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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2002.
or
[ ] Transition Report pursuant Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _________.
Commission File No. 1-8439
LOJACK CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2664794
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
200 Lowder Brook Drive, Suite 1000
Westwood, Massachusetts 02090
(Address of Principal Executive Offices) (Zip Code)
(781) 326-4700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Share Purchase Rights
(Title of Class)
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 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the registrant's common stock, $.01 par value (the
"Common Stock") held by non-affiliates was approximately $49,695,916 as of June
28, 2002. The aggregate market value of Common Stock indicated is based upon the
last traded price of the Common Stock as reported by NASDAQ on June 28, 2002.
As of March 18, 2003, there were issued and outstanding 14,738,621 shares of the
registrant's Common Stock, $.01 par value.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the definitive Proxy Statement for Registrant's Annual
Meeting of Stockholders to be held on May 29, 2003 (Part III, Items 10,
11, 12 and 13).
LOJACK CORPORATION
TABLE OF CONTENTS
Securities and Exchange Commission
Item Number and Description
Page
PART I
ITEM 1. Business.............................................................................................. 1
ITEM 2. Properties........................................ ................................................... 9
ITEM 3. Legal Proceedings..................................................................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders................................................... 9
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters..... ....................... 9
ITEM 6. Selected Financial Data........................................................ ..................... 10
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 11
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk........................................... 22
ITEM 8. Financial Statements and Supplementary Data.......................................................... 22
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 40
PART III
ITEM 10. Directors and Executive Officers of the Registrant................................................... 40
ITEM 11. Executive Compensation............................................................................... 40
ITEM 12. Security Ownership of Certain Beneficial Owners and Management....................................... 40
ITEM 13. Certain Relationships and Related Transactions....................................................... 40
ITEM 14. Controls and Procedures.............................................................................. 40
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 40
SIGNATURES....................................................................................................... 44
CERTIFICATIONS .................................................................................................. 45
In as much as the calculation of shares of the registrant's voting stock held by
non-affiliates requires a calculation of the number of shares held by
affiliates, such figure, as shown on the cover page hereof, represents the
registrant's best good faith estimate for purposes of this Annual Report on Form
10-K. All outstanding shares beneficially owned by executive officers and
directors of the registrant or by any shareholder beneficially owning more than
10% of registrant's Common Stock, as disclosed herein, were considered for
purposes of this disclosure to be held by affiliates.
PART I
ITEM 1 - BUSINESS
GENERAL
LoJack Corporation ("LoJack" or the "Company") was organized as a Massachusetts
corporation in 1978. Its corporate offices are located at 200 Lowder Brook
Drive, Suite 1000, in Westwood, MA 02090. Its telephone number is (781)
326-4700.
LoJack develops and markets the LoJack(R) System, a unique, patented system
designed to assist law enforcement personnel in locating, tracking and
recovering stolen vehicles. Beginning in 2002, the Company introduced the LoJack
Early Warning(TM) Recovery System ("LoJack Early Warning"), a new product
building on the Company's stolen vehicle recovery technology that provides early
notification to a vehicle owner in the event an unauthorized user is operating
the vehicle. In addition, LoJack develops and markets a product line of its
patented LoJack System designated for use in international markets where it may
not be practicable or desirable to implement the fully integrated LoJack System.
The LoJack System is comprised of a Registration System, maintained and operated
by LoJack; a Sector Activation System and Police Tracking Computers, operated by
law enforcement officials (the "Law Enforcement Components"); and a LoJack Unit,
a VHF (very high frequency) transponder sold to consumers (together, the "LoJack
System"). The LoJack System is designed to be integrated into existing law
enforcement computer systems and telecommunication systems and procedures. If a
car equipped with a LoJack Unit is stolen, its owner should report the theft as
usual to the local police department. If the theft involves a vehicle equipped
with a LoJack Unit, and is reported in a jurisdiction where the LoJack System is
operational, a unique radio signal will be transmitted automatically to the
LoJack Unit in the stolen vehicle, activating its tracking signal. The Police
Tracking Computer, installed in police patrol cars and aircraft throughout the
coverage areas and used to lead law enforcement officers to the stolen vehicle,
uses sophisticated direction-finding technology to locate the source of the
tracking signal emitted from the LoJack Unit.
The Company's revenues in the United States are derived primarily from the sale
of LoJack Units and related products, alarms, LoJack Early Warning and extended
warranties to consumers. Approximately 90% of domestic sales are made through a
distribution network consisting of dealers of new and used automobiles. The
Company has strong consumer brand awareness in the United States, originally
built in the cars and light trucks market, and is continuing to expand its brand
awareness to the commercial fleet and construction markets.
The Company also derives revenues in over 26 international markets from license
fees, sales of product and royalties pursuant to agreements to license the use
of the Company's stolen vehicle recovery system technology. These international
markets have existing infrastructure and forecasted revenues for 2003. Revenues
from the International segment comprised approximately 17% of consolidated
revenues for the year ended December 31, 2002. In connection with this
international expansion, the Company modified its stolen vehicle recovery
technology to have the flexibility of operating independently of existing law
enforcement communication networks.
OPERATION OF THE LOJACK SYSTEM IN THE UNITED STATES
Under agreements with state agencies, LoJack generally furnishes the Law
Enforcement Components for distribution to state, county and municipal law
enforcement agencies for a nominal rent. The installation, testing and
maintenance of the Law Enforcement Components are primarily the responsibility
of LoJack. LoJack generally owns the Law Enforcement Components. The LoJack
System is designed to integrate with law enforcement systems. The local law
enforcement agency operates the LoJack System as required during the term of
each state, county or city's agreement with LoJack. The agreements with the
applicable law enforcement agencies are generally for initial terms up to five
years. To date, substantially all such agreements that have expired have been
renewed or are in the process of renewal. Renewal or extension of any such
agreement may be subject to competitive bidding. The Company has no legal
obligation to retail customers to provide ongoing systems support and
maintenance or to refund any of the purchase price if these contracts expire and
are not renewed, or are terminated either by LoJack or by the local law
enforcement agencies.
- 1 -
The LoJack System has been implemented in all or a portion of each of the
following domestic jurisdictions pursuant to agreements with applicable law
enforcement agencies as follows:
Statewide coverage* (over 80% of the population) is available in the following
states:
Arizona
California
Connecticut
District of Columbia
Maryland
Massachusetts
Michigan
New Jersey
Rhode Island
Major metropolitan areas, cities and high crime area coverage* is available in
the following states:
Colorado
Delaware
Florida
Georgia
Illinois
Louisiana
Nevada
New Hampshire
New York
Pennsylvania
Texas
Virginia
Coverage in the State of Washington is in process and should be completed by
April 2003.
* Coverage areas have been identified and defined based on a qualitative
analysis of population density, geography and distribution of police tracking
computers.
- 2 -
The Company's strategic plan for the operation of its stolen vehicle recovery
network in the United States is to increase penetration in its existing
automotive channel, expand the construction trade channel, open additional
complimentary channels of distribution and continue to expand the use of its
technology to those domestic and international markets where the combination of
new vehicle sales, population density and the incidence of vehicle theft is
high. The Company's strategic plan for growth also includes the launch of new
products, as well as the continued re-engineering of the LoJack Unit to take
advantage of leading edge RF (Radio Frequency) technology. In certain
circumstances, the Company has made direct strategic investments in
international licensee operations to leverage its close relationships with its
partners, to better understand the business models of its licensees, to develop
a global technology roadmap and to expand unit sales. These initiatives require
substantial investments of capital and operating resources.
THE LOJACK SYSTEM
The LoJack System consists of four basic components:
1. LoJack Unit
2. Police Tracking Computer
3. Sector Activation System
4. Registration System
The LoJack Unit. The LoJack Unit is the component of the LoJack System that is
installed in a purchaser's vehicle. The LoJack Unit consists of a VHF
transponder, a microprocessor-based computer and a modem. The computer's memory
contains a set of codes unique to the particular LoJack Unit. The microprocessor
activates the LoJack Unit's transmitter upon receipt of its unique activation
code from the Sector Activation System. Since each LoJack Unit has its own
unique activation code and reply code, the microprocessor responds only upon
receipt of the appropriate code. An activated LoJack Unit will continue to
broadcast its reply code until it receives a properly coded message to stop. The
deactivation command message is sent automatically to the LoJack Unit upon entry
of information in the police computer system, in a jurisdiction in which the
LoJack System is operational, that the police have recovered the vehicle. All
transmissions are made on a nationwide radio frequency allocated by the Federal
Communications Commission ("FCC") as a law enforcement radio service.
Police Tracking Computer. The Police Tracking Computer ("PTC") is a
sophisticated radio direction finder. The PTC is used by police to locate and
track activated LoJack Units. The PTC consists of a radio receiver with a
directional antenna array, doppler signal processor, microprocessor-based
computer and a controllable display. When the PTC detects a LoJack Unit
transmission from a stolen vehicle, it displays the reply code along with
graphic indications of signal strength and the direction toward the stolen
vehicle. The officer then radios the reply code to the police dispatcher and
obtains a vehicle description.
The PTC is generally installed in police vehicles. Modified designs of the PTC
are used in helicopters as well as fixed locations such as toll booths, radio
towers or police communication centers. Effective tracking range varies under
different topographical and other conditions, from about one mile to
approximately five miles under ideal conditions.
Sector Activation System. The Sector Activation System is the part of the LoJack
System that contains the Sector Activation Computer ("SAC"), the Sector
Activation Transmitters and the communication network that connects them.
For each vehicle equipped with a LoJack Unit, the SAC contains the vehicle
identification number ("VIN") assigned by the vehicle's manufacturer, and the
activation, deactivation and reply codes for the LoJack Unit installed in that
vehicle. The SAC also controls the Sector Activation Transmitters network,
causing activation, speed-up and deactivation commands to be broadcast at
appropriate times during the stolen vehicle activation and recovery sequence.
The Sector Activation System was designed to function with existing law
enforcement computer and telecommunication systems and procedures. Routine and
normal processing of a stolen vehicle report activates the Sector Activation
System, even if the person reporting the theft and the officer responding are
unfamiliar with the LoJack System.
When the VIN of a stolen vehicle is entered into the existing police computer
system, it is compared automatically to those contained in the SAC database. If
a match is found, the SAC causes the Sector Activation Transmitters network to
broadcast the appropriate activation command. Police officers who receive the
corresponding reply code through their PTCs call dispatch and receive a
description of the transmitting vehicle.
- 3 -
After recovery, the officer reports to dispatch, which enters the vehicle as
recovered. That routine entry into the police computer causes the Sector
Activation System to transmit a deactivate command, which returns the LoJack
Unit to its original state.
Registration System. The Registration System is a proprietary method of
assigning digital codes to be transmitted and received by LoJack Units in such
manner that unique activation codes are permanently correlated with the unique
VIN assigned to the vehicle in which the LoJack Unit has been installed.
NEW PRODUCT DEVELOPMENTS
LoJack Early Warning. LoJack Early Warning is a new product, building on the
Company's stolen vehicle recovery technology that provides early notification to
a vehicle owner in the event an unauthorized user is operating the vehicle.
LoJack Early Warning consists of the LoJack Unit, a uniquely coded key pass and
a motion sensor. The motion sensor monitors vehicle movement and detects the
presence of the registered owner's key pass, ensuring an authorized user is
driving the vehicle. Should the motion sensor detect that the vehicle is moving
without the presence of the registered owner's key pass, a communication from
the LoJack Unit in the vehicle is transmitted back to the LoJack Control Center,
a Company-maintained database that provides automatic notification via e-mail,
pager, and/or home, work or cell phone call to the consumer. LoJack Early
Warning has been approved by the FCC. LoJack Early Warning was launched in the
Northeastern United States in the fourth quarter of 2002 and launched nationally
in January 2003.
Next Generation of the LoJack Unit. LoJack is continuing the development of the
next generation of the LoJack Unit, which will replace the current version.
While functionally the same as the current LoJack Unit, the new module will be
smaller, will use less energy, and will be re-engineered to take advantage of
leading-edge technology and improved manufacturing techniques. It is anticipated
that the new version of the LoJack Unit will be available in 2004. The Company
is also exploring additional integrated technologies to enable ubiquitous
coverage - a footprint similar to the cellular industry.
MARKETING AND DISTRIBUTION OF LOJACK UNITS - UNITED STATES
LoJack's marketing approach focuses on new car dealerships that will offer the
LoJack System as an option on both their new and used car sales. LoJack also
markets conventional vehicle security devices, LoJack Early Warning and extended
warranties through car dealers. The Company markets primarily through a national
sales force that routinely visits new and used automobile dealers to educate and
train dealership personnel on the benefits of the LoJack System and related
products. In addition, to supplement its distribution efforts, the Company has
entered into cooperative arrangements with third party companies specializing in
after-market installations of vehicle accessories to expedite the expansion of
the market for the LoJack System. The actual method of distribution is
determined on a market-by-market basis. Like other options on vehicles, the
LoJack Unit and related products usually can be financed conveniently as a part
of the purchase price of the vehicle. LoJack also uses direct advertising to
consumers to generate product awareness.
LoJack also markets its products directly to operators of fleet and commercial
vehicles. The Company is looking to expand to other vehicle markets in the
future.
During 2002, the Company adopted alternative installation methods by contracting
with certified dealers and other third parties to perform the installation of
the LoJack Unit. LoJack ensures the quality of these alternative installations
through the use of an expanded quality control process. For installations
performed by the Company, LoJack maintains full responsibility for installation.
For all installations, the Company maintains full warranty service of LoJack
Units, both for the convenience of dealers through whom the LoJack Units are
marketed and for LoJack to maintain a high degree of quality control and
security over its technology. LoJack also offers an extended warranty at the
point of sale to new customers and through direct sales efforts to existing
customers.
LoJack is evaluating additional channels of distribution, including marketing
through insurers and direct marketing through partnerships.
- 4 -
INTERNATIONAL OPERATIONS
The Company also licenses the use of its stolen vehicle recovery system
technology in selected international markets. Unlike the LoJack System currently
operational in the United States, the product available to its international
markets has the flexibility of operating independently of existing law
enforcement communication networks.
The Company targets its products for use by either law enforcement or private
security companies in selected international markets where the implementation of
a fully integrated LoJack System may not be feasible. This application of the
LoJack technology allows stolen vehicles to be activated, tracked and recovered
without the direct involvement of local police.
License agreements with international parties have thus far been denominated in
U.S. dollars and structured with up-front licensing fees, which may be
substantial and are non-recurring, and provide that the Company will
subsequently either supply components and products at prices to be determined
from time to time and/or receive royalties based upon the licensees' revenues.
It is the Company's intention to continue to license the use of the LoJack
stolen recovery system technology in other selected international markets on the
same basis as described above.
LoJack has made direct investments in selected international licensees, which
the Company believes offer significant market opportunity for LoJack Unit sales.
The Company focuses on markets that have high per capita thefts, high annual
recurring sales of new vehicles and large numbers of vehicles operating in the
area. The Company expects to leverage its close relationship with its
international partners to continue to better understand the business models of
its licensees and to develop a global technology roadmap. In December 2001, the
Company acquired a 7.9% equity interest in its French licensee. In 2002, the
Company entered into a loan agreement with its Argentine licensee which
converted the licensee's existing accounts receivable into a long term financing
agreement and allowed the licensee to borrow up to an aggregate amount of $1.74
million advanced in the form of inventory from the Company. This loan is secured
by a pledge of all of the stock of the Argentine licensee as well as a personal
guarantee by the licensee's principal. In addition, in consideration for the
loan the Company received 10% of the common stock of the Argentine licensee and
has agreed to return half of this stock to the licensee upon repayment of the
loan at maturity. In March 2003, the Company converted an existing receivable
balance into a 12.5% equity investment in its Mexican licensee. In addition, in
March 2003 the Company converted an existing receivable balance of approximately
$306,000 from its French licensee plus 60,000 Euros into a convertible debenture
at a conversion ratio to be determined with reference to the price paid by
future third party investors. In 2003, the Company may make additional
investments in its French licensee.
During December 31, 2002, the Company recognized revenues from licensees using
LoJack's technology in the following countries: Bahamas, Brazil, Chile,
Colombia, Costa Rica, Czechoslovakia, Ecuador, France, Germany, Hong Kong,
Italy, Kenya, Korea, Mexico, Nigeria, Panama, Paraguay, Poland, Russia, South
Africa, Spain, Trinidad and Tobago, Uganda, United Kingdom, Uruguay and
Venezuela. The Company also is pursuing similar agreements for licensing its
technology in other countries.
Approximately 17% of the Company's revenues for the year ended December 31, 2002
were derived from sales and license fees to international customers. These
revenues were comprised of product and component sales and licensing revenues.
The Company generally sells products and components of the LoJack System to
foreign licensees through cash prepayments, letters of credit, purchased export
insurance, or established payment terms. The Company recognizes revenue upon
shipment of the product, or when payment becomes reasonably assured, whichever
is later. (See Notes 1, 9 and 10 in the notes to the consolidated financial
statements included herein at Item 8).
GOVERNMENT REGULATION AND APPROVAL
The FCC allocated frequency 173.075 MHz, used by the LoJack System, for
nationwide use by state and local law enforcement agencies for stolen vehicle
recovery systems. Law enforcement agencies in jurisdictions where the Company
operates have been granted authority by the FCC to use this frequency for a
stolen vehicle recovery system.
In connection with its domestic operations, the Company must obtain the approval
of law enforcement agencies for implementation of the LoJack System before sales
of LoJack Units can commence in a given jurisdiction.
- 5 -
The approval process may be time consuming and costly and is subject to
considerations generally affecting the process of governmental decision-making.
In some jurisdictions, governmental approval may be terminable at the
convenience of the executive or legislative body. Any such termination could
have a material adverse effect on future sales in any such jurisdiction.
If LoJack were to seek to charge more than nominal prices for the Law
Enforcement Components, governmental appropriation of funds would be required.
Most government agencies have established, by policy, statute or regulation, a
process requiring competitive bidding for all acquisitions of products and
equipment. This process may cause delay and expense to the Company. To date, the
Company has not sought to charge law enforcement agencies more than nominal
prices for the Law Enforcement Components, and does not expect to do so in the
near future.
AUTOMOBILE INSURANCE BENEFITS
Management considers automobile insurance premium discounts to be an inducement
for the purchase of LoJack Units by vehicle owners. The application of insurance
premium discounts, which are generally applied to the vehicle owner's
comprehensive insurance, varies from state to state and, in some cases, from
insurance company to insurance company. For example, insurance regulations in
some states, including Massachusetts, Rhode Island, New York and New Jersey,
provide for mandated insurance discounts for automobiles protected by automobile
security systems. In other states, such as California, where the granting of
such discounts is not regulated, individual insurance carriers make the
determination. Currently, insurance discounts, which vary from state to state
and nationally by certain insurance carriers, provide for discounts of up to 35%
on comprehensive insurance premiums for vehicles equipped with a vehicle
recovery and anti-theft device.
The Company is working directly with the insurance industry to explore the
feasibility of initiating marketing programs directly with insureds. Since the
insurance industry is, in general, heavily regulated, the process of seeking
voluntary or mandatory discounts for vehicles may involve significant time and
effort.
PRODUCT WARRANTY
LoJack Product Warranties. LoJack warrants to consumers that the LoJack System
and related products including the LoJack Starter Disabler, Alarm System, Shock
Sensor and LoJack Early Warning will be free from defects in material or
workmanship for a period of two years from the date of installation. If the
product proves to be defective in material or workmanship, the Company will, at
its option, either replace the product or provide, without charge, the labor and
parts necessary to remedy any such defects at a LoJack operated installation
center.
Limited Recovery Warranty. LoJack also warrants to original purchasers of LoJack
Units that if their LoJack equipped vehicle is stolen and reported in a covered
jurisdiction within two years of installation and not recovered within 24 hours
from the time that the theft is reported to the police, LoJack will pay the
consumer an amount equal to the full purchase price of the LoJack Unit up to a
maximum of $695 (up to $895 if the consumer also purchased LoJack Early
Warning).
LoJack Guarantee Plus 5000. Consumers may purchase an additional warranty in
which LoJack, or in most jurisdictions an independent third party insurer,
warrants to original purchasers of LoJack Units that if the vehicle becomes a
total loss due to theft or is not recovered in 30 days from the time the theft
is reported to the police, the consumer could receive up to $2,500 to cover
theft related expenses plus up to an additional $2,500 towards the purchase or
lease of a replacement vehicle if the consumer returns to the original dealer.
Where the Company, and not an independent third party, is the primary obligor
under this warranty, the Company has insured the risk relating to these
warranty claims.
PATENTS AND TRADEMARKS
LoJack holds United States Patents Nos. 4,818,998, 4,908,629 and 5,917,423 which
expire in 2006, 2007 and 2017, respectively, covering the LoJack System. The
Company also holds patents in various countries in Europe, Asia, South America
and North America. Patent protection has also been sought by LoJack in several
other countries. Although Management believes the patents have value, there can
be no assurance such patents will effectively deter others from manufacturing
and marketing a stolen vehicle recovery system. LoJack's name and logo are
registered trademarks in the United States and many foreign countries.
- 6 -
COMPETITION
Several competitors or potential competitors are marketing or have announced the
development of products, including those that are based on global positioning
software, which claim to have stolen vehicle tracking features that may compete
directly with the LoJack System. To the knowledge of Management, none of these
products are directly integrated with law enforcement systems or operated and
monitored exclusively by law enforcement agencies, as is the LoJack System.
LoJack markets the LoJack System as a stolen vehicle recovery device. Management
believes, however, that makers of auto theft prevention devices view the LoJack
System as competitive, and, consequently, LoJack believes it faces competition
from companies that sell vehicle security devices. Some of the competitors and
potential entrants into the vehicle tracking industry have greater resources
than LoJack. In addition, there can be no assurance that a competitor will not
develop a system of theft detection or recovery, including other stolen vehicle
recovery systems that may not require government approvals, which would compete
with or be superior to the LoJack System.
CONTRACT MANUFACTURING ARRANGEMENTS
LoJack has contract manufacturing arrangements for the LoJack Unit, new products
and LoJack system components. The Company has utilized Motorola, Inc. for over
15 years to manufacture the LoJack Unit. LoJack believes that several companies
have the capability to manufacture LoJack Units. The Company also has contracted
with Motorola for the development and redesign of the LoJack Unit to accommodate
additional applications.
INVENTORY
LoJack seeks to maintain a 90-day supply of LoJack Units, which it believes is
in line with sales levels and sufficient to rapidly fulfill orders. The Company
maintains an inventory of certain Law Enforcement Components beyond its current
requirements in order to facilitate expansion into additional domestic and
international markets.
RESEARCH AND DEVELOPMENT
Costs for research and development are expensed as incurred and include
salaries, fees to consultants, and other related costs associated with the
development of new products. Total research and development expenses totaled
$2,291,000, $2,634,000 and $1,200,000 for the year ended December 31, 2002, the
ten months ended December 31, 2001 and the year ended February 28, 2001,
respectively. A portion of the Company's research and development efforts has
been outsourced to third parties. The contracts with third parties require
payments based upon completion of defined milestones. Expenses related to
milestone achievements amounted to $85,000, $1,071,000 and $392,000 for the year
ended December 31, 2002, the ten months ended December 31, 2001 and the year
ended February 28, 2001, respectively. In addition, software product development
costs of $174,000 in the year ended December 31, 2002, $194,000 in the ten
months ended December 31, 2001, and $534,000 in the year ended February 28, 2001
were capitalized.
EMPLOYEES
As of December 31, 2002, the Company had a total of 688 full-time employees, 380
of which are field installation personnel and 91 of which are part of the field
sales organization.
SEGMENT INFORMATION
For financial information about our segments, see Note 10 to our consolidated
financial statements contained herein at Item 8.
- 7 -
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's executive officers is set forth below.
Name Age Title
----------------- --- -------------------------------------
Ronald J. Rossi 63 Chairman and Chief Executive Officer
Joseph F. Abely 50 President, Treasurer and Chief
Operating Officer
William R. Duvall 51 Senior Vice President
Peter J. Conner 62 Vice President (Government Relations)
Donna Driscoll 50 Vice President (Marketing)
Keith E. Farris 55 Vice President (Finance) and Chief
Financial Officer
Kevin M. Mullins 48 Vice President (Sales)
Mr. Rossi joined LoJack in November 2000 as Chief Executive Officer. He became a
Director and was elected Chairman of the Board of Directors effective May 21,
2001. Prior to joining LoJack, Mr. Rossi spent 35 years with the Gillette
Company, progressing through a variety of management positions in sales,
marketing, and general management in the United States, Canada and Puerto Rico.
Mr. Rossi served as President of Oral-B Worldwide, a Gillette Company, from 1998
to 2000. From 1988 to 1998 he was President of Gillette North America; previous
positions include President of Gillette Canada and President of Braun/Canada.
Mr. Rossi is also a member of the board of the Mentor Corporation since January,
2000 and had served on the executive board of the Massachusetts Bay Red Cross
from 1993-1998, the board of the New England Sports Museum from 1993-1998, and
as chairman of the Canadian Cosmetic and Toiletry Fragrance Association since
1987.
Mr. Abely joined LoJack in October 1988 as Senior Vice President and Chief
Financial Officer. He was named President and Chief Operating Officer in January
1996 and a Director in November 2000. From 1976 until October 1988, Mr. Abely
was employed by the accounting firm of Deloitte Haskins & Sells, where he served
as a partner from 1985. Mr. Abely is a Certified Public Accountant.
Mr. Duvall joined LoJack in 1985 and is a Senior Vice President. He was
appointed President of LoJack International in 2001. From 1984 to 1985, he was a
part owner and manager of Rich's Car Tunes, a company engaged in the sale and
installation of consumer electronic products in the automotive aftermarket. For
six years prior to 1984, Mr. Duvall was Vice President of Marketing and Sales
for Analog and Digital Systems, Inc., a manufacturer of consumer electronic
products.
Mr. Conner joined LoJack in 1985 and is Vice President of Government Relations.
From 1982 to 1985, he was a franchise director for Continental Cablevision of
Boston, Massachusetts. From 1980 to 1982, Mr. Conner was a franchise director
for American Television Communications of Denver, Colorado, a cable television
operator.
Mr. Mullins joined LoJack in February 1996 and is Vice President of Sales. Mr
Mullins served as Vice President of Sales and Marketing of LoJack from February
1996 until May 2001. From 1976 until joining LoJack, Mr. Mullins served in a
variety of positions at Proctor & Gamble Company, Inc., including District Sales
Manager, Customer Business Development Manager, and most recently as Northeast
Operation Manager.
Mr. Farris joined LoJack in October 2000 as Vice President of Finance and Chief
Financial Officer. From 1996 to 2000, Mr. Farris served as Vice President of
Finance and Chief Financial Officer of Arkwright, Inc., a manufacturer of
digital imaging supplies. From 1981 to 1996, Mr. Farris held various financial
management positions at Digital Equipment Corporation. Mr. Farris is a Certified
Public Accountant.
Ms. Driscoll joined LoJack in May 2001 and is Vice President of Marketing. From
1999-2000, she was Chief Marketing Officer for Roxy.com, an on-line retailer of
consumer electronics. From 1987 until joining LoJack,
- 8 -
Ms. Driscoll served in a variety of executive positions at various companies
including Citigroup from 1997-1999; AT&T Capital Corp from 1994-1997; Fidelity
Investments from 1992-1994; and Citigroup Point of Sale Information Services
Inc. from 1987-1992.
There are no arrangements or understandings pursuant to which any executive
officer was or is to be selected for election or reelection. There are no family
relationships among any Directors or executive officers.
ITEM 2 - PROPERTIES
The Company's executive offices are located at 200 Lowder Brook Drive, Suite
1000, Westwood, Massachusetts, under a lease for such space expiring in January
2007. In addition, the Company leases various facilities in Arizona, California,
Florida, Georgia, Illinois, Massachusetts, Nevada, New Jersey, Pennsylvania and
Texas under operating leases that expire from 2003 to 2008. The leases contain
renewal options ranging from two to five years. Because the Company's operations
do not require any special facilities, the Company does not anticipate any
difficulty in finding space adequate for its purposes at reasonable rates,
should the need arise. The Company believes that its facilities are adequate for
its operations.
ITEM 3 - LEGAL PROCEEDINGS
The Company was not a party to any material legal proceedings during the fiscal
year ended December 31, 2002, and the Company is not currently a party to any
material legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
LoJack's common stock is traded on the NASDAQ National Market under the symbol:
LOJN.
The following table sets forth the range of the high and low bid information for
the common stock of LoJack for the periods indicated, as reported by NASDAQ.
This information reflects inter-dealer prices, without retail mark-up, markdowns
or commission and may not necessarily reflect actual transactions.
HIGH LOW
Twelve Months Ended December 31, 2002
First Quarter $5.54 $4.45
Second Quarter 5.60 3.37
Third Quarter 4.37 3.60
Fourth Quarter 5.00 3.69
Ten Months Ended December 31, 2001
First Quarter $6.88 $4.90
Second Quarter 7.11 5.11
Third Quarter 5.77 4.90
December 5.45 5.10
On March 18, 2003, there were 2,488 record holders of the Company's common
stock. The Company believes the actual number of beneficial owners of the Common
Stock is approximately 5,724 because a large number of the shares of the
Company's common stock are held in custodial or nominee accounts for the benefit
of persons other than the record holders.
LoJack has never paid a dividend, and at the present time the Company expects
that future earnings will be retained for use in its business or to repurchase
shares of its common stock. The Company's line-of-credit facility with a bank
permits the payment of dividends so long as such payment does not cause
noncompliance with certain loan covenants.
- 9 -
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of LoJack
Corporation ("LoJack" or the "Company") for the periods indicated. On October
24, 2001, the Company changed the date of its fiscal year end from the last day
of February to December 31, effective December 31, 2001. The selected
consolidated financial data for and as of the year ended December 31, 2002, the
ten months ended December 31, 2001 and for each of the three years in the
periods ended February 2001, 2000, 1999, are derived from the consolidated
financial statements of the Company. The amounts in the year ended February 28,
2001, include the cumulative effect on prior years of a change in accounting
policy for revenue recognition on international license fees in accordance with
SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements". The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included within Item 7 and the consolidated financial statements and
notes included within Item 8.
YEAR TEN MONTHS YEARS ENDED
ENDED ENDED ---------------------------------------------------
DECEMBER 31, DECEMBER 31, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2002 2001 2001 2000 1999
-------------------------------------------------------------------------------------
STATEMENTS OF INCOME
(in thousands, except share and per share
information):
Revenues $ 116,426 $ 84,379 $ 95,850 $ 90,159 $ 83,210
Cost of goods sold 59,558 42,267 47,414 41,933 37,565
------------- ------------ ------------ ------------ -----------
Gross margin 56,868 42,112 48,436 48,226 45,645
Costs and expenses 54,047 37,552 37,087 34,035 29,159
------------- ------------ ------------ ------------ -----------
Operating income 2,821 4,560 11,349 14,191 16,486
Interest income (expense) and other - net 178 130 528 695 1,563
------------- ------------ ------------ ------------ -----------
Income before provision for income taxes 2,999 4,690 11,877 14,886 18,049
Income tax provision 1,170 1,735 4,371 5,805 7,041
------------- ------------ ------------ ------------ -----------
Income before cumulative effect of
change in accounting principle 1,829 2,955 7,506 9,081 11,008
Cumulative effect of change in
accounting principle - - (2,978) - -
------------- ------------ ------------ ------------ -----------
Net income $ 1,829 $ 2,955 $ 4,528 $ 9,081 $ 11,008
============= ============ ============ ============ ===========
Basic earnings per share before cumulative
effect of change in accounting principle $ 0.12 $ 0.19 $ 0.47 $ 0.54 $ 0.61
Cumulative effect of change in accounting (0.19)
principle - - - -
------------- ------------ ------------ ------------ -----------
Basic earnings per share $ 0.12 $ 0.19 $ 0.28 $ 0.54 $ 0.61
============= ============ ============ ============ ===========
Diluted earnings per share before
cumulative effect of change in
accounting principle $ 0.12 $ 0.19 $ 0.45 $ 0.52 $ 0.57
Cumulative effect of change in accounting
principle - - (0.18) - -
------------- ------------ ------------ ------------ -----------
Diluted earnings per share $ 0.12 $ 0.19 $ 0.27 $ 0.52 $ 0.57
============= ============ ============ ============ ===========
Weighted average shares outstanding:
Basic 14,692,225 15,272,264 15,910,138 16,665,116 17,919,868
============= ============ ============ ============ ===========
Diluted 14,726,131 15,774,719 16,624,789 17,481,403 19,215,061
============= ============ ============ ============ ===========
BALANCE SHEET DATA:
Working capital $ 12,855 $ 14,359 $ 18,758 $ 15,453 $ 18,735
Total assets 55,003 48,194 42,155 35,161 38,479
Long-term debt 1,064 1,038 1,087 1,204 1,373
Total liabilities 34,635 28,517 20,319 13,907 13,363
Stockholders' equity 20,368 19,677 21,836 21,254 25,116
- 10 -
REVENUES, MARGIN AND EARNINGS BY QUARTER
(Unaudited and in thousands except per share information):
On October 24, 2001, the Company changed its fiscal year end from the last day
of February to December 31, effective beginning December 31, 2001.
TWELVE MONTHS ENDED DECEMBER 31, 2002
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Revenues $ 27,400 $ 30,419 $ 31,087 $ 27,520
Gross margin 13,400 14,809 14,671 13,988
Net income 84 28 813 904
Basic earnings per share $ 0.01 $ - $ 0.06 $ 0.06
Diluted earnings per share $ 0.01 $ - $ 0.06 $ 0.06
TEN MONTHS ENDED DECEMBER 31, 2001
FIRST SECOND THIRD MONTH OF
QUARTER QUARTER QUARTER DECEMBER
--------- --------- --------- ---------
Revenues $ 24,547 $ 25,408 $ 26,940 $ 7,484
Gross margin 12,242 12,536 14,029 3,307
Net income (loss) 2,199 1,965 155 (1,364)
Basic earnings (loss) per share $ 0.14 $ 0.13 $ 0.01 $ (0.09)
Diluted earnings (loss) per share $ 0.14 $ 0.12 $ 0.01 $ (0.09)
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes included within Item 8.
OVERVIEW
LoJack develops and markets the LoJack System, a unique, patented system
designed to assist law enforcement personnel in locating, tracking and
recovering stolen vehicles. Beginning in 2002, the Company introduced LoJack
Early Warning, a new product building on the Company's stolen vehicle recovery
technology, that provides early notification to a vehicle owner in the event an
unauthorized user is operating the vehicle. In addition, LoJack developed and
markets a product line of its patented LoJack System designated for use in
international markets where it may not be practicable or desirable to implement
the fully integrated LoJack System.
The Company's revenues in the United States are derived primarily from the sale
of LoJack Units and related products, alarms, LoJack Early Warning and extended
warranties to consumers. Approximately 90% of domestic sales are made through a
distribution network consisting of dealers of new and used automobiles. The
Company has strong consumer brand awareness in the United States, originally
built in the cars and light trucks market, and is continuing to expand its brand
awareness to the commercial fleet and construction markets.
- 11 -
The Company also derives revenues from license fees, sales of product and
royalties pursuant to agreements to license the use of the Company's stolen
vehicle recovery system technology in over 26 international markets. Revenues
from the International segment comprised approximately 17% of consolidated
revenues for the year ended December 31, 2002. In connection with this
international expansion, the Company modified its stolen vehicle recovery
technology to have the flexibility of operating independently of existing law
enforcement communication networks.
During the fourth quarter of fiscal year ended December 31, 2002, the Company
introduced LoJack Early Warning in its Northeastern markets in the United
States, and launched the product in all domestic markets in January 2003.
Revenues from the sale of LoJack Early Warning are recognized over a period of
the estimated life of vehicle ownership, generally five years. While the Company
showed minimal revenues in 2002 as a result of this product, the Company expects
that this product will contribute more significant revenues in 2003 and will
result in increased sales of the LoJack Unit.
On October 24, 2001, the Company's Board of Directors approved a change in the
Company's fiscal year end from the last day of February to December 31,
effective beginning December 31, 2001. All references to the period ended
December 31, 2001 refer to the ten-month transition period ended December 31,
2001.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements include the accounts of LoJack and its
wholly owned subsidiaries. Intercompany transactions and balances are eliminated
in consolidation. Management is required, in certain instances, to use estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and the notes thereto. The actual results could differ from those
estimates. The Company's accounting policies are fully described in Note 1 to
the consolidated financial statements included herein at Item 8. A "critical
accounting policy" is one that is both important to the portrayal of the
Company's financial condition and results of operations and requires
Management's most difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. The significant accounting policies, which the Company believes to be
the most critical in understanding and evaluating the Company's reported
financial position and results of operations, include:
Revenue Recognition and Deferred Revenue. The Company earns revenues primarily
from the domestic sale and installation of LoJack Units and LoJack Early
Warning, international license fees, sales of products and components to
international licensees and from extended and enhanced warranty programs.
The Company recognizes revenue on sales of domestic LoJack Units and most
related products upon installation. Revenues relating to the sale of LoJack
Early Warning are recognized over a period of the estimated life of vehicle
ownership, which third party market research indicates is approximately five
years. If the estimated life of vehicle ownership proves to vary materially from
the estimates used by the Company, the Company would be required to change its
estimates, which could result in material differences in the amount of revenue
recognized in any given period. Historically, there have not been any changes to
Management's five-year estimate. Management believes the likelihood of material
changes to the average estimated life of vehicle ownership is remote.
Revenues from international license fees are recognized ratably over the initial
term of the license, typically ten years. Revenues from the sales of products
and components of the LoJack System to international licensees are recognized
upon shipment to the licensee or, if later, when payment becomes reasonably
assured. As of December 31, 2002 and 2001, the Company deferred revenue
recognition of approximately $1,053,000 and $1,498,000, respectively, in product
shipments to international licensees. Revenue on these shipments is recognized
as payment becomes reasonably assured.
The Company warrants to consumers that the LoJack Unit and related products
including the LoJack Starter Disabler, Alarm System, Shock Sensor and LoJack
Early Warning will be free from defects in material or workmanship for a period
of two years. The Company also warrants to purchasers of LoJack Units that if
their LoJack equipped vehicle is stolen in a covered jurisdiction within two
years of installation and not recovered within 24 hours from the time that the
theft is reported to the police, the Company will pay the consumer an amount
equal to the full purchase price of the LoJack Unit up to a maximum of $695 (up
to $895 if the consumer purchased LoJack Early Warning). The actual warranty
expense is partially contingent upon the percentage of consumer vehicles not
recovered. Historically, LoJack technology has proven to be successful with a
consistently high 90% recovery rate since the product was introduced in 1986. If
the actual recovery
- 12 -
rates were to decline significantly, adverse differences relating to the amount
of warranty costs to be accrued could result. Historically, the Company's
warranty claims have been within the range of Management's estimates and
recorded warranty reserves.
The Company sells several types of contractual extended warranty products.
Effective January 1, 2002, for those warranty products to which a third party,
and not the Company, is the primary obligor, the Company recognizes payments for
these insurance contracts, net of related costs, in revenues at the time of
sale. Revenues related to extended warranties aggregated approximately $875,000
for the year ended December 31, 2002. If laws of jurisdictions change so that
the Company is determined to be the primary obligor, revenues may have to be
deferred under such circumstances. Management believes that if these
jurisdictional changes occur, reported revenues could be adversely impacted.
For those warranty products for which the Company is the primary obligor,
revenues are deferred and recognized over the estimated term of the warranties,
determined to be equivalent to the estimated life of vehicle ownership, which is
five years. Such revenues earned from extended warranties previously deferred
aggregated approximately $2,877,000 for the year ended December 31, 2002. If the
estimated life of vehicle ownership significantly varies from the estimates used
by the Company, material differences in the amount of revenue recognized in any
given period could result. Incremental costs directly related to the provision
of such warranties are deferred and charged to expense proportionately as the
revenues are recognized. Any remaining warranty costs relating to actual claims
made are recognized when incurred.
Accounts Receivable. Domestic accounts receivable are due principally from
automobile dealers that are geographically dispersed. If the creditworthiness or
the financial strength of the Company's customers were to decline, there could
be an adverse effect on the Company's operating results and cash flows. The
Company generally sells products and components of the LoJack System to foreign
licensees through cash prepayments, letters of credit, purchased export
insurance or established payment terms. Should geopolitical situations change in
the countries where the Company's foreign licensees operate, there could be
additional credit risks. As of December 31, 2002, $7,005,000 or 37% of net
accounts receivable were due from foreign licensees. Management makes estimates
of the collectibility of accounts receivable based upon historic experience,
customer credit worthiness and current economic trends. Historically,
Management's estimates have been consistent with actual losses incurred. Bad
debt expense totaled $889,000 for the year ended December 31, 2002.
Research and Development. Costs for research and development are expensed as
incurred and include salaries, fees to consultants, and other related costs
associated with the development of new products. Total research and development
expenses totaled $2,291,000, $2,634,000 and $1,200,000 for the year ended
December 31, 2002, the ten months ended December 31, 2001 and the year ended
February 28, 2001, respectively. A substantial portion of the Company's research
and development efforts have been outsourced to third parties. The contracts
with third parties require payments based upon completion of defined milestones.
Because these milestones and the rate of achievement are unpredictable, the
Company's recorded research and development expenses may vary significantly from
period to period. Such variability can have a significant impact on our
operations and cash flows. Expenses related to milestone achievements amounted
to $85,000, $1,071,000 and $392,000 for the year ended December 31, 2002, the
ten months ended December 31, 2001 and the year ended February 28, 2001,
respectively. Future expected attainment of existing milestones could result in
expenses of approximately $710,000. Milestone deliverables are scheduled to be
due within the next 18 months.
Valuation of cost investments. The Company has made investments in certain
foreign licensees, including its French and Argentine licensees and, in March
2003, its Mexican licensee. These investments to date have resulted in ownership
of 12.5% or less of any one licensee, resulting in accounting for these
investments using the cost method of accounting. Under the cost method of
accounting, investments are carried at cost and are adjusted only for
other-than-temporary declines in fair value, distributions of earnings and
additional investments made. The carrying value of these investments are
periodically reviewed. Based upon projections of anticipated future cash flows,
market conditions, legal factors and operational performance, Management has
concluded that there are no impairments to the fair value of these investments
that should be viewed as other than temporary. The Company has not recorded any
gains or losses on these investments through December 31, 2002. While Management
believes that its estimates are reasonable, different assumptions regarding
items such as future cash flows and the volatility inherent in operating in
these foreign markets could materially affect the Company's evaluations and
result in impairment charges against the carrying value of these investments. As
of December 31, 2002, total investments in the Company's foreign licensees,
accounted for on the cost basis, amounted to $1,389,000.
- 13 -
RESULTS OF OPERATIONS
In October 2001, the Company announced that it had changed its fiscal year end
from the end of February to December 31, effective December 31, 2001. The
financial statements reflect the balance sheets as of December 31, 2002 and
December 31, 2001 and the related statements of income, stockholders' equity and
cash flows for the fiscal year ended December 31, 2002, the ten months ended
December 31, 2001, and the year ended February 28, 2001. Unaudited financial
information for the comparable twelve-month period ended December 31, 2001 and
the ten-month period ended December 31, 2000 are presented in the tables below
and include any adjustments (consisting of normal, recurring adjustments), which
are, in the opinion of Management, necessary for a fair presentation. For
purposes of Management's Discussion and Analysis of Financial Condition and
Results of Operations, the Company believes that these statements and
comparisons provide a more meaningful analysis.
(in thousands, except per share amounts)
TWELVE MONTHS AS A TWELVE MONTHS AS A
ENDED PERCENT OF ENDED PERCENT OF
DECEMBER 31, 2002 REVENUES DECEMBER 31, 2001 REVENUES
----------------- ---------------- ----------------- ----------------
(UNAUDITED)
Revenues $ 116,426 100.0% $ 99,860 100.0%
Cost of goods sold 59,558 51.2% 50,727 50.8%
----------------- ---------------- ----------------- ----------------
Gross margin 56,868 48.8% 49,133 49.2%
----------------- ---------------- ----------------- ----------------
Costs and expenses:
Research and development 2,291 2.0% 2,796 2.8%
Sales and marketing 34,924 30.0% 26,381 26.4%
General and administrative 14,540 12.5% 13,920 13.9%
Depreciation and amortization 2,292 2.0% 1,979 2.0%
----------------- ---------------- ----------------- ----------------
Total 54,047 46.4% 45,076 45.2%
Operating income 2,821 2.4% 4,057 4.1%
----------------- ---------------- ----------------- ----------------
Other income: 178 0.2% 216 0.2%
----------------- ---------------- ----------------- ----------------
Income before provision
for income taxes 2,999 2.6% 4,273 4.2%
Provision for income taxes 1,170 1.0% 1,581 1.6%
----------------- ---------------- ----------------- ----------------
Net income $ 1,829 1.6% $ 2,692 2.7%
================= ================ ================= ================
----------------- -----------------
Basic earnings per share: $ 0.12 $ 0.18
================= =================
----------------- -----------------
Diluted earnings per share: $ 0.12 $ 0.17
================= =================
Weighted average shares:
Basic 14,692,225 15,272,264
================= =================
Diluted 14,726,131 15,774,719
================= =================
- 14 -
(in thousands, except per share amounts)
TEN MONTHS AS A TEN MONTHS AS A
ENDED PERCENT OF ENDED PERCENT OF
DECEMBER 31, 2001 REVENUES DECEMBER 31, 2000 REVENUES
----------------- ---------- ----------------- ----------
(UNAUDITED)
Revenues $ 84,379 100.0% $ 80,369 100.0%
Cost of goods sold 42,267 50.1% 39,080 48.6%
----------------- ---------- ----------------- ----------
Gross margin 42,112 49.9% 41,289 51.4%
----------------- ---------- ----------------- ----------
Costs and expenses:
Research and development 2,634 3.1% 911 1.1%
Sales and marketing 22,783 27.0% 18,315 22.8%
General and administrative 10,531 12.5% 8,726 10.9%
Depreciation and amortization 1,604 1.9% 1,494 1.9%
----------------- ---------- ----------------- ----------
Total 37,552 44.5% 29,446 36.7%
Operating income 4,560 5.4% 11,843 14.7%
----------------- ---------- ----------------- ----------
Other income: 130 0.2% 442 0.5%
----------------- ---------- ----------------- ----------
Income before provision for income taxes 4,690 5.6% 12,285 15.2%
Provision for income taxes 1,735 2.1% 4,546 5.7%
----------------- ---------- ----------------- ----------
Income before cumulative effect of change
in accounting principle 2,955 3.5% 7,739 9.5%
Cumulative effect of change
- (2,978)
----------------- ---------- ----------------- ----------
Net income $ 2,955 3.5% $ 4,761 5.9%
================= ========== ================= ==========
Basic earnings (loss) per share:
Before cumulative effect of change $ 0.19 $ 0.49
Cumulative effect of change - (0.19)
----------------- -----------------
After cumulative effect of change $ 0.19 $ 0.30
================= =================
Diluted earnings (loss) per share:
Before cumulative effect of change $ 0.19 $ 0.47
Cumulative effect of change - (0.18)
----------------- -----------------
After cumulative effect of change $ 0.19 $ 0.29
================= =================
Weighted average shares:
Basic 15,272,264 15,915,662
================= =================
Diluted 15,774,719 16,626,290
================= =================
- 15 -
YEAR ENDED DECEMBER 31, 2002 VS. DECEMBER 31, 2001
Revenues increased by $16,566,000, or 17%, to $116,426,000 for the year ended
December 31, 2002, from $99,860,000 for the same period a year ago. Domestic
revenues increased by $13,901,000 or 17%, to $96,405,000 during the year ended
December 31, 2002, as compared to $82,504,000 for the prior period.
International revenues from product sales and licensing fees increased by
$2,665,000, or 15%, for the year ended December 31, 2002, to $20,021,000 from
$17,356,000 in the prior period.
The increase in domestic revenues reflects LoJack Unit volume increases of 18%
for the twelve-month period ended December 31, 2002 as compared to the same
period a year ago. The increase in unit sales, which Management believes is
primarily attributable to the Company's investments in marketing, advertising
and sales initiatives, is partially offset by $1,162,000 in higher volume
pricing discounts earned by larger customers in 2002 as compared to the same
period in 2001. In addition, revenues from sales of other automobile security
products increased by $533,000 to $7,676,000 for the year ended December 31,
2002, from $7,143,000 in the same period a year ago.
The increase in international revenues was primarily the result of an increase
of approximately $3,964,000 in sales of the international version of the LoJack
Unit and related products and components primarily to France, Puerto Rico and
Mexico, as those markets continue to expand. These increases are partially
offset by reduced product sales of $1,154,000 to the Company's South African
licensee for the year ended December 31, 2002, due to lower demand from that
licensee in 2002. As of December 31, 2002, the Company deferred revenues of
$1,053,000 of shipments to certain licensees; the Company will recognize this
revenue in future periods as collectibility becomes reasonably assured.
Cost of goods sold for the year ended December 31, 2002, remained at 51% as
compared to the same period a year ago. Domestically, cost of goods sold was 50%
of related revenues for the year ended December 31, 2002, compared to 49% for
the same period a year earlier. This increase is primarily due to a decrease in
average revenue per unit partially offset by increased efficiencies in the
overall installed cost of the product. International cost of goods sold
decreased to 55% of related revenues for the year ended December 31, 2002, from
61% a year earlier. The decrease in international cost of goods sold is
primarily due to favorable volume variable pricing and other vendor rebates, as
well as lower inventory write-offs than in the prior year.
Research and development expense decreased by $505,000 to $2,291,000 for the
year ended December 31, 2002 from $2,796,000 in the same period a year ago.
Development milestone payments to third parties were $85,000 in 2002 compared to
$1,071,000 in 2001, resulting in a decrease of $986,000. Additionally, $408,000
of costs relating to beta test units received in 2001 were expensed in that
period. There were no similar expenses for the year ended December 31, 2002.
These decreases were partially offset by additional testing component costs and
equipment depreciation of $379,000 and additional personnel costs of $532,000
incurred in the year ended December 31, 2002, as compared to the same period a
year earlier as the Company continued to prepare for future growth. The Company
continues to participate in research and development efforts regarding both
improvements and modifications to the LoJack Unit and LoJack System components
as well as new products. Because milestones and the rate of achievement are
unpredictable, the Company's recorded research and development expenses may vary
significantly from period to period. Such variability can have a significant
impact on our operations and cash flows. Future attainment of existing
milestones could result in recorded expenses of approximately $710,000.
Milestone deliverables are scheduled to be due within the next 18 months.
Sales and marketing expense increased by $8,542,000, to $34,924,000 in the year
ended December 31, 2002 from $26,381,000 for the same period a year ago. The
incremental spending in sales and marketing expense includes $3,730,000 in sales
and marketing salaries and benefits in support of the Company's strategic
business plan for growth, $5,740,000 in increased advertising and other
marketing costs and $380,000 of additional call center expenses to improve
customer service. The increases are partially offset by a reduction in bad debt
expense of $787,000, relating mainly to the Company's licensee located in
Argentina, during the year ended December 31, 2002 as compared to December 31,
2001, as well as lower sales program incentive spending of $785,000 during the
year ended December 31, 2002 as compared to December 31, 2001. The Company
expects to keep sales and marketing spending in 2003 consistent with the dollars
spent in 2002.
General and administrative expense increased by $620,000 to $14,540,000 for the
year ended December 31, 2002 from $13,920,000 for the same period in the prior
year. The increase was primarily due to increased professional fees of
$1,588,000 related primarily to the establishment of new international markets
and alternative domestic distribution partners as well as professional advisory
services in support of compliance and
- 16 -
tax matters. The increase also includes additional expenses necessary to support
future growth including $343,000 of rent, telephone and related overhead costs
and $233,000 of staffing costs. The increases were partially offset by a
severance and retirement charge of $1,513,000 recorded in February 2001 related
to a management reorganization.
Other income-net decreased by $38,000 from $216,000 in the year ended December
31, 2001 to $178,000 for the year ended December 31, 2002. The decrease is
mainly due to lower interest income of $216,000 due to lower interest rates and
lower cash balances available for investment, offset by higher gains of $144,000
on fully depreciated installation vehicles sold in the normal course of business
and a reduction of interest expense of $37,000 due to lower interest rates
related to capitalized vehicle leases entered into during the year.
The provision for income taxes decreased by $411,000 to $1,170,000 for the
twelve-month period ended December 31, 2002, from $1,581,000 for the same period
a year ago as the result of the decrease of $1,274,000 in related taxable income
partially offset by an increase in the Company's effective tax rate from 37% in
the year ended December 31, 2001 to 39% for the year ended December 31, 2002.
The increase in the effective tax rate is primarily a result of the effect of
permanent differences between book and tax income, which had a more significant
impact on the rate due to the comparatively lower pre-tax income.
As a result of the foregoing, net income decreased by $863,000 to $1,829,000
during the year ended December 31, 2002 from $2,692,000 for the same
twelve-month period in the prior year.
TEN MONTHS ENDED DECEMBER 31, 2001 VS. TEN MONTHS ENDED DECEMBER 31, 2000
Revenues increased by $4,010,000, or 5%, to $84,379,000 for the ten-month
transition period ended December 31, 2001 from $80,369,000 for the comparable
ten-month period a year ago. Domestic revenues increased by $1,462,000 or 2%, to
$70,226,000 during the ten months ended December 31, 2001 as compared to
$68,764,000 for the comparable ten-month period in the prior year. International
revenues from product sales and licensing fees increased by $2,548,000, or 22%,
for the transition period to $14,153,000 from $11,605,000 in the ten-month
period in the prior year.
The increase in domestic revenues of 2% or $1,462,000 reflect LoJack Unit volume
increases of 4% or $2,401,000 for the ten-month period offset by $1,256,000
relating to standard volume variable pricing discounts earned by larger
customers. For the period of March 2001 - September 2001, units decreased by 5%
while during the period of October 2001 - December 2001, units increased by 27%
as compared to the comparable periods in the prior year. The increase in units
realized in the last three months of the year, is primarily due to the Company's
investments in marketing, advertising and sales initiatives during that same
period. In addition, revenues from sales of other automobile security products
increased by $330,000 from $5,726,000 in the ten months ended December 31, 2001
to $5,396,000 in the comparable period a year ago.
The increase in international revenues of $2,548,000 was primarily the result of
an increase of approximately $3,273,000 on sales of the international version of
the LoJack Unit and related products primarily to Colombia, Ecuador, Mexico and
South Africa as those markets became more mature. These increases are partially
offset by a decrease of approximately $693,000 in recognized revenue of product
shipments to Argentina from the comparable period a year ago. As of December 31,
2001, the Company deferred revenues of $1,498,000 of shipments to its Argentine
licensee due to uncertainties in that country's economic environment. The
Company will recognize this revenue in future periods as collectibility of
related payments become reasonably assured.
Cost of goods sold for the ten months ended December 31, 2001 increased to 50%
of revenues from 49% for the comparable period a year ago. Domestically, cost of
goods sold was 48% of related revenues for the ten months ended December 31,
2001, compared to 47% for the comparable period a year earlier. This increase is
primarily due to declines in average revenue per LoJack Unit. International cost
of goods sold increased to 61% of related revenues for the ten months ended
December 31, 2001 from 58% a year earlier. The change in international cost of
goods sold is partially a result of two large customers achieving volume based
price rebate levels of $348,000 during the period ended December 31, 2001.
Additionally, a charge totaling $155,000 was recorded relating to inventory
unique to two smaller markets becoming obsolete.
Research and development expense increased by $1,723,000 to $2,634,000 in the
ten months ended December 31, 2001 from $911,000 in the ten months ended
December 31, 2000, primarily as a result of project milestones met for work
related to a redesign of the LoJack Unit of $694,000 in the ten-month period
ending December 31, 2001. The remaining increase relates mainly to new product
development costs including the receipt of beta test units with a cost of
approximately $408,000 and additional development consulting costs of $169,000
and other
- 17 -
expensed development costs of $114,000. In addition, approximately $194,000 of
product development costs associated with a new feature of the LoJack Unit were
capitalized during the ten months ended December 31, 2001, compared to $534,000
in the prior year. The Company continues to participate in research and
development efforts regarding both improvements and modifications to the LoJack
Unit and LoJack System components as well as new products.
Sales and marketing expense increased by $4,468,000, to $22,783,000 in the ten
months ended December 31, 2001 from $18,315,000 for the comparable ten-month
period of a year ago. The increase in sales and marketing expense includes
$2,197,000 in sales and marketing salaries and benefits in support of the
Company's strategic business plan for growth, $696,000 in increased advertising
and other marketing costs, and $272,000 of additional call center expenses to
improve customer service. The increase is also due to $1,275,000 of
international bad debt reserves primarily relating to the Company's licensee
located in Argentina, a country experiencing economic uncertainties.
General and administrative expense increased by $1,805,000 to $10,531,000 in the
transition period from $8,726,000 for the comparable period in the prior year.
The increase is comprised of $781,000 of increased legal and accounting fees
necessary for the expansion to international markets and professional advisory
services in support of compliance and tax matters. The increase also included
additional expenses necessary to support future growth including $548,000 of
rent, telephone and related overhead costs and $414,000 of staffing costs.
Other income-net decreased by $312,000 from $442,000 in the ten months ended
December 31, 2000 to $130,000 for the ten months ended December 31, 2001. The
decrease is mainly due to lower interest income of $264,000 due to lower
interest rates and lower cash balances available for investment as well as lower
gains amounting to $122,000 on fully depreciated installation vehicles sold in
the normal course of business. These decreases are partially offset by a
reduction of interest expense of $71,000 due to lower interest rates related to
capitalized vehicle leases entered in to during the year.
The provision for income taxes decreased by $2,811,000 to $1,735,000 for the
ten-month period ended December 31, 2001 from $4,546,000 for the comparable
period a year ago as the result of the decrease in related taxable income. The
Company's effective tax rate remained at 37% during both periods.
As described in note 1 of the notes to consolidated financial statements, the
Company adopted the Commission Staff Accounting Bulletin No. 101, effective
March 1, 2000, and changed its revenue recognition policy for international
license fees, recording a non-cash charge of $2,978,000, or ($0.18) per diluted
share, net of a $1,904,000 tax benefit, to reflect the cumulative effect on
prior years.
As a result of the foregoing, net income decreased by $1,806,000 to $2,955,000
during the transition period from $4,761,000 for the comparable ten-month period
in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's strategic plan for the operation of its stolen vehicle recovery
network in the United States is to increase penetration in the existing
automotive channel, expand the construction trade channel, open additional
complimentary channels of distribution and continue to expand the use of its
technology to those domestic and international markets where the combination of
new vehicle sales, population density and the incidence of vehicle theft is
high. The Company's strategic plan for growth also includes the launch of new
products, increasing penetration in existing international markets, as well as
the continued re-engineering of the LoJack Unit to take advantage of leading
edge RF (Radio Frequency) technology. In certain circumstances, the Company has
made direct strategic investments in international licensee operations to
leverage its close relationships with its partners, to better understand the
business models of its licensees, to develop a global technology roadmap and to
expand unit sales. These initiatives require substantial investments of capital
and operating resources. In March 2003, the Company converted an existing
receivable balance from its Mexican licensee of $1,502,000 into a 12.5% equity
investment. In addition, in March 2003 the Company converted an existing
receivable balance of approximately $306,000 from its French licensee plus
60,000 Euros into a convertible debenture at a conversion ratio to be determined
with reference to the price paid by future third party investors. The Company
expects to make additional equity investments amounting to approximately
$200,000 to $700,000 in its foreign licensees in 2003.
- 18 -
The Company plans to fund these investments as well as capital expenditures
using existing cash, cash flows from operations or the existing line of credit
discussed below. The Company estimates that capital expenditures in 2003 will be
approximately $3,800,000, principally for on-going capital requirements.
The Company finances its capital and operating needs through cash flow from
operations. This liquidity is contingent on continued customer demand for its
products and services, and continuing the existing relationships with
international licensees and with certain law enforcement agencies. The Company
expects to continue its ongoing relationship with law enforcement agencies,
believes it will be able to keep pace with required technological change in its
products, and that its sales and marketing initiatives will continue to drive
customer demand.
The Company maintains a line-of-credit that provides for unsecured borrowings up
to a maximum of $10,000,000 and expires in June 2005. Outstanding borrowings
under the new line-of-credit facility bear annual interest, payable monthly, at
the bank's base rate (4.25% at December 31, 2002), or if converted at the option
of the Company, based upon the London Interbank Offered Rate ("LIBOR") plus 200
basis points (3.38% at December 31, 2002). No borrowings were outstanding under
the line-of-credit as of December 31, 2002; however, a $250,000 irrevocable
letter of credit was established for a vendor in November 2002. The $250,000
letter of credit reduces the available borrowings on the line-of-credit.
The line-of-credit facility generally contains limitations on indebtedness,
certain investments in equity securities and entity acquisitions; requires
lender's approval of mergers; and prohibits disposition of assets other than in
the normal course of business. Additionally, the Company is required to maintain
certain financial performance measures including debt service coverage, a
maximum ratio of total liabilities to tangible net worth and a minimum current
ratio. The payment of dividends and repurchase of the Company's common stock is
permitted under the line-of-credit facility and is limited only to the extent
such payments affect the Company's ability to meet certain financial performance
measures thereunder. Failure to maintain compliance with covenants could impair
the availability of the facility.
Cash and equivalents as of December 31, 2002 decreased by $4,522,000 during the
year ended December 31, 2002. The overall decrease is the result of cash
provided by operating activities of $2,545,000 offset by cash used for investing
activities of $3,096,000 and cash used for financing activities of $3,971,000.
Net cash provided by operating activities for the year ended December 31, 2002
was $2,545,000 as compared to $9,791,000 for the year ended December 31, 2001.
This decrease of $7,246,000 is primarily due to (i) the Company's lower current
year net income, (ii) increases in accounts receivable, inventories and prepaid
expenses, (iii) reduction in customer deposits and (iv) inventory advanced to
the Company's Mexican licensee. The increases in accounts receivable and
inventory reflect the growth in volumes in 2002, while the $2,081,000 increase
in prepaid and other assets relates primarily to receivables from vendors for
rebates. Cash flows in 2001 were enhanced by customer deposits totaling
$1,635,000, while during 2002, product was shipped against these advances.
During 2002, the Company advanced $1,156,000 in inventory to the Mexican
licensee. In March 2003, the related receivable balance of $1,502,000 was
converted to a 12.5% equity investment.
Net cash used for investing activities for the year ended December 31, 2002
decreased to $3,096,000 from $4,924,000, or by $1,868,000, as compared to the
ten months ended December 31, 2001. This decrease in cash used is primarily
related to lower leasehold improvements made in 2002 as compared to 2001, when
the company moved its corporate headquarters to its current Westwood,
Massachusetts location. Additionally, cash used in investing activities in 2001
included $866,000 used to fund a 7.5% equity investment the Company made in its
French licensee. The Company expects to make additional investments in its
foreign licensees in the final three quarters of 2003 totaling $200,000 -
$700,000. The Company expects capital expenditures in 2003 to amount to
approximately $3,800,000.
Net cash used for financing activities for the year ended December 31, 2002
decreased to $3,971,000 from $6,967,000, or by $2,996,000, as compared to the
ten months ended December 31, 2001. The decrease is primarily attributable to a
decrease of $2,207,000 in repurchases of the Company's common stock. The Company
voluntarily suspended purchases under its stock repurchase plan after the first
quarter of 2002. Financing activities in 2002 were positively impacted by a net
increase of $901,000 from the exercise of stock options in 2002 compared to 2001
and $258,000 received from the issuance of the Company's common stock under it's
newly approved Employee Stock Purchase Plan.
- 19 -
Through December 2002, the Company's Board of Directors authorized a stock
repurchase program, which, as amended provided for the repurchase of up to
9,200,000 common shares. As of December 31, 2002, the Company had repurchased
8,663,034 shares for a total of $78,702,000. The Company may continue its
activities under the stock repurchase program in 2003 depending on existing
share prices, alternative investment opportunities and available cash balances.
The Company has substantial fixed contractual obligations under various capital
and operating lease agreements, severance arrangements, non-cancelable inventory
purchase commitments and engineering expenditures if project milestones are met.
Management believes the attainment of the project milestones over the next 18
months is reasonably possible and estimable and such estimates have been
included in the table below. Contractual obligations and commercial commitments
existing at December 31, 2002 were as follows:
Payments Due by Period
-----------------------------------------------------------------
Less than
Total One Year 1-3 Years 4-5 Years
-------------- -------------- -------------- --------------
Capital lease obligations including interest $ 2,712,000 $ 1,613,000 $ 1,099,000 $ -
Operating leases 9,504,000 2,560,000 6,325,000 619,000
Severance arrangements 762,000 254,000 508,000 -
Purchase commitments and milestone payments 9,593,000 9,223,000 370,000 -
Letter of credit 250,000 250,000 - -
-------------- -------------- -------------- --------------
Total $ 22,821,000 $ 13,900,000 $ 8,302,000 $ 619,000
============== ============== ============== ==============
OTHER INFORMATION
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF Issue No.
00-21"). EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company does not believe that EITF Issue No. 00-21 will
have a significant impact on the Company's results of operations or financial
condition.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" - an
amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends FASB
Statement No. 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
FASB Statement No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure requirements of SFAS No. 148 have been implemented in notes 1 and 5
to the consolidated financial statements and the interim reporting requirements
will be adopted in the first quarter of 2003.
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its employees may contain
"forward-looking" information, which involves risk and uncertainty. 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 the Company's market and
customers, the Company's objectives and plans for future operations and products
and the Company's expected liquidity and capital 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:
The Company depends on its principal products and market acceptance of them. The
Company currently derives most of its revenues from sales of LoJack Units and
related products and the licensing of the LoJack System and sale of related
products to licensees in foreign countries. The Company also derives a portion
of its
- 20 -
revenues from sales of conventional vehicle security devices and the sale of
warranties. As a result, any factor adversely affecting sales of the Company's
principal products would have an adverse effect on the Company.
The Company's success is also heavily dependent upon acceptance of its current
and future products in new markets. There is no assurance that the LoJack System
will continue to achieve widespread consumer acceptance in all of the Company's
existing or future markets.
The Company is affected by changes in economic conditions and new vehicle sales.
The Company's products are installed principally in new and used vehicles. While
the increase in the sale of its vehicle recovery system was substantially
greater than the increase in the sale of new vehicles, any change in general
economic conditions resulting in decreased new vehicle sales could adversely
affect the Company. Because new car sales are most often a discretionary
activity, the Company is unable to accurately predict its sales in future
quarters. In any quarter, many factors can affect the Company's revenues. These
factors include, but are not limited to, periods of economic slowdown, slowdowns
in vehicle production, labor disputes affecting the automobile industry and any
change in general economic conditions. If significantly fewer new vehicles are
sold, fewer LoJack Units may be installed.
The Company relies on key personnel. The Company's success depends, to a
significant degree, upon the efforts and abilities of key technical, marketing,
sales and management personnel. The loss of services of one or more of these key
employees could have an adverse effect on the Company. In addition, the Company
believes that its future success depends in part upon its ability to attract,
retain, and motivate qualified personnel necessary for the development of its
business. There can be no assurance that the Company will be successful in
attracting and retaining such personnel.
The Company is subject to Government regulations and approval. The Company must
obtain the approval of law enforcement agencies, as well other governmental
agencies, for implementation of the LoJack System before sales of LoJack Units
can commence in a given jurisdiction. The approval process may be time consuming
and costly. In addition, governmental approval may be terminable by the
executive or legislative body in some jurisdictions. Such governmental
discretion and regulation may limit the number of potential customers for the
Company's services or impede its ability to offer competitive services to the
market. The Company's licensees will likely encounter similar or additional
regulatory requirements as it expands into foreign markets through its
licensees.
The Company depends on proprietary technology. The Company's success is
dependent on its proprietary technology. Although the Company seeks to protect
its intellectual rights through patents, copyrights, trademarks, trade secrets
and license agreements, there can be no assurance that the Company will be able
to protect its technology from misappropriation or that competitors will not
develop similar technology independently. There can be no assurance that third
parties will not assert that the Company's products infringe upon their own
patents, copyrights or trade secrets. In addition, the laws of certain foreign
countries in which the Company's products are or may be distributed do not
protect the Company's products and intellectual rights to the same extent as the
laws of the United States.
The Company currently depends on a single supplier for its principal product.
Key components of the Company's principal product are currently manufactured to
the Company's specifications by a single supplier. Although these key components
could be obtained from other suppliers, there can be no assurance that the
Company could obtain such components from an alternative supplier without undue
cost and expense.
The Company faces competition. Several competitors or potential competitors are
marketing or have announced the development of stolen vehicle tracking products,
which may be directly competitive with the LoJack System. To the Company's
knowledge, competitors have not developed stolen vehicle recovery products
compatible with the LoJack System. In addition, the Company is unaware of any
competitor who proposes a system capable of being operated or actively monitored
exclusively by law enforcement agencies as is the LoJack System. However, there
can be no assurance that the Company will be able to compete successfully
against existing companies or new entrants to the marketplace. Furthermore, the
development by competitors of new or improved products or technologies may
render the Company's products or proposed products obsolete or less competitive.
- 21 -
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited exposure to market risk due to the nature of its
financial instruments. The Company's financial instruments at December 31, 2002
consisted of cash and equivalents, accounts receivable, accounts payable,
deposits, accrued liabilities, and capital lease obligations. The fair value of
these financial instruments as of December 31, 2002, approximated their carrying
values.
The Company's interest rate exposure is limited primarily to the effect of
interest rate changes on amounts outstanding under its $10,000,000 variable rate
line-of-credit facility. An immediate adverse change in market interest rates
would not have had any effect on the Company's interest expense for the year
ended December 31, 2002, as there were no borrowings outstanding at any time
during those periods under its line-of-credit facility.
In addition, the Company does not have any significant foreign currency exposure
as most transactions with customers and vendors are denominated in U.S. dollars.
In November 2002, the Company entered into an agreement to convert $1,033,000 of
its $1,749,000 note receivable from its Argentine licensee to be denominated in
Argentina Pesos. As this note is 100% reserved, there is no foreign currency
exposure.
In December 2002, the Company established a Brazilian subsidiary; however,
operations have not begun. If the Company encounters foreign currency exposure
by electing to process purchase and sale transactions in Brazalian Reales, it
would manage the related exposure by purchasing forward exchange contracts.
Currently, the Company does not enter into financial instrument transactions for
trading or speculative purposes. The Company does not have any interest in a
special purpose entity and does not have any material off balance sheet
financing transactions.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the related report of
the Company's independent public accountants thereon are included in this report
at the page indicated.
Report of Independent Public Accountants...............................................................23
Consolidated Balance Sheets as December 31, 2002 and 2001..............................................24
Consolidated Statements of Operations for the year ended December 31, 2002, the ten months ended
December 31, 2001 and the year ended February 28, 2001.........................................25
Consolidated Statements of Stockholder's Equity for the year ended December 31, 2002, the ten months
Ended December 31, 2001 and the year ended February 28, 2001...................................26
Consolidated Statements of Cash Flows for the year ended December 31, 2002, the ten months ended
December 31, 2001 and the year ended February 28, 2001.........................................27
Notes to consolidated financial statements.............................................................28
- 22 -
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
LoJack Corporation:
We have audited the accompanying consolidated balance sheets of LoJack
Corporation and subsidiaries (the "Company") as of December 31, 2002 and 2001,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the year ended December 31, 2002, the ten-month period ended
December 31, 2001 and the year ended February 28, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of LoJack Corporation and subsidiaries
as of December 31, 2002 and 2001, and the results of their operations and their
cash flows for the year ended December 31, 2002, the ten-month period ended
December 31, 2001 and the year ended February 28, 2001 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, during the year ended
February 28, 2001, the Company changed its method of accounting for revenue
recognition for international license fees in accordance with guidance provided
in SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements."
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 15, 2003
- 23 -
LOJACK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS DECEMBER 31,
2002 2001
CURRENT ASSETS:
Cash and equivalents ...................................................... $ 1,367 $ 5,889
Accounts receivable - Net ................................................. 19,152 16,207
Inventories ............................................................... 7,965 5,865
Prepaid expenses and other ................................................ 3,175 387
Prepaid income taxes ...................................................... 219 141
Deferred income taxes ..................................................... 2,358 1,942
------------ ------------
Total current assets .................................................. 34,236 30,431
PROPERTY AND EQUIPMENT - Net ................................................ 13,404 12,764
DEFERRED INCOME TAXES ....................................................... 2,886 2,205
OTHER ASSETS - Net .......................................................... 4,477 2,794
------------ ------------
TOTAL ....................................................................... $ 55,033 $ 48,194
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations .............................. $ 1,504 $ 1,539
Accounts payable .......................................................... 10,950 6,689
Accrued and other liabilities ............................................. 1,392 1,288
Customer deposits ......................................................... 794 1,635
Current portion of deferred revenue ....................................... 4,527 3,086
Accrued compensation ...................................................... 2,214 1,835
------------ ------------
Total current liabilities ............................................. 21,381 16,072
ACCRUED COMPENSATION ........................................................ 508 747
DEFERRED REVENUE ............................................................ 11,682 10,660
CAPITAL LEASE OBLIGATIONS ................................................... 1,064 1,038
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value; 35,000,000 shares authorized; 23,403,675 and
22,700,281 shares issued at December 31, 2002 and 2001, respectively ..... 234 227
Additional paid-in capital ................................................ 63,884 61,530
Retained earnings ......................................................... 34,952 33,123
Treasury stock, at cost, 8,663,034 and 7,995,840 shares at
December 31, 2002 and 2001, respectively ................................. (78,702) (75,203)
------------ ------------
Total stockholders' equity ............................................ 20,368 19,677
------------ ------------
TOTAL ....................................................................... $ 55,003 $ 48,194
============ ============
See notes to consolidated financial statements.
- 24 -
LOJACK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 FEBRUARY 28, 2001
REVENUES ..................................................... $ 116,426 $ 84,379 $ 95,850
-------------------- -------------------- --------------------
COST OF GOODS SOLD:
Product and installation costs ............................. 57,228 40,874 46,244
System costs (exclusive of depreciation shown
separately below) .......................................... 2,330 1,393 1,170
-------------------- -------------------- --------------------
Total .......................................... 59,558 42,267 47,414
-------------------- -------------------- --------------------
GROSS MARGIN ................................................. 56,868 42,112 48,436
-------------------- -------------------- --------------------
COSTS AND EXPENSES:
Research and development ................................... 2,291 2,634 1,200
Sales and marketing ........................................ 34,924 22,783 21,904
General and administrative ................................. 14,540 10,531 12,114
Depreciation and amortization .............................. 2,292 1,604 1,869
-------------------- -------------------- --------------------
Total .......................................... 54,047 37,552 37,087
-------------------- -------------------- --------------------
OPERATING INCOME ............................................. 2,821 4,560 11,349
-------------------- -------------------- --------------------
OTHER INCOME (EXPENSE):
Interest expense ........................................... (213) (200) (321)
Interest income ............................................ 148 285 629
Gain on sale of fixed assets ............................... 243 43 220
Other income ............................................... - 2 -
-------------------- -------------------- --------------------
Total .......................................... 178 130 528
-------------------- -------------------- --------------------
INCOME BEFORE PROVISION FOR INCOME TAXES ..................... 2,999 4,690 11,877
PROVISION FOR INCOME TAXES ................................... 1,170 1,735 4,371
-------------------- -------------------- --------------------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE ..................................... 1,829 2,955 7,506
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE, NET OF $1,904 TAX BENEFIT ........................ - - (2,978)
-------------------- -------------------- --------------------
NET INCOME ................................................... $ 1,829 $ 2,955 $ 4,528
==================== ==================== ====================
BASIC EARNINGS PER SHARE:
Before cumulative effect of a change in accounting
principle ................................................. $ 0.12 $ 0.19 $ 0.47
Cumulative effect of a change in accounting principle ...... - - (0.19)
-------------------- -------------------- --------------------
After cumulative effect of a change in accounting
principle ................................................. $ 0.12 $ 0.19 $ 0.28
==================== ==================== ====================
DILIUTED EARNING PER SHARE:
Before cumulative effect of a change in accounting
principle ................................................. $ 0.12 $ 0.19 $ 0.45
Cumulative effect of a change in accounting principle ...... - - (0.18)
-------------------- -------------------- --------------------
After cumulative effect of a change in accounting
principle ................................................. $ 0.12 $ 0.19 $ 0.27
==================== ==================== ====================
WEIGHTED AVERAGE SHARES:
BASIC ................................................... 14,692,225 15,272,264 15,910,138
==================== ==================== ====================
DILUTED ................................................. 14,726,131 15,774,719 16,624,789
==================== ==================== ====================
See notes to consolidated financial statements.
- 25 -
LOJACK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2002, TEN MONTHS ENDED DECEMBER 31, 2001 AND YEAR ENDED
FEBRUARY 28, 2001
(in thousands, except share amounts)
COMMON STOCK ADDITIONAL TREASURY STOCK
NUMBER OF PAID-IN RETAINED NUMBER OF
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
---------- ----------- ----------- ------------ ------------ ----------- ------------
BALANCE, FEBRUARY 29, 2000 22,474,581 $ 224 $ 60,688 $ 25,640 $ 6,393,600 $ (65,299) $ 21,253
Net income 4,528 4,528
Exercise of stock options 42,700 1 212 213
Repurchase of common stock 545,600 (4,198) (4,198)
Tax benefit of employee
stock option exercises 40 - - - 40
---------- ----------- ----------- ------------ ------------ ----------- ------------
BALANCE, FEBRUARY 28, 2001 22,517,281 225 60,940 30,168 6,939,200 (69,497) 21,836
Net income 2,955 2,955
Exercise of stock options 183,000 2 364 366
Repurchase of common stock 1,056,640 (5,706) (5,706)
Tax benefit of employee
stock option exercises 226 - - - 226
---------- ----------- ----------- ------------ ------------ ----------- ------------
BALANCE, DECEMBER 31, 2001 22,700,281 227 61,530 33,123 7,995,840 (75,203) 19,677
Net income 1,829 1,829
Exercise of stock options 631,900 6 1,261 1,267
Issuance of shares under
employee stock purchase
plan 71,494 1 257 258
Repurchase of common stock 667,194 (3,499) (3,499)
Tax benefit of employee
stock option exercises 836 - - - 836
---------- ----------- ----------- ------------ ------------ ----------- ------------
BALANCE, DECEMBER 31, 2002 23,403,675 $ 234 $ 63,884 $ 34,952 8,663,034 $ (78,702) $ 20,368
========== =========== =========== ============ ============ =========== ============
See notes to consolidated financial statements.
- 26 -
LOJACK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
2002 2001 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 1,829 $ 2,955 $ 4,528
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting
principle ......................................... - - 2,978
Deferred revenue recognized ........................ (6,980) (6,403) (2,609)
Deferred revenue additions ......................... 9,443 8,879 4,348
Depreciation and amortization ...................... 4,330 3,216 3,929
Provision for doubtful accounts .................... 889 1,275 242
Deferred income taxes .............................. (1,097) (1,149) (718)
Increase (decrease) in cash from changes
in assets and liabilities:
Accounts receivable ............................ (4,180) (4,193) (1,088)
Inventories .................................... (2,100) (1,273) (999)
Prepaid expenses and other ..................... (2,788) 75 (310)
Prepaid income taxes ........................... 758 1,456 225
Other assets ................................... (68) (423) 2
Accounts payable ............................... 4,261 4,617 (945)
Customer deposits .............................. (841) 1,635 -
Advances to licensee and related costs ......... (1,156) (346) -
Accrued and other liabilities .................. 245 (530) 1,550
------- ------- -------
Net cash provided by operating activities .... 2,545 9,791 11,133
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment - net .......... (2,922) (3,864) (2,689)
Investment in foreign licensee ......................... - (866) -
Expenditures for product development ................... (174) (194) (534)
------- ------- -------
Net cash used for investing activities ......... (3,096) (4,924) (3,223)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options .............................. 1,267 366 213
Issuance of shares under employee stock
purchase plan ......................................... 258 - -
Repayment of capital lease obligations ................. (1,997) (1,627) (1,959)
Repurchase of common stock ............................. (3,499) (5,706) (4,198)
------- ------- -------
Net cash used for financing activities ......... (3,971) (6,967) (5,944)
------- ------- -------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS ............ (4,522) (2,100) 1,966
BEGINNING CASH AND EQUIVALENTS ........................... 5,889 7,989 6,023
------- ------- -------
ENDING CASH AND EQUIVALENTS .............................. $ 1,367 $ 5,889 $ 7,989
======= ======= =======
See notes to consolidated financial statements.
- 27 -
LOJACK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002, TEN MONTHS ENDED DECEMBER 31, 2001 AND YEAR
ENDED FEBRUARY 28, 2001
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - LoJack Corporation and subsidiaries ("LoJack" or the "Company")
market and license for use components of the LoJack System and related products,
a unique proprietary system for tracking, locating and recovering stolen
vehicles. The Company is headquartered in Westwood, Massachusetts and has
significant operations throughout the United States and 26 foreign markets.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change in Fiscal Year - On October 24, 2001, the Company's Board of Directors
approved a change in the Company's fiscal year end from the last day of February
to December 31, effective beginning December 31, 2001. All references in the
financial statements to the period ended December 31, 2001 refer to the ten
months ended December 31, 2001 whereas the years ended December 31, 2002 and
February 28, 2001 reference twelve-month fiscal periods.
Principles of Consolidation - The consolidated financial statements include the
accounts of LoJack and its wholly owned subsidiaries. Intercompany transactions
and balances are eliminated in consolidation.
Use of Estimates - The management of the Company is required, in certain
instances, to use estimates and assumptions that affect the amounts reported in
the consolidated financial statements and the notes thereto, in order to conform
with generally accepted accounting principles. The Company's actual results
could differ from these estimates.
Revenue Recognition, Deferred Revenue and Change in Accounting Principle - The
Company recognizes revenue on sales of domestic LoJack Units and most related
products upon installation. Revenues relating to the sale of the LoJack Early
Warning Recovery System ("LoJack Early Warning") are recognized over a period of
the estimated life of vehicle ownership, generally five years. Revenues from the
sales of products and components of the LoJack System to international licensees
are recognized upon shipment to the licensee or, if later, when payment becomes
reasonably assured. As of December 31, 2002 and 2001, the Company has deferred
revenue recognition of approximately $1,053,000 and $1,498,000 in product
shipments to international licensees until payment becomes reasonably assured.
Effective March 1, 2000, the Company changed its method of revenue recognition
for international license fees to comply with SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). The new
method of revenue recognition records the license fee revenue ratably over the
initial term of the license, typically ten years. The Company recorded a
non-cash charge of approximately $4,883,000 ($2,978,000 net of tax benefit, or
($0.18) per diluted share) to reflect the cumulative effect of this accounting
change as of the beginning of the fiscal year ended February 28, 2001. This
deferred revenue is recorded as license fee revenue over the remaining term of
the licenses. The effect of adopting this revenue recognition policy was to
reduce revenues for the fiscal year ended February 28, 2001 by $180,000 and net
income by $113,000 or ($0.01) per diluted share before recording the cumulative
effect of this change in accounting principle. For the year ended December 31,
2002 and the ten months ended December 31, 2001, the Company recognized $850,000
and $708,000 of revenue and net income of $519,000 or $.04 per diluted share and
$446,000 or $.03 per diluted share, respectively that was previously included in
the fiscal 2001 cumulative effect adjustment.
The Company offers several types of contractual extended warranty products.
Effective January 1, 2002, for those warranty products to which an independent
third party insurer, and not the Company, is the primary obligor, the Company
recognizes payments for these contracts, net of related costs, in revenues at
the time of sale. Such recognized revenues aggregated approximately $875,000 for
the year ended December 31, 2002.
For those warranty products to which the Company is the primary obligor,
revenues are deferred and recognized over the term of the warranties, determined
to be equivalent to the estimated life of vehicle ownership, which is five
years. Revenues from extended warranties to be amortized beyond one year are
classified as long-term deferred revenue. Such revenues earned from extended
warranties previously deferred aggregated
- 28 -
approximately $2,877,000, $1,781,000 and $1,703,000 for the year ended December
31, 2002, the ten months ended December 2001 and for the year ended February 28,
2001, respectively. Incremental costs directly related to the provision of such
warranties are deferred and charged to expense proportionately as the revenues
are recognized. Any remaining warranty costs relating to actual claims made, are
recognized when incurred.
Warranty costs - The Company warrants to consumers that the LoJack Unit will be
free from defects in material or workmanship for a period of two years from the
date of installation. The Company also warrants to purchasers of the LoJack Unit
that if the LoJack Unit equipped vehicle is stolen in a covered jurisdiction
within two years of installation and not recovered within 24 hours from the time
that the theft is reported to the police, the Company will pay the consumer an
amount equal to the full purchase price of the LoJack Unit up to a maximum of
$695 (up to $895 if the consumer has purchased LoJack Early Warning).
Anticipated costs related to this standard product warranty are charged against
income at the time of sale of the related product. Warranty costs for the
periods ended December 31, 2002 and 2001 and February 28, 2001, were as follows:
Balance at Charges to Balance at
Beginning Costs and Deductions End
Of Period Expenses Of Period
For the year ended:
December 31, 2002 $ 430,000 $ 128,000 $ (133,000) $ 425,000
========== ========== =========== ==========
For the ten months ended:
December 31, 2001 $ 459,000 $ 67,000 $ (96,000) $ 430,000
========== ========== =========== ==========
For the year ended:
February 28, 2001 $ 484,000 $ 98,000 $ (123,000) $ 459,000
========== ========== =========== ==========
Cash and Cash Equivalents - Cash and cash equivalents include short-term, highly
liquid investments purchased with remaining maturities of three months or less.
Management routinely assesses the financial strength of its depository banks
and, as of December 31, 2002, believes it had no significant exposure to credit
risks.
Fair Value of Financial Instruments - The Company's financial instruments
consist of cash and equivalents, accounts receivable, accounts payable, customer
deposits, accrued liabilities and capital lease obligations. The fair value of
these financial instruments, at the end of December 31, 2002 and 2001
approximated their carrying value.
Accounts Receivable - The allowance for doubtful accounts was as follows for the
periods ended December 31, 2002 and 2001 and February 28, 2001:
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND TRANSFERS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (1) OF PERIOD
For the year ended:
December 31, 2002 $ 1,551,000 $ 889,000 $ (1,182,000)(3) $ 1,258,000
=========== =========== ================ ==============
For the ten months ended:
December 31, 2001 $ 602,000 $ 1,275,000 $ (326,000) $ 1,551,000(2)
=========== =========== ================ ==============
For the year ended:
February 28, 2001 $ 630,000 $ 242,000 $ (270,000) $ 602,000
=========== =========== ================ ==============
(1) Deductions represent net accounts written off.
- 29 -
(2) Total includes $1,275,000 of international bad debt reserves primarily
relating to the Company's licensee located in Argentina, a country
experiencing economic uncertainties.
(3) Total includes the transfer of $1,073,000 from the allowance for
doubtful accounts relating to an Argentine receivable balance, which was
converted to a note receivable during 2002. In addition, the Company
reclassed $677,000 from deferred liabilities for the same Argentine
receivable, resulting in the note receivable in the amount of $1,749,000
to be fully reserved at December 31, 2002.
Domestic accounts receivable are principally due from new and used automobile
dealers that are geographically dispersed in various states. International
accounts receivable are principally due from foreign licensees. When possible,
the Company assures payment for its products to foreign licensees through the
purchase of export insurance.
Inventories - Inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of finished goods, including LoJack
Units and other related products and components held for resale.
Property and Equipment - Property and equipment are stated at cost. Depreciation
and amortization are calculated using the straight-line method over the
estimated useful lives of the related assets (three to seven years).
Investments - The Company has made investments in certain foreign licensees.
These investments to date have resulted in ownership of 12.5% or less of any one
licensee. These investments are accounted for using the cost method of
accounting. Under the cost method of accounting, investments in private
companies are carried at cost and are adjusted only for other than temporary
declines in fair value, distributions of earnings, additional investments made
and other ownership changes. The Company has not recorded any gains or losses on
these investments through December 31, 2002.
Impairment of Long-lived Assets - The Company reviews its long-lived assets for
impairment when events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets.
Software Capitalization - Software development costs of $174,000 in the year
ended December 31, 2002, $194,000 in the ten months ended December 2001 and
$534,000 in the year ended February 28, 2001 were capitalized in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use".
Income Taxes - The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
Company's financial statements or tax returns. Deferred tax assets and
liabilities are determined based upon the difference between the financial
statement carrying amounts and tax basis of existing assets and liabilities,
using enacted tax rates anticipated to be in effect in the year(s) in which the
differences are expected to reverse.
Research and Development - Costs for research and development are expensed as
incurred and include salaries, fees to consultants, and other related costs
associated with the development of new products. Total research and development
expenses totaled $2,291,000, $2,634,000 and $1,200,000 for the year ended
December 31, 2002, the ten months ended December 31, 2001 and the year ended
February 28, 2001, respectively. A portion of the Company's research and
development efforts have been outsourced to third parties. The contracts with
third parties require payments based upon completion of defined milestones.
Because these milestones and the level of effort expended by the contractors is
not always consistent, the Company's recorded research and development expenses
may vary significantly from period to period. Expenses related to milestone
achievements amounted to $85,000, $1,071,000 and $392,000 for the year ended
December 31, 2002, the ten months ended December 31, 2001 and the year ended
February 28, 2001, respectively.
Accounting for Stock-Based Compensation - The Company accounts for stock-based
compensation for employees and directors under the recognition and measurement
principles of APB No. 25, "Accounting for Stock Issued to Employees", and has
elected the disclosure alternative under SFAS No. 123. No stock-based employee
compensation costs are reflected in net income, as all options granted under the
plans had an exercise price equal to the market value of the underlying common
stock on the date of the grant. Had a compensation
- 30 -
cost for the Company's stock plans been determined consistent with SFAS No. 123,
the Company's net income and basic and diluted net income per share would have
been as follows:
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
2002 2001 2001
Net income, as reported $ 1,829 $ 2,955 $ 4,528
Less stock based compensation expense
determined under fair value method
for all stock options, net of related
income tax expense (1,374) (1,525) (1,675)
------------ ------------ ------------
Pro forma net income $ 455 $ 1,430 $ 2,853
============ ============ ============
Earnings per share:
Basic, as reported $ 0.12 $ 0.19 $ 0.28
Basic, pro forma $ 0.03 $ 0.09 $ 0.17
Diluted, as reported $ 0.12 $ 0.19 $ 0.27
Diluted, pro forma $ 0.03 $ 0.09 $ 0.17
Options granted during the year ended December 31, 2002, the ten months ended
December 31, 2001 and the year ended February 28, 2001, respectively, had a
weighted average fair value on the date of grant of $2.98, $3.42, and $4.29,
respectively. The fair value of options on their grant date was measured using
the Black/Scholes option-pricing model. Key assumptions used to apply this
pricing model were as follows:
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
2002 2001 2001
Range of risk free interest rates 4.93% - 5.28% 4.57% - 5.39% 5.72% - 6.26%
Expected life of option grants 9 years 9 years 9 years
Range of expected volatility of
underlying stock 29% - 39% 35% - 47% 31% - 45%
Dividend yield 0 % 0 % 0 %
The Black/Scholes option pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in Management's opinion, the existing
models do not necessarily provide a reliable measure of the fair value of its
stock options.
Earnings Per Share - Basic income per common share is computed using the
weighted average number of common shares outstanding during each year. Diluted
income per common share reflects the effect of the Company's outstanding stock
options (using the treasury stock method), except where such stock options would
be antidilutive.
- 31 -
A reconciliation of weighted average shares used for the basic and diluted
computations is as follows:
Year Ended Ten Months Ended Year Ended
December 31, 2002 December 31, 2001 February 28, 2001
Weighted average shares for basic 14,692,225 15,272,264 15,910,138
Dilutive effect of stock options 33,906 502,455 714,651
----------------- ----------------- -----------------
Weighted average shares for diluted 14,726,131 15,774,719 16,624,789
================= ================= =================
Options to purchase 3,918,295, 3,162,205 and 2,350,105 shares of common stock
were outstanding at December 31, 2002, December 31, 2001, and February 28, 2001,
respectively, but were not included in the computation of diluted earnings per
share, because the options' exercise prices were greater than the average market
price of the common share.
Certain Concentrations - The Company has subcontracted with one supplier to
manufacture a certain LoJack System component (police tracking computers). The
Company has also subcontracted the manufacturing of the LoJack Unit to one
vendor. The Company believes that other suppliers have the capability to perform
these services, but that changing suppliers may cause delays and additional
costs to the Company.
Segment Reporting - The Company has determined that it has two distinct
reportable segments: the domestic segment and the international segment. The
Company considers these two segments reportable as they are managed separately
and the operating results of each segment are regularly reviewed and evaluated
separately by the Company's senior management. Certain general overhead costs
have been allocated to each segment based on methods considered to be reasonable
by the Company's management. Income taxes have been allocated to each segment
using the Company's effective tax rate.
New Accounting Pronouncements - In November 2002, the Emerging Issues Task Force
reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables" ("EITF Issue 00-21"). EITF Issue No. 00-21 provides guidance on
how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements entered into in fiscal
periods after June 15, 2003. The Company does not believe that EITF Issue No.
00-21 will have a significant impact on results of operations or financial
condition.
In December 2002, the Financial Accounting Standards Board or FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" -
an amendment of FASB Statement No. 123 ("SFAS No. 148"). SFAS No. 148 amends
FASB Statement No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of FASB Statement No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure requirements of SFAS No. 148 have been implemented in
Note 1 and the interim reporting requirements will be adopted in the first
quarter of 2003.
Supplemental Disclosures of Cash Flow Information - Cash payments for interest
aggregated approximately $213,000, $200,000 and $321,000 for the year ended
December 31, 2002, the ten months ended December 2001 and for the year ended
February 28, 2001, respectively. Cash payments for income taxes for the year
ended December 31, 2002, the ten months ended December 2001 and for the year
ended February 28, 2001 were approximately $954,000, $1,494,000 and $4,808,000,
respectively.
Supplemental Disclosures of Noncash Investing and Financing Activities - Capital
lease obligations aggregating approximately $2,097,000, $1,627,000 and
$1,831,000, were incurred when the Company entered into lease agreements for new
vehicles during the year ended December 31, 2002, the ten months ended December
2001 and the year ended February 28, 2001, respectively. During the ten months
ended December 31, 2001, the Company obtained an ownership interest in a foreign
licensee valued at $1,389,000, of which $500,000 was a non-cash exchange
relating to a partial payment of a license contract fee. There were no such
non-cash investing activities in 2002.
- 32 -
Reclassifications - Certain amounts reported in prior years have been
reclassified to conform with the current presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
2002 2001
LoJack System components $ 22,260,000 $ 20,772,000
Equipment, furniture, and fixtures 8,587,000 7,169,000
Vehicles 9,142,000 8,547,000
------------- -------------
Total 39,989,000 36,488,000
Less accumulated depreciation and
amortization (28,047,000) (25,643,000)
------------- -------------
Total 11,942,000 10,845,000
LoJack System components not yet in service 1,462,000 1,919,000
------------- -------------
Property and equipment - net $ 13,404,000 $ 12,764,000
============= =============
LoJack System components not yet in service consist primarily of certain
components relating to the operation of the LoJack System. Such components
at December 31, 2002 are expected to be placed into service during the year
ended December 31, 2003.
3. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31,
2002 2001
Investment in international licensee $ 1,389,000 $ 1,389,000
Long term deferred receivable from licensee 1,502,000 -
Capitalized and purchased development costs 1,193,000 1,019,000
Patents (net of amortization of $218,000
and $157,000) 207,000 268,000
Security deposits 138,000 108,000
Vendor deposits 48,000 10,000
------------- -------------
Total other assets $ 4,477,000 $ 2,794,000
============= =============
The long term deferred receivable relates to the conversion of receivable
balances from the Company's Mexican licensee.
4. LINE OF CREDIT AND CAPITAL LEASE OBLIGATIONS
Line-of-Credit - In June 2002, the Company entered into a new line-of-credit
facility, which provides for maximum borrowings of $10,000,000 and expires in
June 2005. Outstanding borrowings under the new line-of-credit facility bear
annual interest, payable monthly, at the bank's base rate (4.25% at December 31,
2002), or if converted at the option of the Company, based upon the LIBOR rate
plus 200 basis points (3.38% at December 31, 2002). No borrowings were
outstanding under the line-of-credit facility as of December 31, 2002; however,
- 33 -
a $250,000 irrevocable letter of credit was established for a vendor in November
2002. The $250,000 letter of credit reduces the available borrowings under the
line-of-credit.
The line-of-credit facility generally contains limitations on indebtedness,
certain investments in equity securities and entity acquisitions; requires
lender's approval of mergers; and prohibits disposition of assets other than in
the normal course of business. Additionally, the Company is required to maintain
certain financial performance measures including debt service coverage, a
minimum ratio of total liabilities to tangible net worth, a minimum current
ratio and minimum adjusted earnings before interest, taxes, depreciation and
amortization. The payment of dividends and repurchase of the Company's common
stock is permitted under the line-of-credit facility and is limited only to the
extent such payments affect the Company's ability to meet certain financial
performance measures thereunder. Failure to maintain compliance with covenants
could impair the availability of the facility.
Capital Lease Obligations - The Company has entered into capital lease
arrangements for certain vehicles. The cost of leased vehicles included in
property and equipment is approximately $9,142,000 and $8,547,000, and the
related accumulated amortization is approximately $5,957,000 and $5,517,000 as
of December 31, 2002 and December 31, 2001, respectively. Amortization of such
assets is included within product and installation costs in the accompanying
consolidated income statements.
At December 31, 2002, scheduled repayment requirements for capital lease
obligations are as follows:
2003 $ 1,613,000
2004 923,000
2005 176,000
--------------
Total payments 2,712,000
Less amounts representing interest 144,000
--------------
Total principal 2,568,000
Less current portion 1,504,000
--------------
Long-term portion $ 1,064,000
==============
5. STOCKHOLDERS' EQUITY
Common Stock - As of December 31, 2002, the Company has 35,000,000 authorized
shares of $.01 par value common stock of which 14,740,641 are issued and
outstanding and an additional 4,704,930 shares are reserved for the future
issuance and exercise of stock options.
Preferred Stock - The Company has 10,000,000 authorized shares of $.01 par value
Preferred Stock. 350,000 shares of Preferred Stock have been designated as
Series B Junior Participating Preferred Stock, par value $.01 per share, of the
Company (the "Series B Preferred Stock"). The Series B Preferred Stock is
reserved for issuance pursuant to Series B Preferred Share Purchase Rights (each
a "Right") attached to the common. The description and terms of the Rights are
set forth in a Rights Agreement between the Company and American Stock Transfer
and Trust Company, a Rights Agent. There were no shares outstanding at December
31, 2002 and December 31, 2001, and there are no current plans to issue
Preferred Stock.
Stock Options - The Company's Incentive Stock Option Plan ("the Option Plan"),
as amended, provides for the issuance of incentive stock options to employees,
senior management ("Management Options") and non-employee directors ("Directors
Options") to purchase an aggregate of 6,374,135 shares of common stock. The
incentive options are granted at exercise prices equal to the fair market value
of the common stock on the date of grant. Options generally become exercisable
over periods of two to five years and expire ten years from the date of the
grant. Selected information regarding the options under the Option Plan as of
December 31, 2002 is as follows:
AUTHORIZED AVAILABLE FOR
FOR GRANT OUTSTANDING FUTURE GRANT
Management and incentive stock options 6,064,135 3,686,295 732,135
Directors' options 310,000 232,000 54,500
---------- ----------- -------------
6,374,135 3,918,295 786,635
========== =========== =============
- 34 -
The following table presents activity of all stock options:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
Outstanding at February 29, 2000 3,660,915 $ 7.76
Granted 606,700 7.21
Exercised (42,700) 4.97
Canceled (182,385) 9.32
------------- ----------------
Outstanding at February 28, 2001 4,042,530 7.67
Granted 496,750 5.85
Exercised (183,000) 2.00
Canceled (216,075) 9.72
------------- ----------------
Outstanding at December 31, 2001 4,140,205 7.53
Granted 502,900 5.34
Exercised (631,900) 2.01
Canceled (92,910) 6.43
------------- ----------------
Outstanding at December 31, 2002 3,918,295 $ 8.17
============= ================
The following table sets forth information regarding options outstanding at
December 31, 2002:
WEIGHTED AVERAGE
WEIGHTED AVERAGE EXERCISE PRICE FOR
NUMBER OF RANGE OF EXERCISE WEIGHTED AVERAGE REMAINING LIFE NUMBER CURRENTLY CURRENTLY
OPTIONS PRICES EXERCISE PRICE (YEARS) EXERCISABLE EXERCISABLE
1,223,300 $ 4.70- 5.90 $ 5.37 3 393,910 $ 3.54
1,508,945 6.88- 8.13 7.64 4 1,191,945 7.73
475,775 9.13-10.25 9.78 4 475,775 9.78
710,275 12.38-15.00 13.04 4 703,720 13.04
------------ ----------------- ---------------- ---------------- ---------------- ------------------
3,918,295 $ 4.70-$15.00 $ 8.17 4 2,765,350 $ 8.84
============ ================= ================ ================ ================ ==================
At December 31, 2001 and February 28, 2001, there were 3,010,385 and 2,804,005
options exercisable at weighted average prices of $7.73 and $7.03, respectively.
The Company is submitting the 2003 Stock Incentive Plan (the "2003 Plan") to the
shareholders for their approval at the annual meeting. If the 2003 Plan is
approved, the Company does not intend to issue any further options under the
existing Option Plan.
Employee Stock Purchase Plan - In May 2002, the Company's stockholders
authorized up to 250,000 shares of common stock to be available for the
Company's Employee Stock Purchase Plan. The plan allows eligible employees to
purchase the Company's stock at the lower of 85% of the fair market value of the
shares on the offering date or the purchase date, which is six months after
commencement of the offering date. For the year ended December 31, 2002, 71,494
shares were issued under the plan.
Stock Repurchase Plan - During fiscal 1996, the Company's Board of Directors
authorized a stock repurchase plan (the "Repurchase Plan"). The Repurchase Plan,
as amended several times since that date, authorizes the Company to purchase up
to 9,200,000 shares of its outstanding common stock. Through December 31, 2002,
the Company has repurchased 8,663,034 shares for a total of $78,702,000.
- 35 -
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the year
ended December 31, 2002, the ten months ended December 31, 2001 and the year
ended February 28, 2001:
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
2002 2001 2001
Current:
Federal $ 1,957,000 $ 2,271,000 $ 4,488,000
State 310,000 613,000 601,000
------------------------------------------
Total 2,267,000 2,884,000 5,089,000
------------------------------------------
Deferred:
Federal (932,000) (981,000) (566,000)
State (165,000) (168,000) (152,000)
------------------------------------------
Total (1,097,000) (1,149,000) (718,000)
------------------------------------------
Provision for income taxes $ 1,170,000 $ 1,735,000 $ 4,371,000
==========================================
The difference between the Company's effective income tax rate and the United
States statutory rate is reconciled below:
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
2002 2001 2001
U.S. statutory rate 35% 35% 35%
State taxes, net of federal benefit 6 4 4
Foreign sales corporation (6) (4) (4)
Other, net 4 2 2
------------------------------------------
Effective tax rate 39% 37% 37%
==========================================
- 36 -
The tax effects of the items comprising the Company's net deferred tax asset at
the end of December 2002 and December 2001 are as follows:
DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------------- ----------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
Deferred tax liabilities:
Differences between book and tax
basis of property $ - (2,770,000) $ - (2,477,000)
------------ ------------ ------------ -------------
Deferred tax liabilities - (2,770,000) - (2,477,000)
------------ ------------ ------------ -------------
Deferred tax assets:
Accruals not currently deductible $ 539,000 $ 909,000 $ 573,000 $ 465,000
Income deferred for book purposes 1,711,000 4,747,000 1,226,000 4,217,000
Net operating loss carryforwards 108,000 - 143,000 -
------------ ------------ ------------ -------------
Deferred tax assets 2,358,000 5,656,000 1,942,000 4,682,000
------------ ------------ ------------ -------------
Net deferred tax assets $ 2,358,000 $ 2,886,000 $ 1,942,000 $ 2,205,000
============ ============ ============ =============
7. COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments - The Company leases various facilities and vehicles under
operating leases whose terms expire from 2003 to 2008; the facility leases
contain renewal options ranging from two to five years.
Minimum annual lease payments as of December 31, 2002 are as follows:
2003 $ 2,560,000
2004 2,392,000
2005 2,278,000
2006 1,655,000
2007 and thereafter 619,000
-------------
Total $ 9,504,000
=============
Rental expense under operating leases aggregated approximately $2,370,000,
$1,671,000 and $1,507,000, for the year ended December 31, 2002, the ten months
ended December 31, 2001 and the year ended February 28, 2001, respectively.
Severance and Retirement Agreement - In February 2001 the Company recorded a
charge to general and administrative expenses of $1,513,000 related to a
management reorganization. The expense consisted of severance, which was paid in
2001, and retirement compensation and related benefits, which will be paid
through 2006. At December 31, 2002, approximately $720,000 remains in accrued
compensation ($212,000 classified as short term and $508,000 as long term).
Purchase Commitments and Milestone Payments - In January 2003, the Company
placed purchase orders to fulfill its calendar year 2003 production
requirements. The orders include non-cancelable commitments of approximately
$9,223,000. The Company is committed to its suppliers for certain engineering
expenditures if project milestones are achieved relating to the re-engineering
of the LoJack Unit. The expenditures are expected to total approximately
$370,000 and are scheduled to be due within the next 18 months.
Contingencies - From time to time, the Company is engaged in certain legal
matters arising in the ordinary course of business. In the opinion of
Management, the Company has adequate legal defenses or insurance coverage with
respect to these actions and believes that the ultimate outcomes will not have a
material adverse effect on its financial position.
- 37 -
8. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 40l(k) plan covering substantially all
full-time employees. Under the provisions of the plan, employees may contribute
a portion of their compensation within certain limitations. The Company matches
a percentage of employee contributions on a discretionary basis as determined by
the Board of Directors. The Company's Board of Directors elected to match 50% of
employee contributions (100% of employee contributions for those with more than
five years of service) for the year ended December 31, 2002, the ten months
ended December 31, 2001 and the year ended February 28, 2001, subject to certain
limitations. Company contributions become fully vested after five years of
continuous service. Company contributions related to the plan were approximately
$655,000, $455,000 and $490,000 for the year ended December 31, 2002, the ten
months ended December 31, 2001 and the year ended February 28, 2001,
respectively.
9. EXPORT SALES
Export revenues relate to product sales to, and licensing revenues from
licensees in foreign countries. A summary of such revenues is as follows:
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
2002 2001 2001
Export Revenues:
Europe and Russia $ 3,087,000 $ 974,000 $ 1,020,000
South America 9,652,000 6,365,000 6,063,000
Asia 182,000 105,000 157,000
Africa, primarily South Africa 7,100,000 6,709,000 7,957,000
------------ ------------ ------------
Total $ 20,021,000 $ 14,153,000 $ 15,197,000
============ ============ ============
- 38 -
10. SEGMENT INFORMATION
The following tables present information about the Company's operating segments
for the year ended December 31, 2002, the ten months ended December 31, 2001 and
the year ended February 28, 2001:
(in thousands)
Domestic International
Segment Segment Consolidated
---------- ------------- ------------
YEAR ENDED DECEMBER 31, 2002
Revenues $ 96,405 $ 20,021 $ 116,426
Depreciation and amortization 4,321 9 4,330
Segment net income (742) 2,571 1,829
Capital expenditures (excluding capital leases) 2,859 63 2,922
Segment assets 33,203 21,800 55,003
TEN MONTHS ENDED DECEMBER 31, 2001
Revenues $ 70,226 $ 14,153 $ 84,379
Depreciation and amortization 3,213 3 3,216
Segment net income 1,913 1,042 2,955
Capital expenditures (excluding capital leases) 3,864 - 3,864
Segment assets 41,606 6,588 48,194
YEAR ENDED FEBRUARY, 2001
Revenues $ 80,653 $ 15,197 $ 95,850
Depreciation and amortization 3,925 4 3,929
Segment net income before change in accounting 4,960 2,546 7,506
Segment net income (loss) after change in accounting 4,960 (433) 4,527
Capital expenditures (excluding capital leases) 2,689 - 2,689
Segment assets 38,357 3,798 42,155
- 39 -
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no changes in or disagreements with our accountants on accounting
and financial disclosure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 1, Business - Executive Officers of the Registrant.
The remainder of the information required by this item is incorporated herein by
reference to the information appearing in the Company's definitive Proxy
Statement for its Annual Meeting of Stockholders to be held May 29, 2003 under
the headings "Proposal No. 1 - Election of Directors", "Board of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information appearing in the Company's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on May 29, 2003 under the heading "Executive
Compensation."
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the
information appearing in the Company's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on May 29, 2003 under the headings "Principal
and Management Stockholders" and "Securities Authorized for Issuance Under
Equity Compensation Plans."
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
information appearing in the Company's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on May 29, 2003 under the heading "Certain
Relationships and Related Transactions."
ITEM 14 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Within the 90 days prior
to the date of this report, Management of the Company carried out an evaluation,
under the supervision and with the participation of the Company's principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to the Securities Exchange Act ("Exchange Act") Rule 13a-14(c) and
15d-14(c). Based upon that evaluation, the Company's principal executive officer
and principal financial officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic Securities and Exchange
Commission (the "Commission") filings.
(b) Changes in internal controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls since the Company's evaluation of these controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements
The following financial statements and the report of the
independent auditors are included on the page indicated.
---------------------------------------------------------
Independent Auditors' Report Relating to the Consolidated
Financial Statements (and notes thereto) 23
Consolidated Balance Sheets 24
Consolidated Statements of Income 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
- 40 -
Notes to Consolidated Financial Statements 28
(b) Reports on Form 8-K:
None
(c) Exhibits
Certain of the exhibits listed hereunder have been previously
filed with the Commission as exhibits to certain registration
statements and periodic reports as indicated and are
incorporated herein by reference pursuant to Rule 12b-32
promulgated under the Exchange Act. The location of each
document so incorporated by reference is indicated in
parentheses following the description of the document.
3A. Restated Articles of Organization (incorporated by reference to
Exhibit 3A filed with the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1994, filed with the Commission,
File No. 108439 (the "1994 Form 10-K")).
3B. Amended By-Laws (incorporated by reference to Exhibit 3B filed with
the Company's Annual Report on Form 10-K for the fiscal year ended
February 29, 1992, filed with the Commission, File No. 108439 (the
"1992 Form 10-K")).
4A. Specimen Share Certificate (incorporated by reference to Exhibit 4A
to File No. 2-74238-B).
4A1. Amended Specimen Share Certificate (incorporated by reference to
Exhibit 4B to File No. 2-98609).
4B. Rights Agreement, dated December 17, 1999, between the Company and
American Stock Transfer and Trust Company (incorporated by reference
to Exhibit 4.1 filed with Form 8-A, filed with Commission, File No.
28563).
10A. Supply Agreement with Motorola (incorporated by reference to Exhibit
10J to the Company's Annual Report on Form 10-K for the fiscal year
ended February 28, 1986, filed with the Commission, File No. 108439
(the "1986 Form 10-K")).
10B. Agreement with the City of Los Angeles dated March 9, 1989
(incorporated by reference to Exhibit 10K to File No. 33-27457).
10C. Contract between the State of Michigan and LoJack Corporation, dated
as of April 24, 1989 (incorporated by reference to exhibit 10O filed
with the Company's Annual Report on Form 10-K for the fiscal year
ended February 28, 1990, filed with the Commission, File No. 108439
(the "1990 Form 10-K")).
10D. Agreement between the Company and the Illinois State Police, dated
as of August 23, 1990 (incorporated by reference to Exhibit 10P to
the 1990 Form 10-K).
10E.++ 1985 Non-Qualified Stock Option Plan, as amended (incorporated by
reference to Exhibit 10F to the 1992 Form 10-K).
10F.++ Directors' Compensation Plan (incorporated by reference to Exhibit
10G to the 1992 Form 10-K).
10G.++ Form of Agreement with respect to options granted to certain
officers and employees (incorporated by reference to exhibit 10H to
File No. 33-27457).
10H. Accepted Proposal by the Company to the Massachusetts Department of
Public Safety (incorporated by reference to Exhibit 10F to File No.
2-74238-B).
10I. Lease Agreement Number VA-901212-LOJ between the Company and the
Commonwealth of Virginia, dated September 17, 1991 (incorporated by
reference to Exhibit 10W to the Company's Annual Report on Form 10-K
for the fiscal year ended February 28, 1993, filed with the
Commission, File No. 00274238B (the "1993 Form 10-K")).
10J. Lease Agreement between the Company and the State of Georgia
Department of Public Safety, dated June 6, 1991 (incorporated by
reference to Exhibit 10X to the 1993 Form 10-K).
10K.++ Form of Senior Management Option (incorporated by reference to
exhibit 10H to File No. 33-27457).
10L. License, Trademark and Supply Agreement, dated July 16, 1992, by and
between Carsearch Corporation, a subsidiary of the Company, and
Secar, Ltd. Kutuzovovn, Bratislava, Czechoslovakia (incorporated by
reference to Exhibit 10aa to the 1993 Form 10-K).
10M. Patent License and Ancillary Know-How Agreement, dated December 30,
1991, and Second Amendment (relating to the Patent, License and
Know-How Agreement of December 30, 1991), dated January 29, 1993,
each by and between the Company and Stolen Vehicle Recovery Systems
Limited, Aylesbury, Buckingham, UK (incorporated by reference to
exhibit 10bb to the 1993 Form 10-K).
- 41 -
10N. Agreement, dated January 21, 1994, between the New York Division of
State Police and the Company (incorporated by reference to Exhibit
10aa to the 1994 Form 10-K).
10O. Memorandum of Understanding, dated July 29, 1993, with the District
of Columbia Metropolitan Police Department (incorporated by
reference to Exhibit 10cc filed with the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 1995, filed with
the Commission, File No. 00274238B (the "1995 Form 10-K")).
10P. Memorandum of Understanding, dated February 28, 1994, with Rhode
Island State Police (incorporated by reference to Exhibit 10dd to
the 1995 Form 10-K).
10Q. Contract, dated July 15, 1993, with the State of Connecticut
(incorporated by reference to Exhibit 10ee to the 1995 Form 10-K).
10R. License, Trademark, and Supply Agreement, dated October 13, 1994,
between LoJack International Corporation and Tracker Vehicle
Location Systems (PTY) Ltd., Cape Town, South Africa (incorporated
by reference to Exhibit 10nn to the 1995 Form 10-K).
10S. Patent License and Ancillary Know-How Agreement, dated November 30,
1994, between LoJack International Corporation and LoJack Italia,
Bologna, Italy (incorporated by reference to Exhibit 10pp to the
1995 Form 10-K).
10T. License and Supply Agreement, dated April 25, 1995, between LoJack
International Corporation and United States Consolidated
Technologies Corporation (incorporated by reference to Exhibit 10qq
to the 1995 Form 10-K).
10U. Trademark and Supply Agreement, dated August 15, 1995, between
LoJack International and CarTrack Kenya Limited, Nairobi, Kenya
(incorporated by reference to Exhibit 10yy to the 1996 Form 10-K).
10V. License, Trademark and Supply Agreement, dated September 10, 1996,
between the Company, LoJack International and S1 Corporation, Seoul,
Korea (incorporated by reference to Exhibit 10nn to the 1997 Form
10-K).
10W. Agreement, dated September 1, 1996, between the Company and the
Texas Department of Public Safety (incorporated by reference to
Exhibit 10oo to the 1997 Form 10-K).
10X. Agreement between the Commonwealth of Pennsylvania, Pennsylvania
State Police and the Company, dated May 14, 1996 (incorporated by
reference to Exhibit 10pp to the 1997 Form 10-K).
10Y. Agreement between the Maryland Department of State Police and the
Company, dated November 8, 1996 (incorporated by reference to
Exhibit 10qq to the 1997 Form 10-K).
10Z. Employment Agreement with Ronald J. Rossi, dated November 1, 2000
(incorporated by reference to Exhibit 10 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2001,
filed with the Commission, File No. 108439).
10aa. Loan Agreement, dated June 21, 2002, among Citizens Bank of
Massachusetts and the Company, LoJack International Corporation,
LoJack of New Jersey Corporation, Recovery Systems, Inc., LoJack
Holdings Corporation, LoJack of Pennsylvania, Inc., LoJack Recovery
Systems Business Trust, LoJack Arizona, LLC, Vehicle Recovery
Systems Company (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002, filed with the Commission, File No. 108439).
10bb. Loan Agreement, between the Company and its Argentine licensee
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002, filed with the Commission, File No. 108439 (the "September
2002 Form 10-Q")).
10cc. Promissory Note, dated September 5, 2002, issued to the Company by
its Argentine licensee (incorporated by reference to Exhibit 10.2 to
the September 2002 Form 10-Q).
10dd. Pledge and Security Agreement, dated September 5, 2002, made by
Carlos Roberto MacKinley in favor of the Company (incorporated by
reference to Exhibit 10.3 to the September 2002 Form 10-Q).
10ee. Pledge and Security Agreement, dated September 5, 2002, made by
Roberto Bonanni Rey in favor of the Company (incorporated by
reference to Exhibit 10.4 to the September 2002 Form 10-Q).
10ff. Guarantee Agreement, dated September 5, 2002, by Carlos Roberto
MacKinley in favor of the Company (incorporated by reference to
Exhibit 10.5 to the September 2002 Form 10-Q).
10gg.* Amended Employment Agreement with Ronald J. Rossi, dated July 31,
2002.
10hh.* Amendment, effective November 30, 2002, to the September 5, 2002
Loan Agreement, entered into by and among Car Security S.A., LoJack
Recovery Systems Business Trust, the Company, Carlos Mackinlay and
Roberto Bonanni Rey.
10ii.*++ Restated and Amended Stock Incentive Plan, as restated February 28,
2001, and as amended on December 11, 2001 and December 23, 2002.
10jj.*++ Form of Senior Management Option Agreement.
10kk.*++ Form of Non-Employee Director Option Agreement.
- 42 -
10ll.* Amendment No. 1 to Loan Agreement and Consent, dated as of January
8, 2003, by and among the Company, LoJack International Corporation,
Vehicle Recovery Systems Company, LoJack Global LLC, LoJack
Operating Company, L.P. and Citizens Bank of Massachusetts.
10mm.* Form of change of Control Agreement.
10nn.* Form of change of Control Agreement.
10oo.* Subscription Agreement, dated as of March 14, 2002, by and among
LoJack de Mexico, S. de R.L. de C.V., Grupo Car Mart, S.A. de C.V.
and Jose Antonio Ocejo Gutierrez.
21.* Subsidiaries of the Registrant.
23.* Consent of Deloitte & Touche LLP.
99.1* Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2* Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- ----------
* Indicates an exhibit which is filed herewith.
++ Indicates an exhibit which constitutes an executive compensation plan.
- 43 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the Town of Westwood,
Commonwealth of Massachusetts, on the 28th day of March 2003.
LOJACK CORPORATION
(Registrant)
BY: /s/ Ronald J. Rossi
--------------------
Ronald J. Rossi
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacity and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Ronald J. Rossi Director, Chairman, and Chief Executive March 28, 2003
- ------------------- Officer
Ronald J. Rossi
/s/ Joseph F. Abely Director, President and Chief Operating March 28, 2003
- ------------------- Officer
Joseph F. Abely
/s/ John H. MacKinnon Director March 28, 2003
- ---------------------
John H. MacKinnon
/s/ Robert J. Murray Director March 28, 2003
- --------------------
Robert J. Murray
/s/ Larry C. Renfro Director March 28, 2003
- -------------------
Larry C. Renfro
/s/ Robert L. Rewey Director March 28, 2003
- -------------------
Robert L. Rewey
/s/ Harvey Rosenthal Director March 28, 2003
- --------------------
Harvey Rosenthal
/s/ Lee T. Sprague Director March 28, 2003
- ------------------
Lee T. Sprague
/s/ Keith E. Farris Vice President of Finance and Chief March 28, 2003
- ------------------- Financial Officer
Keith E. Farris
- 44 -
CERTIFICATIONS
I, Ronald Rossi, certify that:
1. I have reviewed this annual report on Form 10-K of LoJack Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 28, 2003
By: /s/ Ronald J. Rossi
-------------------------------------
Ronald J. Rossi
Chairman of the Board of Directors
and Chief Executive Officer
- 45 -
CERTIFICATIONS
I, Keith Farris, certify that:
1. I have reviewed this annual report on Form 10-K of LoJack Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 28, 2003
By: /s/ Keith E. Farris
-----------------------------
Keith E. Farris
Chief Financial Officer
(Principal Financial Officer)
- 46 -