Attached files
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EX-32 - EXHIBIT 32 - LOJACK CORP | c08056exv32.htm |
EX-31.1 - EXHIBIT 31.1 - LOJACK CORP | c08056exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - LOJACK CORP | c08056exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-08439
LOJACK CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2664794 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification Number) | |
200 Lowder Brook Drive, Suite 1000 | ||
Westwood, Massachusetts | 02090 | |
(Address of principal executive offices) | (Zip code) |
(781) 251-4700
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company, in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
As of October 29, 2010, there were 18,296,025 shares of our common stock issued and
outstanding.
LOJACK CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LOJACK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 37,513 | $ | 36,490 | ||||
Restricted cash |
300 | 603 | ||||||
Marketable securities at fair value |
1,411 | 1,834 | ||||||
Accounts receivableNet |
27,148 | 34,216 | ||||||
Inventories |
11,058 | 10,665 | ||||||
Prepaid and other expenses |
3,181 | 3,136 | ||||||
Prepaid and receivable income taxes |
7,848 | 9,076 | ||||||
Deferred income taxes |
| 6,653 | ||||||
Total current assets |
88,459 | 102,673 | ||||||
PROPERTY AND EQUIPMENTNET |
16,432 | 18,985 | ||||||
DEFERRED INCOME TAXES |
95 | 8,824 | ||||||
INTANGIBLE ASSETSNET |
388 | 674 | ||||||
GOODWILL |
1,717 | 1,717 | ||||||
OTHER ASSETSNET |
11,874 | 14,617 | ||||||
TOTAL ASSETS |
$ | 118,965 | $ | 147,490 | ||||
LIABILITIES AND EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 4,688 | $ | 7,236 | ||||
Accrued and other liabilities |
10,734 | 9,253 | ||||||
Current portion of deferred revenue |
22,597 | 24,416 | ||||||
Accrued compensation |
5,788 | 3,002 | ||||||
Total current liabilities |
43,807 | 43,907 | ||||||
LONG TERM DEBT |
8,063 | 13,375 | ||||||
DEFERRED REVENUE |
30,504 | 33,467 | ||||||
OTHER ACCRUED LIABILITIES |
2,362 | 2,314 | ||||||
ACCRUED COMPENSATION |
1,535 | 2,493 | ||||||
Total liabilities |
86,271 | 95,556 | ||||||
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10) |
||||||||
EQUITY: |
||||||||
Preferred stock$.01 par value; authorized, 10,000,000 shares |
| | ||||||
Common stock$.01 par value; authorized, 35,000,000 shares;
issued and outstanding 18,296,025 at September 30, 2010 and
18,359,738 at December 31, 2009 |
183 | 183 | ||||||
Additional paid-in capital |
20,380 | 18,072 | ||||||
Accumulated other comprehensive income |
7,370 | 7,531 | ||||||
Retained earnings |
4,945 | 25,997 | ||||||
Total LoJack Corporation equity |
32,878 | 51,783 | ||||||
Noncontrolling interest in subsidiary |
(184 | ) | 151 | |||||
Total equity |
32,694 | 51,934 | ||||||
TOTAL LIABILITIES AND EQUITY |
$ | 118,965 | $ | 147,490 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
Table of Contents
LOJACK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenue |
$ | 38,485 | $ | 36,121 | $ | 106,624 | $ | 99,366 | ||||||||
Cost of goods sold |
19,126 | 15,554 | 53,310 | 46,620 | ||||||||||||
Gross profit |
19,359 | 20,567 | 53,314 | 52,746 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Product development |
1,202 | 1,928 | 4,909 | 5,267 | ||||||||||||
Sales and marketing |
6,881 | 8,678 | 22,737 | 24,276 | ||||||||||||
General and administrative |
6,644 | 10,597 | 24,674 | 28,619 | ||||||||||||
Legal settlement |
| 18,250 | | 18,250 | ||||||||||||
Depreciation and amortization |
1,678 | 1,418 | 5,415 | 4,845 | ||||||||||||
Impairment of goodwill and intangible assets |
| | | 14,038 | ||||||||||||
Total |
16,405 | 40,871 | 57,735 | 95,295 | ||||||||||||
Operating income (loss) |
2,954 | (20,304 | ) | (4,421 | ) | (42,549 | ) | |||||||||
Other income (expense): |
||||||||||||||||
Interest income |
| 519 | 230 | 1,139 | ||||||||||||
Interest expense |
(178 | ) | (98 | ) | (488 | ) | (343 | ) | ||||||||
Other, net |
300 | 201 | (98 | ) | 674 | |||||||||||
Total |
122 | 622 | (356 | ) | 1,470 | |||||||||||
Income (loss) before provision (benefit) for income taxes |
3,076 | (19,682 | ) | (4,777 | ) | (41,079 | ) | |||||||||
Provision (benefit) for income taxes |
402 | (6,064 | ) | 16,610 | (8,188 | ) | ||||||||||
Net income (loss) |
2,674 | (13,618 | ) | (21,387 | ) | (32,891 | ) | |||||||||
Less: Net loss attributable to the noncontrolling interest |
(49 | ) | (179 | ) | (335 | ) | (510 | ) | ||||||||
Net income (loss) attributable to LoJack Corporation |
$ | 2,723 | $ | (13,439 | ) | $ | (21,052 | ) | $ | (32,381 | ) | |||||
Net income (loss) per share attributable to LoJack Corporation: |
||||||||||||||||
Basic |
$ | 0.16 | $ | (0.78 | ) | $ | (1.21 | ) | $ | (1.89 | ) | |||||
Diluted |
$ | 0.15 | $ | (0.78 | ) | $ | (1.21 | ) | $ | (1.89 | ) | |||||
Weighted average shares: |
||||||||||||||||
Basic |
17,378,804 | 17,228,083 | 17,330,533 | 17,148,463 | ||||||||||||
Diluted |
17,738,093 | 17,228,083 | 17,330,533 | 17,148,463 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
Table of Contents
LOJACK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (21,387 | ) | $ | (32,891 | ) | ||
Adjustments to reconcile net loss to net cash provided (used) by operating activities: |
||||||||
Stock-based compensation |
2,468 | 2,333 | ||||||
Depreciation and amortization |
5,790 | 5,479 | ||||||
Impairment of goodwill and intangible assets |
| 14,038 | ||||||
Fair value adjustment to warrants |
(348 | ) | (747 | ) | ||||
Allowance for doubtful accounts |
1,034 | 460 | ||||||
Deferred income taxes |
15,387 | 15 | ||||||
Loss on disposal of property and equipment |
2 | 7 | ||||||
Gain on marketable securities |
1 | (468 | ) | |||||
Increase (decrease) in cash from changes in assets and liabilities: |
||||||||
Accounts receivable |
5,992 | 9,313 | ||||||
Inventories |
(355 | ) | 2,381 | |||||
Prepaid and other expenses |
(41 | ) | 854 | |||||
Prepaid income taxes |
1,231 | (5,464 | ) | |||||
Other assets |
599 | (207 | ) | |||||
Accounts payable |
(2,525 | ) | (2,298 | ) | ||||
Accrued and other liabilities |
4,107 | (1,482 | ) | |||||
Deferred revenue |
(4,003 | ) | (3,843 | ) | ||||
Net cash provided (used) by operating activities |
7,952 | (12,520 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Investment in property and equipment |
(2,980 | ) | (4,103 | ) | ||||
Purchase of marketable securities |
(193 | ) | (186 | ) | ||||
Proceeds from the sale of marketable securities |
1,223 | 4,051 | ||||||
Restricted cash |
303 | (16,983 | ) | |||||
Net cash used by investing activities |
(1,647 | ) | (17,221 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Issuance of shares under employee stock purchase plan |
| 344 | ||||||
Repayment of debt |
(6,322 | ) | (14,146 | ) | ||||
Proceeds from debt |
719 | 2,327 | ||||||
Payment of tax withholding obligations related to stock |
(161 | ) | (35 | ) | ||||
Net cash used by financing activities |
(5,764 | ) | (11,510 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
482 | 44 | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
1,023 | (41,207 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
36,490 | 57,888 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 37,513 | $ | 16,681 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
Table of Contents
LOJACK CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been
prepared by LoJack Corporation and its subsidiaries, or LoJack, we, our, or the Company,
without audit. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The unaudited condensed consolidated financial statements include the accounts of
LoJack, its wholly-owned subsidiaries, and SC-Integrity, or SCI. We consolidate entities which we
own or control. All intercompany transactions and balances have been eliminated in consolidation.
In the opinion of our management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of items of a normal and recurring nature) necessary
to present fairly the financial position as of September 30, 2010, and the results of operations
for the three and nine months ended September 30, 2010 and 2009 and cash flows for the nine months
ended September 30, 2010 and 2009. The results of operations for the three and nine month periods
ended September 30, 2010 are not necessarily indicative of the results to be expected for the full
year.
These financial statements should be read in conjunction with our Annual Report on Form 10-K
for the year ended December 31, 2009, which includes consolidated financial statements and notes
thereto for the year ended December 31, 2009.
2. Earnings Per Share
Basic earnings per common share is computed using the weighted average number of common shares
outstanding during each period. Diluted earnings per common share is computed using the weighted
average number of common shares outstanding during the year and includes the effect of our
outstanding stock options and unvested stock (using the treasury stock method), except where such
stock options or unvested stock would be antidilutive.
A reconciliation of weighted average shares used for the basic and diluted computations for
the three months and nine months ended September 30, 2010 and 2009, respectively, is as follows:
Three Months Ended | Three Months Ended | |||||||
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
Weighted average shares for basic |
17,378,804 | 17,228,083 | ||||||
Dilutive effect of unvested stock |
359,289 | | ||||||
Weighted average shares for diluted |
17,738,093 | 17,228,083 | ||||||
Nine Months Ended | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
Weighted average shares for basic |
17,330,533 | 17,148,463 | ||||||
Weighted average shares for diluted |
17,330,533 | 17,148,463 | ||||||
For the three months ended September 30, 2010, 2,353,618 stock options and 127,901 shares
of restricted stock were excluded from the computation of diluted net loss per share because the
effect of including such shares would be antidilutive. Because of the net losses reported for the
nine months ended September 30, 2010 and the three and nine months ended September 30, 2009,
respectively, all shares of stock issuable pursuant to stock options and unvested stock have not
been considered for dilution as their effect would be antidilutive. For the nine months ended
September 30, 2010, 2,353,618 stock options and 890,038 shares of restricted stock were excluded
from the computation of diluted net loss per share. For the three and nine months ended September
30, 2009, 2,275,162 stock options and 561,797 shares of restricted stock were excluded from the
computation of diluted net loss per share. Performance shares totaling 128,625 and 70,525 were
excluded from the computation of earnings per share for the three and nine months ended September
30, 2010 and 2009, respectively, because the performance conditions had not been achieved at the
respective balance sheet dates.
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Table of Contents
3. Inventories
Inventories are classified as follows (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 545 | $ | 633 | ||||
Work in process |
416 | 894 | ||||||
Finished goods, net |
10,097 | 9,138 | ||||||
Total inventories |
$ | 11,058 | $ | 10,665 | ||||
4. Stock Compensation
Stock Options
The following table presents activity of all stock options for the nine month period ended
September 30, 2010:
Weighted | ||||||||||||||||
Weighted | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise | Contractual Term | Value | |||||||||||||
Options | Price | (in years) | (in thousands) | |||||||||||||
Outstanding at January 1, 2010 |
2,265,080 | $ | 7.94 | |||||||||||||
Granted |
819,200 | 4.21 | ||||||||||||||
Exercised |
| | ||||||||||||||
Cancelled, expired or forfeited |
(730,662 | ) | 6.40 | |||||||||||||
Outstanding at September 30, 2010 |
2,353,618 | $ | 7.37 | 4.55 | $ | 6 | ||||||||||
Vested and unvested expected to vest at September 30, 2010 |
2,329,889 | $ | 7.39 | 4.54 | $ | 6 | ||||||||||
Exercisable at September 30, 2010 |
1,169,501 | $ | 9.25 | 3.41 | $ | 2 |
The aggregate intrinsic values in the preceding table represent the total intrinsic values
based on our closing stock price of $3.82 per share as of September 30, 2010.
Unvested Stock
Unvested stock represents shares of common stock that are subject to the risk of forfeiture
until the fulfillment of specified performance criteria. Our unvested stock awards generally cliff
vest on either the first, second or third anniversary date of the grant.
For grants which vest based on specified Company performance criteria, the grant date fair
value of the shares is recognized over the period of performance once achievement of such criteria
is deemed probable. For grants that vest through passage of time, the grant date fair value of the
award is recognized ratably over the vesting period. The fair value of unvested stock awards is
determined based on the number of shares granted and the market value of our shares on the grant
date.
The following table presents activity of all unvested stock for the nine month period ended
September 30, 2010:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Unvested at January 1, 2010 |
799,524 | $ | 6.01 | |||||
Granted |
574,925 | 4.29 | ||||||
Vested |
(167,119 | ) | 10.09 | |||||
Forfeited/cancelled |
(317,292 | ) | 4.53 | |||||
Unvested at September 30, 2010 |
890,038 | $ | 4.67 | |||||
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5. Investments and Fair Value Measurements
The Financial Accounting Standards Board, or FASB, authoritative guidance on fair value
measurements defines fair value, establishes a framework for measuring fair value and expands
disclosure requirements about fair value measurements. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date.
Financial assets and liabilities recorded on the accompanying unaudited condensed consolidated
balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1Financial assets and liabilities whose values are based on unadjusted quoted prices
for identical assets or liabilities in an active market that the company has the ability to access
at the measurement date (examples include active exchange-traded equity securities, listed
derivatives and most United States government and agency securities).
Level 2Financial assets and liabilities whose values are based on quoted prices in markets
where trading occurs infrequently or whose values are based on quoted prices of instruments with
similar attributes in active markets. Level 2 inputs include the following:
| Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds which trade infrequently); |
| Inputs other than quoted prices that are observable for substantially the full term of the asset or liability (examples include interest rate and currency swaps); and |
| Inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (examples include certain securities and derivatives). |
Level 3Financial assets and liabilities whose values are based on prices or valuation
techniques that require inputs that are both unobservable and significant to the overall fair value
measurement. These inputs reflect managements own assumptions about the assumptions a market
participant would use in pricing the asset or liability. We currently do not have any Level 2 or
Level 3 financial assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In
instances where the inputs used to measure fair value fall into different levels of the fair value
hierarchy, the fair value measurement has been determined based on the lowest level input
significant to the fair value measurement in its entirety. Our assessment of the significance of a
particular item to the fair value measurement in its entirety requires judgment, including the
consideration of inputs specific to the asset or liability. The following table sets forth by level
within the fair value hierarchy, our financial assets that are accounted for at fair value on a
recurring basis at September 30, 2010 and December 31, 2009, according to the valuation techniques
we used to determine their fair values (in thousands):
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
September 30, | Identical Assets | Observable Inputs | Inputs | |||||||||||||
Description | 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Nonqualified deferred compensation plan investments |
$ | 1,142 | $ | 1,142 | $ | | $ | | ||||||||
Marketable securities |
1,411 | 1,411 | | | ||||||||||||
Investment in common stock of French licensee |
372 | 372 | | | ||||||||||||
Total |
$ | 2,925 | $ | 2,925 | $ | | $ | | ||||||||
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
December 31, | Identical Assets | Observable Inputs | Inputs | |||||||||||||
Description | 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Nonqualified deferred compensation plan investments |
$ | 1,924 | $ | 1,924 | $ | | $ | | ||||||||
Marketable securities |
1,834 | 1,834 | | | ||||||||||||
Absolute Software warrants |
336 | | 336 | | ||||||||||||
Investment in common stock of French licensee |
776 | 776 | | | ||||||||||||
Total |
$ | 4,870 | $ | 4,534 | $ | 336 | $ | | ||||||||
Our investments associated with our Nonqualified Deferred Compensation Plan consist of
mutual fund shares that are publicly traded and for which market prices are readily available.
Gains and losses related to such investments are recorded in other income (expense) in the
statement of operations.
8
Table of Contents
In June 2005, we entered into a ten-year trademark license agreement with Absolute Software,
Inc., or Absolute, a Vancouver, British Columbia, Canada based computer theft recovery company to
brand its consumer offering LoJack for Laptops®. In addition to an annual
per unit royalty, we were granted 1,000,000 (on a post split basis) warrants to purchase Absolutes
common stock with vesting on a pro rata basis over a five year period commencing on July 1, 2006.
As of September 30, 2010, all of the above warrants had vested and were exercised. As of September
30, 2010, we held 366,500 Absolute common shares as marketable securities that we have designated
as trading securities. The gains and losses on these securities are recorded in other income
(expense) in the statement of operations. These shares are publicly traded and their market price
is readily available.
Our investment in common stock of our French licensee consists of publicly traded shares with
a market price that is readily available. Because the quoted stock price of our investment fell
below our recorded cost for an extended period of time, we recorded an other-than-temporary decline
in our investment in other income (expense) in the statement of operations in the first quarter of
2009. During the nine months ended September 30, 2010, we recorded an unrealized gain related to
this investment in accumulated other comprehensive income.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Certain assets are measured at fair value on a non-recurring basis. Assets that are not
measured at fair value on an ongoing basis are subject to fair value adjustments only in certain
circumstances. Our assets in this category include cost and equity method investments, which are
written down to fair value when their declines are determined to be other-than-temporary, and
long-lived assets, or goodwill, that are written down to fair value when they are held for sale or
determined to be impaired.
We use Level 3 inputs to measure the fair value of goodwill and intangible assets on
their annual measurement dates or, if a triggering event occurs, on an interim basis.
As of September 30, 2010, our investments in international licensees included a 12.5% equity
interest in our Mexican licensee, totaling $1,541,000, and a 17.5% equity interest in our Benelux
licensee, totaling $496,000. Our investments in the aforementioned licensees are carried at cost
and adjusted only for other-than-temporary declines in fair value, distributions of capital and
additional investments made. Management periodically reviews the carrying value of these
investments using Level 3 inputs such as projections of anticipated cash flows, market conditions,
legal factors, operational performance, and valuations, when appropriate. We have concluded that
there are no impairments to the fair value of these investments for all periods presented.
Financial Instruments not Measured at Fair Value
Some of our financial instruments, including cash and cash equivalents, restricted cash,
accounts receivable and accounts payable are not measured at fair value on a recurring basis but
are recorded at amounts that approximate fair value due to their liquid or short-term nature.
At September 30, 2010, the carrying value of $8,063,000 of our long-term debt approximated the
fair value, because our two year multicurrency revolving credit agreement, which was established on
December 29, 2009, carries a variable rate of interest which is adjusted periodically and reflects
current market conditions. Also see Note 6 below.
6. Debt
As of September 30, 2010 and December 31, 2009, our debt consisted of the following (in
thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Long-term debt: |
||||||||
Canadian dollar denominated term loanlong term |
$ | 8,063 | $ | 13,375 | ||||
Total long-term debt |
$ | 8,063 | $ | 13,375 | ||||
On December 29, 2009, we entered into a two year multicurrency revolving credit
agreement, or the Credit Agreement, with RBS Citizens, N.A., as a Lender, Administrative Agent and
Lead Arranger, and TD Bank, N.A., as a Lender and Issuing Bank. The Credit Agreement provides for a
multicurrency revolving credit facility in the maximum amount of USD $30,000,000, subject to a
borrowing base calculation (or its equivalent in alternate currencies). We have the right to
increase the aggregate amount available to be borrowed under the USD $30,000,000 multicurrency
facility up to USD $50,000,000, subject to certain conditions, including consent of the lenders. At
September 30, 2010, based upon the borrowing base calculation, we had additional borrowing
availability of $10,086,000.
The outstanding borrowings under the Credit Agreement totaled CAD $8,300,000 (equivalent to
USD $8,063,000) as of September 30, 2010. The interest rate on borrowings under the Credit
Agreement varies depending on our choice of interest rate and currency options, plus an applicable
margin. The interest rate in effect as of September 30, 2010 was 4.11%. As of September 30,
2010, we also had three outstanding irrevocable letters of credit in the aggregate amount of
$1,280,000. The letters of credit reduce our outstanding borrowing availability under the Credit
Agreement.
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The Credit Agreement contains limitations on capital expenditures, repurchases of common
stock, certain investments, acquisitions and/or mergers, and prohibits disposition of assets other
than in the normal course of business. Additionally, we are required to maintain certain financial
performance measures including maximum leverage ratio, minimum cash flow coverage ratio, minimum
quick ratio and maximum capital expenditures. The payment of dividends is permitted but is limited
only to the extent such payments affect our ability to meet certain financial performance measures.
Failure to maintain compliance with covenants could impair our ability to borrow under the
facility.
On June 30, 2010, we entered into an amendment of the Credit Agreement. The amendment allows
for certain one-time severance costs that would otherwise be deducted in calculating Consolidated
Net Income to be added back for the purposes of determining Consolidated EBITDA, provided that such
additions will only be effective for the purpose of determining the Debt Service Coverage Ratio
covenant for the quarters ending June 30, 2010 and September 30, 2010, respectively. Consolidated
Net Income, Consolidated EBITDA and Debt Service Coverage Ratio are defined terms in the Credit
Agreement. At September 30, 2010, we were in compliance with all financial covenants in the Credit
Agreement.
The Credit Agreement terminates on December 29, 2011, at which point all amounts outstanding
under the revolving credit facility are due. The Credit Agreement is guaranteed by our United
States domestic subsidiaries and certain Canadian subsidiaries and is secured by all domestic
assets, including our intellectual property and a pledge of 100% of the stock of Boomerang Tracking
Inc. and 65% of the capital stock of LoJack Equipment Ireland, or LoJack Ireland.
7. Comprehensive Income (Loss)
Total comprehensive income (loss) and its components for the three and nine months ended
September 30, 2010 and 2009 were as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) |
$ | 2,674 | $ | (13,618 | ) | $ | (21,387 | ) | $ | (32,891 | ) | |||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustments |
200 | (890 | ) | 12 | (585 | ) | ||||||||||
Unrealized gains (losses) on marketable securities, net of tax |
293 | 175 | (173 | ) | 367 | |||||||||||
Total comprehensive income (loss) |
3,167 | (14,333 | ) | (21,548 | ) | (33,109 | ) | |||||||||
Less: Comprehensive loss attributable to noncontrolling interest |
(49 | ) | (179 | ) | (335 | ) | (510 | ) | ||||||||
Comprehensive income (loss) attributable to LoJack Corporation |
$ | 3,216 | $ | (14,154 | ) | $ | (21,213 | ) | $ | (32,599 | ) | |||||
Total accumulated other comprehensive income and its components were as follows (in
thousands):
Total | ||||||||||||
Foreign | Unrealized | Accumulated | ||||||||||
Currency | Gain on | Other | ||||||||||
Translation | Marketable | Comprehensive | ||||||||||
Adjustment | Securities | Income | ||||||||||
Balance at December 31, 2009 |
$ | 7,171 | $ | 360 | $ | 7,531 | ||||||
Foreign currency translation adjustments |
12 | | 12 | |||||||||
Unrealized loss on marketable securities |
| (173 | ) | (173 | ) | |||||||
Balance at September 30, 2010 |
$ | 7,183 | $ | 187 | $ | 7,370 | ||||||
8. Income Taxes
We recorded a worldwide provision for income taxes of $402,000 and $16,610,000 for the three
and nine months ended September 30, 2010, respectively, which includes a non-cash tax charge of
$15,100,000 in the nine months ended September 30, 2010, recorded to establish a valuation
allowance for our net U.S. deferred tax assets in the second quarter ended June 30, 2010. The effective income
tax rate for the three month period ended September 30, 2010 was lower
than our federal statutory rate because of the favorable tax rate in Ireland
and because no U.S. income tax expense was recorded for the three months ended
September 30, 2010 due to the valuation allowance on our net U.S. deferred
tax assets that was established in the second quarter ended June 30, 2010.
The effective income tax rate for the nine month period ended
September 30, 2010 is substantially higher than our federal statutory rate
due to the establishment of a valuation allowance on our net U.S. deferred tax
assets recorded in the second quarter ended June 30, 2010.
The effective income
tax rate for the three month period ended September 30, 2009 was lower
than our federal statutory rate due to the varying tax treatments of an
impairment charge and the legal settlement expense incurred. In the three
months ended September 30, 2009, we recorded an expense associated with a
legal settlement in the amount of $18,250,000. This expense generated a tax
benefit for the quarter in the amount of $4,699,000. In the nine months ended
September 30, 2009, in addition to the legal settlement, we recorded a
goodwill and intangible impairment charge of $14,038,000, for which no tax
benefit was recorded.
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We have net U.S. deferred tax assets that have arisen as a result of temporary differences
between book and tax accounting, primarily related to deferred revenue and stock compensation. The
FASB authoritative guidance on accounting for income taxes requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax assets. Our ability to
realize a deferred tax asset is based on our ability to generate sufficient future taxable income.
The valuation allowance was determined in accordance with the guidance, which requires an
assessment of both positive and negative evidence when determining whether it is more likely than
not that deferred tax assets are recoverable. Such assessment is required on a
jurisdiction-by-jurisdiction basis. Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against the net deferred tax assets. At year end 2009 and for the three months ended March
31, 2010, we had recorded a U.S. income tax benefit. At that time, management determined that the
ultimate realization of deferred tax assets for U.S. federal and state income tax purposes was
considered more likely than not, primarily due to taxable income in the federal carry back period
and anticipated sufficient future taxable income. As a result of U.S. operating losses incurred in
the quarter ended June 30, 2010, cumulative losses incurred in recent years and uncertainty as to
the extent and timing of profitability in future periods, we recorded a full valuation allowance of
$15,100,000 against our net U.S. deferred tax assets for the quarter ended June 30, 2010. As a
result of establishing a full valuation allowance against our net U.S. deferred tax assets, we did
not recognize any deferred tax benefits related to U.S. net losses incurred in the second or third
quarters of 2010. We will maintain a full valuation allowance on our net U.S. deferred tax assets
until sufficient positive evidence exists to support reversal of the valuation allowance.
9. Segment Reporting
We have three separately managed and reported business segments: North America, International
and All Other.
In the fourth quarter of 2009, we began the integration of Boomerangs operations with our
domestic operations and we re-evaluated our operating segments. In the fourth quarter of 2009, we
identified the following operating segments: domestic, Boomerang, international licensees, LoJack
Italia, SRL, or LoJack Italia, LoJack SafetyNet and SCI. In accordance with the quantitative and
qualitative criteria included in the authoritative guidance for segment reporting, we have
aggregated our domestic and Boomerang units into our North America segment, and our international
licensees and LoJack Italia units into our International segment. LoJack SafetyNet and SCI do not
meet the quantitative thresholds for separate reporting and have been grouped in All Other. In
addition, we changed our measure of segment profit to operating income (loss).
Our North America segment includes our domestic operations, which sells products that operate
in all or a portion of 28 states and the District of Columbia in the United States, and Boomerang,
a provider of stolen vehicle recovery products and services in Canada.
Our International segment includes our international operations, which sells products, and
licenses or owns and operates LoJack proprietary vehicle recovery technology in 32 countries and
territories located in South America, Mexico, the Caribbean, Africa, Asia and Europe, including
Italy where we operate through our wholly-owned subsidiary, LoJack Italia.
Our All Other segment includes the results of LoJack SafetyNet and SCI. LoJack SafetyNet and
SCI provide technology for the tracking and rescue of people at risk, and recovery of valuable
cargo and business information, respectively.
The following table presents information about our operating segments for the three and nine
months ended September 30, 2010 and 2009, respectively (in thousands). Certain general overhead
costs have been allocated to the North America and International segments based on methods
considered to be reasonable by our management.
North America | International | |||||||||||||||
Segment | Segment | All Other | Consolidated | |||||||||||||
Consolidated Statements of Operations Data |
||||||||||||||||
Three Months Ended September 30, 2010 |
||||||||||||||||
Revenue |
$ | 24,370 | $ | 13,405 | $ | 710 | $ | 38,485 | ||||||||
Depreciation and amortization |
1,571 | 108 | 55 | 1,734 | ||||||||||||
Operating (loss) income |
(1,211 | ) | 4,689 | (524 | ) | 2,954 | ||||||||||
Three Months Ended September 30, 2009 |
||||||||||||||||
Revenue |
$ | 26,209 | $ | 9,138 | $ | 774 | $ | 36,121 | ||||||||
Depreciation and amortization |
1,271 | 142 | 132 | 1,545 | ||||||||||||
Legal settlement |
9,125 | 9,125 | | 18,250 | ||||||||||||
Operating loss |
(8,784 | ) | (10,788 | ) | (732 | ) | (20,304 | ) | ||||||||
Nine Months Ended September 30, 2010 |
||||||||||||||||
Revenue |
$ | 73,265 | $ | 30,548 | $ | 2,811 | $ | 106,624 | ||||||||
Depreciation and amortization |
5,163 | 317 | 310 | 5,790 | ||||||||||||
Operating (loss) income |
(9,339 | ) | 6,890 | (1,972 | ) | (4,421 | ) | |||||||||
Nine Months Ended September 30, 2009 |
||||||||||||||||
Revenue |
$ | 73,919 | $ | 23,146 | $ | 2,301 | $ | 99,366 | ||||||||
Depreciation and amortization |
4,823 | 339 | 317 | 5,479 | ||||||||||||
Legal settlement |
9,125 | 9,125 | | 18,250 | ||||||||||||
Impairment of goodwill and intangible assets |
14,038 | | | 14,038 | ||||||||||||
Operating loss |
(29,245 | ) | (11,376 | ) | (1,928 | ) | (42,549 | ) |
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10. Commitments and Contingent Liabilities
We are subject to various legal proceedings and claims discussed below, as well as certain
other legal proceedings and claims that have not been fully resolved and that have arisen in the
ordinary course of business. The matters discussed below, if decided
adversely to, or settled by us, individually or in the aggregate, may result in
liability material to our financial condition or results of operations.
California Class Action Litigations
Employee Claims
In April 2006, a suit was filed against LoJack Corporation in the United States District Court
for the Central District of California by an employee alleging violations of the Fair Labor
Standards Act, the California Labor Code and the California Business & Professions Code, and
seeking class action status. In September 2007, our motion for summary judgment was granted and
the district court dismissed all of the plaintiffs federal law claims. The plaintiff appealed the
dismissal to the Ninth Circuit Court of Appeals and in August 2009, the Ninth Circuit affirmed the
district courts grant of summary judgment on all claims except as to the claim for compensation
for the required postliminary data transmission, or the data transmission claim, for which the
dismissal was vacated. The plaintiff filed a petition for rehearing to the Ninth Circuit and on
March 2, 2010, the Ninth Circuit affirmed the district courts grant of summary judgment on all
claims except as to (i) the claim for compensation for commuting under state law and (ii) the
data transmission claim, which are the two remaining claims. Our petition for rehearing to
the Ninth Circuit was denied.
Due to the dismissal of the plaintiffs claims in federal court as discussed above, in
November 2007, the plaintiff also filed state law claims in California State Court. In June 2009,
the California State Court granted class certification with respect to nine claims and denied class
certification with respect to five claims. The Company appealed this decision and on March 26,
2010, the California State Appellate Court granted our appeal in part, denying certification with
respect to certain claims and affirming certification with respect to other claims, including
claims related to meal and rest breaks, postliminary data transmission, and time traveling to UPS
stores. There are currently four claims class certified in this State Court case.
In both the Federal and State Court cases, the plaintiff, on behalf of the class, seeks unpaid
wages, penalties, interest and attorneys fees in unspecified amounts. The parties have scheduled
a mediation hearing to address all remaining Federal and State claims for November 13, 2010.
There can be no guarantee of the
possible outcome of the mediation between the parties, and there may or may not
be a resolution of the above matters as a result of the mediation. The Company
believes that it has substantial legal and factual defenses to these claims and
intends to defend its interests vigorously.
We have made accruals in the amount of $750,000 in the nine-month period ended September 30,
2010, with respect to certain of the above claims, where a potential loss is considered probable.
For other claims, we cannot at this time predict the outcome of the case related to such claims nor estimate the
possible loss or range of loss, if any, we could incur if there was an unfavorable outcome with
respect to this litigation.
Consumer Claims
On June 15, 2010, a suit was filed by a consumer against LoJack Corporation in the Los Angeles
County Superior Court of the State of California (Central District) alleging, amongst other claims,
violations of the California Consumers Legal Remedies Act, the California Business and Professions
Code §17200 (unfair competition) and §17500 (false advertising), and breach of implied warranty
with respect to LoJack Early Warning for motorcycles, and seeking class action status. On July 29, 2010, the Company removed the case to the United States
District Court for the Central District Court of California. On August 23, 2010, the Company filed
a motion to dismiss all claims. On September 27, 2010, the Court granted our motion to dismiss,
without prejudice. The dismissal without prejudice provided plaintiff with the opportunity to
amend its complaint, and on October 25, 2010, plaintiff filed its amended complaint, for alleged
fraud, violations of the California Consumers Legal Remedies Act, the California Business and
Professions Code §17200 (unfair competition) and §17500 (false advertising), and breach of implied
warranty and again seeks class certification. The Plaintiff, on behalf of the class, seeks injunctive
relief, restitution, disgorgement, punitive damages, interest and attorneys fees in unspecified amounts.
The Company is currently preparing its response and believes that it
has substantial legal and factual defenses to these claims and
intends to defend its interests vigorously.
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We
cannot at this time predict the outcome of this case nor estimate the possible loss or range
of loss, if any, we could incur if there was an unfavorable outcome with respect to this
litigation.
New York Litigation
On October 13, 2010, a suit was filed by G.L.M. Security & Sound, Inc. against LoJack
Corporation in United States District Court for the Eastern District of New York alleging, among
other claims, breach of contract, misrepresentation, violation of the NY franchise law, and price
discrimination. Plaintiff seeks damages of $10,000,000, punitive damages, interest and attorneys
fees, and treble damages. The Company is currently preparing its
response and believes that it has substantial legal and factual defenses to
these claims and intends to defend its interests vigorously.
Given the early stages of this matter, we cannot predict the outcome of the case
nor estimate the possible loss or range of loss, if any, we could incur if there was an
unfavorable outcome with respect to this litigation.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following information should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and
with Managements Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for the year ended December 31, 2009.
Cautionary Statements
The Private Securities Litigation Reform Act of 1995 and other securities laws contain certain
safe harbors regarding forward-looking statements. From time to time, information provided by us or
statements made by our employees may contain forward-looking information which involves risks and
uncertainties. Any statements in this report and accompanying materials that are not statements of
historical fact are forward-looking statements (including, but not limited to, statements
concerning the characteristics and growth of our market and customers, our objectives and plans for
future operations and products and our expected liquidity, revenue, profit and capital expenditures
and resources). Such forward-looking statements are based on a number of assumptions and involve a
number of risks and uncertainties, and accordingly, actual results could differ materially. Factors
that may cause such differences include, but are not limited to: (i) the continued and future
acceptance of and demand for our products and services; (ii) our ability to obtain financing from
lenders; (iii) the outcome of ongoing litigation involving the company; (iv) maintenance and
development of the relationships with our customers, dealers, licensees, and business partners;
(v) the presence of competitors with greater technical, marketing, and financial resources;
(vi) our customers ability to access the credit markets; (vii) our ability to promptly and
effectively respond to technological change to meet evolving customer needs; (viii) our ability to
successfully develop and expand our products, channels and operations; and (ix) changes in general
economic, political or geographical conditions. For a further discussion of these and other
significant factors to consider in connection with forward-looking statements concerning us,
reference is made to Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2009.
Except as required by law, we undertake no obligation to update these forward-looking
statements to reflect events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Overview
We are a leading global provider of technology products and services for the tracking and
recovery of valuable mobile assets and people at risk of wandering. Our proprietary technology,
wireless network and unique integration with law enforcement agencies provide an effective means
for the tracking and recovery of stolen vehicles, construction equipment, motorcycles, cargo and
people at risk.
We have three separately managed and reported business segments: North America, International
and All Other.
In the fourth quarter of 2009, we began the integration of Boomerangs operations with our
domestic operations and we re-evaluated and identified our operating segments as follows: domestic,
Boomerang, international licensees, LoJack Italia, LoJack SafetyNet and SCI. In accordance with the
quantitative and qualitative criteria included in the authoritative guidance for segment reporting,
we aggregated our domestic and Boomerang units into our North America segment, and our
international licensees and LoJack Italia units into our International segment. LoJack SafetyNet
and SCI do not meet the quantitative thresholds for separate reporting and have been grouped in All
Other. In addition, we changed our measure of segment profit to operating income (loss). The
presentation of all historical segment reporting has been recast to conform to our new business
segment reporting structure.
North America Segment
Our revenue in the United States is derived primarily from the sale of LoJack units, LoJack
Early Warning, and extended warranty products to consumers. Approximately 87% of sales in the
United States market are made through a distribution network consisting of dealers of new and used
automobiles. We have strong consumer brand awareness in the United States.
The price paid by the consumer for a LoJack unit includes installation. We maintain a
workforce that performs these installations and we supplement our installation capacity by
contracting with and certifying select dealers and other third parties to install our products. We
continually seek to minimize the fixed costs related to the installation of a LoJack unit by
increasing our installation capacity with certified dealers and other third parties. We monitor the
quality of these installations through the use of an expanded quality control process.
We offer warranty products at the point of sale to new customers and through direct sales
efforts to our existing customers.
We record additions to deferred revenue for our LoJack Early Warning product and for certain
warranty products for which we are the primary obligor of the underlying contract. We typically
receive full payment within 60 days of the transaction, but recognition of the deferred revenue is
recognized over the estimated life of the product or service.
Our revenue in Canada is derived from the sale of Boomerang Espion, Boomerang Espion Alert,
Boomerang, Boomerang2 and BoomerangXpress units, related products, and service contracts. Certain
insurance companies in Quebec offer rebates to customers
who install a Boomerang unit in their high priced or high risk of theft vehicles and, in many
instances, require installation of a Boomerang unit in such vehicles.
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Those who purchase Boomerang units are also required to enter into a service contract. The
terms of service contracts offered range from 12 to 60 months and are payable in full upon
activation of the related unit or renewal of a previous service contract.
International Segment
Internationally, our stolen vehicle recovery technology is operational in 32 countries and
territories around the world. We have existing licensees in South America, Mexico, the Caribbean,
Africa, Asia and Europe. Revenue from this segment consists of product and infrastructure sales to
our licensees, royalties and license fees.
We record additions to deferred revenue for international license fees and recognize the
revenue over the term of the license (generally ten years). Royalty revenue is recognized when
earned.
Italy is the only country outside of North America where we own and operate a stolen vehicle
recovery network. Consumers who purchase LoJack units in Italy are also required to enter into a
service contract with LoJack Italia. The terms of service contracts offered range from 10 to 84
months and are payable in full upon activation of the related unit or renewal of a previous service
contract, except for the Fleet market, whose units and tracking service is payable on a monthly
basis.
All Other Segment
Our All Other segment revenue is derived from our SCI and LoJack SafetyNet operations. SCI
revenue is derived from the sale of cargo and business information tracking devices as well as
subscription fees for monitoring service alerts and activity reporting.
LoJack SafetyNet revenue is primarily comprised of the sale of Search and Rescue, or SAR,
receivers, Personal Locator Units, or PLUs, and replacement parts.
Key Economic Factors and Trends and our Business
North America Segment
In the first quarter of 2010, our North American business began to stabilize after disruptions
caused by the general economic climate; however, the turnaround of the United States auto industry
was uneven throughout the first nine months of 2010. Recent U.S. automobile industry projections
indicate that new vehicle sales are expected to be in the range of 11 to 11.5 million units for the
year. In the United States market, LoJack unit volume trends have consistently tracked the retail
trends in the broader domestic auto market for the year. Despite the growth in total auto sales
recorded in the third quarter, actual retail auto sales declined. The industry-wide increase in
the third quarter was fueled primarily by fleet sales which rose 24%. Consumer purchases continue
to be impacted by the restrictive credit environment, continued high unemployment and fewer
incentives offered by auto manufacturers. The consistency of our penetration rate demonstrates that
our business has not been significantly impacted by any competing technology. Our unit volume
performance has improved and as confidence returns to certain dealerships we continue to expand our
bulk installation program. As the United States auto market recovers, we expect that our
installations will increase in a manner that is consistent with the retail market trends.
International Segment
Our international business has also stabilized in 2010. Our licensees have returned to more
normalized purchasing patterns and their orders reflect new demand for our products. The third
quarter results from our International segment reflect the growth in sales across the majority of
our licensees, particularly those in Africa and Latin America. Additionally, our licensees have
begun to take delivery of our self-powered product. Our business in Italy is continuing to gain
traction and has delivered growth in terms of both revenue and subscriber base in the first nine
months of 2010.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with U.S. generally
accepted accounting principles. As such, management is required to make certain estimates,
judgments and assumptions that it believes are reasonable based on the information available. These
estimates and assumptions affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses for the periods presented.
The significant accounting policies and estimates which management believes are the most critical
to aid in fully understanding and evaluating our reported financial results include revenue
recognition and deferred revenue, accounts receivable, valuation of investments, valuation of
long-lived assets, intangibles and goodwill, and income taxes. These critical accounting policies
and estimates are the same as those detailed in our Annual Report on Form 10-K for the year ended
December 31, 2009. There have been no material changes to our critical accounting policies or in
such estimates and assumptions, except for the deferred tax asset valuation allowance established
in the quarter ended June 30, 2010 as disclosed in Note 8 to the condensed consolidated financial
statements.
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Results of Operations for the three months ended September 30, 2010 versus the three months
ended September 30, 2009
Revenue
Revenue for the three months ended September 30, 2010 increased by $2,365,000 as compared to
the same period in 2009. The following table presents revenue by our segments (dollars in
thousands):
Three Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2010 | 2009 | 2010 vs. 2009 | ||||||||||
North America |
$ | 24,370 | $ | 26,209 | (7 | )% | ||||||
International |
13,405 | 9,138 | 47 | |||||||||
All Other |
710 | 774 | (8 | ) | ||||||||
Total revenue |
$ | 38,485 | $ | 36,121 | 7 | % | ||||||
Revenue related to our North America segment decreased by $1,838,000 for the three months
ended September 30, 2010, as compared to the same period in 2009.
During August 2009, in response to the financial crisis, the U.S. Government provided
consumers up to $4,500 in credit for trading in their cars or trucks for those that were more fuel
efficient under the Cash for Clunkers program. Cash for Clunkers resulted in a significant spike
in domestic new automobile sales during August of 2009, resulting in a seasonally adjusted run rate
in the broader market of over 14 million vehicles. Without a comparable promotion in the third
quarter of 2010, our dealer and direct distribution channels in the United States market saw
revenue declines of 9% and 10%, respectively, over the prior period. Revenue for our motorcycle
channel saw revenue declines of 18%, while revenue for our heavy equipment, or commercial, channel
increased 37% in the third quarter of 2010 as compared to the same period in 2009.
The activity that resulted in a 7% decrease in our North America segment revenue for the three
months ended September 30, 2010 as compared to the same period in 2009 was primarily attributable
to:
| A decrease of $1,634,000, or 10%, in revenue from LoJack units, primarily due to a 6% decrease in the number of units sold and a 4% decrease in average revenue per unit sold, as compared to the same period in 2009; |
| A decrease of $66,000, or 2%, in revenue related to our Boomerang products, primarily due to the change in the exchange rate between the Canadian and U.S. dollar; |
| A decrease of $113,000, or 18%, in revenue from the motorcycle channel caused by a 34% decrease in the number of units sold from 1,900 to 1,200 units, partially offset by a 25% increase in the average revenue per unit sold; and |
| A decrease of $176,000, or 4%, in the recognition of deferred revenue from our Early Warning and warranty products; |
partially offset by:
| An increase of $180,000 in all other revenue including a decrease in sales promotions offered to our dealers and an increase in fees charged for inspections and offsite installations. |
Revenue related to our International segment increased $4,267,000 for the three months ended
September 30, 2010, as compared to the same period in 2009.
This increase in our International segment was primarily due to a 62% increase in unit volume
as compared to the same period one year ago. Our International segment unit volume and revenue in
2009 reflected the impact of the deteriorating global economic conditions and the effects of
inventory build-up by certain licensees at the end of the fourth quarter of 2008. In the third
quarter of 2010, our International business strengthened as a result of orders from our licensees
in Africa and Latin America and increased unit and subscriber volumes in Italy. Our licensees are
returning to more normalized purchasing patterns and their orders reflect restored demand for our
products.
The increase in our International segment revenue for the three months ended September 30,
2010 as compared to the same period in 2009 was primarily attributable to:
| An increase of $3,471,000, or 538%, in revenue from African licensees due to a 45,000 increase in the number of units sold in the third quarter of 2010 compared to the same period in 2009; |
| An increase of $439,000, or 6%, in revenue from Latin American licensees due to an 18% increase in the number of units sold from 97,100 to 114,800, partially offset by an 11% decrease in average revenue per unit; |
| An increase of $40,000, or 10%, in revenue from European licensees due to a 108% increase in the number of units sold from 2,500 to 5,200, partially offset by a 47% decrease in average revenue per unit caused by volume based pricing penalties which were assessed in 2009 when targets were not achieved and not repeated in the current year; | ||
| An increase of $34,000, or 15%, in revenue from LoJack Italia due to a 149% increase in the number of units sold from 1,200 to 2,900, partially offset by a 48% decrease in average revenue per unit as the majority of the incremental sales were sold through our broker channel; and |
| An increase of $328,000, or 36%, in revenue from infrastructure, royalty, license fee, and other revenue. |
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Revenue related to our All Other segment decreased $64,000 for the three months ended
September 30, 2010 compared to the same period in 2009.
Cost of Goods Sold
The following table presents cost of goods sold by our segments (dollars in thousands):
Three Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2010 | 2009 | 2010 vs. 2009 | ||||||||||
North America |
$ | 12,590 | $ | 11,308 | 11 | % | ||||||
International |
6,232 | 3,998 | 56 | |||||||||
All Other |
304 | 248 | 23 | |||||||||
Total cost of goods sold |
$ | 19,126 | $ | 15,554 | 23 | % | ||||||
As a percentage of total revenue, total cost of goods sold was 50% and 43% for the three
months ended September 30, 2010 and 2009, respectively.
As a percentage of North America revenue, cost of goods sold relating to our North America
segment was 52% and 43% for the three months ended September 30, 2010 and 2009, respectively. The
increase in cost of goods sold as a percentage of revenue is due to increased unit volume related
to the lower margin United States bulk installation program, the discontinuation of a non-core GPS
product, and increased product warranty expense related to the Boomerang technology in Canada
during the three months ended September 30, 2010 as compared to the same period in 2009. In
addition, in 2009, in Canada, we received a sales tax refund related to Boomerang cell phone line
charges which decreased the cost of goods sold and was unmatched in the three months ended
September 30, 2010.
As a percentage of International revenue, cost of goods sold relating to our International
segment was 46% and 44% for the three months ended September 30, 2010 and 2009, respectively. The
increase in cost of goods sold as a percentage of revenue over the prior year period reflects the
mix of sales between product, royalty and infrastructure components which have differing margins.
As a percentage of revenue, our cost of goods sold associated with the All Other segment for
the three months ended September 30, 2010 and 2009 was 43% and 32%, respectively.
Operating Expenses
The following table presents our operating expenses (dollars in thousands):
Three Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2010 | 2009 | 2010 vs. 2009 | ||||||||||
Product development |
$ | 1,202 | $ | 1,928 | (38 | )% | ||||||
Sales and marketing |
6,881 | 8,678 | (21 | ) | ||||||||
General and administrative |
6,644 | 10,597 | (37 | ) | ||||||||
Legal settlement |
| 18,250 | (100 | ) | ||||||||
Depreciation and amortization |
1,678 | 1,418 | 18 | |||||||||
Total operating expenses |
$ | 16,405 | $ | 40,871 | (60 | )% | ||||||
Product Development
As a percentage of total revenue, product development expenses were 3% and 5% for the three
months ended September 30, 2010 and 2009, respectively.
Product development expenses decreased $726,000 for the three months ended September 30, 2010
as compared to the same period in 2009, primarily due to a decrease of $714,000 in compensation
expenses related to workforce reductions completed in the second quarter of 2010.
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Sales and Marketing
As a percentage of total revenue, sales and marketing expenses were 18% and 24% for the three
months ended September 30, 2010 and 2009, respectively.
The decrease of $1,797,000 for the three months ended September 30, 2010 as compared to the
same period in 2009 was primarily attributable to:
| Decreased compensation expenses of $897,000 as compared to the same period in 2009, including $845,000 of lower salary expense, as compared to the same period in 2009 caused by workforce reductions completed in the second quarter of 2010 and decreased sales commissions of $47,000; and |
| Decreased advertising expenses of $800,000 due to managements decision to reduce online and cable television advertising in 2010; |
partially offset by:
| Increased facilities expenses of $238,000 related to the costs of maintaining our sales offices which were previously included in general and administrative expenses and are now classified as sales and marketing expenses; |
General and Administrative
As a percentage of total revenue, general and administrative expenses were 17% and 29% for the
three months ended September 30, 2010 and 2009, respectively.
The decrease of general and administrative expenses of $3,953,000, for the three months ended
September 30, 2010 as compared to the same period in 2009 was primarily attributable to:
| Decreased legal expenses of $1,727,000, which were primarily attributable to the litigation with our former licensee in China which was settled in 2009; |
| Decreased facilities expenses of $238,000 related to the costs of maintaining our sales offices which were previously included in general and administrative expenses and are now classified as sales and marketing expenses; |
| Decreased compensation expenses of $1,503,000 related to workforce reductions completed in the second quarter of 2010; and |
| Decreased administrative expenses of $407,000 in our Boomerang segment primarily due to the change in the exchange rate between the Canadian and U.S. dollar. |
Depreciation and Amortization
As a percentage of total revenue, depreciation and amortization expenses were approximately 4%
for both the three months ended September 30, 2010 and 2009.
Depreciation and amortization expenses increased by $260,000, for the three months ended
September 30, 2010 as compared to the same period one year ago. The increase is primarily related
to certain assets being placed into service since September 30, 2009.
Other Income (Expense)
The following table presents our other income (expense) (dollars in thousands):
Three Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2010 | 2009 | 2010 vs. 2009 | ||||||||||
Interest income |
$ | | $ | 519 | (100 | )% | ||||||
Interest expense |
(178 | ) | (98 | ) | 82 | |||||||
Other income |
300 | 201 | 49 | |||||||||
Total other income |
$ | 122 | $ | 622 | (80 | )% | ||||||
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Other income for the three months ended September 30, 2010 decreased by $500,000 from
income of $622,000 for the three months ended September 30, 2009 to $122,000 for the same period in
2010. This change is primarily attributable to the following:
| Decreased interest income of $519,000, which is primarily attributable to interest collected on our licensee receivable balances in 2009, and lower interest rates and lower average cash balances; |
| Increased interest expense of $80,000, which is primarily attributable to a higher interest rate partially offset by a lower average debt balance; and |
| Increased other income of $99,000 which is primarily attributable to: (i) an increase in dividend income of $109,000 primarily related to a dividend received from our licensee in Mexico, (ii) a $230,000 increase in gains related to foreign currency transactions, and (iii) a $263,000 decrease in the income associated with our marketable securities, primarily related to the valuation of our Absolute common stock and the investments in the deferred compensation plan. |
Provision (Benefit) for Income Taxes
We recorded a $402,000 provision for income taxes for the three months ended September 30,
2010, largely comprised of a provision for income taxes for our Irish subsidiary and adjustments to
our prepaid taxes. The effective income
tax rate for the three month period ended September 30, 2010 was lower
than our federal statutory rate because of the favorable tax rate in Ireland
and because no U.S. income tax expense was recorded for the three months ended
September 30, 2010 due to the valuation allowance on our net U.S. deferred
tax assets that was established in the second quarter ended June 30, 2010.
Net Income (Loss) and Earnings Per Share Attributable to LoJack Corporation
As a result of the foregoing, the net income attributable to LoJack Corporation increased by
$16,162,000 from a net loss of $13,439,000 for the three months ended September 30, 2009, to net
income of $2,723,000 for the three months ended September 30, 2010. For the three months ended
September 30, 2010, the net income per share attributable to LoJack Corporation was $0.15 per
diluted share as compared to a net loss of $0.78 per diluted share in the same period in 2009.
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Results of Operations for the nine months ended September 30, 2010 versus the nine months ended
September 30, 2009
Revenue
Revenue for the nine months ended September 30, 2010 increased by $7,258,000 as compared to
the same period in 2009. The following table presents revenue by our segments (dollars in
thousands):
Nine Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2010 | 2009 | 2010 vs. 2009 | ||||||||||
North America |
$ | 73,265 | $ | 73,919 | (1 | )% | ||||||
International |
30,548 | 23,146 | 32 | |||||||||
All Other |
2,811 | 2,301 | 22 | |||||||||
Total revenue |
$ | 106,624 | $ | 99,366 | 7 | % | ||||||
Revenue related to our North America segment decreased by $654,000 for the nine months
ended September 30, 2010, as compared to the same period in 2009.
The turnaround of the United States auto industry was uneven throughout the first nine months
of 2010. In the United States market, LoJack unit volume trends have consistently tracked the
retail trends in the broader domestic auto market for the year. Consumer purchases continue to be
impacted by the restrictive credit environment, continued high unemployment and fewer incentives
offered by auto manufacturers. While our unit volume performance has improved over prior quarters,
we have continued to expand our bulk installation program as confidence returns to certain
dealerships, therefore the increases in unit volume have been somewhat offset by decreases in
average revenue per unit for the nine months ended September 30, 2010. Revenue for our dealer
channel decreased 1%, as compared to the same period in 2009, while our commercial and motorcycle
channels saw revenue declines of 9% and 19%, respectively.
The activity that resulted in a 1% decrease in our North America segment revenue for the nine
months ended September 30, 2010 as compared to the same period in 2009 was primarily attributable
to:
| A decrease of $1,023,000, or 2%, in revenue from LoJack units, primarily due to a 3% increase in the number of units sold and a 5% decrease in average revenue per unit sold, as compared to the same period in 2009; |
| A decrease of $348,000, or 43%, in royalty revenue related to our license agreement with Absolute; |
| A decrease of $382,000, or 19%, in revenue from the motorcycle channel caused by a 30% decrease in the number of units sold from 5,900 to 4,100 units, partially offset by a 17% increase in the average revenue per unit sold; and |
| A decrease of $442,000 in the recognition of deferred revenue from our Early Warning and warranty products; |
partially offset by:
| An increase of $552,000, or 6%, in revenue related to our Boomerang products, primarily due to the change in the exchange rate between the Canadian and U.S. dollar; and |
| An increase of $988,000, or 768%, in all other revenue driven by a reduction of sales promotions offered to our dealers, and an increase in fees charged for inspections and offsite installations. |
Revenue related to our International segment increased $7,402,000 for the nine months ended
September 30, 2010 as compared to the same period in 2009.
This increase in our International segment was primarily due to a 53% increase in unit volume
compared to the same period one year ago. Our International segment unit volume and revenue in 2009
reflected the impact of the deteriorating global economic conditions and the effects of inventory
build-up by certain licensees at the end of the fourth quarter of 2008. In the first nine months of
2010, our International business strengthened as a result of orders from our licensees in Latin
America and Africa. Our licensees are returning to more normalized purchasing patterns and their
orders reflect restored demand for our products.
The increase in our International segment revenue for the nine months ended September 30, 2010
as compared to the same period in 2009 was primarily attributable to:
| An increase of $7,430,000 in revenue from African licensees due to an increase in the number of units sold from 8,600 to 104,000, as the inventory build-up at the end of 2008, discussed above, was sold off and more normalized buying patterns resumed; |
| An increase of $503,000, or 85%, in revenue from LoJack Italia due to a 222% increase in the number of units sold from 3,100 to 10,100, partially offset by a 39% decrease in average revenue per unit as the majority of the incremental sales were sold through our broker channel; |
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| An increase of $360,000, or 2%, in revenue from Latin American licensees due to a 19% increase in the number of units sold from 226,100 to 268,600, partially offset by a 14% decrease in average revenue per unit; |
partially offset by:
| A decrease of $329,000, or 19%, in revenue from European licensees due to a 27% decrease in the number of units sold from 24,000 to 17,500, partially offset by a 12% increase in average revenue per unit; and |
| A decrease of $562,000, or 16%, in revenue from infrastructure, royalty, license fee, and other revenue. |
Revenue related to our All Other segment increased $510,000 for the nine months ended
September 30, 2010 compared to the same period in 2009. The increase was the result of an increase
of $253,000 in sales related to LoJack SafetyNet and an increase of $257,000 in sales at SCI.
Cost of Goods Sold
The following table presents cost of goods sold by our segments (dollars in thousands):
Nine Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2010 | 2009 | 2010 vs. 2009 | ||||||||||
North America |
$ | 37,601 | $ | 34,712 | 8 | % | ||||||
International |
14,643 | 10,933 | 34 | |||||||||
All Other |
1,066 | 975 | 9 | |||||||||
Total cost of goods sold |
$ | 53,310 | $ | 46,620 | 14 | % | ||||||
As a percentage of total revenue, total cost of goods sold was 50% and 47% for the nine
months ended September 30, 2010 and 2009, respectively.
As a percentage of North America revenue, cost of goods sold relating to our North America
segment was 51% and 47% for the nine months ended September 30, 2010 and 2009, respectively. The
increase in cost of goods sold as a percentage of revenue is due to increased unit volume related
to the lower margin United States bulk installation program, the discontinuation of a non-core GPS
product, and increased product warranty expense related to the Boomerang technology in Canada
during the nine months ended September 30, 2010 as compared to the same period in 2009. In
addition, in 2009, in Canada, we received a sales tax refund related to Boomerang line charges,
which decreased the cost of goods sold.
As a percentage of International revenue, cost of goods sold relating to our International
segment was 48% and 47% for the nine months ended September 30, 2010 and 2009, respectively. The
increase in cost of goods sold as a percentage of revenue over the prior year period reflects the
mix of sales between product, royalty and infrastructure components which have differing margins.
As a percentage of revenue, our cost of goods sold associated with the All Other segment for
the nine months ended September 30, 2010 and 2009 was 38% and 42%, respectively.
Operating Expenses
The following table presents our operating expenses (dollars in thousands):
Nine Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2010 | 2009 | 2010 vs. 2009 | ||||||||||
Product development |
$ | 4,909 | $ | 5,267 | (7 | )% | ||||||
Sales and marketing |
22,737 | 24,276 | (6 | ) | ||||||||
General and administrative |
24,674 | 28,619 | (14 | ) | ||||||||
Legal settlement |
| 18,250 | (100 | ) | ||||||||
Depreciation and amortization |
5,415 | 4,845 | 12 | |||||||||
Loss on impairment of goodwill and intangible assets |
| 14,038 | (100 | ) | ||||||||
Total operating expenses |
$ | 57,735 | $ | 95,295 | (39 | )% | ||||||
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Product Development
As a percentage of total revenue, product development expenses were 5% for both the nine
months ended September 30, 2010 and 2009.
Product development expenses decreased $358,000 for the nine months ended September 30, 2010
as compared to the same period in 2009. The decrease in 2010 was primarily due to a decrease of
$129,000 in compensation expenses related to workforce reductions completed in the second quarter
of 2010 and a decrease of $298,000 in product development costs.
Sales and Marketing
As a percentage of total revenue, sales and marketing expenses were 21% and 24% for the nine
months ended September 30, 2010 and 2009, respectively.
The decrease of $1,539,000 for the nine months ended September 30, 2010 as compared to the
same period in 2009 was primarily attributable to:
| Decreased compensation expenses of $386,000, including $1,659,000 of lower salary expense resulting from workforce reductions completed in the second quarter of 2010, partially offset by increased severance payments of $586,000 made for the workforce reductions and increased sales commissions of $687,000 earned during the nine months ended September 30, 2010; and |
| Decreased advertising expenses of $1,949,000 due to managements decision to reduce online and cable television advertising in 2010; |
partially offset by:
| Increased provision for credit losses of $444,000 related primarily to receivables in our North America and International segments; and |
| Increased facilities expenses of $526,000 related primarily to the costs of maintaining our sales offices, which were previously included in general and administrative expenses. |
General and Administrative
As a percentage of total revenue, general and administrative expenses were 23% and 29% for the
nine months ended September 30, 2010 and 2009, respectively.
The decrease of general and administrative expenses of $3,945,000 for the nine months ended
September 30, 2010 as compared to the same period in 2009 was primarily attributable to:
| Decreased legal expenses of $3,621,000, which were primarily attributable to the litigation with our former licensee in China, which was settled in 2009; and |
| Decreased administrative expenses of $1,946,000 in our Boomerang segment, which was primarily due to the change in the exchange rate between the Canadian and U.S. dollar; |
partially offset by:
| Increased compensation expenses of $1,226,000, primarily related to workforce reductions completed during the second quarter of 2010. |
Depreciation and Amortization
As a percentage of total revenue, depreciation and amortization expenses were approximately 5%
for both the nine months ended September 30, 2010 and 2009.
Depreciation and amortization expenses increased by $570,000, for the nine months ended
September 30, 2010 as compared to the same period one year ago. The increase is primarily related
to certain assets being placed into service since September 30, 2009.
Other Income (Expense)
The following table presents our other income (expense) (dollars in thousands):
Nine Months Ended | ||||||||||||
September 30, | Percentage Change | |||||||||||
2010 | 2009 | 2010 vs. 2009 | ||||||||||
Interest income |
$ | 230 | $ | 1,139 | (80 | )% | ||||||
Interest expense |
(488 | ) | (343 | ) | 42 | |||||||
Other income (expense) |
(98 | ) | 674 | (115 | ) | |||||||
Total other income (expense) |
$ | (356 | ) | $ | 1,470 | (124 | )% | |||||
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Other income (expense) for the nine months ended September 30, 2010 changed by $1,826,000
from income of $1,470,000 for the nine months ended September 30, 2009 to expense of $356,000 for
the same period in 2010. This change is primarily attributable to the following:
| Decreased interest income of $909,000, which is primarily attributable to interest collected on our licensee receivable balances in 2009, and lower interest rates and lower average cash balances; |
| Increased interest expense of $145,000, which is primarily attributable to a higher interest rate, partially offset by a lower average debt balance; and |
| Decreased other income of $772,000 which is primarily attributable to: (i) a $99,000 decrease in the income associated with our marketable securities, primarily related to the valuation of our Absolute common stock and the investments in the deferred compensation plan, and (ii) a $663,000 increase in losses related to foreign currency transactions. |
(Benefit) Provision for Income Taxes
We recorded a $16,610,000 provision for income taxes for the nine months ended September 30,
2010, which includes the establishment of a valuation allowance for our net U.S. deferred tax
assets of $15,100,000 and the establishment of a valuation allowance for deferred tax assets in a
Canadian subsidiary of $282,000. The effective income
tax rate for the nine month period ended September 30, 2010 is
substantially higher than our federal statutory rate due to the establishment
of a valuation allowance on our net U.S. deferred tax assets recorded in the
second quarter ended June 30, 2010.
We have net U.S. deferred tax assets that have arisen as a result of temporary differences
between book and tax accounting, primarily related to deferred revenue and stock compensation. The
FASB authoritative guidance on accounting for income taxes requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax assets. Our ability to
realize a deferred tax asset is based on our ability to generate sufficient future taxable income.
The valuation allowance was determined in accordance with the guidance, which requires an
assessment of both positive and negative evidence when determining whether it is more likely than
not that deferred tax assets are recoverable. Such assessment is required on a
jurisdiction-by-jurisdiction basis. Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against the net deferred tax assets. At year end 2009 and for the three months ended March
31, 2010, we had recorded a U.S. income tax benefit. At that time, management determined that the
ultimate realization of deferred tax assets for U.S. federal and state income tax purposes was
considered more likely than not, primarily due to taxable income in the federal carry back period
and anticipated sufficient future taxable income. As a result of U.S. operating losses incurred in
the quarter ended June 30, 2010, cumulative losses incurred in recent years and uncertainty as to
the extent and timing of profitability in future periods, we recorded a full valuation allowance of
$15,100,000 against our net U.S. deferred tax assets for the quarter ended June 30, 2010. As a
result of establishing a full valuation allowance against our net U.S. deferred tax assets, we did
not recognize any deferred tax benefits related to U.S. net losses incurred in the second and third
quarters of 2010. We will maintain a full valuation allowance on our net U.S. deferred tax assets
until sufficient positive evidence exists to support reversal of the valuation allowance.
Net Loss and Loss Per Share Attributable to LoJack Corporation
As a result of the foregoing, the net loss attributable to LoJack Corporation decreased by
$11,329,000 from a net loss of $32,381,000 for the nine months ended September 30, 2009, to a net
loss of $21,052,000 for the nine months ended September 30, 2010. For the nine months ended
September 30, 2010, the net loss per share attributable to LoJack Corporation was $1.21 per diluted
share as compared to a net loss of $1.89 per diluted share in the same period in 2009.
Recently Adopted Accounting Guidance
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or
SFAS 167, as codified in ASC 810, Consolidations, or ASC 810. ASC 810 amends FIN 46(R),
Consolidation of Variable Interest Entities (revised December 2003)an interpretation previously
known as ARB No. 51, by replacing the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a variable interest
entity with a primarily qualitative approach. ASC 810 requires an additional reconsideration event
when determining whether an entity is a variable interest entity when any changes in facts and
circumstances occur, ongoing assessments of whether an enterprise is the primary beneficiary of a
variable interest entity and additional disclosures about an enterprises involvement in variable
interest entities. Our adoption of ASC 810 as of January 1, 2010 did not have an impact on our
consolidated results of operations, financial position, and statement of cash flows.
In January 2010, the FASB revised accounting standards related to fair value measurements to
expand disclosure requirements to include significant transfers of assets and liabilities in and
out of Level 1 and Level 2 fair value measurements and the reasons for those transfers, as well as
a gross presentation of purchases, sales, issuances and settlements within the rollforward of
changes in Level 3 assets and liabilities. The revised standards also provide clarification to
existing fair value disclosure requirements related to the level of disaggregation and disclosure
about inputs and valuation techniques. The majority of the requirements of these revised accounting
standards was effective and adopted by us in the first quarter of 2010 and had no impact on the
consolidated balance sheet,
results of operations, or statement of cash flows. Certain requirements related to the gross
presentation of activity in the rollfoward of changes in Level 3 assets and liabilities will become
effective for fiscal years beginning after December 15, 2010 and for interim reporting periods
within those fiscal years.
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Accounting Guidance Issued But Not Yet Adopted
In September 2009, the FASB ratified EITF Issue 08-1, Revenue Arrangements with Multiple
Deliverables as codified in ASC 605, Revenue Recognition, or ASC 605. ASC 605 provides greater
ability to separate and allocate arrangement consideration in a multiple element revenue
arrangement. In addition, ASC 605 requires the use of estimated selling price to allocate
arrangement considerations, resulting in the elimination of the use of the residual method of
accounting. ASC 605 will be effective for fiscal years beginning after June 15, 2010 and may be
applied retrospectively or prospectively for new or materially modified arrangements. Earlier
application is permitted. We are currently evaluating the impact of adopting ASC 605 on our
consolidated results of operations, financial position and statement of cash flows.
Liquidity and Capital Resources
Our liquidity is primarily contingent on continued customer demand for our products and
services and continuing our existing relationships with automobile dealers, insurance companies,
international licensees and certain law enforcement agencies. In response to trends in the
automotive industry, we developed, and in the fourth quarter of 2009 we launched, our next
generation, self-powered, product which enables us to expand into the hybrid auto segment, further
expedite installations and provide the opportunity for covert installation of the LoJack units in a
greater number of locations within a vehicle. We believe that we will be able to keep pace with
required technological changes in our products and expect that our sales and marketing initiatives
will continue to drive demand.
On December 29, 2009, we entered into a multicurrency revolving credit agreement, or the
Credit Agreement, with RBS Citizens, N.A., as a Lender, Administrative Agent and Lead Arranger, and
TD Bank, N.A., as a Lender and Issuing Bank. The Credit Agreement provides for a multicurrency
revolving credit facility in the maximum amount of USD $30,000,000, subject to borrowing base
limitations, (or its equivalent in alternate currencies). We have the right to increase the
aggregate amount available to be borrowed under the USD $30,000,000 multicurrency facility up to
USD $50,000,000, subject to certain conditions, including consent of the lenders. At September 30,
2010, based upon the borrowing base calculation, we had additional borrowing availability of
$10,086,000.
The outstanding borrowings under the Credit Agreement totaled CAD $8,300,000 (equivalent to
USD $8,063,000) as of September 30, 2010. The interest rate on borrowings under the Credit
Agreement varies depending on our choice of interest rate and currency options, plus an applicable
margin. The interest rate in effect as of September 30, 2010 was 4.11%. As of September 30, 2010,
we also had three outstanding irrevocable letters of credit in the aggregate amount of $1,280,000.
The letters of credit reduce our outstanding borrowing availability under the Credit Agreement.
The Credit Agreement contains limitations on capital expenditures, repurchases of common
stock, certain investments, acquisitions and/or mergers; and prohibits disposition of assets other
than in the normal course of business. Additionally, we are required to maintain certain financial
performance measures including maximum leverage ratio, minimum cash flow coverage ratio, minimum
quick ratio and maximum capital expenditures. The payment of dividends is permitted and is limited
only to the extent such payments affect our ability to meet certain financial performance measures.
Failure to maintain compliance with covenants could impair the availability of the facility.
On June 30, 2010, we entered into an amendment of the Credit Agreement. The amendment allows
for certain one-time severance costs that would otherwise be deducted in calculating Consolidated
Net Income to be added back for the purposes of determining Consolidated EBITDA, provided that such
additions will only be effective for the purpose of determining the Debt Service Coverage Ratio
covenant for the quarters ending June 30, 2010 and September 30, 2010, respectively. Consolidated
Net Income, Consolidated EBITDA and Debt Service Coverage Ratio are defined terms in the Credit
Agreement. At September 30, 2010, we were in compliance with all financial covenants in the Credit
Agreement.
The Credit Agreement terminates on December 29, 2011, at which point all amounts outstanding
are due. This Credit Agreement is guaranteed by our United States subsidiaries and certain Canadian
subsidiaries and it is secured by all United States assets, including our intellectual property and
a pledge of 100% of the stock of Boomerang Tracking Inc. and 65% of the capital stock of LoJack
Ireland.
In recent years, we have made no attempt to raise capital from external sources nor do we have
any credit rated debt outstanding. Therefore, it is difficult to predict whether any efforts to
raise capital would be successful. Furthermore, we believe our ability to raise such funds may be
limited due to the condition of the automotive industry and the United States economy as a whole.
If additional equity securities were to be issued, shareholder value would be diluted and the new
equity securities may have rights, preferences or privileges senior to those of our common stock.
On February 15, 2008 our Board of Directors authorized the repurchase of 1,000,000 shares of
our common stock under a trading plan intended to comply with Rule 10b5-1 under the Exchange act of
1934, as amended, the Exchange Act, and additionally renewed the remaining management discretion
authority to repurchase an incremental 2,000,000 shares, for a total repurchase
authorization of 3,000,000 shares. We did not repurchase under the stock repurchase plan and
given the current capital market environment, we do not expect to repurchase any stock under the
repurchase program in 2010.
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We plan to continue to improve and expand our infrastructure and explore opportunities to
expand our core businesses in the United States and internationally.
We have commercial operations in Italy through LoJack Italia which began in 2005. Based on our
experience with current international licensees, we believe LoJack Italia will generate long-term
profitability and value after the investment period. This investment is part of our strategy to own
a controlling interest in select international markets that present a significant long-term
financial growth opportunity.
We expect our initiative to own and operate the Italian stolen vehicle recovery network,
expand the LoJack SafetyNet business in the United States, fund Boomerang and SCIs operating cash
deficits, combined with our longer term international investment requirements and domestic
expansion, to be funded using existing cash, cash flows from operations and, if needed, our
existing credit facility.
We intend to continue to improve upon our existing technologies and develop new technologies
and we may introduce new products that leverage our strong brand recognition, proven technology and
understanding of the process of stolen vehicle recovery. We plan to expand into additional markets
as they become economically feasible.
Over the next four years, we expect to spend between $17,000,000 and $21,200,000 on new
product development and between $14,000,000 and $17,600,000 on capital expenditures to support
these plans. These funds are expected to be allocated as follows: $16,000,000 to $18,800,000 for
enhancement to LoJacks core tracking and recovery technology; $5,000,000 to $7,200,000 in product
and technology enhancements for our LoJack SafetyNet and cargo initiatives; and $10,000,000 to
$12,800,000 for maintenance and enhancements to our internal systems and technology infrastructure.
These future capital spending levels are consistent with what we have spent historically to support
enhancements to our core tracking and recovery technology and support new initiatives. We expect to
fund the product development and capital expenditures out of working capital.
We expect capital expenditures for 2010 to be between $4,400,000 and $5,700,000, which we
expect to fund out of our existing working capital, which was $44,652,000 as of September 30, 2010
and included $37,513,000 of cash. Non-discretionary capital expenditures budgeted for 2010 include:
$500,000 to $630,000 for enhancement of our core tracking and recovery technology; $600,000 to
$715,000 for development of our next generation LoJack SafetyNet technology; and $1,400,000 to
$1,700,000 for enhancements to our internal systems and technology infrastructure. Discretionary
expenditures for 2010, which could be delayed to a future period, include $1,900,000 to $2,700,000
for additional hardware infrastructure and system upgrades. However, we currently have no plans to
delay these projects or reduce these spending levels. For the nine months ended September 30, 2010,
we had capital expenditures of $2,980,000.
If we decide to pursue significant opportunities in domestic and international markets, we may
be required to find sources of capital in addition to existing working capital. We believe the
sources currently available to us will be adequate for the next 12 months and on a long-term basis.
We plan to fund our existing operations, including capital expenditures, using existing cash, cash
flows from operations and, if needed, the existing Credit Agreement discussed above.
Our cash flows from operating, investing and financing activities, as reflected in the
consolidated statements of cash flows, are summarized in the following table (in thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cash provided (used) by: |
||||||||
Operating activities |
$ | 7,952 | $ | (12,520 | ) | |||
Investing activities |
(1,647 | ) | (17,221 | ) | ||||
Financing activities |
(5,764 | ) | (11,510 | ) | ||||
Effect of exchange rate changes on cash |
482 | 44 | ||||||
Increase (decrease) in cash and cash equivalents |
$ | 1,023 | $ | (41,207 | ) | |||
Cash provided by operating activities increased by $20,472,000 during the nine months
ended September 30, 2010, compared to the same period in 2009. The increase was primarily
attributable to a net increase of $14,721,000 in earnings excluding non cash items, and an increase
in cash provided by other working capital items of $5,751,000.
Investing activities used $1,647,000 of cash during the nine months ended September 30, 2010,
as compared to $17,221,000 of cash used during the same period in 2009. This $15,574,000 change was
primarily due to a decrease in capital expenditures of $1,123,000 and a decrease in restricted cash
of $17,286,000 caused primarily by the settlement of litigation with our former licensee in China.
These changes were offset by a decrease in the net proceeds from our marketable securities activity
of $2,835,000.
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Cash used by financing activities decreased by $5,746,000 during the nine months ended
September 30, 2010, compared to the same period in 2009. The decrease was primarily attributable
to a decrease in the repayment, net of proceeds, of our debt and short term borrowings of
$6,216,000; partially offset by a decrease of $344,000 related to the issuance of shares under the
employee stock purchase plan in the prior year period and an increase in tax withholding related to
stock grants and lapses of $126,000 in the current year period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have exposure to market risk due to the nature of our financial instruments. Our financial
instruments at September 30, 2010 consisted of cash and cash equivalents, marketable securities,
accounts receivable, non-current investments, accounts payable, customer deposits, accrued
liabilities, long-term debt and credit facilities. The fair value of cash and cash equivalents,
marketable securities, accounts receivable, non-current investments, accounts payable, customer
deposits, accrued liabilities, long-term debt and credit facilities as of September 30, 2010,
approximated their carrying values.
Our primary market risk exposures relate to interest rate risk, foreign currency exchange rate
risk and market value risk relating to the common stock price of Absolute and Traqueur, our French
licensee. Significant changes in the market price of Absolutes and Traqueurs common stock could
result in significant fluctuations in other income (expense). Based on the 366,500 shares of
Absolute common stock held by us as of September 30, 2010, a $1.00 change in the market price of
Absolutes common stock would result in a $366,000 increase/decrease in the fair value of our
marketable securities. Based on the 182,030 shares of Traqueur common stock held by us as of
September 30, 2010, a $1.00 change in the market price would result in an $182,000
increase/decrease in the fair value of our non-current investments.
Interest rate exposure relates primarily to the effect of interest rate changes on amounts
outstanding under our Credit Agreement for which there was CAD $8,300,000 (equivalent to USD
$8,063,000) of borrowings outstanding as of September 30, 2010. Based on the outstanding borrowings
under the agreement as of September 30, 2010, a 1% increase in the interest rate would result in an
additional $81,000 of annual interest expense.
Accounts for subsidiaries whose functional currency is not the U.S. dollar are translated
using exchange rates in effect at period-end for assets and liabilities and at average exchange
rates during the period for results of operations. The related translation adjustments are reported
in accumulated other comprehensive income in equity. Transaction gains and losses are reported in
the statement of operations. Historically, we have had limited foreign currency exposure as most
transactions with customers and vendors are denominated in U.S. dollars. We manage future foreign
exchange exposures that cause both earnings and cash volatility by utilizing a hedging strategy if
the exposure is material and the hedge is cost effective. As of September 30, 2010, we had no
derivative contracts outstanding.
We do not enter into financial instrument transactions for trading or speculative purposes. We
have not established any special purpose entities, and except for operating leases, do not have any
material off balance sheet financing transactions. We will continue to monitor our foreign currency
exposure and will implement a hedging strategy if we believe that we are materially at risk and
that the hedge is cost effective.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal
financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive
officer and principal financial officer have concluded that as of such date, our disclosure
controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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PART IIOTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various legal proceedings and claims discussed below, as well as certain
other legal proceedings and claims that have not been fully resolved and that have arisen in the
ordinary course of business. The matters discussed below, if decided
adversely to, or settled by us, individually or in the aggregate, may result in
liability material to our financial condition or results of operations.
California Class Action Litigations
Employee Claims
In April 2006, a suit was filed against LoJack Corporation in the United States District Court
for the Central District of California by an employee alleging violations of the Fair Labor
Standards Act, the California Labor Code and the California Business & Professions Code, and
seeking class action status. In September 2007, our motion for summary judgment was granted and
the district court dismissed all of the plaintiffs federal law claims. The plaintiff appealed the
dismissal to the Ninth Circuit Court of Appeals and in August 2009, the Ninth Circuit affirmed the
district courts grant of summary judgment on all claims except as to the claim for compensation
for the required postliminary data transmission, or the data transmission claim, for which the
dismissal was vacated. The plaintiff filed a petition for rehearing to the Ninth Circuit and on
March 2, 2010, the Ninth Circuit affirmed the district courts grant of summary judgment on all
claims except as to (i) the claim for compensation for commuting under state law and (ii) the
data transmission claim, which are the two remaining claims. Our petition for rehearing to
the Ninth Circuit was denied.
Due to the dismissal of the plaintiffs claims in federal court as discussed above, in
November 2007, the plaintiff also filed state law claims in California State Court. In June 2009,
the California State Court granted class certification with respect to nine claims and denied class
certification with respect to five claims. The Company appealed this decision and on March 26,
2010, the California State Appellate Court granted our appeal in part, denying certification with
respect to certain claims and affirming certification with respect to other claims, including
claims related to meal and rest breaks, postliminary data transmission, and time traveling to UPS
stores. There are currently four claims class certified in this State Court case.
In both the Federal and State Court cases, the plaintiff, on behalf of the class, seeks unpaid
wages, penalties, interest and attorneys fees in unspecified amounts. The parties have scheduled
a mediation hearing to address all remaining Federal and State claims for November 13, 2010. There can be no guarantee of the
possible outcome of the mediation between the parties, and there may or may not
be a resolution of the above matters as a result of the mediation. The Company
believes that it has substantial legal and factual defenses to these claims and
intends to defend its interests vigorously.
Consumer Claims
On June 15, 2010, a suit was filed by a consumer against LoJack Corporation in the Los Angeles
County Superior Court of the State of California (Central District) alleging, amongst other claims,
violations of the California Consumers Legal Remedies Act, the California Business and Professions
Code §17200 (unfair competition) and §17500 (false advertising), and breach of implied warranty
with respect to LoJack Early Warning for motorcycles, and seeking class action status. On July 29, 2010, the Company removed the case to the United States
District Court for the Central District Court of California. On August 23, 2010, the Company filed
a motion to dismiss all claims. On September 27, 2010, the Court granted our motion to dismiss,
without prejudice. The dismissal without prejudice provided plaintiff with the opportunity to
amend its complaint, and on October 25, 2010, plaintiff filed its amended complaint, for alleged
fraud, violations of the California Consumers Legal Remedies Act, the California Business and
Professions Code §17200 (unfair competition) and §17500 (false advertising), and breach of implied
warranty and again seeks class certification. The Plaintiff, on behalf of the class,
seeks injunctive relief, restitution, disgorgement, punitive damages, and attorneys fees in
unspecified amounts. The Company is currently preparing its response
and believes that it has substantial legal and factual defenses to
these claims and intends to defend its interests vigorously.
New York Litigation
On October 13, 2010, a suit was filed by G.L.M. Security & Sound, Inc. against LoJack
Corporation in United States District Court for the Eastern District of New York alleging, among
other claims, breach of contract, misrepresentation, violation of the NY franchise law, and price
discrimination. Plaintiff seeks damages of $10,000,000, punitive damages, interest and attorneys
fees, and treble damages. The Company is currently preparing its
response and believes that it has substantial legal and factual defenses to
these claims and intends to defend its interests vigorously.
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Item 6. Exhibits
(a) Exhibits
Exhibit | ||||
No. | Description | |||
10.1 | First Amendment to Credit Agreement dated as of June 30,
2010 (incorporated by reference to the Companys Current
Report on Form 8-K, filed with the Commission on July 1,
2010, File No. 001-08439) |
|||
31.1 | * | Rule 13a-14(a)/15(d)-14(a) Certification. |
||
31.2 | * | Rule 13a-14(a)/15(d)-14(a) Certification. |
||
32 | * | Certification Pursuant to 18 U.S.C. Section 1350. |
* | Indicates an exhibit which is filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LoJack Corporation Registrant |
||||
Date: November 9, 2010 | By: | /s/ Richard T. Riley | ||
Richard T. Riley | ||||
President and Chief Executive Officer (Principal Executive Officer) |
Date: November 9, 2010 | By: | /s/ Timothy P. OConnor | ||
Timothy P. OConnor | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) |
29