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EXCEL - IDEA: XBRL DOCUMENT - LOJACK CORP | Financial_Report.xls |
EX-32 - EXHIBIT 32 - LOJACK CORP | c22232exv32.htm |
EX-10.1 - EXHIBIT 10.1 - LOJACK CORP | c22232exv10w1.htm |
EX-31.1 - EXHIBIT 31.1 - LOJACK CORP | c22232exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - LOJACK CORP | c22232exv31w2.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 September 30, 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
þ 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 November 2, 2011, there were 18,426,761 shares of our common stock issued and
outstanding.
LOJACK CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 51,674 | $ | 51,789 | ||||
Restricted cash |
| 175 | ||||||
Marketable securities at fair value |
1,386 | 1,365 | ||||||
Accounts receivable, net of allowances of $2,986 and $3,534, respectively |
21,527 | 26,897 | ||||||
Inventories |
8,649 | 8,506 | ||||||
Prepaid and other expenses |
2,768 | 4,036 | ||||||
Prepaid and receivable income taxes |
616 | 657 | ||||||
Deferred income taxes |
308 | 308 | ||||||
Total current assets |
86,928 | 93,733 | ||||||
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $50,069 and
$46,206 respectively |
12,384 | 15,114 | ||||||
DEFERRED INCOME TAXES |
116 | 101 | ||||||
INTANGIBLE ASSETSNET |
113 | 294 | ||||||
GOODWILL |
1,717 | 1,717 | ||||||
OTHER ASSETSNET |
8,886 | 11,352 | ||||||
TOTAL ASSETS |
$ | 110,144 | $ | 122,311 | ||||
LIABILITIES AND EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Short term debt |
$ | 146 | $ | 146 | ||||
Accounts payable |
4,755 | 7,097 | ||||||
Accrued and other liabilities |
10,343 | 11,111 | ||||||
Current portion of deferred revenue |
19,971 | 21,824 | ||||||
Accrued compensation |
3,524 | 4,681 | ||||||
Total current liabilities |
38,739 | 44,859 | ||||||
LONG TERM DEBT |
9,445 | 8,798 | ||||||
DEFERRED REVENUE |
23,612 | 28,834 | ||||||
DEFERRED INCOME TAXES |
308 | 308 | ||||||
OTHER ACCRUED LIABILITIES |
3,635 | 3,503 | ||||||
ACCRUED COMPENSATION |
1,211 | 1,633 | ||||||
Total liabilities |
76,950 | 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 18,426,761 at September 30, 2011 and 18,296,959 at December
31, 2010 |
184 | 183 | ||||||
Additional paid-in capital |
21,805 | 19,968 | ||||||
Accumulated other comprehensive income |
6,914 | 6,713 | ||||||
Retained earnings |
4,523 | 7,691 | ||||||
Total LoJack Corporation equity |
33,426 | 34,555 | ||||||
Noncontrolling interest in subsidiary |
(232 | ) | (179 | ) | ||||
Total equity |
33,194 | 34,376 | ||||||
TOTAL LIABILITIES AND EQUITY |
$ | 110,144 | $ | 122,311 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
1
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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenue |
$ | 34,492 | $ | 38,485 | $ | 98,352 | $ | 106,624 | ||||||||
Cost of goods sold |
16,717 | 19,126 | 48,428 | 53,310 | ||||||||||||
Gross profit |
17,775 | 19,359 | 49,924 | 53,314 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Product development |
1,326 | 1,202 | 4,005 | 4,909 | ||||||||||||
Sales and marketing |
6,897 | 6,881 | 20,098 | 22,737 | ||||||||||||
General and administrative |
8,748 | 6,644 | 24,270 | 24,674 | ||||||||||||
Depreciation and amortization |
1,296 | 1,678 | 4,634 | 5,415 | ||||||||||||
Total |
18,267 | 16,405 | 53,007 | 57,735 | ||||||||||||
Operating income (loss) |
(492 | ) | 2,954 | (3,083 | ) | (4,421 | ) | |||||||||
Other income (expense): |
||||||||||||||||
Interest income |
125 | | 945 | 230 | ||||||||||||
Interest expense |
(159 | ) | (178 | ) | (487 | ) | (488 | ) | ||||||||
Other, net |
(708 | ) | 300 | 560 | (98 | ) | ||||||||||
Total |
(742 | ) | 122 | 1,018 | (356 | ) | ||||||||||
Income (loss) before provision for income taxes |
(1,234 | ) | 3,076 | (2,065 | ) | (4,777 | ) | |||||||||
Provision for income taxes |
556 | 402 | 1,157 | 16,610 | ||||||||||||
Net income (loss) |
(1,790 | ) | 2,674 | (3,222 | ) | (21,387 | ) | |||||||||
Less: Net loss attributable to the noncontrolling interest |
(7 | ) | (49 | ) | (54 | ) | (335 | ) | ||||||||
Net income (loss) attributable to LoJack Corporation |
$ | (1,783 | ) | $ | 2,723 | $ | (3,168 | ) | $ | (21,052 | ) | |||||
Net income (loss) per share attributable to LoJack Corporation: |
||||||||||||||||
Basic |
$ | (0.10 | ) | $ | 0.16 | $ | (0.18 | ) | $ | (1.21 | ) | |||||
Diluted |
$ | (0.10 | ) | $ | 0.15 | $ | (0.18 | ) | $ | (1.21 | ) | |||||
Weighted average shares: |
||||||||||||||||
Basic |
17,678,213 | 17,378,804 | 17,601,996 | 17,330,533 | ||||||||||||
Diluted |
17,678,213 | 17,738,093 | 17,601,996 | 17,330,533 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
2
Table of Contents
LOJACK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (3,222 | ) | $ | (21,387 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: |
||||||||
Stock-based compensation |
1,916 | 2,468 | ||||||
Depreciation and amortization |
4,919 | 5,790 | ||||||
Non cash revenue from warrants |
(431 | ) | (348 | ) | ||||
Allowance for doubtful accounts |
(745 | ) | 1,034 | |||||
Deferred income taxes |
(15 | ) | 15,387 | |||||
Loss on disposal of property and equipment |
32 | 2 | ||||||
Loss on marketable securities |
| 1 | ||||||
Increase (decrease) in cash from changes in assets and liabilities: |
||||||||
Accounts receivable |
6,127 | 5,992 | ||||||
Inventories |
(174 | ) | (355 | ) | ||||
Prepaid and other expenses |
1,301 | (41 | ) | |||||
Prepaid and receivable income taxes |
38 | 1,231 | ||||||
Other assets |
(64 | ) | 599 | |||||
Accounts payable |
(2,345 | ) | (2,525 | ) | ||||
Accrued and other liabilities |
(1,794 | ) | 4,107 | |||||
Deferred revenue, net of deferred cost of goods sold |
(4,281 | ) | (4,003 | ) | ||||
Net cash provided by operating activities |
1,262 | 7,952 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Investment in property and equipment |
(2,079 | ) | (2,980 | ) | ||||
Purchase of marketable securities |
| (193 | ) | |||||
Proceeds from the sale of marketable securities |
| 1,223 | ||||||
Other |
12 | | ||||||
Restricted cash |
175 | 303 | ||||||
Net cash used by investing activities |
(1,892 | ) | (1,647 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Exercise of stock options |
44 | | ||||||
Repayment of debt |
(2,050 | ) | (6,322 | ) | ||||
Proceeds from debt |
3,173 | 719 | ||||||
Payment of tax withholding obligations related to stock |
(122 | ) | (161 | ) | ||||
Net cash provided (used) by financing activities |
1,045 | (5,764 | ) | |||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
(530 | ) | 482 | |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(115 | ) | 1,023 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
51,789 | 36,490 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 51,674 | $ | 37,513 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
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 September 30, 2011, and the results of
operations for the three and nine months ended September 30, 2011 and 2010 and cash flows for the
nine months ended September 30, 2011 and 2010. The results of operations for the three and nine
months ended September 30, 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.
Recently Adopted Accounting Guidance
In September 2009, the Financial Accounting Standards Board, or FASB, issued Accounting
Standards Update, or ASU, No. 2009-13, as codified in Accounting Standards Codification 605, Revenue
Recognition, or ASC 605. ASC 605 provides greater ability to
separate and allocate
consideration in a multiple element revenue arrangement. In addition, ASC 605 requires the use of
estimated selling price to allocate consideration in a multiple
element revenue arrangement, therefore eliminating the use of
the residual method of accounting.
In the U.S., sales of a combined LoJack and Early Warning Unit constitute a multiple element
arrangement under ASC 605 subtopic 25, Revenue Recognition:
Multiple Element Arrangements. The combined Lojack and Early
Warning Unit includes LoJack unit hardware, Early Warning
hardware, installation service, and an Early Warning ongoing automated notification service, which
is provided over the period of vehicle ownership.
The delivered elements of a multiple element arrangement (LoJack unit hardware and Early
Warning Hardware and installation service) must meet certain criteria
to qualify each component of the combined unit for separate
accounting. Management performed an analysis and has determined that each of the delivered elements
in the arrangement qualify for separate accounting based on the applicable guidance.
The guidance establishes a selling price hierarchy for determining the selling price of a
deliverable in a multiple element arrangement. The selling price for each deliverable is based on
vendor-specific objective evidence, or VSOE, if available, third-party evidence, or TPE, if VSOE is
not available, or managements best estimated selling price, or BESP, if neither VSOE nor TPE are
available. The residual method of allocation is no longer permitted under the relevant guidance and
thus it is required that consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price allocation method. The relative selling price method
allocates any discount in the arrangement proportionately to each deliverable on the basis of the
deliverables estimated fair value. Management determined an estimated fair value for each element
in the arrangement as follows: (i) LoJack unit hardware selling price has been determined using
VSOE; (ii) Early Warning hardware selling price has been determined based on BESP; (iii)
installation service selling price has been determined using TPE; (iv) Early Warning ongoing
notification service selling price has been determined based on BESP. We plan to analyze the
selling prices used in our allocation of arrangement consideration, at a minimum, on an annual
basis. Selling prices will be analyzed on a more frequent basis if a significant change in the
business necessitates a more timely analysis or if we experience significant variances in our
selling prices.
The LoJack and Early Warning hardware and installation service components of each sale are
considered to have met delivery requirements for revenue recognition upon installation of the unit;
however, revenue from the ongoing notification service is deferred and recognized over an estimated
life of new vehicle ownership.
Our adoption of ASC 605 as of January 1, 2011 did not have a material impact on our
consolidated results of operations, financial position, or cash flows.
4
Table of Contents
Accounting Guidance Issued But Not Yet Adopted
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, or IFRS.
ASU 2011-04 explains how to measure fair value and intends to improve the comparability of fair
value measurements presented and disclosed in financial statements prepared in accordance with U.S.
GAAP and IFRS. ASU 2011-04 will become effective prospectively for interim and annual reporting
periods beginning on or after December 15, 2011. Early adoption is not permitted for public
entities, therefore the standard will become effective for the Company in January 2012. The Company
is currently evaluating the impact ASU 2011-04 may have on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05
eliminates the current option to report other comprehensive income and its components in the
statement of changes in equity and requires that all non-owner changes in stockholders equity be
presented either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. In addition, ASU 2011-05 requires entities
to present on the face of the financial statements reclassification adjustments for items that
are reclassified from other comprehensive income to net income in the statements where the
components of net income and the components of other comprehensive income are presented. ASU
2011-05 will become effective for public entities for fiscal years, and interim periods within
those years, beginning after December 15, 2011, with early adoption permitted. As we do not intend
to early adopt, the standard will become effective for the Company in January 2012. The Company is
currently evaluating the impact ASU 2011-05 may have on its consolidated financial statements.
In September 2011, the FASB issued ASU 2011-8, Intangibles Goodwill and Other. ASU 2011-8
is intended to simplify the testing of goodwill for impairment by permitting an entity to first
assess qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount as a basis for determining whether it is necessary
to perform the two-step goodwill impairment test described in Accounting Standards Codification
350. ASU 2011-8 will become effective for fiscal years beginning after December 15, 2011, with
early adoption permitted in limited circumstances. As we do not intend to early adopt, the standard
will become effective for the Company in January 2012 and the adoption is not expected to have a
significant impact on the Companys consolidated financial statements.
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 and nine months ended September 30, 2011 and 2010 is as follows:
Three Months Ended | Three Months Ended | |||||||
September 30, | September 30, | |||||||
2011 | 2010 | |||||||
Weighted average shares for basic |
17,678,213 | 17,378,804 | ||||||
Dilutive effect of stock options and unvested restricted stock |
| 359,289 | ||||||
Weighted average shares for diluted |
17,678,213 | 17,738,093 | ||||||
Nine Months Ended | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
2011 | 2010 | |||||||
Weighted average shares for basic |
17,601,996 | 17,330,533 | ||||||
Dilutive effect of stock options and unvested restricted stock |
| | ||||||
Weighted average shares for diluted |
17,601,996 | 17,330,533 | ||||||
Because of the net losses reported for the three and nine months ended September 30, 2011 and
the nine months ended September 30, 2010, all shares of stock issuable pursuant to stock options
and unvested stock have not been considered for dilution as their effect would be antidilutive. For
the three and nine months ended September 30, 2011, 2,375,047 stock options and 717,014 shares of
restricted stock were excluded from the computation of diluted net loss per share. For the three
months ended September 30, 2010, 2,353,618 stock options and 127,901 shares of restricted stock
were excluded from the computation of diluted net loss per share because the effect of including
such shares would be antidilutive. For the nine months ended September 30, 2010, 2,353,618 stock
options and 890,038 shares of restricted stock were excluded from the computation of diluted net
loss per share. Performance shares totaling 51,589 and 128,625 were excluded from the computation of earnings per share for the
three and nine months ended September 30, 2011 and 2010, respectively, because the performance
conditions had not been achieved at the respective balance sheet dates.
5
Table of Contents
3. Inventories
Inventories are classified as follows (in thousands):
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Raw materials |
$ | 111 | $ | 333 | ||||
Work in process |
273 | 314 | ||||||
Finished goods, net |
8,265 | 7,859 | ||||||
Total inventories |
$ | 8,649 | $ | 8,506 | ||||
4. Stock Compensation
Stock Options
The following table presents activity of all stock options for the nine month period ended
September 30, 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 |
400,400 | 5.70 | ||||||||||||||
Exercised |
(8,000 | ) | 4.79 | |||||||||||||
Cancelled, expired or forfeited |
(278,918 | ) | 4.92 | |||||||||||||
Outstanding at September 30, 2011 |
2,375,047 | $ | 7.30 | 4.12 | $ | 0 | ||||||||||
Vested at
September 30, 2011 and unvested expected to vest |
2,347,961 | $ | 7.33 | 4.10 | $ | 0 | ||||||||||
Exercisable at September 30, 2011 |
1,423,822 | $ | 8.70 | 3.21 | $ | 0 |
The aggregate intrinsic values in the preceding table represent the total intrinsic values
based on our closing stock price of $3.17 per share as of September 30, 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 nine months
ended September 30, 2011:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Unvested at January 1, 2011 |
784,063 | $ | 4.77 | |||||
Granted |
344,784 | 5.39 | ||||||
Vested and exercised |
(224,225 | ) | 5.29 | |||||
Forfeited and cancelled |
(187,608 | ) | 4.65 | |||||
Unvested at September 30, 2011 |
717,014 | $ | 4.94 | |||||
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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 September 30, 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 | ||||||||||||||
September 30, | Identical Assets | Observable Inputs | Inputs | |||||||||||||
Description | 2011 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Nonqualified deferred compensation plan investments |
$ | 810 | $ | 810 | $ | | $ | | ||||||||
Marketable securities |
1,386 | 1,386 | | | ||||||||||||
Equity investment in French licensee |
322 | 322 | | | ||||||||||||
Total |
$ | 2,518 | $ | 2,518 | $ | | $ | | ||||||||
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 Nonqualified Deferred Compensation Plan investments 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. For the three
and nine month periods ended September 30, 2011 we recorded losses related to our investments of
$120,000 and $64,000, respectively. For both the three and nine months ended September 30, 2010 we
recorded gains related to our investments of $81,000.
Our marketable securities as of September 30, 2011 and September 30, 2010 consisted of 366,500
common shares of Absolute Software Inc., or Absolute, a Vancouver, British Columbia, Canada based
computer theft company, that we have designated as trading securities. These shares are publicly
traded and their market price is readily available. The gains and losses on these securities are
recorded in other income (expense) in the statement of operations. For the three and nine month
periods ended September 30, 2011 we recorded losses of $228,000 and gains of $21,000, respectively,
relating to these securities. For the three and nine months ended September 30, 2010 we recorded
losses relating to these securities of $53,000 and $1,000, respectively.
Our investment in the common stock of our French licensee consists of publicly traded shares
with a market price that is readily available. The gains and losses on our investment are recorded
through accumulated other comprehensive income on the balance sheet. During the nine months ended
September 30, 2011 and the three months September 30, 2010, we recorded unrealized gains on our
investment of $8,000 and $63,000, respectively. During the three months ended September 30, 2011
and the nine months September 30, 2010, we recorded unrealized losses on our investment of $84,000
and $403,000, respectively.
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 September 30, 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 September 30, 2011, the carrying value of $9,445,000 of our long-term debt approximated the
fair value because our multicurrency revolving credit agreement, or the Credit Agreement,
which was established on December 29, 2009 and amended on September 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 September 30, 2011 and December 31, 2010, our debt consisted of the following (in
thousands):
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Short-term debt: |
||||||||
SCI convertible promissory note |
$ | 146 | $ | 146 | ||||
Long-term debt: |
||||||||
Term loan |
9,445 | 8,798 | ||||||
$ | 9,591 | $ | 8,944 | |||||
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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 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. At September 30, 2011, the entire amount of the note remained outstanding. On October 14, 2011, a new 11% Convertible Promissory
Note totaling $752,000 and maturing on October 1, 2012, was issued, replacing the outstanding
principal and interest under the original note. The amount of the note due to non-controlling
holders of SCI, $274,000, is considered a third party loan and is classified as short-term debt on
our consolidated balance sheet as of October 14, 2011.
On December 29, 2009, we entered into 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). The maturity date for the revolving credit loan is January 10, 2014. 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.
As of September 30, 2011, we had a total outstanding borrowings of CAD $9,900,000 (USD
$9,445,000) under the Credit Agreement. 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 rate in effect as of September 30, 2011 was 3.86%. As of September 30, 2011, we also
had three outstanding irrevocable letters of credit in the aggregate amount of $1,181,000. 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 under the
Credit Agreement but 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 September 30, 2011, we had borrowing availability
of $17,569,000. At September 30, 2011, we were in compliance with all of the 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 Income (Loss)
Total comprehensive income (loss) and its components for the three and nine months ended
September 30, 2011 and 2010 were as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | (1,790 | ) | $ | 2,674 | $ | (3,222 | ) | $ | (21,387 | ) | |||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustments |
1,350 | 200 | 193 | 12 | ||||||||||||
Unrealized gains (losses) on marketable securities |
(84 | ) | 293 | 8 | (173 | ) | ||||||||||
Total comprehensive income (loss) |
(524 | ) | 3,167 | (3,021 | ) | (21,548 | ) | |||||||||
Less: Comprehensive loss attributable to noncontrolling interest |
(7 | ) | (49 | ) | (54 | ) | (335 | ) | ||||||||
Comprehensive income (loss) attributable to LoJack Corporation |
$ | (517 | ) | $ | 3,216 | $ | (2,967 | ) | $ | (21,213 | ) | |||||
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 |
193 | | 193 | |||||||||
Unrealized gain on marketable securities |
| 8 | 8 | |||||||||
Balance at September 30, 2011 |
$ | 6,777 | $ | 137 | $ | 6,914 | ||||||
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8. Income Taxes
We recorded a worldwide provision for income taxes of $556,000 and $1,157,000 for the three
and nine months ended September 30, 2011, respectively. These amounts are primarily comprised of
the provision for income taxes for our Irish and Brazilian subsidiaries. The effective income tax
rates for the three and nine month periods ended September 30, 2011 were higher than our federal
statutory rate in large part because no U.S. income tax benefit was recorded for the current year
domestic net operating loss, nor was a foreign tax benefit recorded for foreign tax losses.
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. We maintain a full valuation allowance against our
net U.S. deferred tax assets, which was recorded during the second quarter of 2010, and did not
recognize any deferred tax benefits related to U.S. net losses incurred during the three and nine
months ended September 30, 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.
All Other 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 and nine
months ended September 30, 2011 and 2010 (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 | |||||||||||||||
Consolidated Statements of Operations Data | Segment | Segment | All Other | Consolidated | ||||||||||||
Three Months Ended September 30, 2011 |
||||||||||||||||
Revenue |
$ | 24,231 | $ | 9,537 | $ | 724 | $ | 34,492 | ||||||||
Depreciation and amortization |
1,220 | 110 | 50 | 1,380 | ||||||||||||
Operating (loss) income |
(2,755 | ) | 2,602 | (339 | ) | (492 | ) | |||||||||
Three Months Ended September 30, 2010 |
||||||||||||||||
Revenue |
$ | 24,370 | $ | 13,405 | $ | 710 | $ | 38,485 | ||||||||
Depreciation and amortization |
1,571 | 108 | 55 | 1,734 | ||||||||||||
Operating (loss) income |
(1,211 | ) | 4,689 | (524 | ) | 2,954 | ||||||||||
Nine Months Ended September 30, 2011 |
||||||||||||||||
Revenue |
$ | 70,331 | $ | 25,835 | $ | 2,186 | $ | 98,352 | ||||||||
Depreciation and amortization |
4,354 | 323 | 242 | 4,919 | ||||||||||||
Operating (loss) income |
(7,296 | ) | 5,460 | (1,247 | ) | (3,083 | ) | |||||||||
Nine Months Ended September 30, 2010 |
||||||||||||||||
Revenue |
$ | 73,265 | $ | 30,548 | $ | 2,811 | $ | 106,624 | ||||||||
Depreciation and amortization |
5,163 | 317 | 310 | 5,790 | ||||||||||||
Operating (loss) income |
(9,339 | ) | 6,890 | (1,972 | ) | (4,421 | ) |
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10. Commitments and Contingent Liabilities
As of September 30, 2011, we were subject to the 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, Mike Rutti vs. LoJack Corporation, Inc. was filed in the United States District
Court for the Central District of California, or the District Court, by a former employee alleging
violations of the Fair Labor Standards Act, or the FLSA, the California Labor Code, and the
California Business & Professions Code, and seeking class action status, or 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 United States
Court of Appeals for the Ninth Circuit, or the Ninth Circuit, 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 reversed. The plaintiff filed a petition for rehearing and, on
March 2, 2010, the Ninth Circuit amended its decision to affirm the District Courts grant of
summary judgment on all claims except as to (a) the Data Transmission Claim and (b) the claim for
compensation for commuting under state law, or the Commuting Claim. The plaintiff later sought to
pursue the Commuting Claim in the State Court Case referenced below. The plaintiff moved for
conditional certification of the Data Transmission Claim under the FLSA and, on January 14, 2011,
the District Court granted the plaintiffs motion. On October 7, 2011, the parties filed a joint
stipulation with the District Court stating that they had reached a settlement of the Data
Transmission Claims. On November 7, 2011, the parties filed a joint motion for approval of the
settlement as required by the FLSA. Pursuant to the terms of the settlement, the Federal Court
Case would be dismissed; the plaintiffs would release the Company of the claims asserted in the
Federal Court Case and all other wage-and-hour claims (except, in the case of two plaintiffs, the
claims asserted in the State Court Case); and the Company would pay to the plaintiffs an aggregate
amount of approximately $115,000 and pay to their attorneys an amount for attorneys fees and costs
to be determined by the District Court after noticed motion but not to exceed $1,100,000. During
the three months ended September 30, 2011 we recorded an accrual in the amount of $1,215,000 with
respect to the terms of the settlement. Nothing in the settlement would constitute an admission of
any wrongdoing, liability or violation of law by the Company. Rather, the Company has agreed to
the settlement to resolve the Federal Court Case, thereby eliminating the uncertainties and expense
of further protracted litigation.
Due to the dismissal of the plaintiffs claims by the District Court in September 2007 as
discussed above, in November 2007, the plaintiff and a second plaintiff filed in the Superior Court
of California for Los Angeles County, or the Superior Court, Mike Rutti, Gerson Anaya vs. LoJack
Corporation, Inc. to assert wage-and-hour claims under California law on behalf of current and
former Company technicians, or the State Court Case. In September 2009, the Superior Court granted
class certification with respect to nine claims and denied class certification with respect to five
claims. The Company sought appellate review of this decision. On March 26, 2010, the California
Court of Appeals for the Second Appellate District granted our request in part, denying
certification with respect to certain claims but affirming certification with respect to certain
other claims.
On July 29, 2011, the Superior Court granted class certification of the remaining claims
except for a vehicle maintenance expense reimbursement claim. Thus, in the State Court Case there
currently are 16 certified claims, including the Commuting Claim; a Data Transmission Claim arising
under state law; claims for various amounts of unpaid time; claims for reimbursement of work tools
expenses and the cost of washing the company vehicle; claims for unfair competition under
California Business and Professions Code section 17200; and claims for waiting-time penalties and
penalties under the California Labor Code Private Attorneys General Act. Trial of the State Court
Case is currently set for July 2012.
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In the State Court Case, the plaintiff, on behalf of the class, seeks unpaid wages, penalties,
interest and attorneys fees.
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 $970,000, with respect to certain of the above
claims in the State Court Case based on our best estimates, where a potential loss is considered
probable. We have estimated our range of possible loss with respect to the State Court Case to be
between $970,000 and $30,000,000.
Consumer Claims
On September 15, 2010, a suit entitled Louis Morin v. LoJack Corp., Inc., et al was filed 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 United States District Court for the Central District
of California preliminarily approved the settlement on September 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. A fairness hearing for final approval of the
settlement is scheduled for December 5, 2011.
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, and violation of the New York franchise law, violation of Mass. Gen
Laws c. 93A and Robinson-Patman Act, amongst other claims. 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.
On September 30, 2011, the Court ruled on the pending motions and denied, as futile, the
plaintiffs request to amend the complaint with respect to the misrepresentation, New York
franchise law, violation of Mass. Gen Laws c. 93A and breach of fiduciary duty claims. The Court
granted the plaintiff permission to re-plead the tortious interference with business relations and
Robinson-Patman Act claims. The breach of contract and breach of covenant of good faith and fair
dealing claims remain viable.
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On October 14, 2011, the plaintiff filed a motion for reconsideration of the dismissal of the
violation of Mass. Gen Laws c. 93A and the violation of the New York
Franchise law claims. The Company
opposed such motion and is awaiting the Courts ruling.
The Company believes that it has substantial legal and factual defenses to these claims and
intends to defend its interests vigorously.
Given that there are still pending motions regarding which claims will survive and which will
be dismissed, 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.
Brazilian Licensee Litigation
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 alleged that the Company failed to maintain a
patent for the stolen vehicle recovery system in Brazil and included claims for breach of contract,
breach of the implied covenant of good faith and fair dealing, misrepresentation, and violation of
Mass. Gen. Laws c. 93A. The claimant sought $111,500,000 in damages, treble damages, and
attorneys fees and costs. On May 11, 2011, the American Arbitration Association administratively
closed this matter.
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
sought, amongst other things, $289,500,000 in actual damages, treble damages, attorneys fees, and
declaratory and injunctive relief. On July 6, 2011, claimants voluntarily withdrew their
application for arbitration and Tracker do Brasil LTDA commenced the below discussed lawsuit
against LoJack Equipment Ireland, Ltd., or LoJack Ireland, requesting that a Massachusetts Court
order LoJack Ireland to submit to arbitration before the American Arbitration Associations
International Centre for Dispute Resolution, without limitation or precondition. On July 7, 2011,
LoJack Ireland was served by Tracker do Brasil LTDA with the aforementioned lawsuit which was filed
in Norfolk Superior Court in Massachusetts. The lawsuit alleged interference with contractual
relations, fraud/intentional misrepresentation, negligent misrepresentation, 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 for the licensee. The
claimant sought, amongst other things, $289,500,000 in actual damages, treble damages, attorneys
fees, and declaratory and injunctive relief. The claimant also sought a court order compelling
arbitration and staying the case in Norfolk Superior Court during the pendency of the arbitration.
On September 1, 2011, the parties stipulated to the entry of an order that the dispute relating to
product pricing and the fulfillment of purchase orders to the licensee would be re-filed for
arbitration with the International Centre for Dispute Resolution. Thus, as of September 1, 2011,
both the International Centre for Dispute Resolution filing and the Norfolk Superior Court action
relating to product pricing and the fulfillment of purchase orders
were not pending.
On September 27, 2011, the Company received Tracker do Brasil LTDAs re-filed
arbitration demand against LoJack Equipment Ireland Ltd. before the International Centre for
Dispute Resolution. The filing alleges interference with contractual relations, fraud/intentional
misrepresentation, negligent misrepresentation, 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,
$55,000,000 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 current stage 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 expected capital
expenditures, 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; (ix) changes in general economic or
geopolitical conditions; and (x) the expected timing of purchases by
our customers. 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 and in our other periodic filings with the
Securities and Exchange Commission.
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
sells products, licenses or owns and operates 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, SRL, or 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 the monitoring service related to 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. Service revenue from
these contracts is deferred and recognized over the term of the service contract.
Concurrent with the migration from Boomerang technology to LoJack technology in the Canadian market during the
second quarter of 2011, we have transitioned the selling model in that market from a subscription based model to a
product based model. Therefore, as the LoJack unit becomes a larger component of the Boomerang product portfolio, this
transition will have an impact on our revenue recognition in Canada.
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 are payable on a monthly
basis. Service revenue from these contracts is deferred and recognized over the term of the service
contract.
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, replacement parts and related service contracts.
Key Economic Factors and Trends and our Business
The natural disaster in Japan in early 2011 impacted the supply of automobiles for certain
manufacturers in the worldwide market. The sale of LoJack units is indexed to many of the brands
experiencing disruption, and our sales volumes have been negatively impacted through the third
quarter of 2011.
North America Segment
Industry experts are now estimating the seasonally adjusted annual rate, or SAAR, for the retail auto market in the United States to be 10.3 million for 2011, as compared to a SAAR of 9.5
million new vehicles in 2010. The improvement of the United States auto industry, however, has
continued to be uneven, with some major auto manufacturers participating to a greater extent than
others.
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While the broader U.S. auto market is expected to deliver double-digit top line growth for the
full year in 2011, there continued to be a significant change in the underlying brand mix in the
market from prior years, which is negatively impacting the sale of LoJack units. We continued to be
negatively impacted by a shift in our historical brand and model mix, as well as a slowdown in our
bulk installations due to a shortage of dealer vehicle inventory following the production
disruptions created by the natural disaster in Japan earlier in the year. Auto manufacturers and
industry experts now expect the inventory shortages to ease considerably in the fourth quarter,
which should position us to benefit as the affected auto manufacturers rebuild their inventory
levels at the dealerships and move to recapture their share of the domestic market. Brands with
which our penetration rates have been historically high are generally the brands which experienced
sales declines during the first nine months of 2011. Other brands where we have had historically lower
penetration rates have been growing at rates that outpaced the overall growth of the market.
We have developed and continue to invest in new sales programs that address the changes in the U.S. auto market,
including both the growth in leased vehicles and the shift in brand and model mix within the market. 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 work with major finance companies to
enhance their understanding of the LoJack product offering 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 Boomerang technology since the
conversion of the cellular infrastructure in Canada from analog to digital. As a result, we have
built out the necessary infrastructure to launch the LoJack technology in our Canadian market.
During the second quarter of 2011, the Espion Powered by LoJack system was officially launched in
Canada.
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 higher penetration rate. We continue to aggressively manage costs to ensure
that we are spending at a level appropriate for the size of our
business in Canada.
International Segment
Our international business declined from 2010 as a result of reduced shipments to a number of our licensees. In
the past, we have experienced some quarterly fluctuation in purchases
in 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. While the level of revenue in the first quarter of 2011 for international business
was consistent with historical trends, we did not meet our expected targets for unit sales in the second and third
quarters of 2011 due to a softening in the international market as well as protracted negotiations with some of our
licensees. International revenue in the third quarter was negatively impacted by the timing of these negotiations,
however with their conclusion we now expect purchases in the final quarter of the year to include some of the volume
that was not included in the third quarter shipments.
Our business in Italy is continuing to gain traction and delivered growth in terms of both
revenue and subscribers during 2010 and the first nine months of 2011. We entered 2011 with
approximately 13,000 subscribers in Italy, and continued growing the number of monthly subscribers,
adding approximately 4,800 net new subscribers in Italy during the nine months ended September 30,
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 of wandering.
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.
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Recently Adopted Accounting Guidance
In September 2009, the Financial Accounting Standards Board, or FASB, issued Accounting
Standards Update, or ASU, No. 2009-13, as codified in Accounting Standards Codification 605, Revenue
Recognition, or ASC 605. ASC 605 provides greater ability to separate and allocate
consideration in a multiple element revenue arrangement. In addition, ASC 605 requires the use of
estimated selling price to allocate consideration in a multiple
element revenue arrangement therefore eliminating the use of
the residual method of accounting.
In the U.S., sales of a combined LoJack and Early Warning Unit constitute a multiple element
arrangement under ASC 605 subtopic 25, Revenue Recognition: Multiple Element Arrangements. The
combined Lajack and Early Warning Unit includes LoJack unit hardware, Early Warning
hardware, installation service, and an Early Warning ongoing automated notification service, which
is provided over the period of vehicle ownership.
The delivered elements of a multiple element arrangement (LoJack unit hardware and Early
Warning Hardware and installation service) must meet certain criteria
to qualify each component of the unit for separate
accounting. Management performed an analysis and has determined that each of the delivered elements
in the arrangement qualify for separate accounting based on the applicable guidance.
The guidance establishes a selling price hierarchy for determining the selling price of a
deliverable in a multiple element arrangement. The selling price for each deliverable is based on
vendor-specific objective evidence, or VSOE, if available, third-party evidence, or TPE, if VSOE is
not available, or managements best estimated selling price, or BESP, if neither VSOE nor TPE are
available. The residual method of allocation is no longer permitted under the relevant guidance and
thus it is required that consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price allocation method. The relative selling price method
allocates any discount in the arrangement proportionately to each deliverable on the basis of the
deliverables estimated fair value. Management determined an estimated fair value for each element
in the arrangement as follows: (i) LoJack unit hardware selling price has been determined using
VSOE; (ii) Early Warning hardware selling price has been determined based on BESP; (iii)
installation service selling price has been determined using TPE; (iv) Early Warning ongoing
notification service selling price has been determined based on BESP. We plan to analyze the
selling prices used in our allocation of arrangement consideration, at a minimum, on an annual
basis. Selling prices will be analyzed on a more frequent basis if a significant change in the
business necessitates a more timely analysis or if we experience significant variances in our
selling prices.
The LoJack and Early Warning hardware and installation service components of each sale are
considered to have met delivery requirements for revenue recognition upon installation of the unit;
however, revenue from the ongoing notification service is deferred and recognized over an estimated
life of new vehicle ownership.
Our adoption of ASC 605 as of January 1, 2011 did not have a material impact on our
consolidated results of operations, financial position, or cash flows.
The remaining 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.
Accounting Guidance Issued But Not Yet Adopted
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, or IFRS.
ASU 2011-04 explains how to measure fair value and intends to improve the comparability of fair
value measurements presented and disclosed in financial statements prepared in accordance with U.S.
GAAP and IFRS. ASU 2011-04 will become effective prospectively for interim and annual reporting
periods beginning on or after December 15, 2011. Early adoption is not permitted for public
entities, therefore the standard will become effective for the Company in January 2012. The Company
is currently evaluating the impact ASU 2011-04 may have on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05
eliminates the current option to report other comprehensive income and its components in the
statement of changes in equity and requires that all non-owner changes in stockholders equity be
presented either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. In addition, ASU 2011-05 requires entities
to present on the face of the financial statements reclassification adjustments for items that
are reclassified from other comprehensive income to net income in the statements where the
components of net income and the components of other comprehensive income are presented. ASU
2011-05 will become effective for public entities for fiscal years, and interim periods within
those years, beginning after December 15, 2011, with early adoption permitted. As we do not intend
to early adopt, the standard will become effective for the Company in January 2012. The Company is
currently evaluating the impact ASU 2011-05 may have on its consolidated financial statements.
In September 2011, the FASB issued ASU 2011-8, Intangibles Goodwill and Other. ASU 2011-8
is intended to simplify the testing of goodwill for impairment by permitting an entity to first
assess qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount as a basis for determining whether it is necessary
to perform the two-step goodwill impairment test described in Accounting Standards Codification
350. ASU 2011-8 will become effective for fiscal years beginning after December 15, 2011, with
early adoption permitted in limited circumstances. As we do not intend to early adopt, the standard
will become effective for the Company in January 2012 and the adoption is not expected to have a
significant impact on the Companys consolidated financial statements.
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Results of Operations for the three months ended September 30, 2011 versus the three months ended
September 30, 2010
Revenue
Revenue for the three months ended September 30, 2011 decreased by $3,993,000 as compared to
the same period in 2010. The following table presents revenue by our segments (in thousands):
Three Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
North America |
$ | 24,231 | $ | 24,370 | (1 | )% | ||||||
International |
9,537 | 13,405 | (29 | ) | ||||||||
All Other |
724 | 710 | 2 | |||||||||
Total revenue |
$ | 34,492 | $ | 38,485 | (10 | )% | ||||||
Revenue related to our North America segment decreased by $139,000 for the three months ended
September 30, 2011, as compared to the same period in 2010.
Revenue in North America for our dealer channel decreased 8% when compared to the same period
in 2010. Revenue in North America from our heavy equipment, or commercial, channel increased 29%
over the same period in 2010. Our motorcycle and direct distribution channels in the United
States market saw revenue declines of 16% and increases of 9%, respectively, as compared to the
same period in 2010.
The activity that resulted in a 1% decrease in our North America segment revenue for the three
months ended September 30, 2011 as compared to the same period in 2010 was primarily attributable
to:
| A decrease of $1,017,000, or 7%, in revenue from LoJack units, primarily due to a 5%
decrease in the number of units sold and a 2% decrease in the average revenue per unit; |
| A decrease of $521,000, or 16%, in Boomerang unit and service revenue, driven by a 38%
decrease in the number of base units sold from 2,730 to 1,690 and a decrease of 11% in
service revenue driven by a 15% decline in the average number of subscribers to 54,500 for
the three months ended September 30, 2011; offset by |
| An increase of $1,729,000, or 36%, in the recognition of deferred revenue from our Early
Warning and warranty products. The increase was primarily driven by a $1,960,000 increase in
Early Warning revenue, partially offset by a decrease of $230,000 in revenue from our
warranty products for the three months ended September 30, 2011 as compared to the same
period in 2010. The increase in Early Warning revenue was largely attributed to the
recognition of revenue relating to the hardware portion of the Early Warning product. In
prior years, Early Warning hardware was combined with the Early Warning notification service
and all revenue was deferred and recognized over an estimated service period. See Critical
Accounting Policies and Estimates above for discussion of the
revised revenue recognition policies for multiple
element arrangements. As the cost of goods sold relating to the hardware is also recognized
as opposed to deferred, the net effect of this increase in revenue was not material to the
financial statements as a whole. |
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Revenue related to our International segment decreased $3,868,000 for the three months ended
September 30, 2011, as compared to the same period in 2010. The decrease was primarily due to a
decrease of $3,845,000, or 31%, in product revenue from our licensees due to a 57,000 decrease in
the number of units sold in the third quarter of 2011 compared to the same period in 2010 and a
decrease of $238,000, or 45%, in revenue from the sale of infrastructure components, royalty,
license fee, and other revenue from our licensees as compared to the same period in 2010. The decrease was partially offset by an increase of
$215,000, or 45%, in revenue from our Italy business for the third quarter of 2011 as compared to
the same period in 2010.
Revenue related to our All Other segment increased $14,000 for the three months ended
September 30, 2011 compared to the same period in 2010. The increase of $99,000, or 17%, in the
revenue from SCI was partially offset by a decrease in SafetyNet revenue for the three months ended
September 30, 2011 as compared to the same period in 2010.
The following table presents cost of goods sold by our segments (in thousands):
Three Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
North America |
$ | 12,369 | $ | 12,590 | (2 | )% | ||||||
International |
4,056 | 6,232 | (35 | ) | ||||||||
All Other |
292 | 304 | (4 | ) | ||||||||
Total cost of goods sold |
$ | 16,717 | $ | 19,126 | (13 | )% | ||||||
As a percentage of total revenue, total cost of goods sold was 48% and 50% for the three
months ended September 30, 2011 and 2010, respectively.
As a percentage of North America revenue, cost of goods sold relating to our North America
segment was 51% and 52% for the three months ended September 30, 2011 and 2010, respectively.
As a percentage of International revenue, cost of goods sold relating to our International
segment was 43% and 46% for the three months ended September 30, 2011 and 2010, respectively.
As a percentage of All Other revenue, our cost of goods sold associated with the All Other
segment for the three months ended September 30, 2011 and 2010 was 40% and 43%, respectively.
Operating Expenses
The following table presents our operating expenses (in thousands):
Three Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
Product development |
$ | 1,326 | $ | 1,202 | 10 | % | ||||||
Sales and marketing |
6,897 | 6,881 | 0 | |||||||||
General and administrative |
8,748 | 6,644 | 32 | |||||||||
Depreciation and amortization |
1,296 | 1,678 | (23 | ) | ||||||||
Total operating expenses |
$ | 18,267 | $ | 16,405 | 11 | % | ||||||
Product Development
As a percentage of total revenue, product development expenses were 4% and 3% for the three
months ended September 30, 2011 and 2010, respectively.
Product development expenses increased $124,000 for the three months ended September 30, 2011
as compared to the same period in 2010, primarily due to an increase of $212,000 in compensation
expenses partially offset by a $137,000 decrease in research and development expenses.
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Sales and Marketing
As a percentage of total revenue, sales and marketing expenses were 20% and 18% for the three
months ended September 30, 2011 and 2010, respectively.
The increase of $16,000 of sales and marketing expenses for the three months ended September
30, 2011 as compared to the same period in 2010 was primarily attributable to an increase in
advertising expenses of $463,000 partially offset by a decrease in bad debt expenses of $437,000.
General and Administrative
As a percentage of total revenue, general and administrative expenses were 25% and 17% for the
three months ended September 30, 2011 and 2010, respectively.
The increase of general and administrative expenses of $2,104,000 for the three months ended
September 30, 2011 as compared to the same period in 2010 was primarily attributable to:
| Increased legal expenses of $2,298,000 which were primarily attributable to the accrual
of $1,600,000 for a loss contingency related to the wage and hour related litigation in
California and an increase of $698,000 related to the costs associated with the litigation
discussed in Part II, Item 1, Legal Proceedings; and |
| Increased compensation expenses of $280,000, primarily attributable to an increase of
$123,000 in costs relating to temporary employees, an increase of $168,000 in severance
expenses and an increase of $177,000 in other compensation expenses, partially offset by a
decrease of $275,000 in bonus expense. |
The increases in general and administrative expenses were partially offset by decreased consulting
expenses of $313,000 for the three months ended September 30, 2011 as compared to the same period
in 2010.
Depreciation and Amortization
As a percentage of total revenue, depreciation and amortization expense was 4% for both the
three months ended September 30, 2011 and 2010, respectively.
Depreciation and amortization expense decreased by $382,000 for the three months ended
September 30, 2011 as compared to the same period in 2010. The decrease is primarily related to
retirement of assets and certain assets becoming fully depreciated during 2010 and the three months
ended September 30, 2011.
Other Income (Expense)
The following table presents our other income (expense) (in thousands):
Three Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
Interest income |
$ | 125 | $ | | 100 | % | ||||||
Interest expense |
(159 | ) | (178 | ) | (11 | ) | ||||||
Other income (expense) |
(708 | ) | 300 | (336 | ) | |||||||
Total other income (expense) |
$ | (742 | ) | $ | 122 | (708 | )% | |||||
Total other income (expense) for the three months ended September 30, 2011 changed by $864,000
from income of $122,000 for the three months ended September 30, 2010 to expense of $742,000 for
the same period in 2011. This change is primarily attributable to decreased other income of
$1,008,000, partially offset by increased interest income of $125,000 due to an increase in
interest realized on the outstanding accounts receivable balances of some of our international
licensees as compared to the same period in 2010. The decrease in other income is primarily
attributable to a $774,000 increase in losses related to foreign currency transactions and a
$375,000 decrease in the income associated with our marketable securities due to a $174,000
valuation adjustment to our investment in the common stock of Absolute Software and $201,000 of
investment losses in our deferred compensation plan.
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Provision for Income Taxes
We recorded a $556,000 provision for income taxes for the three months ended September 30,
2011. This amount is primarily comprised of the provision for income taxes for our Irish and
Brazilian subsidiaries. We recorded a $402,000 provision for income taxes for the three months
ended September 30, 2010. The effective income tax rate for the three month period ended September
30, 2011 was higher than our federal statutory rate in large part because no U.S. income tax
benefit was recorded for the current year domestic net operating loss, nor was a foreign tax
benefit recorded for foreign tax losses.
Net Income (Loss) Per Share Attributable to LoJack Corporation
As a result of the foregoing, the net income attributable to LoJack Corporation decreased by
$4,506,000 from a net income of $2,723,000 for the three months ended September 30, 2010, to a net
loss of $1,783,000 for the three months ended September 30, 2011. For the three months ended
September 30, 2011, the net loss per share attributable to LoJack Corporation was $0.10 per diluted
share as compared to a net income of $0.15 per diluted share in the same period in 2010.
Results of Operations for the nine months ended September 30, 2011 versus the nine months ended
September 30, 2010
Revenue
Revenue for the nine months ended September 30, 2011 decreased by $8,272,000 as compared to
the same period in 2010. The following table presents revenue by our segments (in thousands):
Nine Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
North America |
$ | 70,331 | $ | 73,265 | (4 | )% | ||||||
International |
25,835 | 30,548 | (15 | ) | ||||||||
All Other |
2,186 | 2,811 | (22 | ) | ||||||||
Total revenue |
$ | 98,352 | $ | 106,624 | (8 | )% | ||||||
Revenue related to our North America segment decreased by $2,934,000 for the nine months ended
September 30, 2011, as compared to the same period in 2010.
Revenue in the North America segment from our dealer channel decreased by 6% as compared to
the same period in 2010. Revenue in the North America segment from our heavy equipment, or
commercial, channel increased 53% over the prior period. Revenue for both motorcycle and direct
distribution channels in the United States market saw declines of 13% as compared to the same
period in 2010.
The activity that resulted in a 4% decrease in our North America segment revenue for the nine
months ended September 30, 2011 as compared to the same period in 2010 was primarily attributable
to:
| A decrease of $1,659,000, or 4%, in revenue from LoJack units, primarily due to a 3%
decrease in the number of units sold and a 1% decrease in the average revenue per unit; |
| A decrease of $1,443,000, or 15%, in Boomerang unit and service revenue, driven by a 50%
decrease in the number of base units sold from 8,980 to 4,500, partially offset by a 3%
increase in the average revenue per unit, and a decrease of 6% in service revenue driven by
an 11% decline in the average number of subscribers to 57,600 subscribers for the nine
months ended September 30, 2011; |
| A decrease of $464,000 in all other revenue including a decrease of $208,000 in revenue
from the motorcycle channel, a decrease of $116,000 relating to an increase in sales
referral discounts offered to our dealers and a decrease of $391,000 in revenue generated
from repairs and inspections, partially offset by a $79,000 increase in royalty revenue and
an increase of $172,000 in other revenue items; and |
| An increase of $932,000, or 7%, in the recognition of deferred revenue from our Early
Warning and warranty products. The increase was primarily driven by a $1,576,000 increase in
Early Warning revenue, partially offset by a decrease of $644,000 in the recognition of
deferred revenue from our warranty products for the nine months ended September 30, 2011 as
compared to the same period in 2010. The increase in Early Warning revenue was largely
attributed to the recognition of revenue relating to the hardware portion of the Early
Warning product. In prior years, Early Warning hardware was combined with the Early Warning notification service and all revenue was deferred and recognized over an estimated
service period. See Critical Accounting Policies and
Estimates above for discussion of the revised revenue
recognition policies for multiple element arrangements. As the cost of goods sold relating to
the hardware is also recognized as opposed to deferred, the net effect of this increase in
revenue was not material to the financial statements as a whole. |
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Revenue related to our International segment decreased $4,713,000 for the nine months ended
September 30, 2011 as compared to the same period in 2010. The decrease was primarily due to a
decline of $5,016,000, or 18%, in product revenue from our licensees due to a 74,000 decrease in
the number of units sold in the first nine months of 2011 compared to the same period in 2010 and a
decrease of $411,000, or 30%, in revenue from the sale of infrastructure components, royalty,
license fee, and other revenue from our licensees for the first nine months of 2011 compared to the
same period in 2010. The decrease in revenue was partially offset by a $714,000, or 44%, increase
in revenue from our Italy business in the first nine months of 2011 as compared to the same period
in 2010.
Revenue related to our All Other segment decreased $625,000 for the nine months ended
September 30, 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 nine months ended September
30, 2011, compared to the same period in 2010. The decrease in SafetyNet revenue for the nine
months ended September 30, 2011 as compared to the same period in 2010 was partially offset by an
increase of $254,000, or 14%, in the revenue from SCI.
Cost of Goods Sold
The following table presents cost of goods sold by our segments (in thousands):
Nine Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
North America |
$ | 35,583 | $ | 37,601 | (5 | )% | ||||||
International |
12,042 | 14,643 | (18 | ) | ||||||||
All Other |
803 | 1,066 | (25 | ) | ||||||||
Total cost of goods sold |
$ | 48,428 | $ | 53,310 | (9 | )% | ||||||
As a percentage of total revenue, total cost of goods sold was 49% and 50% for the nine months
ended September 30, 2011 and 2010, respectively.
As a percentage of North America revenue, cost of goods sold relating to our North America
segment was 51% for both the nine months ended September 30, 2011 and 2010.
As a percentage of International revenue, cost of goods sold relating to our International
segment was 47% and 48% for the nine months ended September 30, 2011 and 2010, respectively.
As a percentage of All Other revenue, our cost of goods sold associated with the All Other
segment for the nine months ended September 30, 2011 and 2010 was 37% and 38%, respectively.
Operating Expenses
The following table presents our operating expenses (in thousands):
Nine Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
Product development |
$ | 4,005 | $ | 4,909 | (18 | )% | ||||||
Sales and marketing |
20,098 | 22,737 | (12 | ) | ||||||||
General and administrative |
24,270 | 24,674 | (2 | ) | ||||||||
Depreciation and amortization |
4,634 | 5,415 | (14 | ) | ||||||||
Total operating expenses |
$ | 53,007 | $ | 57,735 | (8 | )% | ||||||
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Product Development
As a percentage of total revenue, product development expenses were 4% and 5% for the nine
months ended September 30, 2011 and 2010, respectively.
Product development expenses decreased $904,000 for the nine months ended September 30, 2011
as compared to the same period in 2010, primarily due to a decrease of $686,000 in compensation
expenses related to workforce reductions which took place through the second quarter of 2010 and a
$179,000 decrease in research and development expenses.
Sales and Marketing
As a percentage of total revenue, sales and marketing expenses were 20% and 21% for the nine
months ended September 30, 2011 and 2010, respectively.
The decrease of $2,639,000 of sales and marketing expenses for the nine months ended September
30, 2011 as compared to the same period in 2010 was primarily attributable to:
| Decreased compensation expense of $1,492,000 as compared to the same period in 2010,
including $1,099,000 of lower salary expenses resulting from workforce reductions which took
place through the second quarter of 2010 and a $573,000 decrease in severance expense due to
severance accruals having been recorded during the second quarter of 2010 relating to the
aforementioned workforce reductions, partially offset by a $226,000 increase in benefits
expense; |
| Decreased bad debt expense of $790,000 as compared to the same period in 2010; |
| Decreased travel expense of $210,000 as compared to the same period in 2010; and |
| Decreased rent expense of $210,000 as compared to the same period in 2010. |
General and Administrative
As a percentage of total revenue, general and administrative expenses were 25% and 23% for the
nine months ended September 30, 2011 and 2010, respectively.
The decrease of general and administrative expenses of $404,000 for the nine months ended
September 30, 2011 as compared to the same period in 2010 was primarily attributable to:
| Decreased compensation expenses of $2,159,000, primarily related to a decrease of
$869,000 in salary expenses resulting from workforce reductions which took place through the
second quarter of 2010, a $600,000 decrease in severance expense due to severance accruals
having been recorded during the second quarter of 2010 relating to the aforementioned
workforce reductions, a $399,000 decrease in benefits expense and a $490,000 decrease in
other compensation expenses, partially offset by a $366,000 increase in expenses relating to
temporary employees; |
| Decreased sales tax expense of $413,000 primarily due to the reversal of a prior year
accrual for estimated custom tariffs no longer owed; |
| Decreased consulting expenses of $555,000, primarily associated with a
consulting fee incurred in 2010; and |
| Decreased general and administrative expenses of $672,000 in our Boomerang segment
primarily due to the change in the exchange rate between the Canadian and U.S. dollar. |
The decrease in general and administrative expenses was partially offset by: |
| Increased legal expenses of
$3,868,000 primarily related to a loss contingency accrual of $2,035,000
recorded during the first nine months of 2011 for the settlement of the consumer claims litigation and the wage
and hour litigation in California as discussed in Part II, Item 1, Legal Proceedings and an increase other
legal expenses of $2,672,000 which were primarily attributable to the ongoing costs associated with the
litigation discussed in Part II, Item 1, Legal Proceedings. The increase was partially offset by a $750,000
a loss contingency accrual which was recorded during the first nine months of 2010 for a loss contingency
related to wage and hour litigation in California.
|
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Depreciation and Amortization
As a percentage of total revenue, depreciation and amortization expenses were 5% for both the
nine months ended September 30, 2011 and 2010.
Depreciation and amortization expenses decreased by $781,000, for the nine months ended
September 30, 2011 as compared to the same period in 2010. The decrease is primarily related to the
retirement of assets and certain assets becoming fully depreciated during 2010 and the nine months
ended September 30, 2011.
Other Income (Expense)
The following table presents our other income (expense) (in thousands):
Nine Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||
Interest income |
$ | 945 | $ | 230 | 311 | % | ||||||
Interest expense |
(487 | ) | (488 | ) | (0 | ) | ||||||
Other income (expense) |
560 | (98 | ) | (671 | ) | |||||||
Total other income (expense) |
$ | 1,018 | $ | (356 | ) | (386 | )% | |||||
Total other income (expense) for the nine months ended September 30, 2011 changed by
$1,374,000 from expense of $356,000 for the nine months ended September 30, 2010 to income of
$1,018,000 for the same period in 2011. This change is primarily attributable to the following:
| Increased interest income of $715,000, which is primarily attributable to $677,000 of
interest realized on the outstanding accounts receivable balances of some of our
international licensees, which is recognized upon collection; and |
| Increased other income of $658,000 which is primarily attributable to a $562,000 increase
in gains related to foreign currency transactions and a $230,000 increase in dividend
income, partially offset by a decrease of $124,000 in the income associated with our
marketable securities, primarily due to a decrease in the value of
the investments in our deferred
compensation plan. |
Provision for Income Taxes
We recorded a $1,157,000 provision for income taxes for the nine months ended September 30,
2011. This amount is primarily comprised of the provision for income taxes for our Irish and
Brazilian subsidiaries. We recorded a $16,610,000 provision for income taxes for the nine months
ended September 30, 2010, which includes the establishment of a valuation allowance for our U.S.
net deferred tax assets of $15,100,000 and the establishment of a valuation allowance for deferred
tax assets in a Canadian subsidiary of $282,000. The effective income tax rate for the nine month
period ended September 30, 2011 was higher than our federal statutory rate in large part because no
U.S. income tax benefit was recorded for the current year domestic net operating loss, nor was a
foreign tax benefit recorded for foreign tax losses.
Net Loss Per Share Attributable to LoJack Corporation
As a result of the foregoing, the net loss attributable to LoJack Corporation decreased by
$17,884,000 from a net loss of $21,052,000 for the nine months ended September 30, 2010, to a net
loss of $3,168,000 for the nine months ended September 30, 2011. For the nine months ended
September 30, 2011, the net loss per share attributable to LoJack Corporation was $0.18 per diluted
share as compared to a net loss of $1.21 per diluted share in the same period in 2010.
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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. 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, LoJack was issued a $254,000 note which 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. At September 30, 2011, the entire amount of the
note remained outstanding. On October 14, 2011, a new 11% Convertible Promissory Note totaling
$752,000 and maturing on October 1, 2012, was issued, replacing the outstanding principal and
interest under the original note. The amount of the note due to noncontrolling holders of SCI,
$274,000, is considered a third party loan and will be classified as short-term debt on our
consolidated balance sheet.
On December 29, 2009, we entered into 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). The maturity date for the credit loan is January 10, 2014. 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.
As of September 30, 2011, we had total outstanding borrowings of CAD $9,900,000 (USD
$9,445,000) under the Credit Agreement. 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 rate in effect as of September 30, 2011 was 3.86%. As of September 30, 2011, we also
had three outstanding irrevocable letters of credit in the aggregate amount of $1,181,000. 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 under the
Credit Agreement but 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 September 30, 2011, we had borrowing availability of
$17,569,000. At September 30, 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 of 1934, or the 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, second or third quarters of 2011. At September 30, 2011, 1,681,778 shares remained
available for repurchase under our repurchase plan.
We expect our continuing operation and expansion of the Italian stolen vehicle recovery
network, the expansion of the LoJack SafetyNet business in the United States, and 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.
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For the three and nine months ended September 30, 2011, we had capital expenditures of
$1,048,000 and $2,079,000, respectively. We expect our total capital expenditures for 2011 to be
between $4,000,000 and $5,000,000. We have funded our 2011 expenditures out of our working
capital of $48,189,000 and also expect to fund the remainder out of our existing working capital,
which included $51,764,000 of cash and cash equivalents. We expect total 2011 capital expenditures
to include $1,500,000 to $2,000,000 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.
We also expect to incur $2,000,000 of capital spending and $500,000 of additional expenses in the
fourth quarter of 2011 for the relocation of our corporate headquarters.
If we decide to pursue significant investment opportunities in domestic and international
markets, we may be required to find sources of capital in addition to existing working capital. Our
foreign entities have approximately $27,934,000 of cash and cash equivalents which, if repatriated
to the U.S., would result in an increase in our U.S. income taxes. We do not provide for income
taxes on undistributed earnings of our foreign operations that are intended to be invested
indefinitely outside the United States and do not anticipate the need to repatriate this cash. We
believe the sources of cash currently available to us will be adequate for at least the next twelve
months. 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.
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):
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash provided (used) by: |
||||||||
Operating activities |
$ | 1,262 | $ | 7,952 | ||||
Investing activities |
(1,892 | ) | (1,647 | ) | ||||
Financing activities |
1,045 | (5,764 | ) | |||||
Effect of exchange rate changes on cash |
(530 | ) | 482 | |||||
Increase (decrease) in cash and cash equivalents |
$ | (115 | ) | $ | 1,023 | |||
Cash provided by operating activities decreased by $6,690,000 during the nine months ended
September 30, 2011, compared to the same period in 2010. The decrease was primarily attributable to
a decrease in cash provided by other working capital items of $6,197,000 and a net decrease of
$493,000 in losses excluding non cash items.
Investing activities used $1,892,000 of cash during the nine months ended September 30, 2011,
as compared to using $1,647,000 of cash during the same period in 2010. The $245,000 increase in
cash used for investing activities was primarily due to net proceeds from our marketable securities
activity of $1,030,000 in 2010 not recurring in 2011 and a decrease in restricted cash activity of
$128,000, which were partially offset by $901,000 of lower capital expenditures in the nine months
ended September 30, 2011 than the same period in 2010.
Financing activities provided $1,045,000 of cash during the nine months ended September 30,
2011, as compared to using $5,764,000 of cash during the same period in 2010. The $6,809,000 change
was primarily attributable to a decrease in the repayment, net of proceeds, of our debt and short
term borrowings of $6,726,000 under our existing Credit Agreement, an increase of $44,000 received
in connection with stock options exercised during the period, and a decrease in tax withholding
related to stock grants and lapses of $39,000.
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 September 30, 2011 consisted of
cash and cash equivalents, 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 September 30, 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 September 30, 2011, we analyzed the effect of interest rates on our
variable-rate Credit Agreement, for which there was CAD $9,900,000 (USD $9,445,000) of outstanding
borrowings as of September 30, 2011. Based on the outstanding borrowings under the Credit Agreement
at September 30, 2011, a 1% increase in the interest rate would result in an additional $94,000 of
annual interest expense.
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We are subject to foreign currency risk through our international operations. As of September
30, 2011, we held cash denominated in foreign currencies, primarily in Euro, Canadian Dollar, and
Brazilian Real. These assets accounted for approximately 7% of our total cash and cash equivalents
at September 30, 2011. We translate accounts for subsidiaries whose functional currency is not the
U.S. 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 U.S. 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 U.S. 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
September 30, 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.
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
September 30, 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 three and nine months ended September 30, 2011, we recorded unrealized losses $84,000
and unrealized gains of $8,000, respectively, in accumulated other comprehensive income. Realized
gains and losses on available-for-sale securities are included in other income (expense).
As of September 30, 2011, we held $51,674,000 of cash and cash equivalents. Of this balance,
$3,759,000, or 7%, is denominated in foreign currencies, including the Canadian Dollars, Euro and
Brazilian Real. The remaining $47,915,000, or 93%, is denominated in U.S. Dollars. At September 30,
2011, $33,450,000, or 65%, of our total cash and cash equivalents balance was held in money market
accounts, with the remaining $18,224,000 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 September 30, 2011, we were subject to the 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, Mike Rutti vs. LoJack Corporation, Inc. was filed in the District
Court by a former employee alleging
violations of the FLSA, the California Labor Code, and the
California Business & Professions Code, and seeking class action status.
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 and, in August 2009, the Ninth Circuit
affirmed the District Courts grant of summary judgment on all claims except as to the
Data Transmission Claim, for
which the dismissal was reversed. The plaintiff filed a petition for rehearing and, on March 2,
2010, the Ninth Circuit amended its decision to affirm the District Courts grant of summary
judgment on all claims except as to (a) the Data Transmission Claim and (b) the Commuting Claim. The plaintiff later sought to
pursue the Commuting Claim in the State Court Case referenced below. The plaintiff moved for
conditional certification of the Data Transmission Claim under the FLSA and, on January 14, 2011,
the District Court granted the plaintiffs motion. On October 7, 2011, the parties filed a joint
stipulation with the District Court stating that they had reached a settlement of the Data
Transmission Claims. On November 7, 2011, the parties filed a joint motion for approval of the
settlement as required by the FLSA. Pursuant to the terms of the settlement, the Federal Court
Case would be dismissed; the plaintiffs would release the Company of the claims asserted in the
Federal Court Case and all other wage-and-hour claims (except, in the case of two plaintiffs, the
claims asserted in the State Court Case); and the Company would pay
to the plaintiffs an aggregate amount of approximately
$115,000 and pay to their attorneys an amount for attorneys fees and costs to be determined by the
District Court after noticed motion but not to exceed $1,100,000. Nothing in the settlement would
constitute an admission of any wrongdoing, liability or violation of law by the Company. Rather,
the Company has agreed to the settlement to resolve the Federal Court Case, thereby eliminating the
uncertainties and expense of further protracted litigation.
Due to the dismissal of the plaintiffs claims by the District Court in September 2007 as
discussed above, in November 2007, the plaintiff and a second plaintiff filed in the Superior Court
Mike Rutti, Gerson Anaya vs. LoJack
Corporation, Inc. to assert wage-and-hour claims under California law on behalf of current and
former Company technicians. In September 2009, the Superior Court granted
class certification with respect to nine claims and denied class certification with respect to five
claims. The Company sought appellate review of this decision. On March 26, 2010, the California
Court of Appeals for the Second Appellate District granted our request in part, denying
certification with respect to certain claims but affirming certification with respect to certain
other claims.
On July 29, 2011, the Superior Court granted class certification of the remaining claims
except for a vehicle maintenance expense reimbursement claim. Thus, in the State Court Case there
currently are 16 certified claims, including the Commuting Claim; a Data Transmission Claim arising
under state law; claims for various amounts of unpaid time; claims for reimbursement of work tools expenses
and the cost of washing the company vehicle; claims for unfair competition under California
Business and Professions Code section 17200; and claims for waiting-time penalties and penalties
under the California Labor Code Private Attorneys General Act. Trial of the State Court Case is
currently set for July 2012.
In the State Court Case, the plaintiff, on behalf of the class, seeks unpaid wages, penalties,
interest and attorneys fees.
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 September 15, 2010, a suit entitled Louis Morin v. LoJack Corp., Inc., et al was filed 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 United States District Court for the Central District
of California preliminarily approved the settlement on September 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. A fairness hearing for final approval of the
settlement is scheduled for December 5, 2011.
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, and violation of the New York franchise law, violation of Mass. Gen
Laws c. 93A and Robinson-Patman Act, amongst other claims. 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.
On September 30, 2011, the Court ruled on the pending motions and denied, as futile, the
plaintiffs request to amend the complaint with respect to the misrepresentation, New York
franchise law, violation of Mass. Gen Laws c. 93A and breach of fiduciary duty claims. The Court
granted the plaintiff permission to re-plead the tortious interference with business relations and
Robinson-Patman Act claims. The breach of contract and breach of covenant of good faith and fair
dealing claims remain viable.
On October 14, 2011, the plaintiff filed a motion for reconsideration of the dismissal of the
violation of Mass. Gen Laws c. 93A and the violation of the New York
Franchise law claims. The Company
opposed such motion and is awaiting the Courts ruling.
The Company believes that it has substantial legal and factual defenses to these claims and
intends to defend its interests vigorously.
Given that there are still pending motions regarding which claims will survive and which will
be dismissed, 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.
Brazilian Licensee Litigation
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 alleged that the Company failed to maintain a
patent for the stolen vehicle recovery system in Brazil and included claims for breach of contract,
breach of the implied covenant of good faith and fair dealing, misrepresentation, and violation of
Mass. Gen. Laws c. 93A. The claimant sought $111,500,000 in damages, treble damages, and
attorneys fees and costs. On May 11, 2011, the American Arbitration Association administratively
closed this matter.
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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
sought, amongst other things, $289,500,000 in actual damages, treble damages, attorneys fees, and
declaratory and injunctive relief. On July 6, 2011, claimants voluntarily withdrew their
application for arbitration and Tracker do Brasil LTDA commenced the below discussed lawsuit
against LoJack Ireland requesting that a Massachusetts Court
order LoJack Ireland to submit to arbitration before the American Arbitration Associations
International Centre for Dispute Resolution, without limitation or precondition. On July 7, 2011,
LoJack Ireland was served by Tracker do Brasil LTDA with the aforementioned lawsuit which was filed
in Norfolk Superior Court in Massachusetts. The lawsuit alleged interference with contractual
relations, fraud/intentional misrepresentation, negligent misrepresentation, 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 for the licensee. The
claimant sought, amongst other things, $289,500,000 in actual damages, treble damages, attorneys
fees, and declaratory and injunctive relief. The claimant also sought a court order compelling
arbitration and staying the case in Norfolk Superior Court during the pendency of the arbitration.
On September 1, 2011, the parties stipulated to the entry of an order that the dispute relating to
product pricing and the fulfillment of purchase orders to the licensee would be re-filed for
arbitration with the International Centre for Dispute Resolution. Thus, as of September 1, 2011,
both the International Centre for Dispute Resolution filing and the Norfolk Superior Court action
relating to product pricing and the fulfillment of purchase orders
were not pending.
On September 27, 2011, the Company received Tracker do Brasil LTDAs re-filed
arbitration demand against LoJack Equipment Ireland Ltd. before the International Centre for
Dispute Resolution. The filing alleges interference with contractual relations, fraud/intentional
misrepresentation, negligent misrepresentation, 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,
$55,000,000 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 current stage 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 6. | Exhibits |
(a) Exhibits
Exhibit | ||
No. | Description | |
10.1* | Separation Agreement between LoJack Corporation and Paul Weichselbaum, effective as of September 16, 2011. |
|
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. |
|
101** | The following materials from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2011,
formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets,
(ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash
Flows, and (iv) Notes to Condensed Consolidated Financial Statements tagged as blocks of text. |
* | 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: November 9, 2011 | By: | /s/ Randy L. Ortiz | ||
Randy L. Ortiz | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: November 9, 2011 | By: | /s/ Donald R. Peck | ||
Donald R. Peck | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
32