KVH Industries
Annual Report 2014

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2014OR¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number 0-28082KVH Industries, Inc.(Exact Name of Registrant as Specified in its Charter)Delaware 05-0420589(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)50 Enterprise Center, Middletown, RI 02842(Address of Principal Executive Offices) (Zip Code)(401) 847-3327(Registrant’s Telephone Number, Including Area Code)Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, $0.01 par value per share The NASDAQ Global MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate 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 xIndicate 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 12months (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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xNo ¨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’sknowledge, 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. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o Accelerated filer xNon-accelerated filer o Smaller reporting company o(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xAs of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $188,649,721 based on the closing sale price of$13.03 per share as reported on the NASDAQ Global Market. Shares of common stock held by executiveTable of Contentsofficers and directors of the registrant and their affiliates have been excluded from this calculation because such persons may be deemed affiliates.As of March 13, 2015, the registrant had 15,990,015 shares of common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Proxy Statement relating to its 2015 Annual Meeting of Stockholders are incorporated herein by reference in Part III. Table of ContentsINDEX TO FORM 10-K Page PART I Item 1.Business3Item 1A.Risk Factors13Item 1B.Unresolved Staff Comments27Item 2.Properties28Item 3.Legal Proceedings28Item 4.Mine Safety Disclosures28 PART II Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities29Item 6.Selected Financial Data30Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations32Item 7A.Quantitative and Qualitative Disclosure About Market Risk46Item 8.Financial Statements and Supplementary Data46Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure46Item 9A.Controls and Procedures48Item 9B.Other Information50 PART III Item 10.Directors, Executive Officers and Corporate Governance52Item 11.Executive Compensation52Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters52Item 13.Certain Relationships and Related Transactions and Director Independence52Item 14.Principal Accountant Fees and Services52 PART IV Item 15.Exhibits and Financial Statement Schedules53Signatures562Table of ContentsPART IITEM 1.BusinessCautionary Statement Regarding Forward-Looking InformationIn addition to historical facts, this annual report contains forward-looking statements. Forward-looking statements are merely our current predictionsof future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could causeactual events to vary from our predictions include those discussed in this annual report under the headings “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations,” and “Item 1A. Risk Factors.” We assume no obligation to update our forward-looking statements to reflectnew information or developments. We urge readers to review carefully the risk factors described in this annual report and in the other documents that we filewith the Securities and Exchange Commission. You can read these documents at www.sec.gov.Additional Information AvailableOur principal Internet address is www.kvh.com. Our website provides a hyperlink to a third-party website through which our annual, quarterly, andcurrent reports, as well as amendments to those reports, are available free of charge. We believe these reports are made available as soon as reasonablypracticable after we electronically file them with, or furnish them to, the SEC. We do not provide any information regarding our SEC filings directly to thethird-party website, and we do not check its accuracy or completeness.IntroductionWe are a leading manufacturer of solutions that provide global high-speed Internet, television, and voice services via satellite to mobile users at seaand on land. We are also a leading provider of commercially licensed entertainment, including news, sports, music, and movies, to commercial and leisurecustomers in the maritime, hotel, and retail markets. In addition, as a result of our July 2014 acquisition of Videotel Marine Asia Limited and Super DragonLimited (together referred to as Videotel), we develop and distribute training films and e-Learning computer-based training courses to commercial maritimecustomers. We are also a premier manufacturer of high-performance navigational sensors and integrated inertial systems for defense and commercial guidanceand stabilization applications. We are headquartered in Middletown, Rhode Island, with active operations in Denmark, Hong Kong, the State of Illinois,Japan, Norway, Singapore, and the United Kingdom.Our Products and ServicesWe design, develop, manufacture, and market mobile communications products and services for the marine and land mobile markets, and navigation,guidance, and stabilization products for both the defense and commercial markets.Mobile Broadband ProductsIn the global maritime market, we believe that there is increasing demand for mobile access to television, entertainment, voice services, the Internet,and near real-time operational services such as safety training, navigation chart updates, weather services, and voyage optimization. For both maritime andterrestrial customers that want to access live television while on the move, we offer a comprehensive family of mobile satellite antenna products marketedunder the TracVision brand. For access to the Internet and voice services while on the move, which we refer to collectively as our airtime services, we offer afamily of mobile satellite antenna products and services marketed under the brands TracPhone and mini-VSAT Broadband. The network infrastructure that wehave developed to support our airtime services is also supporting the delivery of other value-added services over our IP-MobileCast content delivery servicefor both entertainment and operational needs.Our mobile satellite antenna products are typically installed on mobile platforms and use sophisticated robotics, stabilization and control software,sensing technologies, transceiver integration, and advanced antenna designs to automatically search for, identify and point directly at the selected televisionand communications satellite while the vehicle or vessel is in motion. Our antennas use gyros and inclinometers to measure the pitch, roll and yaw of anantenna platform in relation to the earth. Microprocessors and our proprietary stabilization and control software use that data to compute the antennamovement necessary for the antenna’s motors to point the antenna properly and maintain contact with the satellite. If an obstruction temporarily blocks thesatellite signal, our products continue to track the satellite’s location according to the movement of the antenna platform in order to carry out automatic,rapid reacquisition of the signal when a direct line of sight to the satellite is restored.3Table of ContentsOur Certified Support Network offers our TracVision and TracPhone customers an international network of skilled technical dealers and supportcenters in many locations where our customers are likely to travel. We have selected distributors based on their technical expertise, professionalism, andcommitment to quality and regularly provide them with extensive training in the sale, installation and support of our products.MaritimeIn the marine market, we offer a range of mobile satellite TV and communications products.Satellite TV. Our TracVision TV-series and M-series satellite TV antennas are designed with the full spectrum of vessel sizes in mind, ranging fromrecreational vessels as small as 20 to 25 feet to large commercial vessels. In mid-2014, we launched a new TV-series, which replaced a number of the M-seriesantennas with new antennas that incorporate new features, including an IP-enabled control unit to allow access to system information from any Wi-Fi device.Our family of marine TracVision products includes the 32-cm diameter TracVision TV1, 37-cm diameter TracVision TV3, 45-cm diameter TracVision TV5,60-cm diameter TracVision TV6, and 81.3-cm diameter TracVision M9, each of which employs a high-efficiency circular antenna. These products arecompatible with Ku-band HDTV programming as well as high-powered regional satellite TV services around the globe, based on available signal strengthand antenna size requirements. In September 2014, we announced our support for a new “Pay-As-You-Go” satellite TV service from DISH Network, which isaimed at seasonal boaters who only want to use the service when their boats are in the water.Our TracVision HD-series satellite TV antennas are designed to offer a high definition TV experience comparable to that enjoyed by a homeDIRECTV HDTV subscriber. Our TracVision HD7 uses a 61-cm diameter satellite TV antenna to receive signals from two DIRECTV Ka-band satellites andone DIRECTV Ku-band satellite simultaneously. It includes an Internet Protocol-enabled antenna control unit as well as optional antenna control via a freeTracVision application for use on an Apple iPhone or iPad. We believe the TracVision HD7 was the first marine antenna to offer this combination ofcapabilities. Our TracVision HD11 offers a worldwide satellite TV capability through the use of a 1-meter diameter antenna and a global low noise blockdesigned for use with the majority of direct-to-home satellite TV services. As a result, it is able to receive all Ku-band and DIRECTV Ka-band satellitetelevision signals without changing out hardware elements. The Ku-band also works with modern satellite television services currently available in theworld. The Ka-band will receive DIRECTV HDTV. Like the TracVision HD7, it features a customer application for the Apple iPhone or iPad to provide easycontrol of the system.Satellite Phone and Internet. Our mini-VSAT Broadband network offers an end-to-end solution for offshore connectivity. This unified C/Ku-bandBroadband service enables us to offer commercial, leisure, and government customers an integrated hardware and service solution for mobilecommunications and seamless region-to-region roaming. We design and manufacture the onboard TracPhone terminals, own the hub equipment installed inleased earth stations, lease the satellite capacity, manage the network through third-party service providers, and provide 24/7/365 after-sale support. Becausewe manufacture the onboard hardware, we can integrate the full rack of discrete below decks equipment typically used on traditional VSAT systems into asingle, streamlined unit that is significantly easier to deploy than competing VSAT solutions. Our mini-VSAT Broadband network utilizes ArcLight spreadspectrum modem technology developed by ViaSat. This spread spectrum approach reduces the broadcast power requirements and the pointing accuracynecessary to track the high-bandwidth C- and Ku-band satellites that carry the service. The resulting efficiencies allowed us to develop and bring to marketour TracPhone terminals. In June 2013, we introduced our new TracPhone V-IP Series product line for the mini-VSAT Broadband network, which was anupgrade to the previous TracPhone V-Series. Our 60-cm diameter TracPhone V7-IP Ku-band antenna is 85% smaller by volume and 75% lighter thanalternative 1-meter diameter VSAT antennas. Our 37-cm diameter TracPhone V3-IP Ku-band antenna is practical for use on smaller vessels as well as landvehicles. We believe that the TracPhone V3 is the smallest maritime VSAT system currently available. Our dual-mode TracPhone V11-IP antenna seamlesslytracks both C- and Ku-band satellites, making it the only 1-meter diameter maritime VSAT antenna to deliver seamless global coverage outside the far polarregions.We are actively engaged in sales efforts for the TracPhone V-IP Series and mini-VSAT Broadband service to government agencies for maritime,military, and emergency responder use. In September 2010, the U.S. Coast Guard awarded us a 10-year contract valued at up to $42 million to supplyTracPhone V7 systems and mini-VSAT Broadband airtime to as many as 216 U.S. Coast Guard cutters. As of December 31, 2014, we have supplied TracPhoneV7 and V7-IP systems for approximately 104 U.S. Coast Guard vessels. We are also taking steps to expand our ability to support the commercial maritimemarket. In March 2011, we signed a contract to provide TracPhone V7 and mini-VSAT Broadband service to Vroon B.V. and its fleet of more than 125commercial vessels and, as of December 31, 2014, approximately 112 systems have shipped. In March 2012, V.Ships, the world’s largest independent shipmanager serving a fleet of over 1,000 vessels, selected our mini-VSAT Broadband service as its preferred satellite communications solution. In June 2012,Tokyo-based shipping and logistics company, Nippon Yusen Kaisha (NYK Line), selected our TracPhone V7 and mini-VSAT Broadband service and, as of4Table of ContentsDecember 31, 2014, approximately 137 systems have shipped.In September 2010, we acquired Virtek Communication, a Norwegian firm that developed CommBox, a ship-to-shore network management productthat comprises shipboard hardware, a KVH-hosted or privately owned shore-based hub, and a suite of software applications. CommBox offers a range of toolsdesigned to increase communication efficiency, reduce costs, and manage network operations. Key functions include web and data compression andoptimization to increase network capacity; remote PC management for customer IT departments; integrated e-mail, firewalls, and security; least-cost routing;and bandwidth management on multiple communication carriers. CommBox is offered as an option for all TracPhone V-IP Series products (TracPhone VSATproducts) through software accompanying the integrated Commbox modem. We also offer Commbox for our Inmarsat-compatible TracPhone and IridiumOpenPort systems as well as other systems and services. CommBox sales include both the shipboard hardware and optional private shore-based hub,subscriptions to the selected software applications, and monthly system maintenance fees.We offer Iridium OpenPort hardware and service to be used in conjunction with our mini-VSAT service. Iridium OpenPort service provides data ratesup to 128Kbps and covers the entire world, including the polar regions. We offer the Iridium hardware and service along with our own mini-VSAT solutionand our CommBox, which will switch over to the Iridium service if the mini-VSAT service is not available. Our customers might choose to add the Iridiumservice to expand the geographic coverage of the system or as a backup service.In addition to our TracPhone VSAT products and mini-VSAT Broadband service, we also offer a family of Inmarsat-compatible TracPhone productsthat provide in-motion access to global satellite communications. These products rely on services offered by Inmarsat, a satellite service provider thatsupports links for phone, fax, and data communications as fast as 432 Kbps. The TracPhone FB150, FB250, and FB500 antennas use the InmarsatFleetBroadband service to offer voice as well as high-speed Internet service. The TracPhone FB150, FB250, and FB500 are manufactured by Thrane &Thrane A/S of Denmark (acquired by Cobham) and distributed on an OEM basis by us in North America under our TracPhone brand and distributed in othermarkets on a non-exclusive basis.Unlike mini-VSAT Broadband, where we control and sell the airtime, we purchase Inmarsat and Iridium airtime from a distributor and resell it to ourcustomers.Land MobileWe design, manufacture, and sell a range of TracVision satellite TV antenna systems for use on a broad array of vehicles, including recreationalvehicles, buses, conversion vans, and automobiles.In the RV and bus markets, we offer TracVision satellite TV products, intended for both stationary and in-motion use. Our TracVision R1 deliversDIRECTV or DISH network service through a small 31.75-cm diameter dome. Our TracVision A9, introduced in January 2015 as a replacement for theDIRECTV-only TracVision A7, uses hybrid phased-array antenna technology to provide in-motion reception of satellite TV programming in the continentalUnited States using either the DIRECTV or DISH Network services. The TracVision A9 stands approximately five inches high and mounts either to avehicle’s roof rack or directly to the vehicle’s roof, making it practical for use aboard minivans, SUVs and other passenger vehicles. The TracVision A9includes a mobile satellite television antenna and an IP-enabled TV hub for easy system configuration and control via Wi-Fi devices, such as an AppleiPhone or iPad. The TracVision A9 is also suitable for tall motor coaches and buses. Automotive customers subscribe to DIRECTV’s TOTAL CHOICEMOBILE satellite TV programming package, which is specifically promoted for automotive applications, or to DISH Network programming. Local channelsand network programming are also available as an option for TracVision A9 users as a result of the system’s integrated GPS. At this time, we are the onlycompany authorized by DIRECTV to sell, promote, and activate automotive users for the TOTAL CHOICE MOBILE programming package.Airtime ServicesIn addition to our mobile satellite antenna hardware and software, we offer airtime plans that enable customers to obtain Internet and voice services.We offer a variety of rate plans that typically require an initial commitment of one or more years with a one-year auto-renewal feature. Prices for fixed rateplans vary depending on data speeds and include protocol restrictions, such as limiting those that stream video content. User speeds are also restricted but notstopped when users reach established data use thresholds. In addition, we offer multiple metered plans that are either billed monthly based on the dataconsumed without any application or protocol blocking or based on a monthly minimum data quota with the option to add more data for an incrementalcharge. The TracPhone V3 requires a metered plan while the TracPhone V7 and V11 can support any plan.5Table of ContentsThe high bandwidth offered by the Ku-band satellites also permits faster data rates than those supported by Inmarsat’s L-band satellites. TracPhoneV7-IP and V11-IP customers may select service packages with Internet data connections offering ship-to-shore satellite data rates as fast as 1 megabit persecond, or Mbps, and shore-to-ship satellite data rates as fast as 4 Mbps. The TracPhone V3-IP, due to its smaller dish diameter, offers ship-to-shore data ratesas fast as 128 kilobits per second, or Kbps, and shore-to-ship satellite data rates as fast as 2 Mbps. In addition, subscriptions include Voice over InternetProtocol (VoIP) telephone services optimized for use over satellite connections. The TracPhone V7-IP and V11-IP can support two or more simultaneous callswhile the TracPhone V3-IP can support one call at a time.Our mini-VSAT Broadband network currently uses a combination of 21 Ku-band and three global C-band transponders on 16 satellites to providecoverage throughout the northern hemisphere and all of the major continents in the southern hemisphere. We currently offer our Ku-band mini-VSATBroadband service in the Americas, Europe, the Middle East, Africa, Asia-Pacific, and Australian and New Zealand waters. It is our long-term plan to continueto invest in and enhance our mini-VSAT Broadband network. In May 2014, we more than doubled our mini-VSAT Broadband network capacity in Africa andin November 2014 we tripled our capacity in South America to address the rising satellite communication demands of the Brazilian offshore oil and gasindustry, inland waterways, and other markets. Under the terms of our revenue sharing arrangement with ViaSat, these types of expansions position us to earnrevenue not only from the maritime and land-based use of the mini-VSAT Broadband service but also from aeronautical applications that roam throughoutour network.Advanced Media & ServicesWe offer a variety of value-added services to our maritime customers as well as news content to our hotel customers and radio content to a smallnumber of retail customers. The vast majority of these value-added services are subscription-based. We also off a variety of engineering and programmanagement services to certain customers that purchase our guidance and stabilization products.In May 2013, we acquired Headland Media Limited (now known as KVH Media Group), a media and entertainment service company based in theUnited Kingdom that distributes commercially licensed entertainment, including news, sports, music, and movies, to commercial and leisure customers in themaritime, hotel, and retail markets. Sales from KVH Media Group are included in our mobile broadband services sales. Our “news from home” digitalnewspaper service includes more than 60 daily newspapers in 14 languages that at the end of 2014 was delivered to more than 10,000 commercial ships,hotels, and cruise ships. The digital content can be printed onboard or viewed on a tablet, smartphone, or laptop. For movie content, we are an approveddistributor of certain major Hollywood, Bollywood, and independent studios for licensed content that is often available before release to DVD. For televisioncontent, we are an approved distributor for certain major TV studios worldwide.In July 2014, we acquired Videotel, a leading provider of high-quality training films and e-Learning services for the commercial maritime industry.Servicing over 11,500 vessels at the end of 2014, Videotel offers video, animation, e-Learning computer-based training (CBT) and interactive distancelearning services. Certification and refresher courses are mandated by international regulations and, at the end of 2014, more than 100 million training hoursof Videotel content had been delivered to over 250,000 registered crew members. Sales from Videotel are included in our mobile broadband service sales.In late 2014, we launched a new content delivery service called IP-MobileCast. Content and data files are transmitted using a sophisticated multicasttechnology across our global satellite network to every vessel or mobile vehicle that has an active, compatible TracPhone V series or V-IP series terminal. Thecontent is either stored on the terminal itself or on a KVH-supplied media server, which is required for digital rights managed content such as movies andVideotel content. This delivery mechanism reduces the amount of bandwidth required to transmit large files to a large population of customers. Beforemulticasting was possible, large data files were generally transmitted across satellite networks “on demand” or unicast, which consumes significantbandwidth. Moreover, copyright law requires permission from the rights holder for exhibitions of copyrighted film and television. Historically, studios havegranted KVH Media Group permission to license non-theatrical exhibitions aboard ships. While traditionally we have licensed this content to commercialmaritime customers through the distribution of DVDs, we have now automated the transmission of this type of entertainment via IP-MobileCast.Customers that subscribe to one of our entertainment packages generally receive a variety of movie and television content that is cached locallyonboard with unlimited onboard viewing for a year. We transmit 14 thirty-minute local “news from home” segments in a variety of languages on a dailybasis, up to 20 movies a month plus daily sports and news clips and special programming such as the 2014 FIFA World CupTM.We also offer a variety of operational services through IP-MobileCast. Subscribers to the Videotel training and e-Learning content can also receivenew content over the IP-MobileCast network with TRAININGlink, whereby customers6Table of Contentsreceive new content more frequently than once a year. As part of our CHARTlink service, we transmit electronic chart updates for ECDIS solution providersTransas and Jeppesen. For our FORECASTlink service, we transmit global forecasts and high-resolution weather data provided by AWT. Our charting andweather forecasting services provide critical content for voyage optimization.In addition, we offer professional services for our VSAT products that include network design, installation of onboard TracPhone terminals and customconfiguration of the CommBox based on customer requirements. These services are performed by our employees as well as a dealer network of certifiedengineers.Guidance and Stabilization ProductsWe offer a portfolio of digital compass and fiber optic gyro (FOG)-based systems that address the rigorous requirements of military and commercialcustomers. Our systems provide reliable, easy-to-use and continuously available navigation and pointing data. Our guidance and stabilization productsinclude our FOG-based inertial measurement units (IMUs) for precision guidance, FOGs for tactical navigation as well as pointing and stabilization systems,and digital compasses that provide accurate heading information for demanding applications.Guidance and StabilizationOur high-performance digital signal processing (DSP)-based FOG products use an all-fiber design that has no moving parts, resulting in an affordablecombination of precision, accuracy, and durability. Our FOG products support a broad range of military applications, including stabilization of remoteweapons stations, antennas, radar, optical devices, or turrets; image stabilization and synchronization for shoulder-or tripod-mounted weapon simulators;precision tactical navigation systems for military vehicles, and guidance for weapons and unmanned autonomous vehicles. Our FOG products are also used innumerous commercial products, such as navigation and positioning systems for various applications including precision mapping, dynamic surveying,autonomous vehicles, train location control and track geometry measurement systems, industrial robotics, and optical stabilization.Our TG-6000 IMU is a guidance system that provides precise measurement of motion and acceleration in three dimensions. It uses a three-axisconfiguration of our FOGs integrated with three accelerometers. We believe that this configuration provides outstanding performance, high reliability, lowmaintenance and easy system integration. The TG-6000 IMU is a component in the U.S. Navy’s MK54 lightweight torpedo and is suitable for use in otherapplications that involve flight control, orientation, instrumentation, and navigation, such as unmanned aerial vehicles. The CG-5100, our first commercial-grade IMU, is suitable for a wide range of applications such as 3D augmented reality, mobile mapping, platform navigation, and GPS augmentation forunmanned vehicle programs, precise mapping, and imagery.Our CNS-5000 continuous navigation system is a self-contained navigation system that combines our FOG-based inertial measurement technologywith GPS technology from NovAtel. This navigation solution provides precise position and orientation of a host platform on a continuous basis, even duringperiods where GPS signals are blocked by natural or man-made obstructions or conditions. The CNS-5000 is designed for demanding commercialapplications, such as dynamic surveying, mobile mapping, precision agriculture, container terminal management, and autonomous vehicle navigation, wherethe ability to determine the precise position and orientation of a piece of equipment or a mobile platform is critical. The CNS-5000 is a commercial-off-the-shelf (COTS) product consisting of a FOG-based inertial measurement unit tightly integrated with GPS within a single enclosure. This design reduces theoperational complexities for customers whose products cross international boundaries.Our open-loop DSP-1750, DSP-3000, and DSP-4000 FOGs provide precision measurement of the rate and angle of a platform’s turning motion forsignificantly less cost than competing closed-loop gyros. These DSP-based products deliver performance superior to analog signal processing devices, whichexperience greater temperature-sensitive drift and rotation errors. Applications for these products include inertial measurement units, integrated navigationsystems, attitude/heading/reference systems, and stabilization of antenna, radar, and optical equipment.The DSP-1750, which we believe to be the world’s smallest high-performance FOG, is the first to use our E·Core ThinFiber® technology. This thinfiber, which is created at our Tinley Park, Illinois manufacturing facility, is only 170 microns in diameter, enabling longer lengths of fiber to be wound intosmaller housings. Since the length of the fiber used in a FOG directly relates to gyro accuracy and performance, this technology enables us to produce smallerand more accurate gyros. The small size and weight of the DSP-1750 make it well suited for applications with size and weight restrictions, such as nightvision and thermal imaging systems, aircraft-mounted gimbaled cameras for law enforcement and homeland security, and7Table of Contentsshipboard optical systems.Our DSP-1760 single-axis and multi-axis FOGs offer improved performance and ease of integration relative to the DSP-1750. Many customers usingour DSP-1750 single-axis and dual-axis FOGs also had requirements for packaged DSP-1750s. To address this demand, we introduced the DSP-1760 productline, consisting of packaged one, two, or three axes of FOGs, each with two different interface connector options.The DSP-3000 and DSP-3100 are each slightly larger than a deck of playing cards and offers a variety of interface options to support a range ofapplications. High-performance 2-axis and 3-axis configurations can be realized by integrating multiple DSP-3000 and DSP-3100 units. Currently, the DSP-3000 and DSP-3100 are used in an array of pointing and stabilization applications, including the U.S. Army’s Common Remotely Operated Weapon Station(CROWS) to provide the image and gun stabilization necessary to ensure that the weapon remains aimed at its target. We estimate that more than 20companies have developed or are developing stabilized remote weapons stations that we believe will require similar FOG stabilization capabilities. Thelarger, militarized dual axis DSP-4000 is designed for use in high-shock and highly dynamic environments, such as gun turret stabilization.Our 1750 IMU is an advanced 6-degrees-of-freedom sensor designed to integrate easily into the most demanding stabilization, pointing, andnavigation applications. It offers enhanced performance at a lower cost than competing systems. The 1750 IMU marries the E·Core ThinFiber technology ofour DSP-1750 FOGs with very low noise, solid state MEMS accelerometers to create a commercial-off-the-shelf IMU. In September 2014, we introduced ournew 1775 IMU and 1725 IMU products to complement the 1750 IMU and provide customers with a range of choices for advanced 6-degrees-of-freedomsensors. The family of IMUs offers exceptional precision in a very small form factor, making them suitable for applications where space is limited, such asmanned and unmanned commercial and defense platforms, optical equipment stabilization systems, pipeline inspection equipment, and autonomous vehiclecontrol and navigation systems.Tactical NavigationOur TACNAV® tactical navigation product line employs digital compass sensors and KVH FOGs to offer vehicle-based navigation and pointingsystems with a range of capabilities, including GPS backup and enhancement, vehicle position, hull azimuth and navigation displays. Because our digitalcompass products measure the earth’s magnetic field rather than detect satellite signals from the GPS, they are not susceptible to GPS jamming devices.TACNAV systems vary in size and complexity to suit a wide range of vehicles. Our TACNAV Light is a low-cost, digital compass-based battlefieldnavigation system specifically designed for non-turreted vehicles, such as high mobility multi-wheeled vehicles (HMMWVs) and trucks. Our TACNAV TLS,a digital compass-based tactical navigation and targeting system, offers a FOG upgrade for enhanced accuracy designed for turreted vehicles, includingreconnaissance vehicles, armored personnel carriers, and light armored vehicles. Our TACNAV II Fiber Optic Gyro Navigation system offers a compactdesign, continuous output of heading and pointing data, and a flexible architecture that allows it to function as either a stand-alone navigation module or asthe central component of an expanded, multifunctional navigation system. In June 2014, we introduced our new TACNAV 3D product, which is FOG-basedand provides full three dimensional navigation. The TACNAV 3D is fitted with an Iridium transceiver to transmit and receive vehicle position, waypoint, andtarget location to or from a command center or other vehicle. The system also allows messages to be received from battlefield management systems.Our navigation systems function as standalone tools and also aggregate, integrate, and communicate critical information from a variety of on-boardsystems. TACNAV can receive data from systems such as the vehicle’s odometer, military and commercial GPS devices, laser rangefinders, turret angleindicators and laser warning systems. TACNAV can also output this data to an on-board computer for retransmission through the vehicle’s communicationssystems to a digital battlefield management application.Our TACNAV digital compass products have been sold for use aboard U.S. Army, Marine Corps, and Navy vehicles as well as to many foreigncountries, 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.Value-Added ServicesOur value-added services for the guidance and stabilization market include product repairs, engineering services provided under developmentcontracts, and extended warranty sales.8Table of ContentsSales, Marketing and SupportOur sales, marketing and support efforts target markets that are substantial and require dedicated dealers and distributors to reach customers. Thesechannels vary from time to time, but currently include targeted efforts to reach the commercial and leisure maritime markets; the RV, high-end automotiveand bus markets; and the commercial, industrial, and government markets. We believe our brands are well known and well respected by customers withintheir respective niches. These brands include:•TracVision - satellite television systems for vessels and vehicles•TracPhone - two-way satellite communications systems•mini-VSAT Broadband - mobile satellite communications network•IP-MobileCast - content delivery service•NewsLink - maritime newspapers•Videotel - maritime training content and services•CommBox - network management hardware and software for maritime communications•TACNAV - tactical navigation systems for military vehiclesWe sell our mobile satellite communications products directly and through an international network of independent retailers, chain stores anddistributors, as well as to manufacturers of vessels and vehicles.We sell entertainment media content directly through our KVH Media Group, headquartered in Leeds, England and our training and e-Learningcontent directly though our Videotel group, which is located in London, England, and Hong Kong.Our European headquarters, which is located in Denmark, coordinates our sales, marketing, and support efforts for our mobile satellitecommunications products in Europe, the Middle East, and Africa. Asian (excluding Japanese) and Australia/New Zealand sales are managed through ouroffices located in Singapore. Japanese sales are managed through our offices in Japan. All international offices are managed under the oversight of our NorthAmerican sales and marketing office. Standalone CommBox sales are managed by our Norwegian subsidiary in cooperation with members of our satellitesales teams in all offices worldwide. See Note 13 of the notes to our consolidated financial statements for information regarding our geographic segments.We sell our guidance and stabilization products directly to U.S. and foreign governments and government contractors, as well as through aninternational network of authorized independent sales representatives. This network also sells our FOG products to commercial and industrial customers.In 2013, purchases of TACNAV products and services by the U.S. Army Program Office - Saudi Arabian National Guard (SANG) represented 12% ofour total sales.BacklogBacklog is not a meaningful indicator for predicting revenue in future periods. Commercial resellers for our mobile satellite communications productsand legacy products do not carry extensive inventories and rely on us to ship products quickly. Generally due to the rapid delivery of our commercialproducts, our backlog for those products is not significant.Our backlog for all products and services was approximately $27.3 million, $20.5 million, and $35.0 million on December 31, 2014, 2013, and 2012,respectively. As of December 31, 2014, our backlog was scheduled for fulfillment in 2015 except for $9.8 million scheduled for fulfillment in 2016 through2019. The increase in backlog of $6.8 million from December 31, 2013 to December 31, 2014 was primarily the result of a $19.0 million TACNAV productand services contract with an international military customer for our new FOG-based tactical navigation system. The contract includes program managementand engineering services expected to be delivered through 2017 and hardware shipments expected to be fulfilled in 2015 and 2016, as well as out-yearsupport services to be provided as part of this order. The decrease in backlog of $14.5 million from December 31, 2012 to December 31, 2013 was primarily aresult of the fulfillment of the order for TACNAV products and services received in June 2012 from SANG and decreased orders for FOGs, partially offset byadditional TACNAV orders.Backlog consists of orders evidenced by written agreements and specified delivery dates for customers who are acceptable credit risks. We do notinclude satellite connectivity or media content service sales in our backlog even though many of our satellite connectivity and media content customershave signed annual or multi-year service contracts providing for a fixed monthly fee. Military orders included in backlog are generally subject tocancellation for the convenience of the customer. When orders are canceled, we generally recover actual costs incurred through the date of cancellation andthe costs9Table of Contentsresulting from termination. As of December 31, 2014, our backlog included approximately $22.4 million in orders that are subject to cancellation forconvenience by the customer. Individual orders for guidance and stabilization products are often large and may require procurement of specialized long-leadcomponents and allocation of manufacturing resources. The complexity of planning and executing larger orders generally requires customers to order well inadvance of the required delivery date, resulting in backlog.Intellectual PropertyOur ability to compete effectively depends to a significant extent on our ability to protect our proprietary information. We rely primarily on patent,copyright and trade secret laws, confidentiality procedures, and licensing arrangements to protect our intellectual property rights. We own approximately 22U.S. and foreign patents and have additional patent applications that are currently pending. We also register our trademarks in the United States and otherkey markets where we do business. Our patents will expire at various dates between June 2015 and July 2028. We enter into confidentiality agreements withour consultants, key employees, and sales representatives and maintain controls over access to and distribution of our technology, software, and otherproprietary information. The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technologyto compete with us.We do not generally conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by thirdparties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patentapplications pending, many of which are confidential when filed, with regard to similar technologies.From time to time, we have faced claims by third parties that our products or technologies infringe their patents or other intellectual property rights,and we may face similar claims in the future. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if theclaim 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 berequired 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 tooffer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which would preventus 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.ManufacturingManufacturing operations for our mobile satellite communications and navigation products consist of light manufacture, final assembly and testing.Manufacturing operations for our FOG products are more complex. We produce specialized optical fiber, FOG components and sensing coils and combinethem with components purchased from outside vendors for assembly into finished goods. We own optical fiber drawing towers with which we produce thespecialized optical fiber that we use in all of our FOG products. Excluding the CommBox product, which we manufacture in Norway, we manufacture,warehouse and distribute our mobile satellite communications products at our facilities in Middletown, Rhode Island. We manufacture our navigation andFOG products in our facility located in Tinley Park, Illinois.We contract with third parties for fabrication and assembly of printed circuit boards, injection-molded plastic parts, machined metal components,connectors and housings. We believe there are a number of acceptable vendors for the components we purchase. We regularly evaluate both domestic andforeign suppliers for quality, dependability and cost effectiveness. In some instances we utilize sole-source suppliers to develop strategic relationships toenhance the quality of materials and save costs. Our manufacturing processes are controlled by an ISO 9001:2008-certified quality standards program.For subscribers of the Videotel maritime safety video and computer-based training modules, we provide computer hardware preloaded with the content(“VOD kiosk”), which is updated annually by DVD. We use two contract manufacturers in the United Kingdom to supply the VOD kiosks, which eliminatesthe dependence on one vendor.CompetitionWe encounter significant competition in all of our markets, and we expect this competition to intensify in the future. Many of our primary competitorsare well-established companies and some have substantially greater financial, managerial, technical, marketing, operational, and other resources than we do.In the marine market for satellite TV equipment, we compete primarily with Intellian, Cobham SATCOM, Orbit Communication Systems, RayMarine(Intellian made), KNS, and Sea King (King Controls).10Table of ContentsIn the marine market for voice, fax, data, and Internet communications equipment, we compete primarily with Intellian, Cobham SATCOM, OrbitCommunication Systems, Jotron AS, KNS Inc., Inmarsat, AddValue, and Iridium Satellite LLC.In the marine market for voice, fax, data, and Internet services, we compete primarily with Inmarsat, Globalstar LP, and Iridium Satellite LLC. We alsoface competition from providers of marine satellite data services and maritime VSAT solutions, including Inmarsat (and its newly announced Global Xpressservice, which Inmarsat expects to attain global coverage in 2015), Marlink, MTN/SeaMobile, Speedcast, CapRock, and Airbus Defense & Space.In the market for land mobile satellite TV equipment, we compete primarily with King Controls and Winegard Company.In the markets for media content, we compete primarily with Swank Motion Pictures and NewspaperDirect.In the markets for safety and e-Learning content, we compete primarily with Seagull AS.In the markets for mobile satellite communications technology, the principal competitive factors are product size, features, design, performance,reliability, and price. In the markets for airtime services, the principal competitive factors are geographic coverage, data speed, value-added services, andprice. In the markets for media content, the principal competitive factors are license rights, distribution, and price.In the guidance and stabilization markets, we compete primarily with Honeywell International Inc., Northrop Grumman Corporation, GoodrichAerospace, IAI, Fizoptica, SAGEM, and Systron Donner Inertial. We believe the principal competitive factors in these markets are performance, size,reliability, durability, and price.Research and DevelopmentFocused investments in research and development are critical to our future growth and competitive position in the marketplace. Our research anddevelopment efforts are directly related to timely development of new and enhanced products and services that are central to our core business strategy. Theindustries in which we compete are subject to rapid technological developments, evolving industry standards, changes in customer requirements, and newproduct and service introductions and enhancements. As a result, our success depends in part upon our ability, on a cost-effective and timely basis, tocontinue to enhance our existing products and to develop and introduce new products and services that improve performance and meet customers’operational and cost requirements. Our current research and development efforts include projects to achieve additional cost reductions in our products andthe development of new products and services for our existing marine and land mobile communications markets, and navigation, guidance, and stabilizationapplication markets. For example:•In May 2014, we launched our new TracVision TV-series, which replaced a number of the previous TracVision M-series antenna products withnew features, including an IP-enabled control unit to allow access to system information from any Wi-Fi device.•In June 2014, we introduced our new TACNAV 3D product, which is FOG-based and provides full three-dimensional navigation.•In September 2014, we introduced our new 1775 IMU and 1725 IMU FOG products to complement the 1750 IMU and provide customers with arange of choices for advanced 6-degrees-of-freedom sensors.•In October 2014, we launched IP-MobileCast, a new content delivery service across our global satellite network. Content and data files aretransmitted using a sophisticated multicast technology across our global satellite network to every vessel or mobile vehicle that has an active,compatible TracPhone V-series or V-IP-series terminal.Our research and development activities consist of projects funded by us and projects funded with the assistance of customer-funded contract research.Our customer-funded research efforts are made up of contracts with defense and OEM customers, whose performance specifications are unique to their productapplications. 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 useour own funds to accelerate new product development efforts.Government RegulationOur manufacturing operations are subject to various laws governing the protection of the environment and our employees. These laws and regulationsare 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 andregulations.11Table of ContentsWe are subject to compliance with the U.S. Export Administration Regulations. Some of our products have military or strategic applications and areon the Munitions List of the U.S. International Traffic in Arms Regulations. These products require an individual validated license to be exported to certainjurisdictions. 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 toeither 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 U.S. and foreign jurisdictions in which we offer and sell our satellite communication productsand services, including those of the European Union, Brazil, Norway, Singapore,a and Japan. These laws and regulations, as well as the interpretation andapplication of these laws and regulations, are subject to change and any such change may affect our ability to offer and sell existing and planned satellitecommunications products and services.EmployeesOn December 31, 2014, we employed 523 full-time employees. We also employ part-time employees as well as temporary or contract personnel, whennecessary, 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 continuedability to attract and retain highly qualified technical and managerial personnel. None of our employees is represented by a labor union. We have neverexperienced a work stoppage and consider our relationship with our employees to be good.12Table of ContentsITEM 1A.Risk FactorsAn 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 ourbusiness, financial condition and results of operations could be adversely affected. If that happens, the market price of our common stock could decline.Our revenues and results of operations have been and may continue to be adversely impacted by worldwide economic turmoil, credit tightening, highfuel prices, and associated declines in consumer spending.Worldwide economic conditions have experienced significant turmoil over the last several years, including slower economic activity, tightened creditmarkets, inflation and deflation concerns, increased fuel prices, decreased consumer confidence, reduced corporate profits, reduced or canceled capitalspending, adverse business conditions, and liquidity concerns. These conditions make it difficult for businesses, governments and consumers to accuratelyforecast and plan future activities. Many governments are experiencing significant deficits that have caused and may continue to cause them to curtailspending significantly and/or reallocate funds away from defense programs. There can be no assurances that government responses to the disruptions in theeconomy will remedy these problems. As a result of these and other factors, customers could continue to slow or suspend spending on our products andservices. We may also incur increased credit losses and need to increase our allowance for doubtful accounts, which would have a negative impact on ourearnings and financial condition.We cannot predict the timing, duration, or ultimate impact of the turmoil in our markets. We expect our business to continue to be adversely impactedby this turmoil, particularly in Europe and South America.Our financial performance is impacted by U.S. government contracts, which are subject to uncertain levels of funding and termination.A reduction in sales to the U.S. government or its contractors, whether due to lack of funding, for convenience or otherwise, or the occurrence ofdelays, could negatively impact our results of operations and financial condition. For example, in recent years, we had historically sold a substantial portionof our FOG systems to a U.S. government contractor for the U.S. Army’s CROWS III program. However, during 2014, we recorded only $2.5 million in FOGsales under the CROWS III program. We currently have no expectation that FOG sales under this program will show any improvement from such a level in thenear future, and as a result we do not anticipate that this program will significantly contribute to our FOG sales in 2015 or future years, as it did for previousfiscal years.Further, the funding of U.S. government programs is subject to congressional appropriations. Congress generally appropriates funds on a fiscal yearbasis even though a program may extend over several fiscal years. Consequently, programs are often only partially funded initially and additional funds arecommitted only as Congress makes further appropriations. If appropriations for any program in which we participate become unavailable, or are reduced ordelayed, our contract or subcontract under such program may be terminated or adjusted by the government, which could have a negative impact on our futuresales under such contract or subcontract. When a formal appropriation bill has not been signed into law before the end of the U.S. government's fiscal year,which has become more frequent in recent years, Congress may pass a continuing resolution that authorizes agencies of the U.S. government to continue tooperate, generally at the same funding levels from the prior year, but that typically does not authorize new spending initiatives, during this period.Appropriations can also be impacted by other budgetary considerations, such as failure to increase the statutory debt ceiling of the U.S. government. Duringsuch periods (or until the regular appropriation bills are passed), delays can occur in procurement of products and services due to lack of funding, and thesedelays can affect our results of operations during the period of delay.Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. government. For example, future federalsequestration measures could continue to adversely affect federal spending across the U.S. government, including the Department of Defense, and we expectthat these measures will continue to limit or reduce defense spending, including spending for our FOG products for the U.S. Army's CROWS III program.In addition, U.S. government contracts generally also permit the government to terminate the contract, in whole or in part, without prior notice, at thegovernment's convenience or for default based on performance. If one of our contracts is terminated for convenience, we would generally be entitled topayments for our allowable costs and would receive some allowance for profit on the work performed. If one of our contracts is terminated for default, wewould generally be entitled to payments for our work that has been accepted by the government. A termination arising out of our default could expose us toliability and adversely affect our ability to obtain future contracts and orders. Furthermore, on contracts for which we are a subcontractor and not the primecontractor, the U.S. government could terminate the prime contract for convenience or otherwise, irrespective of our performance as a subcontractor.13Table of ContentsWe must generate a certain level of sales of the TracPhone V-series products and our mini-VSAT Broadband service in order to maintain or improveour service gross margins.As a result of our mini-VSAT Broadband network infrastructure, our cost of service sales includes certain fixed costs that do not generally vary with thevolume of service sales, and we have almost no ability to reduce these fixed costs in the short term. These fixed costs have increased significantly each yearas we have further expanded our network to accommodate additional subscriber demand and/or coverage areas, and we expect that this trend will continue in2015 and beyond. If sales of our TracPhone V-series products and the mini-VSAT Broadband service do not generate the level of revenue that we expect ordecline, our service gross margins may decline. As our market share has increased, we have also experienced a general increase in customer termination ratesand lower unit sales of our mobile communications hardware, both in the United States and Europe. The failure to improve our mini-VSAT Broadband servicegross margins would have a material adverse effect on our overall profitability.Competition may limit our ability to sell our mobile communications products and services and guidance and stabilization products.The mobile communications markets and defense navigation, guidance and stabilization markets in which we participate are very competitive, and weexpect this competition to persist and intensify in the future. We may not be able to compete successfully against current and future competitors, which couldimpair our ability to sell our products. For example, improvements in the performance of lower cost gyros by competitors could potentially jeopardize salesof our FOGs. As our market share in the mobile satellite communications market has grown, competition has intensified significantly, most notably fromcompanies that seek to compete primarily on price. These companies may continue to implement price reductions and discounts for both products andservices, which may require us to reduce our prices or offer discounts in order to maintain or increase our market share. We anticipate that this trend ofsubstantial competition will continue.In the marine market for satellite TV equipment, we compete primarily with Intellian, Cobham SATCOM, Orbit Communication Systems, RayMarine(Intellian made), KNS, and Sea King (King Controls).In the marine market for voice, fax, data, and Internet communications equipment, we compete primarily with Intellian, Cobham SATCOM, OrbitCommunication Systems, Jotron AS, KNS Inc., Inmarsat, AddValue, and Iridium Satellite LLC.In the marine market for voice, fax, data, and Internet services, we compete primarily with Inmarsat, Globalstar LP, and Iridium Satellite LLC. We alsoface competition from providers of marine satellite data services and maritime VSAT solutions, including Inmarsat (and its newly announced Global Xpressservice, which Inmarsat expects to attain global coverage in 2015), Marlink, MTN/SeaMobile, Speedcast, CapRock, and Airbus Defense & Space. We believethat certain customers have deferred purchase decisions in anticipation of the Global Xpress rollout, which is reducing demand in this market.In the market for land mobile satellite TV equipment, we compete primarily with King Controls and Winegard Company.In the markets for media content, the KVH Media Group competes primarily with Swank Motion Pictures and NewspaperDirect, and Videotel competeswith Seagull AS.In the guidance and stabilization markets, we compete primarily with Honeywell International Inc., Northrop Grumman Corporation, GoodrichAerospace, IAI, Fizoptica, SAGEM, and Systron Donner Inertial.Among the factors that may affect our ability to compete in our markets are the following:•many of our primary competitors are well-established companies that generally have substantially greater financial, managerial, technical,marketing, personnel and other resources than we do, which help them to compete more effectively in the market for mobile broadbandsolutions for larger fleets of vessels;•product and service improvements, new product and service developments or price reductions by competitors may weaken customer acceptanceof, and reduce demand for, our products and services;•new technology or market trends may disrupt or displace a need for our products and services;•our competitors may have access to a broader array of media content than we do, which may cause customers to prefer competitors’ mediaofferings; and•our competitors may have lower production costs than we do, which may enable them to compete more aggressively in offering discounts andother promotions.The emergence of a competing small maritime VSAT antenna and complementary service or other similar service could reduce the competitiveadvantage we believe we currently enjoy with our 60-centimeter (cm) diameter TracPhone V714Table of Contentsand 37-cm diameter TracPhone V3 antennas along with our integrated Ku-band mini-VSAT Broadband service, or with our C/Ku-band mini-VSATBroadband service and our TracPhone V11.Our TracPhone V3 and V7 systems offer customers a range of benefits due to their integrated design, hardware costs that are lower than existingmaritime Ku-band VSAT systems, and spread spectrum technology. We currently compete against companies that offer established maritime Ku-band VSATservice using, in some cases, antennas 1-meter in diameter or larger. While we are unaware of any company offering a 37-cm VSAT solution comparable toour TracPhone V3, we are encountering regional competition from companies offering 60-cm VSAT systems and services, which are comparable in size to ourTracPhone V7. Likewise, our TracPhone V11, at 1.1-meter in diameter, is approximately 85% smaller and lighter than competing C-band maritime VSATsystems, which uses antennas in excess of 2.4-meters in diameter to provide similar global services. We are unaware of any competitor currently offering asimilar size solution for global C-band coverage, but any introduction of such a product could adversely impact our success. In addition, other companiescould replicate some of the distinguishing features of our TracPhone V-series products, which could potentially reduce the appeal of our solution, increaseprice competition, and adversely affect sales. For example, Inmarsat has announced a new global Ka-band mobile VSAT service called Global Xpress whichthey claim will be faster and have a lower price per megabit than existing Ku-band services that might adversely impact sales of KVH’s mini-VSATBroadband service and related equipment. Moreover, consumers may choose other services such as FleetBroadband or Iridium OpenPort for their servicecoverage and potentially lower hardware costs despite higher service costs and slower data rates.If we are unable to improve our existing mobile communications and guidance and stabilization products and services and develop new, innovativeproducts and services, our sales and market share may decline.The markets for mobile communications products and services and guidance and stabilization products and services are each characterized by rapidtechnological change, frequent new product innovations, changes in customer requirements and expectations, and evolving industry standards. If we fail tomake innovations in our existing products and services and reduce the costs of our products and services in a timely way, our market share may decline. Forexample, the introductions of our new TracVision TV-series antennas and our new IP-MobileCast service occurred later than we had anticipated, which webelieve led certain customers to purchase competing products. Products or services using new technologies, or emerging industry standards, could render ourproducts and services obsolete. If our competitors successfully introduce new or enhanced products or services that eliminate technological advantages ourproducts or services may have in a market or otherwise outperform our products or services, or are perceived by consumers as doing so, we may be unable tocompete successfully in the markets affected by these changes.Our results of operations could be adversely affected if unseasonably cold weather, prolonged winter conditions, disasters or similar events occur.Our marine leisure business is highly seasonal and seasonality can also impact our commercial marine business. Historically, we have generated themajority of our marine leisure product revenues during the first and second quarters of each year, and these revenues typically decline in the third and fourthquarters of each year, compared to the first two quarters. Temporary suspensions of our airtime services typically increase in the third and fourth quarters ofeach year as boats are placed out of service during winter months. Our marine leisure business is also significantly affected by the weather. Unseasonably coolweather, prolonged winter conditions, hurricanes, unusual amounts of rain, and natural and other disasters may decrease boating, which could reduce ourrevenues. Specifically, we may encounter a decrease in new airtime activations as well as an increase in the number of cancellations or temporary suspensionsof our airtime service.Declining oil prices may adversely affect our revenues and profitability.Customers of our mobile satellite business include shipping companies that participate in, or are dependent upon, the oil industry. Recent declines inworldwide oil prices have hurt the financial performance of companies in this sector of the economy, and as a result they are seeking to reduce expendituresand increasing pressure on their suppliers to reduce prices. These trends could continue to limit or reduce demand for our satellite antenna products andairtime services from companies in this sector, which could adversely affect our revenues and profitability.We could derive an increasing portion of our revenues from commercial leases of mobile communications equipment, rather than sales, which couldincrease our credit and collection risk.We are actively seeking to increase revenues from the commercial markets for our mini-VSAT Broadband service, particularly shipping companies andother companies that deploy a fleet of vessels. In marketing this service, we offer leasing arrangements for the TracPhone antennas to both commercial andleisure customers. If commercial leases become increasingly15Table of Contentspopular with our customers, we could face increased risks of default under those leases. Defaults could increase our costs of collection (including costs ofretrieving or abandoning leased equipment) and reduce the amount we collect from customers, which could harm our results of operations. Moreover, fleetsales are likely to be less common than, and perhaps substantially larger than, our typical orders, which could lead to increased variability in our quarterlyrevenues and gross margin realization.The purchasing and delivery schedules and priorities of the U.S. military and foreign governments are often unpredictable.We sell our FOG systems and tactical navigation products to U.S. and foreign military and government customers, either directly or as a subcontractorto other contractors. These customers often use a competitive bidding process and have unique purchasing and delivery requirements, which often makes thetiming of sales to these customers unpredictable. Factors that affect their purchasing and delivery decisions include:•increasing budgetary pressures, which may reduce or delay funding for military programs;•changes in modernization plans for military equipment;•changes in tactical navigation requirements;•global conflicts impacting troop deployment, including troop withdrawals from the Middle East;•priorities for current battlefield operations;•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 internationalshipment of certain of our military products;•delays in military procurement schedules; and•delays in the testing and acceptance of our products, including delays resulting from changes in customer specifications.These factors can cause substantial fluctuations in sales of our TACNAV and FOG products from period to period. For example, sales of our FOGproducts decreased $5.5 million, or 23%, from 2013 to 2014. Similarly, TACNAV service sales decreased $6.5 million, or 63%, from 2013 to 2014. However,in October 2014, we received a $19.0 million TACNAV product and services contract with an international military customer which include programmanagement and engineering services expected to be delivered through 2017 and hardware shipments expected to be fulfilled in 2015 and 2016, as well asout-year support services to be provided as part of this order. Sales of our TACNAV products increased $0.5 million, or 3%, from 2013 to 2014. In November2014, we received a $4.3 million TACNAV product order with an international military customer for which shipments were completed in the fourth quarter of2014. These large orders contribute to the unpredictability of our revenues from period to period. The U.S. government may change defense spendingpriorities at any time. Moreover, government customers and their contractors can generally cancel orders for our products for convenience or decline toexercise previously disclosed contract options. Even under firm orders with government customers, funding must often be appropriated in the budget processin order for the government to complete the contract. The cancellation of or failure to fund orders for our products could further reduce our net sales andresults of operations.Sales of our FOG systems and TACNAV products generally consist of a few large orders, and the delay or cancellation of a single order couldsubstantially reduce our net sales. KVH products sold to customers in the defense industry are purchased through orders that can generally range in size from several hundred thousanddollars to more than one million dollars. For example, we received orders for TACNAV products and services of $4.3 million, $19.0 million, $5.2 million,$7.2 million, $35.6 million, and $2.8 million in November 2014, October 2014, May 2014, January 2013, September 2012, and September 2012,respectively. Orders of this size are often unpredictable and difficult to replicate. As a result, the delay or cancellation of a single order could materiallyreduce our net sales and results of operations. We periodically experience repeated and unanticipated delays in defense orders, which make our revenues andoperating results less predictable. Because our guidance and stabilization products typically have relatively higher product gross margins than our mobilecommunications products, the loss of an order for guidance and stabilization products could have a disproportionately adverse effect on our results ofoperations.Only a few customers account for a substantial portion of our guidance and stabilization revenues, and the loss of any of these customers couldsubstantially reduce our net sales.We derive a significant portion of our guidance and stabilization revenues from a small number of customers, many of whom are contractors for theU.S. government. For example, in 2013, one customer accounted for 12% of our total sales. In October 2014, we received a $19.0 million TACNAV productand services contract with an international military customer16Table of Contentswhich include program management and engineering services expected to be delivered through 2017 and hardware shipments expected to be fulfilled in2015 and 2016 as well as out-year support services to be provided as part of this order. The loss of business from any of these customers could substantiallyreduce our net sales and results of operations and could seriously harm our business. Since we are often awarded a contract as a subcontractor to a majordefense supplier that is engaged in a competitive bidding process as prime contractor for a major weapons procurement program, our revenues dependsignificantly on the success of the prime contractors with which we align ourselves.Commercial sales of our guidance and stabilization products are unpredictable.Increased commercial sales of our guidance and stabilization products are making it more difficult to predict our future revenues. We have beenmarketing our guidance and stabilization products, particularly our FOGs, to original equipment manufacturers for incorporation into commercial products,such as navigation and positioning systems for various applications, including precision mapping, dynamic surveying, autonomous vehicles, train locationcontrol and track geometry measurement systems, industrial robotics, and optical stabilization. Because we sell these products to original equipmentmanufacturers rather than end-users, we have less information about market trends and other developments affecting the buying patterns of end-users and, as aresult, may be unable to forecast demand for these products accurately. Sales of FOGs for commercial applications increased from 2013 to 2014; however,sales can significantly increase or decrease quarter-to-quarter due to the customer mix. Moreover, sales of these products for commercial applications dependon the success of our customers’ products, and any decline in sales of our customers’ products would reduce demand for our products.Our ability to compete in the maritime airtime services market may be impaired if we are unable to provide sufficient service capacity to meetcustomer demand.The TracPhone V-series products and our mini-VSAT Broadband service offer a range of benefits to mariners, especially in commercial markets, due tothe smaller size antenna and faster, more affordable airtime. We have completed the rollout of our original network coverage plan and currently offer servicein the Americas, Europe, the Middle East, Africa, Asia-Pacific, and Australian and New Zealand waters. In the future, we may need to expand capacity inexisting coverage areas to support an expanding subscriber base. If we are unable to reach agreement with third-party satellite providers to support the mini-VSAT Broadband service and its spread spectrum technology or transponder capacity is unavailable should we need to increase our capacity to meet growingdemand in a given region, our ability to support vessels and aeronautical applications globally will be at risk and could reduce the attractiveness of ourproducts and services to these customers.High fuel prices, tight credit availability, environmental concerns and ongoing low levels of consumer confidence are adversely affecting sales of ourmobile satellite TV products.Factors such as high fuel prices, tight credit, environmental protection laws and ongoing low levels of consumer confidence can materially andadversely affect sales of larger vehicles and vessels for which our mobile satellite TV products are designed. Many customers finance their purchases of thesevehicles and vessels, and tightened credit availability can reduce demand for both these vehicles and vessels and our mobile satellite TV products. Moreover,in the current credit markets, financing for these purchases has sometimes been unavailable or more difficult to obtain. The increased cost of operating thesevehicles and vessels can adversely affect demand for our mobile satellite TV products. Recent declines in oil prices may not result in any material increase indemand.Our business has substantial indebtedness, which could restrict our business opportunities.We currently have, and will likely continue to have, a substantial amount of indebtedness. Our indebtedness could, among other things, make it moredifficult for us to satisfy our debt obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwisecreate liquidity problems, limit our flexibility to adjust to market conditions, place us at a competitive disadvantage and expose us to interest ratefluctuations. As of December 31, 2014, we had total debt outstanding of $70.9 million, which included $63.8 million in aggregate principal amount ofindebtedness outstanding under our term note that we entered into on July 1, 2014.We expect to obtain the money to pay our expenses and pay the principal and interest on our indebtedness from cash flow from our operations andpotentially from other debt or equity offerings. Accordingly, our ability to meet our obligations depends on our future performance and capital raisingactivities, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If our cash flow and capitalresources prove inadequate to allow us to pay the principal and interest on our debt and meet our other obligations, we could face substantial liquidityproblems and might be required to dispose of material assets or operations, restructure or refinance our debt, which we may be unable to do on17Table of Contentsacceptable terms, and forego attractive business opportunities. In addition, the terms of our existing or future debt agreements may restrict us from pursuingany of these alternatives.The agreements governing our indebtedness subject us to various restrictions that may limit our ability to pursue business opportunities.The agreements governing our indebtedness subject us to various restrictions on our ability to engage in certain activities, including, among otherthings, our ability to:•acquire other businesses or make investments;•raise additional capital;•incur additional debt or create liens on our assets;•pay dividends or make distributions;•prepay indebtedness; and•merge, dissolve, liquidate, consolidate, or dispose of all or substantially all of our assets.These restrictions may limit or restrict our cash flow and our ability to pursue business opportunities or strategies that we would otherwise consider tobe in our best interests.Our secured credit facility contains certain financial and other restrictive covenants that we may not satisfy, and that, if not satisfied, could result in theacceleration of the amounts due under our secured credit facility and the limitation of our ability to borrow additional funds in the future.The agreements governing our secured credit facility subject us to various financial and other restrictive covenants with which we must comply on anongoing or periodic basis. These include covenants pertaining to a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverageratio, covenants requiring the mandatory prepayment of amounts outstanding under the term loan and the revolver under specified circumstances, including(i) 100% of the net cash proceeds from certain dispositions to the extent not reinvested in our business within a stated period, (ii) 50% of the net cashproceeds from stated equity issuances, and (iii) 100% of the net cash proceeds from certain receipts of more than $250,000 outside the ordinary course ofbusiness, and limits on capital expenditures. If we violate any of these covenants, we may suffer a material adverse effect. Most notably, our outstanding debtunder our secured credit facility could become immediately due and payable, our lenders could proceed against any collateral securing such indebtedness,and our ability to borrow additional funds in the future could be limited or terminated. Alternatively, we could be forced to refinance or renegotiate the termsand conditions of our secured credit facility, including the interest rates, financial and restrictive covenants and security requirements of the secured creditfacility, on terms that may be significantly less favorable to us.A default under agreements governing our indebtedness could result in a default and acceleration of indebtedness under other agreements.Certain agreements governing our indebtedness contain cross-default provisions whereby a default under one agreement could result in a default andacceleration of our repayment obligations under other agreements. If a cross-default were to occur, we may not be able to pay our debts or borrow sufficientfunds to refinance them. Even if new financing were available, it may not be available on acceptable terms. If some or all of our indebtedness is in default forany reason, our business, financial condition, and results of operations could be materially and adversely affected.Our mobile satellite products currently depend on satellite services and facilities provided by third parties, and a disruption in those services couldadversely affect sales.Our satellite antenna products include the equipment necessary to utilize satellite services; we do not own the satellites to directly provide two-waysatellite communications. We currently offer satellite television products compatible with the DIRECTV and DISH Network services in the United States, theBell TV service in Canada, the Sky Mexico service and various other regional satellite TV services in other parts of the world.SES, Eutelsat, Sky Perfect-JSAT, Telesat, EchoStar, Intelsat and Star One currently provide the satellite capacity to support the mini-VSAT Broadbandservice and our TracPhone V-series products. Intelsat also currently provides our C-Band satellite coverage. In addition, we have agreements with variousteleports and Internet service providers around the globe to support the mini-VSAT Broadband service. We rely on Inmarsat for satellite communicationsservices for our FleetBroadband compatible TracPhone products.18Table of ContentsIf customers become dissatisfied with the programming, pricing, service, availability or other aspects of any of these satellite services, or if any one ormore of these services becomes unavailable for any reason, we could suffer a substantial decline in sales of our satellite products. There may be no alternativeservice provider available in a particular geographic area, and our modem or other technology may not be compatible with the technology of any alternativeservice provider that may be available. In addition, the unexpected failure of a satellite could disrupt the availability of programming and services, whichcould reduce the demand for, or customer satisfaction with, our products.We rely upon spread spectrum communications technology developed by ViaSat and transmitted by third-party satellite providers to permit two-waybroadband Internet via our 60-cm diameter TracPhone V7 antenna, our 37-cm diameter TracPhone V3 antenna, and our 1.1-meter diameterTracPhone V11, and any disruption in the availability of this technology could adversely affect sales.Our mini-VSAT Broadband service relies on spread spectrum technology developed with ViaSat, Inc., for use with satellite capacity controlled by SES,Eutelsat, Sky Perfect-JSAT, Telesat, Echostar, Intelsat and Star One. Our TracPhone two-way broadband satellite terminals combine our stabilized antennatechnology with ViaSat’s ArcLight spread spectrum mobile broadband technology, along with ViaSat’s ArcLight spread spectrum modem. The ArcLighttechnology is also integrated within the satellite hubs that support this service. Sales of the TracPhone V-series products and our mini-VSAT Broadbandservice could be disrupted if we fail to receive approval from regulatory authorities to provide our spread spectrum service in the waters of various countrieswhere our customers operate or if there are issues with the availability of the ArcLight maritime modems. Moreover, over the course of our ten-year agreementwith ViaSat, which expires in 2018, satellite communications technology may continue to evolve, which could reduce the relative attractiveness of thetechnology we currently offer, and our technology may cease to be compatible with changes in satellite service offerings. If we were to seek to, or required to,transition to any new technology, we may encounter technological challenges, increased expenses, customer dissatisfaction, inventory obsolescence,interruptions in supply, disruptions in current relationships or arrangements and unforeseen obstacles, any of which could have a material adverse effect onour mobile satellite business, revenues and profitability.We have single dedicated manufacturing facilities for each of our mobile communications and guidance and stabilization product categories, and anysignificant disruption to a facility could impair our ability to deliver our products.Excluding the products manufactured by Videotel, which we manufacture in the United Kingdom, we currently manufacture all of our mobilecommunications products at our manufacturing facility in Middletown, Rhode Island, and the majority of our guidance and stabilization products at ourfacility in Tinley Park, Illinois. Some of our production processes are complex, and we may be unable to respond rapidly to the loss of the use of eitherproduction facility. For example, our production facilities use some specialized equipment that may take time to replace if they are damaged or becomeunusable for any reason. In that event, shipments would be delayed, which could result in customer or dealer dissatisfaction, loss of sales and damage to ourreputation. Finally, we have only a limited capability to increase our manufacturing capacity in the short term. If short-term demand for our products exceedsour manufacturing capacity, our inability to fulfill orders in a timely manner could also lead to customer or dealer dissatisfaction, loss of sales and damage toour 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. Anyinterruption in supply could impair our ability to deliver our products until we identify and qualify a new source of supply, which could take several weeks,months or longer and could increase our costs significantly. Suppliers might change or discontinue key components, which could require us to modify ourproduct designs. For example, in the past, we have experienced changes in the chemicals used to coat our optical fiber, which changed its characteristics andthereby necessitated design modifications. Department of Defense regulations requiring government contractors to implement processes to avoid counterfeitparts may require us to find new sources of materials or components if the current supplier cannot meet the requirements. In general, we do not have writtenlong-term supply agreements with our suppliers but instead purchase components through purchase orders, which expose us to potential price increases andtermination of supply without notice or recourse. It is generally not our practice to carry significant inventories of product components, and this couldmagnify 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 unexpectedmanufacturing difficulties and could affect product performance and reliability. In addition, from time to time, lead times for certain components can increasesignificantly due to imbalances in overall market supply and demand. This, in turn, could limit our ability to satisfy the demand for certain of our products ona timely basis and could result in some customer orders being rescheduled or canceled.19Table of ContentsWe may continue to increase the use of international suppliers to source components for our manufacturing operations, which could disrupt ourbusiness.Although we have historically manufactured and sourced raw materials for the majority of our products domestically, in order for us to compete withlower priced competing products while also improving our profitability, in some instances we have found it desirable to source raw materials andmanufactured components and assemblies from Europe, Asia, and South America. Reliance on foreign manufacturing and/or raw material supply haslengthened our supply chain and increased the risk that a disruption in that supply chain could have a material adverse effect on our operations and financialperformance.Adverse economic conditions could result in financial difficulties or bankruptcy for any of our suppliers, which could adversely affect our business andresults of operations.The significant downturn in worldwide economic conditions and credit tightening could present challenges to our suppliers, which could result indisruptions to our business, increase our costs, delay shipment of our products or delivery of services, and impair our ability to generate and recognizerevenue. To address their own business challenges, our suppliers may increase prices, reduce the availability of credit, require deposits or advance paymentsor take other actions that may impose a burden on us.They may also reduce production capacity, slow or delay delivery of products, face challenges meeting our specifications or otherwise fail to meet ourrequirements. In some cases, our suppliers may face bankruptcy. We may be required to identify, qualify, and engage new suppliers, which would require timeand the attention of management. Any of these events could impair our ability to deliver our products and services to customers in a timely and cost-effectivemanner, cause us to breach our contractual commitments or result in the loss of customers.Our media and entertainment business relies on licensing arrangements with content providers, and the loss of or changes in those arrangements couldadversely affect our business.We distribute premium news, sports, movies, and music content for commercial and leisure customers in the maritime, hotel, and retail markets. We donot generate this content but instead license the content from third parties on a non-exclusive basis. We do not have long-term license agreements with anycontent provider. Accordingly, any content provider could terminate our existing arrangements with little or no advance notice or could adversely modifythe terms of the arrangement, including potential price increases. Further, the licenses we obtain are limited in scope, and any violation of the terms of alicense could expose us to liability for copyright infringement. We pay license fees that are based in part on the revenue we generate from sublicenses, andour licensors generally have the right to audit our records to determine whether we have paid all necessary license fees. Failure to pay required license feescould result in termination of our license rights, penalties, or damages. The loss of content could adversely affect the attractiveness of our media andentertainment offerings, which could adversely affect our revenues. Any increase in the cost of content could reduce the profitability of these offerings.Any failure to maintain and expand our third-party distribution relationships may limit our ability to penetrate markets for mobile communicationsproducts and services.We market and sell our mobile communications products and services through an international network of independent retailers, chain stores anddistributors, as well as to manufacturers of marine vessels, recreational vehicles and buses. If we are unable to maintain or improve our distributionrelationships, it could significantly limit our sales. Some of our distribution relationships are new, and our new distributors may not be successful inmarketing and selling our products and services. In addition, our distribution partners may sell products of other companies, including competing products,and are generally not required to purchase minimum quantities of our products.Our international business operations expose us to a number of difficulties in coordinating our activities abroad and in dealing with multiple regulatoryenvironments.Historically, sales to customers outside the United States have accounted for a significant portion of our net sales, and our acquisitions of Videotel inJuly 2014 and Headland Media Limited (now known as the KVH Media Group) in May 2013 increased our sales in new foreign markets. We derived 33%,37%, and 39% of our revenues in 2012, 2013, and 2014, respectively, from sales to customers outside the United States. We have foreign sales offices inDenmark, the United Kingdom, Singapore, Hong Kong, Japan, Norway, and Cyprus, as well as a subsidiary in Brazil that manages local sales. However, asidefrom these international sales offices, substantially all of our personnel and operations, particularly for our mobile satellite communications equipmentbusiness and our guidance and stabilization business, are located in the United States. Our limited operations in foreign countries may impair our ability tocompete successfully in international markets and20Table of Contentsto meet the service and support needs of our customers in countries where we have little to no infrastructure. We are subject to a number of risks associatedwith our international business activities, which may increase our costs and require significant management attention. Our acquisitions of Videotel andHeadland Media Limited (now known as KVH Media Group) have augmented these risks. These risks include:•technical challenges we may face in adapting our mobile communications products to function with different satellite services and technologyin use in various regions around the world;•satisfaction of international regulatory requirements and delays and costs associated with procurement of any necessary licenses or permits;•the potential unavailability of content licenses covering international waters and foreign locations;•restrictions on the sale of certain guidance and stabilization products to foreign military and government customers;•increased costs of providing customer support in multiple languages;•increased costs of managing operations that are international in scope;•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; and•economic and political instability in some international markets.Changes in foreign currency exchange rates may negatively affect our financial condition and results of operations.Because of the scope of our foreign sales and foreign operations, we face significant exposure to movements in exchange rates for foreign currencies,particularly the British pound sterling and the euro. In recent months, the U.S. dollar has generally strengthened against relevant foreign currencies, whichreduces our revenues reported in U.S. dollars and reduces the reported value of our assets in foreign countries. Moreover, certain of our products and servicesare sold internationally in U.S. dollars; as the U.S. dollar strengthens, the relative cost of these products and services to customers located in foreign countriesincreases, which adversely affects sales. In addition, most of our financial obligations, including payments under our outstanding debt obligations, must besatisfied in U.S. dollars. Our exposures to changes in foreign currency exchange rates may change over time as our business practices evolve and could resultin increased costs or reduced revenue and could adversely affect our cash flow. Changes in the relative values of currencies occur regularly and may have asignificant impact on our operating results. We cannot predict with any certainty changes in foreign currency exchange rates or the degree to which we cancost-effectively mitigate this exposure.We could incur additional legal compliance costs associated with our international operations and could become subject to legal penalties if we do notcomply with certain regulations.As a result of our expanding international operations, we are subject to a number of legal requirements, including the U.S. Foreign Corrupt PracticesAct, the U.K. Bribery Act and the customs, export, trade sanctions and anti-boycott laws of the United States, including those administered by the U.S.Customs and Border Protection, the Bureau of Industry and Security, the Department of Commerce and the Office of Foreign Assets Control of the TreasuryDepartment, as well as those of other nations in which we do business. Compliance with these laws and regulations is complex and involves significant costs.These risks are heightened for acquired businesses that have historically been managed outside the United States, where these laws and regulations may nothave applied to the same extent. Our assessment of compliance with these laws and regulations by businesses that we have acquired may not have uncoveredinstances of non-compliance, and we may face liability for such non-compliance. In addition, our training and compliance programs and our other internalcontrol policies may be insufficient protect us from acts committed by our employees, agents or third-party contractors. Any violation of these requirementsby us or our employees, agents or third-party contractors may subject us to significant criminal and civil liability.Exports of certain guidance and stabilization products are subject to the U.S. Export Administration Regulations and the International Traffic in ArmsRegulations 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. Certain of ourproducts have military or strategic applications and are on the munitions list of the ITAR and require an individual validated license in order to be exportedto certain jurisdictions. Any changes in export regulations or reclassifications of our products may further restrict the export of our products, and we maycease to be able to procure export licenses for our products under existing regulations. The length of time required by the licensing process can vary,potentially21Table of Contentsdelaying the shipment of products and the recognition of the corresponding revenue. Any restriction on the export of a product line or any amount of ourproducts could cause a significant reduction in net sales.Acquisitions may disrupt our operations or adversely affect our results.We evaluate strategic acquisition opportunities to acquire other businesses as they arise, such as our acquisitions of Videotel in July 2014 andHeadland Media Limited (now known as the KVH Media Group) in May 2013. The expenses we incur evaluating and pursuing these and other suchacquisitions could have a material adverse effect on our results of operations. For example, during 2014, we incurred significant expenses related to theacquisition of Videotel. 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 strategic, financial, operational and other benefits we anticipate from any acquisition, and any acquisition may increase ouroverall operating expenses. Competition for acquisition opportunities could increase the price we pay for businesses we acquire and could reduce the numberof potential acquisition targets. Further, our approach to acquisitions may involve a number of special financial and business risks, such as:•entry into new and unfamiliar lines of business or markets, which may present challenges or risks that we did not anticipate;•increased expenses associated with the amortization of acquired intangible assets;•increased exposure to fluctuations in foreign currency exchange rates;•charges related to any potential acquisition from which we may withdraw;•diversion of our management’s time, attention, and resources;•loss of key acquired personnel;•increased costs to improve or coordinate managerial, operational, financial, and administrative systems, including compliance with theSarbanes-Oxley Act of 2002;•dilutive issuances of equity securities;•the assumption of legal liabilities; and•losses arising from impairment charges associated with goodwill or intangible assets.For example, we are incurring additional expenses to implement internal control over financial reporting appropriate for a public company at Videotel,which previously operated as a private company not subject to U.S. generally accepted accounting principles.If we cannot effectively manage changes in our rate of growth, our business may suffer.We have previously expanded our operations to pursue existing and potential market opportunities, and we are continuing to expand our internationaloperations. For example, we opened a new sales office in Japan in 2012 to service local customers, and we expanded our service offerings through theacquisitions of Videotel and Headland Media Limited (now known as the KVH Media Group) in 2014 and 2013, respectively. This growth has placed a strainon our personnel, management, financial and other resources and has increased our operating expenses. If any portion of our business grows more rapidlythan we anticipate and we fail to manage that growth properly, we may incur unnecessary expenses, and the efficiency of our operations may decline. If weare unable to adjust our operating expenses on a timely basis in response to changes in revenue cycles, our results of operations may be harmed. To managechanges in our rate of growth effectively, we must, among other things:•match our manufacturing facilities and capacity to demand for our products and services in a timely manner;•secure appropriate satellite capacity to match changes in demand for airtime services in a timely manner;•successfully attract, train, motivate and manage appropriate numbers of employees for manufacturing, sales and customer support activities;•effectively manage our inventory and working capital;•maintain the efficiencies within our operating, administrative, financial and accounting systems; and•ensure that our procedures and internal controls are revised and updated to remain appropriate for the size and scale of our business operations.We identified material weaknesses in our internal control over financial reporting as of December 31, 2014, and the occurrence of these or any othermaterial weaknesses could have a material adverse effect on our ability to report accurate financial information in a timely manner.Our management recently concluded that, as described under the heading “Item 9A. Controls and Procedures,” we had material weaknesses ininternal control over financial reporting as of December 31, 2014 and therefore did not maintain22Table of Contentseffective internal control over financial reporting or effective disclosure controls and procedures, both of which are requirements of the Securities ExchangeAct of 1934, as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that thereis a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Thematerial weaknesses related to guidance and stabilization contracts where revenue is recognized on a bill and hold basis, the accounting for income taxes andthe accounting for multiple-element lease transactions. Although we concluded that no issued financial statement was material misstated, it is possible thatthe internal controls in place on that date would not have detected a material misstatement had one been present. In any event, the existence of the materialweakness prevented us from filing this annual report on Form10-K on or before its due date. We are taking steps to remediate the material weaknesses.However, the remedial measures we are taking may not be adequate to prevent future misstatements or avoid other control deficiencies or materialweaknesses. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgmentsused in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk offraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofchanges in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, therecan be no assurance that any system of or internal control over financial reporting will be successful in preventing all errors or fraud or in making all materialinformation known in a timely manner to the appropriate levels of management. As a result, it is possible that our financial statements will not comply withgenerally accepted accounting principles, will contain a material misstatement or will not be available on a timely basis, any of which could cause investorsto lose confidence in us and lead to, among other things, unanticipated legal, accounting and other expenses, delays in filing required financial disclosures,enforcement actions by government authorities, fines, penalties, the delisting of our common stock and liabilities arising from stockholder litigation.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 wefail to attract and retain the necessary personnel, we may be unable to achieve our business objectives and may lose our competitive position, which couldlead to a significant decline in net sales. We face significant competition for these skilled professionals from other companies, research and academicinstitutions, government entities and other organizations.Our success depends on the services of our executive officers.Our future success depends to a significant degree on the skills and efforts of Martin Kits van Heyningen, our co-founder, President, Chief ExecutiveOfficer, and Chairman of the Board. If we lost the services of Mr. Kits van Heyningen, our business and operating results could be seriously harmed. We alsodepend on the ability of our other executive officers to work effectively as a team. The loss of one or more of our executive officers could impair our ability tomanage our business effectively.Our business may suffer if we cannot protect our proprietary technology.Our ability to compete depends significantly upon our patents, copyrights, source code, and other proprietary technology. The steps we have taken toprotect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. Our patents could expire or bechallenged, invalidated or circumvented, and the rights we have under our patents could provide no competitive advantages. Existing trade secret, copyright,and trademark laws offer only limited protection. Customers or others with access to our proprietary or licensed media content could copy that contentwithout permission or otherwise violate the terms of our customer agreements, which would adversely affect our revenues and could impair our relationshipswith content providers. In addition, the laws of some foreign countries do not protect our proprietary technology to the same extent as the laws of the UnitedStates, which could increase the likelihood of misappropriation. Furthermore, other companies could independently develop similar or superior technologywithout violating our intellectual property rights. Any misappropriation of our technology or the development of competing technology could seriouslyharm 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, distractthe 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 rightsto 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 tocompete with us.23Table of ContentsClaims 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 otherintellectual 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, orother 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 thirdparties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patentapplications 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, andwe may face similar claims in the future. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim isinvalid, 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 topay 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 ourproducts, and, in any case, could substantially increase our costs and have a material adverse effect on our business, financial condition and results ofoperations.Cybersecurity breaches could expose us to liability, damage our reputation, and require us to incur significant costs or otherwise adversely affect ourfinancial results.We retain sensitive data, including intellectual property, proprietary business information, personally identifiable information, credit card information,and usage data of our employees and customers on our computer networks. Although we take certain protective measures and endeavor to modify them ascircumstances warrant, invasive technologies, and techniques continue to evolve rapidly, and our computer systems, software and networks are vulnerable tounauthorized access, misuse, erasure, alteration, employee error, phishing, computer viruses or other malicious code, and other events that could have asecurity impact. Any security breach may compromise information stored on our networks and may result in significant data losses or theft of our, ourcustomers', our business partners' or our employees' sensitive information.If any of these events were to occur, they could cause us to lose existing customers and fail to attract new customers, as well as subject us to regulatoryactions, litigation, fines, damage to our reputation or competitive position, or orders or decrees requiring us to modify our business practices, any of whichcould have a material adverse effect on our financial position, results of operations or cash flows.Our media business may expose us to claims regarding our media content.Our media business produces training films and eLearning computer-based training courses, including programs on safety, maintenance, security andregulatory compliance, and also provides commercially licensed maritime charting and navigation information. Our efforts to ensure the accuracy andreliability of the content we provide could be inadequate, and we could face claims of liability based on this content. Contractual and other measures we taketo limit our liability may be inadequate to protect us from these claims. Although we have certain rights of indemnification from third parties for certainportions of the content we provide to customers, it may be time-consuming and expensive to enforce our rights, and the third parties may lack the resources tofulfill their obligations to us. Further, our insurance coverage is subject to deductibles, exclusions and limitations of coverage, and there can be no assurancethat our insurance coverage would be available to satisfy any claims against us. Any such claims may have a material adverse effect on our financialcondition and results of operations.Our Crewtoo social network exposes us to potential liability.We operate the Crewtoo social network, which permits users to chat, post photos and other content, and engage in other social interactions. As a result,we may be exposed to claims of copyright infringement, trademark infringement, defamation, privacy violations or other unlawful conduct. The DigitalMillennium Copyright Act, or DMCA, is intended in part to limit the liability of eligible online service providers for caching, hosting, listing, or linking touser content or third-party websites that include materials that give rise to copyright infringement. Portions of the Communications Decency Act, or CDA, areintended to provide statutory protections to online service providers who distribute third-party content. We rely on the protections provided by both theDMCA and the CDA in conducting our business, but the scope of this protection is uncertain and similar protections are not available in all jurisdictionswhere we may face liability. Further, we may be adversely impacted by future legislation or future judicial decisions altering available protection fromliability. Other laws, such as the Providing Resources,24Table of ContentsOfficers, and Technology to Eradicate Cyber Threats to Our Children Act of 2008, impose certain reporting obligations and restrictions on data collection onus, and we may face liability if we fail to make necessary reports or if we collect information unlawfully.Fluctuations in our quarterly net sales and results of operations could depress the market price of our common stock.We have at times experienced significant fluctuations in our net sales and results of operations from one quarter to the next. Our future net sales andresults of operations could vary significantly from quarter to quarter due to a number of factors, many of which are outside our control. Accordingly, youshould 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 resultsof 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 fallsignificantly. Our results of operations in any quarter can fluctuate for many reasons, including:•changes in demand for our mobile communications products and services and guidance and stabilization products and services;•the timing and size of individual orders from military customers;•the mix of products and services we sell, including the mix of fixed rate and metered contracts for airtime services;•our ability to manufacture, test and deliver products in a timely and cost-effective manner, including the availability and timely delivery ofcomponents and subassemblies from our suppliers;•our success in winning competitions for orders;•the timing of new product introductions by us or our competitors;•expenses incurred in pursuing acquisitions;•expenses incurred in expanding our mini-VSAT Broadband network;•market and competitive pricing pressures;•unanticipated charges or expenses, such as increases in warranty claims;•general economic climate; and•seasonality of pleasure boat and recreational vehicle usage.A large portion of our expenses, including expenses for network infrastructure, 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 achieveanticipated net sales could therefore significantly harm our operating results for a particular fiscal period.The market price of our common stock may be volatile.Our stock price has historically been volatile. During the period from January 1, 2013 to December 31, 2014, the trading price of our common stockranged from $10.87 to $15.00. 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 and services by us or our competitors;•changing needs of military customers;•changes in estimates of our performance or recommendations by securities analysts;•the hiring or departure of key personnel;•acquisitions or strategic alliances involving us or our competitors;•market conditions in our industries; and•the global macroeconomic and geopolitical environment.In addition, the stock market can experience extreme price and volume fluctuations. Major stock market indices experienced dramatic declines in2008 and in the first quarter of 2009. These fluctuations are often unrelated to the operating performance of particular companies. These broad marketfluctuations may adversely affect the market price of our common stock. When the market price of a company’s stock drops significantly, stockholders ofteninstitute securities litigation against that company. Any such litigation could cause us to incur significant expenses defending against the claim, divert thetime and attention of our management and result in significant damages.We may have exposure to additional tax liabilities, which could negatively impact our income tax expense, net income and cash flow.25Table of ContentsWe are subject to income taxes and other taxes in both the U.S. and the foreign jurisdictions in which we currently operate. The determination of ourworldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of ourbusiness, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit by bothdomestic and foreign tax authorities and to the prospective and retrospective effects of changing tax regulations and legislation. Although we believe our taxestimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our consolidated financial statements and maymaterially affect our income tax benefit or expense, net loss or income, and cash flows in the period in which such determination is made.Deferred tax assets are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases ofassets and liabilities, and for operating losses and tax credit carry forwards. A valuation allowance reduces deferred tax assets to estimated realizable value,which assumes that it is more likely than not that we will be able to generate sufficient future taxable income to realize the net carrying value. We review ourdeferred tax assets and valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulativeresults in recent years.If, during our quarterly reviews of our deferred tax assets, we determine that it is more likely than not that we will not be able to generate sufficientfuture taxable income to realize the net carrying value of our deferred tax assets, we will record a valuation allowance to reduce the tax assets to estimatedrealizable value. This could result in a material income tax charge.Changes in the competitive environment or supply chain issues may require inventory write-downs.From time to time, we have recorded significant inventory reserves and/or inventory write-offs as a result of substantial declines in customer demand.Market or competitive changes could lead to future charges for excess or obsolete inventory, especially if we are unable to appropriately adjust the supply ofmaterial from our vendors.If goodwill or other intangible assets that we have recorded in connection with our acquisitions of other businesses become impaired, we could have totake significant charges against earnings.As a result of our acquisitions, we have recorded, and may continue to record, a significant amount of goodwill and other intangible assets. Undercurrent accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other intangible assetshas been impaired. Any reduction or impairment of the value of goodwill or other intangible assets will result in additional charges against earnings, whichcould materially reduce our reported results of operations in future periods.Compliance with the SEC's new conflict minerals rules will increase our costs and adversely affect our results of operations.We are subject to the SEC's new disclosure requirements for public companies that manufacture, or contract to manufacture, products for which certainminerals and their derivatives, namely tin, tantalum, tungsten and gold, known as “conflict minerals,” are necessary to the functionality or production ofthose products. These regulations require us to determine which of our products contain conflict minerals and, if so, to perform an extensive inquiry into oursupply chain in an effort to determine whether or not such conflict minerals originate from the Democratic Republic of Congo, or DRC, or an adjoiningcountry. We expect to incur additional costs to comply with these disclosure requirements, including costs related to determining the source of any of therelevant minerals used in our products, which will adversely affect our results of operations. Because our supply chain is complex, the country of origininquiry and due diligence procedures that we implement may not enable us to ascertain the origins of any conflict minerals that we use or determine thatthese minerals did not originate from the DRC or an adjoining country, which may harm our reputation. In the conflict minerals report that we filed in 2014,we concluded that the origins of the relevant conflict minerals we used in 2013 were “DRC conflict undeterminable,” as a result of which we were notrequired to obtain an independent private sector audit of our conflict minerals report. The rules permitting issuers to report that the origins of the conflictminerals they use are “DRC conflict undeterminable” are temporary and will apply to us only for our next conflict minerals report due in May 2015, afterwhich we expect that the expenses of preparing our conflict minerals report and obtaining a private sector audit will increase. We may also face difficulties insatisfying customers who may require that our products be certified as DRC conflict-free, which could harm our relationships with these customers and lead toa loss of revenue. These new requirements could also have the effect of limiting the pool of suppliers from which we source these minerals, and we may beunable to obtain conflict-free minerals at competitive prices, which could increase our costs and adversely affect our manufacturing operations and ourprofitability.Our charter and by-laws and Delaware law may deter takeovers.26Table of ContentsOur certificate of incorporation, by-laws and Delaware law contain provisions that could have an anti-takeover effect and discourage, delay or preventa change in control or an acquisition that many stockholders may find attractive. These provisions may also discourage proxy contests and make it moredifficult 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 annualmeeting 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 stockentitled 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 CommentsNone.27Table of ContentsITEM 2.PropertiesThe following table provides information about our facilities as of December 31, 2014.Location Type Principal Uses ApproximateSquareFootage Ownership LeaseExpirationMiddletown, RhodeIsland Office Corporate headquarters, research anddevelopment, sales and service, marketing andadministration 75,000 Owned —Middletown, RhodeIsland Plant andwarehouse Manufacturing and warehousing (mobilecommunications products) 75,300 Owned —Tinley Park, Illinois Plant andwarehouse Manufacturing, warehousing, research anddevelopment (guidance and stabilizationproducts) 101,000 Owned —Kokkedal, Denmark Office andwarehouse European headquarters, sales, marketing andsupport 11,000 Leased June 2015Horten, Norway Office Research and development, sales, marketing andsupport 4,400 Leased December 2018Singapore Office Asian headquarters, sales office 2,000 Leased April 2016Leeds, UK Office Audio/video production, sales and support 2,700 Leased April 2018Liverpool, UK Office Maritime sales, news production, marketing andsupport 3,400 Leased June 2023Liverpool, UK Office Sales 1,292 Leased June 2023London, UK Office General office 1,801 Leased August 2019London, UK Office andproduction Production and general office 1,788 Leased August 2019London, UK Office andproduction Sales, production, and general office 1,907 Leased August 2019London, UK Office andwarehouse Dispatch and office 1,813 Leased August 2019ITEM 3.Legal ProceedingsFrom time to time, we are involved in litigation incidental to the conduct of our business. 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.Mine Safety DisclosuresNot applicable.28Table of ContentsPART IIITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Information. Our common stock trades on the NASDAQ Global Market under the symbol “KVHI.” The following table provides, for the periodsindicated, the high and low sale prices for our common stock as reported on the NASDAQ Global Market. High LowYear Ended December 31, 2014: First quarter$14.42 $12.35Second quarter13.79 12.70Third quarter14.25 11.28Fourth quarter13.44 10.87Year Ended December 31, 2013: First quarter$15.00 $11.98Second quarter13.89 12.11Third quarter14.62 12.66Fourth quarter14.27 12.71Stockholders. As of March 13, 2015, we had 92 holders of record of our common stock. This number does not include stockholders for whom shareswere held in a nominee or “street” name.Dividends. We have never declared or paid cash dividends on our capital stock, and we have no plan to pay any cash dividends in the foreseeablefuture. We currently intend to retain any future earnings to finance our operations and future growth. In addition, the terms of our senior credit agreement,which we entered into in July 2014, place restrictions on our ability to pay cash dividends on our common stock.Issuer Purchases of Equity Securities. On November 26, 2008, our Board of Directors authorized a program to repurchase up to one million shares ofour common stock. The repurchase program is funded using our existing cash, cash equivalents, marketable securities, and future cash flows. Under therepurchase program, at management’s discretion, we may repurchase shares on the open market from time to time, in privately negotiated transactions orblock transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares, price, marketconditions, alternative uses of capital, and applicable regulatory requirements. The program may be modified, suspended, or terminated at any time withoutprior notice. The repurchase program has no expiration date. There were no other repurchase programs outstanding during the year ended December 31, 2014,and no repurchase programs expired during the period.We did not repurchase any shares of our common stock in open market transactions during the years ended December 31, 2014, 2013, and 2012.During the year ended December 31, 2014, 35,450 vested restricted shares were surrendered in satisfaction of tax withholding obligations at anaverage price of $13.59 per share.29Table of ContentsSTOCK PERFORMANCE GRAPHThe following graph compares the performance of our cumulative stockholder return with that of the NASDAQ Composite Index, a broad equitymarket index, and the NASDAQ Telecommunications Index, a published industry index. The cumulative stockholder returns for shares of our common stockand for the market indices are calculated assuming $100 was invested on December 31, 2009. We paid no cash dividends during the periods shown. Theperformance of the market indices is shown on a total return (dividends reinvested) basis. Measurement points are the last trading days of the years endedDecember 2010, 2011, 2012, 2013, and 2014. 2009 2010 2011 2012 2013 2014KVH Industries, Inc. $100 $81 $53 $95 $88 $86NASDAQ Composite 100 117 115 133 184 209NASDAQ Telecommunications 100 104 91 93 115 125ITEM 6.Selected Financial DataWe have derived the following selected financial data from our audited consolidated financial statements. You should read this data in conjunctionwith “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements andSupplementary Data.” In September 2010, we acquired Virtek Communication for $6.5 million. In May 2013, we acquired Headland Media Limited (now known as theKVH Media Group) for $24.2 million. In July 2014, we acquired Videotel for $47.4 million. See Note 1 to our consolidated financial statements for asummary of significant accounting policies and the effects on the year-to-year comparability of the selected financial data.30Table of Contents Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands, except per share data)Consolidated Statement of Operations Data: Sales: Product$81,143 $90,295 $90,677 $85,136 $92,059Service91,448 71,993 46,435 27,400 20,184Net sales172,591 162,288 137,112 112,536 112,243Costs and expenses: Costs of product sales48,843 51,518 51,775 46,598 51,348Costs of service sales50,301 45,058 30,363 20,970 16,086Research and development14,101 12,987 12,147 11,548 10,715Sales, marketing and support32,976 28,792 24,069 23,473 18,469General and administrative24,448 17,764 12,188 10,555 10,084Total costs and expenses170,669 156,119 130,542 113,144 106,702Income (loss) from operations1,922 6,169 6,570 (608) 5,541Interest income738 657 510 297 301Interest expense1,296 637 323 223 204Other (expense) income, net(39) 494 86 910 23Income before income taxes1,325 6,683 6,843 376 5,661Income tax expense (benefit)1,284 2,150 3,263 (484) (2,612)Net income$41 $4,533 $3,580 $860 $8,273Per share information: Net income per common share, basic$0.00 $0.30 $0.24 $0.06 $0.57Net income per common share, diluted$0.00 $0.30 $0.24 $0.06 $0.56Number of shares used in per share calculation: Basic15,420 15,144 14,777 14,768 14,420Diluted15,605 15,341 15,019 15,072 14,850 December 31, 2014 2013 2012 2011 2010 (in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents, and marketable securities$49,802 $55,744 $38,285 $30,570 $37,307Working capital65,200 78,933 65,242 59,778 60,571Total assets235,837 183,849 137,568 128,556 115,198Line of credit— 30,000 7,000 9,000 —Long-term debt, excluding current portion64,687 7,094 3,414 3,553 3,684Other long-term obligations1,459 204 140 135 1,263Total stockholders’ equity116,540 116,467 105,704 96,668 96,30331Table of ContentsITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis should be read in conjunction with the other financial information and consolidated financial statements andrelated notes appearing elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussedunder the heading “Item 1A. Risk Factors” and elsewhere in this annual report.OverviewWe design, develop, manufacture and market mobile communications products and services for the marine and land mobile markets, and navigation,guidance and stabilization products for both the defense and commercial markets.Our mobile communications products enable customers to receive voice and Internet services and live digital television via satellite services in marinevessels, recreational vehicles, buses and automobiles. Our CommBox offers a range of tools designed to increase communication efficiency, reduce costs, andmanage network operations. We sell and lease our mobile communications products through an extensive international network of dealers and distributors.We also sell and lease products directly to end users.Our mobile communications service sales include sales earned from satellite voice and Internet airtime services, engineering services provided underdevelopment contracts, sales from product repairs, and extended warranty sales. Our mobile communications services sales also include our distribution ofentertainment, including news, sports, music, and movies, to commercial and leisure customers in the maritime, hotel, and retail markets through KVH MediaGroup (acquired as Headland Media Limited), the media and entertainment service company that we acquired on May 11, 2013, and the distribution oftraining films and eLearning computer-based training courses to commercial customers in the maritime market through Super Dragon Limited and VideotelMarine Asia Limited (together referred to as Videotel), a maritime training services company that we acquired on July 2, 2014. We typically recognizerevenue from media content sales ratably over the period of the service contract. We provide, for monthly fixed and usage fees, satellite connectivity servicesfor broadband Internet, data and Voice over Internet Protocol (VoIP) service to our TracPhone V-series customers. We also earn monthly usage fees for third-party satellite connectivity for voice, data and Internet services to our Inmarsat and Iridium customers who choose to activate their subscriptions with us. Ourservice sales have grown as a percentage of total revenue from 34% of our net sales in 2012 to 44% in 2013 to 53% in 2014, a portion of which is attributableto our acquisition of the KVH Media Group business in May 2013 and Videotel in July 2014.We acquired Videotel for an aggregate purchase price of $47.4 million in cash. The purchase price was subject to a potential post-closing adjustmentbased on the value of the net assets delivered at the closing. We financed $35.0 million of the purchase price through a new senior credit facility and paid theremaining portion of the purchase price from cash and cash equivalents. Revenue for the Videotel group companies was $10.4 million in the six monthsended December 31, 2014. Videotel’s revenue is included in service revenue in our consolidated financial statements. The majority of Videotel’s services areinvoiced in pounds sterling, which increases our exposure to fluctuations in exchange rates.We also offer precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing, and guidance. Ourguidance and stabilization products also include tactical navigation systems that provide uninterrupted access to navigation and pointing information in avariety of military vehicles, including tactical trucks and light armored vehicles. Our guidance and stabilization products are sold directly to U.S. and foreigngovernments and government contractors, as well as through an international network of authorized independent sales representatives. In addition, ourguidance and stabilization products are used in numerous commercial products, such as navigation and positioning systems for various applicationsincluding precision mapping, dynamic surveying, autonomous vehicles, train location control and track geometry measurement systems, industrial roboticsand optical stabilization.Our guidance and stabilization service sales include engineering services provided under development contracts, product repairs and extendedwarranty sales. Our guidance and stabilization sales in 2014 and 2013 included $1.3 million and $15.3 million, respectively, attributable to our original$35.6 million contract from 2012 with the Saudi Arabian National Guard (SANG), the largest contract in the history of our company. We completed thedelivery of TACNAV product shipments under the original SANG contract in the second quarter of 2013, and we completed the services portion of theoriginal SANG contract in the third quarter of 2014. In May 2014, we entered into a contract modification to the original order for an additional $5.2 millionfor TACNAV products and services. All additional TACNAV products related to the contract modification were shipped in the second quarter of 2014, andwe completed the services portion of the contract modification in the third quarter of 2014. In October 2014, we entered into a $19.0 million TACNAVproduct and services contract with an international military customer. This contract includes program management and engineering services expected to bedelivered through 2017 and hardware shipments expected to be fulfilled in 2015 and 2016 as well as out-year support services to be provided as part of this32Table of Contentsorder. Our guidance and stabilization sales in 2014 included $1.1 million related to this order.We generate sales primarily from the sale of our mobile communications systems and services and our guidance and stabilization products andservices. The following table provides, for the periods indicated, our sales by industry category: Year Ended December 31, 2014 2013 2012 (in thousands)Mobile communications$129,920 $108,151 $87,685Guidance and stabilization42,671 54,137 49,427Net sales$172,591 $162,288 $137,112Net sales to SANG accounted for less than 10% of our net sales in 2014 and 12% of our net sales in 2013. The decrease in net sales to SANG from 2013to 2014 was primarily driven by the timing of deliverables in fulfillment of the 2012 SANG contract described above. The terms and conditions of these salesto SANG were consistent with our standard terms and conditions of product sales as discussed in Note 1 of our consolidated financial statements. There wereno receivables outstanding related to the SANG contract as of December 31, 2014. No other customer accounted for more than 10% of our net sales for eachof the years ended December 31, 2014, 2013, and 2012.We have historically derived a substantial portion of our revenue from sales to customers located outside the United States and Canada. The followingtable provides, for the periods indicated, sales to specified geographic regions: Year Ended December 31, 2014 2013 2012 (in thousands)Originating from the Americas locations United States$99,477 $86,621 $71,489Canada14,521 14,272 11,513Europe4,833 7,876 12,210Other15,107 28,610 22,202Total Americas133,938 137,379 117,414Originating from European and Asian locations United States1,527 1,099 —Canada66 39 —Europe21,698 18,571 15,255Other15,362 5,200 4,443Total Europe and Asia38,653 24,909 19,698Net sales$172,591 $162,288 $137,112See Note 13 to our consolidated financial statements for more information on our geographic segments.In addition to our internally funded research and development efforts, we also conduct research and development activities that are funded by ourcustomers. These activities relate primarily to engineering studies, surveys, prototype development, program management, and standard productcustomization. In accordance with accounting principles generally accepted in the United States of America, we account for customer-funded research asservice revenue, and we account for the associated research and development costs as costs of service and product sales. As a result, customer-funded researchand development are not included in the research and development expense that we present in our statement of operations. The following table presents ourtotal annual research and development effort, representing the sum of research costs of service and product sales and the operating expense of research anddevelopment as described in our statement of operations. Our management believes this information is useful because it provides a better understanding ofour total expenditures on research and development activities.33Table of Contents Year ended December 31, 2014 2013 2012 (in thousands)Research and development expense presented on the statement of operations$14,101 $12,987 $12,147Costs of customer-funded research and development included in costs of servicesales2,633 2,387 3,424Total consolidated statements of operations expenditures on research anddevelopment activities$16,734 $15,374 $15,57134Table of ContentsResults of OperationsThe following table provides, for the periods indicated, certain financial data expressed as a percentage of net sales: Year Ended December 31, 2014 2013 2012Sales: Product47.0 % 55.6% 66.1%Service53.0 44.4 33.9Net sales100.0 100.0 100.0Costs and expenses: Costs of product sales28.3 31.7 37.8Costs of service sales29.2 27.8 22.1Research and development8.2 8.0 8.9Sales, marketing and support19.1 17.7 17.6General and administrative14.2 11.0 8.9Total costs and expenses99.0 96.2 95.3Income from operations1.0 3.8 4.7Interest income0.4 0.4 0.3Interest expense0.7 0.4 0.2Other income, net— 0.3 0.1Income before income taxes0.7 4.1 4.9Income tax expense0.7 1.3 2.4Net income0.0 % 2.8% 2.5%Years ended December 31, 2014 and 2013Net SalesProduct sales decreased $9.2 million, or 10%, to $81.1 million in 2014 from $90.3 million in 2013. The decrease was primarily due to a decrease insales of our guidance and stabilization products of $5.1 million, or 12%, from $43.3 million in 2013 to $38.2 million in 2014. Specifically, sales of our FOGproducts decreased $5.5 million, or 23%, primarily as a result of decreased product sales under the Crows III program. This decrease was partially offset by ayear-over-year increase of $0.5 million of TACNAV hardware sales. Two large TACNAV contracts in 2014 more than replaced the $9.8 million of TACNAVproduct sales related to the SANG contract that were shipped in the first half of 2013.We expect that our TACNAV product sales will decrease year-over-year for at least the first quarter of 2015 based on existing backlog. Although weexpect that TACNAV sales will continue to grow over the long term, sales on a quarter-to-quarter or year-to-year basis will continue to be very uneven.Mobile communications product sales decreased $4.0 million, or 8%, to $43.0 million in 2014 from $47.0 million in 2013. The decrease was primarilydue to a decrease in sales of our marine satellite communications products of $3.6 million, or 10%, driven primarily by an 11% decrease in shipments of ourTracPhone mini-VSAT products and an 8% decrease in marine satellite television sales. Sales of our land mobile products of $4.7 million were flat with 2013.Mobile communications product sales in 2014 originating from our U.S. and European subsidiaries decreased $3.8 million, or 10%, compared to 2013.Mobile communications product sales originating from our Asian subsidiaries increased by $0.3 million, or 8%, compared to 2013.We remain cautious about the prospects for our marine leisure sales, specifically in Europe, as a result of ongoing challenges in the global economy.We are also cautious in our outlook for vessels that serve the oil exploration and distribution industry.Service sales for 2014 increased $19.4 million, or 27%, to $91.4 million from $72.0 million for 2013. The primary reason for the increase was an $11.4million increase in airtime sales for our mini-VSAT Broadband service. Also contributing to the increase in service sales was a $10.4 million increase in newservice e-Learning and maritime safety training sales arising from our acquisition of Videotel in July 2014 and a $5.6 million increase in new media salesarising from our acquisition of35Table of ContentsHeadland Media Limited in May 2013. Partially offsetting these increases was a $6.5 million decrease in contracted engineering services primarily fromdecreased installation and program management services provided in connection with the SANG contract as well as a $0.6 million decrease in Inmarsatservice sales.We expect that our mini-VSAT services sales will continue to grow year-over-year primarily from an overall increase in our mini-VSAT Broadbandcustomer base, and from new value-added services to our mini-VSAT Broadband customers such as IP-MobileCast, which was launched during the fourthquarter of 2014. We also expect service sales to increase as a result of the acquisition of Videotel in July 2014. However, we expect that our contractedengineering services will decrease year-over-year in at least the first quarter of 2015 as a result of the completion of the SANG installation and projectmanagement services in 2014.Costs of SalesOur costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products. For 2014, costs ofproduct sales decreased by $2.7 million, or 5%, to $48.8 million from $51.5 million in 2013. The primary reason for the decrease was the decrease in sales ofour FOG and marine products discussed above offset by a $0.5 million increase in warranty expense predominantly associated with our mini-VSAT products.Our costs of service sales consist primarily of satellite service capacity, depreciation, and service network overhead expense associated with our mini-VSAT Broadband network infrastructure, direct network service labor, engineering, and related direct costs associated with customer-funded research anddevelopment, media materials and distribution costs, service repair material, Inmarsat service costs, as well as product installation costs. Costs of service salesincreased by $5.2 million, or 12%, to $50.3 million in 2014 from $45.1 million in 2013. The primary reason for the increase was a $9.2 million increase inairtime costs of sales for our mini-VSAT Broadband service. Also contributing to the increase was a $3.1 million increase in costs of service sales from ournew Videotel business and a $1.8 million increase in costs of service sales from the KVH Media Group. Partially offsetting these increases was a $6.6 milliondecrease in engineering services costs of sales due primarily to a decrease in the services provided in connection with the SANG contract as discussed above,a $0.5 million decrease in Inmarsat costs of service, and a $0.2 million decrease in service repair costs.Gross margin from product sales for 2014 decreased to 40% as compared to 43% for 2013. The decrease in our gross margin from product sales wasprimarily due to a decrease in gross margin on our marine TV product sales resulting from the launch of a new TV product series in June 2014. The grossmargins on these products improved in the second half of 2014 as we were able to take advantage of improved material prices on volume purchases. Alsocontributing to the reduction in gross profit margin was under-utilization of our FOG production capacity due to reduced unit sales in 2014.Gross margin from service sales in 2014 increased to 45% as compared to 37% in 2013. The increase in our gross margin from service sales wasprimarily attributable to the service gross margin contributed from our KVH Media Group business, as the service revenue for 2013 included only a partialyear of service revenue from that business based on the May 11, 2013 acquisition date. Also contributing to the increase in gross margin was the service grossmargin from our new Videotel business and an increase in gross margin from contracted engineering services that resulted from completing the low margininstallation and project management services under the SANG contract.We expect service gross margins to increase in the first half of 2015 as a result of the acquisition of Videotel in July 2014. We also anticipate that thefavorable year-over-year impact to our mini-VSAT Broadband service margin that we expect to achieve from an overall increase in our mini-VSATBroadband customer base in the first quarter of 2015 will be offset by the additional costs of new satellite capacity and the release of new value-addedservices to our mini-VSAT Broadband customers, such as IP-MobileCast.Operating ExpensesResearch and development expense consists of direct labor, materials, external consultants, and related overhead costs that support our internallyfunded product development and product sustaining engineering activities. Research and development expense for 2014 increased by $1.1 million, or 8%, to$14.1 million from $13.0 million in 2013. The primary reasons for the increase in expense in the 2014 period were a $0.5 million increase in U.S.-basedemployee compensation for research and development personnel and a $0.2 million increase in consulting expense, both of which were driven by thedevelopment of our new satellite television products and IP-MobileCast content delivery service. Also contributing to the increase was a $0.5 millionincrease in expensed materials. As a percentage of net sales, research and development expense was 8% for 2014 and 2013.We expect that research and development expense will be modestly lower year-over-year as a result of the completion of36Table of Contentsa major product development effort for a significant portion of our marine TV product line in the first half of 2014.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 servicepersonnel and support costs, warranty-related costs and bad debt expense. Sales, marketing and support expense also includes the entire operating expensesof our subsidiaries in Denmark, Singapore, Brazil, and Japan. Sales, marketing and support expense for 2014 increased by $4.2 million, or 15%, to $33.0million from $28.8 million for 2013. The primary reasons for the increase in the 2014 period were a $2.8 million increase in sales, marketing, and supportexpense related to our new Videotel business, a $1.3 million increase from our KVH Media business, a $0.6 million increase in warranty expense mainly inrelation to TracPhone V7 and V11 products, a $0.5 million increase in U.S.-based employee compensation, and a one-time $0.5 million insurance recoveryreceived in the third quarter of 2013 related to misappropriated funds identified at our Danish subsidiary. Partially offsetting these increases were a $0.8million decrease in variable product sales expense primarily as a result of the completion of product shipments relating to the SANG contract in the secondquarter of 2013, a $0.3 million decrease in bad debt expense, and a $0.3 million decrease in sales promotions and demonstration units. As a percentage of netsales, sales, marketing and support expense for 2014 was 19% as compared to 18% for 2013.We expect that our sales, marketing, and support expense will increase by at least 9% year-over-year in 2015 due to the acquisition of Videotel on July2, 2014.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 for 2014 increased by $6.6 million, or 37%, to $24.4million from $17.8 million for 2013. The primary reason for the increase in 2014 expense was a $3.0 million increase in expense from our new Videotelbusiness, a $2.9 million increase in general and administrative expense relating to the KVH Media Group, and a $0.5 million increase in U.S.-based employeecompensation, as well as a $0.4 million increase in compensation expense related to purchase accounting and a $0.4 million increase in acquisition costs,both of which related to the purchase of Videotel. Partially offsetting this increase was a $0.4 million decrease in accrued performance-based incentivecompensation. As a percentage of net sales, general and administrative expense for 2014 was 14% as compared to 11% for 2013.We expect general and administrative expenses to increase year-over-year in 2015, driven primarily by additional expenses from our acquisition ofVideotel, including incremental amortization expenses for acquired intangible assets. Incremental amortization from the Videotel acquisition that isallocated to general and administrative expense, based on currency exchange rates in effect at December 31, 2014, is currently estimated at approximately$2.2 million per year. The actual amount of amortization in 2015 will depend on currency exchange rates in effect during 2015.Interest and Other Expense (Income), NetInterest income remained consistent from 2013 to 2014 at $0.7 million. Interest expense for 2014 increased by $0.7 million, or 117%, to $1.3 millionfrom $0.6 million for 2013. The primary reason for the increase was borrowings under our new senior credit facility executed in July 2014 to finance thepurchase of Videotel in July 2014. Other expense (income), net for 2014 decreased by $0.5 million, or 108%, to other expense of $0.1 million from otherincome of $0.5 million for 2013. The primary reason for the increase in expense was a reduction in the market value of cash flow hedges, as well as foreigncurrency exchange losses primarily associated with our UK operations.Income Tax ExpenseIncome tax expense for 2014 was $1.3 million as compared to income tax expense of $2.2 million for 2013. The decrease in income tax expense isprimarily due to a $5.4 million decrease in pretax income offset by increased valuation allowances, which created discrete tax charges of $0.9 million in2014.Years ended December 31, 2013 and 2012Net SalesProduct sales decreased in 2013 by $0.4 million, or less than 1%, to $90.3 million from $90.7 million in 2012. The primary reason for the decrease in2013 was a decrease in sales of our mobile communications products to $47.0 million, or 2%. The decrease was primarily due to a $1.2 million, or 25%,decrease in sales of our land mobile products. The decrease in our land mobile products was primarily a result of decreased sales to original equipmentmanufacturers in the recreational vehicle market. Sales of marine products in 2013 were consistent with 2012. Sales of our TracPhone V11 product, which wasreleased in the fourth quarter of 2012, increased as did our TracPhone V7 sales in the Americas. Partially offsetting these increases in marine product sales wasdecreased sales of our TracPhone V7 product in Asia and Europe.37Table of ContentsMobile communications product sales originating from our European and Asian subsidiaries decreased $3.3 million, or 18%, in 2013 as compared to2012. Mobile communications product sales originating from the Americas increased $2.1 million, or 7%, in 2013 as compared to 2012.Offsetting the decrease in mobile communications product sales was an increase of $0.8 million, or 2%, in sales of guidance and stabilization products.Specifically, sales of our FOG products increased $1.1 million, or 5%, primarily due to increased demand for commercial applications. Partially offsetting theincrease in FOG products was decreased sales from the U.S. Army’s Common Remotely Operated Weapon Stations (CROWS) III Program. Sales of ourTACNAV defense products decreased $0.6 million, or 3%, primarily as a result of decreased product sales related to our SANG contract, the largest contract inour history. The SANG contract contributed $9.8 million and $11.4 million to our product sales in 2013 and 2012, respectively, and we completed deliveryof products under the SANG contract in the second quarter of 2013.Service sales increased in 2013 by $25.6 million, or 55%, to $72.0 million from $46.4 million in 2012. The primary reason for the increase was a $12.2million increase in airtime sales for our mini-VSAT Broadband service. Also contributing to the increase were $8.8 million in new media service sales arisingfrom our acquisition of Headland Media Limited (now known as the KVH Media Group) in May 2013, and a $4.8 million increase in contracted engineeringservices driven by construction and program management services provided in connection with the SANG contract.Costs of SalesOur costs of product sales consist primarily of materials, manufacturing overhead and direct labor used to produce our products. Costs of product salesin 2013 decreased by $0.3 million, or less than 1%, to $51.5 million from $51.8 million in 2012, consistent with the decrease in product sales discussedabove.Our costs of service sales consist primarily of satellite service capacity, depreciation and service network overhead expense associated with our mini-VSAT Broadband network infrastructure, direct network service labor, engineering and related direct costs associated with customer-funded research anddevelopment, media materials and distribution costs, service repair material, Inmarsat service costs, as well as product installation costs. Costs of service salesincreased by $14.7 million, or 48%, to $45.1 million in 2013 from $30.4 million in 2012. The primary reason for the increase was a $6.2 million increase inairtime costs of service sales for our mini-VSAT Broadband service. Also contributing to the increase was a $5.8 million increase in engineering services costsof sales due primarily to the services provided in connection with the SANG contract discussed above, and a $2.5 million increase in costs of service salesfrom media services arising from our new KVH Media Group business.Gross margin from product sales remained consistent at 43% in 2013 and 2012.Gross margin from service sales increased to 37% in 2013 from 35% in 2012. The increase in our gross margin from service sales was primarilyattributable to the service gross margin contributed from our new KVH Media Group business. Also contributing to the gross margin increase was an increasein gross margin for mini-VSAT Broadband service sales to 35% from 31% in the year-ago period. Partially offsetting the increase in gross margin for mini-VSAT broadband service was a significant decrease in gross margin for contracted engineering services as a result of the facility construction, installation andproject management services in Saudi Arabia, as these services had a gross margin of approximately 10%.Operating ExpensesSales, 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 servicepersonnel and support costs, warranty-related costs, and bad debt expense. Sales, marketing, and support expense also includes the entire operating expensesof our subsidiaries in Denmark, Singapore, Brazil and Japan. Sales, marketing and support expense in 2013 increased by $4.7 million, or 20%, to $28.8million from $24.1 million in 2012. The primary reasons for the increase in 2013 were a $2.7 million increase in sales, marketing and support expense relatedto our new KVH Media Group business, and our Danish and Japanese subsidiaries, and a $1.0 million increase in warranty expense predominantly associatedwith our mini-VSAT products.Also contributing to the increase was a $0.8 million increase in U.S.-based compensation for sales, marketing and support, a $0.5 million increase inbad debt expense mainly related to airtime sales for our mini-VSAT Broadband service, a $0.3 million increase in variable sales expense primarily as a resultof the sales relating to the SANG contract and related facility construction, and a $0.2 million increase in demonstration equipment expense. Partiallyoffsetting these increases was a $0.5 million insurance recovery related to misappropriated funds identified at our Danish subsidiary, and a $0.2 milliondecrease in sales, marketing and support expense related to our Norwegian subsidiary. As a percentage of net sales, sales, marketing and support expense was18% in 2013, which was consistent with 2012.38Table of ContentsResearch and development expense consists of direct labor, materials, external consultants and related overhead costs that support our internallyfunded product development and product sustaining engineering activities. Research and development costs are generally expensed as incurred. Researchand development expense in 2013 increased by $0.9 million, or 7%, to $13.0 million from $12.1 million in 2012. The primary reason for the increase in 2013expense was a $0.6 million increase in U.S.-based compensation for research and development personnel driven by the development of our new IP-MobileCast content delivery service. As a percentage of net sales, research and development expense decreased to 8% in 2013 from 9% in 2012.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 2013 increased by $5.6 million, or 46%, to $17.8million from $12.2 million in 2012. The primary reason for the increase in 2013 was a $3.9 million increase in general and administrative expense relating toour new KVH Media Group business, and $0.9 million in transaction expenses related to that acquisition. Also contributing to the increase was a $0.5 millionincrease in U.S.-based employee compensation, and a $0.2 million increase in legal expense. As a percentage of net sales, general and administrative expenseincreased to 11% in 2013 from 9% in 2012.Income Tax ExpenseIncome tax expense decreased by $1.1 million to $2.2 million in 2013 from $3.3 million in 2012. The decrease in income tax expense is primarily duean income tax benefit from the American Taxpayer Relief Act of 2012, which extended the research and development tax credit for two years to December 31,2013. As a result of the retroactive extension, a discrete income tax benefit of $0.4 million was recognized in 2013 for qualifying research and developmentamounts incurred in 2012, and an income tax benefit of $0.4 million was recognized for qualifying research and development amounts incurred in 2013. In2012, we also recognized a discrete income tax expense of $0.2 million associated with tax shortfalls for non-qualified stock options expirations andshortfalls associated with restricted stock awards vesting.Critical Accounting Policies and Significant EstimatesThe discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our financialstatements. Our significant accounting policies are summarized in Note 1 to our consolidated financial statements. The significant accounting policies thatwe believe are the most critical in understanding and evaluating our reported financial results include the following:Revenue RecognitionProduct sales. Product sales are recognized when persuasive evidence of an arrangement exists, goods are shipped, title has passed, and collectabilityis reasonably assured. Our standard sales terms require that:•All sales are final;•Terms are generally Net 30;•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 guidance and stabilization product sales, customer acceptance or inspection may be required before title and risk of loss transfers to thecustomer. For those sales, revenue is recognized after transfer of title and risk of loss and after notification of customer acceptance. In certain circumstancescustomers may request a bill and hold arrangement. Under these bill and hold arrangements, revenue is recognized when we have fulfilled all of ourperformance obligations, the units are segregated and available for shipment in accordance with the defined contract delivery schedule, and we have receivednotification of customer acceptance which transfers title and risk of loss to the customer.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 allowedon any returned product unless we have granted and confirmed prior written permission by39Table of Contentsmeans of appropriate authorization. We establish reserves for potential sales returns, credits and allowances, and evaluate, on a monthly basis, the adequacyof those reserves based upon historical experience and our expectations for the future.Multiple-element revenue arrangements. Some of our sales involve multiple-element arrangements that include both hardware-related products andcontracted service, or satellite connectivity. We analyze revenue arrangements with multiple deliverables to determine if the deliverables should be dividedinto more than one unit of accounting. For contracts with more than one unit of accounting, we allocate the consideration we receive among the separateunits of accounting based on a selling price hierarchy for determining the selling price of each deliverable, which includes: (1) vendor-specific objectiveevidence (VSOE) if available; (2) third-party evidence (TPE) if VSOE is not available; and (3) best estimated selling price (BESP), if neither VSOE nor TPE isavailable. Best estimate selling price is determined based on prices of the deliverables if sold on a stand-alone basis, or if not sold on a stand-alone basis, theprices we would charge if sold on a stand-alone basis. We recognize revenue for each deliverable based on the revenue recognition policies described in thissection.We have accounted for our $35.6 million contract received in June 2012 from SANG to purchase TACNAV defense products and services as amultiple-element arrangement. The total contract value associated with TACNAV defense products is $21.2 million, for which the final shipments werecompleted in the second quarter of 2013. The total contract value associated with all services is $14.4 million, and such services were completed in the thirdquarter of 2014. In October 2014, we entered into a $19.0 million TACNAV product and services contract with an international military customer. Thiscontract includes program management and engineering services expected to be delivered through 2017 and hardware shipments expected to be fulfilled in2015 and 2016, as well as out-year support services. The revenue for these services is recognized using the proportional performance accounting method.Total revenue recognized in 2014 related to this order was $1.1 million.Contracted service sales. We also engage in contracts for development, production and services activities related to standard product modificationor enhancement, which we account for using the proportional performance method of revenue recognition. The use of contract accounting requiressignificant judgment relative to estimating total contract revenues and costs, including assumptions relative to the length of time to complete the contract,the nature and complexity of the work to be performed, and prices for subcontractor services and materials. Our estimates are based upon the professionalknowledge and experience of our engineers, program managers and other personnel, who review each long-term contract monthly to assess the contract'sschedule, performance, technical matters, and estimated cost at completion. A cancellation, schedule delay, or modification of a fixed-price contract which isaccounted for using the proportional performance method may adversely affect our gross margins for the period in which the contract is modified. Changes inestimates are applied when adjustments in estimated contract costs are identified, such revisions may result in current period adjustments to earningsapplicable to performance in prior periods.Satellite connectivity and media content sales. Directly sold and re-sold satellite connectivity service for voice, data and Internet is recognizedmonthly based upon minutes or megabytes of traffic processed or contracted fixed fee schedules. Typically, all subscribers enter into a contracted one-yearminimum service agreement. We record all satellite connectivity service sales to subscribers as gross sales, as we are the primary obligor in the contractedservice arrangement. All associated regulatory service fees and costs are recorded net in our consolidated financial statements. Media content sales includeour distribution of commercially licensed news, sports, movies and music content for commercial and leisure customers in the maritime, hotel, and retailmarkets as well as training videos to the merchant marine market that are typically based on a contracted fixed fee schedule. We typically recognize revenuefrom media content sales ratably over the period of the service contract. The accounting estimates related to the recognition of satellite connectivity andmedia content service sales in our results of operations require us to make assumptions about future billing adjustments for disputes with subscribers as wellas unauthorized usage.Accounts Receivable AllowanceOur estimate of allowance for doubtful accounts related to trade receivables is primarily based on specific and historical criteria. We evaluate specificaccounts where we have information that the customer may have an inability to meet its financial obligations. We make judgments, based on facts andcircumstances, regarding the need to record a specific reserve for that customer against amounts owed to reduce the receivable to the amount that we expectto collect. We also provide for a reserve based on an aging analysis of our accounts receivable. We evaluate these reserves on a monthly basis and adjust themas we receive additional information that impacts the amount reserved. If circumstances change, we could change our estimates of the recoverability ofamounts owed to us by a material amount. For example, our bad debt expense increased $0.5 million in 2014 from 2013, driven by bad debt expenseassociated with airtime sales for our mini-VSAT Broadband service.We wrote off $0.6 million, $0.5 million, and $0.2 million of our accounts receivable in 2014, 2013, and 2012, respectively. These write-offs weredriven largely by the financial deterioration of several airtime and lease customers as well as several mobile communications product distributors. The currenteconomic downturn could continue to adversely impact the40Table of Contentsfinancial condition of our customers, which could result in additional write-offs and increases in our allowance for doubtful accounts and have a negativeimpact on our results of operations.InventoriesInventory is valued at the lower of cost or market. We generally must order components for our products and build inventory in advance of productshipments. We regularly review current quantities on hand, actual and projected sales volumes and anticipated selling prices on products and write down, asappropriate, slow-moving and/or obsolete inventory to its net realizable value. In 2014, 2013, and 2012, we wrote off $0.2 million, $0.1 million, and $0.2million, respectively, of fully reserved inventory. However, if we overestimate projected sales or anticipated selling prices, our inventory might beoverstocked or overvalued, and we would have to reduce our inventory valuation accordingly.Accounting for Income TaxesAs part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions inwhich we operate. This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessingtemporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets andliabilities. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce thedeferred tax assets to an amount that, in our judgment, is more likely than not to be recovered.Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowancerecorded against our deferred tax assets. The valuation allowance is based on our estimates of future taxable income and the period over which we expect thedeferred tax assets to be recovered. Our assessment of future taxable income is based on historical experience and current and anticipated market andeconomic conditions and trends. In the event that actual results differ from these estimates or we adjust our estimates in the future, we may need to adjust ourvaluation allowance, which could materially impact our consolidated financial position and results of operations. At December 31, 2014, we had valuationallowances of $4.2 million to offset gross deferred tax assets of $13.6 million.Warranty ProvisionWe typically offer a one to two year warranty for all of our base products. We provide for the estimated cost of product warranties at the time productrevenue is recognized. Factors that affect our warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and thecost per repair. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of ourcomponent suppliers, our estimated warranty obligation is affected by ongoing product failure rates, specific product class failures outside our baselineexperience, material usage and service delivery costs incurred in correcting a product failure. If actual product failure rates, material usage or service deliverycosts differ from our estimates, revisions to the estimated warranty liability would be required. For example, our warranty expense increased $0.5 million in2014 from 2013, driven primarily by warranty expense associated with our mini-VSAT products.Assumptions and historical warranty experience are evaluated to determine the appropriateness of such assumptions. We assess the adequacy of thewarranty provision on a quarterly basis and we adjust this provision when necessary.Stock-Based CompensationOur stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisiteservice period, which is generally the vesting period.We use the Black-Scholes valuation model for estimating the fair value on the date of grant of compensatory stock options. Determining the fair valueof stock option awards at the grant date requires judgment regarding certain valuation assumptions, including the volatility of our stock price, expected termof the option, risk-free interest rate and expected dividends. Changes in these assumptions and estimates could result in different fair values and couldtherefore impact our earnings. These changes would not impact our cash flows. The fair value of restricted stock awards is based upon our stock price on thegrant date.The amount of stock-based compensation expense recorded in any period for unvested awards requires estimates of the amount of stock-based awardsthat are expected to be forfeited prior to vesting.Compensation costs for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite serviceperiod for the entire award.41Table of ContentsGoodwill and Intangible AssetsGoodwill is tested at least annually for impairment. If an event occurs or circumstances change that indicate that the carrying value may not berecoverable, we will perform an interim test at that time. The impairment test begins by allocating goodwill to its reporting unit. Goodwill is then tested usinga two-step process that begins with an estimation of the fair value of the reporting unit using an income approach, which looks to the present value ofexpected future cash flows. The impairment test is performed through the application of a two-step process. The first step is a screen for potential impairmentby comparing the carrying value of our reporting units to their estimated fair values as of the test date. The estimated cash flows are calculated using anincome approach. If fair value is less than carrying value, a second step is performed to quantify the amount of the impairment, if any.Intangible assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. Recoverability of intangible assets with estimated lives and other long-lived assets is measured bycomparing the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset. If these comparisons indicate that anasset is not recoverable, we will recognize an impairment loss for the amount by which the carrying value of the asset exceeds the related estimated fair value.Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset.Considerable judgment is required to estimate discounted future operating cash flows. Judgment is also required in determining whether an event hasoccurred that may impair the value of goodwill or identifiable intangible or other long-lived assets. Factors that could indicate an impairment may existinclude significant underperformance relative to plan or long-term projections, changes in business strategy, significant negative industry or economictrends, a significant change in circumstances relative to a large customer, a significant decline in our stock price for a sustained period and a decline in ourmarket capitalization to below net book value. We must make assumptions about future cash flows, future operating plans, discount rates and other factors inour models and valuation reports. To the extent these future projections and estimates change, the estimated amounts of impairment could differ from currentestimates. Our annual testing for impairment of goodwill is completed as of August 31 of each year. As of August 31, 2014, we performed our annualimpairment test for goodwill at the reporting unit level and, after conducting the first step, determined that it was not necessary to conduct the second step aswe concluded that the fair value of our reporting units exceeded their carrying value. Accordingly, we determined no adjustment to goodwill was necessary.There were no indicators of potential goodwill, intangible asset, or other long-lived asset impairment noted as of December 31, 2014. As of December 31,2014, we have goodwill of $40.5 million and intangible assets of $33.6 million, which are associated with the purchase of Virtek Communication inSeptember 2010, Headland Media Limited (KVH Media Group) in May 2013, and Videotel in July 2014.ContingenciesWe are subject to ongoing business risks arising in the ordinary course of business. See Item 3. Legal Proceedings, for more information regardinglitigation matters. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and theamount of loss can be reasonably estimated. We regularly evaluate current information available to determine whether such amounts should be adjusted andrecord changes in estimates in the period they become known. We reserve for legal contingencies and legal fees when the amounts are probable andreasonably estimable. At December 31, 2014, we have not recorded any material loss contingencies.Liquidity and Capital ResourcesWe have historically funded our operations primarily from cash flows from operations, net proceeds from public and private equity offerings, bankfinancings, and proceeds received from exercises of stock options. As of December 31, 2014, we had $49.8 million in cash, cash equivalents, and marketablesecurities, of which $9.8 million in cash equivalents were held in a local currency by our foreign subsidiaries. There were no marketable securities held by ourforeign subsidiaries as of December 31, 2014. As of December 31, 2014, we had $65.2 million in working capital.Operating ActivitiesNet cash provided by operations for 2014 was $10.4 million as compared to net cash provided by operations of $16.3 million for 2013. The $5.9million decrease is primarily due to a decrease in cash inflows attributable to accounts receivable of $9.5 million, a $4.5 million decrease in net income(which reflects a $4.0 million increase in depreciation and amortization expense and a $1.1 million increase in deferred income taxes), and a $1.4 millionincrease in cash outflows related to accrued expenses and accounts payable. Partially offsetting the decrease in cash inflows were a $2.8 million decrease incash outflows related to inventory, a $1.5 million increase in cash inflows related to deferred revenue, a $1.2 million decrease in cash42Table of Contentsoutflows related to other non-current assets, and a $0.5 million decrease in cash outflows related to prepaid expenses and other assets.Net cash provided by operations for 2013 was $16.3 million as compared to net cash provided by operations of $15.1 million for 2012. The $1.2million increase is primarily due to an increase in cash inflows attributable to accounts receivable of $3.5 million, a $1.3 million decrease in prepaid andother assets, a $1.0 million increase in net income, and a $0.7 million increase in cash inflows related to deferred revenue. Partially offsetting the increase incash inflows are a $4.4 million increase in cash outflows as a result of increased inventory levels, and a $0.3 million increase in cash outflows related toaccrued expenses and accounts payable.Investing ActivitiesNet cash used in investing activities for 2014 was $26.7 million as compared to net cash used in investing activities of $44.7 million for 2013. The$18.1 million decrease in cash outflows is primarily due to the net cash paid for the acquisition of Videotel of $43.5 million in 2014 and an increase incapital expenditures of $0.4 million. Partially offsetting the increase in cash outflows is a $39.0 million decrease in our net investment in marketablesecuritiesNet cash used in investing activities for 2013 was $44.7 million as compared to net cash used in investing activities of $12.3 million for 2012. The$32.4 million increase in cash outflows is primarily due to the net cash paid for the acquisition of Headland Media Limited (now known as KVH MediaGroup) of $22.9 million and an $11.3 million increase in our net investment in marketable securities. Partially offsetting the increase in cash outflows is adecrease in capital expenditures of $1.8 million.Financing ActivitiesNet cash provided by financing activities for 2014 was $32.7 million as compared to net cash provided by financing activities of $29.3 million for2013. The $3.4 million increase in cash provided by financing activities is primarily due to the net proceeds from borrowings on a term note, net of payments,in the amount of $63.8 million in 2014. These proceeds were offset by a $30.0 million repayment of borrowings under a line of credit in connection with thedebt restructuring we undertook in connection with the acquisition of Videotel, as well as a $1.7 million decrease in proceeds from exercises of stock optionsand purchases under our employee stock purchase plan and $1.3 million in repayments of long-term debt.Net cash provided by financing activities for 2013 was $29.3 million as compared to net cash used in financing activities of $0.9 million for 2012. The$30.2 million increase in cash provided by financing activities is primarily due to $23.0 million in borrowings from our line of credit used to finance themajority of the acquisition cost of Headland Media Limited (now known as the KVH Media Group) in May 2013, and $5.8 million in borrowings on long-term debt associated with the equipment security notes that we entered into in January and December 2013. Also contributing to the increase was a $2.0million reduction in payments on our line of credit and a $0.8 million increase in proceeds from exercises of stock options and purchases under our employeestock purchase plan. Partially offsetting this increase was a $1.0 million increase in repayments of long-term debt, as well as a $0.5 million increase inpayments related to employee restricted stock withholdings.Borrowing ArrangementsPrincipal Credit FacilityAs of December 31, 2014, there was $63.8 million in aggregate principal amount outstanding under our principal credit facility. On July 1, 2014, weentered into a five-year senior credit agreement with Bank of America, N.A., as administrative agent, and the lenders named from time to time as partiesthereto, for an aggregate amount of up to $80.0 million, including a revolving credit facility of up to $15.0 million and a term loan of $65.0 million to beused for general corporate purposes, including both the refinancing of the $30.0 million of indebtedness then outstanding under our former credit facility andpermitted acquisitions. We also entered into a security agreement with respect to our grant of a security interest in substantially all of our assets in order tosecure our obligations under the credit agreement and the related notes and pledge agreements with respect to our grant of a security interest in 65% of thecapital stock of each of KVH Industries A/S and KVH Industries U.K. Limited held by us in order to secure our obligations under the credit agreement and thenotes.We executed $65.0 million in term notes on July 1, 2014 in connection with our acquisition of Videotel. We applied proceeds in the amount of $35.0million toward the payment of a portion of the purchase price for Videotel, and we applied proceeds in the amount of $30.0 million toward the refinancing ofthe then-outstanding balance under our former credit facility. We must make principal repayments on the term loan in the amount of approximately $1.2million at the end of each of the first eight three-month periods following the closing; thereafter, we must make principal repayments in the amount ofapproximately $1.6 million for each succeeding three-month period until the maturity of the loan on July 1, 2019. On the maturity date, the entire remainingprincipal balance of the loan, including any future loans under the revolver, is due and payable, together with43Table of Contentsall accrued and unpaid interest, penalties and other amounts due and payable under the credit agreement. The credit agreement contains provisions requiringthe mandatory prepayment of amounts outstanding under the term loan and the revolver under specified circumstances, including (i) 100% of the net cashproceeds from certain dispositions to the extent not reinvested in our business within a stated period, (ii) 50% of the net cash proceeds from stated equityissuances and (iii) 100% of the net cash proceeds from certain receipts of more than $250,000 outside the ordinary course of business. The prepayments arefirst applied to the term loan, in inverse order of maturity, and then to the revolver. In the discretion of the administrative agent, certain mandatoryprepayments made on the revolver can permanently reduce the amount of credit available under the revolver.Loans under the credit agreement bear interest at varying rates determined in accordance with the credit agreement. Each LIBOR Rate Loan, as definedin the credit agreement, bears interest on the outstanding principal amount thereof for each interest period from the applicable borrowing date at a rate perannum equal to the LIBOR Daily Floating Rate or LIBOR Monthly Floating Rate, each as defined in the credit agreement, as applicable, plus the ApplicableRate, as defined in the credit agreement, and each Base Rate Loan, as defined in the credit agreement, bears interest on the outstanding principal amountthereof from the applicable borrowing date at a rate per annum equal to the Base Rate, as defined in the credit agreement, plus the Applicable Rate. TheApplicable Rate ranges from 1.50% to 2.25%, depending on our Consolidated Leverage Ratio, as defined in the credit agreement. The highest ApplicableRate applies when the Consolidated Leverage Ratio exceeds 2.00:1.00. Upon certain defaults, including failure to make payments when due, interestbecomes payable at a higher default rate.Borrowings under the revolver are subject to the satisfaction of numerous conditions precedent at the time of each borrowing, including the continuedaccuracy of our representations and warranties and the absence of any default under the credit agreement. As of December 31, 2014, there were no borrowingsoutstanding under the revolver.The credit agreement contains two financial covenants, a Maximum Consolidated Leverage Ratio and a Minimum Consolidated Fixed ChargeCoverage Ratio, each as defined in the credit agreement. The Maximum Consolidated Leverage Ratio was initially 2.25:1.00, declined to 1.50:1.00 onDecember 31, 2014, and declines to 1.00:1.00 on September 30, 2015. The Minimum Consolidated Fixed Charge Coverage Ratio may not be less than1.25:1.00 at any time after December 31, 2014. We were in compliance with these financial ratio debt covenants as of December 31, 2014. The creditagreement imposes certain other affirmative and negative covenants, including without limitation covenants with respect to the payment of taxes and otherobligations, compliance with laws, entry into material contracts, creation of liens, incurrence of indebtedness, investments, dispositions, fundamentalchanges, restricted payments, changes in the nature of our business, transactions with affiliates, corporate and accounting changes, and sale and leasebackarrangements.Our obligation to repay loans under the credit agreement could be accelerated upon a default or event of default under the terms of the credit agreement,including certain failures to pay principal or interest when due, certain breaches of representations and warranties, the failure to comply with our affirmativeand negative covenants under the credit agreement, a change of control, certain defaults in payment relating to other indebtedness, the acceleration ofpayment of certain other indebtedness, certain events relating to our liquidation, dissolution, bankruptcy, insolvency or receivership, the entry of certainjudgments against us, certain events relating to the impairment of collateral or the lenders’ security interest therein, and any other material adverse changewith respect to us.Mortgage LoanOn April 6, 2009, we entered into a mortgage loan in the amount of $4.0 million related to our headquarters facility in Middletown, Rhode Island. OnJune 9, 2011, we entered into an amendment to the mortgage loan. The loan term is ten years, with a principal amortization of 20 years, and the interest ratewill be a rate per year adjusted periodically based on a defined interest period equal to the BBA LIBOR Rate plus 2.00 percentage points. Land, building andimprovements with an approximate carrying value of approximately $5.0 million as of December 31, 2014 secure the mortgage loan. The monthly mortgagepayment is approximately $12,000, plus interest and increases in increments of $1,000 each year throughout the life of the mortgage. Due to the difference inthe term of the loan and amortization of the principal, a balloon payment of $2.6 million is due on April 1, 2019. The loan contains one financial covenant, aFixed Charge Coverage Ratio, which applies in the event that our consolidated cash, cash equivalents, and marketable securities balance falls below $25.0million at any time. As our consolidated cash, cash equivalents, and marketable securities balance was above $25.0 million throughout 2014, the FixedCharge Coverage Ratio did not apply. Under the mortgage loan we may prepay our outstanding loan balance subject to certain early termination charges asdefined in the mortgage loan agreement. If we were to default on our mortgage loan, the land, building and improvements would be used as collateral. Asdiscussed in Note 16 to the consolidated financial statements, effective April 1, 2010, in order to reduce the volatility of cash outflows that arise fromchanges in interest rates, we entered into two interest rate swap agreements that are intended to hedge our mortgage interest obligations by fixing the interestrates specified in the mortgage loan to 5.9% for half of the principal amount outstanding and 6.1% for the remaining half of the principal amount outstandingas of April 1, 2010 until the mortgage loan expires on April 16, 2019.44Table of ContentsOther MattersIt is our intent to continue to invest in the mini-VSAT Broadband network on a global basis in cooperation with ViaSat under the terms of a ten-yearagreement announced in July 2008. As part of the future potential capacity expansion, we would plan to seek to acquire additional satellite capacity fromsatellite operators, expend funds to seek regulatory approvals and permits, develop product enhancements in anticipation of the expansion, and hireadditional personnel. In addition, in December 2011, we entered into a five-year agreement to lease satellite capacity from a satellite operator, effectiveFebruary 1, 2012, and in 2012 we also purchased three satellite hubs to support this added capacity. The total cost of the five-year satellite capacityagreement, the satellite hubs, and teleport services is approximately $12.2 million, of which approximately $2.7 million related to the total cost of the threehubs. On January 30, 2013, we borrowed $4.7 million from a bank and pledged as collateral six satellite hubs and related equipment, including the three hubspurchased in 2012. The term of the equipment loan is five years, and the loan bears interest at a fixed rate of 2.76% per annum. The monthly payment isapproximately $83,000, including interest expense. On December 30, 2013, we borrowed $1.2 million from a bank and pledged as collateral one satellite huband related equipment. The term of the equipment loan is five years, and the loan bears interest at a fixed rate of 3.08% per annum. The monthly payment isapproximately $21,000, including interest expense.On November 26, 2008, our Board of Directors authorized a program to repurchase up to one million shares of our common stock. The share repurchaseprogram is funded using our existing cash, cash equivalents, marketable securities and future cash flows. As of December 31, 2014, 341,009 shares of ourcommon stock remain available for repurchase under the program. We did not purchase any shares of our common stock in 2014.As of December 31, 2014, we held $49.8 million in cash, cash equivalents, and marketable securities. We believe that our cash, cash equivalents, andmarketable securities, together with our other existing working capital and cash flows from operations, will be adequate to meet planned operating andcapital requirements through at least the next twelve months. However, as the need or opportunity arises, we may seek to raise additional capital throughpublic 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 thatsuch funding will be available on terms acceptable to us.Contractual Obligations and Other Commercial CommitmentsAs of December 31, 2014, our contractual commitments consisted of satellite service capacity, near-term purchase commitments, term notes payable, amortgage note payable, equipment notes payable, and equipment and facility leases. Our purchase commitments include unconditional purchase orders forinventory, manufacturing materials and fixed assets extending out over various periods throughout 2015. We are also obligated under satellite servicecapacity leases and multi-year facility leases that terminate at various times between 2015 and 2018.The following table summarizes our obligations under these commitments, excluding interest, at December 31, 2014: Payment Due by PeriodContractual Obligations Total Less than1 Year 1-3 Years 3-5 Years More than5 Years (in thousands)Term notes payable $63,781 $4,875 $11,781 $47,125 $—Satellite service capacity and related equipment leaseobligations 28,143 12,050 13,055 3,038 —Inventory, materials, and fixed asset purchase commitments 9,282 9,282 — — —Equipment notes payable 3,826 1,159 2,418 249 —Mortgage notes payable 3,268 154 335 2,779 —Facility lease obligations 2,090 480 734 538 338Total $110,390 $28,000 $28,323 $53,729 $338We did not have any off-balance sheet commitments, guarantees, or standby repurchase obligations as of December 31, 2014.45Table of ContentsRecently Issued Accounting PronouncementsSee Note 1 of our accompanying audited consolidated financial statements for a description of recently issued accounting pronouncements includingthe dates of adoption and effects on our results of operations, financial position and disclosures.ITEM 7A.Quantitative and Qualitative Disclosure About Market RiskOur primary market risk exposures are interest rate risk and foreign currency exchange rate risk.We are exposed to changes in interest rates because we finance certain operations through fixed and variable rate debt instruments.We had $63.8 million in borrowings outstanding at December 31, 2014, at an interest rate equal to the LIBOR Daily Floating Rate plus 1.50% underour new variable-rate credit facility. For more information regarding our new credit facility, see Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Borrowing Arrangements. A hypothetical 10% increase or decrease in interest rates would have an approximately $0.2million impact on our annual interest expense, based on the $63.8 million outstanding at December 31, 2014 with an interest rate of 2.41%.As discussed in Note 16 to the consolidated financial statements, effective April 1, 2010, in order to reduce the volatility of cash outflows that arisefrom changes in interest rates, we entered into two interest rate swap agreements. These interest rate swap agreements are intended to hedge our mortgage loanrelated to our headquarters facility in Middletown, Rhode Island by fixing the interest rates specified in the mortgage loan to 5.9% for half of the principalamount outstanding and 6.1% for the remaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan expires on April 16,2019.We are exposed to currency exchange rate fluctuations related to our subsidiary operations in the United Kingdom, Denmark, Norway, Brazil,Singapore, Hong Kong, Cyprus, Japan, Belgium, and the Netherlands. Our recent acquisition of Videotel expanded our international operations and thereforeour exposure to these fluctuations. Certain transactions in these locations are made in the local currency, yet are reported in the U.S. dollar, the functionalcurrency. For foreign currency exposures existing at December 31, 2014, a 10% unfavorable movement in the foreign exchange rates for our subsidiarylocations would not expose us to material losses in earnings or cash flows.From time to time, we have purchased foreign currency forward contracts. These forward contracts are intended to offset the impact of exchange ratefluctuations on cash flows of our foreign subsidiaries. Foreign exchange contracts are accounted for as cash flow hedges and are recorded on the balance sheetat fair value until executed. Changes in the fair value are recognized in earnings. We did not enter into any such contracts during 2014. However, we didinherit cash flow hedges from our acquisition of Headland Media Limited (now known as the KVH Media Group) in May 2013, all of which settled prior toDecember 31, 2014. We do not currently anticipate that we will enter into new agreements to replace the settled contracts.The primary objective of our investment activities is to preserve principal and maintain liquidity, while at the same time maximizing income. We havenot 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 ourportfolio of cash equivalents and short-term investments in a variety of securities that can include United States treasuries, certificates of deposit, investmentgrade asset-backed corporate securities, money market mutual funds, municipal bonds, and government agency and non-government debt securities. As ofDecember 31, 2014, a hypothetical 100 basis-point increase in interest rates would have resulted in an immaterial decrease in the fair value of ourinvestments that had maturities of greater than one year. Due to the conservative nature of our investments and the relatively short duration of theirmaturities, we believe this interest rate risk is substantially mitigated. As of December 31, 2014, 59% of the $24.5 million classified as available-for-salemarketable securities will mature or reset within one year. Accordingly, long-term interest rate risk is not considered material for our investment activities. Wedid not invest in any financial instruments denominated in foreign currencies as of December 31, 2014.ITEM 8.Financial Statements and Supplementary DataOur consolidated financial statements and supplementary data, together with the reports of Grant Thornton LLP and KPMG LLP, our independentregistered public accounting firms, are included in Part IV of this annual report.ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.46Table of Contents47Table of ContentsITEM 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,or the Exchange Act, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that suchinformation is accumulated and communicated to our management, including our President, Chief Executive Officer and Chairman of the Board, or CEO, andChief Financial and Accounting 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 andprocedures as of December 31, 2014, the end of the period covered by this annual report. Based on that evaluation, our CEO and CFO concluded that ourdisclosure controls and procedures were not effective as of December 31, 2014 due to the material weaknesses in our internal control over financial reportingdescribed below.Management's Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financialreporting is the process designed by and under the supervision of our CEO and CFO to provide reasonable assurance regarding the reliability of our financialreporting and the preparation of our financial statements for external reporting in accordance with accounting principles generally accepted in the UnitedStates of America. Management has evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).Under the supervision and with the participation of our CEO and CFO, our management has assessed the effectiveness of our internal control overfinancial reporting as of December 31, 2014 and concluded that it was not effective because of the material weaknesses described below. Management’sassessment of internal control over financial reporting did not include Videotel Marine Asia Limited, Super Dragon Limited or any of their respectivesubsidiaries (collectively, Videotel), which were acquired in July 2014. Videotel’s financial statements reflect total assets and revenues constituting 26% and6%, respectively, of the corresponding amounts in our consolidated financial statements as of and for the year ended December 31, 2014.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management'sassessment identified the following control deficiencies in our internal control over financial reporting as material weaknesses:•We enter into guidance and stabilization contracts that may contain bill and hold provisions. We have a control to identify and evaluate these typesof transactions that have been recognized each quarter. However, the control did not operate effectively during 2014 because it did not identify abill and hold transaction at December 31, 2014 for evaluation by the finance team in the quarter in which it was reported.•We engage a third party to assist in the preparation of our quarterly and annual income tax provisions. However, our preliminary provision atDecember 31, 2014 did not properly identify changes in the Rhode Island tax rate and related impact on the realizability of the state tax assetcarryforwards. We have since adjusted those amounts. We do not have sufficient controls over the review of the work performed by the third party toensure accurate financial reporting.•We lease our antenna products directly to certain end users and also enter into airtime service agreements with these customers. The pricing of thelease and airtime service agreement is negotiated with each individual customer. We do not have a control designed and implemented to evaluatethese multi-element arrangements to ensure proper allocation of the transaction price among the elements.The material weaknesses did not result in material misstatement in the financial statements included in Item 8 or previously issued financialstatements, however, we concluded that, as of December 31, 2014, there was a reasonable possibility that material misstatements could occur in theconsolidated financial statements.48Table of ContentsOur independent registered public accounting firm, Grant Thornton LLP, has issued an adverse report regarding the effectiveness of our internalcontrol over financial reporting as of December 31, 2014, and that report is included in Item 9a in this annual report.Evaluation of Changes in Internal Control over Financial ReportingUnder the supervision and with the participation of our CEO and CFO, our management has evaluated changes in our internal control over financialreporting that occurred during the fourth quarter of 2014. Based on that evaluation, our CEO and CFO did not identify any change in our internal controlover financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.However, during the first quarter of 2015, management commenced implementation of a remediation plan, which is ongoing. Management believesthat the implementation of this plan will remediate the material weaknesses described above. The remediation plan includes the following steps:•With respect to bill and hold arrangements, we plan to revise sales orders and general ledger entries to facilitate identification of these arrangementsat the time they are created. We plan to implement written procedures to document all material bill and hold arrangements, as well as other terms andconditions that may impact revenue recognition, such as multiple-element arrangements. We plan to perform quarterly assessments of quantities ofinventory on hand that are subject to bill and hold arrangements with customers. We also plan to enhance existing review controls through theimplementation of more detailed checklists and the involvement of additional personnel with knowledge of these arrangements.•With respect to reliance on third parties to assist in the calculation of our provision for income taxes, we plan to implement a more formalizedprocess to review the work completed by third parties, including detailed checklists to perform a proper evaluation of each element of theapportionment of state taxes and any related impact on our deferred tax assets.•With respect to the allocation of revenue for multiple-element arrangements involving leased antennas and airtime service agreements, we instituteda new control earlier in the first quarter of 2015 to review each lease at the time of execution in order to assess and document any lease discountarising from reasonably anticipated airtime service agreements.Management may determine to enhance existing controls and/or implement additional controls as implementation progresses.Important ConsiderationsThe 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, thepossibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controlsmay 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 willbe successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.Report of Independent Registered Public Accounting FirmBoard of Directors and StockholdersKVH Industries, Inc.We have audited the internal control over financial reporting of KVH Industries, Inc., a Delaware corporation, and subsidiaries (the “Company”) as ofDecember 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control overFinancial Reporting.” (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting basedon our audit. Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financialreporting of Videotel Marine Asia Limited and Super49Table of ContentsDragon Limited (together referred to as Videotel), wholly owned subsidiaries, whose financial statements reflect total assets and revenues constituting 26 and6 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014. As indicated inManagement’s Report, Videotel was acquired during 2014. Management’s assertion on the effectiveness of the Company’s internal control over financialreporting excluded internal control over financial reporting of Videotel.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures aswe 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 financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal 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 asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Thefollowing material weaknesses have been identified and included in management’s assessment.As of December 31, 2014, management disclosed material weaknesses over the effectiveness of controls related to (1) guidance and stabilizationcontracts where revenue is recognized on a bill and hold basis, (2) the accounting for income taxes and (3) the accounting for multiple element leasetransactions.In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, theCompany has not maintained effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 InternalControl-Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedfinancial statements of the Company as of and for the year ended December 31, 2014. The material weaknesses identified above were considered indetermining the nature, timing, and extent of audit tests applied in our audit of the 2014 consolidated financial statements, and this report does not affect ourreport dated March 16, 2015, which expressed an unqualified opinion on those financial statements./s/ Grant Thornton LLP Boston, MassachusettsMarch 16, 201550Table of ContentsITEM 9B.Other Information None.51Table of ContentsPART IIIWe have omitted the information required in Part III of this annual report because we intend to include that information in our definitive proxystatement for our 2015 annual meeting of stockholders, which we expect to file before 120 days after the end of fiscal 2014. We incorporate the informationrequired in Part III of this annual report by reference to our 2015 proxy statement.ITEM 10.Directors, Executive Officers and Corporate GovernanceExcept as set forth below, the information required by this item is incorporated by reference to our 2015 proxy statement.Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our directors, executive officers and employees. Our Codeof 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 anyamendments 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 Conductand 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 CompensationThe information required by this item is incorporated by reference to our 2015 proxy statement.ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this item is incorporated by reference to our 2015 proxy statement.ITEM 13.Certain Relationships and Related Transactions and Director IndependenceThe information required by this item is incorporated by reference to our 2015 proxy statement.ITEM 14.Principal Accountant Fees and ServicesThe information required by this item is incorporated by reference to our 2015 proxy statement.52Table of ContentsPART IVITEM 15.Exhibits and Financial Statement Schedules Page(a)1.Financial Statements Report of Independent Registered Public Accounting Firm - Grant Thornton LLP 57 Report of Independent Registered Public Accounting Firm - KPMG LLP58 Consolidated Balance Sheets as of December 31, 2014 and 201359 Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 201260 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2014, 2013 and 201260 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 201262 Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 201263 Notes to Consolidated Financial Statements64 (a)2.Financial Statement Schedules None. 3.Exhibits Exhibit No. Description Filed withthis Form10-K Incorporated by Reference Form Filing Date Exhibit No.2.1 Share Purchase Agreement, dated as of May 11, 2013 by andamong KVH Industries, Inc., Oakley Capital Private Equity L.P.and the other parties thereto 8-K May 14, 2013 2.12.2 Share Purchase Agreement, dated as of July 2, 2014, by andbetween KVH Media Group Limited and Nigel Cleave 8-K July 3, 2014 2.13.1 Amended and Restated Certificate of Incorporation, as amended 10-Q August 6,2010 3.13.2 Amended and Restated Bylaws of KVH Industries, Inc. 8-K April 30, 2014 3.14.1 Specimen certificate for the common stock S-1/A March 22,1996 4.1*10.1 Amended and Restated 1996 Incentive and Nonqualified StockOption Plan 8-K July 31, 2007 10.3*10.2 Amended and Restated 1996 Employee Stock Purchase Plan 8-K June 2, 2010 10.2*10.3 Second Amended and Restated 2003 Incentive and NonqualifiedStock Option Plan 10-Q May 6, 2009 10.21*10.4 Third Amended and Restated 2006 Stock Incentive Plan 8-K June 2, 2010 10.1*10.5 Form of Nonqualified Stock Option agreement granted under theSecond Amended and Restated 2003 Incentive and NonqualifiedStock Option Plan 10-K March 15,2005 10.14*10.6 Form of Incentive Stock Option agreement granted under theSecond Amended and Restated 2003 Incentive and NonqualifiedStock Option Plan 10-K March 15,2005 10.1553Table of ContentsExhibit No. Description Filed withthis Form10-K Incorporated by Reference Form Filing Date Exhibit No.*10.7 Form of Incentive Stock Option agreement granted under the ThirdAmended and Restated 2006 Stock Incentive Plan 8-K August 28,2006 10.1*10.8 Form of Non-Statutory Stock Option agreement granted under theThird Amended and Restated 2006 Stock Incentive Plan 8-K August 28,2006 10.2*10.9 Form of Restricted Stock Agreement granted under the ThirdAmended and Restated 2006 Stock Incentive Plan 8-K August 16,2007 10.1*10.10 Policy Regarding Automatic Grants to Non-Employee Directors 10-Q May 6, 2009 10.2310.11 Loan Agreement dated April 6, 2009 by and among KVHIndustries, Inc., and Bank of America, N.A. 8-K April 8,2009 10.110.12 Second Amendment, dated June 9, 2011 by and between KVHIndustries, Inc. and Bank of America, N.A., amending the LoanAgreement, dated April 6, 2009, as amended 8-K June 14,2011 10.210.13 Master Loan and Security Agreement, dated as of January 30, 2013by and between KVH Industries, Inc. and Banc of America Leasing& Capital, LLC 8-K February 5, 2013 10.110.14 Equipment Security Note, dated as of January 30, 2013 by andbetween KVH Industries, Inc. and Banc of America Leasing &Capital, LLC 8-K February 5, 2013 10.210.15 Credit Agreement, dated as of July 1, 2014, by and between Bankof America, N.A., The Washington Trust Company and KVHIndustries, Inc. 8-K July 3, 2014 10.110.16 Term Notes, dated as of July 1, 2014, by and between KVHIndustries, Inc. and each of Bank of America, N.A. and TheWashington Trust Company 8-K July 3, 2014 10.210.17 Revolving Credit Notes, dated as of July 1, 2014, by and betweenKVH Industries, Inc. and each of Bank of America, N.A. and TheWashington Trust Company 8-K July 3, 2014 10.310.18 Security Agreement, dated as of July 1, 2014, by and betweenBank of America, N.A. and KVH Industries, Inc. 8-K July 3, 2014 10.410.19 Pledge Agreements, dated as of July 1, 2014, by and between Bankof America, N.A. and KVH Industries, Inc. with respect to KVHIndustries A/S and KVH Industries U.K. Limited 8-K July 3, 2014 10.521.1 List of Subsidiaries X 23.1 Consent of Grant Thornton LLP X 23.2 Consent of KPMG LLP X 31.1 Rule 13a-14(a)/15d-14(a) certification of principal executiveofficer X 31.2 Rule 13a-14(a)/15d-14(a) certification of principal financial officer X 32.1 Rule 1350 certification X 54Table of Contents101.1 Interactive Data File regarding (a) our Consolidated BalanceSheets as of December 31, 2014 and 2013, (b) our ConsolidatedStatements of Operations for the years ended December 31, 2014,2013, and 2012, (c) our Consolidated Statements ofComprehensive (Loss) Income for the years ended December 31,2014, 2013, and 2012, (d) our Consolidated Statements ofStockholders' Equity for the years ended December 31, 2014,2013, and 2012, (e) our Consolidated Statements of Cash Flows forthe years ended December 31, 2014, 2013, and 2012 and (e) theNotes to such Consolidated Financial Statements X *Management contract or compensatory plan. 55Table of ContentsSIGNATURESPursuant 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 besigned on its behalf by the undersigned, thereunto duly authorized. KVH Industries, Inc. Date: March 16, 2015By:/S/ MARTIN A. KITS VAN HEYNINGEN Martin A. Kits van HeyningenPresident, Chief Executive Officer and Chairman of the BoardPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities andon the dates indicated.Name Title Date /S/ MARTIN A. KITS VAN HEYNINGEN President, Chief Executive Officer and Chairman of the Board (PrincipalExecutive Officer) March 16, 2015Martin A. Kits van Heyningen /S/ PETER RENDALL Chief Financial Officer (Principal Financial and Accounting Officer) March 16, 2015Peter Rendall /S/ ROBERT W.B. KITS VAN HEYNINGEN Director March 16, 2015Robert W.B. Kits van Heyningen /S/ MARK S. AIN Director March 16, 2015Mark S. Ain /S/ STANLEY K. HONEY Director March 16, 2015Stanley K. Honey /S/ BRUCE J. RYAN Director March 16, 2015Bruce J. Ryan /S/ CHARLES R. TRIMBLE Director March 16, 2015Charles R. Trimble 56Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersKVH Industries, Inc.We have audited the accompanying consolidated balance sheet of KVH Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2014, and therelated consolidated statement of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for the year then ended. These consolidatedfinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based onour audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditprovide 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 subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal controlover financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2015 expressed an adverse opinion thereon./s/ Grant Thornton LLPBoston, MassachusettsMarch 16, 201557Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersKVH Industries, Inc.:We have audited the accompanying consolidated balance sheet of KVH Industries, Inc. and subsidiaries as of December 31, 2013, and the relatedconsolidated statements of operations, comprehensive income, stockholders’ equity and accumulated other comprehensive income, and cash flows for eachof the years in the two-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the KVH Industries, Inc.’smanagement. 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 thatwe plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide 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 the KVH Industries, Inc.and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for each of the years in the two-year period endedDecember 31, 2013, in conformity with U.S. generally accepted accounting principles./s/ KPMG LLPProvidence, Rhode IslandMarch 17, 201458Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share data) December 31, 2014 2013ASSETS Current assets: Cash and cash equivalents$25,289 $9,358Marketable securities24,513 46,386Accounts receivable, net of allowance for doubtful accounts of $2,723 as of December 31, 2014 and $1,705 as ofDecember 31, 201339,936 27,549Inventories17,424 18,255Prepaid expenses and other assets2,953 3,784Current deferred income tax asset2,772 3,060Total current assets112,887 108,392Property and equipment, less accumulated depreciation of $41,486 as of December 31, 2014 and $36,456 as ofDecember 31, 201341,696 37,142Intangible assets, less accumulated amortization of $5,864 as of December 31, 2014 and $2,005 as of December 31,201333,641 14,987Goodwill40,454 18,281Other non-current assets4,469 5,047Non-current deferred income tax asset2,690 —Total assets$235,837 $183,849LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$12,460 $8,876Accrued compensation and employee-related expenses4,932 5,859Accrued other10,963 7,325Accrued product warranty costs1,853 1,269Deferred revenue7,791 4,858Current portion of long-term debt6,188 1,272Liability for uncertain tax positions3,500 —Total current liabilities47,687 29,459Other long-term liabilities1,459 204Long-term debt, excluding current portion64,687 37,094Non-current deferred income tax liability5,464 625Total liabilities$119,297 $67,382Commitments and contingencies (Notes 1, 5, 6 and 17) Stockholders’ equity: Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued— —Common stock, $0.01 par value. Authorized 30,000,000 shares, 17,152,743 and16,936,128 shares issued; 15,493,752 and 15,277,137 shares outstanding atDecember 31, 2014 and December 31, 2013, respectively172 169Additional paid-in capital121,084 117,147Accumulated earnings11,881 11,840Accumulated other comprehensive (loss) income(3,447) 461 129,690 129,617Less: treasury stock at cost, common stock, 1,658,991 shares as of December 31, 2014 and December 31, 2013,respectively(13,150) (13,150)Total stockholders’ equity116,540 116,467Total liabilities and stockholders’ equity$235,837 $183,849See accompanying Notes to Consolidated Financial Statements.59Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Year Ended December 31, 2014 2013 2012Sales: Product$81,143 $90,295 $90,677Service91,448 71,993 46,435Net sales172,591 162,288 137,112Costs and expenses: Costs of product sales48,843 51,518 51,775Costs of service sales50,301 45,058 30,363Research and development14,101 12,987 12,147Sales, marketing and support32,976 28,792 24,069General and administrative24,448 17,764 12,188Total costs and expenses170,669 156,119 130,542Income from operations1,922 6,169 6,570Interest income738 657 510Interest expense1,296 637 323Other (expense) income(39) 494 86Income before income tax expense1,325 6,683 6,843Income tax expense1,284 2,150 3,263Net income$41 $4,533 $3,580Per share information: Net income per share, basic$0.00 $0.30 $0.24Net income per share, diluted$0.00 $0.30 $0.24Number of shares used in per share calculation: Basic15,420 15,144 14,777Diluted15,605 15,341 15,019See accompanying Notes to Consolidated Financial Statements.60Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME(in thousands) Year Ended December 31, 2014 2013 2012Net income$41 $4,533 $3,580Other comprehensive (loss) income, net of tax: Unrealized gain (loss) on marketable securities8 (4) (1)Foreign currency translation adjustment(3,953) 388 562Unrealized gain (loss) on derivative instruments37 210 (31)Other comprehensive (loss) income, net of tax(3,908) 594 530Total comprehensive (loss) income$(3,867) $5,127 $4,110See accompanying Notes to Consolidated Financial Statements.61Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands) Common Stock AdditionalPaid-inCapital AccumulatedEarnings AccumulatedOtherComprehensiveIncome (Loss) TreasuryStock TotalStockholders’Equity Shares Amount Balance at December 31, 201114,548 $162 $106,592 $3,727 $(663) $(13,150) $96,668Net income— — — 3,580 — — 3,580Other comprehensive loss— — — — 530 — 530Stock-based compensation— — 3,679 — — — 3,679Tax benefit from exercise of stockoptions 619 619Common stock issued under benefitplan27 — 271 — — — 271Payment of restricted stock taxwithholdings(34) — (333) — — — (333)Exercise of stock options, vestingof restricted stock awards364 4 686 — — — 690Balance at December 31, 201214,905 $166 $111,514 $7,307 $(133) $(13,150) $105,704Net income— — — 4,533 — — 4,533Other comprehensive income— — — — 594 — 594Stock-based compensation— — 4,124 — — — 4,124Tax benefit from exercise of stockoptions— — 694 — — — 694Common stock issued under benefitplan27 — 308 — — — 308Payment of restricted stock taxwithholdings(61) (1) (833) — — — (834)Exercise of stock options, vestingof restricted stock awards406 4 1,340 — — — 1,344Balance at December 31, 201315,277 $169 $117,147 $11,840 $461 $(13,150) $116,467Net income— — — 41 — — 41Other comprehensive income— — — — (3,908) — (3,908)Stock-based compensation— — 3,771 — — — 3,771Registration fees— — 41 — — — 41Tax benefit from exercise of stockoptions— — (2) — — — (2)Common stock issued under benefitplan12 — 138 — — — 138Payment of restricted stock taxwithholdings(35) — (481) — — — (481)Exercise of stock options, vestingof restricted stock awards240 3 470 — — — 473Balance at December 31, 201415,494 $172 $121,084 $11,881 $(3,447) $(13,150) $116,540See accompanying Notes to Consolidated Financial Statements.62Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2014 2013 2012Cash flows from operating activities: Net income$41 $4,533 $3,580Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts1,610 1,305 536Depreciation and amortization9,987 5,994 4,610Deferred income taxes(1,813) (713) 2,046Loss on sale of fixed assets30 — —(Gain) loss on derivatives instruments— (222) 128Compensation expense related to stock-based awards and employee stock purchase plan3,771 4,124 3,679Changes in operating assets and liabilities: Accounts receivable(8,235) 1,229 (2,231)Inventories867 (1,967) 2,420Prepaid expenses and other assets1,141 619 (716)Other non-current assets569 (675) (558)Accounts payable1,676 1,196 943Deferred revenue1,622 (124) (785)Accrued expenses(1,002) 891 1,401Other long-term liabilities106 65 4Net cash provided by operating activities$10,370 $16,255 $15,057Cash flows from investing activities: Capital expenditures(5,118) (4,720) (6,504)Net cash paid for business acquired(43,448) (22,944) —Purchases of marketable securities(12,270) (41,950) (21,945)Maturities and sales of marketable securities34,150 24,867 16,190Net cash used in investing activities$(26,686) $(44,747) $(12,259)Cash flows from financing activities: Repayments of long-term debt(1,272) (1,030) (131)Borrowings from long-term debt— 5,844 —Repayments of term note borrowings(1,219) — —Proceeds from term note borrowings65,000 — —Proceeds from stock options exercised and employee stock purchase plan608 2,344 1,578Payment of employee restricted stock withholdings(482) (828) (332)Repayments of line of credit borrowings(30,000) — (2,000)Proceeds from line of credit borrowings— 23,000 —Payment of stock registration fee41 (5) —Net cash provided by (used in) financing activities32,676 29,325 (885)Effect of exchange rate changes on cash and cash equivalents(429) (453) 48Net increase in cash and cash equivalents15,931 380 1,961Cash and cash equivalents at beginning of period9,358 8,978 7,017Cash and cash equivalents at end of period$25,289 $9,358 $8,978Supplemental disclosure of cash flow information: Cash paid for interest$1,296 $601 $201Cash paid for income taxes$2,470 $1,248 $323Supplemental disclosure of noncash investing activity: Changes in accrued liabilities related to fixed asset additions$— $— $435See accompanying Notes to Consolidated Financial Statements.63Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2014, 2013 and 2012(in thousands, except per share amounts) (1)Summary of Significant Accounting Policies(a)Description of BusinessKVH Industries, Inc. (together with its subsidiaries, the Company or KVH) designs, develops, manufactures and markets mobile communicationsproducts and services for the marine, and land mobile markets, and navigation, guidance, and stabilization products for both the defense and commercialmarkets.KVH’s mobile communications products enable customers to receive voice and Internet services, and live digital television via satellite services inmarine vessels, recreational vehicles, buses and automobiles. KVH’s CommBox offers a range of tools designed to increase communication efficiency, reducecosts, and manage network operations. KVH sells and leases its mobile communications products through an extensive international network of dealers anddistributors. KVH also sells and leases products directly to end users.KVH’s mobile communications service sales represent primarily sales earned from satellite voice and Internet airtime services. KVH provides, formonthly fixed and usage fees, satellite connectivity services, including broadband Internet, data and Voice over Internet Protocol (VoIP) services, to itsTracPhone V-series customers. Mobile communications services sales also include the distribution of commercially licensed entertainment, including news,sports, music, and movies to commercial and leisure customers in the maritime, hotel, and retail markets through KVH Media Group (acquired as HeadlandMedia Limited), the media and entertainment service company that KVH acquired on May 11, 2013, and the distribution of training films and eLearningcomputer-based training courses to commercial customers in the maritime market through Super Dragon Limited and Videotel Marine Asia Limited (togetherreferred to as Videotel), a maritime training services company that KVH acquired on July 2, 2014. KVH also earns monthly usage fees from third-partysatellite connectivity services, including voice, data and Internet services, provided to its Inmarsat and Iridium customers who choose to activate theirsubscriptions with KVH. Mobile communications service sales also include engineering services provided under development contracts, sales from productrepairs, and extended warranty sales.KVH acquired Videotel for an aggregate purchase price of $47.4 million in cash. The purchase price was subject to a potential post-closing adjustmentbased on the value of the net assets delivered at the closing. We financed approximately $35.0 million of the purchase price through a new senior creditfacility and paid the remaining portion of the purchase price from cash and cash equivalents. Revenue for the Videotel group companies was $10.4 million inthe year ended December 31, 2014. The majority of Videotel’s services are invoiced in pounds sterling, which increases our exposure to fluctuations inexchange rates.KVH also offers precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing and guidance.KVH’s guidance and stabilization products also include tactical navigation systems that provide uninterrupted access to navigation and pointinginformation in a variety of military vehicles, including tactical trucks and light armored vehicles. KVH’s guidance and stabilization products are sold directlyto U.S. and foreign governments and government contractors, as well as through an international network of authorized independent sales representatives. Inaddition, KVH's guidance and stabilization products are used in numerous commercial products, such as navigation and positioning systems for variousapplications including precision mapping, dynamic surveying, autonomous vehicles, train location control and track geometry measurement systems,industrial robotics and optical stabilization.KVH’s guidance and stabilization service sales include product repairs, engineering services provided under development contracts and extendedwarranty sales.(b)Principles of ConsolidationThe accompanying consolidated financial statements of KVH Industries, Inc. and its wholly owned subsidiaries have been prepared in accordance withaccounting principles generally accepted in the United States of America. The Company has evaluated all subsequent events through the date of this filing.All of the operating expenses of the subsidiaries that serve as the Company’s European, Singaporean, Japanese, and Brazilian international distributors arereflected within sales, marketing, and support within the accompanying consolidated statements of operations. All significant intercompany accounts andtransactions have been eliminated in consolidation.64Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)(c)Significant Estimates and AssumptionsThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities asof the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Significant estimates and assumptions bymanagement affect the Company’s revenue recognition, valuation of accounts receivable, valuation of inventory, assumptions used to determine fair value ofgoodwill and intangible assets, deferred tax assets and related valuation allowance, stock-based compensation, warranty and accounting for contingencies.Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recordedin the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to bereasonable under the circumstances.The Company has accounted for its $35,600 contract received in June 2012 from SANG to purchase TACNAV products and services under ASC605-25, Multiple-Element Arrangements. See section (e) of this note for estimates and assumptions related to multiple-element-arrangements and completedcontract sales accounting.The SANG total contract value associated with TACNAV products is $21,200, for which final shipments were completed in the second quarter of2013. Revenue was recognized for these product sales after transfer of title and risk of loss and after inspection occurred. The total contract value associatedwith all services is $14,400, and services were completed in the third quarter of 2014. The revenue for these services is recognized using the proportionalperformance accounting method. The Company limits the amount of revenue recognized for delivered elements to the amount that is not contingent on thefuture delivery of products or services, future performance obligations, or subject to customer-specific return or refund privileges. Total revenue recognizedon the SANG contract in 2014 and 2013 was approximately $1,300 and $19,600, respectively. (d)Concentration of Credit Risk and Single Source SuppliersCash, cash equivalents and marketable securities. The Company is potentially subject to financial instrument concentration of credit risk through itscash, cash equivalent and marketable securities investments. To mitigate these risks the Company maintains cash, cash equivalents and marketable securitieswith reputable and nationally recognized financial institutions. As of December 31, 2014, $24,513 classified as marketable securities was held by WellsFargo and substantially all of the cash and cash equivalents were held by Bank of America, N.A. See Note 2 for a description of marketable securities.Trade accounts receivable. Concentrations of risk (see Note 12) with respect to trade accounts receivable are generally limited due to the large numberof customers and their dispersion across several geographic areas. Although the Company does not foresee credit risk associated with these receivables todeviate from historical experience, repayment is dependent upon the financial stability of those individual customers. The Company establishes allowancesfor potential bad debts and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and its expectations for futurecollectability concerns. Activity within the Company’s allowance for doubtful accounts for the periods presented is as follows: 2014 2013 2012Beginning balance$1,705 $929 $623Additions to sales allowance and bad debt expense1,610 1,305 536Deductions (write-offs/recoveries) from reserve(592) (529) (230)Ending balance$2,723 $1,705 $929Certain components from third parties used in the Company’s products are procured from single sources of supply. The failure of a supplier, includinga subcontractor, to deliver on schedule could delay or interrupt the Company’s delivery of products and thereby materially adversely affect the Company’srevenues and operating results.65Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)(e)Revenue RecognitionProduct sales. Product sales are recognized when persuasive evidence of an arrangement exists, goods are shipped, title has passed and collectability isreasonably assured. The Company’s standard sales terms require that:•All sales are final;•Terms are generally Net 30;•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 guidance and stabilization product sales, customer acceptance or inspection may be required before title and risk of loss transfers. For thosesales, revenue is recognized after transfer of title and risk of loss and after notification of customer acceptance. In certain circumstances customers may requesta bill and hold arrangement. Under these bill and hold arrangements, revenue is recognized when the Company has fulfilled all of its performanceobligations, the units are segregated and available for shipment in accordance with the defined contract delivery schedule, and the Company has receivednotification of customer acceptance which transfers title and risk of loss to the customer.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 isallowed on any returned product unless the Company has granted and confirmed prior written permission by means of appropriate authorization. TheCompany establishes reserves for potential sales returns, credits, and allowances, and evaluates, on a monthly basis, the adequacy of those reserves basedupon historical experience and expectations for the future.Multiple-element revenue arrangements. Some of our sales involve multiple-element arrangements that include both hardware-related products andcontracted service, or satellite connectivity that are accounted under ASC 605-25, Multiple-Element Arrangements.Multiple elements, arrangement consideration is allocated to each element based on the relative selling prices of all of the elements in the arrangementusing the fair value hierarchy as required by “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” (Accounting StandardsUpdate “ASU” 2009-13). The Company adopted the provisions of ASU 2009-13 as of January 1, 2010. ASU 2009-13 requires the Company establish VSOEof fair value based upon the price charged when the same element is sold separately or established by management having the relevant pricing authority.When VSOE exists it is used to determine the selling price of a deliverable. When VSOE is not established, the Company attempts to establish the sellingprice of each element based on TPE. When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in the allocation ofarrangement consideration for the relevant deliverables. The objective of BESP is to determine the price at which the Company would transact a sale if aproduct or service was sold on a stand-alone basis. The Company determines BESP for our products and certain services by considering multiple factorsincluding, but not limited to, overall market conditions, including geographic or regional-specific market factors and profit objectives for such deliverables.Each deliverable within the Company's multiple-deliverable revenue arrangements is accounted for as a separate unit of accounting under theguidance of ASU 2009-13 if both of the following criteria are met: the delivered item or items have value to the customer on a standalone basis; and for anarrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probableand substantially in the control of the Company. The Company considers a deliverable to have standalone value if the item is sold separately by theCompany or another vendor or if the item could be resold by the customer. Further, the Company's revenue arrangements generally do not include a generalright of return relative to delivered products.Deliverables not meeting the criteria for being a separate unit of accounting are combined with a deliverable that does meet that criterion. Theappropriate allocation of arrangement consideration and recognition of revenue is then determined for the combined unit of accounting.Satellite connectivity and media content sales. Directly sold and re-sold satellite connectivity service for voice, data and Internet is recognizedmonthly based upon minutes or megabytes of traffic processed or contracted fixed fee schedules. Typically, all subscribers enter into a contracted one-yearminimum service agreement. The Company records all satellite66Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)connectivity service sales to subscribers as gross sales, as the Company is the primary obligor in the contracted service arrangement. All associated regulatoryservice fees and costs are recorded net in the consolidated financial statements. Media content sales include the Company's distribution of commerciallylicensed news, sports, movies and music content for commercial and leisure customers in the maritime, hotel, and retail markets as well as training videos tothe merchant marine market that are typically based on a contracted fixed fee schedule. The Company typically recognizes revenue from media content salesratably over the period of the service contract. The accounting estimates related to the recognition of satellite connectivity and media content service sales inresults of operations requires the Company to make assumptions about future billing adjustments for disputes with subscribers as well as unauthorized usage.Lease financing. Lease financing consists of sales-type leases primarily of the TracPhone V-IP Series. The Company records the leases at a pricetypically equivalent to normal selling price and in excess of the cost or carrying amount. Upon delivery, the Company records the present value of allpayments under these leases as revenues, and the related costs of the product are charged to cost of sales. Interest income is recognized throughout the leaseterm (typically three years) using an implicit interest rate. Through December 31, 2014, lease sales have not been a significant portion of the Company’s totalsales.Contracted service sales. The Company engages in contracts for development, production, and services activities related to standard productmodification or enhancement, which it accounts for using the proportional performance method of revenue recognition. The Company considers the nature ofthese contracts and the types of products and services provided when determining the proper accounting for a particular contract. Customer and government-agency contracted engineering service and grant sales under development contracts are recognized primarily under the proportional performance methodduring the period in which the Company performs the service or development efforts in accordance with the agreement. Services performed under these typesof contracts include engineering studies, surveys, building construction, prototype development, and program management. Performance is determinedprincipally by comparing the accumulated costs incurred to date with management’s estimate of the total cost to complete the contracted work. TheCompany establishes billing terms at the time project deliverables and milestones are agreed. Unbilled revenue recognized in excess of the amounts invoicedto clients are classified within the accompanying consolidated balance sheets in the caption “prepaid expenses and other assets.”The use of contract accounting requires significant judgment relative to estimating total contract revenues and costs, including assumptions relative tothe length of time to complete the contract, the nature and complexity of the work to be performed, and prices for subcontractor services and materials. Therisk to the Company on a fixed-price contract is that if estimates to complete the contract change from one period to the next, profit levels will vary fromperiod to period. The Company's estimates are based upon the professional knowledge and experience of its engineers, program managers and otherpersonnel, who review each long-term contract monthly to assess the contract's schedule, performance, technical matters and estimated cost at completion.Changes in estimates are applied when adjustments in estimated contract costs are identified, such revisions may result in current period adjustments toearnings applicable to performance in prior periods. 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 an expected loss, then such loss is provided for in that period. Through December 31, 2014,contracted service revenue has not been a significant portion of the Company’s total sales.Product service sales. Product service sales other than under development contracts are recognized when completed services are provided to thecustomer and collectability is reasonably assured. The Company establishes reserves for potential sales returns, credit and allowances, and evaluates, on amonthly basis, the adequacy of those reserves based upon historical experience and its expectations for the future. Through December 31, 2014, productservice sales have not been a significant portion of the Company’s total sales.Extended warranty sales. The Company sells extended warranty contracts on mobile communications and guidance and stabilization products. Salesunder these contracts are recognized ratably over the contract term. Through December 31, 2014, warranty sales have not been a significant portion of theCompany’s total sales.(f)Fair Value of Financial InstrumentsThe carrying amounts of the Company’s financial instruments, which include cash equivalents, investments, accounts receivable, accounts payableand accrued expenses approximate their fair values due to the short maturity of these instruments. The carrying amount of the Company’s mortgage loanapproximates fair value based on currently available quoted rates of similarly structured mortgage facilities. See Note 2 for more information on the fair valueof the Company’s marketable securities.67Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)(g)Cash, Cash Equivalents, and Marketable SecuritiesIn accordance with the Company’s investment policy, cash in excess of operational needs is invested in money market mutual funds, governmentagency bonds, United States treasuries, municipal bonds, corporate notes, and certificates of deposit, which are reflected within marketable securities in theaccompanying consolidated balance sheets. The Company determines the appropriate classification of marketable securities at each balance sheet date. As ofDecember 31, 2014 and 2013, all of the Company’s marketable securities have been designated as available-for-sale and are carried at their fair value withunrealized gains and losses included in accumulated other comprehensive (loss) income in the accompanying consolidated balance sheets.The Company reviews investments in debt securities for other than temporary impairment whenever the fair value of an investment is less thanamortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether animpairment is other-than-temporary, the Company considers whether it intends to sell the security, whether it expects to recover the credit loss, and if it ismore likely than not that the Company will be required to sell the security prior to recovery. Evidence considered in this assessment includes the reasons forthe impairment, compliance with the Company’s investment policy, the severity and duration of the impairment, changes in value subsequent to year-endand forecasted performance of the investee. The Company has reviewed its securities with unrealized losses as of December 31, 2014 and 2013, and hasconcluded that no other-than-temporary impairments exist.(h)InventoriesInventories are stated at the lower of cost or market using the first-in first-out costing method. The Company provides inventory reserves based onexcess and obsolete inventory determined primarily by future demand forecasts. The Company records inventory charges to costs of product sales.(i)Property and EquipmentProperty and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives ofthe respective assets. The principal lives used in determining the depreciation rates of various assets are: buildings and improvements, 5-40 years; machinery,satellite hubs and equipment, and video-on-demand (VOD) units, 5-10 years; office and computer equipment, 3-7 years; and motor vehicles, 5 years.(j)Goodwill and Intangible AssetsThe Company’s goodwill and intangible assets are associated with the purchase of Virtek Communication (now known as KVH Industries Norway AS)in September 2010. Headland Media Limited (now known as the KVH Media Group) in May 2013, and Videotel in July 2014.Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired.Goodwill is not amortized, but instead is tested for impairment at least annually, or if events or changes in circumstances indicate that the carrying value maynot be recoverable. The Company estimates the fair value of the reporting unit using a discounted cash flow model or other valuation models, such ascomparative transactions and market multiples. The impairment test is performed through the application of a two-step process. The first step compares thecarrying value of the Company’s reporting units to their estimated fair values as of the test date. If fair value is less than carrying value, a second step isperformed to quantify the amount of the impairment, if any. As of August 31, 2014, the Company performed its annual impairment test for goodwill at thereporting unit level and, after conducting the first step, determined that it was not necessary to conduct the second step as it concluded that the fair value ofits reporting units exceeded their carrying value. Accordingly, the Company determined no adjustment to goodwill was necessary. There were no indicatorsof potential goodwill impairment noted as of December 31, 2014.Intangible assets are comprised of the following, which are being amortized on a straight-line basis over the following estimated useful lives:68Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts) EstimatedUseful LifeVirtek Communication (now KVH Industries Norway AS): Intellectual property7Headland Media Limited (now the KVH Media Group): Subscriber relationships10Distribution rights15Internally developed software3Proprietary content2Videotel Subscriber relationships8Internally developed software4Proprietary content5Favorable lease5Intangible assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by acomparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. Ifthese comparisons indicate that an asset is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of theasset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraisedvalues, depending on the nature of the asset. There are no events or changes in circumstances that indicated any of the carrying amounts of the Company’sintangible assets may not be recoverable during 2014. See Note 10 for further discussion of goodwill and intangible assets.(k)Other Non-Current AssetsOther non-current assets are primarily comprised of long-term lease receivables, prepaid expenses, and deposits.(l)Product WarrantyThe Company’s products carry limited warranties that range from one to four years and vary by product. The warranty period begins on the date ofretail purchase or lease by the original purchaser. The Company accrues estimated product warranty costs at the time of sale and any additional amounts arerecorded when such costs are probable and can be reasonably estimated. Factors that affect the Company’s warranty liability include the number of units soldor leased, historical and anticipated rates of warranty repairs and the cost per repair. Warranty and related costs are reflected within sales, marketing andsupport in the accompanying statements of operations. As of December 31, 2014 and 2013, the Company had accrued product warranty costs of $1,853 and$1,269, respectively. The following table summarizes product warranty activity during 2014 and 2013: 2014 2013Beginning balance$1,269 $814Charges to expense2,048 1,457Costs incurred(1,464) (1,002)Ending balance$1,853 $1,269(m)Shipping and Handling CostsShipping and handling costs are expensed as incurred and included in cost of sales. Billings for shipping and handling are reflected within net sales inthe accompanying statements of operations.69Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)(n)Research and DevelopmentExpenditures for research and development, including customer-funded research and development, are expensed as incurred. Revenue and relateddevelopment costs from customer-funded research and development are as follows: Year Ended December 31, 2014 2013 2012Customer-funded service sales$3,806 $10,302 $5,470Customer-funded costs included in costs of service sales2,633 2,387 3,424(o)Advertising CostsCosts related to advertising are expensed as incurred. Advertising expense was $2,825, $3,189, and $2,523 for the years ended December 31, 2014,2013, and 2012, respectively, and is included in sales, marketing, and support expense in the accompanying consolidated statements of operations.(p)Foreign Currency TranslationThe financial statements of the Company’s foreign subsidiaries located in Denmark and Singapore are maintained using the United States dollar as thefunctional currency. Exchange rates in effect on the date of the transaction are used to record monetary assets and liabilities. Revenue and other expenseelements are recorded at rates that approximate the rates in effect on the transaction dates. Realized foreign currency remeasurement gains and losses arerecognized within “other (expense) income” in the accompanying consolidated statements of operations. For the years ended December 31, 2014, 2013, and2012, the Company experienced foreign currency losses of $126, $123, and $37, respectively.The financial statements of the Company’s foreign subsidiaries located in the United Kingdom, Brazil, Norway, Cyprus, Belgium, the Netherlands andJapan subsidiaries use the foreign subsidiaries’ respective local currencies as the functional currency. The Company translates the assets and liabilities ofthese foreign subsidiaries at the exchange rates in effect at year-end. Net sales, costs and expenses are translated using average exchange rates in effect duringthe year. Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive loss included in stockholders' equityin the accompanying consolidated balance sheets.(q)Income TaxesIncome taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities andtheir 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 temporarydifferences 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 theperiod that includes the enactment date. The Company records valuation allowances to reduce deferred income tax assets to the amount that is more likelythan not to be realized. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not morelikely than not that a position will be sustained, no amount of the benefit attributable to the position is recognized. The tax benefit to be recognized of anytax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized uponresolution of the contingency. See Note 8 for further discussion of income taxes.(r)Net Income per Common ShareBasic net income per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net incomeper share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities, if any, as determined in accordancewith the treasury stock accounting method. Common stock equivalents related to options and restricted stock awards for 784,000, 545,000, and 862,000shares of common stock for the years ended December 31, 2014, 2013, and 2012, respectively, have been excluded from the fully diluted calculation of netincome per share, as inclusion would be anti-dilutive.70Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)A reconciliation of the basic and diluted weighted average common shares outstanding is as follows: 2014 2013 2012Weighted average common shares outstanding—basic15,420 15,144 14,777Dilutive common shares issuable in connection with stock plans185 197 242Weighted average common shares outstanding—diluted15,605 15,341 15,019(s)Contingent LiabilitiesThe Company estimates the amount of potential exposure it may have with respect to claims, assessments and litigation in accordance with ASC 450,Contingencies. As of December 31, 2014, the Company was not party to any lawsuit or proceeding that, in management’s opinion, was likely to materiallyharm the Company’s business, results of operations, financial condition or cash flows, as described in Note 17. It is not always possible to predict theoutcome of litigation, as it is subject to many uncertainties. Additionally, it is not always possible for management to make a meaningful estimate of thepotential loss or range of loss associated with such litigation. As of December 31, 2014, no losses have been accrued with respect to pending litigation.(t)Operating SegmentsThe Company operates in a single segment. Operating segments are identified as components of an enterprise about which separate discrete financialinformation is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance.To date, the chief operating decision maker has made such decisions and assessed performance at the company level, as one segment. The Company’s chiefoperating decision maker is its President, Chief Executive Officer and Chairman of the Board.(u) Film Production CostsThe Company capitalizes direct costs incurred in the production of its training videos, such as writing, directing, narrating, casting, location rental,and editing. These film costs are classified as a non-current asset on its consolidated balance sheet and are placed into service upon the film title beingreleased and available for customers' use. The Company’s sales model associated with training is subscription-based, in which fees from third parties are notdirectly attributable to the exhibition of a particular film but relate instead to access to the entire film library. Accordingly, management estimates that thestraight line method is the most representative method for the amortization of film costs. Consistent with the period over which revenues are assessed (i.e. thesubscription period), the film costs are amortized over four years. In the event that the film title is replaced or removed from the film library before theamortization period has expired, all unamortized costs are expensed immediately.(v) Recently Issued Accounting StandardsRevenueIn May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”),regarding ASC Topic 606 of the same nomenclature. ASU 2014-09 represents the culmination of efforts by the FASB and the International AccountingStandards Board (“IASB”) to issue a common revenue standard. When effective, ASU 2014-09 will generally supersede the current revenue guidanceincluded in ASC Topic 605 “Revenue” and its associated Subtopics. The ASU requires that an entity recognize revenue to depict the transfer of a promisedgood or service to its customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for such transfer. ASU 2014-09also specifies accounting for certain costs incurred by an entity to obtain or fulfill a contract with a customer and provides for enhancements to revenuespecific disclosures intended to allow users of the financial statements to clearly understand the nature, amount, timing and uncertainty of revenue and cashflows arising from an Entity’s contracts with its customers. ASU 2014-09 becomes effective for public entities for annual periods, and interim periods withinannual periods, beginning after December 15, 2016. The ASU becomes effective for all other entities for annual periods beginning after December 15, 2017and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the impact, if any, the adoption of ASU2014-09 will have on its financial position, results of operations and cash flows.71Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)Presentation of Financial Statements - Going ConcernIn August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), regarding ASC Topic 205-40 “Presentation of Financial Statements-Going Concern.” ASU 2014-15 requires management to assess an entity’s ability tocontinue as a going concern, including requiring an evaluation every reporting period including interim periods, and requires certain disclosures when thereis substantial doubt of the entity’s ability to continue as a going concern, whether or not it is alleviated as a result of consideration of management’s plans.ASU 2014-15 becomes effective for the Company for annual periods ending after December 15, 2016, with early application permitted. The Company doesnot believe implementation of ASU 2014-15 will have an impact on its financial statement disclosures. Extraordinary and Unusual ItemsIn January 2015, the FASB issued ASU 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”(“ASU 2015-01”), which amends ASC 225-20 “Income Statement - Extraordinary and Unusual Items” (ASC 225-20). ASU 2015-01 eliminates the concept ofextraordinary items from generally accepted accounting principles and also expands the disclosure requirements of items that are unusual in nature or occurinfrequently. Upon adopting this amended guidance, a material event or transaction that an entity considers to be unusual or infrequent, or both, may still bepresented separately but would now be presented on a pretax basis within income from continuing operations or disclosed in the notes to the financialstatements. ASU 2015-01 becomes effective for the Company for annual periods beginning after December 15, 2015 and may be applied retrospectively orprospectively, with early adoption permitted. The Company does not believe implementation of ASU 2015-01 will have an impact on its financial statementdisclosures.72Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)(2)Marketable SecuritiesIncluded in marketable securities as of December 31, 2014 and 2013 are the following:December 31, 2014AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValueMoney market mutual funds$6,824 $— $— $6,824Government agency bonds3,505 — (3) 3,502United States treasuries4,002 4 — 4,006Corporate notes4,665 2 — 4,667Certificates of deposit4,155 0 — 4,155Municipal bonds1,358 1 — 1,359Total marketable securities designated as available-for-sale$24,509 $7 $(3) $24,513 December 31, 2013AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValueMoney market mutual funds$19,957 $— $— $19,957Government agency bonds7,515 — (6) 7,509United States treasuries8,035 6 — 8,041Corporate notes8,457 — (4) 8,453Certificates of deposit2,426 — — 2,426Total marketable securities designated as available-for-sale$46,390 $6 $(10) $46,386The amortized costs and fair value of debt securities as of December 31, 2014 and 2013 are shown below by effective maturity. Effective maturitiesmay differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.December 31, 2014AmortizedCost FairValueDue in less than one year$7,663 $7,668Due after one year and within two years10,022 10,021 $17,685 $17,689December 31, 2013AmortizedCost FairValueDue in less than one year$31,023 $31,023Due after one year and within two years15,367 15,363 $46,390 $46,386The Company realized gains of $110 and $0 from marketable securities during the years ended December 31, 2014 and 2013.73Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)(3)InventoriesInventories are stated at the lower of cost or market using the first-in first-out costing method. Inventories as of December 31, 2014 and 2013 includethe costs of material, labor, and factory overhead. Inventories consist of the following: December 31, 2014 2013Raw materials$8,619 $9,783Work in process2,896 3,087Finished goods5,909 5,385 $17,424 $18,255(4)Property and EquipmentProperty and equipment, net, as of December 31, 2014 and 2013 consist of the following: December 31, 2014 2013Land$3,828 $3,827Building and improvements22,323 22,228Leasehold improvements351 286Machinery and equipment42,869 35,182Office and computer equipment13,760 12,024Motor vehicles51 51 83,182 73,598Less accumulated depreciation(41,486) (36,456) $41,696 $37,142Depreciation for the years ended December 31, 2014, 2013, and 2012 amounted to $6,127, $4,815, and $4,216, respectively.(5)Debt and Line of CreditLong-term debt consists of the following: December 31, 2014 December 31, 2013Line of credit$— $30,000Term notes63,781 —Mortgage loan3,268 3,414Equipment loans3,826 4,952Total70,875 38,366Less amounts classified as current6,188 1,272Long-term debt, excluding current portion$64,687 $37,094Term Note and Line of CreditOn July 1, 2014, the Company entered into (i) a five-year senior credit facility agreement (the Credit Agreement) with Bank of America, N.A., asAdministrative Agent, and the lenders named from time to time as parties thereto (the Lenders), for an aggregate amount of up to $80,000, including arevolving credit facility (the Revolver) of up to $15,000 and a term loan74Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)(Term Loan) of $65,000 to be used for general corporate purposes, including both (A) the refinancing of the Company’s $30,000 then-outstandingindebtedness under its previous credit facility and (B) permitted acquisitions, (ii) revolving credit notes (together, the Revolving Credit Note) to evidence theRevolver, (iii) term notes (together, the Term Note, and together with the Revolving Credit Note, the Notes) to evidence the Term Loan, (iv) a SecurityAgreement (the Security Agreement) required by the Lenders with respect to the grant by the Company of a security interest in substantially all of the assetsof the Company in order to secure the obligations of the Company under the Credit Agreement and the Notes, and (v) Pledge Agreements (the PledgeAgreements) required by the Lenders with respect to the grant by the Company of a security interest in 65% of the capital stock of each of KVH Industries A/Sand KVH Industries U.K. Limited held by the Company in order to secure the obligations of the Company under the Credit Agreement and the Notes.The $65,000 Term Note was executed on July 1, 2014 in connection with the acquisition of Videotel. See Note 13 below for more informationregarding the acquisition. Proceeds in the amount of $35,000 were applied toward the payment of a portion of the purchase price for the acquired shares ofVideotel, and proceeds in the amount of approximately $30,000 were applied toward the refinancing of the then-outstanding balance of the Company’sprevious credit facility. The Company must make principal repayments on the Term Loan in the amount of approximately $1,200 at the end of each of thefirst 8 three-month periods following the closing; thereafter, the Company must make principal repayments in the amount of approximately $1,600 for eachsucceeding three-month period until the maturity of the loan on July 1, 2019. The Company made the first payment on this debt in September 2014. On thematurity date, the entire remaining principal balance of the loan, including any future loans under the Revolver, is due and payable, together with all accruedand unpaid interest, penalties, and other amounts due and payable under the Credit Agreement. The Credit Agreement contains provisions requiring themandatory prepayment of amounts outstanding under the Term Loan and the Revolver under specified circumstances, including (i) 100% of the net cashproceeds from certain dispositions to the extent not reinvested in the Company’s business within a stated period, (ii) 50% of the net cash proceeds from statedequity issuances and (iii) 100% of the net cash proceeds from certain receipts of more than $250 outside the ordinary course of business. The prepayments arefirst applied to the Term Loan, in inverse order of maturity, and then to the Revolver. In the discretion of the Administrative Agent, certain mandatoryprepayments made on the Revolver can permanently reduce the amount of credit available under the Revolver.Loans under the Credit Agreement bear interest at varying rates determined in accordance with the Credit Agreement. Each LIBOR Rate Loan, asdefined in the Credit Agreement, bears interest on the outstanding principal amount thereof for each interest period from the applicable borrowing date at arate per annum equal to the LIBOR Daily Floating Rate or LIBOR Monthly Floating Rate, each as defined in the Credit Agreement, as applicable, plus theApplicable Rate, as defined in the Credit Agreement, and each Base Rate Loan, as defined in the Credit Agreement, bears interest on the outstandingprincipal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate, as defined in the Credit Agreement, plus theApplicable Rate. The Applicable Rate ranges from 1.50% to 2.25%, depending on the Company’s Consolidated Leverage Ratio, as defined in the CreditAgreement. The highest Applicable Rate applies when the Consolidated Leverage Ratio exceeds 2.00:1.00. Upon certain defaults, including failure to makepayments when due, interest becomes payable at a higher default rate.Borrowings under the Revolver are subject to the satisfaction of numerous conditions precedent at the time of each borrowing, including the continuedaccuracy of the Company’s representations and warranties and the absence of any default under the Credit Agreement. As of December 31, 2014, there wereno borrowings outstanding under the revolver.The Credit Agreement contains two financial covenants, a Maximum Consolidated Leverage Ratio and a Minimum Consolidated Fixed ChargeCoverage Ratio, each as defined in the Credit Agreement. The Maximum Consolidated Leverage Ratio was initially 2.25:1.00, declined to 1.50:1.00 onDecember 31, 2014, and declines to 1.00:1.00 on September 30, 2015. The Minimum Consolidated Fixed Charge Coverage Ratio may not be less than1.25:1.00 at any time after December 31, 2014. The Company was in compliance with these financial ratio debt covenants as of December 31, 2014. TheCredit Agreement imposes certain other affirmative and negative covenants, including without limitation covenants with respect to the payment of taxes andother obligations, compliance with laws, entry into material contracts, creation of liens, incurrence of indebtedness, investments, dispositions, fundamentalchanges, restricted payments, changes in the nature of the Company’s business, transactions with affiliates, corporate and accounting changes, and sale andleaseback arrangements.The Company’s obligation to repay loans under the Credit Agreement could be accelerated upon a default or event of default under the terms of theCredit Agreement, including certain failures to pay principal or interest when due, certain breaches of representations and warranties, the failure to complywith the Company’s affirmative and negative covenants under the Credit Agreement, a change of control of the Company, certain defaults in paymentrelating to other indebtedness, the75Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)acceleration of payment of certain other indebtedness, certain events relating to the liquidation, dissolution, bankruptcy, insolvency or receivership of theCompany, the entry of certain judgments against the Company, certain events relating to the impairment of collateral or the Lenders' security interest therein,and any other material adverse change with respect to the Company.Mortgage LoanOn April 6, 2009, the Company entered into a mortgage loan in the amount of $4,000 related to its headquarters facility in Middletown, Rhode Island.On June 9, 2011, the Company entered into an amendment to the mortgage loan. The loan term is ten years, with a principal amortization of 20 years, and theinterest rate will be a rate per year adjusted periodically based on a defined interest period equal to the BBA LIBOR Rate plus 2.00 percentage points. Land,building and improvements with an approximate carrying value of $5,000 as of December 31, 2014 secure the mortgage loan. The monthly mortgagepayment is approximately $12 plus interest and increases in increments of approximately $1 each year throughout the life of the mortgage. Due to thedifference in the term of the loan and amortization of the principal, a balloon payment of $2,551 is due on April 1, 2019. The loan contains one financialcovenant, a Fixed Charge Coverage Ratio, which applies in the event that the Company’s consolidated cash, cash equivalents, and marketable securitiesbalance falls below $25,000 at any time. As the Company’s consolidated cash, cash equivalents, and marketable securities balance was above the minimumthreshold throughout the twelve months ended December 31, 2014, the Fixed Charge Coverage Ratio did not apply. Under the mortgage loan, the Companymay prepay its outstanding loan balance subject to certain early termination charges as defined in the mortgage loan agreement. If the Company were todefault on its mortgage loan, the land, building and improvements would be used as collateral. As discussed in Note 16 to the consolidated financialstatements, effective April 1, 2010, in order to reduce the volatility of cash outflows that arise from changes in interest rates, the Company entered into twointerest rate swap agreements that are intended to hedge its mortgage interest obligations by fixing the interest rates specified in the mortgage loan to 5.91%for half of the principal amount outstanding and 6.07% for the remaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loanexpires on April 16, 2019.Equipment LoanOn January 30, 2013, the Company borrowed $4,700 from a bank and pledged as collateral six satellite hubs and related equipment, including threehubs purchased in 2012. The term of the equipment loan is five years, and the loan bears interest at a fixed rate of 2.76% per annum. The monthly payment isapproximately $83, including interest expense. On December 30, 2013, the Company borrowed $1,200 from a bank and pledged as collateral one satellitehub and related equipment. The term of the equipment loan is five years, and the loan bears interest at a fixed rate of 3.08% per annum. The monthly paymentis approximately $21, including interest expense.The following is a summary of future principal payments under these long-term debt agreements:Year ending December 31, PrincipalPayment2015 $6,1882016 6,6362017 7,8982018 6,9312019 43,222Thereafter —Total outstanding at December 31, 2014 $70,875(6)Commitments and ContingenciesThe Company has certain operating leases for satellite capacity, various equipment, and facilities. The following reflects future minimum paymentsunder operating leases that have initial or remaining non-cancelable lease terms at December 31, 2014:76Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)Years ending December 31,OperatingLeases2015$12,53020167,44820176,34120182,6662019910Thereafter338Total minimum lease payments$30,233Total rent expense incurred under facility operating leases for the years ended December 31, 2014, 2013, and 2012 amounted to $820, $639, and $302,respectively. Total expense incurred under satellite capacity and equipment operating leases for the years ended December 31, 2014, 2013, and 2012amounted to $30,280, $23,215, and $18,135, respectively, which also includes payments for usage charges in excess of the minimum contractualrequirements.In the normal course of business, the Company enters into unconditional purchase order obligations with its suppliers for inventory and otheroperational purchases. Outstanding and unconditional purchase order obligations were $9,282 as of December 31, 2014.The Company did not have any off-balance sheet commitments, guarantees, or standby repurchase obligations as of December 31, 2014.(7)Stockholders’ Equity(a)Employee Stock OptionsOptions 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 annualamounts over four years beginning on the first anniversary of the date of the grant. No options are exercisable for periods of more than five years after date ofgrant. Under the Company’s Amended and Restated 2006 Stock Incentive Plan, each share issued under awards other than options will reduce the number ofshares reserved for issuance by two shares. Shares issued under options will reduce the shares reserved for issuance on a share-for-share basis. All plans wereapproved by the Company’s shareholders, pursuant to which 9,415,000 shares of the Company’s common stock were reserved for issuance. As ofDecember 31, 2014, 7,392,732 options and awards to purchase shares of common stock had been issued, net of expired, canceled or forfeited options, and2,022,268 were available for future grants. The Compensation Committee of the Board of Directors administers the plan, approves the individuals to whomoptions will be granted and determines the number of shares and exercise price of each option. Outstanding options under the plan at December 31, 2014expire from November 2015 through October 2019. None of the Company’s outstanding options includes performance-based or market-based vestingconditions as of December 31, 2014.The Company has estimated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. The expectedvolatility assumption is based on the historical daily price data of the Company’s common stock over a period equivalent to the weighted average expectedlife of the Company’s options. The expected term of options granted is derived using assumed exercise rates based on historical exercise patterns andrepresents the period of time the options granted are expected to be outstanding. The risk-free interest rate is based on the actual U.S. Treasury zero-couponrates 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 the Company hasnot historically declared or paid cash dividends, and does not expect to declare or pay dividends in the foreseeable future.The per share weighted-average fair values of stock options granted during 2014, 2013, and 2012 were $4.71, $5.45, and $4.97, respectively. Theweighted-average assumptions used to value options as of their grant date were as follows:77Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts) Year EndedDecember 31, 2014 2013 2012Risk-free interest rate1.52% 1.06% 0.69%Expected volatility46.5% 50.9% 64.6%Expected life (in years)4.21 4.24 4.22Dividend yield0% 0% 0%The changes in outstanding stock options for the year ended December 31, 2014 are as follows: Number of Options Weighted AverageExercise Price Weighted AverageRemainingContractual Life(in Years) Aggregate IntrinsicValueOutstanding at December 31, 20131,021,791 $11.55 Granted326,496 11.74 Exercised(53,232) 8.85 Expired, canceled or forfeited(90,452) 12.55 Outstanding at December 31, 20141,204,603 $11.65 2.72 $1,814Exercisable at December 31, 2014489,674 $11.87 1.76 $761Options vested or expected to vest at December 31,20141,164,544 $11.64 2.67 $1,768The total aggregate intrinsic value of options exercised was $232, $933, and $173 in 2014, 2013, and 2012, respectively. The total aggregate intrinsicvalue of options outstanding at December 31, 2013 and 2012 was $1,958 and $112, respectively. The total aggregate intrinsic value of options exercisable atDecember 31, 2013 and 2012 was $619 and $85, respectively. As of December 31, 2013 and 2012, the number of options exercisable was 349,449 and 290,911, respectively, and the weighted average exercise priceof those options was $11.90 and $10.52 per share, respectively. The weighted average remaining contractual term for options exercisable at December 31,2013 and 2012 was 2.21 and 1.78 years, respectively. The weighted average remaining contractual term for options outstanding at December 31, 2013 and2012 was 2.83 and 3.28 years, respectively.As of December 31, 2014, there was $2,492 of total unrecognized compensation expense related to stock options, which is expected to be recognizedover a weighted-average period of 2.33 years. In 2014, 2013, and 2012, the Company recorded compensation charges of $1,368, $1,438, and $1,130,respectively, related to stock options. Compensation costs for options subject only to service conditions that vest ratably are recognized on a straight-linebasis over the requisite service period for the entire award. During 2014, 2013, and 2012, cash received under stock option plans for exercises was $471,$1,344 and $689, respectively. (b)Restricted StockThe Company granted 265,380, 265,625, and 43,340 restricted stock awards to employees under the terms of the Amended and Restated 2006 StockIncentive Plan for the years ended December 31, 2014, 2013, and 2012, respectively. The restricted stock awards vest annually over four years from the dateof grant subject to the recipient remaining an employee through the applicable vesting dates. Compensation expense for restricted stock awards is measuredat fair value on the date of grant based on the number of shares granted and the quoted market closing price of the Company’s common stock. Such value isrecognized as expense over the vesting period of the award, net of estimated forfeitures. The weighted-average grant-date fair value of restricted stock grantedduring 2014, 2013, and 2012 was $13.57, $13.61, and $12.53 per share, respectively.As of December 31, 2014, there was $4,034 of total unrecognized compensation expense related to restricted stock awards, which is expected to berecognized over a weighted-average period of 2.46 years. Compensation costs for awards subject only to service conditions that vest ratably are recognizedon a straight-line basis over the requisite service period for the entire award. Compensation cost for awards initially subject to certain performance conditionsare recognized on a ratable78Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)basis over the requisite service period for the entire award. In 2014, 2013, and 2012, the Company recorded compensation charges of $2,317, $2,613, and$2,495, respectively, related to restricted stock awards.Restricted stock activity under the Amended and Restated 2006 Stock Incentive Plan for 2014 is as follows: Number ofShares Weighted-averagegrant datefair valueOutstanding at December 31, 2013, unvested379,007 $13.61Granted265,380 13.57Vested(182,606) 13.41Forfeited(34,679) 13.81Outstanding at December 31, 2014, unvested427,102 $13.67 (c)Employee Stock Purchase PlanUnder the Company’s Amended and Restated Employee Stock Purchase Plan (ESPP), the Company is authorized to issue up to 650,000 shares ofcommon stock, of which 46,575 shares remain available as of December 31, 2014.The ESPP covers all of the Company’s employees. Under the terms of the ESPP, eligible employees can elect to have up to six percent of their pre-taxcompensation withheld to purchase shares of the Company’s common stock on a semi-annual basis. The ESPP allows eligible employees the right topurchase the Company’s common stock on a semi-annual basis at 85% of the market price at the end of each purchase period. During 2014, 2013, and 2012,12,398, 27,027, and 27,308 shares, respectively, were issued under this plan. The Company utilizes the Black-Scholes option-pricing model to calculate thefair value of these discounted purchases. The fair value of the 15% discount is recognized as compensation expense over the purchase period. The Companyapplies a graded vesting approach because the ESPP provides for multiple purchase periods and is, in substance, a series of linked awards. In 2014, 2013, and2012, the Company recorded compensation charges of $55, $73, and $54, respectively, related to the ESPP. During 2014, 2013, and 2012, cash receivedunder the ESPP was $138, $308, and $270, respectively.(8)Income TaxesIncome tax expense (benefit) for the years ended December 31, 2014, 2013, and 2012 attributable to income (loss) from operations is presented below.79Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts) Current Deferred TotalYear ended December 31, 2014 Federal$325 $(623) $(298)State(2) 1,036 1,034Foreign1,640 (1,092) 548 $1,963 $(679) $1,284Year ended December 31, 2013 Federal$1,793 $(497) $1,296State242 (52) 190Foreign901 (237) 664 $2,936 $(786) $2,150Year ended December 31, 2012 Federal$715 $2,036 $2,751State146 254 400Foreign249 (137) 112 $1,110 $2,153 $3,263The actual income tax expense differs from the “expected” income tax expense computed by applying the United States Federal corporate income taxrate of 35% to income before tax expense as follows: Year Ended December 31, 2014 2013 2012Computed “expected” tax expense$451 $2,339 $2,395(Decrease) increase in income taxes resulting from: State income tax expense, net of federal benefit(31) 336 674State research and development, investment credits(365) (309) (301)Non-deductible meals & entertainment37 31 22Non-deductible stock compensation expense29 178 95Non-deductible deferred compensation expense87 — —Non-deductible transaction costs73 170 —Subpart F income, net of foreign tax credits296 162 —Manufacturing deduction(123) — —Nontaxable interest income(105) (86) —Foreign tax rate differential(289) (369) (27)Federal research and development credits(453) (746) —Uncertain tax positions97 — —Provision to tax return adjustments(317) — (29)Change in tax rates235 — —Change in valuation allowance1,665 491 468Other$(3) $(47) $(34)Net income tax expense$1,284 $2,150 $3,26380Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)The components of income before income tax expense (benefit) determined by tax jurisdiction, are as follows: Year Ended December 31, 2014 2013 2012United States$907 $5,500 $7,917Foreign418 1,183 (1,074)Total$1,325 $6,683 $6,843The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of the dates presented are asfollows: December 31, 2014 2013Deferred tax assets: Accounts receivable, due to allowance for doubtful accounts$664 $641Inventories531 436Operating loss carry-forwards1,939 1,392Stock-based compensation expense1,743 1,515Property and equipment, due to difference in depreciation1,334 —Research and development, alternative minimum tax credit carry-forwards3,313 2,600Foreign tax credit carry-forwards725 1,442State tax credit carry-forwards2,176 2,094Warranty reserve682 —Accrued expenses505 722Gross deferred tax assets13,612 10,842Less valuation allowance(4,157) (2,700)Total deferred tax assets9,455 8,142Deferred tax liabilities: Purchased intangible assets(6,917) (3,129)Property and equipment, due to differences in depreciation(2,410) (2,548)Other(130) (30)Total deferred tax liabilities(9,457) (5,707)Net deferred tax (liability) asset$(2) $2,435Net deferred tax asset—current$2,772 $3,060Net deferred tax asset—noncurrent$2,690 $—Net deferred tax liability—noncurrent$(5,464) $(625)As of December 31, 2014, the Company had foreign net operating loss carry-forwards available to offset future foreign income of $6,000. The foreignnet operating loss carry-forwards have no expiration.As of December 31, 2014, the Company had federal research and development tax credit carry-forwards in the amount of $3,379 that expire in years2026 through 2034, and foreign tax credit carry-forwards in the amount of $762 that expire in years 2018 through 2024. The Company also had alternativeminimum tax credits of $132 that have no expiration date. As of December 31, 2014, the Company had state research and development tax credit carry-forwards in the amount of $3,367 that expire in years 2015 through 2021. The Company also had other state tax credit carry-forwards of $256 available toreduce future state tax expense that expire in years 2015 through 2021. The tax benefit related to $1,702 of federal and state tax credits would result in acredit to additional paid-in capital when these deferred tax assets reduce taxes payable.81Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)The Company’s ability to utilize these net operating loss carry-forwards and tax credit carry-forwards may be limited in the future if the Companyexperiences an ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when the ownership percentages of 5% orgreater stockholders change by more than 50% over a three-year period.In assessing the reliability of its net deferred tax assets, the Company considered whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. As of December 31, 2014, the Company concluded that a net increase of $1,457 of the valuation allowance wasappropriate. As part of the Company’s analysis, the Company evaluated, among other factors, its recent history of generating taxable income and its near-termforecasts of future taxable income. The net increase in valuation allowance of $1,457 is composed of expense of $1,665, a decrease of $223 related to theexpiration of previously reserved state tax credit carry-forwards, and an increase of $15 related to the use of net operating loss and credit carryforwardsattributed to tax deductions in excess of recognized compensation expense from employee stock compensation awards that existed as of the adoption of ASC718, Compensation - Stock Compensation. $1,243 of the valuation allowance is attributable to tax deductions in excess of recognized compensation costfrom employee stock compensation awards that existed as of the adoption of ASC 718. The Company will recognize the net deferred tax asset andcorresponding benefit to additional paid-in capital for these windfall tax benefits once such amounts reduce income taxes payable, in accordance with therequirements of ASC 718.As of December 31, 2014, the Company has not provided for U.S. deferred income taxes on undistributed earnings of its foreign subsidiaries ofapproximately $3,464 since these earnings are expected to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends orotherwise, the Company will be subject to additional U.S. and state income taxes (less foreign tax credits), as well as withholding taxes in its foreignlocations. The amount of taxes attributable to the undistributed earnings is not practicably determinable.The Company establishes reserves for uncertain tax positions based on management’s assessment of exposure associated with tax deductions,permanent tax differences, and tax credits. The tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to thereserve. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.During the years ended December 31, 2014, 2013, and 2012, the aggregate changes in the total gross amount of unrecognized tax benefits aresummarized as follows: Year Ended December 31, 2014 2013 2012Unrecognized tax benefits as of January 1$— $— $—Gross increases—tax positions in prior years— — —Gross increases—tax positions in current year14 — —Settlements with taxing authorities— — —Lapse of statute of limitations— — —Gross increase from current year acquisition of Videotel2,473 — —Ending balance$2,487 $— $—The Company had gross unrecognized tax benefits of $2,487, $0, and $0 as of December 31, 2014, 2013, and 2012. At December 31, 2014, $1,172represents the amount of unrecognized tax benefits that, if recognized, would result in a reduction of the Company's effective tax rate.As of December 31, 2014, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $1,067.The timing of any resolution of income tax examinations is highly uncertain, as are the amounts and timing of any settlement payment. These eventscould cause fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company expects a reduction ofapproximately $2,684 of unrecognized tax benefits within the next twelve months. $2,473 of the expected decrease is attributable to tax positions related tothe Videotel acquisition that the Company anticipates will be resolved with taxing authorities during 2015. $211 of the expected decrease is related totemporary differences that the Company anticipates will reverse during 2015.82Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)The Company’s tax jurisdictions include the United States, the UK, Denmark, Cyprus, Norway, Brazil, Singapore, Belgium, Bermuda, the Netherlands,Hong Kong, and Japan. In general, the statute of limitations with respect to the Company's United States federal income taxes has expired for years prior to2011, and the relevant state and foreign statutes vary. However, preceding years remain open to examination by United States federal and state and foreigntaxing authorities to the extent of future utilization of net operating losses and research and development tax credits generated in each preceding year.(9) AcquisitionsVideotelOn July 2, 2014, KVH Media Group Limited (KMG UK), an indirectly wholly owned subsidiary of KVH, entered into a Share Purchase Agreement withNigel Cleave to acquire all of the issued share capital of Super Dragon Limited and Videotel Marine Asia Limited, for an aggregate purchase price ofapproximately $47,446, which excluded $1,719 of cash consideration that was considered deferred compensation in purchase accounting. The Companyexpensed approximately $400 related to the deferred compensation during the year ended December 31, 2014. Videotel is a maritime training servicescompany headquartered in London that produces and distributes training films and eLearning computer-based training courses to commercial customers inthe maritime market. Videotel also has sales offices in Hong Kong and Singapore. The acquisition was consummated on the same day. The purchase price wasdetermined through arm’s-length negotiation and is subject to a potential post-closing adjustment based on the value of the net assets delivered at theclosing.The Share Purchase Agreement contains certain representations, warranties, covenants and indemnification provisions. The Share Purchase Agreementprovides that 10% of the purchase price shall be held in escrow for a period of approximately 21 months after the closing in order to satisfy validindemnification claims that KMG UK may assert for specified breaches of representations, warranties and covenants. The escrow and holdback amounts ofapproximately $6,000 were not funded as of December 31, 2014, which have been accrued for in accrued other on the Company's consolidated balancesheets.In the Share Purchase Agreement, Mr. Cleave agreed to comply with certain confidentiality, non-competition and non-solicitation covenants withrespect to the business of Videotel for a period of 18 months after the closing.The total purchase price and the excess of the total purchase price over the estimated fair value of the net assets acquired are as follows:Consideration transferred - cash $47,446Book value of net assets acquired$1,732 Fair value adjustments to deferred revenue961 Fair value of tangible net assets acquired $2,693 Identifiable intangibles at acquisition-date fair value Subscriber relationships$12,759 Proprietary content9,814 Internally developed software2,160 Favorable operating leases791 Total intangible assets $25,524Deferred income taxes (3,922)Goodwill $23,151The Company's fair value estimate of assets acquired and liabilities assumed is pending completion of several elements, including the finalization ofvaluations of the fair value of the assets acquired and liabilities assumed and final review by the Company's management. Included in the liabilities is anuncertain tax position liability of approximately $3,800 which was held on Videotel’s balance sheet as of the acquisition date and which the Company iscontinuing to evaluate. The final determination of the assets acquired and liabilities assumed will be based on the established fair value of the assets acquiredand the liabilities83Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)assumed as of the acquisition date. The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill. The final determinationof the purchase price, fair values and resulting goodwill may differ significantly from what is reflected in the foregoing table.The acquired finite-lived intangible assets from the Videotel acquisition were recorded at their estimated fair value of $25,524 on the acquisition date.Refer to Note 1 and Note 14 for the classification of Videotel intangible assets including their useful lives.Total service revenue of approximately $10,400 from Videotel is included in the Company's results for the year ended December 31, 2014. Transactioncosts related to the acquisition of Videotel were $1,200 for the year ended December 31, 2014.The following table summarizes the supplemental statements of operations information on an unaudited pro forma basis as if the Videotel acquisitionhad occurred on January 1, 2013: Year Ended December 31, 2014 2013Pro forma net revenues $183,886 $183,267Pro forma net income $2,386 $7,356Basic pro forma net income per share $0.15 $0.49Diluted pro forma net income per share $0.15 $0.48The pro forma results presented above are for illustrative purposes only for the periods presented and do not purport to be indicative of the actualresults which would have occurred had the transaction been completed as of the beginning of the period, nor are they indicative of results of operationswhich may occur in the future.Headland Media LimitedOn May 11, 2013, KVH Industries U.K. Limited, a newly formed, wholly owned subsidiary of KVH, entered into a Share Purchase Agreement withOakley Capital Private Equity L.P., Mark Woodhead, Andrew Michael Galvin and the Trustees of the Headland Media Limited Employee Benefit Trust toacquire all of the issued share capital of Headland Media Limited (now known as the KVH Media Group), a media and entertainment service company basedin the United Kingdom that distributes news, sports, movies, music and training video content for commercial and leisure customers in the maritime, hotel,and retail markets, for an aggregate purchase price of £15,576 ($24,169 at the exchange rate of £1.00: $1.5517 on May 11, 2013). The aggregate purchaseprice includes $169 in payments made in July 2013 related to a post-closing adjustment. The acquisition of Headland Media Limited (now known as theKVH Media Group) was accounted for under the acquisition method of accounting for the business combination. The purchase price was determined as aresult of arms-length negotiation and was subject to a potential post-closing adjustment based on the value of the net assets delivered at the closing.The Share Purchase Agreement contains certain representations, warranties, covenants and indemnification provisions. The Share Purchase Agreementprovides that 10% of the purchase price shall be held in escrow for a period of at least 18 months after the closing in order to satisfy valid indemnificationclaims that KVH may assert for specified breaches of representations, warranties and covenants. The Company released the escrow in November 2014.84Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)The total purchase price and the excess of the total purchase price over the fair value of the net assets acquired are as follows:Consideration transferred - cash $24,169Book value of net assets acquired$163 Fair value adjustments to deferred revenue123 Fair value of tangible net assets acquired $286 Identifiable intangibles at acquisition-date fair value Subscriber relationships$8,271 Distribution rights4,888 Internally developed software543 Proprietary content186 Total intangible assets $13,888Deferred income taxes (3,134)Goodwill $13,129Since the date of the acquisition, May 11, 2013, the Company has recorded approximately $23,200 of service revenue attributable to KVH Media Groupwithin its consolidated financial statements, of which approximately $14,400 was recorded during the year ended December 31, 2014.The following table summarizes the supplemental statements of operations information on an unaudited pro forma basis as if the KVH Media Groupacquisition had occurred on January 1, 2012: Year Ended December 31, 2013 2012Pro forma net revenues $166,819 $149,836Pro forma net income $5,276 $4,781Basic pro forma net income per share $0.35 $0.32Diluted pro forma net income per share $0.34 $0.32The pro forma results presented above are for illustrative purposes only for the periods presented and do not purport to be indicative of the actualresults which would have occurred had the transaction been completed as of the beginning of the period, nor are they indicative of results of operationswhich may occur in the future.85Table of Contents(10) Goodwill and Intangible AssetsThe Company’s goodwill and intangible assets are associated with the purchase of Virtek Communication (now KVH Industries Norway AS) inSeptember 2010, Headland Media Limited (now known as the KVH Media Group) in May 2013, and Videotel in July 2014.Intangible assets are subject to amortization. The following table summarizes other intangible assets as of December 31, 2014 and 2013,respectively: GrossCarryingAmount AccumulatedAmortization Net CarryingValueDecember 31, 2014 Subscriber relationships$19,919 $2,165 $17,754Distribution rights4,915 558 4,357Internally developed software2,529 569 1,960Proprietary content9,137 1,094 8,043Intellectual property2,284 1,403 881Favorable lease721 75 646 $39,505 $5,864 $33,641December 31, 2013 Subscriber relationships$8,763 $540 $8,223Distribution rights5,183 212 4,971Internally developed software571 118 453Proprietary content195 61 134Intellectual property2,280 1,074 1,206 $16,992 $2,005 $14,987The Company amortizes its intangible assets over the estimated useful lives of the respective assets as discussed above in our Summary ofSignificant Accounting Policies. Amortization expense related to intangible assets was $3,859, $1,179, and $394 for years ended December 31, 2014, 2013,and 2012, respectively.Estimated future amortization expense for intangible assets recorded by the Company at December 31, 2014 is as follows:Years ending December 31,AmortizationExpense2015$5,55420165,40520175,24220184,76920193,562Thereafter9,109Total amortization expense$33,641Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. Thechanges in the carrying amount of goodwill during the year ended December 31, 2014 is as follows: 2014Balance at January 1$18,281Acquisition of Videotel23,151Foreign currency translation adjustment(978)Balance at December 31$40,45486Table of ContentsThe changes in the carrying amount of intangible assets during the year ended December 31, 2014 is as follows: 2014Balance at January 1$14,987Acquisition of Videotel25,524Amortization expense(3,859)Foreign currency translation adjustment$(3,011)Balance at December 31$33,641(11) 401(k) PlanThe Company has a 401(k) Plan (the Plan) for all eligible employees. Participants may defer a portion of their pre-tax earnings subject to limitsdetermined by the Internal Revenue Service. Participants age 50 or older may be eligible to make additional contributions. As of December 31, 2014, theCompany matches one half of the first 6% contributed by the Plan participants. The Company’s contributions vest over a five-year period from the date ofhire. Total Company matching contributions were $462, $376, and $352 for the years ended December 31, 2014, 2013, and 2012, respectively. In addition,the Company may make contributions to the Plan at the discretion of the Compensation Committee of the Board of Directors. There were no discretionarycontributions in 2014, 2013, or 2012.(12) Business and Credit ConcentrationsSignificant portions of the Company’s net sales are as follows: Year EndedDecember 31, 2014 2013 2012Net sales to foreign customers outside the U.S. and Canada33% 37% 40%Net sales to SANG* 12% 11% *Represents less than 10% of net sales.The terms and conditions of sales to SANG are consistent with the Company’s standard terms and conditions of product sales as discussed in Note 1above. All receivable balances outstanding for this customer as of December 31, 2014 were paid as of the date of this report. No other individual customeraccounted for more than 10% of the Company’s net sales for the years ended December 31, 2014, 2013, and 2012, respectively.(13) Segment ReportingUnder common operational management, the Company designs, develops, manufactures and markets its navigation, guidance and stabilization andmobile communications products for use in a wide variety of applications. Products are generally sold directly to third-party consumer electronic dealers andretailers, original equipment manufacturers, government contractors or to U.S. and other foreign government agencies. Primarily, sales originating in theAmericas consist of sales within the United States and Canada and, to a lesser extent, Mexico and some Latin and South American countries. The Americas’sales also include all guidance and stabilization product sales throughout the world. Sales originating from the Company’s European and Asian subsidiariesprincipally consist of sales into all European countries, both inside and outside the European Union, as well as Africa, Asia/Pacific, the Middle East, andIndia.The Company operates in two geographic segments, exclusively in the mobile communications, navigation and guidance and stabilization equipmentindustry, which it considers to be a single business activity. The Company has two primary product categories: mobile communication and guidance andstabilization. Mobile communication sales and services include marine, land mobile, and automotive communication equipment and satellite-based voice,television and Broadband Internet connectivity services; distribution of commercially licensed news, sports, movies, and music content for commercial andleisure customers in the maritime, hotel, and retail markets; and distribution of training films and eLearningcomputer-based training courses to commercial customers in the maritime market.87Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts)Guidance and stabilization sales and services include sales of defense-related navigation and guidance and stabilization equipment based upon digitalcompass and FOG sensor technology. Mobile communication and guidance and stabilization sales also include development contract revenue, productrepairs and extended warranty sales.The following table summarizes information regarding the Company’s operations by geographic segment: Sales Originating FromYear ended December 31, 2014Americas Europeand Asia TotalMobile communication sales to the United States$85,670 $1,527 $87,197Mobile communication sales to Canada539 66 605Mobile communication sales to Europe482 21,698 22,180Mobile communication sales to other geographic areas4,576 15,362 19,938Guidance and stabilization sales to the United States13,807 — 13,807Guidance and stabilization sales to Canada13,982 — 13,982Guidance and stabilization sales to Europe4,351 — 4,351Guidance and stabilization sales to other geographic areas10,531 — 10,531Intercompany sales5,366 3,902 9,268Subtotal139,304 42,555 181,859Eliminations(5,366) (3,902) (9,268)Net sales$133,938 $38,653 $172,591Segment net (loss) income$(1,390) $1,431 $41Depreciation and amortization$4,532 $5,455 $9,987Total assets$127,920 $107,917 $235,837 Sales Originating FromYear ended December 31, 2013Americas Europeand Asia TotalMobile communication sales to the United States$78,729 $1,099 $79,828Mobile communication sales to Canada462 39 501Mobile communication sales to Europe455 18,571 19,026Mobile communication sales to other geographic areas3,596 5,200 8,796Guidance and stabilization sales to the United States7,892 — 7,892Guidance and stabilization sales to Canada13,810 — 13,810Guidance and stabilization sales to Europe7,421 — 7,421Guidance and stabilization sales to other geographic areas25,014 — 25,014Intercompany sales3,465 2,184 5,649Subtotal140,844 27,093 167,937Eliminations(3,465) (2,184) (5,649)Net sales$137,379 $24,909 $162,288Segment net income (loss)$5,260 $(727) $4,533Depreciation and amortization$4,521 $1,473 $5,994Total assets$136,051 $47,798 $183,84988Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2014, 2013, and 2012(in thousands except share and per share amounts) Sales Originating FromYear ended December 31, 2012NorthAmerica Europe TotalMobile communication sales to the United States$62,857 $— $62,857Mobile communication sales to Canada777 — 777Mobile communication sales to Europe417 15,255 15,672Mobile communication sales to other geographic areas3,936 4,443 8,379Guidance and stabilization sales to the United States8,632 — 8,632Guidance and stabilization sales to Canada10,736 — 10,736Guidance and stabilization sales to Europe11,793 — 11,793Guidance and stabilization sales to other geographic areas18,266 — 18,266Intercompany sales8,485 2,064 10,549Subtotal125,899 21,762 147,661Eliminations(8,485) (2,064) (10,549)Net sales$117,414 $19,698 $137,112Segment net income$4,316 $(736) $3,580Depreciation and amortization$4,116 $494 $4,610Total assets$118,076 $19,492 $137,568(14) Share Buyback ProgramOn November 26, 2008, the Company’s Board of Directors authorized a program to repurchase up to 1,000,000 shares of the Company’s commonstock. As of December 31, 2014, 341,009 shares of the Company’s common stock remain available for repurchase under the authorized program. Therepurchase program is funded using the Company’s existing cash, cash equivalents, marketable securities and future cash flows. Under the repurchaseprogram, the Company, at management’s discretion, may repurchase shares on the open market from time to time, in privately negotiated transactions orblock transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares, price, marketconditions, alternative uses of capital, and applicable regulatory requirements. The program may be modified, suspended or terminated at any time withoutprior notice. The repurchase program has no expiration date. There were no other repurchase programs outstanding during the year ended December 31, 2014and no repurchase programs expired during the period.During the years ended December 31, 2014, 2013, and 2012 the Company did not repurchase any shares of its common stock in open markettransactions.(15) Fair Value MeasurementsASC 820, Fair Value Measurements and Disclosures, provides a framework for measuring fair value and requires expanded disclosures regarding fairvalue measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 alsoestablishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:Level 1:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. TheCompany’s Level 1 assets are investments in money market mutual funds, government agency bonds, United States treasuries, corporatenotes, and certificates of deposit.Level 2:Quoted prices for similar assets or liabilities in active markets; or observable prices that are based on observable market data, based ondirectly or indirectly market-corroborated inputs. The Company’s Level 2 assets are investments in municipal bonds and its Level 2liabilities are interest rate swaps.89Table of ContentsLevel 3:Unobservable inputs that are supported by little or no market activity, and are developed based on the best information available given thecircumstances. The Company has no Level 3 assets.Assets and liabilities measured at fair value are based the valuation techniques identified in the table below. The valuation techniques are:(a)Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets.(b)The valuations of the interest rate swaps intended to mitigate the Company’s interest rate risk are determined with the assistance of a third-partyfinancial institution using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of eachinstrument. This analysis utilizes observable market-based inputs, including interest rate curves and interest rate volatility, and reflects thecontractual terms of these instruments, including the period to maturity.(c)The valuations of foreign currency forward contracts are determined using widely accepted valuation techniques, including discounted cash flowanalysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including commodity forwardcurves, and reflects the contractual terms of these instruments, including the period to maturity.(d)The valuations of municipal bonds are determined utilizing standard pricing procedures of the Company’s investment brokerage firm, whichinclude various third-party pricing services. These procedures also require specific price monitoring practices as well as pricing review reports,valuation oversight, and pricing challenge procedures to maintain an accurate representation of investment fair market value. The following tables present financial assets and liabilities at December 31, 2014 and December 31, 2013 for which the Company measures fair valueon a recurring basis, by level, within the fair value hierarchy: December 31, 2014Total Level 1 Level 2 Level 3 ValuationTechniqueAssets Money market mutual funds$6,824 $6,824 $— $— (a)Government agency bonds3,502 3,502 — — (a)United States treasuries4,006 4,006 — — (a)Corporate notes4,667 4,667 — — (a)Certificates of deposit4,155 4,155 — — (a)Municipal bonds1,359 — 1,359 — (d)Liabilities Interest rate swaps$295 $— $295 $— (b)December 31, 2013Total Level 1 Level 2 Level 3 ValuationTechniqueAssets Money market mutual funds$19,957 $19,957 $— $— (a)Government agency bonds8,041 8,041 — — (a)United States treasuries7,509 7,509 — — (a)Corporate notes8,453 8,453 — — (a)Certificates of deposit2,426 2,426 — — (a)Foreign currency forward contracts114 — 114 — (c)Liabilities Interest rate swaps$332 $— $332 $— (b)Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highlyliquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses.Assets Measured and Recorded at Fair Value on a Nonrecurring Basis90Table of ContentsThe Company's non-financial assets and liabilities, such as goodwill, intangible assets, and other long-lived assets resulting from businesscombinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if there areindicators of impairment. There were no indicators of impairment identified during the year ended December 31, 2014. As of December 31, 2014, theCompany did not have any other non-financial assets and liabilities that were carried at fair value on a recurring basis in the consolidated financialstatements or for which a fair value measurement was required.(16) Derivative Instruments and Hedging ActivitiesEffective April 1, 2010, in order to reduce the volatility of cash outflows that arise from changes in interest rates, the Company entered into twointerest rate swap agreements. These interest rate swap agreements are intended to hedge the Company’s mortgage loan related to its headquarters facility inMiddletown, Rhode Island by fixing the interest rates specified in the mortgage loan to 5.9% for half of the principal amount outstanding and 6.1% for theremaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan expires on April 16, 2019.As required by ASC Topic 815, Derivatives and Hedging, the Company records all derivatives on the balance sheet at fair value. As of December 31,2014, the fair value of the derivatives is included in other accrued liabilities and the unrealized loss is included in other comprehensive loss.As of December 31, 2014, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest raterisk:Interest Rate DerivativesNotional(in thousands) Asset(Liability) Effective Date Maturity Date Index Strike RateInterest rate swap$1,634 (142) April 1, 2010 April 1, 2019 1-month LIBOR 5.91%Interest rate swap$1,634 (153) April 1, 2010 April 1, 2019 1-month LIBOR 6.07%(17) Legal MattersFrom time to time, the Company is involved in litigation incidental to the conduct of its business. In the ordinary course of business, KVH is a party toinquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers. The Company is not a party to any lawsuitor proceeding that, in management’s opinion, is likely to materially harm the Company’s business, results of operations, financial condition or cash flows.91Table of Contents(18) Quarterly Financial Results (Unaudited)The following financial information for interim periods includes transactions which affect comparability of the quarterly results for the year endedDecember 31, 2014. During the second quarter of 2013 and the third quarter of 2014, the Company acquired Headland Media Limited (now known as KVHMedia Group) and Videotel, respectively, as described in Note 9 “Acquisitions,” resulting in increased service sales and service gross margins.Financial information for interim periods was as follows: FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (in thousands, except per share amounts)2014 Product sales$18,007 $20,998 $16,862 $25,276Service sales18,978 19,924 27,388 25,158Gross profit14,593 17,485 18,802 22,567Net (loss) income$(1,123) $55 $151 $958Net (loss) income per share (a): Basic$(0.07) $0.00 $0.01 $0.06Diluted$(0.07) $0.00 $0.01 $0.062013 Product sales$25,216 $25,886 $20,331 $18,862Service sales14,711 17,311 19,885 20,086Gross profit15,769 18,026 16,527 15,390Net (loss) income1,963 1,549 1,386 (365)Net (loss) income per share (a): Basic$0.13 $0.10 $0.09 $(0.02)Diluted$0.13 $0.10 $0.09 $(0.02) (a)Net (loss) income per share is computed independently for each of the quarters. Therefore, the net (loss) income per share for the four quarters may notequal the annual net (loss) income per share data.92 Exhibit 21.1List of Subsidiaries KVH Industries A/SDenmark KVH Industries Pte. Ltd.Singapore KVH Industries Brasil Comunicacao Por Satelite Ltda.Brazil KVH Industries Norway ASNorway KVH Industries Japan Co. Ltd.Japan KVH Industries UK Ltd.United Kingdom KVH Media Group Ltd.United Kingdom KVH Media Group Services Ltd.United Kingdom KVH Media Group Entertainment Ltd.United Kingdom KVH Media Group Communication Ltd.United Kingdom KVH Media Group International Ltd.United Kingdom KVH Media Group Ltd.Cyprus Good Morning News Sprl.Belgium KVH Media Group ApSDenmark KVH Media Group Communication, Inc.United States KVH Media Group, Inc.United States Rigstream B.V.The Netherlands KVH Media Group Ltd.Bermuda Super Dragon Ltd.Hong Kong Videotel Consultants and Rentals Ltd.United Kingdom Videotel Marine International Ltd.United Kingdom Videotel Training Services Ltd.United Kingdom  Videotel Marine Asia Ltd.Hong Kong Videotel Pte. Ltd.Singapore Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated March 16, 2015, with respect to the consolidated financial statements and internal control over financial reporting includedin the Annual Report of KVH Industries, Inc. on Form 10-K for the year ended December 31, 2014. We hereby consent to the incorporation by reference ofsaid reports in the Registration Statements of KVH Industries, Inc. on Forms S-8 (Nos. 333-190541, 333-168406, 333-160230, 333-141404, 333-112341,333-67556, and 333-08491). /s/ Grant Thornton LLP Boston, MassachusettsMarch 16, 2015Exhibit 23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of DirectorsKVH Industries, Inc.:We consent to the incorporation by reference in the Registration Statement Nos. 333-190541, 333-168406, 333-160230, 333-141404, 333-112341,333-67556 and 333-08491 on Form S-8 of KVH Industries, Inc. of our report dated March 17, 2014, with respect to the consolidated balance sheet of KVHIndustries, Inc. and subsidiaries as of December 31, 2013, and the related consolidated statements of operations, comprehensive income, stockholders' equity,and cash flows for each of the years in the two-year period ended December 31, 2013, which report appears in the December 31, 2014 annual report on Form10-K of KVH Industries, Inc. /s/ KPMG LLP Providence, Rhode IslandMarch 16, 2015Exhibit 31.1CertificationI, Martin A. Kits van Heyningen, certify that:1. I have reviewed this annual report on Form 10-K of KVH Industries, Inc.;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 thestatements 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 financialcondition, 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct 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 registrantand have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat 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 inaccordance 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 effectivenessof 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 fiscalquarter (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; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 likelyto 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 overfinancial reporting.Date: March 16, 2015 /s/ Martin A. Kits van Heyningen Martin A. Kits van Heyningen President, Chief Executive Officer and Chairman of the Board Exhibit 31.2CertificationI, Peter Rendall, certify that:1. I have reviewed this annual report on Form 10-K of KVH Industries, Inc.;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 thestatements 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 financialcondition, 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct 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 registrantand have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat 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 inaccordance 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 effectivenessof 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 fiscalquarter (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; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 likelyto 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 overfinancial reporting.Date: March 16, 2015 /s/ Peter Rendall Peter Rendall Chief Financial Officer Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of KVH Industries, Inc. (the “Company”) for the year ended December 31, 2014, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), each of the undersigned President, Chief Executive Officer and Chairman of theBoard, 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 adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and2.The information contained in the Report fairly presents, in all material respects, the by /s/ Martin A. Kits van Heyningen /s/ Peter Rendall Martin A. Kits van Heyningen Peter Rendall President, Chief Executive Officer and Chief Financial Officer Chairman of the Board Date:March 16, 2015 Date:March 16, 2015

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