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ADTRANFORM 10−K
KVH INDUSTRIES INC \DE\ − KVHI
Filed: March 16, 2007 (period: December 31, 2006)
Annual report which provides a comprehensive overview of the company for the past year
Table of Contents
PART I
Page
Item 1.
Business 1
PART I
ITEM 1. Business
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2. Properties
ITEM 3.
ITEM 4. Submission of Matters to a Vote of Security Holders
Legal Proceedings
PART II
ITEM 5. Market for Registrant s Common Equity, Related Stockholder Matters and
Issuer Purchases of E
ITEM 6. Selected Financial Data
ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
ITEM 8.
Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matt
ITEM 13. Certain Relationships and Related Transactions and Director Independence
ITEM 14. Principal Accountant Fees and Services
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
SIGNATURES
EX−23.1 (CONSENT OF KPMG LLP)
EX−31.1 (CERTIFICATION OF CEO PURSUANT TO SECTION 302)
EX−31.2 (CERTIFICATION OF CFO PURSUANT TO SECTION 302)
EX−32.1 (CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906)
Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−K
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended: December 31, 2006
OR
¤ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0−28082
KVH Industries, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
05−0420589
(IRS Employer Identification Number)
50 Enterprise Center, Middletown, RI 02842
(Address of Principal Executive Offices)
(401) 847−3327
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well−known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¤ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes¤ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No¤
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S−K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10−K or any amendment to this Form
10−K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non−accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b−2 of the Exchange Act.
Large accelerated filer¤
Accelerated filer x
Non−acceleratedfiler¤
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b−2 of the Exchange Act). Yes¤ No x
As of June 30, 2006, the aggregate market value of the registrant’s common stock held by non−affiliates of the registrant was $158,457,499 based on the closing
sale price of $11.66 per share as reported on the Nasdaq Global Market.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock.
Class
Common Stock, $0.01 par value per share
DOCUMENTS INCORPORATED BY REFERENCE
Document
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Outstanding
at March 14,
2007
14,951,872
shares
Parts Into
Which
Incorporated
Definitive Proxy Statement for the 2007 Annual Meeting
of Stockholders
Part III
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
INDEX TO FORM 10−K
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART I
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Signatures
PART IV
i
Page
1
9
21
21
22
23
24
25
26
39
39
39
39
42
42
42
42
42
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Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
ITEM 1.
Business
Forward−Looking Statements
PART I
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. Management’s 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, TracPhone and TracNet systems, that enable customers to receive
live digital television, telephone and Internet services in their automobiles, recreational vehicles (RV) and marine vessels while in motion via satellite and
wireless services. We sell our mobile communications products through an extensive international network of distributors and retailers worldwide.
Our defense products include tactical navigation systems that provide uninterrupted navigation and pointing information in a broad range of military
vehicles, including tactical trucks (HMMWVs) and light armored vehicles. We also offer precision fiber optic gyro−based systems that help stabilize platforms,
such as gun turrets and radar units, and provide guidance for munitions. In addition, we are currently investigating opportunities to apply our mobile
communications expertise to military applications that require affordable, high−bandwidth mobile connections and secure communications between vehicles. We
sell our defense 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 live media and information on the move. Our objective is to connect mobile users to the
satellite TV, communications, and Internet services they wish to use by utilizing the best available and most appropriate data sources, such as satellite broadcasts
or wireless
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Table of Contents
service. We have developed a comprehensive family of products marketed under the TracVision, TracPhone and TracNet brand names that use a range of
technologies to address the unique needs of our communications markets. Our products use sophisticated robotics, stabilization and control software, sensing
technologies, 12−volt 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 antenna’s 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 satellite’s 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.
Access to mobile, two−way Internet, e−mail, and MSN TV communication. We currently support global broadband Internet access in the marine
marketplace through the use of our TracPhone satellite communication antennas and the Inmarsat satellite services. In August 2006 we began shipping our
TracNet 100 mobile Internet system suitable for cars, recreational vehicles, and boats in cooperation with Microsoft’s MSN TV division. The TracNet 100
system uses evolution−data optimized (EVDO) high−speed cellular data services to provide two−way access to the Internet and the MSN TV service. EVDO is
currently available in more than 240 metropolitan areas and continues to expand. Should users be outside the EVDO coverage area, a slower speed cellular
service continues to provide uninterrupted accessibility. For recreational vehicles and marine vessels that may travel beyond the range of a typical EVDO
antenna, we offer external, amplified antennas to increase the reception range of the mobile Internet system.
Commitment to customer support. Our Certified Support Network (CSN) offers our TracVision, TracPhone and TracNet 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.
Defense
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 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 earth’s magnetic field rather than detect satellite
signals from the global positioning system (GPS), they are not susceptible to GPS
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jamming devices. Our fiber optic gyro−based 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.
Compatibility with a wide range of vehicles and platforms. We 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. We also
offer several fiber optic gyro−based products that support stabilization applications, such as stabilization of turrets, optical targeting systems, radar and
communication antennas in both the military and commercial markets.
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 vehicle’s 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 vehicle’s 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, TracPhone and TracNet products, which offer satellite television and voice, fax, data and
Internet communications to customers in the land mobile and marine markets. We began to offer both our first KVH−branded mobile satellite communications
product, the TracPhone K2, and our first mobile satellite TV antenna, the TracVision, in 1995. Since that time, we have expanded our product offerings to
include more than 15 different mobile satellite communications products. Our mobile satellite communications antennas are housed in impact−resistant domes to
protect them from inclement weather or debris.
Land. We design, manufacture, and sell a range of TracVision satellite TV antenna systems for use on a broad array of vehicles. Our land satellite business
comprises two principal vehicle classes and opportunities: automotive and RV/truck.
In the automotive market, we began offering the TracVision A7 in August 2006 as a successor to our original TracVision A5 low profile satellite TV
system. The 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 communications 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 vehicle’s roof rack or directly to the vehicle’s roof, making it practical for use aboard minivans,
SUVs and other passenger vehicles. The antenna’s hybrid phased−array technology integrates 260 small antenna elements across a flat surface, mechanically
rotates that surface horizontally and uses an electronic “lens” to bend 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 DIRECTV’s Total Choice Mobile satellite TV programming package, which is specifically promoted for automotive applications. Local channels
and network
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Table of Contents
programming are also available for the first time as an option for TracVision A7 users as a result of the system’s 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.
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 R−series, offer automatic satellite switching and integrated compatibility with the international DVB (Digital
Video Broadcast) standard. The 14.5−inch high in−motion TracVision R5 and stationary automatic TracVision R4, which began shipping in December 2005, use
an elliptical parabolic antenna to reduce the antenna’s profile to address height restrictions on the road. The in−motion TracVision R6, which began shipping in
April 2006, is the flagship product of our RV−specific offerings. This new system incorporates a number of innovations, including a high−efficiency antenna that
reduces the product profile to 12.5 inches high while offering reception comparable to the larger systems, 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 antenna’s radome is not a concern.
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 14.5 inch, 18 inch, and 24−inch diameter round antennas. Our
largest marine satellite TV system is the TracVision G8, which includes a 32−inch carbon fiber antenna for greater range and efficiency. In October 2005, we
introduced the TracVision M3, which has a 14.5−inch diameter antenna and which we believed to be the world’s smallest stabilized marine satellite TV system.
In February 2007, the TracVision M3 was replaced by three new variations on this system, including the lower−cost “at anchor” TracVision M2; the
DIRECTV−optimized, in−motion TracVision M3 ST; and the deluxe TracVision M3 DX, which supports HDTV programming and regional satellite TV services
around the globe. Historically, marine satellite TV use has generally been limited to vessels longer than 40 feet due to the size of the antennas themselves.
However, with reception comparable to larger 18−inch diameter antennas, our high−efficiency TracVision M2, M3 ST, and M3 DX are designed for vessels 25
to 40 feet in length, which we believe is a largely untapped market opportunity.
Our TracPhone products provide in−motion access to global satellite communications offered by Inmarsat, a satellite service provider that supports links
for phone, fax and data communications as fast as 128 Kbps, or kilobits per second. The TracPhone F77, F55 and F33 antennas use the Inmarsat Fleet 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 F77, F55 and F33 are manufactured by Thrane & Thrane A/S of Denmark and distributed exclusively by us in North America
under the KVH TracPhone label and distributed in other markets on a non−exclusive basis.
Broadband Internet and MSN TV Products. In addition to the global Internet access offered by our Inmarsat−compatible TracPhone systems, we also
manufacture Internet−specific products for boats, RVs, and automobiles. Our TracNet 3.0 product provides mobile broadband Internet access in Europe, where
Internet−via−satellite is a relatively common method for Internet service. TracNet 3.0 uses one of our TracVision antennas to receive broadband downloads of
Internet data and either a cellular or satellite system, such as one of our TracPhone systems, as a return path.
In 2006, we entered into an agreement with Microsoft under which we serve as a distributor of the MSN TV service to the marine, RV, and automotive
markets. In August 2006, we began shipping our TracNet 100 mobile
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Internet receiver with MSN TV service, which provides in−motion access to web browsing, Microsoft Windows Media Player, MSN Mail and MSN Messenger,
digital photo viewing, MSN Video, and MSN Radio with two−way connections made possible by broadband EVDO cellular services. EVDO service is available
in more than 240 markets nationwide, with new markets being added on an ongoing basis. Connection speeds for EVDO service are similar to residential DSL
broadband service, with maximum speeds in excess of 2.4 Mbps and typical speeds of 400 Kbps to 700 Kbps. When EVDO is unavailable, the system
automatically switches to standard 1xRTT data service, which is available in most cellular coverage areas. 1xRTT has a maximum upload and download speed of
144 Kbps, and typical speeds of 50 Kbps to 80 Kbps. An amplified external antenna is used to extend the range of the TracNet 100 in marine and RV
applications in which the vessel or vehicle may move beyond the range of the system’s integrated antenna.
The TracNet 100 also includes WiFi output to provide Internet connectivity to a wide range of WiFi−enabled products. We sell the TracNet 100 through
our existing network of marine, RV, and automotive dealers.
Applying Mobile Communications Expertise to Military Applications. We are also taking steps to leverage our mobile communications expertise by
transferring our proven commercial technology into mobile military applications to support high−bandwidth, two−way communication needs with a militarized,
low−profile antenna system. In addition, we successfully tested a new intra−convoy communication system with the U.S. Army in late 2006. This product has the
potential to serve as an affordable solution to identified gaps in U.S. military convoy operations by offering real−time status, alerts, and navigation data for all
vehicles in a convoy. Additional testing is expected to take place in 2007.
Defense Products
Our defense products include digital compasses for tactical navigation, fiber optic gyros for tactical navigation and stabilization and our inertial
measurement unit for precision guidance of torpedoes and unmanned aerial vehicles. 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.
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 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.
Tactical Navigation. The TACNAV II Fiber Gyro Navigation system is a fiber optic gyro−based navigation and pointing system designed to support a
variety of vehicle and weapons platforms. The system 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.
TACNAV TLS is a digital compass−based tactical navigation and targeting system designed for turreted vehicles, including reconnaissance vehicles,
armored personnel carriers and light armored vehicles. The system offers a range of capabilities, including GPS backup and enhancement, vehicle position, hull
and turret azimuth, navigation displays, and target location.
The TACNAV M100 GMENS, which is sold outside the United States under the name TACNAV Light, is a digital compass−based battlefield navigation
system specifically designed for non−turreted vehicles, such as HMMWVs and trucks. We believe that customers purchase the TACNAV M100 GMENS in part
because of its
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low cost relative to its performance. In September 2003, the TACNAV M100 GMENS was designated by the U.S. Special Operations Command as a standard
product, and in November 2003 the German Army gave the product a similar designation. The TACNAV M100 GMENS offers a range of capabilities, including
GPS backup and enhancement, vehicle position, hull azimuth and navigation displays.
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 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. Navy’s 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 platform’s turning
motion for significantly less cost than competing closed−loop gyros. These products use digital signal processing, or DSP, technology to 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. 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. Army’s Common Remotely Operated
Weapon System (CROWS). Two DSP−3000 gyros are installed in every CROWS turret and provide the image and gun stabilization necessary to ensure that the
weapon remains aimed at its target. The larger, militarized DSP−4000 uses the core DSP−3000 technology in both 1− and 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.
Sales and Marketing
We sell our mobile satellite communications products through an international network of independent retailers, chain stores and distributors, as well as to
manufacturers of marine vessels and recreational 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. We are also pursuing arrangements with automobile manufacturers to include our TracVision
A7 product as optional or standard equipment on the vehicles they manufacture.
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 defense 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.
Backlog
Our backlog was approximately $5.6 million on December 31, 2006, $9.5 million on December 31, 2005, and $8.7 million on December 31, 2004.
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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 defense 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 August 2007 and
January 2024. 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. A description of such claims initiated against us and currently pending is found in this annual report under the heading
“Item 3. Legal Proceedings”. 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 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.
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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, 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. 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 communications equipment, we compete primarily with NaviSystem Marine Electronics Systems Srl, King Controls,
Sea Tel, Inc., and Raymarine. In the marine market for telephone, fax, data and Internet communications equipment and services, we compete with Furuno
Electric Co., Ltd., Globalstar LP, Iridium Satellite LLC, and Japan Radio Company. We also may face additional competition from emerging marine satellite
data services and maritime VSAT solutions.
We serve as a distributor of the MSN TV service to the marine, automotive, and recreational vehicle markets and as such, offer what we believe is a unique
mobile Internet solution. Our TracNet 100 mobile Internet system with MSN TV service competes with such products as single−user EVDO cards for use with
individual laptops; EVDO/WiFi hubs such as those manufactured by Kyocera and Top Global; proposed WiMAX services in urban areas, and
Internet−via−satellite systems such as Inmarsat, Iridium Satellite LLC, Globalstar LP and maritime VSAT.
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 defense navigation, 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 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
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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, 2006, we employed 311 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.
ITEM 1A.
Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors in evaluating our business. If
any of these risks, or other risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business,
financial condition and results of operations could be adversely affected. If that happens, the market price of our common stock could decline.
We have a history of variable operating results and may not be profitable in the future.
Although we generated net income during 2005 and 2006, and in twelve of the last sixteen 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 2005 and 2006. As of
December 31, 2006, we had an accumulated deficit of $10.8 million.
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Shifts in our product sales mix toward our mobile communications products may continue to reduce our overall gross margins.
Our mobile communications products historically have had lower product gross margins than our defense products. During 2006, sales of our defense
products grew at a substantially lower rate than our overall sales growth, resulting in a small decline in our overall gross margin compared with 2005. Although
sales of defense products in each of 2006 and 2005 were slightly higher than the prior year, during 2004, sales of our defense products declined compared to
2003. A continuing shift in our product sales mix toward mobile communications products would likely cause lower gross margins in the future.
Competition may limit our ability to sell our mobile communications products and defense products.
The mobile communications markets and defense navigation, guidance and stabilization markets in which we participate are very competitive, and we
expect this competition to persist and intensify in the future. We may not be able to compete successfully against current and future competitors, which could
impair our ability to sell our products. To remain competitive, we must enhance our existing products and develop new products, and we may have to reduce the
prices of our products. Moreover, new competitors may emerge, and entire product lines may be threatened by new technologies or market trends that reduce the
value of those product lines. For example, improvements in less expensive wireless and cellular technologies may limit demand for land−based satellite
telephone and Internet services. Likewise, emerging services like BGAN and maritime VSAT may be disruptive to existing marine Internet, data, and
communication services that we currently support.
In the defense navigation, 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.
In the market for mobile satellite communications products, we compete with a variety of companies. In the land mobile market for satellite TV
communications equipment, we compete directly with King Controls, MotoSAT, TracStar Systems, Inc., and Winegard Company. There is also potential
competition for sales of satellite TV to the automotive market from RaySat, Audiovox, Sirius Satellite Radio, Winegard, and Delphi.
In the marine market for satellite TV communications equipment, we compete with NaviSystem Marine Electronic Systems Srl, King Controls, Sea Tel,
Inc., and Raymarine. In the marine market for telephone, fax, data and Internet communications equipment, we compete with Furuno Electric Co., Ltd.,
Globalstar LP, Iridium Satellite LLC, and Japan Radio Company.
In the mobile Internet market, we may compete with such products as single−user EVDO cards for use with individual laptops; EVDO/WiFi hubs such as
those manufactured by Kyocera and Top Global; proposed WiMAX services in urban areas; and Internet−via−satellite systems proposed by companies such as
RaySat. Moreover, new competitors may surface in the future. Among the factors that may affect our ability to compete in our markets are the following:
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many of our primary competitors are well−established companies that could have substantially greater financial, managerial, technical, marketing,
personnel and other resources than we do;
product improvements or price reductions by competitors may weaken customer acceptance of 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.
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Customers for TACNAV and our other defense products include the U.S. military and foreign governments, whose purchasing and delivery schedules
and priorities can be unpredictable.
We sell TACNAV and our other defense products to the U.S. military and foreign military and government customers. These customers have unique
purchasing and delivery requirements, which can make sales to these customers unpredictable. Factors that affect their purchasing and delivery decisions include:
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changes in modernization plans for military equipment;
changes in tactical navigation requirements;
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.
These factors can cause substantial fluctuations in sales of TACNAV and our other defense products from period to period. For example, sales of our
TACNAV products declined in the third and fourth quarter of 2006, compared with sales in the comparable periods of 2005. Moreover, TACNAV and most of
our other defense products must meet military quality standards, and our products may not continue to meet existing standards or more rigorous standards
adopted in the future. Any failure to meet military contract specifications may produce delays as we attempt to improve our design, development, manufacturing
or quality control processes. Furthermore, 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 TACNAV and our other defense products generally consist of a few large orders, and the delay or cancellation of a single order could
substantially reduce our net sales.
Unlike our mobile communications products, TACNAV and our other defense products 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. Because our defense products typically have relatively higher product gross margins than our mobile communications products, the loss of
an order for defense products could have a disproportionately adverse effect on our results of operations.
Only a few customers account for a substantial portion of our defense revenues, and the loss of any of these customers could substantially reduce our
net sales.
We derive a significant portion of our defense revenues from a small number of customers, including the U.S. Government. The loss of business from any
of these customers could substantially reduce our net sales and results of operations and could seriously harm our business.
The market for our mobile TV products for minivans, SUVs and other passenger vehicles is still emerging, and our business may not grow as we expect.
The market for our low profile automotive TracVision product is still in the early stage of development, which continues to make it difficult for us to
predict customer demand accurately. For example, although sales of the TracVision grew between 2004 and the end of 2006, the sales trend has been below our
original expectations.
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We believe the success of our low profile TracVision systems will depend upon consumers’ assessment of whether these products meet their expectations
for performance, quality, price and design. For example, the TracVision A7 is designed for use on open roads in the continental United States where there is a
clear view of the transmitting satellite in the southern sky, and it may not perform satisfactorily under other conditions. Among the factors that could affect the
success of the low profile TracVision systems are:
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the performance, price and availability of competing or alternative products and technology relative to the automotive TracVision;
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;
the extent to which high fuel prices and environmental concerns may negatively affect consumer demand for SUVs and other large passenger
vehicles;
difficulties or inconveniences associated with scheduling installation at the point of sale;
customers’ willingness to pay monthly fees for satellite television service in automobiles;
the adoption of laws or regulations that restrict or ban television or other video technology in vehicles;
poor performance arising from improper installation or installation of damaged equipment; and
our limited experience with marketing products to the automotive market, which is substantially larger and more fragmented than our other markets.
The market for mobile Internet services in vehicles and vessels may fail to develop or may be satisfied by alternative technological approaches.
Mobile Internet access is a market that is currently focused primarily on cell phones and Internet−enabled PDAs. We serve as a distributor of the MSN TV
service to the marine, automotive, and RV markets and offer what we believe is a unique mobile Internet solution. Competing products based around high−speed
cellular services are available for single users and in integrated EVDO/WiFi hubs. Other technologies, such as proposed WiMAX networks and
Internet−via−satellite options, such as BGAN and maritime VSAT services, may also displace competing wireless services with regard to range and cost,
preventing us from successfully marketing and selling mobile Internet systems in the mobile marketplace.
We depend on others to provide programming for our TracVision products, and the loss of programming could substantially reduce our sales.
Our TracVision products include only the equipment necessary to receive satellite television services; we do not broadcast satellite television
programming. Instead, customers must obtain programming from another source. We currently offer marine and land mobile TracVision products compatible
with the DIRECTV and DISH Network services in the United States, the ExpressVu service in Canada, Sky Mexico and various other regional services in other
parts of the world. Our low profile automotive TracVision products currently offer access to only the DIRECTV service in the continental United States.
Although DIRECTV is offering its Total Choice Mobile programming package at a price that we think should be attractive to consumers, DIRECTV has no
obligation to continue to offer that package at the current price or at all. If customers become dissatisfied with the programming, pricing, service, availability or
other aspects of any of these satellite television services, or if any one or more of these services becomes unavailable for any reason, we could suffer a substantial
decline in sales of our TracVision products. 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 TracVision products.
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Our TracPhone and TracNet 3.0 products currently depend on satellite services provided by third parties, and any disruption in those services could
adversely affect sales.
We rely on Inmarsat for satellite communications services for our TracPhone products. We rely on Telemar for TracNet 3.0 service in Europe.
Our TracNet 100 mobile Internet system uses high−speed EVDO cellular services offered by Verizon Wireless as well as Microsoft’s MSN TV service.
Should EVDO networks become unavailable, our TracNet 100 would be hampered in its ability to provide two−way Internet access. Likewise, if the status of
MSN TV were to change, customers would no longer be able to access the Internet via the TV screens in their boats, RVs, and cars, a feature that offers KVH a
competitive advantage over other mobile Internet solutions.
If any of our vendors were unable to fulfill their obligations, we would need to seek alternate suppliers or solutions. In that case, we may be required to
retrofit or upgrade hardware and software as necessary to ensure the continued operation of the affected products. We may incur significant delays and expenses
in our efforts to make the necessary changes, and those efforts may be unsuccessful. Moreover, we may not be successful in identifying and entering into
appropriate agreements with replacement suppliers on commercially reasonable terms, which would impair our ability to offer the affected products. Similarly,
we may lose the goodwill of existing customers if any currently installed products cease to work for any extended period. Any such outcome could lead to a
substantial reduction in sales.
Our mobile communications products depend on the availability of third−party satellites, which face significant operational risks and could fail earlier
than their expected useful lives.
Our mobile communications products depend on the availability of programming and services broadcast through satellites owned by third parties. 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. These satellites face significant operational risks during launch and while in orbit. These risks include launch failures, malfunctions that can occur as a
result of satellite manufacturing errors, problems with power or control systems and general failures resulting from the harsh space environment. Moreover, each
satellite has a limited useful life, and the satellite providers make no guarantees that the planned backup systems and capacity will be sufficient to support these
satellite services in the event of a loss or reduction of service. We cannot assure that satellite services compatible with our products will continue to be available
or that such services will continue to be offered at reasonable rates. The accuracy or availability of satellite signals may also be limited by ionospheric or other
atmospheric conditions, intentional or inadvertent signal interference or intentional limitations on signal availability imposed by the satellite provider. A
reduction in the number of operating satellites on any system, the inoperability of any key satellite or the failure of any key satellite or satellites to provide an
accurate or available signal could impair the utility of our products or the growth of current and additional market opportunities.
High fuel prices and environmental concerns may adversely affect sales of our mobile communications products.
Fuel prices have been high and may remain high or increase in the foreseeable future. High fuel prices and environmental concerns tend to have a
disproportionate impact on the larger vehicles and vessels for which our mobile communications products are designed, such as marine vessels, recreational
vehicles and SUVs, because they consume relatively large quantities of fuel. We believe that the increased cost of operating these vehicles and vessels and
environmental concerns have likely had an adverse effect on and may continue to adversely affect, demand for our mobile communications products.
Our effort to enter the automotive OEM market for embedded and factory−installed mobile satellite TV products may not be successful.
During 2005, we announced that we intend to support factory installation of an embedded version of our low profile TracVision mobile satellite TV
antenna for automobiles. In addition, it has been our intent to develop an automotive satellite TV system designed to be integrated within the roof of a vehicle
during the OEM
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manufacturing process. The timetable for potential OEM acceptance of an embedded or factory−installed system is uncertain, however, and our efforts to enter
this market may not be successful. In particular, we must take into account roof and headliner designs, space and weight constraints, environmental requirements,
performance standards, and OEM price requirements, and we may encounter unanticipated difficulties in designing antennas that will satisfy all of the unique
requirements of various vehicle configurations. Because different vehicles may require different designs, our manufacturing efficiency for these embedded or
factory−installed antennas may be lower and we may generate lower margins than for the aftermarket version of the low profile TracVision. In addition, our
success in entering this market will depend in part on the close cooperation of vehicle manufacturers, and we cannot be certain that we will obtain the necessary
cooperation. The expenses we expect to incur in pursuing this market may have an adverse effect on our results of operations.
We expect that others will introduce competing mobile satellite TV antennas and technologies for automobiles.
When we began shipping our original low profile TracVision A5 in September 2003, it was the only commercially available, mobile satellite TV antenna
for use on minivans, SUVs and other passenger vehicles. Any advantage we may have had by being the first to market such a product may erode as others enter
this market. We are aware of announcements made by other companies of their intent to offer competing satellite TV or recorded video content to automobiles,
but to date we have no knowledge of any such products in production and available for retail sale. Competing satellite antenna products may have a slightly
lower profile, and customers may delay purchasing our low profile TracVision in anticipation of the release of any of these products. Competition from any of
these products could impair our ability to sell the new low profile TracVision A7 and may force us to reduce the price of the product. The availability of
pre−recorded video content via personal devices such as the iPod or embedded digital hard drives with downloadable content may also limit demand for live
content in vehicles.
We must achieve additional significant cost reductions for our low profile TracVision to reach our targeted profit margins.
Our product profit margins for our low profile TracVision automotive system have been low since its introduction. Although we have had success in
improving profit margins since the introduction of the low profile TracVision in September 2003, we may be unable to achieve the additional cost reductions
necessary to achieve our overall target profit margins. Although our cost reduction programs include obtaining volume purchasing discounts, sourcing of
components from off−shore suppliers and redesigning certain components using lower cost materials and processes, technological or other challenges may
prevent us from achieving all of the necessary cost reductions. Moreover, if the price of the low profile automotive TracVision is not attractive to a broad range
of customers, we may be forced to further lower the price, which would further impair our product profit margins unless we are able to achieve corresponding
cost reductions.
We may fail to continue to increase the sale of our fiber optic products for commercial uses.
Our fiber optic products have numerous commercial applications where mobile communication, navigation, stabilization and precision pointing are
required. For example, our fiber optic gyros have been used in commercial applications such as train location control and track geometry measurement systems,
industrial robotics, and autonomous or remotely operated vehicles. We may not be successful in further developing and marketing our fiber optic products for
commercial uses, which might limit the overall net sales of these products and limit our profitability accordingly.
We may continue to increase the international scope of our 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 improve our
operating margin performance and overall profitability, we have found it desirable to increase the international scope of our operations. This includes the
increased sourcing of raw materials and manufactured components from foreign countries such as China. We have only limited experience
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in foreign manufacturing, and we might not be successful in implementing or integrating an extended program. In addition, our increased reliance on foreign
manufacturing and/or raw material supply has lengthened our supply chain and increased the risk that a disruption in that supply chain will have a material
adverse affect on our operations and financial performance.
We depend on single manufacturing lines for our products, and any significant disruption in production could impair our ability to deliver our
products.
We currently manufacture and assemble our products using individual production lines for each product category. We have experienced manufacturing
difficulties in the past, and any significant disruption to one of these production lines will require time either to reconfigure and equip an alternative production
line or to restore the original line to full capacity. Some of our production processes are complex, and we may be unable to respond rapidly to the loss of the use
of any production line. For example, our production process uses some specialized equipment and custom molds that may take time to replace if they
malfunction. 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. 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 increase the number of our distribution relationships, it could
significantly reduce or limit our net 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. Moreover, our distributors may operate on low product margins and could give higher priority to
products with higher margins than ours.
Our net sales and operating results could decline due to general economic trends or declines in consumer spending.
Our operating performance depends significantly on general economic conditions. Net sales of our mobile communications products are largely generated
by discretionary consumer spending, and demand for these products could demonstrate slower growth than we anticipate as a result of regional and global
economic conditions. Consumer spending tends to decline during recessionary periods and may decline at other times. Consumers may choose not to purchase
our mobile communications products due to a perception that they are luxury items. As global and regional economic conditions change, including the general
level of interest rates, fluctuating oil prices and demand for durable consumer products, demand for our products could be adversely affected.
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If we are unable to improve our existing mobile communications and defense products and develop new, innovative products, our sales and market
share may decline.
The markets for mobile communications products and defense navigation, guidance and stabilization products are each characterized by rapid
technological change, frequent new product innovations, changes in customer requirements and expectations and evolving industry standards. If we fail to make
innovations in our existing products and reduce the costs of our products, our market share may decline. Products using new technologies, or emerging industry
standards, could render our products obsolete. If our competitors successfully introduce new or enhanced products that eliminate technological advantages our
products may have in a certain market or otherwise outperform our products, or are perceived by consumers as doing so, we may be unable to compete
successfully in the markets affected by these changes. For example, other companies have either announced their intentions or have begun to offer low−profile
in−motion satellite antennas or alternative means for providing mobile entertainment. These products will compete with our low profile TracVision and may
offer more attractive performance, pricing and other features.
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 fail to manage our future growth properly, we may incur unnecessary expenses, and the efficiency of our
operations may decline. To manage our growth effectively, we must, among other things:
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upgrade, expand or re−size our manufacturing facilities and capacity in a timely manner;
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 and chief executive
officer. 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
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countries may impair our ability to compete successfully in international markets and to meet the service and support needs of our customers in countries where
we have no infrastructure. We are subject to a number of risks associated with our international business activities, which may increase our costs and require
significant management attention. These risks include:
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technical challenges we may face in adapting our mobile communication products to function with different satellite services and technology in use in
various regions around the world, including multiple satellite services in Europe;
satisfaction of international regulatory requirements and procurement of any necessary licenses or permits;
restrictions on the sale of certain defense products to foreign military and government customers;
additional costs and delays associated with obtaining approvals and licenses under applicable export regulations;
increased costs of providing customer support in multiple languages;
more limited protection of our intellectual property;
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.
If we are unable to maintain adequate product liability insurance, we may have to pay significant monetary damages in a successful product liability
claim against us.
The development and sale of mobile satellite communication products and defense products entail an inherent risk of product liability. For example,
consumers may ignore laws or warnings not to watch satellite television while driving and, as a result, may become involved in serious accidents, for which they
may seek to hold us responsible. Product liability insurance is generally expensive for companies such as ours. Accordingly, we maintain only limited product
liability insurance coverage for our products. Our current levels of insurance or any insurance we may subsequently obtain may not provide us with adequate
coverage against potential claims, such as claims by those involved in accidents caused by drivers watching television. In addition, we may be unable to renew
our policies on commercially reasonable terms or obtain additional product liability insurance on acceptable terms, if at all. If we are exposed to product liability
claims for which we have insufficient insurance, we may be required to pay significant damages, which could seriously harm our financial condition and results
of operations.
Exports of certain defense products are subject to the International Traffic in Arms Regulations and require a license from the U.S. Department of
State prior to shipment.
We must comply with the United States Export Administration Regulations and the International Traffic in Arms Regulations, or ITAR. Our products that
have military or strategic applications are on the munitions list of the ITAR and require an individual validated license in order to be exported to certain
jurisdictions. Any changes in export regulations may further restrict the export of our products, and we may cease to be able to procure export licenses for our
products under existing regulations. The length of time required by the licensing process can vary, potentially delaying the shipment of products and the
recognition of the corresponding revenue. Any restriction on the export of a significant product line or a significant amount of our products could cause a
significant reduction in net sales.
17
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Table of Contents
Our business may suffer if we cannot protect our proprietary technology.
Our ability to compete depends significantly upon our patents, our source code and our other proprietary technology. The steps we have taken to protect
our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. Our patents could be challenged,
invalidated or circumvented, and the rights we have under our patents could provide no competitive advantages. Existing trade secrets, copyright and trademark
laws offer only limited protection. In addition, the laws of some foreign countries do not protect our proprietary technology to the same extent as the laws of the
United States, which could increase the likelihood of misappropriation. Furthermore, other companies could independently develop similar or superior
technology without violating our intellectual property rights. Any misappropriation of our technology or the development of competing technology could
seriously harm our competitive position, which could lead to a substantial reduction in net sales.
If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, distract the
attention of management, and there can be no assurance that we would prevail.
Also, we have delivered certain technical data and information to the U.S. government under procurement contracts, and it may have unlimited rights to
use that technical data and information. There can be no assurance that the U.S. government will not authorize others to use that data and information to compete
with us.
Pending securities class action lawsuits could have a material adverse effect on our financial condition and results of operations.
We and certain of our officers are defendants in a class action lawsuit in the U.S. District Court for the District of Rhode Island. The suit asserts claims
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b−5 thereunder, as well as claims under Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933, on behalf of purchasers of our securities between October 1, 2003 and July 2, 2004. We and certain of our directors and officers are also
defendants in a shareholder’s derivative action in the Rhode Island State Superior Court for Providence County. This suit asserts state law claims on our behalf
between October 1, 2003 and the present arising from the allegations set forth in the class action complaint in the U.S. District Court described above. We and
certain of our directors and officers are also appellees in an appeal of a dismissal of a shareholder’s derivative action by the U.S. District Court for the District of
Rhode Island. This suit asserted federal and state claims on our behalf between October 1, 2003 and the present arising from the same allegations set forth in the
class action complaint described above. We intend to vigorously defend ourselves against these claims. There can be no assurance, however, that we will not
have to pay significant damages or amounts in settlement. An unfavorable outcome or prolonged litigation could materially harm our business. Litigation of this
nature is expensive and time−consuming and diverts the time and attention of our management.
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
18
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
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.
We are presently a defendant in a lawsuit brought by Electronic Controlled Systems, Inc., d/b/a King Controls, alleging infringement of three of its patents.
We are defending ourselves vigorously against these claims, but there can be no assurance that we will not have to pay significant damages or amounts in
settlement, that we will not be enjoined from selling certain of our mobile satellite communications products, or that the suit will not otherwise have a materially
adverse effect on our operations or financial performance.
Fluctuations in our quarterly net sales and results of operations could depress the market price of our common stock.
We have 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 defense 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;
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.
A large portion of our expenses, including expenses for facilities, equipment, and personnel, are relatively fixed. Accordingly, if our net sales decline or do
not grow as much as we anticipate, we might be unable to maintain or improve our operating margins. Any failure to achieve anticipated net sales could therefore
significantly harm our operating results for a particular fiscal period.
Our tax planning strategy involves assumptions that may cause our annual provision for income tax expense or benefit to fluctuate materially.
Moreover, our tax planning strategy is based upon our ability to sell our manufacturing and corporate headquarters facility located in Middletown,
Rhode Island, as may be necessary.
We utilize a tax planning strategy as provided for under accounting principles generally accepted in the United States as a means of supporting the
realizability of certain of our deferred tax assets. The strategy involves our ability to sell our Middletown, Rhode Island headquarters facility in order to generate
taxable income for the sole purpose of utilizing our U.S. net operating tax loss carryforwards before they expire. The
19
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
determination of taxable income, and therefore supportable deferred tax asset value, is based upon the difference between the property’s estimated fair market
value and our book basis. Accordingly, the estimated net realizable value of our deferred tax asset is highly correlated to property values in and around the
Middletown, Rhode Island area and therefore subject to changes in property value and or assumptions used in the valuation process. This fair market value
subjectivity may cause us to record significant increases or decreases to our deferred tax assets during the year.
The strategy represents an action that we ordinarily would not take, but would take, if necessary, to realize an estimated $3.3 million in U.S. deferred tax
assets based on approximately $8.5 million in estimated taxable gain from the sale of the building as of December 31, 2006.
The market price of our common stock may be volatile.
Our stock price has historically been volatile. From January 1, 2004 to December 31, 2006, 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;
changes in, or adoptions of, accounting principles;
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 company’s stock
drops significantly, stockholders often institute securities litigation against that company. We are now defending derivative and class action lawsuits. This
pending litigation has caused us to incur substantial costs and is diverting the time and attention of our management. These adverse consequences may continue
until this action is finally resolved. Any similar litigation in the future could have similar consequences.
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 management’s time, attention, and resources;
20
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
•
•
•
•
•
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.
ITEM 2.
Properties
The following table provides information about our current facilities.
Location
Type
Principal Uses
Footage
Ownership
Expiration
Approximate
Square
Lease
Middletown, Rhode Island
Middletown, Rhode Island
Tinley Park, Illinois
Kokkedal, Denmark
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
Warehouse
Plant and
warehouse
Office and
warehouse
Warehousing (mobile communications
products)
Manufacturing, research and development
(defense & fiber optic products)
European headquarters, sales and service,
marketing and administration
21
39,000
Leased
March 2008
40,000
Leased
December
2013
11,000
Leased
May 2014
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
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 are a defendant in a class action lawsuit in the U.S. District Court for the District of Rhode Island in which we and certain of our officers are named as
defendants. The suit asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b−5 under that statute, as well as claims
under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, on behalf of purchasers of our securities in the period from October 1, 2003 to July 2, 2004 and
seeks certain legal remedies, including compensatory damages. The Teamsters Affiliates Pension Plan has been appointed lead plaintiff. This matter consolidates
into one action eight separate complaints filed between July 24, 2004 and September 15, 2004. On January 14, 2005, the defendants filed a motion to dismiss the
consolidated complaint for failure to state a claim upon which relief can be granted. The court denied this motion in part and granted it in part.
On October 14, 2005, the defendants answered the consolidated complaint and denied liability and all allegations of wrongdoing. Subsequently, on
December 13, 2005, plaintiffs filed a motion for class certification. The motion is pending.
On August 16, 2004, Hamid Mehrvar filed a shareholder’s derivative action in the Rhode Island State Superior Court for Newport County against us and
certain of our officers and directors. The amended complaint asserts state law claims on our behalf arising between October 1, 2003 and the present in connection
with the allegations set forth in the class action consolidated complaint in the U.S. District Court described above. On October 7, 2005, the court dismissed
Mehrvar’s amended complaint without prejudice. By letter dated October 14, 2005, Mehrvar delivered a demand that we commence litigation for the same acts
alleged in his complaint against the directors and senior officers who served during the period from October 1, 2003 to the present. On March 1, 2006, Mehrvar
filed a shareholder’s derivative action in the Rhode Island State Superior Court for Providence County against us and certain of our officers and directors. The
complaint asserts state law claims on our behalf arising between October 1, 2003 and the present in connection with the allegations set forth in the class action
consolidated complaint in the U.S. District Court described above and seeks certain legal and equitable remedies, including restitution from our directors and
officers and corporate governance changes. On June 30, 2006, the defendants moved to dismiss the complaint on the basis that the plaintiff’s complaint failed to
adequately allege that demand was wrongfully refused. The motion to dismiss has been voluntarily withdrawn without prejudice to its refiling at a later date.
On June 20, 2005, Yemin Ji filed a shareholder’s derivative action in the U.S. District Court for the District of Rhode Island against us and certain of our
officers and directors, asserting certain federal and state law claims on our behalf arising between October 1, 2003 and the present in connection with the same
allegations set forth in the class action consolidated complaint in the U.S. District Court and the Mehrvar complaint described above and seeks certain legal and
equitable remedies, including restitution from our directors and officers and corporate governance changes. On August 23, 2005, we moved the Court to abstain
from exercising jurisdiction and dismiss the action as duplicative of the Mehrvar case. The Court denied this motion. On January 5, 2006, the defendants moved
to dismiss the complaint on the same grounds on which the Rhode Island state court dismissed the derivative complaint in Mehrvar that was filed on August 16,
2004. The Court granted this motion and dismissed the complaint on August 29, 2006. In late September 2006, Ji filed an appeal of the dismissal with the U.S.
Court of Appeals for the First Circuit. The appeal is pending.
In May 2005, Electronic Controlled Systems, Inc., d/b/a King Controls, filed a patent infringement suit against us in the U.S. District Court for the District
of Minnesota. The three asserted patents relate generally
22
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
to controlling a satellite dish to acquire a satellite signal. The complaint alleges that we willfully infringe the patents and seeks injunctive relief, enhanced
damages and attorneys’ fees. We have denied the allegations and asserted counterclaims, including claims for false advertising. In January 2006, Electronic
Controlled Systems, Inc., d/b/a/ King Controls, filed a second patent infringement suit against us in the U.S. District Court for the District of Minnesota. The
second suit concerns one of the same three patents asserted in the original suit filed in May 2005, alleges that we willfully infringe the patent and seeks both
preliminary and permanent injunctive relief, enhanced damages and attorneys fees. We have denied the allegations and asserted counterclaims. The court denied
the plaintiff’s motion for a preliminary injunction after a hearing on May 30, 2006. These two cases are now consolidated. An adverse ruling could result in an
injunction preventing us from selling our TracVision products, other than those using phased−array antennas, and in significant monetary damages based, in part,
on sales of those products since at least March 2005. Pursuant to a settlement agreement, the parties stipulated to the dismissal of the false advertising
counterclaims. A final pretrial conference is scheduled for April 2007.
Additionally, in the ordinary course of business, we are a 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 2006.
23
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information. Our common stock trades on the Nasdaq Global Market under the symbol “KVHI”. The following table provides, for the periods
indicated, the high and low sale prices for our common stock as reported on the Nasdaq Global Market (and its predecessor, the Nasdaq National Market).
Year Ended December 31, 2006:
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31, 2005:
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$11.64
12.08
13.60
14.48
$13.23
11.05
10.85
10.00
$9.43
9.71
9.92
9.93
$8.81
8.54
9.00
8.77
Stockholders. As of March 14, 2007, we had 116 holders of record of our common stock. This number does not include stockholders for whom shares
were held in a nominee or “street” name.
Dividends. We have never declared or paid cash dividends on our capital stock, and we do not plan to pay any cash dividends in the foreseeable future. We
currently intend to retain any future earnings to finance our operations and future growth. In addition, the terms of our bank line of credit place restrictions on our
ability to pay cash dividends on our common stock.
Reacquisition of Common Stock. In August 2006, an employee exercised a stock option and delivered 12,153 shares of common stock to us in payment of
the exercise price. The shares were valued on the basis of the closing price of our common stock on the date of exercise.
24
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
ITEM 6.
Selected Financial Data
We have derived the following selected financial data from our audited consolidated financial statements. You should read this data in conjunction with
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”
During the first quarter of 2006, we adopted Statement of Financial Accounting Standard No. 123(R), “Share Based Payments.” For more information, see
note 1 to our consolidated financial statements.
Consolidated Statement of Operations Data:
Net sales
TracVision A5 revaluation charge
All other cost of sales
Total cost of sales
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Year Ended December 31,
2006
2005
2004
2003
2002
(in thousands, except per share data)
$78,973
—
47,168
$71,258
(100)
41,687
$62,303
2,358
39,934
$56,672
—
33,795
$47,694
—
26,505
47,168
41,587
42,292
33,795
26,505
31,805
29,671
20,011
22,877
21,189
7,720
14,387
7,842
7,692
13,845
5,845
6,337
15,907
5,166
8,578
11,201
4,597
8,854
9,951
3,594
Income (loss) from operations
1,856
2,289
(7,399)
(1,499)
(1,210)
2,194
(26)
4,024
(350)
1,269
(338)
3,220
(289)
471
35
(165)
(78)
(119)
(62)
(6,893)
746
(1,742)
272
(1,391)
(86)
$ 3,674
$ 2,931
$ (6,147)
$ (1,470)
$ (1,477)
$
0.25
$
0.20
$ (0.44)
$ (0.13)
$ (0.13)
14,787
14,571
14,109
11,403
11,040
14,915
14,685
14,109
11,403
11,040
December 31,
2006
2005
2004
2003
2002
(in thousands)
$54,739
67,122
88,424
2,158
77,795
$50,090
61,613
82,330
2,282
71,363
$45,728
58,650
75,914
2,397
67,732
$ 2,849
16,514
34,071
2,504
25,333
$ 7,239
17,971
32,549
2,604
25,431
Other income (expense):
Interest income (expense), net
Other (expense) income
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Per share information:
Net income (loss) per common share—basic and diluted
Number of shares used in per share calculation:
Basic
Diluted
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities
Working capital
Total assets
Long−term debt, excluding current portion
Total stockholders’ equity
25
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the other financial information and consolidated financial statements and
related notes appearing elsewhere in this annual report. This discussion contains forward−looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward−looking statements as a result of a variety of factors, including those discussed under the
heading “Item 1A. Risk Factors” and elsewhere in this annual report.
Overview
We develop, manufacture and market mobile communications products for the land and marine markets, and navigation, guidance and stabilization
products for both defense and commercial markets. Our 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 satellites and wireless services. We sell our mobile
communications products through an extensive international network of independent distributors and retailers. Our defense products include tactical navigation
systems that provide uninterrupted access to navigation and pointing information in a spectrum of military vehicles, including tactical trucks (HMMWVs) and
light armored vehicles. We also offer precision fiber optic gyro−based systems that enable stabilization and munitions guidance. We sell our defense products
directly to U.S. and allied governments and government contractors, as well as through an international network of authorized independent sales representatives.
We entered the market for mobile satellite antenna systems in 1993. Initially, we sold our antenna systems primarily to original equipment manufacturers.
In 1995, we began to offer our mobile satellite communications products to customers under the KVH TracPhone brand. That year, we also introduced our first
KVH−branded satellite TV antenna for the marine market, the TracVision. In 1999, we introduced a more compact antenna for use on recreational vehicles and
motor coaches. In September 2003, we introduced the TracVision A5, which used our low−profile satellite TV antenna technology to bring DIRECTV satellite
television service to passenger vehicles. This was our first product for the automotive market. In 2006, we entered into an agreement with Microsoft under which
we serve as a distributor of MSN TV service to cars, boats, and RVs.
In 1979, we invented the first digital fluxgate compass for use in sailing vessels. Since then, we have further developed and refined this technology to
produce reliable precision navigation systems in military environments. In 1997, we acquired fiber optic gyro technology from Andrew Corporation to
complement and enhance our existing navigation and inertial measurement systems. Our fiber optic gyro product line consists of the DSP−3000 fiber optic gyro,
the militarized DSP−4000 fiber optic gyro, and the TG−6000, our fiber optic gyro−based inertial measurement unit. These systems serve both military and
commercial applications.
We generate revenue primarily from the sale of our mobile communications and defense products and services. The following table provides, for the
periods indicated, our net sales by product line category.
Mobile communications
Defense
Net sales
Year Ended December 31,
2006
2005
2004
$ 56,205
22,768
(in thousands)
$ 49,057
22,201
$ 48,500
13,803
$ 78,973
$ 71,258
$ 62,303
In addition to revenue from product sales, our mobile communications revenue includes revenue earned from product repairs, revenue from Inmarsat
satellite phone and Internet usage services, and certain DIRECTV account referral fees earned in conjunction with the sale of our products. We provide, for a fee
based on usage, third−party satellite phone and Internet airtime to our TracPhone and Internet customers who choose to activate their subscriptions with us.
Under current DIRECTV programs, we are eligible to receive a one−time, new mobile
26
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
account activation fee from DIRECTV for each customer who activates their DIRECTV service directly through us. Our defense revenue primarily includes
product sales to both military and commercial markets and, to a lesser extent, engineering services provided under development contracts. To date, our
non−product revenue such as: revenues earned from product repairs, satellite phone and Internet usage services, DIRECTV activations and engineering services
under development contracts have not been a material portion of our revenue individually. In the aggregate, such revenues represented 10%, 8% and 7% of total
net sales for the years ended December 31, 2006, 2005 and 2004, respectively.
Our defense business is characterized by a small number of customers who place a small number of relatively large dollar value orders. In the years ended
December 31, 2006, 2005 and 2004, our top four defense customers, including the U.S. military as a single customer, accounted for 51%, 53% and 48%,
respectively, of our net sales attributable to defense products and services, and 15%, 16% and 10%, respectively, of our total net sales for all products and
services. Direct sales to the U.S. military accounted for 4%, 6% and 3% of our total net sales for the years ended December 31, 2006, 2005 and 2004,
respectively. Orders for our defense products typically range in size and can approximate up to several hundred thousand dollars to over one million dollars.
Accordingly, our quarterly net sales of defense products usually consist of a relatively small number of orders. Each order can have a significant impact on our
net sales, and because our defense products generally have higher margins than our mobile satellite communications products, each order can have an impact on
our net income that is disproportionately large relative to the revenue generated by the order. Moreover, customers of our defense products are predominantly
governments and government contractors that typically must adhere to lengthy procurement processes, which make the timing of individual orders difficult to
predict and often result in long sales cycles. Government customers and their contractors can generally cancel orders for our products for convenience.
We have historically derived a substantial portion of our revenue from sales to customers located outside the United States and Canada. The following
table provides, for the periods indicated, sales to specified geographic regions:
Originating from North American locations
United States and Canada
Europe
Other
Total North America
Originating from European location
Europe
Other
Total Europe
Net sales
Year Ended December 31,
2006
2005
2004
(in thousands)
$ 60,499
2,856
2,991
$ 57,837
2,918
510
$ 50,285
2,166
1,421
66,346
61,265
53,872
10,096
2,531
12,627
8,677
1,316
9,993
7,413
1,018
8,431
$ 78,973
$ 71,258
$ 62,303
See note 13 of notes to our consolidated financial statements for more information on our geographic segments.
Over the last three years we have introduced several new products that were the result of substantial investments that we made in advanced development
during the 2001−2003 timeframe. As a result, in 2006, 2005 and 2004, we were able to bring the total research and development expenses, as a percentage of
revenue, to a level that we believe was more appropriate and sustainable for the near term. We anticipate that this level of investment will allow us to maintain
our efforts in the areas of identifying and evaluating new and innovative products based on our platform technologies, refining products for commercial
introduction and improving manufacturing and development processes.
27
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In addition to our internally funded research and development efforts, we also conduct research and development activities that are funded by our
customers. These activities relate primarily to engineering activities including engineering studies, surveys, prototype development, program management and
standard product customization. In accordance with accounting principles generally accepted in the United States of America, we account for customer−funded
research as revenue, and we account for the associated research costs as cost of goods sold. As a result, customer−funded research and development are not
included in the research and development expense that we present in our statement of operations. The following table presents our total annual research effort,
representing the sum of research cost of goods sold and the operating expense of research and development as described in our statement of operations. Our
management believes this information is useful because it provides a better understanding of our total expenditures on research and development activities.
Research and development expense presented on statement of operations
Cost of customer−funded research and development included in cost of goods sold
Year ended December 31,
2006
2005
2004
$ 7,720
2,060
(in thousands)
$ 7,692
1,418
$ 6,337
1,240
Total expenditures on research and development activities
$ 9,780
$ 9,110
$ 7,577
As of December 31, 2006, we had approximately $54.7 million in cash, cash equivalents and marketable securities and an accumulated deficit of
approximately $10.8 million.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our financial
statements. Our significant accounting policies are summarized in note 1 to our consolidated financial statements. The significant accounting policies that we
believe are the most critical in understanding and evaluating our reported financial results include the following:
Revenue Recognition
Revenue from 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. Our standard sales terms require that:
•
•
•
•
All sales are final;
Terms are either Net 30 or Net 45;
Shipments are tendered and shipped FOB (or as may be applicable, FCA, or EXW) our 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 defense product sales, customer acceptance or inspection may be required before title and risk of loss transfers to the customer. For those sales
revenue is recognized after transfer of title and risk of loss and after notification of customer acceptance.
Under certain limited conditions, we, at our sole discretion, provide for the return of goods. No product is accepted for return and no credit is allowed on
any returned product unless we have granted and confirmed prior written permission by means of appropriate authorization. We establish reserves for potential
sales returns, credit and allowances, and evaluate, on a monthly basis, the adequacy of those reserves based upon historical experience and our expectations for
the future.
See note 12 of notes to our consolidated financial statements for disclosures associated with our significant customers.
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Table of Contents
Accounts Receivable
Our estimate for allowance for doubtful accounts related to trade receivables is primarily based on specific, historical criteria. We evaluate specific
accounts where we have information that the customer may have an inability to meet its financial obligations. We make judgments, based on facts and
circumstances, regarding the need to record a specific reserve for that customer against amounts owed to reduce the receivable to the amount that we expect to
collect. We also provide for a general reserve based on an aging analysis of our accounts receivable. We evaluate these reserves on a monthly basis and adjust
them as we receive additional information that impacts the amount reserved. If circumstances change, we could change our estimates of the recoverability of
amounts owed to us by a material amount. For example, as of December 31, 2006, included in our allowance for doubtful accounts is a specific reserve in the
amount of approximately $492,000 to reserve for all outstanding balances of a European distributor that entered into a voluntary liquidation proceeding under
local law during 2004 and commenced formal bankruptcy proceedings under local law during June 2005. At the time this reserve was established (fourth quarter
of 2004), our allowance for doubtful accounts substantially increased and our net accounts receivable were reduced accordingly.
Inventories
Inventory is valued at the lower of cost or market. We generally must order components for our products and build inventory in advance of product
shipments. We regularly review current quantities on hand, actual and projected sales volumes and anticipated selling prices on products and write down, as
appropriate, slow−moving and/or obsolete inventory to its net realizable value. Generally, our inventory does not become obsolete because the materials we use
are typically interchangeable among various product offerings. However, if we overestimate projected sales or anticipated selling prices, our inventory might be
overvalued, and we would have to reduce our inventory valuation accordingly.
For example, as of December 31, 2006 we had a significant amount of inventory on hand related to military products whose utilization will be dependent
upon the receipt of additional sales orders in the future. If such sales orders do not occur, and we are unable to redeploy the components of such inventory for
other product sales, we may be required to record additional write−downs to inventory which would negatively impact both gross margins and net income in the
period when such write−downs are recorded.
See note 4 of notes to our consolidated financial statements for disclosures associated with our TracVision A5 inventory revaluation and other special
charges.
Income Taxes and Deferred Income Tax Assets and Liabilities
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss
carry forwards. On a quarterly basis, we assess the recoverability of our deferred tax assets by considering whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
For 2006 and 2005, we generated net income of $3.7 million and $2.9 million, respectively. In assessing the realizability of our deferred tax assets, we
considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of 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, 2006 and
2005, we have recorded a valuation allowance against a portion of our deferred tax assets because we believe 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 was approximately $5.0 million as of December 31, 2006.
Should we generate net income in 2007 and project net income for 2008 and beyond, we may determine, after considering all available objective evidence, that it
is more likely than not that all of our net deferred tax asset would be realized. Should that determination be made, we would reverse our deferred tax asset
valuation allowance at such time and recognize a reduction of income tax expense (as of December 31, 2006 such reduction would have been $3.0 million). In
addition, as a portion of our deferred tax asset was generated from excess tax deductions from share−based payment awards, pursuant to SFAS No. 123(R), 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, 2006
such amount would have been $2.0 million).
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Our tax planning strategy provides a basis for the realization of a portion of our total domestic deferred tax assets as of December 31, 2006 and 2005.
Specifically, as of December 31, 2006 and 2005, we had approximately $3.3 million of U.S. deferred tax assets, which consist of federal net operating loss carry
forwards available to offset future taxable income. Our strategy to utilize these assets is based upon our ability to sell our 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 we
ordinarily would take, but would take, if necessary, to realize tax benefits prior to expiration. In 2005 and 2004, as a result of independent and certified appraisals
of our land and building located at 50 Enterprise Center, Middletown, Rhode Island, we recorded an income tax provision of approximately $0.1 million and an
income tax benefit of $0.8 million to reflect changes in the value of the property. The U.S. deferred tax asset as of December 31, 2006 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 we decide to execute on our
strategy to utilize the benefit of our deferred tax assets. Because the realizable value of our 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.
For example, as a result of a revaluation of the property in 2004, the estimated net unrealized taxable gains associated with the land and building increased
from approximately $6.9 million to $8.9 million, thereby generating a $775,000 release of deferred tax asset valuation allowance in 2004. See note 15 to our
consolidated financial statements for disclosures associated with income taxes and deferred income tax assets.
Legal Contingencies
We are currently involved in certain legal proceedings. In connection with these legal proceedings, management periodically reviews estimates of potential
costs to be incurred by us in connection with the adjudication or settlement, if any, of these proceedings. These estimates are developed in consultation with
outside counsel and are based on an analysis of potential litigation outcomes and settlement strategies. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 5, Accounting for Contingencies, loss contingencies are accrued if, in the opinion of management, an adverse outcome is probable and
such outcome can be reasonably estimated. At present, we do not believe that these proceedings will have a material adverse effect on our financial position;
however, it is possible that future results for any particular quarterly or annual period may be materially and adversely affected by changes in our assumptions or
the effectiveness of our strategies relating to these proceedings. As of December 31, 2006, we have not accrued for any legal contingencies. See notes 1 and 15 to
our consolidated financial statements for disclosures associated with legal contingencies.
Results of Operations
The following table provides, for the periods indicated, certain financial data expressed as a percentage of net sales:
Net sales
TracVision A5 revaluation charge
All other costs of sales
Total costs of sales
Gross profit
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Income (loss) from operations
Other income, net
Income (loss) before income taxes
Income tax (expense) benefit
Net income
30
Year Ended December 31,
2006
2005
2004
100.0%
—
59.7
100.0%
(0.1)
58.5
100.0%
3.8
64.1
59.7
40.3
9.8
18.2
9.9
2.4
2.7
5.1
(0.4)
58.4
41.6
10.8
19.4
8.2
3.2
1.3
4.5
(0.4)
67.9
32.1
10.2
25.5
8.3
(11.9)
0.8
(11.1)
1.2
4.7%
4.1%
(9.9)%
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
Years ended December 31, 2006 and 2005
Adoption of SFAS No. 123(R)
Effective as of January 1, 2006, we adopted SFAS No. 123(R), “Share−Based Payment.” SFAS No. 123(R) is a revision of SFAS No. 123, “Accounting
for Stock−Based Compensation.” SFAS 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”
SFAS No. 123(R) requires that we recognize compensation expense in our statement of operations for the grant−date fair value of stock options and other
equity−based compensation issued to directors and employees. Before January 1, 2006, we accounted for share−based payments to employees using APB
Opinion No. 25’s intrinsic value method and recognized no compensation expense for employee stock options or shares purchased under our 1996 Employee
Stock Purchase Plan.
We adopted the provisions of SFAS No. 123(R) under the “modified prospective” transition method. 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 directors and employees prior to the effective date of
SFAS No. 123(R) that were unvested on the effective date. In accordance with the modified prospective transition method provided under SFAS No. 123(R),
results for prior periods have not been restated. As a result, our financial statements for periods ending before January 1, 2006 are not directly comparable to our
financial statements for periods ending after January 1, 2006. Moreover, because the grant−date fair value method under SFAS No. 123(R) is not the same as the
method under SFAS No. 123, our results of operations for periods ending after January 1, 2006 are not directly comparable to our pro forma disclosures in the
notes to our financial statements for periods ending before January 1, 2006 under SFAS No. 123.
We estimate the fair value of each option on the date of grant using the Black−Scholes option−pricing model. This model incorporates assumptions as to
stock price volatility, the expected life of options, a risk−free interest rate and dividend yield. Many of these assumptions are highly subjective and require the
exercise of management judgment. If our actual experience differs significantly from our estimates and we choose to employ different assumptions in the future,
the stock−based compensation expense that we record in future periods may differ materially from that recorded in the current period.
As a result of the adoption of SFAS No. 123(R), our income before income tax expense for 2006 was reduced by approximately $1.1 million. As of
December 31, 2006, there was approximately $2.5 million of total unrecognized compensation expense related to share−based compensation arrangements,
which is expected to be recognized over a weighted−average period of approximately 2.83 years.
Operating Summary
Net income for 2006 was $3.7 million, or $0.25 per basic and diluted common share, as compared to net income of $2.9 million or $0.20 per basic and
diluted common share for 2005. The primary drivers behind the improvement were our ability to increase net sales by $7.7 million, or 11%, and gross profit by
$2.1 million, or 7%. These increases allowed us to maintain income from operations of approximately $1.9 million, despite increased operating expenses
primarily related to increased legal fees and personnel costs (including the effects of adopting SFAS No. 123(R)). Another major contributing factor to the
improvement was an increase in other income of $1.2 million, driven primarily by increased net interest income of $0.9 million.
Included within net income for the year ended December 31, 2006 is approximately $1.1 million of expense related to our adoption of SFAS No. 123(R).
We did not incur any expense related to SFAS No. 123(R) during 2005.
Net Sales
Net sales for 2006 increased $7.7 million, or 11%, to $79.0 million from $71.3 million in 2005. Net sales in 2006 of our mobile communications products
were the primary reason for the improvement as they increased
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$7.1 million, or 15%, to $56.2 million from $49.1 million in 2005. The increase in mobile communications products was due primarily to increased sales of our
marine products and services in 2006, which increased by $6.6 million, or 23%, to $35.8 million from $29.2 million in 2005. The increase in net sales of our
marine products and services was driven by increased sales in 2006 related to our TracVision M3 satellite TV antenna, which was introduced in late 2005,
supplemented by a net increase in sales of our other core marine products, driven largely by increased net sales internationally from our wholly−owned
subsidiary in Denmark. The increase in net sales of our marine products and services in 2006 also included a $0.6 million, or 27% increase in revenue related to
our re−selling of data and voice airtime services to marine vessels. Also contributing to the increase in mobile communications products and services, albeit to a
lesser extent, was an increase in 2006 of net sales of our land mobile products of $0.5 million, to $20.4 million from $19.9 million in 2005.
Net sales of our defense−related products in 2006 increased by $0.6 million, or 3%, to $22.8 million from $22.2 million in 2005. The modest increase in
2006 was due primarily to an increase in sales of our fiber optic gyro products of $2.9 million, or 47%, to $9.0 million from $6.2 million in 2005. This increase
was driven primarily by increased sales in support of the U.S. Navy’s MK54 torpedo program and the U.S. Army’s remotely operated weapons station program.
Also contributing to the improvement, to a much lesser extent, was an increase in contract engineering revenue, and product repair service revenue, driven
largely by increased revenue related to a product service program with a single customer. Offsetting these increases, to a large extent, was a decrease in net sales
in 2006 of our military navigation products of $3.2 million, or 27%, to $8.8 million from $12.0 million in 2005. This decrease was primarily a result of decreased
volume related to the sale of our TACNAV products.
Cost of Sales
Our cost of sales consist of direct labor, materials and manufacturing overhead used to produce our products as well as engineering and related direct costs
associated with customer funded research and development. Our total cost of sales for 2006 increased by $5.6 million, or 13%, to $47.2 million from $41.6
million in 2005. The primary reason for the increase in cost of sales is related to the overall increase in net sales discussed above, coupled with an increase in
manufacturing overhead in 2006 of approximately $1.7 million. The increase in manufacturing overhead is driven primarily by increased personnel and related
costs of $0.9 million, and to a lesser extent increases in product, facility and production costs. Also contributing to the increase in cost of sales was an increase in
2006 of the cost of sales incurred as a result of funded research and development activities of approximately $0.6 million.
Gross margin in 2006 decreased to 40% from 42% in 2005. The primary reason for the decrease in 2006 was due to the modest shift in sales mix towards
our mobile communications products coupled with the increase in manufacturing overhead discussed above. We expect that in 2007 gross margin will increase
modestly compared to 2006.
Operating Expenses
Sales, marketing and support expense consists primarily of salaries and related expenses for sales and marketing personnel, commissions for both in−house
and third−party representatives, other sales and marketing support costs such as advertising, literature and promotional materials, product service personnel and
support costs, warranty−related costs and bad debt expense. Sales, marketing and support also includes the operating expenses of our wholly owned subsidiary in
Denmark. Sales and marketing expense in 2006 increased by $0.5 million, or 4%, to $14.4 million from $13.8 million in 2005. As a percentage of net sales, sales
and marketing expense decreased in 2006 to 18% from 19% in 2005. The primary reason for the increase in sales, marketing and support expense in 2006 is
increased personnel and related costs associated with sales, marketing and service both domestically and with our Danish subsidiary, including approximately
$0.2 million of stock compensation as a result of our adoption of SFAS No. 123(R) in 2006. Also contributing to the increase in 2006, to a lesser extent, was
increased sales support costs related to selling and promotional activities. These increases
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Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
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were partially offset by a decrease in warranty and service−related expenses. In 2007, we anticipate that, sales, marketing and support expense as a percentage of
revenue will decline modestly compared to 2006 levels.
Research and development expense consists of direct labor, materials, external consultants and related overhead costs that support our internally funded
product development and product sustaining engineering activities. All research and development costs are expensed as incurred. Research and development
expense in 2006 remained fairly consistent with 2005 at approximately $7.7 million. As a percentage of net sales, research and development expense decreased
in 2006 to 10% from 11% in 2005. The decrease as a percentage of net sales is primarily a result of the increased revenue discussed above, coupled with
increased utilization, year over year, of engineering personnel to fulfill funded research and development projects. Personnel and other direct costs related to such
projects are reflected in cost of sales. Total research and development spending year over year, inclusive of costs related to customer funded projects included
within cost of sales, increased by approximately $0.6 million to $9.8 million. The increase in total spending was driven primarily by increased labor and
personnel costs, including approximately $0.3 million of stock compensation expense as a result of our adoption of SFAS No. 123(R) in 2006. Our overall
research and development expense in 2006 was focused primarily on sustaining and enhancing our existing product base and advancing new products such as the
TracVision A7 mobile satellite television system for automobiles, the TracVision R6 system for recreational vehicles and the TracNet 100 mobile Internet system
that were introduced in 2006. We anticipate that for 2007, research and development expense as a percentage of revenue will approximate 2006 levels, however,
such estimate is dependent upon a certain level of funded research and development activity. Over the long−term, our intent is to increase research and
development spending roughly in line with revenue growth.
General and administrative expense consists of costs attributable to management, finance and accounting, information technology, human resources,
certain outside professional services and other administrative costs. General and administrative expense in 2006 increased by $2.0 million, or 34%, to $7.8
million from $5.8 million in 2005. As a percentage of net sales, general and administrative expense increased in 2006 to 10% from 8% in 2005. The primary
reason for the increase is due to an increase in legal expense of $1.3 million in 2006 principally as a result of a patent infringement lawsuit and a class action and
derivative suits that have been ongoing throughout the year (see Item 3. “Legal Proceedings”). As the cases are expected to be ongoing throughout much of 2007,
it is anticipated that we will continue to incur legal expenses at a rate consistent with or modestly above the level incurred in 2006. Also contributing to the
overall increase was approximately $0.3 million of external advisory expense related to an acquisition opportunity that was terminated in the third quarter of
2006. The remaining portion of the increase is due to increased personnel costs incurred in 2006 of approximately $0.4 million. Such increase was driven
primarily by approximately $0.5 million of stock compensation expense as a result of our adoption of SFAS No. 123(R) in 2006.
We anticipate that 2007 general and administrative expense will decline modestly as a percentage of sales compared to 2006.
Interest and Other Income, Net
Interest and other income, net increased by $1.2 million to $2.2 million in 2006 from $0.9 million in 2005. The primary reason for the increase is due to
increased interest income in 2006 on cash and marketable securities of approximately $0.9 million, resulting from improved interest rates, primarily on our
marketable securities, which consist principally of fixed income securities, and a higher average invested cash and marketable securities balance in 2006. Also
contributing to the overall increase in 2006 was a $0.3 million net increase in currency gains driven by an increase in gains from remeasurement of accounts from
our Danish subsidiary partially offset by increased losses related to forward currency exchange contracts.
Income Tax Expense
In 2006, we recorded an income tax provision of approximately $0.3 million. The primary components of the provision were U.S. federal and state income
tax expense of approximately $0.1 million and foreign income tax expense of approximately $0.2 million as a result of income generated from our wholly owned
subsidiary in Denmark.
33
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
In 2005, we recorded an income tax provision of approximately $0.3 million. The primary components of the provision were U.S. federal income tax
expense of approximately $0.1 million, deferred U.S. income tax expense of approximately $0.1 million and foreign income tax expense of approximately $0.1
million as a result of income generated from our wholly owned subsidiary in Denmark.
The modest increase in tax expense of approximately $0.1 million is driven primarily by increases in pre−tax income of approximately $0.5 million in the
U.S. and $0.3 million in Denmark, partially offset by the absence of deferred income tax expense in 2006. In 2005, we recorded approximately $0.1 million in
deferred income tax expense to reduce our net deferred tax asset in conjunction with evaluating our tax planning strategy.
We expect that substantially all of our 2007 pre−tax income generated from our U.S. operations, if any, will be offset by both federal and state net
operating losses generated in prior years. Accordingly, we expect that any tax liability generated by our U.S. operations in 2007 will be due solely to alternative
minimum tax, and to a lesser extent, some state income tax expense. Income generated by our subsidiary in Denmark will be subject to taxation at the Danish
statutory rates, as we have no net operating loss carry−forwards or tax credits available to offset current or future taxable income in that jurisdiction.
For 2006 and 2005, we generated net income of $3.7 million and $2.9 million, respectively. In assessing the realizability of our deferred tax assets, we
considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of 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, 2006 and
2005, we have recorded a valuation allowance against a portion of our deferred tax assets because we believe 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 was approximately $5.0 million as of December 31, 2006.
Should we generate net income in 2007 and project net income for 2008 and beyond, we may determine, after considering all available objective evidence, that it
is more likely than not that all of our net deferred tax asset would be realized. Should that determination be made, we would reverse our deferred tax asset
valuation allowance at such time and recognize a reduction of income tax expense (as of December 31, 2006 such reduction would have been $3.0 million). In
addition, as a portion of our deferred tax asset was generated from excess tax deductions from share−based payment awards, pursuant to SFAS No. 123(R), 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, 2006
such amount would have been $2.0 million).
Our tax planning strategy provides a basis for the realization of a portion of our total domestic deferred tax assets as of December 31, 2006 and 2005.
Specifically, as of December 31, 2006 and 2005, we had approximately $3.3 million of U.S. deferred tax assets, which consist of federal net operating loss
carry−forwards available to offset future taxable income. Our strategy to utilize these assets is based upon our ability to sell our 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
we ordinarily would take, but would take, if necessary, to realize tax benefits prior to expiration. In 2005 and 2004, as a result of independent and certified
appraisals of our land and building located at 50 Enterprise Center, Middletown, Rhode Island, we recorded an income tax provision of approximately $0.1
million and an income tax benefit of $0.8 million to reflect changes in the value of the property. The U.S. deferred tax asset as of December 31, 2006 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 we decide
to execute on our strategy to utilize the benefit of our deferred tax assets. Because the realizable value of our 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.
Years ended December 31, 2005 and 2004
Operating Summary
Net income for 2005 was $2.9 million, or $0.20 per basic and diluted common share, as compared to a net loss of $6.1 million, or $(0.44) per basic and
diluted common share, for 2004.
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Our 2005 results reflect a 14% increase in net sales over 2004 as well as an improvement in our gross margin to 42% in 2005 as compared to 32% in 2004.
The primary driver behind the increase in net sales and related margin was an increase in sales related to our higher margin defense products of approximately
$8.4 million year over year and the absence of the TracVision A5 revaluation charge in 2005. Operating expenses for the year ended December 31, 2005 were
$27.4 million, essentially flat with those from the prior year.
Net Sales
Net sales for 2005 increased $9.0 million, or 14%, to $71.3 million from $62.3 million in 2004. Sales of our defense−related products were the primary
reason for the improvement as they increased $8.4 million, or 61%, to $22.2 million in 2005. The increase in sales of defense products was primarily attributable
to significant unit volume increases related to both our military navigation products and our fiber optic gyro products.
Net sales of our mobile satellite communications products increased $0.6 million, or 1%, to $49.1 million in 2005. The slight increase in net sales was
primarily attributable to a 17% increase in net sales of marine satellite communications products, largely offset by a 13% decrease in net sales of land mobile
satellite communications products. The decrease in net sales of our land mobile satellite communications products resulted from a significant unit volume
decrease in sales of our recreational vehicle products to OEMs and in the aftermarket.
Costs of Sales
Our costs of sales consist of direct labor, materials and manufacturing overhead used to produce our products as well as engineering costs related to
customer−funded research and development. Our total costs of sales for 2005 decreased by $0.7 million, or 2%, to $41.6 million from $42.3 million in 2004. Our
total costs of sales in 2004 included the TracVision A5 revaluation charge of $2.4 million, which was not repeated in 2005. All other costs of sales increased by
$1.8 million, or 4.4%, to $41.7 million from $39.9 million in 2004. Although all other costs of sales increased from 2004 to 2005, it increased at a lower rate than
the increase in our net sales. This was due to the mix of product sales and our ability to reduce certain product costs and overhead spending in 2005.
Gross margin in 2005 increased to 42% from 32% in 2004. The primary reason for the increase in margin was due to the overall increase in net sales of our
higher margin defense products on a year over year basis, coupled with a 5.0 point gross margin improvement generated through the sale of our mobile
communications products, substantially all of which resulted from the incurrence of the TracVision A5 revaluation charge recorded in 2004.
Operating Expenses
Research and development expense consists of direct labor, materials and other costs that support our internally−funded product development activities.
All research and development costs are expensed as incurred. Research and development expense in 2005 increased by $1.4 million, or 21%, to $7.7 million from
$6.3 million in 2004. As a percentage of net sales, research and development expense remained fairly consistent on a year−over−year basis, increasing modestly
in 2005 to 10.8% from 10.2% in 2004. The aggregate increase in 2005 reflects increases in consulting services and engineering staff, primarily to support the
development of product enhancements, new technologies and new product offerings in both our mobile communications and defense product portfolios.
Sales, marketing and support expense consists primarily of salaries and related expenses for sales and marketing personnel, commissions for both in−house
and third−party representatives, other sales and marketing support costs such as advertising, literature and promotional materials, product service personnel and
support costs, warranty related costs and bad debt expense. Sales, marketing and support expense in 2005 decreased by $2.1 million, or 13%, to $13.8 million
from $15.9 million in 2004. As a percentage of net sales, sales, marketing and support expense decreased in 2005 to 19.4% from 25.5% in 2004. The primary
reasons for the decrease in sales, marketing and support expense in 2005 were an initiative to refine and focus our sales and marketing
35
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
programs coupled with a reduction in bad debt expense. Specifically, in 2005 we reduced the national and direct marketing promotions associated with our
TracVision A5 and other land mobile communications products. In addition, we also curtailed expenses associated with large accounts and trade show
promotions within the marine and land mobile markets. To a lesser extent, reduced bad debt expense of approximately $0.6 million in 2005 primarily related to a
large European distributor also contributed to the overall decrease in sales, marketing and support expense.
General and administrative expense consists of costs attributable to management, finance and accounting, information technology, human resources and
certain outside professional services. General and administrative expense in 2005 increased by $0.7 million, or 13%, to $5.8 million from $5.2 million in 2004.
As a percentage of net sales, general and administrative expense remained fairly consistent on a year−over−year basis decreasing slightly in 2005 to 8.2% from
8.3% in 2004. The primary reason for the increase in general and administrative expense in 2005 is the increase in personnel costs associated with supporting our
infrastructure and compliance requirements.
Interest and Other Income, Net
Interest and other income, net increased by $0.4 million to $0.9 million in 2005 from $0.5 million in 2004. The primary reason for the increase is an
increase in interest income of approximately $0.8 million, partially offset by an increase in loss on foreign currency of $0.4 million. The increase in interest
income is a result of increased returns on our investments consisting primarily of fixed income securities coupled with an overall higher average cash and
investments balance in 2005 from 2004.
Income Tax Expense
In 2005 we recorded an income tax provision of approximately $0.3 million. The primary components of the provision were comprised of current U.S.
federal income tax expense of approximately $0.1 million, deferred U.S. income tax expense of approximately $0.1 million and foreign income tax expense of
approximately $0.1 million as a result of income generated from our wholly owned subsidiary in Denmark.
During 2004, we recorded a foreign income tax expense of approximately $30,000 as a result of profitability in our foreign subsidiary. Moreover, during
2004 we recorded an approximate $0.8 million release of deferred tax asset valuation allowance (tax benefit) as a result of a revaluation of the net realizable
deferred tax assets in connection with our tax planning strategy.
Liquidity and Capital Resources
We have historically funded our operations primarily from product sales, net proceeds from public and private equity offerings, bank financings and
proceeds received from exercises of stock options. As of December 31, 2006, we had $54.7 million in cash, cash equivalents and marketable securities and $67.1
million in working capital.
For 2006, we generated $5.9 million in cash from operations as compared to cash generated from operations of $6.1 million for 2005. The slight decrease
is primarily due to an increase in net working capital driven primarily by an increase in cash outflows for inventory and reductions in accounts payable, partially
offset by cash inflows related to the collections on accounts receivable. The net increase in working capital is partially offset by increased net income in 2006 of
$0.7 million.
Net cash used in investing activities for 2006 was $5.8 million as compared to cash used in investing activities of $2.9 million for 2005. The primary
reason for the increase in 2006 is an increase in our investment in marketable securities of approximately $2.3 million, coupled with an increase in capital
expenditures related to manufacturing and other equipment of approximately $0.6 million.
Net cash provided by financing activities for 2006 was $1.5 million as compared to net cash provided by financing activities of $0.7 million for 2005. The
primary reason for the increase in 2006 is an increase of approximately $0.8 million in proceeds received from the exercise of employee stock options.
36
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
Currently, we have a revolving loan agreement with a bank that provides for a maximum available credit of $15.0 million that expires on December 31,
2008. We pay interest on any outstanding amounts at a rate equal to, at our option, LIBOR plus 1.5%, or the greater of either the Federal Funds Effective Rate
plus 0.5% or the bank’s prime interest rate. The line of credit contains two financial covenants, a Leverage Ratio and a Fixed Change Ratio, that apply in the
event that our consolidated cash, cash equivalents and marketable securities balance falls below $25.0 million at any time. We may terminate the loan agreement
prior to its full term without penalty, provided we give 30 days advance written notice to the bank. As of December 31, 2006, no borrowings were outstanding
under the facility.
On January 11, 1999, we entered into a mortgage loan in the amount of $3.0 million. The loan term is 10 years, with a principal amortization of 20 years at
a fixed rate of interest of 7.0%. Land, building and improvements secure the mortgage loan. The monthly mortgage payment is $23,259, including interest and
principal. Due to the difference in the term of the loan and amortization of the principal, a balloon payment of $2.0 million is due on February 1, 2009. Under the
mortgage loan we may prepay our outstanding loan balance subject to certain early termination charges as defined in the mortgage loan agreement.
We believe that the $54.7 million we hold in cash, cash equivalents and marketable securities, together with our other existing working capital, will be
adequate to meet planned operating and capital requirements through the foreseeable future. However, as the need or opportunity arises, we may seek to raise
additional capital through public or private sales of securities or through additional debt financing. There are no assurances that we will be able to obtain any
additional funding or that such funding will be available on terms acceptable to us.
Contractual Obligations and Other Commercial Commitments
As of December 31, 2006, our contractual commitments consisted of a mortgage note payable, near−term purchase order commitments, facility leases and
equipment leases. The principal repayment of the mortgage note is based on a 20−year amortization schedule, but the term is 10 years, requiring a balloon
payment of $2.0 million on February 1, 2009. There are no loan−to−value covenants in the loan that would require early pay−down of the mortgage if the market
value of the property should decline. Our purchase commitments include unconditional purchase orders for inventory and manufacturing materials extending out
over various periods throughout 2007. We are also obligated under multi−year facility leases that terminate at various times between 2008 and 2014. Our other
operating leases represent vehicle and equipment operating leases.
The following table summarizes our obligations under these commitments at December 31, 2006:
Contractual Obligations
Mortgage and other loans
Inventory purchase commitments
Facility lease obligations
Other operating lease obligations
Royalty payments
Total
Payment Due by Period
Total
Less than
1 Year
1−3 Years
3−5 Years
5 Years
More than
$ 2,282
11,889
2,934
124
687
$
123
11,889
589
65
250
(in thousands)
$ 2,159
—
785
41
437
$ —
—
1,560
18
—
$
—
—
—
—
—
$17,916
$ 12,916
$ 3,422
$ 1,578
$ —
In the first quarter of 2006, we entered into a licensing agreement with Litton Systems, Inc., a wholly owned subsidiary of Northrop Grumman Systems
Corporation (Grumman) to provide us with the right to access/use certain patented technologies owned by Grumman. Under the agreement, which spans the life
of the patented technology, we 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 the next three years of $250,000, $250,000 and $187,500, respectively.
We have not entered into any off−balance sheet commercial commitments, such as standby letters of credit, guarantees or standby repurchase obligations.
37
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory
Costs” (SFAS No. 151), to amend the guidance in Chapter 4, “Inventory Pricing”, of FASB Accounting Research Bulletin No. 43, “Restatement and Revision of
Accounting Research Bulletins.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS No. 151 requires that those items be recognized as current−period charges. Additionally, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years
beginning after June 15, 2005. We adopted this statement in the first fiscal quarter of 2006. The adoption of this statement did not have a material effect on our
results of operations, cash flows or financial position.
In July 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN No. 48) was issued. FIN No. 48 applies to all tax positions
accounted for under SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109) and is effective for fiscal years beginning after December 15, 2006. FIN
No. 48 clarifies what criteria must be met prior to recognition of the financial benefit of a position taken in a tax return. FIN No. 48 will require companies to
include additional qualitative and quantitative disclosures within their financial statements. The disclosures will include potential tax benefits from positions
taken for tax return purposes that have not been recognized for financial reporting purposes and a tabular presentation of significant changes during each period.
The disclosures will also include a discussion of the nature of uncertainties, factors which could cause a change, and an estimated range of reasonably possible
changes in tax uncertainties. FIN No. 48 will also require a company to recognize a financial statement benefit for a position taken for tax return purposes when it
will be more−likely−than−not that the position will be sustained. We are required to adopt the provisions of FIN No. 48 effective January 1, 2007. We do not
expect that the adoption of this interpretation will have a material impact on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). 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. SFAS No. 157 will
require the fair value of an asset or liability to be used based on a market based measure which will reflect our credit risk. SFAS No. 157 will be applied
prospectively and will be effective for fiscal years beginning after November 15, 2007. We do not expect that the adoption of this interpretation will have a
material impact on our financial position or results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB No. 108). SAB No. 108 was issued to provide interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We adopted the provisions of SAB No. 108
effective December 31, 2006. The adoption of SAB No. 108 did not have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of
FASB Statement No. 115” (SFAS No. 159). 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 our fiscal year 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. We are currently evaluating the impact, if any, of SFAS No. 159 on our consolidated financial statements.
38
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
Our primary market risk exposure is in the area of foreign currency exchange risk. We are exposed to currency exchange rate fluctuations related to our
subsidiary operations in Denmark. Certain functions in Denmark are transacted in the Danish Krone or Euro, yet reported in the U.S. dollar, the functional
currency. For foreign currency exposures existing at December 31, 2006, a 10% unfavorable movement in the foreign exchange rates for our subsidiary location
would not expose us to material losses in earnings or cash flows.
From time to time, we purchase foreign currency forward exchange contracts generally having durations of no more than four months. These forward
exchange contracts are intended to offset the impact of exchange rate fluctuations on cash flows of our foreign subsidiary. Forward exchange contracts are
accounted for as cash flow hedges and are recorded on the balance sheet at fair value until executed. Changes in the fair value are recognized in earnings. For the
year ended December 31, 2006 we recorded a loss of $108,000 related to these contracts. Such loss is reflected within “other (expense) income” in our 2006
consolidated statement of operations. As of December 31, 2006, there were no outstanding forward contracts.
The primary objective of our investment activities is to preserve principal and maintain liquidity, while at the same time maximize income. We have not
entered into any instruments for trading purposes. Some of the securities that we invest in may have market risk. To minimize this risk, we maintain our portfolio
of cash equivalents and short−term investments in a variety of securities, including commercial paper, investment grade asset−backed corporate securities,
money market funds and government agency and non−government debt securities. As of December 31, 2006, a hypothetical 100 basis−point increase in interest
rates would result in an approximate $12,000 decrease in the fair value of our investments that have maturities of greater than one year. Due to the conservative
nature of our investments, the relatively short duration of their maturities, our ability to either convert some or all of our long−term investments to less interest
rate−sensitive holdings or hold most securities until maturity, we believe interest rate risk is mitigated. As of December 31, 2006, approximately 92% of the
$39.0 million classified as available−for−sale marketable securities will mature or reset within one year. We do not invest in any financial instruments
denominated in foreign currencies. Accordingly, interest rate risk is not considered material.
To the extent that we borrow against our variable−rate credit facility, we will be subject to interest rate risk. There were no borrowings outstanding at
December 31, 2006.
ITEM 8.
Financial Statements and Supplementary Data
Our consolidated financial statements and supplementary data, together with the report of KPMG LLP, our independent registered public accounting firm,
are included in Part IV of this annual report on Form 10−K.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit
under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer,
or CEO, and chief financial officer, or CFO, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our CEO and CFO, our management has evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this annual report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were effective as of December 31, 2006.
39
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
Evaluation of Changes in Internal Controls over Financial Reporting
Under the supervision and with the participation of our CEO and CFO, our management has evaluated changes in our internal controls over financial
reporting that occurred during our last fiscal quarter. Based on that evaluation, our CEO and CFO did not identify any change in our internal controls over
financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial
reporting is the process designed by and under the supervision of our CEO and CFO to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of our financial statements for external reporting in accordance with accounting principles generally accepted in the United States
of America. Management has evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.
Under the supervision and with the participation of our CEO and CFO, our management has assessed the effectiveness of our internal control over
financial reporting as of December 31, 2006 and concluded that it is effective.
Our independent registered public accounting firm, KPMG LLP, has issued an attestation report regarding the effectiveness of our internal control over
financial reporting and management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, and that report is
included below.
Important Considerations
The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations,
including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of
human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these
limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in
preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
40
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
KVH Industries, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that KVH
Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). KVH Industries, Inc.’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of KVH Industries, Inc.’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management’s assessment that KVH Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2006,
is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, KVH Industries, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of KVH Industries, Inc. and subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders’
equity and accumulated other comprehensive income (loss), and cash flows for each of the years in the three−year period ended December 31, 2006, and our
report dated March 15, 2007, expressed an unqualified opinion on those consolidated financial statements.
As discussed in note 1 to the consolidated financial statements, on January 1, 2006, KVH Industries, Inc. adopted Statement of Financial Accounting
Standards No. 123(R), “Share−Based Payments”.
/s/ KPMG LLP
Providence, Rhode Island
March 15, 2007
41
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
ITEM 9B. Other Information
None.
We have omitted the information required in Part III of this annual report because we intend to include that information in our definitive proxy statement
for our 2007 annual meeting of stockholders, which we expect to file before 120 days after the end of fiscal 2006. We incorporate that information in this annual
report by reference to our 2007 proxy statement.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Information in our 2007 proxy statement under the captions “Directors and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Code of Ethics,” “Board of Directors and Committees of the Board—Board Committees—Audit Committee” and “Compensation Committee
Report” is incorporated by reference.
Our board of directors has adopted a Code of Business Conduct and Ethics that applies to our directors, executives, officers and employees. Our Code of
Business Conduct and Ethics can be found on our website, which is located at www.kvh.com. We intend to make all required disclosures concerning any
amendments to or waivers from, our Code of Business Conduct and Ethics on our website. Any person may request a copy of the Code of Business Conduct and
Ethics, at no cost, by writing to us at the following address: KVH Industries, Inc., 50 Enterprise Center, Middletown, Rhode Island, 02842, Attention: Investor
Relations.
ITEM 11.
Executive Compensation
Information in our 2007 proxy statement under the captions “Compensation of Directors and Executive Officers” and “Board of Directors and Committees
of the Board—Compensation Committee Interlocks and Insider Participation” is incorporated by reference.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information in our 2007 proxy statement under the captions “Principal Stockholders” and “Equity Compensation Plans” is incorporated by reference.
ITEM 13.
Certain Relationships and Related Transactions and Director Independence
Information in our 2007 proxy under the captions “Board of Directors and Committees of the Board—Director Independence” and “Certain Relationships
and Related−Party Transactions” is incorporated by reference.
ITEM 14.
Principal Accountant Fees and Services
Information in our 2007 proxy statement under the caption “Principal Accountant Fees and Services” is incorporated by reference.
42
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) 1.
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss) for the years ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
(a) 2.
Financial Statement Schedules
None.
43
Page
47
48
49
50
51
52
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
3.
Exhibits
Exhibit No.
Description
3.1
3.2
3.3
4.1
Amended and Restated Certificate of Incorporation
Certificate of Amendment of Certificate of Incorporation
Amended, Restated and Corrected By−Laws
Specimen certificate for the common stock
*10.1
Amended and Restated 1995 Incentive Stock Option Plan
*10.2
Amended and Restated 1996 Incentive and Nonqualified Stock Option Plan
*10.3
Amended and Restated 1996 Employee Stock Purchase Plan
*10.4
2003 Incentive and Nonqualified Stock Option Plan
*10.5
2006 Stock Incentive Plan
*10.6
*10.7
*10.8
*10.9
*10.10
*10.11
*10.12
10.13
10.14
10.15
Form of Nonqualified Stock Option agreement granted under the 1996
Incentive and Nonqualified Stock Option Plan
Form of Incentive Stock Option agreement granted under the 1996
Incentive and Nonqualified Stock Option Plan
Form of Nonqualified Stock Option agreement granted under the 2003
Incentive and Nonqualified Stock Option Plan
Form of Incentive Stock Option agreement granted under the 2003
Incentive and Nonqualified Stock Option Plan
Written Description of Option Acceleration on December 9, 2005
Form of Incentive Stock Option agreement granted under the 2006 Stock
Incentive Plan
Form of Non−Statutory Stock Option agreement granted under the 2006
Stock Incentive Plan
Open End Mortgage and Security Agreement dated January 11, 1999 with
IDS Life Insurance Co. for 50 Enterprise Center, Middletown, RI
Loan and Security Agreement dated March 27, 2000 with Fleet Capital
Corporation
First Amendment to Loan and Security Agreement dated March 7, 2003
with Fleet Capital Corporation
44
Filed with
this Form
10−K
Incorporated by Reference
Form
Filing Date
Exhibit No.
S−1
S−3
8−K
S−1/A
10−K
10−K
DEF 14A
10−K
DEF 14A
10−K
10−K
10−K
10−K
8−K
8−K
8−K
10−K
10−K
8−K/A
February 16,
1996
November 26,
2003
January 23,
2004
March 22,
1996
March 15,
2004
March 15,
2004
April 24,
2006
March 15,
2004
April 24,
2006
March 15,
2005
March 15,
2005
March 15,
2005
March 15,
2005
December 13,
2005
August 28,
2006
August 28,
2006
March 24,
1999
March 30,
2000
November 26,
2003
3.3
4.2
3.1
4.1
10.2
10.3
App. B
10.5
App. A
10.12
10.13
10.14
10.15
10.2
10.1
10.2
99.1
10.38
10.1
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
Exhibit No.
Description
10−K
Form
Filing Date
Exhibit No.
Filed with
this Form
Incorporated by Reference
10.16
10.17
10.18
10.19
21.1
23.1
31.1
31.2
32.1
Second Amendment to Loan and Security Agreement dated as of June 25, 2003 with
Fleet Capital Corporation
Amended and Restated Credit and Security Agreement dated July 17, 2003 with Fleet
Capital Corporation
Assignment and Assumption and Amendment and Note Modification Agreement, dated
July 17, 2006 by and among KVH Industries, Inc. (the “Borrower”), Banc of America
Leasing & Capital, LLC (successor−by−merger to Fleet Capital Corporation) (the
“Assignor”), and Bank of America, N.A. (successor−by−merger to Fleet National
Bank) (the “Assignee”)
Second Amendment and Note Modification Agreement, dated December 28, 2006 by
and among KVH Industries, Inc. (the “Borrower”), and Bank of America, N.A. (the
“Bank”)
List of Subsidiaries
Consent of KPMG LLP
Rule 13a−14(a)/15d−14(a) certification of principal executive officer
Rule 13a−14(a)/15d−14(a) certification of principal financial officer
Rule 1350 certification
X
X
X
X
8−K
8−K
8−K
8−K
S−1
June 27,
2003
July 18,
2003
July 20,
2006
January 3,
2007
March 28,
1996
99.1
99.1
10.1
10.1
21.1
* Management contract or compensatory plan.
45
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 2007
KVH Industries, Inc.
/s/ MARTIN A. KITSVAN HEYNINGEN
By:
Martin A. Kits van Heyningen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on
the dates indicated.
Name
Title
Date
/S/ MARTIN A. KITS VAN HEYNINGEN
Martin A. Kits van Heyningen
/S/ PATRICK J. SPRATT
Patrick J. Spratt
President, Chief Executive Officer and
Director (Principal Executive Officer)
March 16, 2007
Chief Financial Officer (Principal Financial and
March 16, 2007
Accounting Officer)
/S/ ARENT H. KITSVAN HEYNINGEN
Chairman of the Board
March 16, 2007
Arent H. Kits van Heyningen
/S/ ROBERT W.B. KITSVAN HEYNINGEN
Robert W.B. Kits van Heyningen
/S/ MARK S. AIN
Mark S. Ain
/s/ STANLEY K. HONEY
Stanley K. Honey
/S/ BRUCE J. RYAN
Bruce J. Ryan
/S/ CHARLES R. TRIMBLE
Charles R. Trimble
Director
Director
Director
Director
Director
46
March 16, 2007
March 16, 2007
March 16, 2007
March 16, 2007
March 16, 2007
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
Board of Directors and Stockholders
KVH Industries, Inc.:
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of KVH Industries, Inc. and subsidiary as of December 31, 2006 and 2005, and the related
consolidated statements of operations, changes in stockholders’ equity and accumulated other comprehensive income (loss), and cash flows for each of the years
in the three−year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KVH Industries, Inc.
and subsidiary at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three−year period ended
December 31, 2006, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of KVH
Industries, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control−Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2007 expressed an unqualified
opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
As discussed in note 1 to the consolidated financial statements, on January 1, 2006, KVH Industries, Inc. adopted Statement of Financial Accounting
Standards No. 123(R), “Share−Based Payments”.
/s/ KPMG LLP
Providence, Rhode Island
March 15, 2007
47
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Current assets:
ASSETS
Cash and cash equivalents
Marketable securities
Accounts receivable, net of allowance for doubtful accounts of approximately $693,000 in 2006 and $626,000 in
$ 15,780,851
38,958,402
$ 14,159,945
35,930,101
December 31,
2006
2005
2005
Inventories
Prepaid expenses and other assets
Costs and estimated earnings in excess of billings on uncompleted contracts
Deferred income taxes
Total current assets
Property and equipment, net
Intangible assets, less accumulated amortization of approximately $1,079,000 in 2006 and $1,016,000 in 2005
Other non−current assets
Deferred income taxes
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Commitments and contingencies (notes 1, 6, 7 and 15)
Current liabilities:
Accounts payable
Accrued compensation and employee−related expenses
Accrued other
Accrued product warranty costs
Accrued professional fees
Current portion of long−term debt
Total current liabilities
Long−term debt excluding current portion
Deferred revenue
Total liabilities
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued
Common stock, $0.01 par value. Authorized 20,000,000 shares; issued and outstanding 14,866,212 as of
December 31, 2006 and 14,638,100 as of December 31, 2005
Additional paid−in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
48
10,556,362
9,043,326
679,629
183,306
164,949
12,283,225
6,563,550
792,928
235,200
205,365
75,366,825
70,170,314
9,568,640
—
154,994
3,333,794
8,662,681
63,152
99,993
3,333,775
$ 88,424,253
$ 82,329,915
$ 2,639,224
2,782,825
1,621,322
538,886
538,919
123,297
$ 3,479,653
2,976,531
1,003,465
611,169
371,360
114,985
8,244,473
8,557,163
2,158,366
226,542
2,281,663
128,391
10,629,381
10,967,217
—
—
148,664
88,510,689
(10,830,307)
(34,174)
146,381
85,889,934
(14,504,823)
(168,794)
77,794,872
71,362,698
$ 88,424,253
$ 82,329,915
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Net sales
TracVision A5 revaluation charge
All other costs of sales
Total costs of sales
Gross profit
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Year Ended December 31,
2006
2005
2004
$ 78,973,425
—
47,168,133
$ 71,257,981
(100,050)
41,686,618
$ 62,302,541
2,358,420
39,933,088
47,168,133
41,586,568
42,291,508
31,805,292
29,671,413
20,011,033
7,719,995
14,387,075
7,841,602
7,692,426
13,844,955
5,844,681
6,336,781
15,907,155
5,166,066
Income (loss) from operations
1,856,620
2,289,351
(7,398,969)
Other income (expense):
Interest income, net
Other (expense) income
Income (loss) before income taxes
Income tax (expense) benefit
2,193,582
(25,967)
4,024,235
(349,719)
1,269,070
(338,352)
3,220,069
(289,083)
471,226
34,746
(6,892,997)
745,667
Net income (loss)
$ 3,674,516
$ 2,930,986
$ (6,147,330)
Per share information:
Net income (loss) per share, basic and diluted
Number of shares used in per share calculation:
Basic
Diluted
$
0.25
$
0.20
$
(0.44)
14,786,898
14,571,207
14,109,039
14,915,027
14,685,321
14,109,039
See accompanying Notes to Consolidated Financial Statements.
49
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
Balances at January 1, 2004
Comprehensive loss:
Net loss
Unrealized loss on marketable securities
Comprehensive loss
Issuance of common stock
Common stock issued under benefit plan
Exercise of stock options
Common
Stock
Additional
Paid−in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Stockholders’
Equity
$115,901
$36,505,751
$(11,288,479)
$
—
$
—
$25,333,173
—
—
—
27,500
236
1,241
—
—
(6,147,330)
—
—
(49,624)
—
47,955,730
221,731
389,662
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(6,147,330)
(49,624)
(6,196,954)
47,983,230
221,967
390,903
Balances at December 31, 2004
144,878
85,072,874
(17,435,809)
(49,624)
—
67,732,319
Comprehensive income:
Net income
Unrealized loss on marketable securities
Comprehensive income
Common stock issued under benefit plan
Exercise of stock options
—
—
—
241
1,262
—
—
2,930,986
—
—
(119,170)
—
191,787
625,273
—
—
—
—
—
—
—
—
—
—
—
2,930,986
(119,170)
2,811,816
192,028
626,535
Balances at December 31, 2005
146,381
85,889,934
(14,504,823)
(168,794)
—
71,362,698
Comprehensive income:
Net income
Unrealized gain on marketable securities
Comprehensive income
Stock based compensation
Acquisition of treasury stock
Retirement of treasury stock
Common stock issued under benefit plan
Exercise of stock options
—
—
—
—
—
(121)
101
2,303
—
—
3,674,516
—
—
134,620
—
—
3,674,516
134,620
—
1,074,837
—
(152,150)
99,832
1,598,236
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(152,271)
152,271
—
—
3,809,136
1,074,837
(152,271)
—
99,933
1,600,539
Balances at December 31, 2006
$148,664
$88,510,689
$(10,830,307)
$
(34,174)
$
—
$77,794,872
See accompanying Notes to Consolidated Financial Statements.
50
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2006
2005
2004
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
$ 3,674,516
$ 2,930,986
$ (6,147,330)
activities:
Depreciation and amortization
Deferred income tax
Provision for doubtful accounts, net
Loss (gain) on disposal of equipment
Loss (gain) on foreign currency forward exchange contracts
TracVision A5 revaluation and related charges
Compensation expense related to options and employee stock purchase plan
Changes in operating assets and liabilities:
Accounts receivable
Costs and estimated earnings in excess of billings on uncompleted contracts
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Deferred revenue
2,004,507
40,397
138,412
(22,732)
108,312
—
1,083,837
1,588,451
51,894
(2,479,776)
4,987
(840,429)
432,892
98,151
1,957,507
120,020
68,705
(22,021)
(39,059)
(100,050)
—
(2,775,081)
511,438
687,047
(306,036)
1,875,647
1,012,191
144,282
2,042,950
(770,573)
713,993
104,603
(20,673)
2,471,545
—
1,062,313
(331,223)
(1,788,021)
315,191
(1,986,488)
(75,444)
—
Net cash provided by (used in) operating activities
5,883,419
6,065,576
(4,409,157)
Cash flows from investing activities:
Purchase of marketable securities
Capital expenditures
Proceeds from the sale of equipment
Maturities and sales of marketable securities
Other long−term assets
(51,498,176)
(2,851,630)
26,563
48,604,495
(55,001)
(33,898,748)
(2,275,870)
22,021
33,287,919
(41,428)
(71,325,624)
(1,522,066)
5,097
35,837,558
(12,046)
Net cash used in investing activities
(5,773,749)
(2,906,106)
(37,017,081)
Cash flows from financing activities:
Repayment of long−term debt
Proceeds from sale of common stock, net
Stock option and stock benefit plan transactions
(114,985)
—
1,626,221
(107,233)
—
818,563
(109,954)
48,363,712
612,870
Net cash provided by financing activities
1,511,236
711,330
48,866,628
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
1,620,906
3,870,800
14,159,945
10,289,145
7,440,390
2,848,755
Cash and cash equivalents at end of year
$ 15,780,851
$ 14,159,945
$ 10,289,145
Supplemental disclosure of cash flow information:
Cash paid for interest expense
Cash paid for income taxes
Supplemental disclosure of noncash investing activity:
Stock received for option exercise
$
$
164,123
273,828
$
152,271
$
$
$
196,670
2,181
—
$
$
$
189,442
500
—
See accompanying Notes to Consolidated Financial Statements.
51
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(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.
KVH’s 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.
KVH’s defense 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. KVH’s defense 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, KVH’s defense 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 Company’s 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.
(c)
Use of Estimates
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 Company’s 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
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(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, 2006, $39.0 million classified as marketable securities was held by Lehman Brothers Inc., 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 Company’s reserve for bad debt for the periods presented is as follows:
Beginning balance
Additions charged to expense
Deductions (write−offs/recoveries) from reserve
Ending balance
2006
2005
2004
$ 626
138
(71)
$ 677
68
(119)
$ 120
714
(157)
$ 693
$ 626
$ 677
Included in the 2004 expense was approximately $556,000 in specific reserve resulting from a voluntary liquidation under local law of a European
distributor. As the liquidation has not been finalized, the Company continues to maintain the reserve for this customer as of December 31, 2006.
(e)
Revenue Recognition
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 Company’s standard sales terms require that:
•
•
•
•
All sales are final;
Terms are either Net 30 or Net 45;
Shipments are tendered and shipped FOB (or as may be applicable, FCA, or EXW) the Company’s 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 defense 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 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.
53
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(1)
Summary of Significant Accounting Policies—(continued)
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 management’s 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.
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 Company’s 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 Company’s 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 Company’s 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 Company’s 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. In 2006 approximately $83,000 in revenue was recognized in relation to extended warranty contracts. No
revenue was recognized in 2005 related to extended warranty contracts. As of December 31, 2006 and 2005, the Company had aggregate deferred extended
warranty revenue reflected in accrued other and deferred revenue of approximately $314,000 and $144,000, respectively.
(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
Company’s 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 Company’s marketable securities.
54
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(1)
Summary of Significant Accounting Policies—(continued)
(g)
Cash, Cash Equivalents and Marketable Securities
In accordance with the Company’s investment policy, cash in excess of operational needs is invested in money market funds, investment−grade corporate
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, 2006 and 2005, all of the Company’s 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 income (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 investment’s 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 Company’s 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, 2006
and 2005, and has concluded that no other−than−temporary impairments exist.
Interest income earned on the Company’s cash, cash equivalents and marketable securities is reflected in “interest income (expense), net” in the
accompanying statements of operations and approximated $2.4 million, $1.5 million and $0.7 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
(h)
(i)
Inventories
Inventories are stated at the lower of cost or market using the first−in first−out costing method.
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 asset’s 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.
(j)
Long−lived Assets
The Company’s 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.
55
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(1)
Summary of Significant Accounting Policies—(continued)
(k)
Product Warranty
The Company’s 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 Company’s 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, 2006 and 2005, the Company had accrued product warranty costs of approximately $539,000 and $611,000,
respectively. The following table summarizes product warranty activity during 2006 and 2005:
Beginning balance
Charges to expense
Costs incurred
Ending balance
2006
2005
$ 611
630
(702)
$ 440
1,088
(917)
$ 539
$ 611
(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:
Customer−funded revenues
Customer−funded costs
Year ended December 31,
2006
2005
2004
$ 2,073
2,060
$ 1,852
1,418
$ 1,752
1,240
(n)
Advertising Costs
Costs related to advertising are expensed as incurred. Advertising expense was $2.3 million, $2.4 million, and $3.9 million for the years ended
December 31, 2006, 2005 and 2004, 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 Company’s 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) income” in the accompanying consolidated statements of operations. For the years ended December 31, 2006, 2005 and 2004,
foreign currency gains (losses) approximated $0.1 million, $(0.3) million, and $0.1 million, respectively.
56
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(1)
Summary of Significant Accounting Policies—(continued)
(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 enterprise’s 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. 25’s 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.
As a result of the adoption of SFAS No. 123(R), the Company recorded compensation expense of approximately $1,084,000, or $0.07 per share, 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. In accordance with the modified prospective transition method provided under SFAS No. 123(R), results for prior periods have not been
restated. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Historically, as permitted under SFAS No. 123, the Company’s policy was to record forfeitures as incurred. As a result of its adoption of SFAS
No. 123(R), 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. Such forfeiture rate will be periodically revised, if necessary, based on
actual experience.
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 Company’s adoption of SFAS No. 123(R) (see note 8):
Net income (loss) as reported
Stock−based employee compensation determined under the fair value based method
Pro forma net income (loss)
Net income (loss) per common share—basic and diluted
As reported
Pro forma
57
2005
2004
$ 2,931
(2,809)
$(6,147)
(1,887)
$
122
$(8,034)
$ 0.20
$ (0.44)
$ 0.01
$ (0.57)
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(1)
Summary of Significant Accounting Policies—(continued)
(q)
Income Taxes
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 10).
(r)
Income (Loss) per Common Share
Basic net income (loss) per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income
(loss) 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 to purchase 1,083,457, 849,800, and 345,963 shares of common stock
for the years ended December 31, 2006, 2005, and 2004, respectively, have been excluded from the fully diluted calculation of income (loss) per share, as
inclusion would be anti−dilutive.
A reconciliation of the basic and diluted weighted average common shares outstanding is as follows:
Weighted average common shares outstanding—basic
Dilutive common shares issuable in connection with stock plans
14,786,898
128,129
14,571,207
114,114
14,109,039
—
Weighted average common shares outstanding—diluted
14,915,027
14,685,321
14,109,039
2006
2005
2004
(s)
Foreign Currency Forward Exchange Contracts
The Company’s 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. Theses 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 are a creditworthy multinational commercial banks. 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) income” in the accompanying statements of operations.
The Company recorded foreign currency contract (losses) gains of approximately $(108,000), $39,000 and $21,000, for the years ended December 31,
2006, 2005 and 2004.
The Company was not party to any foreign currency forward exchange contracts at December 31, 2006 and 2005.
58
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(1)
Summary of Significant Accounting Policies—(continued)
(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 15. 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, 2006 no losses have been accrued with respect to pending litigation.
(u)
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, to amend the guidance in Chapter 4, “Inventory Pricing”, of FASB Accounting
Research Bulletin No. 43, “Restatement and Revision of Accounting Research Bulletins.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current−period charges.
Additionally, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for fiscal years beginning after June 15, 2005. The Company adopted this statement in the first fiscal quarter of 2006. The
adoption of this statement did not have a material effect on the Company’s results of operations, cash flows or financial position.
In July 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN No. 48) was issued. FIN No. 48 applies to all tax positions
accounted for under SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109) and is effective for fiscal years beginning after December 15, 2006. FIN
No. 48 clarifies what criteria must be met prior to recognition of the financial benefit of a position taken in a tax return. FIN No. 48 will require companies to
include additional qualitative and quantitative disclosures within their financial statements. The disclosures will include potential tax benefits from positions
taken for tax return purposes that have not been recognized for financial reporting purposes and a tabular presentation of significant changes during each period.
The disclosures will also include a discussion of the nature of uncertainties, factors which could cause a change, and an estimated range of reasonably possible
changes in tax uncertainties. FIN No. 48 will also require a company to recognize a financial statement benefit for a position taken for tax return purposes when it
will be more−likely−than−not that the position will be sustained. The Company is required to adopt the provisions of FIN No. 48 effective January 1, 2007. The
Company does not expect that the adoption of this interpretation will have a material impact on the Company’s financial position or results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB No. 108). SAB No. 108 was issued to provide interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We adopted the provisions of SAB No. 108
effective December 31, 2006. The adoption of SAB No. 108 did not have an impact on the Company’s consolidated financial statements.
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,
59
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
including the methods and assumptions used to measure fair value and the effect of fair value measures on earnings. SFAS No. 157 will require the fair value of
an asset or liability to be used based on a market based measure which will reflect the credit risk. SFAS No. 157 will be applied prospectively and will be
effective for fiscal years beginning after November 15, 2007. The Company does not expect that the adoption of this interpretation will have a material impact on
the Company’s financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including 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’s fiscal year 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 is currently evaluating the impact, if any, of SFAS No. 159 on its consolidated financial statements.
(2) Marketable Securities
Included in marketable securities as of December 31, 2006 and 2005 are the following:
December 31, 2006
Auction rate securities
Cash and cash equivalents
Commercial paper
Federal agency obligations
Corporate obligations
Amortized
Cost
$ 17,679
3,727
5,269
6,078
6,240
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
—
—
—
(17)
(18)
$
—
—
—
—
—
—
Estimated
Fair
Value
$ 17,679
3,727
5,269
6,061
6,222
Total marketable securities designated as available for sale
$ 38,993
$
$
(35)
$ 38,958
December 31, 2005
Demand notes
Cash and cash equivalents
Federal obligations
Corporate obligations
Total marketable securities designated as available for sale
60
Amortized
Cost
$ 1,677
4,705
8,499
21,218
$ 36,099
Gross
Unrealized
Gains
$
$
—
—
—
—
—
Gross
Unrealized
Losses
$
—
—
(58)
(111)
Estimated
Fair
Value
$ 1,677
4,705
8,441
21,107
$
(169)
$ 35,930
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
The amortized costs and estimated fair value of debt securities as of December 31, 2006 and 2005 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, 2006
Due in less than one year
Due after one year and within two years
December 31, 2005
Due in less than one year
Due after one year and within two years
Due after two years and within three years
Amortized
Cost
$ 35,950
3,043
Estimated
Fair
Value
$ 35,931
3,027
$ 38,993
$ 38,958
Amortized
Cost
$ 31,950
3,114
1,035
Estimated
Fair
Value
$ 31,849
3,063
1,018
$ 36,099
$ 35,930
No realized gains or losses were recognized on the Company’s marketable securities during the year ended December 31, 2006 and 2005.
(3)
Inventories
Inventories as of December 31, 2006 and 2005 include the costs of material, labor, and factory overhead. Inventories consist of the following:
Raw materials
Finished goods
Work in process
December 31,
2006
2005
$ 5,553
2,886
604
$ 3,673
2,407
484
$ 9,043
$ 6,564
(4)
Inventory Revaluation and Other Special Charges
In July 2004, the Company initiated a new pricing initiative for the TracVision A5 mobile satellite antenna. As a result of the associated price reduction,
and in accordance with Accounting Research Bulletin 43, the Company recognized a $2.6 million loss related to a TracVision A5 inventory revaluation and other
related pricing initiatives in June 2004. Total net charges for the year ended December 31, 2004 were as follows:
Loss on non−cancelable inventory purchase commitments
Revaluation of inventory to net realizable value
Loss on disposal of TracVision A5 tooling and equipment (1)
TracVision A5 revaluation charge recognized in cost of sales
Other TracVision A5 pricing initiative charges not included in cost of sales
Total TracVision A5 revaluation and other charges
$ 1,425
836
97
2,358
211
$ 2,569
(1)
For presentation purposes, loss on disposal of TracVision A5 tooling and equipment was included within the Statement of Cash Flows caption—Loss on
disposal of equipment.
61
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
Balances and activity related to the TracVision A5 liability since inception is as follows:
Category
Non−cancelable inventory purchase
commitments
Other TracVision A5 pricing initiative
Accrued loss on TracVision A5
non−cancelable purchase
commitments
Balance
Recorded
as of
June 30,
2004
Additions/
Adjustments
to
Balance
as of
Dec.
31,
Reductions/
Adjustments
to
Balance
as of
Dec.
31,
Balance
as of
Dec.
31,
Provisions
Utilization
2004
Provisions
Utilization
2005
Utilization
2006
$ 1,480
150
$
(55)
61
$
(430)
(209)
$ 995
2
$
(98)
(2)
$
(842)
—
$
55
—
$
(55)
—
$ —
—
$ 1,630
$
6
$
(639)
$ 997
$
(100)
$
(842)
$
55
$
(55)
$ —
(5)
Property and Equipment
Property and equipment, net, as of December 31, 2006 and 2005 consist of the following:
Land
Building and improvements
Leasehold improvements
Machinery and equipment
Office and computer equipment
Motor vehicles
Less accumulated depreciation
December 31,
2006
2005
$
807
3,649
1,557
11,911
6,181
363
24,468
(14,899)
$
807
3,642
1,557
9,872
5,438
367
21,683
(13,020)
$ 9,569
$ 8,663
Depreciation for the years ended December 31, 2006, 2005 and 2004 amounted to approximately $1.9 million, $1.8 million, and $2.0 million, respectively.
(6) 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 $3.6 million as of December 31, 2006, 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, 2006 totaled approximately $115,000. Interest expense on the mortgage approximated $164,000, $171,000 and $179,000 for the years ended
December 31, 2006, 2005 and 2004, respectively, and is reflected within “interest income (expense) net”, in the accompanying statements of operations.
62
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(6) Debt and Line of Credit—(continued)
The following is a summary of future principal payments under the mortgage:
Years ending December 31,
2007
2008
2009
Total outstanding at December 31, 2006
Principal
Payment
$
123
132
2,026
$ 2,281
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 Company’s 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 bank’s 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, 2006 and 2005, no borrowings were
outstanding under the facility.
Total commitment fees related to the line of credit were approximately $16,000, $25,000 and $19,000 for the year ended December 31, 2006, 2005 and
2004.
(7) 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, 2006:
Years ending December 31,
2007
2008
2009
2010
Thereafter
Total minimum lease payments
Operating
Leases
$
654
441
385
380
1,197
$ 3,057
Total rent expense incurred under facility operating leases for the years ended December 31, 2006, 2005 and 2004 amounted to $738,000, $627,000, and
$499,000, respectively.
63
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
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 $11.9 million as of
December 31, 2006.
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 the next three years of $250,000, $250,000 and $187,500,
respectively. In 2006 the Company’s expense in relation to the licensing fee was approximately $345,000.
(8)
Stockholders’ Equity
(a)
Employee Stock Options
On May 24, 2006, at the Company’s 2006 Annual Meeting of Stockholders, the stockholders of the Company approved the 2006 Stock Incentive Plan. The
2006 Stock Incentive Plan authorizes the Company to issue up to 1,000,000 shares of its common stock pursuant to stock options, restricted stock awards and
other stock−based awards. The Board of Directors of the Company had approved the adoption of the 2006 Stock Incentive Plan on February 22, 2006, subject to
shareholder approval. The Company currently has options outstanding under the 2006 Stock Incentive Plan, 2003 Incentive and Non−Qualified Stock Option
Plan, and the 1996 Incentive and Non−Qualified Stock Option Plan. Under the plans, non−qualified stock options or incentive stock options may be granted to
the Company’s or its subsidiaries’ employees, officers, directors, advisers, or consultants as defined. 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 to five 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 Company’s shareholders,
pursuant to which 3,915,000 shares of the Company’s common stock were reserved for issuance. As of December 31, 2006, 2,896,540 options to purchase shares
of common stock had been issued or expired and 1,018,460 were available for future grants. The Compensation Committee of the 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, 2006 expire from March 2007 through November 2011. None of the Company’s outstanding options includes
performance−based or market−based vesting conditions.
On May 24, 2006, at the Company’s 2006 Annual Meeting of Stockholders, the stockholders of the Company also approved an amendment to the
Company’s 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 78,114 shares remain available as of December 31, 2006.
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 Company’s common stock over a period equivalent to the weighted average expected life of the
Company’s options. Management evaluated whether there were factors during that period which were unusual and which
64
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(8)
Stockholders’ Equity—(continued)
would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. 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 Company also assessed the expected risk tolerance of certain optionee groups. 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 granted cash dividends, and do not expect to issue dividends in the foreseeable future.
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 2006, 2005 and 2004 were $5.44, $5.07, and $8.34, respectively. The weighted−average assumptions used to value options as of their
grant date were as follows:
Risk−free interest rate
Expected volatility
Expected life (in years)
Dividend yield
The changes in outstanding employee stock options for the year ended December 31, 2006, is as follows:
Outstanding at December 31, 2005
Granted
Exercised
Expired or canceled
Outstanding at December 31, 2006
Year Ended
December 31,
2006
2005
2004
4.56%
52.8%
4.35
N/A
4.04%
58.2%
4.37
N/A
3.18%
91.1%
4.31
N/A
Number of
Shares
Weighted−
average
Exercise
Price
1,426,616
$
10.32
432,285
(230,332)
(64,796)
11.48
6.96
10.82
1,563,773
$
11.11
The following table summarizes information about employee stock options as of December 31, 2006:
Range of Exercise Prices
$ 6.25 – $ 9.00
9.01 – 13.50
13.51 – 20.02
Average
Remaining
Life (in Years)
1.06
3.37
1.94
2.70
Outstanding
Weighted
Average
Exercise Price
$
$
7.17
10.98
16.66
11.11
Number
Exercisable
267,008
371,157
239,650
877,815
Exercisable
Weighted
Average
Exercise Price
$
$
7.08
11.14
16.66
11.41
Number
Outstanding
301,976
1,022,147
239,650
1,563,773
65
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(8)
Stockholders’ Equity—(continued)
The total aggregate intrinsic value of options exercised was approximately $969,000, $665,000, and $1,435,000 in 2006, 2005, and 2004, 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 and 2005, was $1,267,000 and $1,469,000, respectively. The weighted average remaining contractual term for
options exercisable at December 31, 2006 and 2005 was 1.76 years and 2.13 years respectively. The weighted average remaining contractual term for options
outstanding at December 31, 2005 was 2.78 years.
As of December 31, 2005, the number of options exercisable was 900,591 and the weighted average exercise price of those options was $10.88 per share.
As of December 31, 2006, there was approximately $2.5 million of total unrecognized compensation expense related to share−based compensation arrangements,
which is expected to be recognized over a weighted−average period of 2.83 years.
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 Company’s 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 cumulative non−cash compensation expense that would have been recorded in the Company’s statement of operations
in future periods as a result of the adoption of SFAS No. 123(R) in 2006.
(b)
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “ESPP”) covers substantially all of the Company’s 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
Company’s common stock. The ESPP allows eligible employees the right to purchase the Company’s common stock on a semi−annual basis at 85% of the
market price at the end of each purchase period. During 2006, 2005 and 2004, 10,083, 24,122, and 23,645 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 2006, the Company recorded compensation charges of approximately $31,000 related to the ESPP. Cash
received under the ESPP in 2006 was approximately $178,000.
(9) Common Stock
On February 13, 2004, the Company completed an underwritten public offering of 2,750,000 shares of its common stock at $18.75 per share. Net proceeds
to the Company, after deducting offering costs, were approximately $48.0 million and are expected to be used for working capital and general corporate
purposes. Financing expenses totaled approximately $3.6 million and included $2.8 million in underwriting fees.
In August 2006, an employee exercised a stock option and delivered 12,153 shares of common stock to the Company in payment of the exercise price. The
shares delivered were immediately retired by the Company. The shares were valued on the basis of the closing price of the Company’s common stock on the date
of exercise.
66
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
(10) Income Taxes
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
Income tax expense (benefit) for the years ended December 31, 2006, 2005 and 2004 attributable to income (loss) from operations is presented below.
Year ended December 31, 2006
Federal
State
Foreign
Year ended December 31, 2005
Federal
State
Foreign
Year ended December 31, 2004
Federal
State
Foreign
Current
Deferred
Total
$
70
67
212
$ —
—
—
$ 70
67
212
$ 349
$ —
$ 349
$
61
—
112
$
105
15
(4)
$ 166
15
108
$ 173
$
116
$ 289
$ —
—
25
$ (676)
(99)
4
$(676)
(99)
29
$
25
$ (771)
$(746)
The actual income tax expense (benefit) differs from the “expected” income tax expense (benefit) computed by applying the United States Federal
corporate income tax rate of 34% to income (loss) before taxes as follows:
Computed “expected” tax expense (benefit)
Increase (decrease) in income taxes resulting from:
State income tax expense, net of federal benefit
Non−deductible expenses
Foreign tax rate and regulation differential
(Increase) decrease of valuation reserve resulting from tax strategy revaluation
Change in valuation allowance
Net income tax expense (benefit)
67
Year Ended December 31,
2006
2005
2004
$ 1,369
$1,095
$(2,344)
44
76
(43)
—
(1,097)
—
22
(27)
120
(921)
—
20
20
(775)
2,333
$
349
$ 289
$ (746)
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(10) Income Taxes—(continued)
The components of results of operations before income taxes, determined by tax jurisdiction, are as follows:
United States
Denmark
Total
Year Ended December 31,
2006
2005
2004
$3,304
720
$2,821
399
$(6,919)
26
$4,024
$3,220
$(6,893)
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:
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts
Inventories
Operating loss carry−forwards
Intangibles due to differences in amortization
Research and alternative minimum tax credit carry−forwards
State tax credit carry−forwards
Accrued loss on TracVision A5 non−cancelable purchase commitments
Accrued expenses
Gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liability:
Property and equipment, due to differences in depreciation
December 31,
2006
2005
$
393
489
6,470
152
285
245
—
812
8,846
(4,950)
3,896
(397)
$
495
494
8,010
153
215
194
21
452
10,034
(6,033)
4,001
(462)
Net deferred tax asset
$ 3,499
$ 3,539
Approximately $0.2 million of the Company’s net deferred tax asset is attributable to future deductible amounts within the Danish tax jurisdiction for the
Company’s wholly owned subsidiary located in Denmark.
As of December 31, 2006, the Company had federal net operating loss carry−forwards available to offset future taxable income of approximately $18.8
million. The Company also had state net operating loss carry−forwards available to offset future state taxable income of approximately $8.2 million. The federal
net operating loss carry−forwards expire in years 2021 through 2024. State net operating loss carry−forwards expire in years 2008 through 2024. The tax benefit
related to approximately $6.0 million of federal and approximately $3.9 million of state net operating loss carry−forwards will be recorded to additional paid−in
capital when utilized.
As of December 31, 2006, the Company had research and development tax credit carry−forwards in the amount of $152,000 that expire in years 2008
through 2012. The Company also had alternative minimum tax
68
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
(10) Income Taxes—(continued)
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
credits of $133,000 that have no expiration date. As of December 31, 2006, the Company’s state tax credit carry−forwards available to reduce future state tax
expense were approximately $245,000. These state tax credit carry−forwards expire in years 2007 through 2011.
The Company’s 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 382. An ownership change occurs when the ownership percentages of 5% or greater stockholders changes by more
than 50% over a three−year period.
For the years ended December 31, 2006 and 2005 the Company generated net income of $3.7 million and $2.9 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, 2006 and 2005, 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 $1.1 million from December 31, 2005 to approximately $5.0 million as of December 31, 2006. Should the Company
generate net income in 2007 and project net income for 2008 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 its deferred tax
asset valuation allowance at such time and recognize a reduction of income tax expense (as of December 31, 2006 such reduction would have been $3.0 million).
In addition, as a portion of the Company’s deferred tax asset was generated from excess tax deductions from share−based payment awards, pursuant to SFAS No.
123(R), 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, 2006 such amount would have been $2.0 million).
The Company’s tax planning strategy provides a basis for the realization of a portion of its total domestic net deferred tax assets as of December 31, 2006
and 2005. Specifically, as of December 31, 2006 and 2005, 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 Company’s 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. In 2005 and 2004, as a
result of independent and certified appraisals of its land and building located at 50 Enterprise Center, Middletown, Rhode Island, the Company recorded an
income tax provision of approximately $0.1 million and an income tax benefit of $0.8 million to reflect changes in the value of the property. The U.S. deferred
tax asset as of December 31, 2006 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 Company’s
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 Company’s 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
69
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
(10) Income Taxes—(continued)
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
foreign tax credits) and withholding taxes in Denmark. The amount of taxes attributable to the undistributed earnings is not practicably determinable.
(11) 401(k) Profit Sharing Plan
The Company has a 401(k) Profit Sharing 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, 2006, the
Company matches one half of the first 4% contributed by the Plan participants. The Company’s contributions vest over a four−year period from the date of
enrollment in the Plan. Total Company contributions were approximately $266,000, $144,000 and $61,000 for the years ended December 31, 2006, 2005, and
2004, respectively.
(12) Business and Credit Concentrations
Significant portions of the Company’s net sales are as follows:
Net sales to foreign customers outside the U.S. and Canada
Net sales to Camping World, Inc.
* Represents less than 10% of net sales in the respective year.
Year Ended
December 31,
2006
2005
2004
23.4%
*
18.8%
*
19.3%
10.1%
For the years ended December 31, 2006 and 2005, no single customer accounted for 10% or more of the Company’s consolidated net sales.
(13) Segment Reporting
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 defense−related product sales throughout the world. Sales originating from the Company’s 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 navigation, 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. Defense 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.
70
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(13) Segment Reporting—(continued)
Year ended December 31, 2006
Mobile communication sales to the United States and Canada
Mobile communication sales to Europe
Mobile communication sales to other geographic areas
Defense sales to the United States and Canada
Defense sales to Europe
Defense sales to other geographic areas
Intercompany sales
Subtotal
Eliminations
Net sales
Segment net income
Depreciation and amortization
Total assets
Year ended December 31, 2005
Mobile communication sales to the United States and Canada
Mobile communication sales to Europe
Mobile communication sales to other geographic areas
Defense sales to the United States and Canada
Defense sales to Europe
Defense sales to other geographic areas
Intercompany sales
Subtotal
Eliminations
Net sales
Segment net income
Depreciation and amortization
Total assets
Year ended December 31, 2004
Mobile communication sales to the United States and Canada
Mobile communication sales to Europe
Mobile communication sales to other geographic areas
Defense sales to the United States and Canada
Defense sales to Europe
Defense sales to other geographic areas
Intercompany sales
Subtotal
Eliminations
Net sales
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Sales Originating From
North
America
Europe
Total
$42,302
503
678
18,197
2,353
2,313
7,043
$ —
10,096
2,531
—
—
—
85
$42,302
10,599
3,209
18,197
2,353
2,313
7,128
73,389
(7,043)
12,712
(85)
86,101
(7,128)
$66,346
$12,627
$78,973
$ 3,161
$ 1,968
$85,896
513
$
$
36
$ 2,528
$ 3,674
$ 2,004
$88,424
Sales Originating From
North
America
Europe
Total
$39,064
—
—
18,773
2,918
510
5,771
$ —
8,677
1,316
—
—
—
22
$39,064
8,677
1,316
18,773
2,918
510
5,793
67,036
(5,771)
10,015
(22)
77,051
(5,793)
$61,265
$ 9,993
$71,258
$ 2,640
$ 1,929
$80,085
291
$
$
29
$ 2,245
$ 2,931
$ 1,958
$82,330
Sales Originating From
North
America
Europe
Total
$40,070
—
—
10,215
2,166
1,421
5,226
$ —
7,413
1,018
—
—
—
79
$40,070
7,413
1,018
10,215
2,166
1,421
5,305
59,098
(5,226)
8,510
(79)
67,608
(5,305)
$53,872
$8,431
$62,303
Segment net income (loss)
Depreciation and amortization
Total assets
$ (6,184)
$ 1,997
$74,005
37
$
46
$
$1,909
$ (6,147)
$ 2,043
$75,914
71
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
(14) Selected Quarterly Financial Results (Unaudited)
Financial information for interim periods was as follows:
2006
Net sales
Gross profit
Income tax expense
Net income
Income per share (a):
Basic
Diluted
2005
Net sales
Gross profit
Income tax expense
Net income
Income per share (a):
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share amounts)
$20,289
8,820
(89)
$ 1,254
$
$
0.09
0.08
$17,893
7,111
(157)
301
$
$
$
0.02
0.02
$21,968
8,595
(229)
$ 1,686
$
$
0.11
0.11
$18,807
7,778
(76)
952
$
$
$
0.07
0.06
$19,291
7,574
(32)
626
$
$
$
0.04
0.04
$16,742
7,100
(13)
674
$
$
$
0.05
0.05
$17,426
6,816
—
108
$
$
$
0.01
0.01
$17,816
7,683
(43)
$ 1,004
$
$
0.07
0.07
(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 (loss) per share data.
(15) Legal Matters
The Company and certain of its officers are defendants in a class action lawsuit in the U.S. District Court for the District of Rhode Island. The suit asserts
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b−5 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 seeks certain legal remedies,
including compensatory damages. The Teamsters Affiliates Pension Plan has been appointed lead plaintiff. This matter consolidates into one action eight
separate complaints filed between July 24, 2004 and September 15, 2004. On January 14, 2005, the defendants filed a motion to dismiss the consolidated
complaint for failure to state a claim upon which relief can be granted. The court denied this motion in part and granted it in part.
On October 14, 2005, the defendants answered the consolidated complaint and denied liability and all allegations of wrongdoing. Subsequently, on
December 13, 2005, plaintiffs filed a motion for class certification. The motion is pending.
On August 16, 2004, Hamid Mehrvar filed a shareholder’s derivative action in the Rhode Island State Superior Court for Newport County against KVH
and certain of its officers and directors. The amended complaint asserts state law claims on KVH’s behalf arising between October 1, 2003 and the present in
72
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Table of Contents
(15) Legal Matters—(continued)
KVH INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2006, 2005 and 2004
(all tabular amounts in thousands except share and per share amounts)
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 Mehrvar’s 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 present. On March 1, 2006,
Mehrvar filed a shareholder’s derivative action in the Rhode Island State Superior Court for Providence County against KVH and certain of its officers and
directors. The complaint asserts state law claims on KVH’s behalf arising between October 1, 2003 and the present in connection with the allegations set forth in
the class action consolidated complaint in the U.S. District Court described above and seeks certain legal and equitable remedies, including restitution from
KVH’s directors and officers and corporate governance changes. On June 30, 2006, defendants moved to dismiss the complaint on the basis that plaintiff’s
complaint failed to adequately allege that demand was wrongfully refused. The motion to dismiss has been voluntarily withdrawn without prejudice to its refiling
at a later date.
On June 20, 2005, Yemin Ji filed a shareholder’s 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 KVH’s behalf arising between October 1, 2003 and the present in connection with the
same allegations set forth in the class action consolidated complaint in the U.S. District Court and the Mehrvar complaint described above and seeks certain legal
and equitable remedies, including restitution from KVH’s 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. The appeal is pending.
In May 2005, Electronic Controlled Systems, Inc., d/b/a King Controls, filed a patent infringement suit against KVH in the U.S. District Court for the
District of Minnesota. The three asserted patents relate generally to controlling a satellite dish to acquire a satellite signal. The complaint alleges that KVH
willfully infringes the patents and seeks injunctive relief, enhanced damages and attorneys’ fees. KVH has denied the allegations and asserted counterclaims,
including claims for false advertising. In January 2006, Electronic Controlled Systems, Inc., d/b/a/ King Controls, filed a second patent infringement suit against
KVH in the U.S. District Court for the District of Minnesota. The second suit concerns one of the same three patents asserted in the original suit filed in May
2005, alleges that KVH willfully infringes the patent and seeks both preliminary and permanent injunctive relief, enhanced damages and attorneys fees. KVH has
denied the allegations and asserted counterclaims. The court denied the plaintiff’s motion for a preliminary injunction after a hearing on May 30, 2006. These
two cases are now consolidated. An adverse ruling could result in an injunction preventing KVH from selling its TracVision products, other than those using
phased−array antennas, and in significant monetary damages based, in part, on sales of those products since at least March 2005. Pursuant to a settlement
agreement, the parties stipulated to the dismissal of the false advertising counterclaims. A final pretrial conference is scheduled for April 2007.
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
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
KVH Industries, Inc.:
We consent to the incorporation by reference in the Registration Statement Nos. 333−112341, 333−08491 and 333−67556 on Form S−8 of our reports dated
March 15, 2007, with respect to the consolidated balance sheets of KVH Industries, Inc., and subsidiary as of December 31, 2006 and 2005, and the related
consolidated statements of operations, changes in stockholders’ equity and accumulated other comprehensive income (loss) and cash flows for each of the years
in the three−year period ended December 31, 2006, management’s assessment of the effectiveness of internal control over financial reporting as of December 31,
2006, and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006 Annual Report
on Form 10−K of KVH Industries, Inc. and subsidiary. Our reports include an explanatory paragraph regarding the Company's adoption of Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share−Based Payments".
Exhibit 23.1
/s/ KPMG LLP
Providence, Rhode Island
March 16, 2007
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Exhibit 31.1
I, Martin A. Kits van Heyningen, President and Chief Executive Officer of KVH Industries, Inc., certify that:
1. I have reviewed this annual report on Form 10−K of KVH Industries, Inc.;
Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a−15(f) and 15d−15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 16, 2007
/s/ Martin A. Kits van Heyningen
Martin A. Kits van Heyningen
President and Chief Executive Officer
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
Exhibit 31.2
I, Patrick J. Spratt, Chief Financial Officer of KVH Industries, Inc., certify that:
1. I have reviewed this annual report on Form 10−K of KVH Industries, Inc.;
Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a−15(f) and 15d−15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 16, 2007
/s/ Patrick J. Spratt
Patrick J. Spratt
Chief Financial Officer
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
CERTIFICATION PURSUANT TO
18 U.S.C. 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES−OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10−K of KVH Industries, Inc. (the “Company”) for the year ended December 31, 2006, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned chief executive officer and chief financial officer of the
Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes−Oxley Act
of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Martin A. Kits van Heyningen
Martin A. Kits van Heyningen
President and Chief Executive Officer
Date: March 16, 2007
/s/ Patrick J. Spratt
Patrick J. Spratt
Chief Financial Officer
Date: March 16, 2007
_______________________________________________
Created by 10KWizard www.10KWizard.com
Source: KVH INDUSTRIES INC , 10−K, March 16, 2007
FORM DEF 14A
KVH INDUSTRIES INC \DE\ − KVHI
Filed: April 27, 2007 (period: May 23, 2007)
Official notification to shareholders of matters to be brought to a vote (Proxy)
Table of Contents
UNITED STATES
SECURITIESAND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant (cid:254)
Filed by a Party other than the Registrant¤
Check the appropriate box:
¤ Preliminary Proxy Statement
¤ Confidential, For Use of the Commission Only (as permitted by Rule 14a−6(e)(2))
(cid:254) Definitive Proxy Statement
¤ Definitive Additional Materials
¤ Soliciting Material under Rule 14a−12
KVH INDUSTRIES, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
(cid:254) No fee required.
¤ Fee computed on table below per Exchange Act Rules 14a−6(i)(1) and 0−11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0−11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4)
Proposed maximum aggregate value of transaction:
Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
(5) Total fee paid:
¤ Fee paid previously with preliminary materials.
¤ Check box if any part of the fee is offset as provided by Exchange Act Rule 0−11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2)
Form, Schedule or Registration Statement No.:
(3)
Filing Party:
(4) Date Filed:
Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
Table of Contents
KVH Industries, Inc.
Notice of Annual Meeting of Stockholders
to be held on May 23, 2007
and
Proxy Statement
IMPORTANT
Please mark, sign and date your proxy
and promptly return it in the enclosed envelope or
vote your proxy over the Internet or by telephone.
This proxy statement and form of proxy are first being mailed to stockholders on or about April 26, 2007.
Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
Table of Contents
KVH Industries, Inc.
50 Enterprise Center
Middletown, RI 02842−5279
April 26, 2007
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders of KVH Industries, Inc. Our meeting will be held at the offices of KVH Industries,
Inc., 50 Enterprise Center, Middletown, Rhode Island, on Wednesday, May 23, 2007, beginning at 11:00 a.m. Eastern time.
At this year’s annual meeting, stockholders will be asked to elect one director and to vote upon any other matters appropriate to the meeting. We have
provided additional information about this item and the annual meeting in the attached notice of annual meeting and proxy statement.
Whether or not you plan to attend the annual meeting, we hope you will vote as soon as possible. You may vote over the Internet, by telephone, or by
mailing a completed proxy card. Voting your proxy will ensure your representation at the annual meeting. If you hold your shares indirectly, such as through a
brokerage firm or similar institution, you should follow the voting instructions provided by that firm.
I urge you to review the proxy materials carefully and to vote for the proposal described in the proxy statement.
Thank you for your cooperation, continued support, and interest in KVH Industries, Inc. I hope to see you at the annual meeting.
Sincerely,
Martin A. Kits van Heyningen
President and Chief Executive Officer
Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
Table of Contents
KVH INDUSTRIES, INC.
Notice of Annual Meeting of Stockholders
to be held on May 23, 2007
KVH Industries, Inc., hereby gives notice that it will hold its annual meeting of stockholders at the offices ofKVH Industries, Inc., 50 Enterprise Center,
Middletown, Rhode Island, on Wednesday, May 23, 2007, beginning at 11:00 a.m., Eastern time, for the following purposes:
1.
2.
To consider and vote upon the election of one Class II director;
To transact such further business as may properly come before the annual meeting or any adjournment of the meeting.
Our Board of Directors has fixed the close of business on Friday, March 30, 2007 as the record date for the determination of the stockholders entitled to
receive notice of, and to vote at, the annual meeting and any adjournment of the meeting. Only stockholders of record on March 30, 2007 are entitled to receive
notice of, and to vote at, the annual meeting or any adjournment of the meeting.
By order of the Board of Directors,
Robert W.B. Kits van Heyningen
Secretary
Middletown, Rhode Island
April 26, 2007
YOUR VOTE IS IMPORTANT
Please sign and return the enclosed proxy, whether or not you
plan to attend the annual meeting.
Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
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Table of Contents
PROXY STATEMENT
TABLE OF CONTENTS
Annual Meeting of Stockholders
Purpose of the annual meeting
Record date
Methods of voting
Quorum requirement
Votes required; tabulation of votes
Solicitation of proxies
Revocability of proxy
Proposal One: Election of Director
Directors and Executive Officers
Compensation of Directors and Executive Officers
Compensation discussion and analysis
Summary compensation table
Grants of plan−based awards
Outstanding equity awards
Option exercises during 2006
Director compensation
Director compensation table
Compensation Committee Report
Equity Compensation Plans
Security Ownership of Certain Beneficial Owners and Management
Principal stockholders
Section 16(a) Beneficial Ownership Reporting Compliance
Board of Directors and Committees of the Board
Director independence
Board meetings
Board committees
Compensation Committee interlocks and insider participation
Director candidates and selection processes
Communications with our Board of Directors
Code of ethics
Certain relationships and related−party transactions
Audit Committee Report
Principal Accountant Fees and Services
Fees for professional services
Pre−approval policies and procedures
Stockholder Proposals
Available Information
Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
Table of Contents
ANNUAL MEETING OF STOCKHOLDERS
Purpose of the annual meeting
At the annual meeting, we will submit the following proposal to our stockholders:
Proposal One:
To elect one Class II director to a three−year term.
Our Board of Directors does not intend to present to the annual meeting any business other than the proposal described in this proxy statement. Our Board
of Directors was not aware, a reasonable time before mailing this proxy statement to stockholders, of any other business that may be properly presented for action
at the annual meeting. If any other business should come before the annual meeting, the persons present will have discretionary authority to vote the shares they
own or represent by proxy in accordance with their judgment, to the extent authorized by applicable regulations.
Record date
Our Board of Directors has fixed the close of business on Friday, March 30, 2007, as the record date for the annual meeting. Only stockholders of record
as of the close of business on that date are entitled to receive notice of the annual meeting, and to vote at, the annual meeting. At the close of business on the
record date, there were issued and outstanding 14,986,198 shares of our common stock, $0.01 par value. Each share of common stock outstanding on the record
date will be entitled to cast one vote.
Methods of voting
The shares represented by your properly signed proxy card will be voted in accordance with your directions. If you do not specify a choice with respect to
a proposal for which our Board of Directors has made a recommendation, the shares covered by your signed proxy card will be voted as recommended in this
proxy statement. We encourage you to vote on all matters to be considered.
Voting by mail:
By signing and returning the proxy card in the enclosed envelope, you are enabling the individuals named on the proxy card (known as “proxies”) to vote
your shares at the meeting in the manner you indicate. We encourage you to sign and return the proxy card even if you plan to attend the meeting. In this way,
your shares will be voted even if you are unable to attend the meeting. If you received more than one proxy card, it is an indication that your shares are held in
multiple accounts. Please sign and return all proxy cards to ensure that all of your shares are voted.
Voting by telephone:
To vote by telephone, please follow the instructions included on your proxy card. If you vote by telephone, you do not need to complete and mail your
proxy card.
Voting on the Internet:
To vote on the Internet, please follow the instructions included on your proxy card. If you vote on the Internet, you do not need to complete and mail your
proxy card.
Voting in person at the meeting:
If you plan to attend the meeting and vote in person, we will provide you with a ballot at the meeting. If your shares are registered directly in your name,
you are considered the stockholder of record and you have the
1
Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
Table of Contents
right to vote in person at the meeting. If your shares are held in the name of your broker or other nominee, you are considered the beneficial owner of the shares
held in street name. If you wish to vote shares held in street name at the meeting, you will need to bring with you to the meeting a legal proxy from your broker
or other nominee authorizing you to vote your shares.
Quorum requirement
Our by−laws provide that a quorum consists of a majority of the shares of common stock issued, outstanding and entitled to vote at the annual meeting.
Shares of common stock represented by a properly signed and returned proxy will be treated as present at the annual meeting for purposes of determining the
existence of a quorum at the annual meeting. In general, votes withheld from any nominee for election as director, abstentions, if applicable, and broker
“non−votes,” if applicable, are counted as present or represented for purposes of determining the existence of a quorum at the annual meeting. A “non−vote”
occurs when a broker or nominee holding shares for a beneficial owner returns a proxy but does not vote on a proposal because the broker or nominee does not
have discretionary voting power and has not received instructions from the beneficial owner.
Votes required; tabulation of votes
A plurality of the votes properly cast at the annual meeting will be necessary to elect the Class II director to a three−year term. A majority of the votes
properly cast at the annual meeting will be necessary to approve any other matter to be acted upon at the annual meeting.
Abstentions and broker “non−votes” will not be included in calculating the number of votes cast on any proposal. Abstentions and broker “non−votes” will
not have any effect on the outcome of the vote on the election of any director and will not have any effect on the outcome of the vote on any other proposal.
Our transfer agent, Computershare Trust Company, N.A., will separately tabulate the votes on each matter presented to the stockholders at the annual
meeting.
Solicitation of proxies
We are soliciting proxies on behalf of our Board of Directors. No compensation will be paid by any person in connection with our solicitation of proxies.
We will reimburse brokers, banks and other nominees for the out−of−pocket expenses and other reasonable clerical expenses they incur in obtaining instructions
from beneficial owners of our common stock. In addition to our solicitation by mail, our directors, officers and employees may make special solicitations of
proxies personally or by telephone, facsimile, courier or e−mail. We expect that the expense of any special solicitation will be nominal. We will pay all expenses
incurred in connection with this solicitation.
Revocability of proxy
You may revoke your proxy at any time before it is voted at the meeting. In order to revoke your proxy, you must either:
•
•
•
sign and return another proxy card with a later date;
provide written notice of the revocation of your proxy to our secretary; or
attend the meeting and vote in person.
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Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
Table of Contents
PROPOSAL ONE: ELECTION OF DIRECTOR
Proposal One concerns the election of one Class II director.
Our Board of Directors currently consists of seven directors and is divided into three classes. We refer to these classes as Class I, Class II and Class III.
The term of one class of directors expires each year at the annual meeting of stockholders. Each director also continues to serve as a director until his or her
successor is duly elected and qualified. This year, the term of the Class II directors is expiring.
Our Nominating and Corporate Governance Committee has nominated Charles R. Trimble to serve as a Class II director for a three−year term. Our current
Class II directors are Charles R. Trimble and Arent H. Kits van Heyningen, who were elected at our annual meeting of stockholders in May 2004. Their current
terms will expire at the 2007 annual meeting. Mr. Arent H. Kits van Heyningen informed us on April 24, 2007 that he does not wish to stand for re−election and
he intends to retire from his position as director by resigning on the date of the 2007 annual meeting.
Proxies will not be voted at the 2007 annual meeting for more than one candidate.
Mr. Trimble has agreed to serve if elected, and we have no reason to believe that he will be unable to serve. If he is unable or declines to serve as a director
at the time of the annual meeting, proxies will be voted for another nominee that our Board will designate at that time.
Our Board of Directors recommends that you vote FOR the election of Mr. Trimble.
The Nominating and Corporate Governance Committee intends to evaluate whether an additional person should be elected to fill the vacancy created by
the retirement of Mr. Kits van Heyningen. Our by−laws provide that a vacancy on the Board of Directors shall be filled by a vote of a majority of the directors
then in office. Our by−laws also provide that the Board of Directors may decrease the number of directors if there is a vacancy caused by resignation of a
director.
The Board of Directors intends to designate Mr. Kits van Heyningen as a Director Emeritus and its Honorary Chairman and he will be invited to attend all
meetings of the Board of Directors as a non−voting participant. Mr. Kits van Heyningen will continue to serve as our Chief Scientist.
3
Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
Table of Contents
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors are as follows:
Name
Arent H. Kits van Heyningen
Martin A. Kits van Heyningen
Patrick J. Spratt
Ian C. Palmer
Robert J. Balog
Daniel R. Conway
James S. Dodez
Dr. Kalyan Ganesan
Robert W.B. Kits van Heyningen
(1)(2)(3)
Mark S. Ain
Stanley K. Honey
Bruce J. Ryan
Charles R. Trimble
(1)(2)(3)
(1)(2)(3)
(3)
Age
91
48
59
41
43
53
48
58
50
64
52
63
65
Position
Chairman of the Board of Directors and Chief Scientist
President, Chief Executive Officer and Director
Chief Financial Officer
Executive Vice President, Satellite Sales
Vice President, Engineering (Satellite Products)
Vice President, Business Development
Vice President, Marketing and Strategic Planning
Vice President, Engineering (Defense Products)
Vice President, Research and Development and Director
Director
Director
Director
Director
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating and Corporate Governance Committee.
Our executive officers are appointed by, and serve at the discretion of, our Board of Directors. Arent H. Kits van Heyningen is the spouse of Josina de
Smit, our Treasurer, and they are the parents of Martin A. Kits van Heyningen and Robert W.B. Kits van Heyningen. Kathleen Kits van Heyningen, our Creative
Director, is the wife of Martin A. Kits van Heyningen.
Directors serving a term expiring at the 2007 annual meeting (Class II directors):
Arent H. Kits van Heyningen, one of our founders, has served as our chief scientist and Chairman of the Board of Directors since 1982. As described
elsewhere in this proxy statement, Mr. Kits van Heyningen has declined to stand for re−election to the Board at the 2007 annual meeting. He will continue to
serve as our chief scientist. From 1963 to 1986, Mr. Kits van Heyningen was employed by the Submarine Signal Division of Raytheon Company, where from
1976 to 1986 he held the position of manager of the digital systems engineering department and from 1963 to 1976 he was principal engineer. Mr. Kits van
Heyningen received a B.S. and an M.S. in electrical engineering from Delft Technical University, the Netherlands. He has also been issued nine patents.
Charles R. Trimble has served as one of our directors since 1999, a member of our Audit Committee since 2001, a member of our Compensation
Committee since 2000 and a member of our Nominating and Corporate Governance Committee since February 2004. From 1981 to 1998, he served as the
president and chief executive officer of Trimble Navigation Limited, a GPS company that he founded in 1978. Previously, he served as the manager of integrated
circuit research and development at Hewlett−Packard’s Santa Clara Division. Mr. Trimble is an elected member of the National Academy of Engineering, and he
has been Chairman of the United States GPS Industry Council since 1996. In addition, Mr. Trimble is a member of the California Institute of Technology
(Caltech) Board of Trustees. He received a B.S. in engineering physics, with honors, and an M.S. in electrical engineering from the California Institute of
Technology.
Directors serving a term expiring at the 2008 annual meeting (Class III directors):
Martin A. Kits van Heyningen, one of our founders, has served as our president and a director since 1982 and has served as our chief executive officer
since 1990. From 1980 to 1982, Mr. Kits van Heyningen was employed by the New England Consulting Group, a marketing consulting firm, as a marketing
consultant. Mr. Kits van Heyningen received a B.A., cum laude, from Yale University and has been issued five patents.
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Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
Table of Contents
Robert W.B. Kits van Heyningen, one of our founders, has served as one of our directors since 1982 and as our vice president of research and
development since April 1998. From 1982 to April 1998, he served as our vice president of engineering. From 1979 to 1982, Mr. Kits van Heyningen was an
associate engineer at the Submarine Signal Division of Raytheon Company and from 1977 to 1984, he served as a consultant to various companies and
universities. Mr. Kits van Heyningen received a B.S. in physics from McGill University with a minor in computer science.
Bruce J. Ryan has served as one of our directors, the Chairman of our Audit Committee, and a member of our Compensation Committee since July 2003.
He has also been a member of our Nominating and Corporate Governance Committee since February 2004. Mr. Ryan is currently involved in private consulting.
From February 1998 to November 2002, he served as executive vice president and chief financial officer of Global Knowledge Network, a provider of
information technology and computer software training programs and certifications. From 1994 to 1997, he served as the executive vice president and chief
financial officer of Amdahl Corporation, a provider of information technology solutions. Mr. Ryan previously had a 25−year career at Digital Equipment
Corporation, where he served in various executive positions, including senior vice president of the financial services, government and professional services
business group. Mr. Ryan also serves on the Board of Directors of Kronos Incorporated and IONA Technologies PLC. He received a B.S. in business
administration from Boston College and an M.B.A. from Suffolk University.
Directors serving a term expiring at the 2009 annual meeting (Class I directors):
Mark S. Ain has served as one of our directors since 1997, the Chairman of our Compensation Committee since 1997, a member of our Audit Committee
since 2000 and a member of our Nominating and Corporate Governance Committee since February 2004. He is the Executive Chairman of the Board of
Directors of Kronos Incorporated, which he founded in 1977. Mr. Ain also serves on the Board of Directors of LTX Corporation and various private companies
and charitable organizations. He received a B.S. from the Massachusetts Institute of Technology and an M.B.A. from the University of Rochester.
Stanley K. Honey has served as one of our directors since 1997 and a member of our Nominating and Corporate Governance Committee since February
2004. From January 2004 through January 2005, Mr. Honey served as the chief scientist of Sportvision Systems, LLC, which he co−founded in November 1997.
He served as president and chief technology officer of Sportvision Systems, LLC, from 2000 to January 2004 and as its executive vice president and chief
technology officer from 1998 to 2000. From 1993 to 1997, Mr. Honey served as executive vice president of technology for the New Technology Group of News
Corporation. From 1989 to 1993, Mr. Honey served as president and chief executive officer of ETAK, Inc., a wholly owned subsidiary of News Corporation.
Mr. Honey founded ETAK in 1983 and served as its executive vice president of engineering until News Corporation acquired it in 1989. Mr. Honey received a
B.S. from Yale University and an M.S. from Stanford University.
Our executive officers who are not also directors are listed below:
Patrick J. Spratt has served as our chief financial officer since July 2002. From April 2001 to June 2002, Mr. Spratt served as an independent consultant,
including service as the chief financial officer of FabCentric, Inc., a provider of productivity software for semiconductor manufacturing, from April 2001 until its
acquisition in December 2001. From January 2000 to April 2001, Mr. Spratt served as a director and the chief financial officer of NEGEN Access, Inc., an
early−stage broadband telecommunications company. From 1998 to January 2000, he served as the chief financial officer and treasurer of BioReliance
Corporation, a pharmaceutical and biotechnology testing, development and manufacturing firm. Mr. Spratt previously had a 25−year career at Digital Equipment
Corporation, including terms of service as vice president of investor relations from 1996 to 1998, vice president of business operations for computer systems
from 1994 to 1996, and vice president of finance for worldwide engineering from 1993 to 1994. Mr. Spratt also serves as a director and Chairman of the Audit
Committee of LTX Corporation, a provider of semiconductor test solutions. Mr. Spratt holds a B.A. in
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Source: KVH INDUSTRIES INC , DEF 14A, April 27, 2007
Table of Contents
mathematics from Boston College and an M.B.A. from Boston University and has completed executive education programs at Columbia University and Harvard
Business School.
Ian C. Palmer has served as our executive vice president, satellite sales since May 2004, and from September 2000 to May 2004, he served as our vice
president of satellite sales. From September 1998 to September 2000, he served as director of satellite sales, from February 1997 to September 1998, he served as
our reseller sales manager, from December 1995 to February 1997 he served as our sales manager and from December 1993 to December 1995, he served as our
marine sales coordinator. From December 1989 to December 1993, Mr. Palmer served as sales manager for Euro Marine Trading. He received a B.A. in
international relations and business from Boston University.
Robert J. Balog has served as our vice president of engineering (satellite products) since he joined the company in February 2005. From June 2003 to
January 2005, Mr. Balog served as president of his own engineering contract services company, Automation Services, Inc., a contract product development and
services group specializing in a wide range of automation solutions. From June 2001 to May 2003, Mr. Balog served as vice president of engineering at ADE
Corporation. From 1989 to April 2001, Mr. Balog held a number of positions at Speedline Technologies, Inc., a supplier of capital equipment to the electronics
assembly industry, including general manager and vice president of research and development. He has served on the Board of Directors of the Surface Mount
Equipment Manufacturers Association, serving as Chairman and numerous other positions. Mr. Balog is the recipient of ten U.S. patents. Mr. Balog holds a B.S.
in Computer Science from Purdue University.
Daniel R. Conway has served as our vice president of business development for military and industrial products since January 2003. From March 2000 to
December 2002, Mr. Conway was the vice president of sales and marketing at BENTHOS Inc., an oceanographic technology company with customers in the
marine, oil and gas, government and scientific markets. From 1980 to January 2000, he served in a variety of positions at Anteon (formerly Analysis &
Technology), including vice president for new business development and acquisition integration from 1997 to January 2000 and vice president of operations for
the Newport, Rhode Island operation from 1991 to 1997. Mr. Conway served for five years as a member of the U.S. Navy nuclear submarine force and was a
Commander in the U.S. Naval Reserve (Naval Intelligence) for more than 10 years. He is a graduate of the U.S. Naval Academy with post−graduate studies in
nuclear engineering, and he received an M.B.A. from the University of Rhode Island.
James S. Dodez has served as our vice president of marketing and strategic planning since March 2007. From October 1998 to March 2007, he served as
our vice president of marketing. He served as our vice president of marketing and reseller sales from 1995 to October 1998, and from 1986 to 1995, he served as
our marketing director. Prior to joining the company, Mr. Dodez was the marketing director at Magratten Wooley, Inc., an advertising agency, where he managed
KVH’s account from 1983 to 1986. Mr. Dodez received a bachelor’s degree in business with an emphasis in marketing from Miami University.
Dr. Kalyan Ganesan has served as our vice president of engineering (defense products) since February 2005. From May 2002 to February 2005, he
served as our vice president of engineering. From February 2001 to February 2002, Dr. Ganesan served as the vice president of engineering for CoWave
Networks, an early−stage developer of wireless broadband products. From February 1990 to September 2000, he served as an assistant vice president at Hughes
Network Systems, where he oversaw engineering and product research and development within the Satellite and Broadband Carrier Networks Divisions. From
1986 to 1990, he served as U.S. West’s technical director for advanced technologies. Dr. Ganesan received a B.S. in electrical engineering from Annamalai
University, India and an M.S. in electronics and communications engineering from the Indian Institute of Technology, New Delhi, India. He received his Ph.D. in
computer science and engineering from Case Western Reserve University.
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Table of Contents
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Compensation Discussion and Analysis
Overview of Executive Compensation Program
The Company’s executive compensation program is overseen and administered by the Compensation Committee of our Board of Directors, which is
comprised entirely of independent directors as determined in accordance with various NASDAQ Global Market, SEC and Internal Revenue Code rules. None of
its members is a current or former employee of the Company. It is the goal of the Compensation Committee to create policies and practices that provide total
compensation for executive officers that is fair, reasonable and competitive. The Compensation Committee operates under a written charter adopted by our
Board.
The Compensation Committee plays an important role in designing and administering our executive compensation program. All principal elements of
compensation paid to our executive officers are subject to approval by the Compensation Committee. Specifically, our Board has delegated authority to the
Compensation Committee to determine and approve (1) our compensation philosophy, (2) annual base salaries, bonuses and equity−based compensation
applicable to our executive officers, and (3) equity−based compensation applicable to non−executive employees.
There are no material differences in the compensation policies, objectives or programs with respect to our named executive officers, except that our
compensation for our President/Chief Executive Officer (CEO) is determined exclusively by the Compensation Committee, while the compensation of other
named executive officers is determined by the Compensation Committee based on similar criteria, but also takes into account the recommendations of our
President/CEO.
Executive Compensation Philosophy and Objectives
The Company’s executive compensation program is designed to attract, retain and motivate highly qualified executives and align their interests with the
interests of our stockholders. The ultimate goal of our executive compensation program is to increase stockholder value by providing executives with appropriate
incentives to achieve our business goals. In recent years, the Company’s executive compensation program has had three principal elements: annual base salary,
annual cash bonus, and equity−based compensation.
The Company’s executive compensation objectives are to:
•
•
•
•
•
offer fair and competitive compensation that attracts and retains superior executive talent;
directly and substantially link rewards to measurable corporate performance;
align the interests of executive officers with those of stockholders by providing executive officers with an equity stake in the Company;
optimize the cost to the Company and value to executives; and
promote long−term career commitments that support a long−standing internal culture of loyalty and dedication to our interests.
The three principal elements of our executive compensation program seek to provide the following rewards:
•
•
Base salaries provide fixed compensation to reward individual value that an executive officer brings to the Company through experience, and past and
expected future contributions to the Company’s success, while factoring in the specific needs of the Company and comparable responsibilities at
similar organizations.
Annual cash bonuses are designed to reward the achievement of the Company’s annual financial goal and certain individual performance goals set at
the beginning of each year. The financial goal is
7
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Table of Contents
based on the Company’s actual earnings per share, excluding stock compensation expense (for fiscal 2006 only), compared to the equivalent goal set
forth in the Company’s internal business plan.
•
Equity grants are designed to reward the achievement of long−term growth in the Company’s stock price. Stock options are granted with an exercise
price equal to the closing price of the Company’s stock on the NASDAQ Global Market on the date of grant. The stock options generally vest in
annual increments over a period of four years, with an option life of five years. Therefore, option grants have value to executive officers only to the
extent of any increase in the Company’s stock price.
For a company of our size, we believe that the use of these executive compensation elements strengthens our ability to attract and retain highly qualified
executives. We believe this combination of programs provides an appropriate mix of fixed and variable pay, balances short−term operational performance with
long−term shareholder value, and encourages executive recruitment and retention.
Our equity incentive program is a key retention tool and the Company’s vehicle for offering long−term incentives. Equity incentives are granted annually
to executive officers to attract, motivate and retain these executives. The Company grants equity incentives to executive officers to encourage executive officers
to work with a long−term view in the interest of shareholders and to reward the achievement of long−term growth in the Company’s stock price. Equity grants in
the form of stock options are inherently performance−based since the option grants will have value to the executive officers only to the extent of any increase in
the Company’s stock price. We believe that granting equity incentives is the best method of motivating the executive officers to manage the Company in a
manner that is consistent with the interests of the Company and our stockholders.
Compensation Decision−Making Process
The Company’s executives are compensated principally through a combination of base salary, an annual cash bonus paid in the first quarter of the
following year and an annual equity grant. In addition, we may also grant an initial equity award to new executive officers when they commence employment.
The base salary and equity incentive for each executive, together with the overall bonus plan for all executives, are established within the first quarter of
each fiscal year at an annual meeting of the Compensation Committee held for this purpose. In deciding the base salary and equity incentive granted to
executives (other than the President/CEO) for the current year, and cash bonuses for the prior fiscal year, the Compensation Committee typically receives
recommendations from the President/CEO. Cash bonuses are awarded in accordance with a formula approved by the Compensation Committee at the start of
each year that recognizes both corporate and individual performance. The President/CEO and the members of the Compensation Committee discuss the
President/CEO’s recommendations. In deciding the base salary and equity incentive granted to the President/CEO for the current year and the cash bonus payable
to the President/CEO with respect to the prior year, the Compensation Committee typically receives recommendations from the Chairman of the Compensation
Committee. The members of the Compensation Committee then discuss the Chairman’s recommendations. The President/CEO is not present at the time of these
deliberations. The Compensation Committee may accept or adjust any recommendations and makes all final compensation decisions.
At the meeting of the Compensation Committee held for the purpose of setting executive compensation, the Compensation Committee also approves a
formula on which each executive’s individual cash bonus for the current fiscal year, which is payable in the following fiscal year, is based. Under the formula set
for 2007, 75% of each executive’s bonus is based on corporate performance and 25% of the bonus is based on individual performance goals. The corporate
performance goal is based on the Company’s actual earnings per share in the fiscal year, as compared to the equivalent goal set forth in the Company’s internal
business plan. The Compensation Committee believes earnings per share is a strong measurement in assessing how well or how poorly the Company is
performing from a financial standpoint as it is a key driver of stockholder return over the long term. The individual performance goals (other than those of the
President/CEO) are determined by the President/CEO, with
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Table of Contents
input from each executive at the beginning of the year, and are memorialized in a memorandum retained by the Company’s human resources department. The
President/CEO individual performance goals are determined by the Compensation Committee, with input from the President/CEO, and are similarly
memorialized in a memorandum retained by the Company’s human resources department.
Although the annual cash bonus plan is formula−based, the Compensation Committee has the discretion to award bonuses that differ from the
formula−based amounts, including awarding bonuses in excess of the maximum amounts based upon the qualitative assessment of an individual’s performance
and contributions during the year, the importance of the individual’s position within the corporation, internal pay equity and retention considerations.
Compensation Consultant
In 2005, our management reviewed proposals from two compensation consulting firms and eventually engaged Radford Surveys and Consulting
(Radford), a business unit of Aon, as our independent compensation consultant. We engaged Radford to advise on matters related to our executive compensation
program and to assist in creating an effective and competitive executive compensation program. Prior to its engagement, Radford had not performed any services
for the Company. We directed Radford to conduct a competitive assessment of our executive compensation program for 2006. During this process, Radford
spoke with several executive officers and other employees to obtain historical data relating to compensation practices at the Company.
Radford assisted the Compensation Committee by providing comparative market data on compensation practices and programs based on an analysis of a
compensation peer group. Radford also provided guidance on industry best practices. Radford advised the Compensation Committee in (1) determining base
salaries for executives, (2) determining total cash bonus compensation as a percentage of base salary, and (3) designing and determining individual equity grant
levels for the 2006 long−term incentive plan for executives.
Radford’s recommendations with respect to base salary, bonus and equity compensation were taken into consideration by the Compensation Committee
when setting base salaries and making changes to the bonus and equity components of the executive compensation program.
Peer Group and Compensation Targets
With the assistance of Radford, the Compensation Committee selected a compensation peer group consisting of 262 technology companies that were
already surveyed by Radford in their 2005 Executive Survey which had an effective date of July 15, 2005. The survey results with respect to the peer group
related to cash compensation data were then increased by a 3.5% annual factor based on the result of Radford’s technology industry surveys to update the
previous market survey results to a common effective date of January 1, 2006. The 262 technology companies selected were included in the peer group because
they were in a comparable industry (technology) and had a revenue range of $50 million or less, or $50 million to $199 million, which was comparable to the
revenue range KVH forecasted in fiscal 2006 and the revenue results of KVH in recent fiscal years. The peer group was used to benchmark compensation for
executive positions with responsibilities similar in breadth and scope to ours with those of businesses comparable in size based on revenue.
Compensation Benchmarking Relative to Market
Radford also provided the Compensation Committee with the survey results for sixteen executives at the Company based on their title compared to the
aforementioned peer group. The assessment did not consider executive tenure, experience or performance. The Radford surveys reviewed by the Compensation
Committee included market data gathered at the 25
percentiles for (1) base salaries, (2) total cash compensation (base salary plus cash incentives), and
(3) long−term incentives (number of options granted and long−term incentive value of equity−based compensation) for the peer group versus the Company.
and 50
th
th
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The Compensation Committee reviewed and analyzed the compensation for each executive and made adjustments as appropriate. The Compensation
Committee targets different compensation levels for each element of compensation as described below.
Historically, the Compensation Committee generally has targeted approximately the median base salary level (50
percentile) of the survey data for base
salaries of executives. Adjustments to the median base salary level may be made based on comparisons to the survey data and evaluation of other factors. These
factors include the value each individual brings to the Company through experience, education and training, the specific needs of the Company, and the
individual’s past and expected future contributions to the Company’s success.
th
We believe that benchmarking and aligning base salaries is especially critical to a competitive compensation program. Other elements of our compensation
are affected by changes in base salary. For example, annual incentives are targeted and paid out as a percentage of base salary.
The compensation program allows executives to participate in an annual cash bonus program. Historically, the payouts for executives have been targeted
percentile) of the survey data when the Company reaches the expected earnings per share performance level for the
to pay out at approximately the median (50
year. The cash bonus based on earnings per share is equivalent to 75% of the target annual cash bonus. The remaining 25% of the target annual cash bonus is
determined based on the success of each executive officer in meeting personal business goals established at the beginning of the year.
th
The compensation program allows executives to receive equity incentive awards under the Company’s equity incentive plans. The primary goal of the
Company is to create long−term value for stockholders, and accordingly the Compensation Committee believes that equity incentive awards provide an
additional incentive to executive officers to work to maximize stockholder value. The target for equity incentive awards is approximately the 25
the survey data.
th
percentile of
Base Salary
As described above, base salaries are set for our executive officers at a meeting of our Compensation Committee which is held for that purpose in the first
quarter of the year. The Compensation Committee defines base salary as the annualized regular cash compensation of an employee, excluding cash bonus
awards, Company contributions to employee benefit plans, or other compensation not designated as salary.
In establishing base salaries of executive officers for 2006, we took into account the value each individual brings to the Company through experience,
education and training, the specific needs of the Company, and the individual’s past and expected future contributions to the Company’s success, as well as
overall corporate performance. We also considered the median base salary survey data of our 262 company peer group as our approximate benchmark. In
considering the above, we concluded that the base salary of our President/CEO was significantly below the median base salary of our peer group. As a result, the
President/CEO’s base salary percentage increase of approximately 19% was significantly higher than that of the other named executive officers. It is not our
policy to pay our executives at the highest level relative to their peers, but rather to set the base salary relatively at mid−range. We believe these rates allow us to
attract and retain talented executives.
Annual Cash Bonus
The management incentive plan is designed to reward our executives for the achievement of annual goals, principally, achievement of company
profitability, and, secondarily, achievement of individual goals. It is our philosophy that the executives be rewarded for their performance as a team. We believe
this is important to align our executive officers’ interests with strong corporate performance and promoting cooperation among them. The executives also are
rewarded for achieving individual goals set at the beginning of each year as described above.
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In February 2006, the Compensation Committee adopted the management incentive plan for 2006. Annual cash bonuses were targeted at 50% of salary for
the President/CEO, 40% of salary for the Chief Financial Officer and 30% of salary for the other executive officers. Under the cash bonus formula for 2006, 75%
of the target bonus for each executive officer was tied directly to the Company’s reported earnings per share, excluding stock compensation expense. The
remaining 25% was determined based on the success of each executive officer in meeting personal business goals established at the beginning of 2006.
The portion of the bonus based upon the Company’s earnings per share increases up to a maximum level determined by the Compensation Committee for
exceeding target earnings per share as set forth in the Company’s internal business plan approved by our Board, and reduces to zero on a sliding scale if earnings
per share decline below the target level. The threshold for bonus payment is achievement of 69% of our target earnings per share. At this level of achievement,
20% of the bonus target for corporate performance is earned. The maximum bonus payment for corporate performance is awarded if we achieve 155% of our
plan, and the payment is 200% of the bonus target.
The annual cash bonus target formula considered the median base salary survey data of our peer group provided by Radford as previously discussed as our
approximate benchmark.
Bonuses Awarded
The Compensation Committee awarded bonuses for fiscal 2006 based primarily upon the Company’s achievement of its non−GAAP earnings per share
goal and based secondarily on performance of individual goals. Our actual non−GAAP earnings per share achievement of $0.32 per share, which was 110% of
the Company’s goal, resulted in payments of 120% of the bonus portion based on our corporate performance goal for each executive officer. The non−GAAP
adjustment was for expenses incurred on equity−based compensation. The bonus portion based on executive’s individual performance goals differed from the
targeted amounts based on each executive’s individual performance. Achievement of individual performance goals from all named executive officers ranged
from 71% to 95%. None of the cash bonuses awarded under the management incentive plan for 2006 performance deviated from the formula−based approach.
Equity Incentive Program
Equity grants to each executive officer are based upon the executive’s prior performance, the importance of retaining his or her services and the potential
for his or her performance to help us attain our long−term goals. These factors are taken into consideration when determining the number of shares covered by
the stock option grant. There is no set formula for the granting of options. The options granted to executives approximated the 25th percentile in the Radford
survey data as a benchmark, however. In March 2006, equity incentives were granted to executive officers in amounts generally consistent with the Company’s
recent historical pattern of equity grants.
Equity grants to our non−executive employees consist of stock options with the quantity of options granted based on a percentage of base salary in most
cases.
Timing of Equity Grants
The Company grants equity incentives to executives in the first quarter of each fiscal year, usually in February, in conjunction with the annual review of
the individual and collective performance of our executive officers.
The Company historically has granted equity incentives in the form of stock options to our non−executive employees during the fiscal third quarter
meeting of the Compensation Committee, which is held in conjunction with the quarterly meeting of our Board. The Company typically grants options to new
hires on a quarterly basis, at the first Compensation Committee meeting subsequent to the employee’s start date.
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Exercise Price and Vesting of Stock Options
Stock options are granted with an exercise price equal to the closing price of the Company’s stock on the NASDAQ Global Market on the date of grant,
generally vest annually in increments of 25% of the number of shares granted on each anniversary of the date of grant and have a life of five years. Under this
vesting schedule, the options are fully exercisable four years after the date of grant, provided that the executive is employed by the Company at the time of
vesting.
Other Compensation and Perquisites
Our executive officers are eligible to receive the same health and welfare benefits that are available to other employees and a contribution to their benefit
premium that is the same as provided to other employees. These benefit programs include health and dental insurance, life insurance, supplemental life insurance,
and long−term disability insurance, and certain other benefits. In general, our employees pay 30% of the health insurance premium due.
The Company maintains an Employee Stock Purchase Plan and a tax−qualified 401(k) plan, which provides for broad−based employee participation.
Under the 401(k) plan, all Company employees, including executive officers, are eligible to receive matching contributions from the Company. The Company
presently matches 50% of all employee 401(k) plan contributions up to 4% of salary, with a maximum annual corporate match per employee of $3,000. The
Company does not provide defined benefit pension plans or defined contribution retirement plans to its executives or other employees other than the 401(k) plan.
The Company provided automobile allowances to four executives in 2006. Martin Kits van Heyningen’s auto allowance was $12,305, Arent Kits van
Heyningen’s was $7,750, Robert Kits van Heyningen’s was $6,569, and Robert Balog’s was $6,000. Executive officers did not receive any other perquisites or
other personal benefits or property from the Company.
The Company has no employment contract or change of control arrangement with any employee.
Tax and Accounting Considerations
Section 162(m) of the Internal Revenue Code limits our ability to deduct annual compensation in excess of $1,000,000 that is paid to our President/CEO or
any other named executive officers, unless that compensation is “performance−based” within the meaning of Section 162(m) and the regulations promulgated
thereunder. We believe that all of our stock options qualify as performance−based compensation and therefore are not subject to the deduction limitation of
Section 162(m). However, the salary and bonuses paid to our executive officers are not exempt from this deduction limit.
We consider tax deductibility in the design and administration of our executive officer compensation plans and programs. However, we believe that it is in
the best interests of the Company and its stockholders that we retain flexibility and discretion to make compensation awards, whether or not deductible, when
such awards are consistent with the strategic goals of the Company.
Rules under generally accepted accounting principles determine the manner in which we account for grants of equity−based compensation to our
employees in our financial statements. Our accounting policies for equity−based compensation are further discussed in notes 1 and 8 to the Company’s
consolidated financial statements.
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Table of Contents
SUMMARY COMPENSATION TABLE
For 2006
The following table provides information concerning the compensation earned by our President/Chief Executive Officer, Chief Financial Officer and each
of our three most highly compensated executive officers other than the President/Chief Executive Officer and Chief Financial Officer (collectively, “named
executive officers”) during 2006. In addition, we are providing information regarding the compensation earned by Arent H. Kits van Heyningen, who is a
director and an immediate family member of Martin A. Kits van Heyningen, our President and Chief Executive Officer. We are treating Arent H. Kits van
Heyningen as a “named executive officer” for purposes of the executive compensation disclosures in this proxy statement in lieu of the information that we
would otherwise provide in response to the disclosure requirements for director compensation and related−party transactions.
Name and Principal Position
Martin A. Kits van Heyningen
President and Chief Executive Officer
Patrick J. Spratt
Chief Financial Officer
Robert J. Balog
Vice President, Engineering (Satellite Products)
Ian C. Palmer
Executive Vice President,
Satellite Sales
Robert W. B. Kits van Heyningen
Vice President, Research and Development
Arent H. Kits van Heyningen
Chief Scientist
Year
2006
Salary
($)
338,961
Bonus
($)(1)
1,000
Option
Awards
($)(2)
83,253
Non−Equity
Incentive Plan
Compensation
($)(3)
193,375
All Other
Compensation
($)(4)
15,305
Total
($)
631,894
2006
224,791
1,000
89,128
102,375
3,000
420,294
2006
190,443
1,000
74,077
65,311
9,000
339,831
2006
197,454
1,000
31,603
67,431
3,000
300,488
2006
186,646
1,000
31,235
61,639
8,625
289,145
2006
182,489
1,000
31,226
62,320
7,750
284,785
(1)
(2)
(3)
(4)
Reflects annual holiday bonus earned and paid in 2006.
Amounts shown do not reflect compensation actually received by the named executive officer. Instead, the amounts shown reflect the compensation
expense recognized in our financial statements in fiscal 2006 that was computed in accordance with the Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 123(R), “Share−Based Compensation,” (SFAS No. 123(R)). A discussion of the assumptions used in calculating
these values may be found in Note 8 to our financial statements in our Form 10−K for the year ended December 31, 2006, as filed with the SEC on March
16, 2007. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service−based vesting conditions.
Reflects amounts that were earned under our management incentive plan for 2006 performance and that were determined and paid in March 2007.
Reflects the value of 401(k) matching contributions ($3,000 maximum) and auto allowances. Executive officers do not receive any other perquisites,
personal benefits or property.
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Table of Contents
GRANTS OF PLAN−BASED AWARDS
For 2006
The following table provides information regarding grants of plan−based awards made to our named executive officers during 2006.
Name
Martin A. Kits van Heyningen
Patrick J. Spratt
Robert J. Balog
Ian C. Palmer
Robert W. B. Kits van Heyningen
Arent H. Kits van Heyningen
Estimated Possible Payouts
Under Non−Equity Incentive
Plan Awards(2)
Target
($)(3)
Threshold
($)
Maximum
($)
Grant
Date(1)
2/22/2006
2/22/2006
2/22/2006
2/22/2006
2/22/2006
2/22/2006
25,500 170,000
90,000
13,500
57,165
8,575
59,280
8,892
56,035
8,405
54,787
8,218
297,500
157,500
100,039
103,740
98,062
95,878
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)(4)
40,000
25,000
7,500
12,500
12,500
12,500
Grant
Date
Fair
Value of
Stock
and
Option
Awards
($)(5)
Exercise
or Base
Price of
Option
Awards
($/Sh)
10.54 204,256
10.54 127,660
38,298
10.54
63,830
10.54
63,830
10.54
63,830
10.54
(1)
(2)
(3)
(4)
(5)
Reflects the date on which the grants and management incentive plan were approved by the Compensation Committee.
The amounts shown in these columns represent the executives’ annual incentive opportunity under the management incentive plan. See “Compensation
Discussion and Analysis—Annual Cash Bonus” for more information regarding this plan.
Target amount includes executive achievement of 100% of individual performance goals.
Represents the grant of non−qualified stock options under the 2003 Incentive and Non−Qualified Stock Option Plan. Options represent the right to
purchase shares of common stock at the price per share (equal to fair market value on the date of grant) indicated in the table. Options will vest over four
years in equal installments (25%) on the first, second, third and fourth anniversaries of the date of grant. See “Compensation Discussion and
Analysis—Equity Incentive Program” for more information regarding these grants.
Reflects the grant date fair value of non−qualified stock options granted to our named executive officers as determined under SFAS No. 123(R).
Regardless of whatever value is placed on a stock option on the date of grant, the actual value of the option will depend on the market value of the
Company’s common stock on the date of exercise. A discussion of the assumptions used in calculating these values may be found in Note 8 to our
financial statements in our Form 10−K for the year ended December 31, 2006, as filed with the SEC on March 16, 2007.
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Table of Contents
OUTSTANDING EQUITY AWARDS
As of December 31, 2006
The following table provides information concerning outstanding equity awards held by the named executive officers on December 31, 2006.
Name
Martin A. Kits van Heyningen
Patrick J. Spratt
Robert J. Balog
Ian C. Palmer
Robert W. B. Kits van Heyningen
Arent H. Kits van Heyningen
Number of Securities
Underlying Unexercised
Options (#) Exercisable
50,000
50,000
25,000
6,250
—
Option Awards
Number of Securities
Underlying Unexercised
Options (#) Unexercisable(1)
—
—
—
18,750(2)
40,000(2)
55,561
15,000
15,000
80
3,670
—
12,500
—
6,250
12,500
12,500
25,000
3,125
—
10,000
12,500
12,500
3,125
—
10,000
12,500
12,500
3,125
—
—
—
—
7,580(3)
3,670(4)
25,000(2)
37,500(2)
7,500(2)
—
—
—
—
9,375(2)
12,500(2)
—
—
—
9,375(2)
12,500(2)
—
—
—
9,375(2)
12,500(2)
Option Exercise
Price ($)
6.25
10.99
15.46
10.11
10.54
7.45
10.99
15.46
10.11
10.11
10.54
10.11
10.54
6.25
10.99
15.46
13.47
10.11
10.54
6.25
10.99
15.46
10.11
10.54
6.25
10.99
15.46
10.11
10.54
Option
Expiration Date
3/28/2007
2/24/2008
2/25/2009
3/3/2010
2/22/2011
7/1/2007
2/24/2008
2/25/2009
3/3/2010
3/3/2010
2/22/2011
3/3/2010
2/22/2011
3/28/2007
2/24/2008
2/25/2009
5/13/2009
3/03/2010
2/22/2011
3/28/2007
2/24/2008
2/25/2009
3/3/2010
2/22/2011
3/28/2007
2/24/2008
2/25/2009
3/3/2010
2/22/2011
(1)
(2)
(3)
(4)
The grant of options is five years prior to the option expiration date. 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 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 Company’s common stock became exercisable on December 9, 2005 as a result of this acceleration. These options had exercise prices
ranging from $10.99 to $17.62 per share. The decision to accelerate the vesting of these stock options was made primarily to reduce the cumulative
non−cash compensation expense that would have been recorded as a result of the adoption of SFAS No. 123(R) on January 1, 2006.
The options vest and become exercisable in equal installments on the first four anniversaries of the grant date.
The options vest and become exercisable as follows: 80 shares on March 3, 2007; 3,750 shares on March 3, 2008; and the remaining 3,750 shares on
March 3, 2009.
The options vest and become exercisable on March 3, 2007.
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Table of Contents
OPTION EXERCISES DURING 2006
The following table provides information regarding option exercises by each of our named executive officers during 2006.
Name
Martin A. Kits van Heyningen
Patrick J. Spratt
Robert J. Balog
Ian C. Palmer
Robert W. B. Kits van Heyningen
Arent H. Kits van Heyningen
Option Awards
Number of
Shares
Acquired
on Exercise (#)
40,000
25,439
—
18,750
10,000
10,000
Value Realized
on Exercise
($)(1)
146,091
129,230
—
75,825
37,705
37,250
(1)
The value realized equals the difference between the option exercise price and the fair market value of the Company’s common stock on the date of
exercise, multiplied by the number of shares for which the option was exercised.
We have no pension plan or nonqualified deferred compensation plan, and accordingly the table of pension benefits and nonqualified deferred compensation is
omitted.
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Table of Contents
Director Compensation
We pay our non−employee directors a $10,000 annual retainer and $2,000 for each regularly scheduled quarterly Board meeting attended, including
participation by telephone. No additional cash compensation is paid for attending any Board or Committee meetings. Directors who are employees do not receive
separate fees for their services as directors.
Non−employee directors who also serve as members of the Audit and Compensation Committees receive an additional annual compensation of $3,000 and
$2,000, respectively, except that the chairmen of each of the Audit and Compensation Committees receive annual compensation of $5,000 and $3,000,
respectively.
Each newly elected non−employee director will automatically receive on the date of his or her election a nonqualified option to purchase 10,000 shares of
our common stock at an exercise price equal to the closing price of the Company’s common stock on the NASDAQ Global Market on that date. Each initial grant
will vest in four equal quarterly installments after the date of grant such that it is fully vested one year after the date of grant and remains exercisable for a term of
five years from the date of grant. Currently, our non−employee directors are Messrs. Ain, Honey, Ryan and Trimble.
At the first meeting of the Board of Directors following the annual meeting of stockholders, non−employee directors will automatically receive a
nonqualified option to purchase 5,000 shares of our common stock with an exercise price equal to the closing price of the Company’s common stock on the
NASDAQ Global Market on that date. Each such option vests immediately and remains exercisable for a term of five years from the date of grant.
In addition, each non−employee director who is appointed to serve on the Audit Committee of our Board of Directors will receive, on the date of his initial
appointment, a nonqualified option to purchase 5,000 shares of our common stock at an exercise price equal to the closing price of the Company’s common stock
on the NASDAQ Global Market on that date, and an additional 5,000 shares on each anniversary, so long as he continues to serve on our Audit Committee. Each
such option will vest in four equal quarterly installments after the date of grant and remains exercisable for a term of five years from the date of grant.
In accordance with the terms of our stock option plans, at the first meeting of the Board of Directors after the 2006 annual meeting of stockholders, each of
Messrs. Ain, Honey, Ryan and Trimble received a nonqualified stock option to purchase 5,000 shares of common stock at an exercise price of $11.65 per share.
On the anniversary of their appointment to the Audit Committee, each of Messrs. Ain, Ryan and Trimble received a further nonqualified stock option to purchase
5,000 shares of common stock at an exercise price of $11.71 per share.
We paid salaries and bonus payments, as well as granted stock options to Martin A. Kits van Heyningen, Robert W.B. Kits van Heyningen and Arent H.
Kits van Heyningen, as set forth in the tables entitled “Summary Compensation Table” and “Grants of Plan−Based Awards.”
17
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Table of Contents
The following table provides information regarding the compensation of our non−employee directors for 2006.
DIRECTOR COMPENSATION TABLE
For 2006
Name
Bruce J. Ryan
Mark S. Ain
Charles R. Trimble
Stanley K. Honey
Fees Earned
or Paid in
Cash ($)
25,000
24,000
23,000
16,000
Option
Awards
($)(1)
52,207(2)
52,207(2)
52,207(2)
27,155(3)
Total
($)
77,207
76,207
75,207
43,155
(1)
(2)
(3)
Amounts shown do not reflect compensation actually received by the director. Instead, the amounts shown reflect the compensation expense recognized in
our financial statements in fiscal 2006 that was computed in accordance with SFAS No. 123(R). A discussion of the assumptions used in calculating these
values may be found in Note 8 to our financial statements in our Form 10−K for the year ended December 31, 2006, as filed with the SEC on March 16,
2007. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service−based vesting conditions.
Reflects the compensation costs recognized in fiscal 2006 for stock option grants with the following fair values as of the grant date: 5,000 options were
granted on August 2, 2006 with a fair value of $27,155; and 5,000 options were granted on August 7, 2006 with a fair value of $27,365. As of December
31, 2006, Mssrs. Ryan, Ain and Trimble all had an aggregate of 45,000 options outstanding.
Reflects the compensation costs recognized in fiscal 2006 for a stock option grant with the following fair value as of the grant date: 5,000 options were
granted on August 2, 2006 with a fair value of $27,155. As of December 31, 2006, Mr. Honey had an aggregate of 25,000 options outstanding.
COMPENSATION COMMITTEE REPORT
(1)
The Compensation Committee established by our Board of Directors is currently composed of Messrs. Ain, Ryan and Trimble. Our Board of Directors
adopted a charter for the Compensation Committee in April 2004. Under the charter, the Compensation Committee is responsible for recommending to the Board
the compensation philosophy and policies that we should follow, particularly with respect to the compensation of the members of our senior management. The
Committee is responsible for reviewing and approving the compensation of our executive officers, including our chief executive officer. In addition, the Board
has delegated to the committee the authority to administer, review and make recommendations with respect to our incentive compensation plans and our
equity−based plans.
The Compensation Committee has submitted the following report for inclusion in this proxy statement:
Our Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this proxy statement. Based on our
Committee’s review of, and the discussions with management with respect to the Compensation Discussion and Analysis, our Committee recommended to the
Board that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference in the Company’s annual report on
Form 10−K for the fiscal year ended December 31, 2006.
Compensation Committee
Mark S. Ain (Chairman)
Bruce J. Ryan
Charles R. Trimble
(1)
The material in this report is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made on, before, or after the date of this proxy
statement and irrespective of any incorporation language in such filing.
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Table of Contents
EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2006 regarding shares authorized for issuance under our equity compensation plans,
including individual compensation arrangements.
The equity compensation plans approved by our stockholders are our 2006 Stock Incentive Plan, Amended and Restated 1996 Incentive and Nonqualified
Stock Option Plan, 2003 Incentive and Nonqualified Stock Option Plan and Amended and Restated 1996 Employee Stock Purchase Plan. The following table
does not reflect the grants during 2007 of stock options to purchase an aggregate of 225,200 shares of our common stock at a weighted average exercise price of
$9.88 per share. As of December 31, 2006, we did not have any equity compensation plans not approved by our stockholders.
Equity Compensation Plan Information
Number of shares to be
issued upon exercise of
outstanding options,
warrants and rights (#)
Weighted−average
exercise price of
outstanding options,
warrants and rights ($)
1,563,773
—
1,563,773
11.11
—
11.11
Number of shares remaining
available for future issuance
under equity compensation
plans (excluding shares
reflected in column (#)
1,096,574(1)
—
1,096,574(1)
Plan category
Equity compensation plans approved by
stockholders
Equity compensation plans not approved by
stockholders
Total
(1)
Includes 78,114 shares of common stock reserved for future issuance under our Amended and Restated 1996 Employee Stock Purchase Plan.
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Table of Contents
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
At the close of business on March 30, 2007, there were issued and outstanding 14,986,198 shares of our common stock entitled to cast 14,986,198 votes.
On March 30, 2007, the closing price of the common stock as reported on the NASDAQ Global Market was $9.32 per share.
Principal stockholders
The following table provides, to the knowledge of management, information regarding the beneficial ownership of our common stock as of March 30,
2007, or as otherwise noted, by:
•
•
•
•
each person known by us to be the beneficial owner of more than five percent of our common stock;
each of our directors;
each executive officer named in the summary compensation table; and
all of our current directors and executive officers as a group.
The persons named in this table have sole voting and investment power with respect to the shares listed, except as otherwise indicated. The inclusion of
shares listed as beneficially owned does not constitute an admission of beneficial ownership. Shares included in the “Right to acquire” column consist of shares
that may be purchased through the exercise of options that are vested or will vest within 60 days of March 30, 2007.
Shares beneficially owned
Outstanding
Right to
acquire
Total
Percent
1,767,100
—
1,767,100
11.9
1,298,276
—
1,298,276
8.7
1,041,700
—
1,041,700
1,002,102
—
1,002,102
936,600
—
936,600
540,685
256,265
103,946
36,800
13,000
28,375
—
26,635
18,586
216
35,675
99,250
34,375
43,750
43,750
25,000
43,750
99,311
59,375
26,875
576,360
355,515
138,321
80,550
56,750
53,375
43,750
125,946
77,961
27,091
7.2
6.8
6.3
3.8
2.4
*
*
*
*
*
*
*
*
1,081,167
634,311
1,715,478
11.0
5% Stockholders
Royce & Associates, LLC
(1)
1414 Avenue of the Americas
New York, NY 10019
Systematic Financial Management, L.P.
(2)
300 Frank W. Burr Blvd
Glenpointe East, 7
Teaneck, NJ 07666
Floor
th
State of Wisconsin Investment Board
(3)
P.O. Box 7842
Madison, WI 53707
Cortina Asset Management, LLC
330 East Kilbourn Avenue
Milwaukee, WI 53202
Arbor Capital Management, LLC
One Financial Plaza
120 South Sixth Street
Minneapolis, MN 55402
(4)
(5)
Directors
(6)
(7)
Arent H. Kits van Heyningen
Martin A. Kits van Heyningen
Robert W.B. Kits van Heyningen
Mark S. Ain
Charles R. Trimble
Stanley K. Honey
Bruce J. Ryan
Other Named Executive Officers
Patrick J. Spratt
Ian C. Palmer
Robert J. Balog
All current directors and executive officers as a group
(13 persons)
* Less than one percent.
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(1) Information is based on a Schedule 13G filed by Royce & Associates, LLC with the Securities and Exchange Commission on January 22, 2007.
(2) Information is based on a Schedule 13G filed by Systematic Financial Management, L.P. with the Securities and Exchange Commission on February 14,
2007. The Schedule 13G states that Systematic Financial Management, L.P. has sole voting power for 1,205,676 shares and sole dispositive power for
1,298,276 shares.
(3) Information is based on a Schedule 13G filed by the State of Wisconsin Investment Board with the Securities and Exchange Commission on February 13,
2007.
(4) Information is based on a Schedule 13G filed by Cortina Asset Management, LLC (CMA) with the Securities and Exchange Commission on February 15,
2007. The Schedule 13G states that CMA has sole voting power for 490,694 shares and sole dispositive power for 1,002,102 shares.
(5) Information is based on a Schedule 13G filed by Arbor Capital Management, LLC with the Securities and Exchange Commission on February 2, 2007.
(6) Includes 245,752 shares of common stock and 1,300 shares subject to options held by Arent H. Kits van Heyningen’s spouse, who is our Treasurer. Arent H.
Kits van Heyningen is the father of Martin A. Kits van Heyningen and Robert W.B. Kits van Heyningen and disclaims beneficial ownership of his sons’
shares.
(7) Includes 5,620 shares of common stock and 1,750 shares subject to options held by Martin A. Kits van Heyningen’s spouse, who is our creative director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors and persons who beneficially own more than ten percent
of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. SEC regulations require executive
officers, directors and greater−than−ten−percent stockholders to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3, 4, 5, and amendments thereto furnished to us with respect to 2006, we believe that all Section 16(a) filing
requirements applicable to our executive officers, directors and greater−than−ten−percent stockholders were fulfilled in a timely manner.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Director independence
A majority of our directors are independent directors under the rules of the NASDAQ Global Market. Our Board of Directors has determined that our
independent directors are Messrs. Ain, Honey, Ryan and Trimble.
Board meetings
During 2006, our Board of Directors met seven times. With the exception of Messrs. Honey and Trimble, each incumbent director attended at least 75% of
the total number of meetings held by the Board and the Committees of the Board on which he served during 2006. Mr. Trimble attended 74% of the total number
of meetings held by the Board and the Committees of the Board on which he served. Mr. Honey attended 71% of the total number of meetings held by the Board
and the Committees of the Board on which he served. To the extent reasonably practicable, directors are expected to attend Board meetings, meetings of
committees on which they serve, and our annual meeting of stockholders. Last year, four of the seven individuals then serving as directors attended the annual
meeting.
Board Committees
Our Board of Directors has three standing committees: the Audit Committee, the Nominating and Corporate Governance Committee and the
Compensation Committee. Each member of the Audit Committee, the
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Table of Contents
Nominating and Corporate Governance Committee and the Compensation Committee meets the independence requirements of the NASDAQ Global Market for
membership on the committees on which he serves. The Audit Committee, the Nominating and Corporate Governance Committee and the Compensation
Committee each have the authority to retain independent advisors and consultants. We pay the fees and expenses of these advisors. Our Board of Directors has
adopted a written charter for each of the Audit Committee, the Nominating and Corporate Governance Committee and the Compensation Committee. We have
made each of these charters available through the Investor Relations page of our website at http://investors.kvh.com.
Audit Committee
Our Audit Committee is currently composed of Messrs. Ain, Ryan and Trimble. Our Audit Committee provides the opportunity for direct contact between
our independent registered public accounting firm and members of the Board of Directors; the auditors report directly to the Committee. The Committee assists
the Board in overseeing the integrity of our financial statements, our compliance with legal and regulatory requirements, our independent registered public
accounting firm’s qualifications and independence, and the performance of our independent registered public accounting firm. The Committee is directly
responsible for appointing, compensating, evaluating and, when necessary, terminating our independent registered public accounting firm. Our Audit Committee
has established procedures for the treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the
confidential and anonymous submission by our employees of concerns regarding questionable accounting, internal accounting controls or auditing matters. Our
Board has determined that Mr. Ryan is an Audit Committee financial expert under the rules of the Securities and Exchange Commission. Our Audit Committee
met eight times during 2006.
Nominating and Corporate Governance Committee
Our Board of Directors established a Nominating and Corporate Governance Committee in February 2004. The current members of our Nominating and
Corporate Governance Committee are Messrs. Ain, Honey, Ryan and Trimble. Our Nominating and Corporate Governance Committee’s responsibilities include
providing recommendations to our Board of Directors regarding nominees for director and membership on the committees of our Board. An additional function
of the committee is to develop corporate governance practices to recommend to our Board and to assist our Board in complying with those practices. Our
Nominating and Corporate Governance Committee met once during 2006.
Compensation Committee
The Compensation Committee’s responsibilities include providing recommendations to our Board regarding the compensation levels of directors,
reviewing and approving the compensation levels of executive officers, providing recommendations to our Board regarding compensation programs,
administering our incentive−compensation plans and equity−based plans, authorizing grants under our stock option and incentive plans, and authorizing other
equity compensation arrangements. For more information regarding the authority of the Compensation Committee, the extent of delegation by the Compensation
Committee, our processes and procedures for determining executive compensation and the role of executive officers and compensation consultants in
determining or recommending the amount or form of compensation for directors and executive officers, please see “Compensation Discussion and Analysis.”
Our Compensation Committee met three times during 2006. Our Compensation Committee is currently composed of Messrs. Ain, Ryan and Trimble.
Compensation Committee interlocks and insider participation
No member of the Compensation Committee had any relationship requiring disclosure under the rules of the Securities and Exchange Commission
regarding transactions and relationships with related parties.
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Director candidates and selection processes
The process followed by our Nominating and Corporate Governance Committee to identify and evaluate director candidates includes requests to our Board
members and others for recommendations, meetings from time to time to evaluate biographical information and background materials relating to potential
candidates, and interviews of selected candidates by members of the Committee and other members of our Board. The Committee may also solicit the opinions
of third parties with whom the potential candidate has had a business relationship. Once the committee is satisfied that it has collected sufficient information on
which to base a judgment, the committee votes on the candidate or candidates under consideration.
In evaluating the qualifications of any candidate for director, the Committee considers, among other factors, the candidate’s depth of business experience,
reputation for personal integrity, understanding of financial matters, familiarity with the periodic financial reporting process, reputation, degree of independence
from management, possible conflicts of interest and willingness and ability to serve. The Committee also considers the degree to which the candidate’s skills,
experience and background complement or duplicate those of our existing directors and the long−term interests of our stockholders. In the case of incumbent
directors whose terms are set to expire, the Committee also gives consideration to each director’s prior contributions to the Board. The minimum qualifications
that each director must possess consist of general familiarity with fundamental financial statements, ten years of relevant business experience, no identified
conflicts of interest, no convictions in a criminal proceeding during the five years prior to the date of selection and the willingness to execute and comply with
our code of ethics. In selecting candidates to recommend for nomination as a director, the Committee abides by our company−wide non−discrimination policy.
The Committee will consider director candidates recommended by stockholders and use the same process to evaluate candidates regardless of whether the
candidates were recommended by stockholders, directors, management or others. The Committee has not adopted any particular method that stockholders must
follow to make a recommendation. We suggest that stockholders make recommendations by writing to the Chairman of our Nominating and Corporate
Governance Committee, in care of our offices, with sufficient information about the candidate, his or her work experience, his or her qualifications for director,
and his or her references as will enable the Committee to evaluate the candidacy properly. We also suggest that stockholders make their recommendations well in
advance of the anticipated mailing date of our next proxy statement so as to provide our Nominating and Corporate Governance Committee an adequate
opportunity to complete a thorough evaluation of the candidacy, including personal interviews. We remind stockholders of the separate requirements set forth in
our by−laws for nominating individuals to serve as directors, which we discuss elsewhere in this proxy statement.
Communications with our Board of Directors
Our Board, including all of the independent directors, has established a process for facilitating stockholder communications with our Board. Stockholders
wishing to communicate with our Board should send written correspondence to the attention of our outside legal counsel, Adam Sonnenschein, Feinberg Law
Group, LLC, 57 River Street, Suite 204, Wellesley, Massachusetts 02481, and should include with the correspondence evidence that the sender of the
communication is one of our stockholders. Satisfactory evidence would include, for example, contemporaneous correspondence from a brokerage firm indicating
the identity of the stockholder and the number of shares held. Our legal counsel will forward all mail to each member of our Board of Directors.
Code of ethics
We have adopted a code of ethics that applies to all of our directors, executive officers and employees, including our principal executive officer and
principal financial and accounting officer. The code of ethics includes provisions covering compliance with laws and regulations, insider trading practices,
conflicts of interest, confidentiality, protection and proper use of our assets, accounting and record keeping, fair competition and fair dealing, business gifts and
entertainment, payments to government personnel and the reporting of illegal or unethical behavior. You can obtain a copy of our code of ethics through the
Investor Relations page of our website at http://investors.kvh.com.
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Certain relationships and related−party transactions
There were no related−party transactions in fiscal 2006. Under its charter, the Audit Committee of the Board of Directors is responsible for approving any
proposed related−party transaction. There are at present no written or otherwise established policies or procedures for the review, approval or ratification of
related−party transactions, except the statement in the Audit Committee charter noted above. The total individual compensation for Kathleen Kits van Heyningen
and Josina de Smit was less than $120,000.
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AUDIT COMMITTEE REPORT
(1)
The Board of Directors appointed an Audit Committee to monitor the integrity of our company’s consolidated financial statements, its system of internal
controls and the independence and performance of our independent registered public accounting firm. The Audit Committee also selects our company’s
independent registered public accounting firm. The Audit Committee is governed by a written charter adopted by the Board of Directors.
The Audit Committee currently consists of three independent directors. Each member of the Audit Committee meets the independence requirements of the
NASDAQ Global Market for membership on the Audit Committee.
Our company’s management is responsible for the financial reporting process, including the system of internal controls, and for the preparation of
consolidated financial statements in accordance with generally accepted accounting principles. Our company’s independent registered public accounting firm is
responsible for auditing those consolidated financial statements. Our responsibility is to monitor and review these processes. However, we are not professionally
engaged in the practice of accounting or auditing and are not experts in the fields of accounting or auditing, including with respect to auditor independence. We
have relied, without independent verification, on the information provided to us and on the representations made by our company’s management and independent
registered public accounting firm.
In fulfilling our oversight responsibilities, we discussed with representatives of KPMG LLP, our company’s independent registered public accounting firm
for 2006, the overall scope and plans for their audit of our company’s consolidated financial statements for 2006. We met with them, with and without our
company’s management present, to discuss the results of their examinations and their evaluations of our company’s internal controls and the overall quality of
our company’s financial reporting.
We reviewed and discussed the audited consolidated financial statements for 2006 with management and the independent registered public accounting
firm.
We discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended by Statement on Auditing Standards No. 90, Audit Committee Communications, including a discussion of
our company’s accounting principles, the application of those principles, and the other matters required to be discussed with Audit Committees under generally
accepted auditing standards.
In addition, we received from the independent registered public accounting firm a letter containing the written disclosures required by Independence
Standards Board Standard No. 1, Independence Discussions with Audit Committees, and discussed the disclosures with them, as well as other matters relevant to
their independence from management and our company. In evaluating the independence of our auditors, we noted that they provided no services to our company
beyond their audit and review of our consolidated financial statements. We also considered the amount of fees they received for audit services.
Based on our review and these meetings, discussions and reports, and subject to the limitations on our role and responsibilities referred to above and in the
Audit Committee charter, we recommended to the Board of Directors that our company’s audited consolidated financial statements for 2006 be included in our
company’s annual report on Form 10−K.
The Audit Committee
Bruce J. Ryan (Chairman)
Mark S. Ain
Charles R. Trimble
(1)
The material in this report is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made on, before, or after the date of this proxy
statement and irrespective of any incorporation language in such filing.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
We expect that representatives of KPMG LLP, our independent registered public accounting firm for 2006, will be present at the annual meeting. They
will have an opportunity to make a statement if they wish and will be available to respond to appropriate questions from stockholders. As of the date of this proxy
statement, our Audit Committee has not met to approve our independent registered public accounting firm to audit our financial statements for 2007.
Fees for professional services
The following is a summary of the fees for professional services rendered by KPMG LLP for 2006 and 2005:
Fee category
Audit fees
Total fees
Fees
2006
$ 452,500
$ 452,500
2005
$ 460,000
$ 460,000
Audit fees represent fees for professional services performed by KPMG LLP for the audit of our annual financial statements, the audit of our internal
controls over financial reporting and the review of our quarterly financial statements. We did not engage KPMG LLP to provide any audit−related services, tax
services or other services during or with respect to 2006.
Pre−approval policies and procedures
Our Audit Committee approves each engagement for audit or non−audit services before we engage KPMG LLP to provide those services.
Our Audit Committee has not established any pre−approval policies or procedures that would allow our management to engage KPMG LLP to provide any
specified services with only an obligation to notify the Audit Committee of the engagement for those services. None of the services provided by KPMG LLP for
2006 or 2005 was obtained in reliance on the waiver of the pre−approval requirement afforded in SEC regulations.
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STOCKHOLDER PROPOSALS
Stockholder proposals for inclusion in our proxy materials relating to our 2008 annual meeting of stockholders must be received by us at our executive
offices no later than December 25, 2007 or, if the date of that meeting is more than 30 calendar days before or after May 23, 2008, a reasonable time before we
begin to print and mail our proxy materials with respect to that meeting.
In addition, our by−laws provide that a stockholder desiring to bring business before any meeting of stockholders or to nominate any person for election to
the Board of Directors must give timely written notice to our secretary in accordance with the procedural requirements set forth in our by−laws. In the case of a
regularly scheduled annual meeting, written notice must be delivered to or mailed and received at our principal executive offices not less than 60 days nor more
than 90 days before the scheduled annual meeting, must describe the business to be brought before the meeting and must provide specific information about the
stockholder, other supporters of the proposal, their stock ownership and their interest in the proposed business. For example, if we were to hold our 2008 annual
meeting on May 7, 2008, in order to bring an item of business before the 2008 annual meeting in accordance with our by−laws, a stockholder would be required
to have delivered the requisite notice of that item of business to us on or after February 7, 2008 and not later than March 8, 2008. If we hold our 2008 annual
meeting before May 7, 2008, and if we give less than 70 days’ notice or prior public disclosure of the date of that meeting, then the stockholder’s notice must be
delivered to or mailed and received at our principal executive offices not later than the close of business on the tenth day after the earlier of (1) the day on which
we mailed notice of the date of the meeting and (2) the day on which we publicly disclosed the date of the meeting.
AVAILABLE INFORMATION
Stockholders of record on March 30, 2007 will receive a proxy statement and our annual report to stockholders, which contains detailed financial
information about us. The annual report is not incorporated herein and is not deemed a part of this proxy statement.
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KVH®
000004 C123456789
000000000.000000 ext 000000000.000000 ext
000000000.000000 ext 000000000.000000 ext
000000000.000000 ext 000000000.000000 ext
MR A SAMPLE DESIGNATION (IF ANY) ADD 1 ADD 2 ADD 3 ADD 4 ADD 5 ADD 6
You can vote by Internet or telephone! Available 24 hours a day, 7 days a week!
Instead of mailing your proxy, you may choose one of the two voting methods outlined below to vote your proxy.
VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.
Proxies submitted by the Internet or telephone must be received by 1:00 a.m., Central Time, on May 23, 2007.
Vote by Internet
Log on to the Internet and go to www.investorvote.com
Follow the steps outlined on the secured website.
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Using a black ink pen, mark your votes with an X as shown in this example. Please do not write outside the designated areas.
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01 − Charles R. Trimble +
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C Authorized Signatures — This section must be completed for your vote to be counted — Date and Sign Below
Please sign exactly as your name(s) appear(s) on the books of the Company. Joint owners should each sign personally. Trustees and other fiduciaries should indicate the capacity in which they
sign, and where more than one name appears, a majority must sign. If a corporation, this signature should be that of an authorized officer who should state his or her title.
Date (mm/dd/yyyy) — Please print date below. Signature 1 — Please keep signature within the box. Signature 2 — Please keep signature within the box.
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