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8-K/A - AMENDMENT TO FORM 8-K - KVH INDUSTRIES INC \DE\d569497d8ka.htm
EX-23.1 - EX-23.1 - KVH INDUSTRIES INC \DE\d569497dex231.htm
EX-99.1 - EX-99.1 - KVH INDUSTRIES INC \DE\d569497dex991.htm

Exhibit 99.2

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION

The following tables set forth certain unaudited pro forma combined consolidated financial information giving effect to KVH Industries, Inc.‘s (“KVH”) acquisition of Headland Media Limited (“Headland”).

The unaudited pro forma combined statements of operations for the year ended December 31, 2012 (KVH’s year-end) and for the three months ended March 31, 2013 (“Pro Forma Statements of Operations”), give effect to KVH’s acquisition of Headland, as discussed in Note 5, as if such acquisition had occurred on January 1, 2012, combining the results of KVH and Headland for the year ended December 31, 2012 and for the three month period ended March 31, 2013. The unaudited pro forma combined balance sheet (“Pro Forma Balance Sheet”) as of March 31, 2013 gives effect to the Headland acquisition as if it had occurred on March 31, 2013, combining the consolidated balance sheets of KVH and Headland. The Pro Forma Statements of Operations and the Pro Forma Balance Sheet are hereafter collectively referred to as the “Pro Forma Financial Information”. The Pro Forma Financial Information is unaudited and does not purport to represent what KVH’s consolidated results of operations would have been if the Headland acquisition had occurred on January 1, 2012, or what those results will be for any future periods; or what KVH’s consolidated balance sheet would have been if the KVH acquisition had occurred on March 31, 2013.

The Pro Forma Financial Information is based upon the historical consolidated financial statements of KVH and Headland and certain adjustments which KVH believes are reasonable, to give effect of the Headland acquisition. The pro forma adjustments and Pro Forma Financial Information included herein were prepared using the acquisition method of accounting for the business combination. The pro forma adjustments are based on preliminary estimates and certain assumptions that KVH believes are reasonable under the circumstances. The purchase price allocation is considered preliminary and subject to change once KVH receives certain information it believes is necessary to finalize the acquisition accounting, as noted in Note 5 to the Pro Forma Financial Information.

The Pro Forma Financial Information has been compiled from the following sources with the following unaudited adjustments:

 

 

U.S. GAAP financial information for KVH has been extracted without adjustment from (i) KVH audited consolidated statement of operations for the year ended December 31, 2012 contained in KVH’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 2, 2013 and (ii) KVH unaudited consolidated balance sheet and consolidated statement of operations for the three months ended March 31, 2013 contained in KVH’s Quarterly Report on Form 10-Q filed with the SEC on May 9, 2013.

 

 

The financial information for Headland has been prepared in accordance with U.K. Accounting Standards (U.K. Generally Accepted Accounting Practice) and derived without material adjustment from: (i) Headland’s audited consolidated profit and loss account as of and for the year ended December 31, 2012, contained in this Form 8-K/A; and (ii) Headland’s unaudited consolidated balance sheet and profit and loss account for the three months ended March 31, 2013, both received from Headland management. These financial statements were originally prepared using pounds sterling as the reporting currency, and have been translated into U.S. dollars in the Pro Forma Financial Information using the methodology and the exchange rates noted below.

 

 

Certain adjustments have been made to convert Headland’s U.K. Generally Accepted Accounting Practice financial information to U.S. GAAP and to align those policies with KVH’s U.S. GAAP accounting policies. The basis of these adjustments is explained in the notes to the Pro Forma Financial Information.


KVH translated the financial information from Headland into U.S. dollars. Based upon its review of Headland’s historical financial statements and understanding of the differences between U.S. GAAP and U.K. Generally Accepted Accounting Practice, KVH is not aware of any further adjustments that it would need to make to Headland’s historical financial statements relating to foreign currency translation.

 

 

The historical financial information and pro forma adjustments in the Pro Forma Financial Information have been translated from pounds sterling to U.S. dollars using historic exchanges rates. The average exchange rates applicable to Headland during the periods presented for the Pro Forma Statements of Operations and the period end exchange rate for the Pro Forma Balance Sheet are as follows:

 

           GBP/USD  

Year ended December 31, 2012

   Average spot rate    $ 1.5847   

Three months ended March 31, 2013

   Average spot rate    $ 1.5533   

March 31, 2013

   Period end spot rate    $ 1.5189   

The unaudited Pro Forma Financial Information should be read in conjunction with:

 

 

the accompanying notes to the Pro Forma Financial Information;

 

 

the unaudited consolidated financial statements of KVH for the three months ended March 31, 2013 and related notes thereto and the consolidated financial statements of KVH for the year ended December 31, 2012 and related notes thereto; and

 

 

the consolidated financial statements of Headland for the year ended December 31, 2012 and related notes thereto, incorporated by reference in this Form 8-K/A.


      
  
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS   

THREE MONTHS ENDED MARCH 31, 2013

(In thousands, except per share amounts)

  

 

      Three Months Ended
March  31,
2013
KVH
     Three Months Ended
March  31,
2013
Headland
                  Pro Forma
KVH
 
      (in USD)      (in GBP)      (in USD)      Pro Forma
and GAAP
Adjustments
    Note      (in USD)  

Sales:

                

Product

   $ 25,216       £         $         $           $   25,216   

Service

     14,711         1,970         3,060              17,771   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Net sales

     39,927         1,970         3,060              42,987   

Costs and expenses:

                

Costs of product sales

     13,909                    13,909   

Costs of service sales

     10,249         474         736         69        5(d)         11,054   

Research and development

     2,950               42        5(i)         2,992   

Sales, marketing and support

     6,943               478        5(h)i; 5(h)ii; 5(i)         7,421   

General and administrative

     3,374         1,166         1,811         (406    
 
5(d); 5(h)ii;
5(i); 5(k)ii
  
  
     4,779   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Total costs and expenses

     37,425         1,640         2,547         183           40,155   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Income from operations

     2,502         330         513         (183        2,832   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Interest income

     168                    168   

Interest expense

     76         39         61         25        5(b); 5(c)ii         162   

Other income

     24         64         99         (194     5(k)i         (71
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Income before income tax expense

     2,618         355         551         (402        2,767   

Income tax expense

     655         110         171         (149     5(e)         677   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Net income

   $ 1,963       £ 245       $ 380       $ (253      $ 2,090   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Pro forma per share information:

                

Net income per share, basic

   $ 0.13                  $ 0.14   
  

 

 

               

 

 

 

Net income per share, diluted

   $ 0.13                  $ 0.14   
  

 

 

               

 

 

 

Number of shares used in pro forma per share calculation:

                

Basic

     14,989                    14,989   
  

 

 

               

 

 

 

Diluted

     15,219                    15,219   
  

 

 

               

 

 

 

See notes to pro forma combined consolidated financial information


      
  
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS   
YEAR ENDED DECEMBER 31, 2012   
(In thousands, except per share amounts)   

 

      Year Ended
December  31,
2012
KVH
     Year Ended December  31,
2012
Headland
                  Pro Forma
KVH
 
      (in USD)      (in GBP)      (in USD)      Pro Forma
and GAAP
Adjustments
    Note      (in USD)  

Sales:

                

Product

   $ 90,677       £         $         $           $ 90,677   

Service

     46,435         8,029         12,724              59,159   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Net sales

     137,112         8,029         12,724              149,836   

Costs and expenses:

                

Costs of product sales

     51,774                    51,774   

Costs of service sales

     30,363         1,795         2,845         280        5(d)         33,488   

Research and development

     12,148               170        5(i)         12,318   

Sales, marketing and support

     24,069               1,919       
5(h)i; 5(h)ii; 5(i)
 
     25,988   

General and administrative

     12,188         4,736         7,505         (1,624    
 
5(d); 5(h)ii;
5(i); 5(k)ii
  
  
     18,069   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Total costs and expenses

     130,542         6,531         10,350         745           141,637   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Income from operations

     6,570         1,498         2,374         (745        8,199   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Interest income

     510                    510   

Interest expense

     323         315         499         (154     5(b); 5(c)ii         668   

Other income

     86               86        5(k)i         172   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Income before income tax expense

     6,843         1,183         1,875         (505        8,213   

Income tax expense

     3,263         344         545         (376     5(e)         3,432   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Net income

   $ 3,580       £ 839       $ 1,330       $ (129      $ 4,781   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Pro forma per share information:

                

Net income per share, basic

   $ 0.24                  $ 0.32   
  

 

 

               

 

 

 

Net income per share, diluted

   $ 0.24                  $ 0.32   
  

 

 

               

 

 

 

Number of shares used in pro forma per share calculation:

                

Basic

     14,777                    14,777   
  

 

 

               

 

 

 

Diluted

     15,019                    15,019   
  

 

 

               

 

 

 

See notes to pro forma combined consolidated financial information


UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET

MARCH 31, 2013

(In thousands)

 

      March 31,
2013
KVH
    March 31,
2013
Headland
                  Pro
Forma

KVH
 
      (in USD)     (in GBP)      (in USD)      Pro Forma
and GAAP
Adjustments
    Note      (in USD)  
ASSETS                

Current Assets

               

Cash and cash equivalents

   $ 6,529      £ 1,691       $ 2,568       $ (1,022     5(b)       $ 8,075   

Marketable securities

     38,316                   38,316   

Accounts receivable, net of allowance for doubtful accounts

     29,392        1,834         2,786              32,178   

Inventories

     16,918        89         135              17,053   

Deferred income taxes

     824        24         36              860   

Prepaid expenses and other assets

     4,071        498         756              4,827   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total current assets

     96,050        4,136         6,281         (1,022        101,309   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 
               

Property and equipment, less accumulated depreciation

     35,912        302         459              36,371   

Intangible assets, less accumulated amortization

     1,524              13,595        5(a)i         15,119   

Goodwill

     4,527        7,993         12,141         (134     5(a)ii         16,534   

Deferred income taxes

     3,153                   3,153   

Other non-current assets

     4,137                   4,137   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total assets

   $ 145,303      £ 12,431       $ 18,881       $ 12,439         $ 176,623   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY                

Current Liabilities

               

Accounts payable

   $ 6,760      £ 371       $ 563       $           $ 7,323   

Accrued compensation and employee-related expenses

     5,093                   5,093   

Accrued other

     5,409        844         1,282         691        5(g)         7,382   

Accrued product warranty costs

     803                   803   

Deferred revenue

     2,074        1,965         2,985         (120     5(a)iii         4,939   

Current portion of long-term debt

     1,098        706         1,072         (1,072     5(c)i         1,098   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total current liabilities

     21,237        3,886         5,902         (501        26,638   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Other long-term liabilities

     1,309                   1,309   

Line of credit

     7,000              23,542        5(b)         30,542   

Long-term debt, excluding current portion

     7,009        1,559         2,368         (2,368     5(c)i         7,009   

Deferred income taxes

             3,068        5(a)iv         3,068   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total liabilities

     36,555        5,445         8,270         23,741           68,566   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

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, 16,785,842 issued and 15,126,851 shares outstanding

     168        10         15         (15     5(f)         168   

Additional paid-in capital

     112,947        4,451         6,761         (6,761     5(f)         112,947   

Accumulated earnings

     9,270        2,477         3,762         (4,453     5(f); 5(g)         8,579   

Accumulated other comprehensive (loss) income

     (487     48         73         (73     5(f)         (487
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 
     121,898        6,986         10,611         (11,302        121,207   

Less: treasury stock at cost, common stock, 1,658,991 shares

     (13,150                (13,150
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total stockholders’ equity

     108,748        6,986         10,611         (11,302        108,057   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total liabilities and stockholders’ equity

   $ 145,303      £ 12,431       $ 18,881       $ 12,439         $ 176,623   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

See notes to pro forma combined consolidated financial information


NOTES TO UNAUDITED PRO FORMA COMBINED

CONSOLIDATED FINANCIAL INFORMATION

(in thousands)

1. BASIS OF PRESENTATION

The accompanying unaudited Pro Forma Statements of Operations for the year ended December 31, 2012 (KVH’s fiscal year end), and for the three months ended March 31, 2013, give effect to KVH’s stock acquisition of Headland as discussed in Note 5, as if such acquisition had occurred on January 1, 2012, combining the results of KVH and Headland for the year ended December 31, 2012 and for the three month period ended March 31, 2013. The acquisition of Headland will be accounted for under the acquisition method of accounting for the business combination. As such, the cost to acquire Headland will be allocated to the respective assets acquired and liabilities assumed based on their estimated fair value at the closing of the acquisition. The accompanying Pro Forma Balance Sheet as of March 31, 2013 gives effect to the Headland acquisition as if it had occurred on March 31, 2013, combining the consolidated balance sheets of KVH and Headland. This unaudited pro forma financial information is not intended to reflect the financial position and results which would have actually resulted had the Headland acquisition occurred on the dates indicated. Further, the pro forma results of operations are not necessarily indicative of the results of operations that may be obtained in the future.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Pro Forma Financial Information has been compiled in a manner consistent with the accounting policies adopted by KVH. Adjustments were made for presentational differences between U.K. Generally Accepted Accounting Practice and U.S. Generally Accepted Accounting Principles (GAAP), as set out further in Note 5, together with adjustments arising as part of the acquisition accounting.

The Headland financial information has been translated from pounds sterling to U.S. dollars using the average exchange rates applicable during the periods presented in the Pro Forma Statements of Operations and the period end spot rate for the Pro Forma Balance Sheet.

3. HEADLAND ACQUISITION

On May 11, 2013, KVH Industries U.K. Limited (KVH U.K.), a newly formed, wholly owned subsidiary of KVH, entered into a Share Purchase Agreement with Oakley Capital Private Equity L.P., Mark Woodhead, Andrew Michael Galvin and the Trustees of the Headland Media Limited Employee Benefit Trust to acquire all of the issued share capital of Headland, a media and entertainment service company based in the United Kingdom that distributes premium news, sports, movies and music content for commercial and leisure customers in the maritime, hotel, and retail markets, for an aggregate purchase price of approximately £15,500 ($24,000 at the exchange rate of £1.00: $1.5517 on May 11, 2013). The acquisition was consummated on the same day. The purchase price was determined as a result of arms-length negotiation and is 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 Agreement provides that 10% of the purchase price shall be held in escrow for a period of at least eighteen months after the closing in order to satisfy valid indemnification claims that KVH may assert for specified breaches of representations, warranties and covenants.

The total purchase price and related preliminary excess total purchase price over fair value of net assets acquired is as follows, excluding approximately $8,200 of acquired intercompany debt due KVH from Headland (in thousands):

 

Consideration transferred—cash

      $ 24,000   

Book value of net assets acquired

   $ 282      

Fair value adjustments to deferred revenue

     123      
  

 

 

    

Fair value of tangible net assets acquired

      $ 405   


Identifiable intangibles at acquisition-date fair value      

Subscriber relationships

     8,271      

Distribution rights

     4,888      

Internally developed software

     543      

Proprietary content

     186      
  

 

 

    
        13,888   

Deferred income taxes

        (3,134
     

 

 

 

Goodwill

      $ 12,841   
     

 

 

 

Except as discussed in Note 5 below, the carrying value of assets and liabilities in Headland’s financial statements are considered to be a reasonable estimate of the fair value of those assets and liabilities.

Our fair value estimate of assets acquired and liabilities assumed is pending completion of several elements, including the finalization of valuations of fair value of the assets acquired and liabilities assumed and final review by our management. The primary areas that are not yet finalized relate to the fair value of certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, and income and non-income based taxes. The final determination of the assets acquired and liabilities assumed will be based on the established fair value of the assets acquired and the liabilities 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 determination of the purchase price, fair values and resulting goodwill may differ significantly from what is reflected in the Pro Forma Financial Information.

Goodwill at the date of acquisition varies from goodwill presented in the Pro Forma Financial Information due to changes in the net book value of tangible assets during the period April 1, 2013 through the date of acquisition and different currency exchange rates at March 31, 2013 and the date of acquisition.

4. CREDIT AGREEMENT AND NOTE

On May 9, 2013, KVH and Bank of America, N.A. (the “Lender”) entered into the Eighth Amendment (the “Amendment”) to the Amended and Restated Credit and Security Agreement, dated July 17, 2003 (as amended to date, the “Credit Agreement”), which, among other modifications, increased KVH’s line of credit from $15,000 to $30,000 (the “Line”). KVH also executed and delivered to the Lender an Amended and Restated Revolving Credit Note dated May 9, 2013 in the amount of up to $30,000 (the “Note”). The Note matures on December 31, 2014. As additional security for the obligations of the KVH to the Lender under the Credit Agreement and the Note, the KVH pledged to the Lender 65% of the KVH’s equity interest in KVH U.K. As amended, the Credit Agreement no longer permits KVH to convert revolving loans into term loans.

In connection with the acquisition of the outstanding shares of Headland pursuant to the Share Purchase Agreement, on May 9, 2013, KVH borrowed $23,000 to pay substantially all of the purchase price for the acquired shares. The entire principal balance of the loan is due and payable on December 31, 2014 and, based on rates in effect on the date hereof, KVH expects to make monthly interest payments of approximately $29 with respect to the loan, which interest payments will be subject to adjustment in accordance with the terms of the Credit Agreement. KVH’s obligation to repay the loan 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 KVH’s affirmative and negative covenants under the Credit


Agreement, a change of control of KVH, certain defaults in payment relating to other indebtedness, the acceleration of payment of certain other indebtedness, certain events relating to the liquidation, dissolution, bankruptcy, insolvency or receivership of KVH, the entry of certain judgments against KVH, certain events relating to the impairment of collateral or the Lender’s security interest therein, and any other material adverse change with respect to KVH.

5. PRO FORMA ADJUSTMENTS

The Pro Forma Financial Information is based upon the historical consolidated financial statements of KVH and Headland and certain adjustments which KVH believes are reasonable to give effect to the Headland acquisition. These adjustments are based upon currently available information and certain assumptions, and therefore the actual adjustments will likely differ from the pro forma adjustments. In particular, such adjustments include information based upon our preliminary allocation of the purchase price for the acquisition of Headland, which is subject to adjustment based upon our further analysis. We have not completed the valuation studies necessary to determine the fair values of the assets we have acquired and liabilities we have assumed and the related allocations of purchase price. Accordingly, the allocation of purchase price set forth in the Pro Forma Financial Information may change as a result of the final purchase price allocation, including the finalization of net assets delivered, and the differences may be material. The Pro Forma Financial Information included herein was prepared using the acquisition method of accounting for the business combination. As discussed above, the purchase price allocation is considered preliminary at this time. However, KVH believes that the preliminary purchase allocation and other related assumptions utilized in preparing the Pro Forma Financial Information provide a reasonable basis for presenting the pro form effects of the Headland acquisition.

All pro forma adjustments have been prepared for informational purposes only. The historical financial statements have been adjusted to give effect to pro forma events that are (i) directly attributable to the merger, (ii) factually supportable, and (iii) with respect to the statement of operations, expected to have a continuing impact on the combined results of KVH.

Other than those described below, KVH believes there are no adjustments, in any material respects, that need to be made to present the Headland financial information in accordance with U.S. GAAP, or to align Headland’s historical accounting policies with KVH’s U.S. GAAP accounting policies.

The adjustments made in preparing the Pro Forma Financial Information are as follows:

 

  (a) Fair Value Acquisition Accounting Adjustments:

For purposes of the pro forma presentation, the following adjustments were made to reflect our preliminary estimate of the fair value of the net assets acquired:

 

  i. The intangible assets with finite lives of Headland have been increased by $13,595 to reflect our preliminary estimate of the fair value of the acquired intangible assets, including subscriber relationships, distribution rights, internally developed software and proprietary content.

 

  ii. The historical carrying value of Headland’s goodwill as of the acquisition date of $12,141 (which relates to prior Headland acquisitions) was eliminated.

 

  iii. Deferred revenue has been decreased $120 to reflect our estimate of the fair value.

 

  iv. Deferred income taxes liabilities and goodwill were increased by $3,068 to reflect the estimated tax impact of the intangible assets acquired at the statutory tax rate recorded at (e) below. These amounts are preliminary estimates and may differ materially in actual future results of operations.

Goodwill, representing the total excess of the total purchase price over the fair value of the net assets acquired, was $12,007 (at exchange rate of £1.00:$1.5189 on March 31, 2013).

 

  (b) Acquisition Funding

The Headland acquisition was funded through $1,000 ($1,022 USD equivalent on March 31, 2013) of existing cash from KVH and $23,000 ($23,542 USD equivalent on March 31, 2013) from a credit agreement. See Note 4. - Credit Agreement and Note above. Adjustments were made in the Pro Forma Financial Information to record interest expense of $86 and $345 for the three months ended March 31, 2013 and the twelve months ended December 31, 2012, respectively. A 1.5% interest expense rate was used based upon the recent interest rate incurred by KVH on the line.


  (c) Debt Borrowing of Headland

 

  i. In accordance with the Share Purchase Agreement, at closing, certain cash paid by KVH to acquire Headland was used to satisfy all outstanding debt of Headland.

 

  ii. Adjustments were made in the Pro Forma Statements of Operations to eliminate interest expense of $61 and $499 paid by Headland related to its outstanding debt for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively. As explained in Note 5(c)(i), all such debt was satisfied at the time of acquisition.

 

  (d) Amortization Expense Related to Acquired Intangible Assets

Acquired finite-lived intangible assets were recorded at their estimated fair value of $13,595. The weighted-average useful life of the acquired intangible assets is estimated at approximately 11 years. Amortization adjustments to record estimated general administrative expense of $289 and $1,177 were made for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively. Amortization adjustments to record costs of service sales of $69 and $280 were made for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively. The intangible assets lives were amortized to income statement categories using the average spot rate for the Pro Forma Statements of Income as follows:

 

Intangible Asset

   Fair Value      Life   

Income Statement Category

Subscriber Relationships

   $ 8,096       10    General and administrative expense

Distribution rights

     4,785       15    General and administrative expense

Internally developed software

     532       3    Costs of service sales

Proprietary content

     181       2    Costs of service sales

 

  (e) Income Taxes

Adjustments were made in the Pro Forma Statements of Operations to reduce income tax expense by $149 and $376 for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively, using the weighted average statutory tax rate in effect during the periods presented.

 

  (f) Elimination of Headland’s Stockholder’s Equity

An adjustment to eliminate Headland’s common stock of $15, additional paid in capital of $6,761, accumulated earnings of $3,762, and accumulated other comprehensive income of $73 was eliminated in the Pro Forma Balance Sheet at March 31, 2013.

 

  (g) Transaction Costs

We have estimated the total Headland acquisition related costs will be $850. These costs have been accrued as a current liability and reflected in the accrued other line item, net of a $159 tax benefit. We are required to expense these costs as they are incurred and have charged them to accumulated earnings as of March 31, 2013. No adjustments have been made to the unaudited Pro Forma Statements of Operations for these expenses as they are non-recurring.


  (h) Stock Compensation Expense

 

  i. Adjustments were made in the Pro Forma Statements of Operations to record sales, marketing and support expense of $17 and $69 for stock option grants issued in conjunction with the Headland acquisition, for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively.

 

  ii. Adjustments were made in the Pro Forma Statements of Operations to record general and administrative expense of $7 and $27, for stock option grants issued in conjunction with the Headland acquisition for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively.

 

  (i) Reclassifications

Certain balances were reclassified from the financial statements of Headland so their presentation would be consistent with KVH.

The following reclassifications were made to the Pro Forma Statement of Operations for the three months ended March 31, 2013

 

     Increase/Decrease  

Research and development

   $ 42   

Sales, marketing and support

     461   

General and administrative

     (503

The following reclassifications were made to the Pro Forma Statement of Operations for the year ended December 31, 2012 (in thousands):

 

     Increase/Decrease  

Research and development

   $ 170   

Sales, marketing and support

     1,850   

General and administrative

     (2,020

 

  (j) Net income per share

Pro forma net income per share for the three months ended March 31, 2013 and for the year ended December 31, 2012, have been calculated using the same weighted average number of common shares used by KVH in its net income per share calculations.


  (k) Pro Forma U.S. GAAP Adjustments

The following adjustments have been made to align the Headland U.K. GAAP financial information with KVH U.S. GAAP accounting policies:

 

  i. Derivatives - Forward currency contracts are not required to be reported at fair value on the balance sheet under U.K. GAAP. Under U.S. GAAP forward currency contracts are required to be valued at fair value at the balance sheet date with any movements in fair value being taken to the income statement. Adjustments were made in the Pro Forma Statements of Operations to record other expense of $194 and other income of $86, to reflect the gain and loss on the fair value of Headland’s forward currency contracts for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively.

 

  ii. Goodwill - Under U.K. GAAP, goodwill arising on acquisition is capitalized and amortized on a straight-line basis over its estimated useful economic life of 20 years. Under U.S. GAAP, goodwill is not amortized but it is instead tested for impairment or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit to a value below its carrying value. As a result, amortization adjustments to reverse general and administrative expense of $199 and $808, were made for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively. These expenses related to Headland acquisition-related goodwill that existed prior to the acquisition, and was subsequently eliminated on the acquisition date.

 

  iii. Deferred Taxes - U.K. GAAP provides for a deferred tax in respect of timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. A net deferred tax asset is regarded as recoverable and therefore recognized only when, on the basis of available evidence, it is regarded as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted.

Under U.S. GAAP, deferred taxation is provided for all temporary differences (differences between the carrying value of assets and liabilities and their corresponding tax bases) on a full liability basis. Certain items that are treated as permanent differences under U.K. GAAP are treated as temporary differences under U.S. GAAP. Deferred tax assets are also recognized (net of a valuation allowance) to the extent that it is more likely than not that the benefit will be realized.

Adjustments were made in the Pro Forma Statements of Operations to reduce income tax expense using the weighted average statutory tax rate in effect during the periods presented as explained in Note 5(e).