Attached files
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EX-32 - EXHIBIT 32 - LOJACK CORP | c16592exv32.htm |
EX-31.1 - EXHIBIT 31.1 - LOJACK CORP | c16592exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - LOJACK CORP | c16592exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-08439
LOJACK CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts (State or other jurisdiction of incorporation or organization) |
04-2664794 (IRS Employer Identification Number) |
|
200 Lowder Brook Drive, Suite 1000 Westwood, Massachusetts (Address of principal executive offices) |
02090 (Zip code) |
(781) 251-4700
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
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 and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO o
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 definition of large
accelerated filer, accelerated filer and smaller reporting company, in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
As of May 03, 2011, there were 18,396,386 shares of our common stock issued and outstanding.
LOJACK CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LOJACK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 52,153 | $ | 51,789 | ||||
Restricted cash |
75 | 175 | ||||||
Marketable securities at fair value |
1,194 | 1,365 | ||||||
Accounts receivable, net of allowances of $2,997 and $3,534, respectively |
22,980 | 26,897 | ||||||
Inventories |
9,124 | 8,506 | ||||||
Prepaid and other expenses |
3,610 | 4,036 | ||||||
Prepaid and receivable income taxes |
832 | 657 | ||||||
Deferred income taxes |
308 | 308 | ||||||
Total current assets |
90,276 | 93,733 | ||||||
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $47,684 and
$46,206, respectively |
14,249 | 15,114 | ||||||
DEFERRED INCOME TAXES |
106 | 101 | ||||||
INTANGIBLE ASSETSNET |
197 | 294 | ||||||
GOODWILL |
1,717 | 1,717 | ||||||
OTHER ASSETSNET |
10,709 | 11,352 | ||||||
TOTAL ASSETS |
$ | 117,254 | $ | 122,311 | ||||
LIABILITIES AND EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Short term debt |
$ | 146 | $ | 146 | ||||
Accounts payable |
4,151 | 7,097 | ||||||
Accrued and other liabilities |
10,513 | 11,111 | ||||||
Current portion of deferred revenue |
20,911 | 21,824 | ||||||
Accrued compensation |
3,845 | 4,681 | ||||||
Total current liabilities |
39,566 | 44,859 | ||||||
LONG TERM DEBT |
11,642 | 8,798 | ||||||
DEFERRED REVENUE |
28,269 | 28,834 | ||||||
DEFERRED INCOME TAXES |
308 | 308 | ||||||
OTHER ACCRUED LIABILITIES |
3,547 | 3,503 | ||||||
ACCRUED COMPENSATION |
1,380 | 1,633 | ||||||
Total liabilities |
84,712 | 87,935 | ||||||
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10) |
||||||||
EQUITY: |
||||||||
Preferred stock$.01 par value; authorized, 10,000,000 shares |
| | ||||||
Common stock$.01 par value; authorized, 35,000,000 shares; issued and
outstanding 18,395,787 at March 31, 2011 and 18,296,959 at December 31,
2010 |
184 | 183 | ||||||
Additional paid-in capital |
20,660 | 19,968 | ||||||
Accumulated other comprehensive income |
5,817 | 6,713 | ||||||
Retained earnings |
6,085 | 7,691 | ||||||
Total LoJack Corporation equity |
32,746 | 34,555 | ||||||
Noncontrolling interest in subsidiary |
(204 | ) | (179 | ) | ||||
Total equity |
32,542 | 34,376 | ||||||
TOTAL LIABILITIES AND EQUITY |
$ | 117,254 | $ | 122,311 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
Table of Contents
LOJACK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Revenue |
$ | 30,339 | $ | 30,788 | ||||
Cost of goods sold |
15,299 | 16,332 | ||||||
Gross profit |
15,040 | 14,456 | ||||||
Costs and expenses: |
||||||||
Product development |
1,449 | 1,924 | ||||||
Sales and marketing |
6,585 | 7,469 | ||||||
General and administrative |
7,983 | 9,242 | ||||||
Depreciation and amortization |
1,666 | 1,735 | ||||||
Total |
17,683 | 20,370 | ||||||
Operating loss |
(2,643 | ) | (5,914 | ) | ||||
Other income (expense): |
||||||||
Interest income |
730 | 97 | ||||||
Interest expense |
(164 | ) | (173 | ) | ||||
Other, net |
666 | 414 | ||||||
Total |
1,232 | 338 | ||||||
Loss before provision for income taxes |
(1,411 | ) | (5,576 | ) | ||||
Provision for income taxes |
221 | 83 | ||||||
Net loss |
(1,632 | ) | (5,659 | ) | ||||
Less: Net loss attributable to the noncontrolling interest |
(26 | ) | (81 | ) | ||||
Net loss attributable to LoJack Corporation |
$ | (1,606 | ) | $ | (5,578 | ) | ||
Net loss per share attributable to LoJack Corporation: |
||||||||
Basic |
$ | (0.09 | ) | $ | (0.32 | ) | ||
Diluted |
$ | (0.09 | ) | $ | (0.32 | ) | ||
Weighted average shares: |
||||||||
Basic |
17,531,613 | 17,283,560 | ||||||
Diluted |
17,531,613 | 17,283,560 | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
Table of Contents
LOJACK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (1,632 | ) | $ | (5,659 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: |
||||||||
Stock-based compensation |
678 | 1,088 | ||||||
Depreciation and amortization |
1,767 | 1,881 | ||||||
Non cash revenue from warrants |
(137 | ) | (213 | ) | ||||
Allowance for doubtful accounts |
(767 | ) | (27 | ) | ||||
Deferred income taxes |
(5 | ) | 51 | |||||
Loss on disposal of property and equipment |
3 | 1 | ||||||
Loss (gain) on marketable securities |
170 | (332 | ) | |||||
Increase (decrease) in cash from changes in assets and liabilities: |
||||||||
Accounts receivable |
4,786 | 3,381 | ||||||
Inventories |
(558 | ) | (147 | ) | ||||
Prepaid and other expenses |
473 | (1,233 | ) | |||||
Prepaid income taxes |
(172 | ) | 158 | |||||
Other assets |
120 | 86 | ||||||
Accounts payable |
(2,973 | ) | (1,513 | ) | ||||
Accrued and other liabilities |
(1,526 | ) | 867 | |||||
Deferred revenue |
(1,382 | ) | (1,323 | ) | ||||
Net cash used by operating activities |
(1,155 | ) | (2,934 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Investment in property and equipment |
(693 | ) | (1,372 | ) | ||||
Proceeds from the sale of marketable securities |
| 1,223 | ||||||
Restricted cash |
100 | 603 | ||||||
Net cash (used) provided by investing activities |
(593 | ) | 454 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Exercise of stock options |
40 | | ||||||
Repayment of debt |
| (3,157 | ) | |||||
Proceeds from debt |
2,529 | 479 | ||||||
Payment of tax withholding obligations related to stock |
(24 | ) | (142 | ) | ||||
Net cash provided (used) by financing activities |
2,545 | (2,820 | ) | |||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
(433 | ) | (109 | ) | ||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
364 | (5,409 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
51,789 | 36,490 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 52,153 | $ | 31,081 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
Table of Contents
LOJACK CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been
prepared by LoJack Corporation and its subsidiaries, or LoJack, we, our, or the Company,
without audit. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP, have
been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, or SEC. The unaudited condensed consolidated financial statements include the accounts
of LoJack, our wholly-owned subsidiaries, and SC-Integrity, or SCI. We consolidate entities which
we own or control. All intercompany transactions and balances have been eliminated in
consolidation. In the opinion of our management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of items of a normal and recurring nature)
necessary to present fairly the financial position as of March 31, 2011, and the results of
operations for the three months ended March 31, 2011 and 2010 and cash flows for the three months
ended March 31, 2011 and 2010. The results of operations for the three month period ended March 31,
2011 are not necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with our Annual Report on Form 10-K
for the year ended December 31, 2010, which includes consolidated financial statements and notes
thereto for the year ended December 31, 2010.
2. Earnings Per Share
Basic earnings per common share is computed using the weighted average number of common shares
outstanding during each period. Diluted earnings per common share is computed using the weighted
average number of common shares outstanding during the year and includes the effect of our
outstanding stock options and unvested stock (using the treasury stock method), except where such
stock options or unvested stock would be antidilutive.
A reconciliation of weighted average shares used for the basic and diluted computations for
the three months ended March 31, 2011 and 2010 is as follows:
Three Months Ended | Three Months Ended | |||||||
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Weighted average shares for basic |
17,531,613 | 17,283,560 | ||||||
Dilutive effect of stock options and unvested restricted stock |
| | ||||||
Weighted average shares for diluted |
17,531,613 | 17,283,560 | ||||||
Because of the net losses reported for the three months ended March 31, 2011 and 2010, all
shares of stock issuable pursuant to stock options and unvested stock have not been considered for
dilution as their effect would be anti-dilutive. For the three months ended March 31, 2011,
2,624,701 stock options and 838,755 shares of unvested restricted stock were excluded from the
computation of diluted net loss per share. For the three months ended March 31, 2010, 2,782,940
stock options and 996,595 shares of unvested restricted stock were excluded from the computation of
diluted net loss per share. Performance shares totaling 51,589 and 141,225 were excluded from the
computation of earnings per share as of March 31, 2011 and 2010, respectively, because the
performance conditions had not been achieved at the respective balance sheet dates.
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3. Inventories
Inventories are classified as follows (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Raw materials |
$ | 134 | $ | 333 | ||||
Work in process |
277 | 314 | ||||||
Finished goods, net |
8,713 | 7,859 | ||||||
Total inventories |
$ | 9,124 | $ | 8,506 | ||||
4. Stock Compensation
Stock Options
The following table presents activity of all stock options for the three month period ended
March 31, 2011:
Weighted | ||||||||||||||||
Weighted | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise | Contractual Term | Value | |||||||||||||
Options | Price | (in years) | (in thousands) | |||||||||||||
Outstanding at January 1, 2011 |
2,261,565 | $ | 7.28 | |||||||||||||
Granted |
370,536 | 5.77 | ||||||||||||||
Exercised |
(7,000 | ) | 4.88 | |||||||||||||
Cancelled, expired or forfeited |
(400 | ) | 8.92 | |||||||||||||
Outstanding at March 31, 2011 |
2,624,701 | $ | 7.07 | 4.54 | $ | 594 | ||||||||||
Vested and unvested expected to vest at March 31, 2011 |
2,573,967 | $ | 7.11 | 4.51 | $ | 583 | ||||||||||
Exercisable at March 31, 2011 |
1,471,508 | $ | 8.53 | 3.47 | $ | 239 |
The aggregate intrinsic values in the preceding table represent the total intrinsic values
based on our closing stock price of $4.69 per share as of March 31, 2011.
Unvested Restricted Stock
Unvested restricted stock represents shares of common stock that are subject to the risk of
forfeiture until the fulfillment of specified performance criteria. Our unvested restricted stock
awards generally cliff vest on either the first, second or third anniversary date of the grant.
For grants which vest based on specified Company performance criteria, the grant date fair
value of the shares is recognized over the period of performance once achievement of such criteria
is deemed probable. For grants that vest through passage of time, the grant date fair value of the
award is recognized ratably over the vesting period. The fair value of unvested restricted stock
awards is determined based on the number of shares granted and the market value of our shares on
the grant date.
The following table presents activity of all unvested restricted stock for the three month
period ended March 31, 2011:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Unvested at January 1, 2011 |
784,063 | $ | 4.77 | |||||
Granted |
229,292 | 5.79 | ||||||
Vested and exercised |
(41,075 | ) | 9.49 | |||||
Forfeited and cancelled |
(133,525 | ) | 4.49 | |||||
Unvested at March 31, 2011 |
838,755 | $ | 4.86 | |||||
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Table of Contents
5. Investments and Fair Value Measurements
The Financial Accounting Standards Board, or FASB, authoritative guidance on fair value
measurements defines fair value, establishes a framework for measuring fair value and expands
disclosure requirements about fair value measurements. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date.
Financial assets and liabilities recorded on the accompanying unaudited condensed consolidated
balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1Financial assets and liabilities whose values are based on unadjusted quoted prices
for identical assets or liabilities in an active market that the company has the ability to access
at the measurement date (examples include active exchange-traded equity securities, listed
derivatives and most United States government and agency securities).
Level 2Financial assets and liabilities whose values are based on quoted prices in markets
where trading occurs infrequently or whose values are based on quoted prices of instruments with
similar attributes in active markets. Level 2 inputs include the following:
| Quoted prices for identical or similar assets or liabilities in non-active markets
(examples include corporate and municipal bonds which trade infrequently); |
| Inputs other than quoted prices that are observable for substantially the full term of
the asset or liability (examples include interest rate and currency swaps); and |
| Inputs that are derived principally from or corroborated by observable market data for
substantially the full term of the asset or liability (examples include certain securities
such as options, warrants and derivatives). |
Level 3Financial assets and liabilities whose values are based on prices or valuation
techniques that require inputs that are both unobservable and significant to the overall fair value
measurement. These inputs reflect managements own assumptions about the assumptions a market
participant would use in pricing the asset or liability.
We currently do not have any Level 2 or Level 3 financial assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In
instances where the inputs used to measure fair value fall into different levels of the fair value
hierarchy, the fair value measurement has been determined based on the lowest level input
significant to the fair value measurement in its entirety. Our assessment of the significance of a
particular item to the fair value measurement in its entirety requires judgment, including the
consideration of inputs specific to the asset or liability. The following table sets forth by level
within the fair value hierarchy, our financial assets that are accounted for at fair value on a
recurring basis at March 31, 2011 and December 31, 2010, according to the valuation techniques we
used to determine their fair values (in thousands):
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
March 31, | Identical Assets | Observable Inputs | Inputs | |||||||||||||
Description | 2011 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Nonqualified deferred compensation plan investments |
$ | 983 | $ | 983 | $ | | $ | | ||||||||
Marketable securities |
1,194 | 1,194 | | | ||||||||||||
Equity investment in French licensee |
385 | 385 | | | ||||||||||||
Total |
$ | 2,562 | $ | 2,562 | $ | | $ | | ||||||||
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
December 31, | Identical Assets | Observable Inputs | Inputs | |||||||||||||
Description | 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Nonqualified deferred compensation plan investments |
$ | 1,251 | $ | 1,251 | $ | | $ | | ||||||||
Marketable securities |
1,365 | 1,365 | | | ||||||||||||
Equity investment in French licensee |
314 | 314 | | | ||||||||||||
Total |
$ | 2,930 | $ | 2,930 | $ | | $ | | ||||||||
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Our investments associated with our Nonqualified Deferred Compensation Plan consist of mutual
fund shares that are publicly traded and for which market prices are readily available. Gains and
losses related to such investments are recorded in other income (expense) in the statement of
operations.
As of March 31, 2011, we held 366,500 common shares of Absolute Software Inc., or Absolute, a
Vancouver British Columbia, Canada based computer theft company, as marketable securities that we
have designated as trading securities. The gains and losses on these securities are recorded in
other income (expense) in the statement of operations. These shares are publicly traded and their
market price is readily available.
Our investment in common stock of our French licensee consists of publicly traded shares with
a market price that is readily available. During the three months ended March 31, 2011, we recorded
an unrealized gain related to this investment in accumulated other comprehensive income.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Certain assets are measured at fair value on a non-recurring basis. Assets that are not
measured at fair value on a recurring basis are subject to fair value adjustments only in certain
circumstances. Our assets in this category include cost and equity method investments, which are
written down to fair value when their declines are determined to be other-than-temporary, and
long-lived assets, or goodwill, that are written down to fair value when they are held for sale or
determined to be impaired.
We use Level 3 inputs to measure the fair value of goodwill and intangible assets on their
annual measurement dates or, if a triggering event occurs, on an interim basis.
As of March 31, 2011, our investments in international licensees included a 12.5% equity
interest in our Mexican licensee, totaling $1,541,000, and a 17.5% equity interest in our Benelux
licensee, totaling $496,000. Our investments in the aforementioned licensees are carried at cost
and adjusted only for other-than-temporary declines in fair value, distributions of capital and
additional investments made. Management periodically reviews the carrying value of these
investments using Level 3 inputs such as projections of anticipated cash flows, market conditions,
legal factors, operational performance, and valuations, when appropriate. We have concluded that
there are no impairments to the fair value of these investments for all periods presented.
Financial Instruments not Measured at Fair Value
Some of our financial instruments, including cash and cash equivalents, restricted cash,
accounts receivable and accounts payable are not measured at fair value on a recurring basis but
are recorded at amounts that approximate fair value due to their liquid or short-term nature.
At March 31, 2011, the carrying value of $11,642,000 of our long-term debt approximated the
fair value because our two year multicurrency revolving credit agreement, which was established on
December 29, 2009 and amended on June 30, 2010 and December 29, 2010, carries a variable rate of
interest which is adjusted periodically and reflects current market conditions. Also see Note 6
below.
6. Debt
As of March 31, 2011 and December 31, 2010, our debt consisted of the following (in
thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Short-term debt: |
||||||||
SCI convertible promissory note |
$ | 146 | $ | 146 | ||||
Long-term debt: |
||||||||
Term loan |
11,642 | 8,798 | ||||||
$ | 11,788 | $ | 8,944 | |||||
On August 10, 2010, SCI issued a one year, 11% interest Convertible Promissory Note totaling
$400,000 to its shareholders. As a 64% holder of SCI, a $254,000 note was issued to LoJack
Corporation and is eliminated in consolidation. The remaining $146,000 due to the noncontrolling
holders of SCI is classified as short-term debt on our consolidated balance sheet.
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On December 29, 2009, we entered into a two year multicurrency revolving credit agreement, or
the Credit Agreement, with RBS Citizens, N.A., as Lender, Administrative Agent and Lead Arranger,
and TD Bank, N.A., as a Lender and Issuing Bank. The Credit Agreement provides for a multicurrency
revolving credit facility in the maximum amount of USD $30,000,000, subject to a borrowing base
calculation (or its equivalent in alternate currencies). We have the right to increase the
aggregate amount available to be borrowed under the Credit Agreement to USD $50,000,000, subject to
certain conditions, including consent of the lenders.
We entered into two amendments to the Credit Agreement during 2010. The first amendment,
entered into on June 30, 2010, allowed for certain one-time severance costs that would otherwise be
deducted in calculating Consolidated Net Income to be added back in determining Consolidated EBITDA
for the purpose of determining the Debt Service Coverage Ratio covenant for the quarters ending
June 30, 2010 and September 30, 2010. The second amendment, entered into on December 29, 2010,
extended the maturity date of the revolving credit loans to January 10, 2014, increased the
Companys authorization for stock repurchase to $10,000,000 and amended the definitions of
Applicable Margin, Consolidated EBITDA and Interest Payment Date.
As of March 31, 2011, we had a total of CAD $11,288,000 (USD $11,642,000) outstanding
borrowings under the Credit Agreement. Of the outstanding borrowings at March 31, 2011, a total of
CAD $9,300,000 (USD $9,592,000) were denominated in Canadian Dollars and CAD $1,988,000 (USD
$2,050,000) were denominated in US Dollars. The interest rate on borrowings under the Credit
Agreement varies depending on our choice of interest rate and currency options, plus an applicable
margin. The interest rates in effect as of March 31, 2011 were 4.1% for the Canadian Dollar
denominated borrowings and 3.3% for the US Dollar denominated borrowings. As of March 31, 2011, we
also had three outstanding irrevocable letters of credit in the aggregate amount of $1,313,000.
These letters of credit reduce our outstanding borrowing availability under the Credit Agreement.
The Credit Agreement contains limitations on capital expenditures, repurchases of common
stock, certain investments, acquisitions and/or mergers and prohibits disposition of assets other
than in the normal course of business. Additionally, we are required to maintain certain financial
performance measures including maximum leverage ratio, minimum cash flow coverage ratio, minimum
quick ratio and maximum capital expenditures. The payment of dividends is permitted but is limited
only to the extent such payments do not affect our ability to meet certain financial performance
measures. Failure to maintain compliance with covenants could impair the availability of the loans
under the facility. At March 31, 2011, based upon the borrowing base calculation, we had borrowing
availability of $18,367,000. At March 31, 2011, we were in compliance with all financial covenants
in the Credit Agreement.
The Credit Agreement terminates on January 10, 2014, at which point all amounts outstanding
under the revolving credit facility are due. The Credit Agreement is guaranteed by our United
States domestic subsidiaries and certain Canadian subsidiaries and is secured by all domestic
assets, including our intellectual property and a pledge of 100% of the stock of Boomerang Tracking
Inc., or Boomerang, and 65% of the capital stock of LoJack Equipment Ireland, or LoJack Ireland.
7. Comprehensive Loss
Total comprehensive loss and its components for the three months ended March 31, 2011 and 2010
were as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net loss |
$ | (1,632 | ) | $ | (5,569 | ) | ||
Other comprehensive income (loss), net of tax: |
||||||||
Foreign currency translation adjustments |
(968 | ) | (867 | ) | ||||
Unrealized gains (losses) on marketable securities |
71 | (204 | ) | |||||
Total comprehensive loss |
(2,529 | ) | (6,730 | ) | ||||
Less: Comprehensive loss attributable to noncontrolling interest |
(26 | ) | (81 | ) | ||||
Comprehensive loss attributable to LoJack Corporation |
$ | (2,503 | ) | $ | (6,649 | ) | ||
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Total accumulated other comprehensive income and its components were as follows (in
thousands):
Total | ||||||||||||
Foreign | Unrealized | Accumulated | ||||||||||
Currency | Gain on | Other | ||||||||||
Translation | Marketable | Comprehensive | ||||||||||
Adjustment | Securities | Income | ||||||||||
Balance at December 31, 2010 |
$ | 6,584 | $ | 129 | $ | 6,713 | ||||||
Foreign currency translation adjustments |
(968 | ) | | (968 | ) | |||||||
Unrealized gain on marketable securities |
| 71 | 71 | |||||||||
Balance at March 31, 2011 |
$ | 5,616 | $ | 201 | $ | 5,817 | ||||||
8. Income Taxes
We recorded a worldwide provision for income taxes of $221,000 for the three months ended
March 31, 2011. The effective income tax rate for the three month period ended March 31, 2011 was
lower than our federal statutory rate in large part because no U.S. income tax benefit was recorded
with respect to the losses in the U.S. for the three months ended March 31, 2011 due to the
valuation allowance on our net U.S. deferred tax assets that was established in the quarter ended
June 30, 2010 and our unbenefited foreign losses. Unbenefited foreign losses are pre-tax losses in
foreign jurisdictions for which we record no foreign tax benefit. Additionally, our favorable tax
rate in Ireland contributed to a low provision for income taxes for the three month period ended
March 31, 2011.
We have net U.S. deferred tax assets that have arisen as a result of temporary differences
between book and tax accounting, primarily related to deferred revenue and stock compensation. The
FASB authoritative guidance on accounting for income taxes requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax assets. Our ability to
realize a deferred tax asset is based on our ability to generate sufficient future taxable income.
The valuation allowance was determined in accordance with the guidance, which requires an
assessment of both positive and negative evidence when determining whether it is more likely than
not that deferred tax assets are recoverable. Such assessment is required on a
jurisdiction-by-jurisdiction basis. Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against the net deferred tax assets. As a result of establishing a full valuation
allowance against our net U.S. deferred tax assets in the quarter ended June 30, 2010, we did not
recognize any deferred tax benefits related to U.S. net losses incurred during the three months
ended March 31, 2011. We will maintain a full valuation allowance on our net U.S. deferred tax
assets until sufficient positive evidence exists to support reversal of the valuation allowance.
9. Segment Reporting
We have three separately managed and reported business segments: North America, International
and All Other.
Our North America segment includes our domestic operations, which sells products that operate
in all or a portion of 28 states and the District of Columbia in the United States, and Boomerang,
a provider of stolen vehicle recovery products and services in Canada.
Our International segment includes our international operations, which sells products, and
licenses or owns and operates LoJack proprietary vehicle recovery technology in 32 countries and
territories located in South America, Mexico, the Caribbean, Africa, Asia and Europe, including
Italy where we operate through our wholly-owned subsidiary, LoJack Italia, SRL, or LoJack Italia.
Our All Other segment includes the results of LoJack SafetyNet and SCI. LoJack SafetyNet and
SCI provide technology for the tracking and rescue of people at risk, and recovery of valuable
cargo and business information, respectively.
The following table presents information about our operating segments for the three months
ended March 31, 2011 and 2010, respectively (in thousands). Certain general overhead costs have
been allocated to the North America and International segments based on methods considered to be
reasonable by our management.
North America | International | |||||||||||||||
Segment | Segment | All Other | Consolidated | |||||||||||||
Consolidated Statements of Operations Data |
||||||||||||||||
Three Months Ended March 31, 2011 |
||||||||||||||||
Revenue |
$ | 22,367 | $ | 7,214 | $ | 758 | $ | 30,339 | ||||||||
Depreciation and amortization |
1,539 | 107 | 121 | 1,767 | ||||||||||||
Operating (loss) income |
(3,134 | ) | 942 | (451 | ) | (2,643 | ) | |||||||||
Three Months Ended March 31, 2010 |
||||||||||||||||
Revenue |
$ | 23,052 | $ | 6,873 | $ | 863 | $ | 30,788 | ||||||||
Depreciation and amortization |
1,654 | 99 | 128 | 1,881 | ||||||||||||
Operating loss |
(5,116 | ) | (209 | ) | (589 | ) | (5,914 | ) |
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10. Commitments and Contingent Liabilities
As of March 31, 2011, we were subject to various legal proceedings and claims discussed below,
as well as certain other legal proceedings and claims that have not been fully resolved and that
have arisen in the ordinary course of business. The results of legal proceedings cannot be
predicted with certainty. Should we fail to prevail in any of these legal matters, our financial
condition and results of operations could be materially adversely affected.
California Class Action Litigations
Employee Claims
In April 2006, a suit entitled Mike Rutti vs. LoJack Corporation, Inc. was filed
in the United States District Court for the Central District of California by an
employee alleging violations of the Fair Labor Standards Act, the California Labor Code and the
California Business & Professions Code, and seeking class action status (the Federal Court Case).
In September 2007, our motion for summary judgment was granted and the district court dismissed all
of the plaintiffs federal law claims. The plaintiff appealed the dismissal to the Ninth Circuit
Court of Appeals and in August 2009, the Ninth Circuit affirmed the district courts grant of
summary judgment on all claims except as to the claim for compensation for the required
postliminary data transmission, or the data transmission claim, for which the dismissal was
vacated. The plaintiff filed a petition for rehearing to the Ninth Circuit and on March 2, 2010,
the Ninth Circuit affirmed the district courts grant of summary judgment on all claims except as
to (a) the claim for compensation for commuting under state law and (b) the data transmission
claim, which are the two remaining claims. The plaintiff seeks to pursue the claim for compensation
for commuting time in the State Court Case referenced below. The plaintiff moved for conditional
class certification for the data transmission claim and on January 14, 2011, the District Court for
the Central District of California granted the plaintiffs motion for conditional certification. Trial for this claim in federal court is
currently scheduled for November 2011.
Due to the dismissal of the plaintiffs claims in federal court in September 2007 as discussed
above, in November 2007, the plaintiff also filed Mike Rutti, Gerson Anaya vs. LoJack Corporation,
Inc. comprising its state law claims in California State Court (the State Court Case). In June
2009, the California State Court granted class certification with respect to nine claims and denied
class certification with respect to five claims. The Company appealed this decision and on March
26, 2010, the California State Appellate Court granted our appeal in part, denying certification
with respect to certain claims and affirming certification with respect to other claims, including
claims related to meal and rest breaks, postliminary data transmission, and time traveling to UPS
stores. There are currently six claims class certified in this State Court Case.
In both the Federal and State Court Cases, the plaintiff, on behalf of the class, seeks unpaid
wages, penalties, interest and attorneys fees.
On February 14, 2011, the Company filed a Notice of Removal to remove this State Court Case to
Federal Court, thereby requesting to consolidate both the Federal and State Court Cases to be heard
in Federal Court and the plaintiff filed for a motion to remand the Federal Court Case to State
Court. On April 15, 2011, the United States District Court for the Central District of California
granted the plaintiffs motion to remand the State Court Case to the California State Court. On
April 29, 2011, the Company filed a petition for leave to appeal the decision to remand. The
parties are currently awaiting the Ninth Circuits determination as to whether it will hear the
appeal.
The Company believes that it has substantial legal and factual defenses to these claims and
intends to defend its interests vigorously.
We have recorded an accrual in the amount of $750,000, with respect to certain of the above
claims based on our best estimates, where a potential loss is considered probable. We
have estimated our possible range of loss with respect to the data transmission claim in the
Federal Court Case to be between $0 and $300,000. For other
claims, due to a variety of uncertain factors, including whether the claims will be heard in State
or Federal Court, whether the claims will be certified or remain certified, the actual number of
individuals who will choose to opt into the class or opt out of the class and the merits of the claims, we cannot
at this time predict the outcome of the case related to such claims nor estimate the possible loss
or range of loss, if any, we could incur if there was an unfavorable outcome with respect to this
litigation.
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Consumer Claims
On June 15, 2010, a suit entitled Louis Morin v. LoJack Corp., Inc., et al was filed by a
consumer in the Los Angeles County Superior Court of the State of
California (Central District) alleging, amongst other claims, violations of the California
Consumers Legal Remedies Act, the California Business and Professions Code § 17200 (unfair
competition) and § 17500 (false advertising), and breach of implied warranty with respect to LoJack
Early Warning for motorcycles, and seeking class action status. On July 29, 2010, the Company
removed the case to the United States District Court for the Central District Court of California.
On August 23, 2010, the Company filed a motion to dismiss all claims, which was granted by the
Court on September 27, 2010, without prejudice. The dismissal without prejudice provided the
plaintiff with the opportunity to amend its complaint, and on October 25, 2010, the plaintiff filed
an amended complaint, for alleged fraud, violations of the California Consumers Legal Remedies Act,
the California Business and Professions Code § 17200 (unfair competition) and § 17500 (false
advertising), and breach of implied warranty and again sought class certification. On November 12,
2010, the Company filed a motion to dismiss all claims and a motion to strike certain claims. On
December 28, 2010, the Court denied the Companys motion to dismiss. The plaintiff, on behalf of
the class, sought injunctive relief, restitution, disgorgement, punitive damages, and attorneys
fees in unspecified amounts. On March 3, 2011, the plaintiff filed a motion for class certification
and the Company filed its opposition to class certification on March 28, 2011.
The parties participated in a mediation hearing on March 29, 2011 and reached a settlement to
resolve all claims on a class-wide basis. The settlement remains subject to preliminary and final
court approval by the United States District Court for the Central District of California and
notice to the class. A hearing for preliminary approval is scheduled for May 16, 2011. Pursuant to
the terms of the settlement, the Company would revise its disclosures in motorcycle related
marketing materials and provide class members with a twelve month extension of the terms of the
Companys Limited Recovery Warranty. The Company would also pay an enhancement award of $20,000 to
the named plaintiff and would pay the plaintiffs attorneys fees and costs up to $415,000. Under
the terms of the settlement, the Company would receive a release by all potential class members who
do not affirmatively opt out of the settlement. Nothing in the settlement agreement constitutes an
admission of any wrongdoing, liability or violation of law by the Company. Rather, the Company has
signed the settlement agreement to resolve the litigation, thereby eliminating the
uncertainties and expense of further protracted litigation.
We have recorded an accrual in the amount of $570,000, with respect to the terms of the
settlement, including a $135,000 accrual relating to the twelve month warranty extension, which did
not have a material impact on our consolidated financial position or results of operations.
New York Litigation
On October 13, 2010, a suit was filed by G.L.M. Security & Sound, Inc. against LoJack
Corporation in United States District Court for the Eastern District of New York alleging breach of
contract, misrepresentation, violation of the New York franchise law, and price discrimination. The
plaintiff seeks damages of $10,000,000, punitive damages, interest and attorneys fees, and treble
damages. On December 14, 2010, the Company filed a motion to dismiss all claims. On February 1,
2011, the plaintiff filed a motion to amend the complaint and sought to add a claim for breach of
fiduciary duty. On February 15, 2011, the Company filed its opposition to the motion to amend and
sought the dismissal of all claims. The parties are currently awaiting the Courts decision. The
Company believes that it has substantial legal and factual defenses to these claims and intends to
defend its interests vigorously.
Given the early stages of this matter, we cannot predict the outcome of the case nor estimate
the possible loss or range of loss, if any, we could incur if there was an unfavorable outcome with
respect to this litigation.
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Brazilian Licensee Arbitration Demands
On March 21, 2011, the Company received a demand for arbitration with the American Arbitration
Association. The demand was filed by Global Tracking Tech., Ltd. and Tracker do Brasil LTDA, which
license the LoJack technology in Brazil. The demand alleges that the Company failed to maintain a
patent for the stolen vehicle recovery system in Brazil and includes claims for breach of contract,
breach of the implied covenant of good faith and fair dealing, and violation of Mass. Gen Laws c.
93A. The claimant seeks $111,500,000 in damages, treble damages, and attorneys fees and costs.
Also on March 21, 2011, the Company received a separate demand for arbitration with the
American Arbitration Association, filed by the same licensee, alleging breach of contract, breach
of the implied covenant of good faith and fair dealing and violation of Mass. Gen Laws c. 93A
relating to product pricing and the fulfillment of purchase orders to the licensee. The claimant
seeks, amongst other things, $289,500,000 in actual damages, treble damages, attorneys fees,
declaratory and injunctive relief.
The Company believes that it has substantial legal and factual defenses to these claims and
intends to defend its interests vigorously.
Given the early stages of this matter, we cannot predict the outcome of the case nor estimate
the possible loss or range of loss, if any, we could incur if there was an unfavorable outcome with
respect to this litigation.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following information should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and
with Managements Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for the year ended December 31, 2010.
Safe Harbor Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 and other securities laws contain certain
safe harbors regarding forward-looking statements. From time to time, information provided by us or
statements made by our employees may contain forward-looking information which involves risks and
uncertainties. Any statements in this report and accompanying materials that are not statements of
historical fact are forward-looking statements (including, but not limited to, statements
concerning the characteristics and growth of our market and customers, our objectives and plans for
future operations and products and our expected liquidity, revenue, profit and capital expenditures
and resources). Such forward-looking statements are based on a number of assumptions and involve a
number of risks and uncertainties, and accordingly, actual results could differ materially. Factors
that may cause such differences include, but are not limited to: (i) the continued and future
acceptance of our products and services; (ii) our ability to obtain financing from lenders; (iii)
the outcome of ongoing litigation involving the company; (iv) the rate of growth in the industries
of our customers; (v) the presence of competitors with greater technical, marketing, and financial
resources; (vi) our customers ability to access the credit markets; (vii) our ability to promptly
and effectively respond to technological change to meet evolving customer needs; (viii) our ability
to successfully expand our operations; and (ix) changes in general economic or geopolitical
conditions. For a further discussion of these and other significant factors to consider in
connection with forward-looking statements concerning us, reference is made to Item 1A Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2010.
Except as required by law, we undertake no obligation to update these forward-looking
statements to reflect events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Overview
We are a leading global provider of technology products and services for the tracking and
recovery of valuable mobile assets and people at risk of wandering, or people at risk. Our
proprietary technology, wireless network and unique integration with law enforcement agencies
provide an effective means for the tracking and recovery of stolen vehicles, construction
equipment, motorcycles, cargo and people at risk.
We have three separately managed and reported business segments: North America, International
and All Other. Our North America segment is comprised of our domestic operation, which sells
products that operate in 28 states and the District of Columbia in the United States, as well as
Boomerang, a provider of stolen vehicle recovery products in Canada. Our International segment is
comprised of sales of products and licenses and the ownership and operation of LoJack proprietary
vehicle recovery technology in 32 countries and territories throughout Europe, Asia, Africa and
Latin America and through our wholly-owned subsidiary in Italy, LoJack Italia. Our All Other
segment includes LoJack SafetyNet and SCI, which are providers of technology for the tracking and
rescue or recovery of people at risk and of valuable cargo and business information, respectively.
North America Segment
Our revenue in the United States is derived primarily from the sale of LoJack units, LoJack
Early Warning, and extended warranty products to consumers. Approximately 87% of our sales in the
United States market are made through a distribution network consisting of dealers of new and used
automobiles. We believe we have strong consumer brand awareness in the United States.
The price paid by the consumer for a LoJack unit includes installation. We maintain a
workforce that performs these installations and we supplement our installation capacity by
contracting with and certifying select dealers and other third parties to install our products. We
continually seek to minimize the fixed costs related to the installation of a LoJack unit by
increasing our installation capacity with certified dealers and other third parties. We monitor the
quality of these installations through the use of an expanded quality control process.
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We offer warranty products at the point of sale to new customers and through direct sales
efforts to our existing customers.
We record additions to deferred revenue for our LoJack Early Warning product and for certain
warranty products for which we are the primary obligor of the underlying contract. We typically
receive full payment within 60 days of the transaction, but recognition of the deferred revenue is
recognized over the estimated life of the product or service.
Our revenue in Canada is derived from the sale of Boomerang Espion, Boomerang Espion Alert,
Boomerang, Boomerang2 and BoomerangXpress units, related products, and service contracts. Certain
insurance companies in Quebec offer rebates to customers who install a Boomerang unit in their high
priced or high risk of theft vehicles and, in many instances, require installation of a Boomerang
unit in such vehicles.
Those who purchase Boomerang units are also required to enter into a service contract. The
terms of service contracts offered range from 12 to 60 months and are payable in full upon
activation of the related unit or renewal of a previous service contract.
In the second quarter of 2011, when the LoJack technology is introduced in the Canadian
market, we plan on developing new selling models which we expect will have an impact on how we
recognize revenue in that market.
International Segment
Internationally, our stolen vehicle recovery technology is operational in 32 countries and
territories around the world. We have existing licensees in South America, Mexico, the Caribbean,
Africa, Asia and Europe. Revenue from this segment consists of product and infrastructure sales to
our licensees, royalties and license fees.
We record additions to deferred revenue for international license fees and recognize the
revenue over the term of the license (generally ten years). Royalty revenue is recognized when
earned.
Italy is the only country outside of North America where we own and operate a stolen vehicle
recovery network. Consumers who purchase LoJack units in Italy are also required to enter into a
service contract with LoJack Italia. The terms of service contracts offered range from 12 to 84
months and are payable in full upon activation of the related unit or renewal of a previous service
contract, except for the Fleet market, whose units and tracking service is payable on a monthly
basis.
All Other Segment
Our All Other segment revenue is derived from our SCI and LoJack SafetyNet operations. SCI
revenue is derived from the sale of cargo and business information tracking devices as well as
subscription fees for monitoring service alerts and activity reporting.
LoJack SafetyNet revenue is primarily comprised of the sale of Personal Locator Units, or PLUs, and replacement parts.
Key Economic Factors and Trends and our Business
Although we have no production facilities in Japan, we do obtain materials and components from
suppliers located in Japan. As a result, we continue to monitor the effects of the earthquake and
resulting events in Japan and any potential impact on our supply chain and on the greater auto
industry. We work closely with our suppliers to minimize any disruptions and, if required, pursue
alternative sources of supply. To date, there has been no effect on our production directly
attributable to the disaster in Japan and we have maintained normal production levels in the first
quarter of 2011.
As the situation in Japan continues to develop, supply interruptions related to materials and
components from Japan could manifest themselves in the weeks ahead. Should the supply of a key
material or component from Japan be disrupted and an alternate supply not available, production of
LoJack Units could be negatively impacted thereby adversely affecting our financial condition and
results of operations.
The impact of the disaster in Japan is expected to affect the supply of automobiles for
certain manufacturers in the worldwide market beginning in June of 2011. Should the sale of LoJack
Units remain indexed to the brands experiencing the disruption our sales volumes could be
negatively impacted thereby adversely affecting our financial condition and results of operations.
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North America Segment
In 2010, our North American business began to stabilize after being adversely affected by the
general economic climate. The turnaround of the United States auto industry which was uneven during
2010 appeared to stabilize in the first quarter of 2011. The seasonally adjusted annual rate, or
SAAR, improved to approximately 11.5 million new vehicles in 2010 with industry experts now
estimating new vehicle sales to be upwards of 13.0 million new vehicles for 2011. The availability
of credit, expanded lease offerings and aggressive incentives offered by auto manufacturers have
driven increased consumer purchases. The auto market in the U.S. has experienced some brand
rotation, in that brands with which our penetration rates have been historically high are growing
more slowly than brands where we have lower penetration rates. LoJacks unit volume performance in
the U.S. has improved but not proportionately to the retail market trends due to the shift in auto
brand popularity. The growth in leased vehicles coupled with the growth in auto brands where LoJack
has typically had low penetration provides an opportunity for new sources of sustained income for
us.
We have developed and are investing in new sales programs to address the growth in leased
vehicles as well as those auto brands where LoJack has relatively low penetration. We are
strategically restructuring our relationships with targeted dealers to make it easier for them to
sell our solutions, increase their profits and create a new business model. We continue to develop
arrangements with major finance companies to help improve the availability of credit for consumers
to ensure that the LoJack Unit and related products can continue to be financed as a part of the
purchase price of the vehicle. We are also implementing a more robust system interface with our
dealers and are offering expanded services to our dealers to generate higher penetration rates and
stronger long term relationships.
Our business in Canada has been adversely affected by performance of the technology since the
conversion from an analog to digital infrastructure. As a result, management decided to and has
built out the necessary infrastructure to launch the LoJack technology in our Canadian market
during the first quarter of 2011.
Additionally, our business in Canada has been challenged by the economic and credit conditions
in Canada and the continued shift in the Canadian auto market away from high-end vehicles, where we
have historically had a high penetration rate. In 2010, management took steps to reduce our
workforce, both domestically and in Canada, in order to lower costs and ensure that we are spending
at a level appropriate for the size of our business.
International Segment
Our international business stabilized in 2010 as our licensees returned to more normalized
purchasing patterns and their orders reflected increased demand for our products. Our results from
our International segment reflected the growth in sales across our licensees, particularly those in
Africa and Latin America. Additionally, some of our licensees have begun to take delivery of our
new self-powered product. In the past, we have experienced some seasonal fluctuation in the
business, primarily with respect to the International segment, with sales in many of our
international markets tending to be higher in the fourth quarter of the year to meet demand caused
by insurance mandates. First quarter sales have tended to be the lowest. As a result, revenue and
operating results for the first quarter typically have been lower than other quarters. The level of
revenue in the first quarter of 2011 for international business is consistent with historical
seasonality trends.
Our business in Italy is continuing to gain traction and delivered growth in terms of both
revenue and subscribers during 2010 and the first quarter of 2011. While we entered 2010 with
approximately 3,000 subscribers in Italy, we added 10,000 net new subscribers during the year
ended December 31, 2010. We continued at that pace, adding an additional 2,000 net new
subscribers in Italy during the quarter ended March 31, 2011.
All Other Segment
The challenges we have faced in the automotive sector have reinforced the importance of our
diversification efforts, which include the extension of the LoJack brand and the introduction of
products for cargo and people at risk.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. As
such, management is required to make certain estimates, judgments and assumptions that it believes
are reasonable based on the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses for the periods presented. The significant accounting policies and
estimates which management believes are the most critical to aid in fully understanding and
evaluating our reported financial results include revenue recognition and deferred revenue,
accounts receivable, valuation of investments, and income taxes. These critical accounting policies and estimates are the same as those detailed in our Annual
Report on Form 10-K for the year ended December 31, 2010.
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Results of Operations for the three months ended March 31, 2011 versus the three months ended
March 31, 2010
Revenue
Revenue for the three months ended March 31, 2011 decreased by $449,000 as compared to the
same period in 2010. The following table presents revenue by our segments (in thousands):
Three Months Ended | ||||||||||||
March 31, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
North America |
$ | 22,367 | $ | 23,052 | (3 | )% | ||||||
International |
7,214 | 6,873 | 5 | |||||||||
All Other |
758 | 863 | (12 | ) | ||||||||
Total revenue |
$ | 30,339 | $ | 30,788 | (1 | )% | ||||||
Revenue related to our North America segment decreased by $685,000 for the three months ended
March 31, 2011, as compared to the same period in 2010.
Revenue for our dealer channel was flat when compared to the same period in 2010. Revenue for
our heavy equipment, or commercial, channel increased 38% over the prior period. Our motorcycle
and our direct distribution channels in the United States market saw revenue declines of 15% and
27%, respectively, as compared to the same period in 2010.
The activity that resulted in a 3% decrease in our North America segment revenue for the three
months ended March 31, 2011 as compared to the same period in 2010 was primarily attributable to:
| A decrease of $412,000, or 3%, in revenue from LoJack units, primarily due to a 10%
decrease in the average revenue per unit sold, partially offset by a 7% increase in the
number of units sold as compared to the same period in 2010; |
| A decrease of $376,000, or 12%, in Boomerang unit and service revenue, driven by a 60%
decrease in the number of base units sold from 2,600 to 1,100, partially offset by a 15%
increase in the average revenue per unit, and a decrease of 3% in service revenue driven by
a 8% decline in the average number of subscribers to 61,000 subscribers for the three months
ended March 31, 2011; and |
| A decrease of $576,000 in all other revenue including a decrease of $76,000 in revenue
from the motorcycle channel, a decrease of $66,000 in royalty revenue, a decrease of
$208,000 relating to increased sales referral discounts offered to our dealers and a decrease of $311,000 in
revenue generated from repairs and inspections, partially offset by an increase of $85,000
in other revenue items. |
The decrease in revenue from our North America segment for the three months ended March 31,
2011 as compared to the same period in 2010 was partially offset by an increase of $679,000, or
15%, in the recognition of deferred revenue from our Early Warning and warranty products.
Revenue related to our International segment increased $341,000 for the three months ended
March 31, 2011, as compared to the same period in 2010, primarily due to:
| An increase of $309,000, or 5%, in product revenue from our licensees and Italy due to a
2,700 increase in the number of units sold in the first quarter of 2011 compared to the same
period in 2010, combined with a 2% increase in average revenue per unit; and |
| An increase of $34,000, or 5%, in revenue from infrastructure, royalty, license fee, and
other revenue. |
Revenue related to our All Other segment decreased $105,000 for the three months ended March
31, 2011 compared to the same period in 2010. The decrease was primarily the result of a decrease
in SafetyNet product shipments to Project Lifesaver during the three months ended March 31, 2011,
compared to the same period in 2010. The decrease in SafetyNet revenue for the three months
ended March 31, 2011 as compared to the same period in 2010 was partially offset by an
increase of $56,800, or 9%, in the revenue from SCI.
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Cost of Goods Sold
The following table presents cost of goods sold by our segments (in thousands):
Three Months Ended | ||||||||||||
March 31, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
North America |
$ | 11,308 | $ | 12,256 | (8 | )% | ||||||
International |
3,730 | 3,705 | 1 | |||||||||
All Other |
261 | 371 | (30 | ) | ||||||||
Total cost of goods sold |
$ | 15,299 | $ | 16,332 | (6 | )% | ||||||
As a percentage of total revenue, total cost of goods sold was 50% and 53% for the three
months ended March 31, 2011 and 2010, respectively.
As a percentage of North America revenue, cost of goods sold relating to our North America
segment was 51% and 53% for the three months ended March 31, 2011 and 2010, respectively. The
decrease in cost of goods sold as a percentage of revenue is due to higher margins on products sold
for the three months ended March 31, 2011, driven by the product mix with more sales in the
commercial, or heavy equipment channel and fewer sales through the bulk installation program
through the dealer channel compared to the same period in 2010.
As a percentage of International revenue, cost of goods sold relating to our International
segment was 52% and 54% for the three months ended March 31, 2011 and 2010, respectively. The
decrease in cost of goods sold as a percentage of revenue from the prior year reflects the mix of
sales between product, royalty and infrastructure components, which have differing margins.
As a percentage of revenue, our cost of goods sold associated with the All Other segment for
the three months ended March 31, 2011 and 2010 was 34% and 43%, respectively.
Operating Expenses
The following table presents our operating expenses (in thousands):
Three Months Ended | ||||||||||||
March 31, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
Product development |
$ | 1,449 | $ | 1,924 | (25 | )% | ||||||
Sales and marketing |
6,585 | 7,469 | (12 | ) | ||||||||
General and administrative |
7,983 | 9,242 | (14 | ) | ||||||||
Depreciation and amortization |
1,666 | 1,735 | (4 | ) | ||||||||
Total operating expenses |
$ | 17,683 | $ | 20,370 | (13 | )% | ||||||
Product Development
As a percentage of total revenue, product development expenses were 5% and 6% for the three
months ended March 31, 2011 and 2010, respectively.
Product development expenses decreased $475,000 for the three months ended March 31, 2011 as
compared to the same period in 2010, primarily due to a decrease of $407,000 in compensation
expenses related to workforce reductions completed in the second quarter of 2010.
Sales and Marketing
As a percentage of total revenue, sales and marketing expenses were 22% and 24% for the three
months ended March 31, 2011 and 2010, respectively.
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The decrease of $884,000 of sales and marketing expenses for the three months ended March 31,
2011 as compared to the same period in 2010 was primarily attributable to:
| Decreased compensation expenses of $420,000 as compared to the same period in 2010,
including $591,000 of lower salary expense caused by workforce reductions completed in the
second quarter of 2010, partially offset by increased sales commissions of $292,000; |
| Decreased travel expenses of $135,000 as compared to the same period in 2010; and |
| Decreased advertising expenses of $120,000 due to managements decision to reduce
advertising expenses as a cost saving measure. |
General and Administrative
As a percentage of total revenue, general and administrative expenses were 26% and 30% for the
three months ended March 31, 2011 and 2010, respectively.
The decrease of general and administrative expenses of $1,259,000, for the three months ended
March 31, 2011 as compared to the same period in 2010 was primarily attributable to:
| Decreased compensation expenses of $874,000 related to workforce reductions completed in
the second quarter of 2010; |
| Decreased sales taxes expense of $402,000 due to the reversal of a prior year accrual for
custom tariffs no longer owed; |
| Decreased consulting expenses of $252,000 associated with consulting fees paid to
establish a strategic marketing plan having only been included in the three months ended
March 31, 2010; |
| Decreased administrative expenses of $153,000 in our All Other segment primarily related
to lower professional services and compensation expenses at SCI related to workforce
reductions completed in 2010; and |
| Decreased miscellaneous expenses of $338,000 which is the difference between the amount
accrued during the three months ended March 31, 2010 for a loss contingency related to wage
and hour related litigation in California and the accrual recorded during the three months
ended March 31, 2011 for the settlement of the consumer claims litigation in California
discussed in Part II, Item 1, Legal Proceedings; |
The decrease in general and administrative expenses for the three months ended March 31, 2011
as compared to the same period in 2010 was partially offset by increased legal expenses of $790,000
which were primarily attributable to the costs associated with the litigation discussed in Part II,
Item 1, Legal Proceedings.
Depreciation and Amortization
As a percentage of total revenue, depreciation and amortization expenses were 5% and 6% for
the three months ended March 31, 2011 and 2010, respectively.
Depreciation and amortization expenses decreased by $69,000, for the three months ended March
31, 2011 as compared to the same period in 2010. The decrease is primarily related to certain
assets being fully depreciated during 2010 and the three months ended March 31, 2011.
Other Income (Expense)
The following table presents our other income (expense) (in thousands):
Three Months Ended | ||||||||||||
March 31, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
Interest income |
$ | 730 | $ | 97 | 653 | % | ||||||
Interest expense |
(164 | ) | (173 | ) | (5 | ) | ||||||
Other income |
666 | 414 | 61 | |||||||||
Total other income |
$ | 1,232 | $ | 338 | 264 | % | ||||||
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Total other income for the three months ended March 31, 2011 increased by $894,000 as compared
to the same period in 2010. This change is primarily attributable to the following:
| Increased interest income of $633,000, which is primarily attributable to $676,000 of
interest received on our licensee receivable balances in 2011 which is only recognized upon collection,
offset by lower interest rates earned on our average cash balances; |
| Decreased interest expense of $9,000, which is primarily attributable to a lower average
debt balance partially offset by higher interest rates; and |
| Increased other income of $252,000 which is primarily attributable to a $765,000 increase
in gains related to foreign currency transactions, offset by a $513,000 decrease in the
income associated with our marketable securities, primarily related to the valuation of the
Absolute common stock we hold and the investments in our deferred compensation plan. |
Provision for Income Taxes
We recorded a $221,000 provision for income taxes for the three months ended March 31, 2011,
largely comprised of a provision for income taxes for our Brazilian subsidiary. The effective
income tax rate for the three month period ended March 31, 2011 was lower than our federal
statutory rate in large part because no U.S. income tax benefit was recorded with respect to the
losses in the U.S. for the three months ended March 31, 2011 due to the valuation allowance on our
net U.S. deferred tax assets that was established in the quarter ended June 30, 2010 and our
unbenefited foreign losses. Unbenefited foreign losses are pre-tax losses in foreign jurisdictions
for which we record no foreign tax benefit. Additionally, our favorable tax rate in Ireland
contributed to a low provision for income taxes for the three month period ended March 31, 2011.
Net Loss Per Share Attributable to LoJack Corporation
As a result of the foregoing, the net loss attributable to LoJack Corporation decreased by
$3,972,000 from a net loss of $5,578,000 for the three months ended March 31, 2010, to a net loss
of $1,606,000 for the three months ended March 31, 2011. For the three months ended March 31, 2011,
the net loss per share attributable to LoJack Corporation was $0.09 per diluted share as compared
to a net loss of $0.32 per diluted share in the same period in 2010.
Recently Adopted Accounting Guidance
In January 2010, the FASB revised accounting standards related to fair value measurements to
expand disclosure requirements to include significant transfers of assets and liabilities in and
out of Level 1 and Level 2 fair value measurements and the reasons for those transfers, as well as
a gross presentation of purchases, sales, issuances and settlements within the rollforward of
changes in Level 3 assets and liabilities. The revised standards also provide clarification to
existing fair value disclosure requirements related to the level of disaggregation and disclosure
about inputs and valuation techniques. Most of these revised accounting standards were effective
and adopted by us in the first quarter of 2010 and had no impact on the consolidated balance sheet,
statement of operations, or statement of cash flows. Certain requirements related to the gross
presentation of activity in the rollforward of changes in Level 3 assets and liabilities became
effective for fiscal years beginning after December 15, 2010 and for interim reporting
periods within those fiscal years.
In September 2009, the FASB issued ASU No. 2009-13 (previously Emerging Issues Task Force, or
EITF, Issue No. 08-1, Revenue Arrangements with Multiple Deliverables) as codified in ASC 605,
Revenue Recognition, or ASC 605. ASC 605 provides greater ability to separate and allocate
arrangement consideration in a multiple element revenue arrangement. In addition, ASC 605 requires
the use of estimated selling price to allocate arrangement considerations, therefore eliminating
the use of the residual method of accounting. ASC 605 became effective for fiscal years beginning
after June 15, 2010 and may be applied retrospectively or prospectively for new or materially
modified arrangements. Earlier application is permitted. The adoption of ASC 605 did not have a
material impact on our consolidated financial position, results of operations, or cash flows.
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Liquidity and Capital Resources
Our liquidity is primarily contingent on continued customer demand for our products and
services and continuing our existing relationships with automobile dealers, insurance companies,
international licensees and certain law enforcement agencies. In response
to trends in the automotive industry, we developed, and in the fourth quarter of 2009 we
launched, our next generation, self-powered, product which enables us to expand into the hybrid
auto segment, further expedite installations and provide the opportunity for covert installation of
the LoJack units in a greater number of locations within a vehicle. We believe that we will be able
to keep pace with required technological changes in our products and expect that our sales and
marketing initiatives will continue to drive demand.
On August 10, 2010, SCI issued a one year, 11% interest Convertible Promissory Note totaling
$400,000 to its shareholders. As a 64% holder of SCI, a $254,000 note was issued to LoJack
Corporation and is considered an intercompany loan, eliminated in consolidation. The remaining
$146,000 due to the noncontrolling holders of SCI is considered a third-party loan and as such is
classified as short-term debt on our consolidated balance sheet.
On December 29, 2009, we entered into a two year multicurrency revolving credit agreement, or
the Credit Agreement, with RBS Citizens, N.A., as Lender, Administrative Agent and Lead Arranger,
and TD Bank, N.A., as a Lender and Issuing Bank. The Credit Agreement provides for a multicurrency
revolving credit facility in the maximum amount of USD $30,000,000, subject to a borrowing base
calculation (or its equivalent in alternate currencies). We have the right to increase the
aggregate amount available to be borrowed under the Credit Agreement to USD $50,000,000, subject to
certain conditions, including consent of the lenders.
We entered into two amendments to the Credit Agreement during 2010. The first amendment,
entered into on June 30, 2010, allowed for certain one-time severance costs that would otherwise be
deducted in calculating Consolidated Net Income to be added back in determining Consolidated EBITDA
for the purpose of determining the Debt Service Coverage Ratio covenant for the quarters ending
June 30, 2010 and September 30, 2010. The second amendment, entered into on December 29, 2010,
extended the maturity date of the revolving credit loans to January 10, 2014, increased the
Companys authorization for stock repurchase to $10,000,000 and amended the definitions of
Applicable Margin, Consolidated EBITDA and Interest Payment Date.
As of March 31, 2011, we had a total of CAD $11,288,000 (USD $11,642,000) outstanding
borrowings under the Credit Agreement. Of the outstanding borrowings at March 31, 2011, a total of
CAD $9,300,000 (USD $9,592,000) were denominated in Canadian Dollars and CAD $1,988,000 (USD
$2,050,000) were denominated in US Dollars. The interest rate on borrowings under the Credit
Agreement varies depending on our choice of interest rate and currency options, plus an applicable
margin. The interest rates in effect as of March 31, 2011 were 4.1% for the Canadian Dollar
denominated borrowings and 3.3% for the US Dollar denominated borrowings. As of March 31, 2011, we
also had three outstanding irrevocable letters of credit in the aggregate amount of $1,313,000.
These letters of credit reduce our outstanding borrowing availability under the Credit Agreement.
The Credit Agreement contains limitations on capital expenditures, repurchases of common
stock, certain investments, acquisitions and/or mergers and prohibits disposition of assets other
than in the normal course of business. Additionally, we are required to maintain certain financial
performance measures including maximum leverage ratio, minimum cash flow coverage ratio, minimum
quick ratio and maximum capital expenditures. The payment of dividends is permitted but is limited
only to the extent such payments do not affect our ability to meet certain financial performance
measures. Failure to maintain compliance with covenants could impair the availability of loans
under the facility. At March 31, 2011, based upon the borrowing base calculation, we had borrowing
availability of $18,367,000. At March 31, 2011, we were in compliance with all financial covenants
in the Credit Agreement.
The Credit Agreement terminates on January 10, 2014, at which point all amounts outstanding
under the revolving credit facility are due. The Credit Agreement is guaranteed by our United
States domestic subsidiaries and certain Canadian subsidiaries and is secured by all domestic
assets, including our intellectual property and a pledge of 100% of the stock of Boomerang and 65%
of the capital stock of LoJack Ireland.
In recent years, we have made no attempt to raise capital from external sources nor do we have
any credit rated debt outstanding. Therefore, it is difficult to predict whether any efforts to
raise capital would be successful. Furthermore, we believe our ability to raise such funds may be
limited due to the condition of the automotive industry and the United States economy as a whole.
If additional equity securities were to be issued, shareholder value would be diluted and the new
equity securities may have rights, preferences or privileges senior to those of our common stock.
On February 15, 2008, our Board of Directors authorized the repurchase of 1,000,000 shares of
our common stock under a trading plan intended to comply with Rule 10b5-1 under the Securities
Exchange Act or 1934, or Exchange Act, and additionally renewed the remaining management discretion
authority to repurchase an incremental 2,000,000 shares, for a total repurchase authorization of
3,000,000 shares. We did not repurchase any shares under the stock repurchase plan in the first
quarter of 2011 and given the current capital market environment, we do not expect to repurchase
any stock under the repurchase program in 2011. At March 31, 2011, 1,681,778 shares remained
available for repurchase under our 2006 repurchase plan.
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We expect our initiative to own and operate the Italian stolen vehicle recovery network,
expand the LoJack SafetyNet business in the United States, Boomerangs and SCIs operating cash
deficits, combined with our longer term international investment requirements and domestic
expansion, to be funded using existing cash, cash flows from operations and, if needed, our
existing credit facility.
We expect capital expenditures for 2011 to be between $4,000,000 and $6,000,000 which we
expect to fund out of our existing working capital, which was $50,710,000 as of March 31, 2011 and
included $52,153,000 of cash and cash equivalents. Non-discretionary capital expenditures budgeted
for 2011 include: $2,500,000 to $3,000,000 for enhancement of our core tracking and recovery
technology; and $500,000 to $1,000,000 for enhancements to our internal systems and technology
infrastructure. Discretionary expenditures for 2011, which could be delayed to a future period,
include $1,000,000 to $2,000,000 for additional hardware infrastructure and system upgrades.
However, we currently have no plans to delay these projects or reduce these spending levels. For
the quarter ended March 31, 2011, we had capital expenditures of $693,000.
If we decide to pursue significant opportunities in domestic and international markets, we may
be required to find sources of capital in addition to existing working capital. We believe the
sources currently available to us will be adequate for the next 12 months and on a long-term basis.
We plan to fund our existing operations, including capital expenditures, using existing cash and
cash equivalents, cash flows from operations and, if needed, the existing Credit Agreement
discussed above.
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Our cash flows from operating, investing and financing activities, as reflected in the
consolidated statements of cash flows, are summarized in the following table (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash provided (used) by: |
||||||||
Operating activities |
$ | (1,155 | ) | $ | (2,934 | ) | ||
Investing activities |
(593 | ) | 454 | |||||
Financing activities |
2,545 | (2,820 | ) | |||||
Effect of exchange rate changes on cash |
(433 | ) | (109 | ) | ||||
Increase (decrease) in cash and cash equivalents |
$ | 364 | $ | (5,409 | ) | |||
Cash used by operating activities decreased by $1,779,000 during the three months ended March
31, 2011, compared to the same period in 2010. The decrease was primarily attributable to a net
increase of $3,287,000 in earnings excluding non cash items, partially offset by an increase in
cash used by other working capital items of $1,508,000.
Investing activities used $593,000 of cash during the three months ended March 31, 2011, as
compared to providing $454,000 of cash during the same period in 2010. The $1,047,000 change was
primarily due to a decrease in the net proceeds from our marketable securities activity of
$1,223,000, a decrease in restricted cash activity of $503,000, partially offset by a decrease in
capital expenditures of $679,000.
Financing activities provided $2,545,000 of cash during the three months ended March 31, 2011,
as compared to using $2,820,000 of cash during the same period in 2010. The $5,365,000 change was
primarily attributable to a decrease in the repayment, net of proceeds, of our debt and short term
borrowings of $5,207,000 under our existing Credit Agreement, an increase of $40,000 received in
connection with stock options exercised during the quarter, and a decrease in tax withholding
related to stock grants and lapses of $118,000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have limited exposure to market risk due to the nature of the financial instruments carried
on our consolidated balance sheet. Our financial instruments as of March 31, 2011 consisted of cash
and cash equivalents, restricted cash, marketable securities, other assets, accounts receivable,
accounts payable, accrued liabilities, long-term debt and credit facilities. Our financial position
is subject to market risk, including, but not limited to, changes in the value of financial
instruments including those resulting from changes in interest rates, foreign currency exchange
rates and market valuation. As of March 31, 2011, the fair value of these financial instruments
approximated their carrying values.
We are exposed to changes in interest rates primarily through amounts outstanding under our
Credit Agreement. As of March 31, 2011, we analyzed the effect of interest rates on our
variable-rate Credit Agreement, for which there was CAD $11,288,000 (equivalent to USD $11,642,000)
of outstanding borrowings as of March 31, 2011. Based on the outstanding borrowings under the
agreement at March 31, 2011, a 1% increase in the interest rate would result in an additional
$116,000 of annual interest expense.
We are subject to foreign currency risk through our international operations. As of March 31,
2011, we held cash denominated in foreign currencies, primarily in Euro, Canadian Dollar, and
Brazilian Real. These assets accounted for approximately 10% of our total cash and cash equivalents
at March 31, 2011. We translate accounts for subsidiaries whose functional currency is not the US
Dollar using exchange rates in effect at period-end for assets and liabilities, and exchange rates
averaged over the period for results of operations. The related translation adjustments are
reported in accumulated other comprehensive income in equity. Transaction gains and losses are
reported in the consolidated statement of operations. As a result, both positive and negative
currency fluctuations against the US Dollar may affect our results of operations and accumulated
other comprehensive income. Our exposure to foreign currency exchange risk is minimized in relation
to our results of operations since a significant portion of our International segment revenue is
denominated in US Dollars. This situation may change in the future if revenue earned and expenses
incurred denominated in foreign currencies increases.
We manage future foreign exchange risk exposures that cause both earnings and cash volatility
by utilizing a hedging strategy if the exposure is material and the hedge is cost effective. As of
March 31, 2011, we had no derivative contracts outstanding. We do not enter into financial
instrument transactions for trading or speculative purposes. We have not established any special
purpose entities
and do not have any material off balance sheet financing transactions. We will continue to
monitor our foreign currency exposure and will implement a hedging strategy if we feel that we are
materially at risk and that the hedge is cost effective.
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We are exposed to market valuation risks related to securities we hold that are carried at
fair value. Our marketable securities consist of Absolute common stock carried at fair value in the
financial statements. Significant changes in the market price of Absolutes common stock could
result in significant changes in other income (expense). Based on the 366,500 shares held as of
March 31, 2011, a $1.00 change in the market price of Absolutes common stock would result in a
$367,000 increase/decrease in the fair value of the shares. Our other assets include our investment
in our French licensee, in the form of a publicly traded common stock, accounted for as an
available-for-sale security and valued at the quoted closing price on its market exchange as of the
reporting date. Unrealized gains or losses on available-for-sale securities are included, net of
tax, in accumulated other comprehensive income in equity until the disposition of the security.
During the quarter ended March 31, 2011, we recorded $71,000 in unrealized losses in accumulated
other comprehensive income. Realized gains and losses on available-for-sale securities are included
in other income (expense). No realized gains or losses were recorded for the quarter ended March
31, 2011.
As of March 31, 2011 we held $52,153,000 of cash and cash equivalents. Of this balance,
$5,218,000, or 10%, is denominated in foreign currencies, including the Canadian Dollar, Euro and
Brazilian Real. The remaining $46,935,000, or 90%, is denominated in US Dollars. At March 31, 2011,
$26,794,000, or 51%, of our total cash and cash equivalents balance was held in money market
accounts, with the remaining $25,359,000 held in traditional deposit accounts.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal
financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive
officer and principal financial officer have concluded that as of such date, our disclosure
controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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PART IIOTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 2011, we were subject to various legal proceedings and claims discussed below,
as well as certain other legal proceedings and claims that have not been fully resolved and that
have arisen in the ordinary course of business. The results of legal proceedings cannot be
predicted with certainty. Should we fail to prevail in any of these legal matters, our financial
condition and results of operations could be materially adversely affected.
California Class Action Litigations
Employee Claims
In April 2006, a suit entitled Mike Rutti vs. LoJack Corporation, Inc. was filed
in the United States District Court for the Central District of California by an
employee alleging violations of the Fair Labor Standards Act, the California Labor Code and the
California Business & Professions Code, and seeking class action status (the Federal Court Case).
In September 2007, our motion for summary judgment was granted and the district court dismissed all
of the plaintiffs federal law claims. The plaintiff appealed the dismissal to the Ninth Circuit
Court of Appeals and in August 2009, the Ninth Circuit affirmed the district courts grant of
summary judgment on all claims except as to the claim for compensation for the required
postliminary data transmission, or the data transmission claim, for which the dismissal was
vacated. The plaintiff filed a petition for rehearing to the Ninth Circuit and on March 2, 2010,
the Ninth Circuit affirmed the district courts grant of summary judgment on all claims except as
to (a) the claim for compensation for commuting under state law and (b) the data transmission
claim, which are the two remaining claims. The plaintiff seeks to pursue the claim for compensation
for commuting time in the State Court Case referenced below. The plaintiff moved for conditional
class certification for the data transmission claim and on January 14, 2011, the District Court for
the Central District of California granted the plaintiffs motion for conditional certification.
Trial for this claim in federal court is currently scheduled for November 2011.
Due to the dismissal of the plaintiffs claims in federal court in September 2007 as discussed
above, in November 2007, the plaintiff also filed Mike Rutti, Gerson Anaya vs. LoJack Corporation,
Inc. comprising its state law claims in California State Court (the State Court Case). In June
2009, the California State Court granted class certification with respect to nine claims and denied
class certification with respect to five claims. The Company appealed this decision and on March
26, 2010, the California State Appellate Court granted our appeal in part, denying certification
with respect to certain claims and affirming certification with respect to other claims, including
claims related to meal and rest breaks, postliminary data transmission, and time traveling to UPS
stores. There are currently six claims class certified in this State Court Case.
In both the Federal and State Court Cases, the plaintiff, on behalf of the class, seeks unpaid
wages, penalties, interest and attorneys fees.
On February 14, 2011, the Company filed a Notice of Removal to remove this State Court Case to
Federal Court, thereby requesting to consolidate both the Federal and State Court Cases to be heard
in Federal Court and the plaintiff filed for a motion to remand the Federal Court Case to State
Court. On April 15, 2011, the United States District Court for the Central District of California
granted the plaintiffs motion to remand the State Court Case to the California State Court. On
April 29, 2011, the Company filed a petition for leave to appeal the decision to remand. The
parties are currently awaiting the Ninth Circuits determination as to whether it will hear the
appeal.
The Company believes that it has substantial legal and factual defenses to these claims and
intends to defend its interests vigorously.
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Consumer Claims
On June 15, 2010, a suit entitled Louis Morin v. LoJack Corp., Inc., et al was filed by a
consumer in the Los Angeles County Superior Court of the State of
California (Central District) alleging, amongst other claims, violations of the California
Consumers Legal Remedies Act, the California Business and Professions Code § 17200 (unfair
competition) and § 17500 (false advertising), and breach of implied warranty with respect to LoJack
Early Warning for motorcycles, and seeking class action status. On July 29, 2010, the Company
removed the case to the United States District Court for the Central District Court of California.
On August 23, 2010, the Company filed a motion to dismiss all claims, which was granted by the
Court on September 27, 2010, without prejudice. The dismissal without prejudice provided the
plaintiff with the opportunity to amend its complaint, and on
October 25, 2010, the plaintiff filed an amended complaint, for alleged fraud, violations of
the California Consumers Legal Remedies Act, the California Business and Professions Code § 17200
(unfair competition) and § 17500 (false advertising), and breach of implied warranty and again
sought class certification. On November 12, 2010, the Company filed a motion to dismiss all claims
and a motion to strike certain claims. On December 28, 2010, the Court denied the Companys motion
to dismiss. The plaintiff, on behalf of the class, sought injunctive relief, restitution,
disgorgement, punitive damages, and attorneys fees in unspecified amounts. On March 3, 2011, the
plaintiff filed a motion for class certification and the Company filed its opposition to class
certification on March 28, 2011.
The parties participated in a mediation hearing on March 29, 2011 and reached a settlement to
resolve all claims on a class-wide basis. The settlement remains subject to preliminary and final
court approval by the United States District Court for the Central District of California and
notice to the class. A hearing for preliminary approval is scheduled for May 16, 2011. Pursuant
to the terms of the settlement, the Company would revise its disclosures in motorcycle related
marketing materials and provide class members with a twelve-month extension of the terms of the
Companys Limited Recovery Warranty. The Company would also pay an enhancement award of $20,000 to
the named plaintiff and would pay the plaintiffs attorneys fees and costs up to $415,000. Under
the terms of the settlement, the Company would receive a release by all potential class members who
do not affirmatively opt out of the settlement. Nothing in the settlement agreement constitutes an
admission of any wrongdoing, liability or violation of law by the Company. Rather, the Company has
signed the settlement agreement to resolve the litigation, thereby eliminating the
uncertainties and expense of further protracted litigation.
New York Litigation
On October 13, 2010, a suit was filed by G.L.M. Security & Sound, Inc. against LoJack
Corporation in United States District Court for the Eastern District of New York alleging breach of
contract, misrepresentation, violation of the New York franchise law, and price discrimination. The
plaintiff seeks damages of $10,000,000, punitive damages, interest and attorneys fees, and treble
damages. On December 14, 2010, the Company filed a motion to dismiss all claims. On February 1,
2011, the plaintiff filed a motion to amend the complaint and sought to add a claim for breach of
fiduciary duty. On February 15, 2011, the Company filed its opposition to the motion to amend and
sought the dismissal of all claims. The parties are currently awaiting the Courts decision. The
Company believes that it has substantial legal and factual defenses to these claims and intends to
defend its interests vigorously.
Brazilian Licensee Arbitration Demands
On March 21, 2011, the Company received a demand for arbitration with the American Arbitration
Association. The demand was filed by Global Tracking Tech., Ltd. and Tracker do Brasil LTDA, which
license the LoJack technology in Brazil. The demand alleges that the Company failed to maintain a
patent for the stolen vehicle recovery system in Brazil and includes claims for breach of contract,
breach of the implied covenant of good faith and fair dealing, and violation of Mass. Gen Laws c.
93A. The claimant seeks $111,500,000 in damages, treble damages, and attorneys fees and costs.
Also on March 21, 2011, the Company received a separate demand for arbitration with the
American Arbitration Association, filed by the same licensee, alleging breach of contract, breach
of the implied covenant of good faith and fair dealing and violation of Mass. Gen Laws c. 93A
relating to product pricing and the fulfillment of purchase orders to the licensee. The claimant
seeks, amongst other things, $289,500,000 in actual damages, treble damages, attorneys fees,
declaratory and injunctive relief.
The Company believes that it has substantial legal and factual defenses to these claims and
intends to defend its interests vigorously.
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Item 1A. Risk Factors
In addition to the information set forth in this Form 10-Q, you should carefully consider the
risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2010, which could materially affect our business, financial condition, or future
results. The following updates our risk factors included in our 2010 Form 10-K:
Production and supply chain disruptions caused by the earthquake and tsunami that struck Japan in
March 2011 could materially adversely impact our sales.
The earthquake and tsunami that struck Japan on March 11, 2011 have caused significant
production and supply chain disruptions for automotive manufacturers which have resulted in
significantly reduced new vehicle production by Japanese manufacturers, both in and outside of
Japan. These disruptions could also impact non-Japanese manufacturers, since many of them rely on
components produced in Japan. Any reduction in the availability of new vehicles to automotive
dealers could adversely affect
the sales of our LoJack products. In addition, the subsequent effects of the supply chain
disruptions could adversely affect our ability to obtain components used in the manufacture of our
LoJack stolen vehicle recovery units and/or may affect the price at which we may be able to obtain
such components. The duration of these disruptions, and the resulting impact on our business, are
uncertain at this time, and there can be no assurance that such disruptions will not have a
material adverse impact on sales and/or results of operations.
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Item 6. Exhibits
(a) Exhibits
Exhibit | ||||
No. | Description | |||
3.1 | Amended and Restated Bylaws of LoJack Corporation (as
adopted on February 11, 2011) (incorporated by reference
to the Companys Current Report on Form 8-K, filed with
the Commission on February 11, 2011, File No. 001-08439). |
|||
10.1 | Second Amendment to Credit Agreement dated as of December
29, 2010 by and among LoJack Corporation, RBS Citizens,
N.A. and TD Bank, N.A. (incorporated by reference to the
Companys Current Report on Form 8-K, filed with the
Commission on January 4, 2011, File No. 001-08439). |
|||
31.1 | * | Rule 13a-14(a)/15(d)-14(a) Certification. |
||
31.2 | * | Rule 13a-14(a)/15(d)-14(a) Certification. |
||
32 | ** | Certification Pursuant to 18 U.S.C. Section 1350. |
* | Indicates an exhibit which is filed herewith. |
|
** | Indicates an exhibit which is furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LoJack Corporation Registrant |
||||
Date: May 9, 2011 | By: | /s/ Richard T. Riley | ||
Richard T. Riley | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: May 9, 2011 | By: | /s/ Timothy P. OConnor | ||
Timothy P. OConnor | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) |
30