits. If, in any period, estimated total costs under a contract indicate a loss, then such loss is provided for in that period. To date, contracted service revenue has not been a significant portion of the Companys total revenue.
Product service revenue.
Revenue from services other
than under development contracts is recognized when completed services are provided to the customer and collectibility is reasonably assured. To date, product service revenue has not been a significant portion of the Companys total revenue.
Satellite activation and usage revenue
. Service
activation fees are recognized upon receiving notice from the third-party satellite service provider that a purchaser of the Companys product has established service with the satellite service provider. Re-sold satellite connectivity and usage
airtime revenue is recognized based upon usage by the subscriber. To date, satellite activation and usage revenue has not been a significant portion of the Companys total revenue.
Extended warranty revenue
. Beginning in 2005, the Company began selling extended warranty contracts to certain of its
customers. Revenue under these contracts is recognized ratably over the contract term.
None of the Companys sources of non-product revenue, including revenues earned from product repairs, satellite phone services, engineering services under development contracts, Internet usage services and
DIRECTV activations, has individually been a material portion of the Companys revenue. In the aggregate, such revenues represented 9%, 11% and 8% of total net sales for the years ended December 31, 2007, 2006 and 2005, respectively.
54
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(1) Summary of Significant Accounting Policies
(continued)
(f)
|
Fair Value of Financial Instruments
|
The carrying amounts of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, prepaid expenses and other
current assets, accounts payable and accrued expenses approximate fair value due to the short maturity of these instruments. The carrying amount of the Companys mortgage loan approximates fair value based on currently available quoted rates of
similarly structured mortgage facilities. See note 2 for information on the fair value of the Companys marketable securities.
(g)
|
Cash, Cash Equivalents and Marketable Securities
|
In accordance with the Companys investment policy, cash in excess of operational needs is invested in money market funds, investment-grade
corporate, auction rate securities and U.S. government debt as well as certain asset-backed securities and is reflected within marketable securities in the accompanying consolidated balance sheets. The Company considers all highly liquid
investments, not included within marketable securities, with an original maturity of ninety days or less, as of the date of purchase, to be cash equivalents. The Company determines the appropriate classification of marketable securities at each
balance sheet date. As of December 31, 2007 and 2006, all of the Companys marketable securities have been designated as available-for-sale and are carried at their fair value with unrealized gains and losses included in accumulated other
comprehensive loss in the accompanying consolidated balance sheets.
The Company reviews investments in debt and equity securities for other than temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investments carrying amount is not
recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and the intent to hold the investment until a market price recovery and considers whether
evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, compliance with the Companys investment policy, the severity and
duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investee. The Company has reviewed its securities with unrealized losses as of December 31, 2007 and 2006, and has concluded that no
other-than-temporary impairments exist.
Inventories are stated at the lower of cost or market using the first-in first-out costing method.
(i)
|
Property and Equipment
|
Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the
respective assets. The principal lives used in determining the depreciation rates of various assets are: buildings and improvements, 5-40 years; leasehold improvements, over the shorter of the assets useful life or the term of the lease;
machinery and equipment, 5-10 years; office and computer equipment, 3-7 years; and motor vehicles, 5 years.
55
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(1)
|
Summary of Significant Accounting Policies
(continued)
|
The Companys management reviews long-lived assets and certain identifiable intangibles 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 undiscounted 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 exceeds 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.
The Companys products carry limited warranties that range from one to two years and vary by product. The warranty period begins on the date of
retail purchase by the original purchaser. The Company accrues estimated product warranty costs at the time of sale and any additional amounts are recorded when such costs are probable and can be reasonably estimated. Factors that affect the
Companys warranty liability include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. Warranty and related costs are reflected within sales, marketing and support in the accompanying
statements of operations. As of December 31, 2007 and 2006, the Company had accrued product warranty costs of approximately $778,000 and $539,000, respectively. The following table summarizes product warranty activity during 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Beginning balance
|
|
$
|
539
|
|
|
$
|
611
|
|
Charges to expense
|
|
|
1,032
|
|
|
|
630
|
|
Costs incurred
|
|
|
(793
|
)
|
|
|
(702
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
778
|
|
|
$
|
539
|
|
|
|
|
|
|
|
|
|
|
(l)
|
Shipping and Handling Costs
|
Shipping and handling costs are expensed as incurred and included in cost of sales. Billings for shipping and handling are reflected within net sales in
the accompanying statements of operations.
(m)
|
Research and Development
|
Expenditures for research and development, including customer-funded research and development, are expensed as 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. Revenue and related development costs from customer-funded research and development are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Customer-funded revenues
|
|
$
|
747
|
|
$
|
2,073
|
|
$
|
1,852
|
Customer-funded costs
|
|
|
638
|
|
|
2,060
|
|
|
1,418
|
56
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(1)
|
Summary of Significant Accounting Policies
(continued)
|
Costs related to advertising are expensed as incurred. Advertising expense was $2.5 million, $2.3 million, and $2.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively, and is included in sales, marketing, and support expense in the accompanying consolidated statements of operations.
(o)
|
Foreign Currency Translation
|
The financial statements of the Companys foreign subsidiary, located in Denmark, are maintained in the United States dollar functional currency for
both reporting and consolidation purposes. Exchange rates in effect on the date of the transaction are used to record monetary assets and liabilities. Revenue and other expense elements are recorded at rates that approximate the rates in effect on
the transaction dates. Realized foreign currency remeasurement gains and losses are recognized within other expense in the accompanying consolidated statements of operations. For the years ended December 31, 2007, 2006 and 2005,
foreign currency gains (losses) approximated $0.1 million, $0.1 million, and $(0.3) million, respectively.
(p)
|
Stock-based Compensation
|
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends
SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the
enterprise, or (b) liability instruments that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) requires an entity to recognize the
grant-date fair-value of stock options and other equity-based compensation issued to employees in the statement of operations.
As permitted by SFAS No. 123, the Company historically accounted for share-based payments to employees using APB Opinion No. 25s intrinsic
value method and recognized no compensation expense for employee stock options or shares purchased under its ESPP. Effective as of January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) under the modified
prospective transition method outlined in the statement. A modified prospective transition method is one in which compensation expense is recognized beginning with the effective date (a) based on the requirements of SFAS
No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that were unvested on
the date of adoption. In accordance with the modified prospective transition method provided under SFAS No. 123(R), results for prior periods have not been restated.
The Company recorded stock-based compensation expense of approximately $1,084,000 for the fiscal year ended December 31, 2006. The
stock-based compensation expense included $123,000 recorded in cost of sales, $298,000 recorded in research and development, $200,000 recorded in sales, marketing and support, and $463,000 recorded in general and administrative expense for the
fiscal year ended December 31, 2006. The Company recorded stock-based compensation expense of approximately $1,190,000 for the fiscal year ended December 31, 2007. The stock-based compensation expense included $177,000 recorded in cost of
sales, $332,000 recorded in research and development, $247,000 recorded in sales, marketing and support, and $434,000 recorded in general and administrative expense for the fiscal year ended December 31, 2007.
57
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(1)
|
Summary of Significant Accounting Policies
(continued)
|
The following table illustrates the pro forma effect on net income and net income per share as if the
fair value based method of SFAS No. 123 had been applied to measure compensation cost prior to the Companys adoption of SFAS No. 123(R) (see note 7 for further discussion):
|
|
|
|
|
|
|
2005
|
|
Net income as reported
|
|
$
|
2,931
|
|
Stock-based employee compensation determined under the fair value based method, net of income tax effect
|
|
|
(2,809
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
122
|
|
|
|
|
|
|
Net income per common sharebasic and diluted
|
|
|
|
|
As reported
|
|
$
|
0.20
|
|
|
|
|
|
|
Pro forma
|
|
$
|
0.01
|
|
|
|
|
|
|
Income taxes are accounted for under the asset and liability method. 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.
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. In accordance with SFAS
No. 109, the Company has adopted a tax planning strategy to support the realization of a portion of its total domestic deferred tax assets (see note 8 for further discussion).
(r)
|
Income per Common Share
|
Basic net income per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per share
incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities, if any, as determined in accordance with the treasury-stock accounting method. Common stock equivalents related to options and restricted
stock awards to purchase 1,519,304, 1,083,457
,
and 849,800 shares of common stock for the years ended December 31, 2007, 2006, and 2005, respectively, have been excluded from the fully diluted calculation of income per share, as
inclusion would be anti-dilutive.
A reconciliation of the
basic and diluted weighted average common shares outstanding is as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Weighted average common shares outstandingbasic
|
|
14,964,410
|
|
14,786,898
|
|
14,571,207
|
Dilutive common shares issuable in connection with stock plans
|
|
19,089
|
|
128,129
|
|
114,114
|
|
|
|
|
|
|
|
Weighted average common shares outstandingdiluted
|
|
14,983,499
|
|
14,915,027
|
|
14,685,321
|
|
|
|
|
|
|
|
58
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(1)
|
Summary of Significant Accounting Policies
(continued)
|
(s)
|
Foreign Currency Forward Exchange Contracts
|
The Companys foreign subsidiary, located in Denmark, occasionally enters into foreign currency forward exchange contracts to reduce the impact of
changes in foreign exchange rates between the United States dollar and the Euro on consolidated results of operations and future foreign currency-denominated cash flows. These contracts primarily reduce the exposure on currency movements affecting
existing trade receivables, payables and forecasted purchases and sales. The counterparty to these foreign currency forward exchange contracts is a creditworthy multinational commercial bank. The Company considers the risk of counterparty
nonperformance associated with these contracts to be remote. The Company accounts for foreign currency forward exchange contracts at fair value and records any changes in fair value within other expense in the accompanying statements of
operations.
The Company recorded foreign currency contract
(losses) gains of approximately $(248,000), $(108,000) and $39,000, for the years ended December 31, 2007, 2006 and 2005.
The Company was not party to any foreign currency forward exchange contracts at December 31, 2007 and 2006.
(t)
|
Contingent Liabilities
|
The Company estimates the amount of potential exposure it may have with respect to claims, assessments and litigation in accordance with SFAS No. 5.
The Company is party to pending legal proceedings as described in note 13. It is not always possible to predict the outcome of litigation, as it is subject to many uncertainties. Additionally, it is not always possible for management to make a
meaningful estimate of the potential loss or range of loss associated with such litigation. As of December 31, 2007 no losses have been accrued with respect to pending litigation.
(u)
|
Recent Accounting Pronouncements
|
In March 2006, the EITF reached a consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (That is, Gross versus Net Presentation), which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of this EITF
include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. As of January 1, 2007, we adopted EITF 06-3 for interim and
annual reporting periods. The adoption of EITF 06-3 did not have a material impact on the Companys financial position or results of operations as the Companys policy is to exclude all such taxes from revenue.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value
measurements, including the methods and assumptions used to measure fair value and the effect of fair value measures on earnings. This statement does not require any new fair value measures; rather, it applies to other accounting pronouncements that
require or permit fair value measurements. SFAS No. 157 will be applied prospectively and will be effective for fiscal years beginning after November 15, 2007. The FASB has provided a one year deferral
59
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(1)
|
Summary of Significant Accounting Policies
(continued)
|
for the implementation of SFAS No. 157 for non-financial assets and liabilities that are not required to be measured at fair value on a recurring
basis. The Company does not expect that the adoption of this interpretation will have a material impact on the Companys financial position or results of operations.
As of January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(see note 8 for further discussion).
In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS No. 159 permits an entity to elect fair value as the initial and
subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to
distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS
No. 159 is effective for the Company in 2008; therefore, we anticipate adopting this standard as of January 1, 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a
cumulative-effect adjustment to retained earnings as of the date of initial adoption. The Company does not expect that the adoption of this interpretation will have a material impact on the Companys financial position or results of operations.
(2)
|
Marketable Securities
|
Included in marketable securities as of December 31, 2007 and 2006 are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
Money market mutual funds
|
|
$
|
40,000
|
|
$
|
|
|
$
|
|
|
|
$
|
40,000
|
Corporate obligations
|
|
|
1,000
|
|
|
21
|
|
|
|
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities designated as available for sale
|
|
$
|
41,000
|
|
$
|
21
|
|
$
|
|
|
|
$
|
41,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
Auction rate securities
|
|
$
|
17,679
|
|
$
|
|
|
$
|
|
|
|
$
|
17,679
|
Money market mutual funds
|
|
|
3,727
|
|
|
|
|
|
|
|
|
|
3,727
|
Commercial paper
|
|
|
5,269
|
|
|
|
|
|
|
|
|
|
5,269
|
Federal agency obligations
|
|
|
6,078
|
|
|
|
|
|
(17
|
)
|
|
|
6,061
|
Corporate obligations
|
|
|
6,240
|
|
|
|
|
|
(18
|
)
|
|
|
6,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities designated as available for sale
|
|
$
|
38,993
|
|
$
|
|
|
$
|
(35
|
)
|
|
$
|
38,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(2) Marketable Securities
(continued)
The amortized costs and estimated fair value of debt securities as of December 31, 2007 and 2006
are shown below by effective maturity. Effective maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
|
|
|
|
|
|
|
December 31, 2007
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
Due in less than one year
|
|
$
|
41,000
|
|
$
|
41,021
|
|
|
|
|
|
|
|
|
|
$
|
41,000
|
|
$
|
41,021
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
Due in less than one year
|
|
$
|
35,950
|
|
$
|
35,931
|
Due after one year and within two years
|
|
|
3,043
|
|
|
3,027
|
|
|
|
|
|
|
|
|
|
$
|
38,993
|
|
$
|
38,958
|
|
|
|
|
|
|
|
No realized gains or
losses were recognized on the Companys marketable securities during the year ended December 31, 2007 and 2006.
Inventories as of December 31, 2007 and 2006 include the costs of material, labor, and factory overhead. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Raw materials
|
|
$
|
5,628
|
|
$
|
5,553
|
Finished goods
|
|
|
2,386
|
|
|
2,886
|
Work in process
|
|
|
1,299
|
|
|
604
|
|
|
|
|
|
|
|
|
|
$
|
9,313
|
|
$
|
9,043
|
|
|
|
|
|
|
|
(4)
|
Property and Equipment
|
Property and equipment, net, as of December 31, 2007 and 2006 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Land
|
|
$
|
807
|
|
|
$
|
807
|
|
Building and improvements
|
|
|
5,623
|
|
|
|
3,649
|
|
Leasehold improvements
|
|
|
1,936
|
|
|
|
1,557
|
|
Machinery and equipment
|
|
|
13,252
|
|
|
|
11,911
|
|
Office and computer equipment
|
|
|
6,771
|
|
|
|
6,181
|
|
Motor vehicles
|
|
|
313
|
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,702
|
|
|
|
24,468
|
|
Less accumulated depreciation
|
|
|
(16,963
|
)
|
|
|
(14,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,739
|
|
|
$
|
9,569
|
|
|
|
|
|
|
|
|
|
|
61
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(4)
|
Property and Equipment
(continued)
|
Depreciation for the years ended December 31, 2007, 2006 and 2005 amounted to approximately
$2.1 million, $1.9 million, and $1.8 million, respectively.
(5)
|
Debt and Line of Credit
|
In January 1999, the Company entered into a mortgage loan in the amount of $3.0 million. The note term is 10 years, with a principal amortization of 20
years at a fixed rate of interest of 7%. Land, building and improvements with an approximate carrying value of $5.4 million as of December 31, 2007, secure the mortgage loan. The monthly mortgage payment is approximately $23,000, including
interest and principal. Due to the difference in the term of the note and amortization of the principal, a balloon payment of approximately $2.0 million is due on February 1, 2009. The mortgage principal paid during the year ended
December 31, 2007 totaled approximately $123,000. Interest expense on the mortgage approximated $156,000, $164,000 and $171,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
The following is a summary of future principal payments under the mortgage:
|
|
|
|
Years ending December 31,
|
|
Principal
Payment
|
2008
|
|
$
|
132
|
2009
|
|
|
2,026
|
|
|
|
|
Total outstanding at December 31, 2007
|
|
$
|
2,158
|
|
|
|
|
Since March 27,
2000, the Company has maintained a credit and security agreement providing for a maximum $15.0 million line of credit. On July 17, 2006 and December 28, 2006, certain terms and conditions contained in the credit and security agreement were
amended to, among other things: (i) extend the maturity date of the note to December 31, 2008; (ii) eliminate the unused portion of the line of credit fee and replace it with a quarterly commitment fee of $2,000 commencing
October 1, 2006; (iii) decrease the margin for borrowings by the Company under the line of credit based in Euros from 2% to 1.5%; and (iv) add two additional financial covenants, a Leverage Ratio and a Fixed Charge Ratio, that will
apply in the event that Companys consolidated cash, cash equivalents and marketable securities balance falls below $25.0 million at any time. In the event of a draw down, the Company would pay interest at a rate equal to, at its option,
Eurodollar rate plus 1.5%, or the greater of the Federal Funds Effective Rate plus 0.5% or the banks prime interest rate. The Company may terminate the loan agreement prior to its full term, provided the bank is given 30 days written notice.
At December 31, 2007 and 2006, no borrowings were outstanding under the facility.
Total commitment fees related to the line of credit were approximately $16,000, $16,000 and $25,000 for the year ended December 31, 2007, 2006 and 2005.
62
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(6)
|
Commitments and Contingencies
|
The Company has certain operating leases for facilities, automobiles, and various equipment. The following reflects future minimum payments under
operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2007:
|
|
|
|
Years ending December 31,
|
|
Operating
Leases
|
2008
|
|
$
|
553
|
2009
|
|
|
541
|
2010
|
|
|
467
|
2011
|
|
|
463
|
2012
|
|
|
425
|
Thereafter
|
|
|
431
|
|
|
|
|
Total minimum lease payments
|
|
$
|
2,880
|
|
|
|
|
Total rent expense
incurred under facility operating leases for the years ended December 31, 2007, 2006 and 2005 amounted to $880,000, $738,000, and $627,000, respectively.
In the normal course of business, the Company enters into unconditional purchase order obligations with its suppliers for inventory and other
operational purchases. Outstanding and unconditional purchase order obligations, which generally are for a period of less than one year, approximated $16.6 million as of December 31, 2007.
In the first quarter of 2006, the Company entered into a licensing agreement
with Litton Systems, Inc., a wholly owned subsidiary of Northrop Grumman Systems Corporation (Grumman) to provide the Company with the right to access/use certain patented technologies owned by Grumman. Under the agreement, which spans the life of
the patented technology, the Company will pay a licensing fee to Grumman equal to 4.5% of the net selling price for each unit sold in which the licensed technology is utilized. The agreement provides for minimum payments during 2008 and 2009 of
$250,000 and $187,000, respectively. In 2007 the Companys expense in relation to the licensing fee was approximately $344,000.
As of December 31, 2007, the Company had a standby letter of credit in the amount of approximately $200,000 outstanding in support of a customer
deposit. The Company did not enter into any other off-balance sheet commitments, guarantees, or standby repurchase obligations as of December 31, 2007.
(a)
|
Employee Stock Options
|
Options are granted with an exercise price equal to the fair market value of the common stock on the date of grant and generally vest in equal annual
amounts over four years beginning on the first anniversary of the date of the grant. No options are exercisable for periods of more than 10 years after date of grant. All plans were approved by the Companys shareholders, pursuant to which
3,915,000 shares of the Companys common stock were reserved for issuance. As of December 31, 2007, 3,191,458 options to purchase shares of common stock had been issued or expired and 723,542 were available for future grants. The
Compensation Committee of the
63
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(7)
|
Stockholders Equity
(continued)
|
Board of Directors administers the plans, approves the individuals to whom options will be granted and determines the number of shares and exercise price of
each option. Outstanding options under the plans at December 31, 2007 expire from February 2008 through September 2012. None of the Companys outstanding options includes performance-based or market-based vesting conditions as of
December 31, 2007.
The Company has estimated the fair
value of each option grant on the date of grant using the Black-Scholes option-pricing model. The expected volatility assumption is based on the historical weekly price data of the Companys common stock over a period equivalent to the weighted
average expected life of the Companys options. The expected term of options granted is derived using assumed exercise rates based on historical exercise patterns and represents the period of time the options granted are expected to be
outstanding. The risk-free interest rate is based on the actual U.S. Treasury zero-coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend yield of zero is based upon the fact that we have not
historically declared or paid cash dividends, and do not expect to declare or pay dividends in the foreseeable future. The Company has applied an estimated forfeiture rate of 10% for option grants awarded subsequent to January 1, 2006. The
forfeiture rate is based substantially on the history of cancellations of similar options granted in prior years. The forfeiture rate will be revised, if necessary, based on actual experience.
The fair value of stock options granted was estimated using the Black-Scholes
option-pricing model. The per share weighted-average fair values of stock options granted during 2007, 2006 and 2005 were $4.26, $5.44, and $5.07, respectively. The weighted-average assumptions used to value options as of their grant date were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Risk-free interest rate
|
|
4.39
|
%
|
|
4.56
|
%
|
|
4.04
|
%
|
Expected volatility
|
|
49.1
|
%
|
|
52.8
|
%
|
|
58.2
|
%
|
Expected life (in years)
|
|
4.19
|
|
|
4.35
|
|
|
4.37
|
|
Dividend yield
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
The changes in
outstanding employee stock options for the year ended December 31, 2007, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Life
(in
Years)
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
1,563,773
|
|
|
$
|
11.11
|
|
|
|
|
|
Granted
|
|
295,650
|
|
|
|
9.65
|
|
|
|
|
|
Exercised
|
|
(203,250
|
)
|
|
|
6.83
|
|
|
|
|
|
Expired or canceled
|
|
(122,750
|
)
|
|
|
10.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
1,533,423
|
|
|
$
|
11.43
|
|
2.41
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
847,826
|
|
|
$
|
12.24
|
|
1.63
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
64
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(7)
|
Stockholders Equity
(continued)
|
The following table summarizes information about employee stock options as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Average
Remaining
Life (in Years)
|
|
Outstanding
Weighted
Average
Exercise Price
|
|
Number
Exercisable
|
|
Exercisable
Weighted
Average
Exercise Price
|
$ 7.92 $ 9.00
|
|
122,026
|
|
2.46
|
|
$
|
8.18
|
|
94,529
|
|
$
|
8.16
|
9.01 13.50
|
|
1,174,197
|
|
2.74
|
|
|
10.71
|
|
516,097
|
|
|
10.95
|
13.51 20.02
|
|
237,200
|
|
0.94
|
|
|
16.65
|
|
237,200
|
|
|
16.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,533,423
|
|
2.41
|
|
$
|
11.43
|
|
847,826
|
|
$
|
12.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total aggregate
intrinsic value of options exercised was approximately $559,000, $969,000, and $665,000 in 2007, 2006, and 2005, respectively. The total aggregate intrinsic value of options exercisable at December 31, 2006 and 2005, was $1,012,000 and
$1,140,000, respectively. The total aggregate intrinsic value of options outstanding at December 31, 2006 was $1,267,000. The weighted average remaining contractual term for options outstanding at December 31, 2006 was 2.70 years.
As of December 31, 2006, the number of options
exercisable was 877,815 and the weighted average exercise price of those options was $11.41 per share. The weighted average remaining contractual term for options exercisable at December 31, 2006 was 1.76 years.
As of December 31, 2007, there was approximately $2.4 million of total
unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.35 years. In 2007 and 2006, the Company recorded compensation charges of approximately $1,099,000 and $1,053,000,
respectively, related to stock options. During 2007, 2006 and 2005, cash received under stock option plans for exercises was approximately $1,144,000, $1,448,000 and $627,000, respectively.
In 2007 and 2006, an employee exercised stock options and delivered 25,996
and 12,153 shares of common stock to the Company in payment of the exercise price, respectively. The shares were valued on the basis of the closing price of our common stock on the date of exercise.
On December 9, 2005, the Compensation Committee of the Board of
Directors accelerated the vesting of existing out-of-the-money stock options that had exercise prices per share equal to or greater than ten percent (10%) above the closing market price on December 8, 2005. On such date, the
closing market price was $9.93. Accordingly, options to purchase approximately 271,000 shares of the Companys common stock became exercisable on December 9, 2005 as a result of this acceleration. These options had exercise prices ranging
from $10.99 to $17.62 per share. The decision to accelerate the vesting of these stock options was made primarily to reduce the total non-cash compensation expense that would have been recorded in the Companys statement of operations in future
periods as a result of the adoption of SFAS No. 123(R) in 2006.
The Company granted 54,962 restricted stock awards to employees under the terms of the 2006 Stock Incentive Plan for the year ended December 31,
2007. The restricted stock awards vest annually over four years from the date of grant subject to the recipient remaining a service provider through the applicable vesting dates. Compensation expense for restricted stock awards is measured at fair
value on the date of grant based on the
65
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(7)
|
Stockholders Equity
(continued)
|
number of shares granted and the quoted market closing price of the Companys common stock. Such value is recognized as expense over the vesting period
of the award, net of estimated forfeitures. The weighted-average grant-date fair value of restricted stock granted in 2007 was $9.79 per share.
As of December 31, 2007, there was approximately $374,000 of total unrecognized compensation expense related to restricted stock awards, which is
expected to be recognized over a weighted-average period of 3.59 years. In 2007 the Company recorded compensation charges of approximately $42,000 related to restricted stock awards.
Restricted stock activity under the 2006 Stock Incentive Plan for 2007 is as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
average
grant date
fair value
|
|
|
|
Outstanding at December 31, 2006, nonvested
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
Granted
|
|
54,962
|
|
|
|
9.79
|
Vested
|
|
|
|
|
|
|
Forfeited
|
|
(481
|
)
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007, nonvested
|
|
54,481
|
|
|
$
|
9.79
|
|
|
|
|
|
|
|
(c)
|
Employee Stock Purchase Plan
|
On May 24, 2006, at the Companys 2006 Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the
Companys Amended and Restated Employee Stock Purchase Plan (ESPP) increasing the number of shares reserved for issuance by 50,000 to a total of 450,000. The Board of Directors of the Company had approved the amendment on February 22,
2006, subject to shareholder approval. Under the ESPP, the Company is authorized to issue up to 450,000 shares of common stock, of which 51,202 shares remain available as of December 31, 2007.
The Employee Stock Purchase Plan (the ESPP) covers substantially
all of the Companys employees in the United States and Denmark. Under the terms of the ESPP, eligible employees can elect to have up to six percent of their pre-tax compensation on a semi-annual basis withheld to purchase shares of the
Companys common stock. The ESPP allows eligible employees the right to purchase the Companys common stock on a semi-annual basis at 85% of the market price at the end of each purchase period. During 2007, 2006 and 2005, 27,062, 10,000,
and 24,122 shares, respectively, were issued under this plan. The Company utilizes the Black-Scholes option-pricing model to calculate the fair value of these discounted purchases. The fair value of the 15% discount is recognized as compensation
expense over the purchase period. The Company applies a graded vesting approach because the ESPP provides for multiple purchase periods and is, in substance, a series of linked awards. In 2007 and 2006, the Company recorded compensation charges of
approximately $49,000 and $31,000, respectively, related to the ESPP. During 2007, 2006 and 2005, cash received under the ESPP was approximately $262,000, $178,000 and $192,000, respectively.
66
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
Income tax expense for the years ended December 31, 2007, 2006 and 2005 attributable to income from operations is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(46
|
)
|
|
$
|
|
|
|
$
|
(46
|
)
|
State
|
|
|
67
|
|
|
|
|
|
|
|
67
|
|
Foreign
|
|
|
76
|
|
|
|
147
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97
|
|
|
$
|
147
|
|
|
$
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
70
|
|
|
$
|
|
|
|
$
|
70
|
|
State
|
|
|
67
|
|
|
|
|
|
|
|
67
|
|
Foreign
|
|
|
212
|
|
|
|
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
349
|
|
|
$
|
|
|
|
$
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
61
|
|
|
$
|
105
|
|
|
$
|
166
|
|
State
|
|
|
|
|
|
|
15
|
|
|
|
15
|
|
Foreign
|
|
|
112
|
|
|
|
(4
|
)
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
173
|
|
|
$
|
116
|
|
|
$
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actual income tax
expense differs from the expected income tax expense computed by applying the United States Federal corporate income tax rate of 34% to income before taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Computed expected tax expense
|
|
$
|
933
|
|
|
$
|
1,369
|
|
|
$
|
1,095
|
|
Decrease in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax expense, net of federal benefit
|
|
|
44
|
|
|
|
44
|
|
|
|
|
|
Non-deductible expenses
|
|
|
31
|
|
|
|
76
|
|
|
|
22
|
|
Foreign tax rate and regulation differential
|
|
|
|
|
|
|
(43
|
)
|
|
|
(27
|
)
|
Decrease of valuation reserve resulting from tax strategy revaluation
|
|
|
|
|
|
|
|
|
|
|
120
|
|
Adjustments to operating loss carry-forwards
|
|
|
162
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(926
|
)
|
|
|
(1,097
|
)
|
|
|
(921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax expense
|
|
$
|
244
|
|
|
$
|
349
|
|
|
$
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of
results of operations before income taxes, determined by tax jurisdiction, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
United States
|
|
$
|
1,868
|
|
$
|
3,304
|
|
$
|
2,821
|
Denmark
|
|
|
875
|
|
|
720
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,743
|
|
$
|
4,024
|
|
$
|
3,220
|
|
|
|
|
|
|
|
|
|
|
67
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(8) Income Taxes
(continued)
The tax effects of temporary differences that give rise to significant portions of deferred tax
assets and liabilities for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, due to allowance for doubtful accounts
|
|
$
|
291
|
|
|
$
|
393
|
|
Inventories
|
|
|
440
|
|
|
|
489
|
|
Operating loss carry-forwards
|
|
|
4,925
|
|
|
|
6,470
|
|
Stock compensation expense
|
|
|
725
|
|
|
|
343
|
|
Intangibles due to differences in amortization
|
|
|
127
|
|
|
|
152
|
|
Federal tax credit carry-forwards
|
|
|
598
|
|
|
|
285
|
|
State tax credit carry-forwards
|
|
|
326
|
|
|
|
245
|
|
Accrued expenses
|
|
|
356
|
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
7,788
|
|
|
|
8,846
|
|
|
|
|
Less valuation allowance
|
|
|
(4,024
|
)
|
|
|
(4,950
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
3,764
|
|
|
|
3,896
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Property and equipment, due to differences in depreciation
|
|
|
(413
|
)
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
3,351
|
|
|
$
|
3,499
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2007. approximately $17,000 of the Companys net deferred tax asset is attributable to future deductible amounts within the Danish tax jurisdiction for the Companys wholly owned subsidiary located in Denmark.
As of December 31, 2007, the Company had federal net operating loss
carry-forwards available to offset future taxable income of approximately $13.6 million. The Company also had state net operating loss carry-forwards available to offset future state taxable income of approximately $6.6 million. The federal net
operating loss carry-forwards expire in years 2021 through 2027. State net operating loss carry-forwards expire in years 2008 through 2012. The tax benefit related to approximately $5.2 million of federal and approximately $3.3 million of state net
operating loss carry-forwards will be recorded to additional paid-in capital when utilized.
As of December 31, 2007, the Company had research and development tax credit carry-forwards in the amount of $151,000 that expire in years 2008 through 2012, and foreign tax credit carry-forwards in the amount of
$345,000 that expire in years 2015 through 2017. The Company also had alternative minimum tax credits of $102,000 that have no expiration date. As of December 31, 2007, the Companys state tax credit carry-forwards available to reduce
future state tax expense were approximately $326,000. These state tax credit carry-forwards expire in years 2008 through 2012.
The Companys ability to utilize these net operating loss carry-forwards and credits may be limited in the future if the Company experiences an
ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when the ownership percentages of 5% or greater stockholders changes by more than 50% over a three-year period.
68
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(8) Income Taxes
(continued)
For the years ended December 31, 2007 and 2006 the Company generated net income of $2.5 million
and $3.7 million, respectively. In assessing the realizability of its net deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The ultimate
realization of net deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2007 and 2006, the Company has recorded a valuation
allowance against a portion of its deferred tax assets because it believes that, after considering all of the available objective evidence, including available tax planning strategies, historical and prospective results of operations, with greater
weight given to historical evidence, it is more likely than not that a portion of the asset will not be realized. The amount of valuation allowance decreased by approximately $900,000 from December 31, 2006 to approximately $4.0 million as of
December 31, 2007. The amount of valuation allowance decreased by approximately $1.1 million from December 31, 2005 to approximately $5.0 million as of December 31, 2006. Should the Company generate net income in 2008 and project net income for
2009 and beyond, the Company may determine, after considering all available objective evidence, that it is more likely than not that all of its net deferred tax asset would be realized. Should that determination be made, the Company would reverse
all or a portion of its deferred tax asset valuation allowance at such time and recognize a reduction of income tax expense (as of December 31, 2007 the amount of any reduction which would impact income tax expense was approximately $2.1
million). In addition, as a portion of the Companys deferred tax asset was generated from excess tax deductions from share-based payment awards, a portion of such valuation allowance reversal would be recorded to additional paid-in capital
when the deduction reduces taxes payable (as of December 31, 2007 such amount would have been $1.9 million).
The Companys tax planning strategy provides a basis for the realization of a portion of its total domestic net deferred tax assets as of
December 31, 2007 and 2006. Specifically, as of December 31, 2007 and 2006, the Company has approximately $3.3 million of U.S. net deferred tax assets, which consist of federal net operating loss carry-forwards available to offset future
taxable income. The Companys strategy to utilize these assets is based upon its ability to sell its property located in Middletown, Rhode Island for the express purpose of generating taxable income to utilize these loss carry-forwards before
they expire. This tax strategy is not an action that the Company ordinarily would take but would take, if necessary, to realize tax benefits prior to expiration. The U.S. deferred tax asset as of December 31, 2007 of approximately $3.3 million
is derived from the estimate that the property sale would generate approximately $8.5 million in net taxable gains, should the Company be required to execute on its strategy to preserve its net deferred tax assets. Because the realizable value of
the Companys deferred tax assets is derived from the fair market valuation of the Middletown property, future tax expense and/or benefit are highly correlated to changes in property values in Rhode Island.
The Companys policy is that undistributed earnings of its foreign
subsidiary are indefinitely reinvested and, accordingly, no related provision for U.S. federal and state income taxes has been provided. Upon distribution of those earnings in the form of dividends or otherwise, the Company will be subject to
both U.S. income taxes (less foreign tax credits) and withholding taxes in Denmark. The amount of taxes attributable to the undistributed earnings is not practicably determinable.
The Company adopted the provisions of FIN No. 48 effective January 1, 2007. The Company did not have any material
unrecognized tax benefits at January 1, 2007 and December 31, 2007. The Companys policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company files United States
Federal, state and Danish income tax returns. In general, the statute of limitations with respect to the Companys United States Federal income taxes has expired for years prior to 2004, and the relevant state statutes vary. However, preceding
years remain open to examination by United States Federal and
69
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(8) Income Taxes
(continued)
state taxing authorities to the extent of future utilization of net operating losses and research and development tax credits generated in each preceding
year. The Company generally is no longer subject to income tax examinations by the Danish tax authorities for years before 2004.
The Company has a 401(k) Plan (the Plan) for all eligible employees. Participants may defer a portion of their pre-tax earnings subject to limits
determined by the Internal Revenue Service. Participants age 50 or older may be eligible to make additional contributions. As of December 31, 2007, the Company matches one half of the first 4% contributed by the Plan participants. The
Companys contributions vest over a four-year period from the date of enrollment in the Plan. Total Company matching contributions were approximately $328,000, $266,000 and $144,000 for the years ended December 31, 2007, 2006, and 2005,
respectively. In addition, the Company may make contributions to the Plan at the discretion of the Compensation Committee of the Board of Directors. There were no discretionary contributions in 2007, 2006, and 2005.
(10)
|
Business and Credit Concentrations
|
Significant portions of the Companys net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net sales to foreign customers outside the U.S. and Canada
|
|
25.0
|
%
|
|
23.4
|
%
|
|
18.8
|
%
|
For the years ended
December 31, 2007, 2006, and 2005, no single customer accounted for 10% or more of the Companys consolidated net sales.
Under common operational management, the Company designs, develops, manufactures and markets its navigation, guidance and stabilization and mobile
communication products for use in a wide variety of applications. Products are generally sold directly to third-party consumer electronic dealers and retailers, consumer manufacturers, government contractors or directly to U.S. and other foreign
government agencies. Primarily, sales originating in North America consist of sales within the United States and Canada and, to a lesser extent, Mexico, Asia/Pacific and some Latin and South American countries. North American sales also include all
guidance and stabilization product sales throughout the world. Sales originating from the Companys Denmark subsidiary principally consist of sales into all European countries, both inside and outside the European Union, as well as Africa, the
Middle East, India and all countries in Asia.
The Company
operates in two geographic segments, exclusively in the mobile communications, navigation and guidance equipment industry, which it considers to be a single business activity. The Company has two primary product categories: mobile communication and
guidance and stabilization. Mobile communication sales and services include automotive, marine and land mobile communication equipment, such as satellite-based telephone, television and broadband Internet connectivity services. Guidance and
stabilization sales and services include sales of commercial marine and defense-related navigation, guidance and stabilization equipment based upon digital compass and fiber optic sensor technology. Guidance and stabilization sales also include
development contract revenue.
70
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(11) Segment Reporting
(continued)
The following table summarizes information regarding the Companys operations by geographic
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Originating From
|
|
Year ended December 31, 2007
|
|
North
America
|
|
|
Europe
|
|
|
Total
|
|
Mobile communication sales to the United States and Canada
|
|
$
|
43,424
|
|
|
$
|
|
|
|
$
|
43,424
|
|
Mobile communication sales to Europe
|
|
|
681
|
|
|
|
12,302
|
|
|
|
12,983
|
|
Mobile communication sales to other geographic areas
|
|
|
527
|
|
|
|
3,717
|
|
|
|
4,244
|
|
Guidance and stabilization sales to the United States and Canada
|
|
|
17,248
|
|
|
|
|
|
|
|
17,248
|
|
Guidance and stabilization sales to Europe
|
|
|
2,018
|
|
|
|
|
|
|
|
2,018
|
|
Guidance and stabilization sales to other geographic areas
|
|
|
998
|
|
|
|
|
|
|
|
998
|
|
Intercompany sales
|
|
|
9,847
|
|
|
|
|
|
|
|
9,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
74,743
|
|
|
|
16,019
|
|
|
|
90,762
|
|
Eliminations
|
|
|
(9,847
|
)
|
|
|
|
|
|
|
(9,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
64,896
|
|
|
$
|
16,019
|
|
|
$
|
80,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net income
|
|
$
|
1,847
|
|
|
$
|
652
|
|
|
$
|
2,499
|
|
Depreciation and amortization
|
|
$
|
2,106
|
|
|
$
|
33
|
|
|
$
|
2,139
|
|
Total assets
|
|
$
|
88,064
|
|
|
$
|
3,506
|
|
|
$
|
91,570
|
|
|
|
|
|
Sales Originating From
|
|
Year ended December 31, 2006
|
|
North
America
|
|
|
Europe
|
|
|
Total
|
|
Mobile communication sales to the United States and Canada
|
|
$
|
42,302
|
|
|
$
|
|
|
|
$
|
42,302
|
|
Mobile communication sales to Europe
|
|
|
503
|
|
|
|
10,096
|
|
|
|
10,599
|
|
Mobile communication sales to other geographic areas
|
|
|
678
|
|
|
|
2,531
|
|
|
|
3,209
|
|
Guidance and stabilization sales to the United States and Canada
|
|
|
18,197
|
|
|
|
|
|
|
|
18,197
|
|
Guidance and stabilization sales to Europe
|
|
|
2,353
|
|
|
|
|
|
|
|
2,353
|
|
Guidance and stabilization sales to other geographic areas
|
|
|
2,313
|
|
|
|
|
|
|
|
2,313
|
|
Intercompany sales
|
|
|
7,043
|
|
|
|
85
|
|
|
|
7,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
73,389
|
|
|
|
12,712
|
|
|
|
86,101
|
|
Eliminations
|
|
|
(7,043
|
)
|
|
|
(85
|
)
|
|
|
(7,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
66,346
|
|
|
$
|
12,627
|
|
|
$
|
78,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net income
|
|
$
|
3,161
|
|
|
$
|
513
|
|
|
$
|
3,674
|
|
Depreciation and amortization
|
|
$
|
1,968
|
|
|
$
|
36
|
|
|
$
|
2,004
|
|
Total assets
|
|
$
|
85,896
|
|
|
$
|
2,528
|
|
|
$
|
88,424
|
|
|
|
|
|
Sales Originating From
|
|
Year ended December 31, 2005
|
|
North
America
|
|
|
Europe
|
|
|
Total
|
|
Mobile communication sales to the United States and Canada
|
|
$
|
39,064
|
|
|
$
|
|
|
|
$
|
39,064
|
|
Mobile communication sales to Europe
|
|
|
|
|
|
|
8,677
|
|
|
|
8,677
|
|
Mobile communication sales to other geographic areas
|
|
|
|
|
|
|
1,316
|
|
|
|
1,316
|
|
Guidance and stabilization sales to the United States and Canada
|
|
|
18,773
|
|
|
|
|
|
|
|
18,773
|
|
Guidance and stabilization sales to Europe
|
|
|
2,918
|
|
|
|
|
|
|
|
2,918
|
|
Guidance and stabilization sales to other geographic areas
|
|
|
510
|
|
|
|
|
|
|
|
510
|
|
Intercompany sales
|
|
|
5,771
|
|
|
|
22
|
|
|
|
5,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
67,036
|
|
|
|
10,015
|
|
|
|
77,051
|
|
Eliminations
|
|
|
(5,771
|
)
|
|
|
(22
|
)
|
|
|
(5,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
61,265
|
|
|
$
|
9,993
|
|
|
$
|
71,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net income
|
|
$
|
2,640
|
|
|
$
|
291
|
|
|
$
|
2,931
|
|
Depreciation and amortization
|
|
$
|
1,929
|
|
|
$
|
29
|
|
|
$
|
1,958
|
|
Total assets
|
|
$
|
80,085
|
|
|
$
|
2,245
|
|
|
$
|
82,330
|
|
71
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(12)
|
Share Buyback Program
|
On July 26, 2007, the Companys Board of Directors authorized a program to repurchase up to one million shares of the Companys common
stock. The repurchase program is funded using the Companys existing cash, marketable securities and future cash flows. Under the repurchase program, the Company, at managements discretion, may repurchase shares on the open market from
time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares, price, market conditions, alternative uses of capital, and
applicable regulatory requirements. The program may be modified, suspended or terminated at any time without prior notice. The repurchase program has no expiration date. There were no other repurchase programs outstanding during the year ended
December 31, 2007, and no repurchase programs expired during the period.
The Company repurchased 241,000 shares of its common stock in the twelve month period ended December 31, 2007 under the program at a cost of approximately $2.2 million.
The Company and certain of its officers were defendants in a class action lawsuit in the U.S. District Court for the District of Rhode Island. The suit
asserted 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 October 1, 2003 to July 2, 2004 and sought certain legal remedies, including compensatory damages. The Teamsters Affiliates Pension Plan was appointed lead plaintiff. This matter consolidated 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. On January 25, 2008,
the U.S. District Court of Rhode Island, for purposes of effecting a settlement, certified a settlement class, granted final approval of the settlement and entered an order dismissing with prejudice all claims that were or could have been brought in
the action.
On August 16, 2004, Hamid Mehrvar filed a
shareholders derivative action in the Rhode Island State Superior Court for Newport County against KVH and certain of its officers and directors. The amended complaint asserted state law claims on KVHs behalf arising between
October 1, 2003 and the then-current time 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 KVH commence litigation for the same acts alleged in his complaint against the directors and senior officers who served during the period
October 1, 2003 to the then-current time. On March 1, 2006, Mehrvar filed a shareholders derivative action in the Rhode Island State Superior Court for Providence County against KVH and certain of its officers and directors. The
complaint asserted state law claims on KVHs behalf arising between October 1, 2003 and the then-current time in connection with the allegations set forth in the class action consolidated complaint in the U.S. District Court described
above and sought certain legal and equitable remedies, including restitution from KVHs directors and officers and corporate governance changes. On June 30, 2006, defendants moved to dismiss the complaint on the basis that plaintiffs
complaint failed to adequately allege that demand was wrongfully refused. The motion to
72
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(13)
|
Legal Matters
(continued)
|
dismiss has been voluntarily withdrawn without prejudice to its refiling at a later date. On November 19, 2007, the Rhode Island State Superior Court
for Providence County granted final approval of the settlement of this action and entered an order dismissing with prejudice all claims that were brought in the action.
On June 20, 2005, Yemin Ji filed a shareholders derivative action in the U.S. District Court for the District of Rhode Island
against KVH and certain of its officers and directors, asserting certain federal and state law claims on KVHs behalf arising between October 1, 2003 and the then-current time 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 sought certain legal and equitable remedies, including restitution from KVHs directors and officers and corporate governance changes. On
August 23, 2005, KVH 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, 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. On January 25, 2008, after agreeing with Ji to settle the action, KVH stipulated with Ji to a dismissal of the appeal with prejudice; on January 29, 2008 the
U.S. Court of Appeals for the First Circuit ordered that the appeal be dismissed and entered final judgment.
On July 26, 2007, KVH entered into agreements to settle each of these three matters. Pursuant to the terms of the settlements, plaintiffs and
their attorneys received an aggregate cash payment of $5.3 million, all of which has been paid by KVHs insurance carrier. KVH also agreed to adopt, formalize, or reconfirm adherence to certain corporate governance policies and
practices. 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; on November 19, 2007, the court granted
final approval of the settlement of the Mehrvar shareholder derivative action and entered an order dismissing with prejudice all claims that were brought in the action. 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; on January 25, 2008, the U.S. District Court for the District of Rhode Island granted final
approval of the settlement of the class action lawsuit and entered an order dismissing with prejudice all claims that were or could have been brought in the action.
Additionally, in the ordinary course of business, KVH is a party to inquiries, legal proceedings and claims including, from
time to time, disagreements with vendors and customers.
73
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2007, 2006 and 2005
(all tabular amounts in thousands except share and per share amounts)
(14)
|
Quarterly Financial Results (Unaudited)
|
Financial information for interim periods was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
(in thousands, except per share amounts)
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
20,397
|
|
|
$
|
23,247
|
|
|
$
|
17,566
|
|
|
$
|
19,705
|
Gross profit
|
|
|
7,593
|
|
|
|
9,865
|
|
|
|
6,987
|
|
|
|
8,021
|
Income tax (expense) benefit
|
|
|
(178
|
)
|
|
|
(332
|
)
|
|
|
93
|
|
|
|
194
|
Net income (loss)
|
|
$
|
57
|
|
|
$
|
1,501
|
|
|
$
|
(20
|
)
|
|
$
|
962
|
Income per share (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.00
|
|
|
$
|
0.10
|
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
20,289
|
|
|
$
|
21,968
|
|
|
$
|
19,291
|
|
|
$
|
17,426
|
Gross profit
|
|
|
8,820
|
|
|
|
8,595
|
|
|
|
7,574
|
|
|
|
6,816
|
Income tax expense
|
|
|
(89
|
)
|
|
|
(229
|
)
|
|
|
(32
|
)
|
|
|
|
Net income
|
|
$
|
1,254
|
|
|
$
|
1,686
|
|
|
$
|
626
|
|
|
$
|
108
|
Income per share (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
0.11
|
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Income (loss) per share is computed independently for each of the quarters. Therefore, the income (loss) per share for the four quarters may not equal the annual income per share
data.
|
74