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KVH INDUSTRIES INC \DE\ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Introduction The statements included in this quarterly report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding our future financial results, operating results, business strategies, projected costs, products, competitive positions and plans, customer preferences, consumer trends, anticipated product development, and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "would," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled "Risk Factors" in Item 1A of Part II of this quarterly report. These and many other factors could affect our future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by us or on our behalf. For example, our expectations regarding certain items as a percentage of sales assume that we will achieve our anticipated sales goals. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. Overview We design, develop, manufacture and market mobile communications products for the marine, land mobile and aeronautical 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 marine vessels, recreational vehicles and automobiles as well as live digital television on commercial airplanes while in motion. Our CommBox offers a range of tools designed to increase communication efficiency, reduce costs, and manage network operations. We sell our mobile communications products through an extensive international network of retailers, distributors and dealers. We also lease products directly to end users. We offer precision fiber optic gyro-based (FOG) systems that enable platform and optical stabilization, navigation, pointing and guidance. Our guidance and stabilization products also include tactical navigation systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles, including tactical trucks and light armored vehicles. Our guidance and stabilization products are sold directly to U.S. and allied governments and government contractors, as well as through an international network of authorized independent sales representatives. In addition, our guidance and stabilization products have numerous commercial applications such as precision mapping, dynamic surveying, autonomous vehicles, train location control and track geometry measurement systems, industrial robotics and optical stabilization. Our mobile communications service sales include sales earned from satellite voice and Internet airtime services, engineering services provided under development contracts, sales from product repairs, and certain DIRECTV account subsidies and referral fees earned in conjunction with the sale of our products and extended warranty sales. We provide, for monthly fixed and usage fees, satellite connectivity services for 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 TracPhone customers who choose to activate their subscriptions with us. Under current DIRECTV programs, we are eligible to receive a one-time payment for each DIRECTV receiver activated for service and a new mobile account activation fee from DIRECTV for each applicable customer who activates their DIRECTV service directly through us. Our guidance and stabilization service sales include engineering services provided under development contracts, product repairs, and extended warranty sales. We generate sales primarily from the sale of our mobile satellite systems and services and our guidance and stabilization products and services. The following table provides, for the periods indicated, our sales by industry category: Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 (in thousands) Mobile communications $ 22,204 $ 17,885 $ 67,079 $ 52,644 Guidance and stabilization 16,618 7,736 30,490 27,959 Net sales $ 38,822 $ 25,621 $ 97,569 $ 80,603 15-------------------------------------------------------------------------------- Table of Contents We have historically derived a substantial portion of our sales from sales to customers located outside the United States. Notes 8 and 12 of the notes to the consolidated financial statements provide information regarding our sales to specific geographic regions. Critical Accounting Policies and Significant Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, sales and expenses, and related disclosure at the date of our financial statements. Our significant accounting policies are summarized in note 1 of the notes to the consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2011. As described in our annual report on Form 10-K for the year ended December 31, 2011, our most critical accounting policies and estimates upon which our consolidated financial statements were prepared were those relating to revenue recognition, allowances for accounts receivable, inventories, income taxes and deferred income tax assets and liabilities, warranty, stock-based compensation, goodwill and intangible assets and contingencies. We have reviewed our policies and estimates and determined that these remain our most critical accounting policies and estimates for the quarter ended September 30, 2012. Readers should refer to our annual report on Form 10-K for the year ended December 31, 2011 under "Management's Discussion and Analysis of Financial Condition and Results of Operation-Critical Accounting Policies and Significant Estimates" for descriptions of these policies and estimates. Results of Operations The following table provides, for the periods indicated, certain financial data expressed as a percentage of net sales: Three Months Ended Nine months ended September 30, September 30, 2012 2011 2012 2011 Sales: Product 63.2 % 70.2 % 64.2 % 75.9 % Service 36.8 29.8 35.8 24.1 Net sales 100.0 100.0 100.0 100.0 Cost and expenses: Costs of product sales 34.3 38.0 37.9 41.9 Costs of service sales 25.8 21.4 23.2 19.1 Sales, marketing and support 16.4 21.9 17.7 20.8 Research and development 7.6 10.9 9.4 10.7 General and administrative 7.8 9.0 9.1 9.7 Total costs and expenses 91.9 101.2 97.3 102.2 Income (loss) from operations 8.1 (1.2 ) 2.7 (2.2 ) Interest income 0.4 0.3 0.4 0.3 Interest expense 0.2 0.3 0.2 0.2 Other income, net 0.1 3.4 0.1 1.1 Income (loss) before income tax (expense) benefit 8.4 2.2 3.0 (1.0 ) Income tax (expense) benefit (3.8 ) 0.1 (2.0 ) 0.1 Net income (loss) 4.6 % 2.3 % 1.0 % (0.9 )% 16-------------------------------------------------------------------------------- Table of Contents Three months ended September 30, 2012 and 2011 Net Sales Product sales for the three months ended September 30, 2012 increased $6.5 million, or 36%, to $24.5 million for the three months ended September 30, 2012 from $18.0 million for the three months ended September 30, 2011. The increase was primarily due to an increase in sales of our guidance and stabilization products of approximately $5.9 million, or 77%. Specifically, sales of our TACNAV defense products increased $4.3 million, or 207% primarily as a result of product sales related to the previously announced Saudi Arabian National Guard contract. Also contributing to the increase in sales of our guidance and stabilization products during the three months ended September 30, 2012 was an increase in sales of our FOG products of $1.8 million, or 34%, as compared to the three months ended September 30, 2011. We expect that our TACNAV product sales will increase significantly year-over-year during the fourth quarter of 2012, primarily due to the order for the Saudi Arabian National Guard discussed above. Although we expect that TACNAV sales will continue to grow over the long term, sales on a quarter-to-quarter or year-to-year basis could continue to be very uneven. We also expect that our FOG sales will be relatively flat sequentially during the fourth quarter of 2012. Also contributing to the increase in product sales was an increase of $0.7 million, or 6%, in sales of our mobile communications products to $11.0 million for the three months ended September 30, 2012 from $10.3 million for the three months ended September 30, 2011. The increase was primarily due to an increase in sales of our marine products of $0.8 million, or 9%, driven primarily by demand for our TracPhone V7 product as well as our new HD11 product that was released in the first quarter of 2012, and demand for our TracPhone V3 product. Partially offsetting this increase was a decrease in our land mobile products of $0.2 million, or 12%, as compared to the three months ended September 30, 2011. The decrease in our land mobile products was primarily a result of decreased sales to original equipment manufacturers in the recreational vehicle market. We remain cautious about the prospects for our leisure sales as a result of ongoing challenges in the global economy. Mobile communications product sales originating from the Americas for the three months ended September 30, 2012 increased $0.3 million, or 5%, as compared to the three months ended September 30, 2011. Mobile communications product sales originating from our European and Asian subsidiaries for the three months ended September 30, 2012 increased $0.3 million, or 11%, as compared to the three months ended September 30, 2011. Service sales for the three months ended September 30, 2012 increased $6.7 million, or 87%, to $14.3 million from $7.6 million for the three months ended September 30, 2011. The primary reason for the increase was a $3.4 million increase in airtime sales for our mini-VSAT Broadband service. Also contributing to the increase in service sales was a $2.7 million increase in contracted engineering services driven by construction and program management services provided in connection with the Saudi Arabian National Guard TACNAV contract. In addition, service repair services increased by approximately $0.7 million as compared to the three months ended September 30, 2011. Costs of Sales For the three months ended September 30, 2012, costs of product sales increased by $3.6 million, or 36%, to $13.3 million from $9.7 million for the three months ended September 30, 2011. The primary reason for the increase was the increase in sales of our TACNAV and FOG products discussed above. Costs of service sales increased by $4.6 million, or 84%, to $10.0 million for the three months ended September 30, 2012 from $5.5 million for the three months ended September 30, 2011. The primary reason for the increase was a $2.5 million increase in engineering services cost of sales due primarily to the services provided in connection with the Saudi Arabian National Guard contract as discussed above. Also contributing to the increase was an increase of $1.7 million in airtime costs of sales for our mini-VSAT Broadband service and a $0.3 million increase in service repair cost of sales. Gross margin from product sales for the three months ended September 30, 2012 was 46%, which was consistent with the gross margin from product sales for the three months ended September 30, 2011. 17 -------------------------------------------------------------------------------- Table of Contents Gross margin from service sales for the three months ended September 30, 2012 increased to 30% from 28% in the year-ago period. The increase in our gross margin from service sales was primarily attributable to the increase in airtime sales for our mini-VSAT Broadband service. Gross margin for mini-VSAT Broadband service sales increased to 31% from 19% in the year-ago period. We anticipate that the gross margin percentage for mini-VSAT Broadband service for the remainder of the year will remain relatively comparable to the level of the third quarter of 2012, driven by the incremental network cost impact of our implementation of C-band coverage in June 2012 for the TracPhone V11 introduction. In 2013, we expect mini-VSAT Broadband service margins to increase primarily from increased TracPhone V11 activations and an overall increase in our customer base, but at a more modest rate than the recent year-over-year gross margin growth. Partially offsetting the increase in gross margin for the mini-VSAT Broadband service sales was a decrease in gross margin for contracted engineering services as a result of the facility construction services and project management services in Saudi Arabia, as these services had a gross margin of approximately 10%. We anticipate the gross margin percentage for contracted engineering services will continue to decrease for the next several quarters as a result of the facility and program management services portion of the Saudi Arabian National Guard TACNAV contract. The total contract value for the services portion of the Saudi Arabian National Guard TACNAV order is $14.4 million. These project management services are estimated to continue to be performed well into 2014. Operating Expenses Sales, marketing and support expense for the three months ended September 30, 2012 increased by $0.7 million, or 13%, to $6.4 million from $5.6 million for the three months ended September 30, 2011. The primary reason for the increase in 2012 was a $0.9 million increase in variable sales expense primarily as a result of sales relating to the Saudi Arabian National Guard TACNAV order and related facility construction that commenced in the third quarter of 2012. Also contributing to the increase in 2012 was a $0.3 million increase in bad debt expense. Partially offsetting these increases was a $0.3 million decrease in sales, marketing and support expense related to demonstration equipment, marketing literature, trade shows and dealer seminars. As a percentage of net sales, sales, marketing and support expense for the quarter ended September 30, 2012 was 16% as compared to 22% for the quarter ended September 30, 2011. Research and development expense for the three months ended September 30, 2012 increased by $0.2 million, or 6%, to $3.0 million from $2.8 million for the three months ended September 30, 2011. The primary reason for the increase in 2012 expense was a $0.3 million increase in U.S.-based employee compensation. As a percentage of net sales, research and development expense for the quarter ended September 30, 2012 was 8% as compared to 11% for the quarter ended September 30, 2011. General and administrative expense for the three months ended September 30, 2012 increased by $0.7 million, or 31%, from $2.3 million for the three months ended September 30, 2011 to $3.0 million for the three months ended September 30, 2012. The primary reason for the increase in 2012 expense was a $0.4 million increase in U.S.-based employee compensation. Also contributing to the increase was a $0.2 million increase in facility expenditures. As a percentage of net sales, general and administrative expense for the quarter ended September 30, 2012 was 8% as compared to 9% for the quarter ended September 30, 2011. We expect total operating expenses will increase year-over-year on an absolute basis for the remainder of the year, but should decline as a percentage of total sales. This increase will be driven largely by costs, including contracted commissions, for the sales related to the Saudi Arabian National Guard TACNAV order. Interest and Other Income Interest income and other income, net for the three months ended September 30, 2012 was $0.1 million as compared to $0.9 million for the three months ended September 30, 2011. The primary reason for the decrease was a $0.8 million net benefit in other income in September 2011 resulting from reaching agreement with LiveTV regarding the termination of our original antenna development and production agreement. Income Tax (Expense) Benefit Income tax expense for the three months ended September 30, 2012 was $1.5 million as compared to $0.0 million for the three months ended September 30, 2011. The increase in income tax expense is primarily due to a $2.7 million increase in pre-tax income. We estimate our effective tax rate for 2012 to be 50% or higher, as a result of the tax effect of discrete events such as stock option exercise activity and restricted stock vesting. 18 -------------------------------------------------------------------------------- Table of Contents Nine months ended September 30, 2012 and 2011 Net Sales Product sales for the nine months ended September 30, 2012 increased by $1.5 million, or 2%, to $62.7 million from $61.2 million for the nine months ended September 30, 2011. The primary reason for the increase in 2012 was an increase of $3.6 million, or 11%, in sales of our mobile communications products to $37.3 million for the nine months ended September 30, 2012 from $33.7 million for the nine months ended September 30, 2011. The increase was primarily due to an increase in sales of our marine products of $4.4 million, or 15%, driven primarily by demand for our new HD11 product that were released in the first quarter of 2012, as well as our TracPhone V7 and TracPhone V3. Also contributing to the marine products increase was increased sales of our HD7 product. Partially offsetting this increase was a decrease in our land mobile products of $0.8 million, or 17%, as compared to the nine months ended September 30, 2011. The decrease in our land mobile products was primarily a result of decreased sales to original equipment manufacturers in the recreational vehicle market. Partially offsetting the increase in sales of our mobile communications products was a decrease in sales of our guidance and stabilization products of $2.2 million, or 8%. Specifically, sales of our FOG products decreased by $1.8 million, or 10%. Mobile communications product sales originating from our European and Asian subsidiaries increased $3.3 million, or 31%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012. Mobile communications product sales originating from the Americas increased $0.3 million, or 1%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012. Service sales for the nine months ended September 30, 2012 increased $15.5 million, or 80%, to $34.9 million from $19.4 million for the nine months ended September 30, 2011. The primary reason for the increase was a $9.3 million increase in airtime sales for our mini-VSAT Broadband service. Also contributing to the increase in service sales was a $4.3 million increase in contracted engineering services driven by the Saudi Arabian order as well as a separate TACNAV-related development effort, a $1.7 million increase in service repair services, and a $0.2 million increase in Inmarsat service sales. Costs of Sales For the nine months ended September 30, 2012, costs of product sales increased by $3.3 million, or 10%, to $37.0 million from $33.8 million for the nine months ended September 30, 2011. The primary reason for the increase was the increase in sales of our mobile communications products discussed above. Costs of service sales increased by $7.3 million, or 48%, to $22.7 million for the nine months ended September 30, 2012 from $15.4 million for the nine months ended September 30, 2011. The primary reason for the increase was a $3.7 million increase in airtime costs of sales for our mini-VSAT Broadband service. Also contributing to the increase was a $2.7 million increase in engineering services cost of sales due primarily to the services provided in connection with the Saudi Arabian National Guard contract as well as a $0.7 million increase in cost of service repair sales and a $0.2 million increase in cost of Inmarsat service sales. Gross margin from product sales for the nine months ended September 30, 2012 decreased to 41% from 45% in the year-ago period. The decrease in our gross margin from product sales was primarily due to the decrease in the FOG sales discussed above, which generally have higher margins than our mobile communications products. Gross margin from service sales for the nine months ended September 30, 2012 increased to 35% from 21% in the year-ago period. The increase in gross margin was primarily due to the increase in gross margin for mini-VSAT Broadband service sales, which increased to 31% from 12% in the year-ago period. Partially offsetting the increase in gross margin for the mini-VSAT Broadband service sales was a decrease in the gross margin for engineering services to 39% from 53% in the year-ago period primarily due to the facility construction and program management services in Saudi Arabia, as these construction services have a gross margin of approximately 10%. 19 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Sales, marketing and support expense for the nine months ended September 30, 2012 increased by $0.4 million, or 3%, to $17.2 million from $16.8 million for the nine months ended September 30, 2011. The primary reasons for the increase in 2012 was a $0.4 million increase in variable sales expense primarily as a result of the sales related to the Saudi Arabian National Guard TACNAV order and related facility construction that commenced in the third quarter of 2012, and a $0.4 million increase in bad debt expense. Also contributing to the increase was a $0.4 million increase in sales, marketing and support expense related to our Danish and Singaporean subsidiaries, and a $0.1 million increase in trade shows. Partially offsetting these increases was a $0.3 million decrease in U.S.-based compensation for sales, marketing and support, a $0.3 million total decrease in marketing literature, cooperative advertising expense, and dealer seminars, a $0.1 million decrease in facility expenditures, and a $0.1 million decrease in Norwegian-based compensation for sales, marketing and support. As a percentage of net sales, sales, marketing and support expense decreased during the nine months ended September 30, 2012 to 18% from 21% for the nine months ended September 30, 2011. Research and development expense for the nine months ended September 30, 2012 increased by $0.5 million, or 6%, to $9.1 million from $8.6 million for the nine months ended September 30, 2011. The primary reason for the increase in 2012 expense was a $0.4 million increase in U.S.-based employee compensation. Also contributing to the increase was a $0.2 million increase in research and development expense related to our Norwegian subsidiary. As a percentage of net sales, research and development expense decreased during the nine months ended September 30, 2012 to 9% from 11% for the nine months ended September 30, 2011. General and administrative expense for the nine months ended September 30, 2012 increased by $1.1 million, or 14%, to $8.9 million from $7.8 million for the nine months ended September 30, 2011. The primary reason for the increase in 2012 expense was a $0.7 million increase in U.S.-based employee compensation. Also contributing to the increase was a $0.6 million increase in facility expenditures, a $0.2 million increase in equipment lease expense and software maintenance expense, and a $0.1 million increase in recruiting expense. Partially offsetting these increases was a $0.4 million decrease in legal expense. As a percentage of net sales, general and administrative expense decreased during the nine months ended September 30, 2012 to 9% from 10% for the nine months ended September 30, 2011. Interest and Other Income Interest and other income, net for the nine months ended September 30, 2012 was $0.2 million as compared to $0.9 million for the nine months ended September 30, 2011. The primary reason for the decrease was a $0.8 million net benefit in other income in September 2011 resulting from reaching agreement with LiveTV regarding the termination of our original antenna development and production agreement. Income Tax (Expense) Benefit Income tax expense for the nine months ended September 30, 2012 was $2.0 million as compared to an income tax benefit of $0.1 million for the nine months ended September 30, 2011. The increase in income tax expense is primarily due to a $3.6 million increase in pre-tax income. Backlog Backlog is not a meaningful indicator for predicting revenue in future periods. Commercial resellers for our mobile satellite communications products and legacy products do not carry extensive inventories and rely on us to ship products quickly. Generally due to the rapid delivery of our commercial products, our backlog for those products is not significant. Our backlog for all products and services was approximately $48.3 million and $22.1 million on September 30, 2012 and December 31, 2011, respectively. The increase in backlog of $26.2 million from December 31, 2011 was primarily a result of the order for TACNAV products and services received in June 2012 for the Saudi Arabian National Guard. Backlog consists of orders evidenced by written agreements and specified delivery dates for customers who are acceptable credit risks. We do not include satellite connectivity service sales in our backlog even though many of our satellite connectivity customers have signed annual service contracts providing for a fixed monthly fee. Military orders included in backlog are generally subject to cancellation for the convenience of the customer. When orders are canceled, we generally recover actual costs incurred through the date of cancellation and the costs resulting from termination. As of September 30, 2012, our backlog included approximately $12.7 million in orders that are subject to cancellation for convenience by the customer. Individual orders for guidance and stabilization products are often large and may require procurement of specialized long-lead components and allocation of manufacturing resources. The complexity of planning and executing larger orders generally requires customers to order well in advance of the required delivery date, resulting in backlog. 20 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We have historically funded our operations primarily from operating cash flows, net proceeds from public and private equity offerings, bank financings and proceeds received from exercises of stock options. As of September 30, 2012, we had $32.9 million in cash, cash equivalents, and marketable securities, of which $1.5 million, $0.3 million and $1.9 million in cash equivalents were held in a local currency by our foreign subsidiaries located in Denmark, Brazil and Norway, respectively. There were no marketable securities held by our foreign subsidiaries as of September 30, 2012. As of September 30, 2012, we had $60.0 million in working capital. Net cash provided by operations was $9.4 million for the nine months ended September 30, 2012 as compared to net cash used in operations of $0.7 million for the nine months ended September 30, 2011. The increase is primarily due to a $5.6 million decrease in cash outflows as a result of decreased inventory levels as well as a $1.6 million increase in net income. Also contributing to the increase was a decrease in cash outflows of approximately $5.3 million related to accounts payable and accrued liabilities primarily as a result of accrued expenses related to the construction of the facility for the Saudi Arabian contract. In addition, we experienced a decrease in cash outflows of approximately $1.3 million related to other long-term liabilities. Partially offsetting the increase in cash inflows is an increase in cash outflows of approximately $2.6 million attributable to accounts receivable and an increase in cash outflows of approximately $2.0 million related to other long-term assets. In addition, there was a decrease in cash inflows of approximately $1.4 million related to deferred revenue. Net cash used in investing activities was $6.0 million for the nine months ended September 30, 2012 as compared to net cash used in investing activities of $5.7 million for the nine months ended September 30, 2011. The increase in cash outflows is due to a $3.2 million increase in our net investment in marketable securities. Partially offsetting the increase in cash outflows is a decrease in capital expenditures of approximately $2.9 million. Net cash used in financing activities was $1.6 million for the nine months ended September 30, 2012 compared to cash provided by financing activities of $4.5 million for the nine months ended September 30, 2011. The increase in cash used in financing activities is primarily due to payments of $2.0 million on our line of credit in 2012 as compared to the $6.5 million increase in borrowings under our line of credit as of September 30, 2011, which were used to finance the construction of our new manufacturing facility. Partially offsetting the increase in cash outflows was a decrease in common stock repurchases in the amount of $2.0 million. On 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. The loan term is 10 years, with a principal amortization of 20 years, and the interest rate will be a rate per year adjusted periodically based on a defined interest period equal to the BBA LIBOR Rate plus 2.25 percentage points. On June 9, 2011, we entered into an amendment to the mortgage loan, providing for an adjustment of the interest rate from the BBA LIBOR Rate plus 2.25 percentage points to the BBA LIBOR Rate plus 2.00 points. Land, building and improvements with an approximate carrying value of $4.4 million as of September 30, 2012 secure the mortgage loan. The monthly mortgage payment is approximately $11,100 plus interest and increases in increments of approximately $600 each year throughout the life of the mortgage. Due to the difference in the 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, a Fixed Charge Coverage Ratio, which applies in the event that our consolidated cash, cash equivalents and marketable securities balance falls below $25.0 million at any time. As our consolidated cash, cash equivalents, and marketable securities balance was above $25.0 million throughout the nine months ended September 30, 2012, the Fixed Charge Coverage Ratio did not apply. Under the mortgage loan we may prepay our outstanding loan balance subject to certain early termination charges as defined in the mortgage loan agreement. If we were to default on our mortgage loan, the land, building and improvements would be used as collateral. As discussed in note 14 to the consolidated financial statements, effective April 1, 2010, in order to reduce the volatility of cash outflows that arise from changes in interest rates, we entered into two interest rate swap agreements that are intended to hedge our 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 loan expires on April 16, 2019. 21 -------------------------------------------------------------------------------- Table of Contents We currently have a revolving loan agreement with a bank that provides for a maximum available credit of $15.0 million and will expire on December 31, 2014. We pay interest on any outstanding amounts at a rate equal to the BBA LIBOR Daily Floating Rate plus 1.25%. The line of credit contains two financial covenants, a Liquidity Covenant, which requires us to maintain at least $20.0 million in unencumbered liquid assets, as defined in the loan agreement, and a Fixed Charge Coverage Ratio. As of September 30, 2012, we were not in default of either covenant. Subject to the terms of the agreement and so long as no event of default has occurred, until September 30, 2013, we have the option of converting up to $12.0 million of revolving loans into one or more term loans at a floating interest rate equal to LIBOR plus 1.75%. We may terminate the loan agreement prior to its full term without penalty; provided we give 30 days advance written notice to the bank. As of September 30, 2012, we had $7.0 million outstanding under the facility, the repayment of which is due no later than the maturity date of December 31, 2014. These funds were used to finance construction of our new manufacturing facility in Middletown, RI, which was completed in the first quarter of 2012. On November 26, 2008, our Board of Directors authorized a program to repurchase up to one million shares of our common stock. The share repurchase program is funded using our existing cash, cash equivalents, marketable securities and future cash flows. As of September 30, 2012, 341,009 shares of our common stock remain available for repurchase under the program. We did not purchase any shares of our common stock in the nine months ended September 30, 2012. It 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 10-year agreement announced in July 2008. As part of this arrangement, we agreed to acquire satellite capacity from Ku-band satellite operators. In addition, in December 31, 2011, we entered into a five-year agreement to lease C-band satellite capacity from a satellite operator, effective February 1, 2012, and we have also purchased three hubs to support this C-band service. The total cost of the five-year satellite capacity agreement, the hubs, and teleport services is approximately $12.2 million, of which approximately 22% relates to the cost of the hubs. Each satellite hub represents a substantial capital investment. As part of the future potential capacity expansion, we would plan to seek to acquire additional satellite capacity from satellite operators, expend funds to seek regulatory approvals and permits, develop product enhancements in anticipation of the expansion, and hire additional personnel. We anticipate these costs will be funded by cash, cash equivalents and marketable securities on hand, as well as cash flows from operations. We believe that the $32.9 million we hold in cash, cash equivalents and marketable securities, together with our other existing working capital and cash flows from operations, will be adequate to meet planned operating and capital requirements through at least the next twelve months. However, as the need or opportunity arises, we may seek to raise additional capital through public or private sales of securities or through additional debt financing. There are no assurances that we will be able to obtain any additional funding or that such funding will be available on terms acceptable to us. 22 -------------------------------------------------------------------------------- Table of Contents |