SEC Company Response from LOJACK CORP (CIK 0000355777) — Apr 28, 2005
LOJACK CORP (CIK 0000355777)
Date: April 28, 2005 · CIK: 0000355777 · Accession: 0000908737-05-000301
AI Filing Summary & Sentiment
Letter
Securities and Exchange Commission LoJack Corporation Form 10-K for the fiscal year ended December 31, 2004 File Number 1-08439
Re:
Dear Mr. Spirgel:
Set forth below are the Company’s responses to the Commission’s comments contained in its letter to the Company dated March 31, 2005. The responses below are keyed to the comment number set forth in the Commission’s letter.
In responding to your comments, the Company acknowledges:
•
The Company is responsible for the adequacy and accuracy of the disclosure in the filings;
•
Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filings; and
•
The Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Comment 1: We note that you have entered into cooperative arrangements with third parties...“to increase penetration in existing markets.” Please tell us the nature of these arrangements with third parties.
Response:
Until 2003, LoJack employees performed all LoJack installations.
We came to realize that some dealers and expediters (independent businesses which call upon automobile dealers to sell and install aftermarket products such as security systems and audio or video equipment) have electronic product installation technicians who are as qualified and experienced as those employed by LoJack. As a small-scale test we allowed some dealers to install LoJack units after LoJack training and subject to LoJack quality control. We found that the quality of these installations was equal to our own.
Based on that test, LoJack adopted a program of allowing selected dealers and expediters to install LoJack units. Contracts with these third parties impose training, certification and quality control standards. This program benefits LoJack in several ways:
•
We can sell and install LoJack units in geographic areas too dispersed for it to be cost effective to cover travel time and other costs associated with installation by our own personnel.
•
We can sell to dealers who have a policy of installing all aftermarket products using their own employees.
•
We can sell to dealers who purchase all of their aftermarket products through expediters with whom they have an exclusive relationship.
This program has resulted in (i) higher market penetration as a result of increasing the number of dealers and expanding installation capability further into suburban and rural areas, and (ii) lower per unit installation cost as a result of more effective utilization of LoJack installers. We do not engage in any cooperative advertising arrangements, revenue sharing, or other promotional allowances with these dealers or expediters.
In our Form 10-K we summarized by saying “We market primarily through a national sales force that routinely visits new and used car dealers to educate and train dealership personnel on the benefits of the LoJack Unit and related products. In addition, to supplement distribution efforts, we have entered into cooperative arrangements with third parties specializing in aftermarket sales and installation of vehicle accessories to increase penetration in existing markets in a cost effective manner.”
For a more detailed description of our revenue recognition policy related to these third parties, see our response to your comment #7.
Comment 2: We note that Boomerang’s annual sales based on its last fiscal year, as disclosed on page 17, if sustained or exceeded, may have a material impact on your future operations. We also note your disclosure in Note 2 that Boomerang was historically profitable. If there is a reasonable likelihood that reported financial information or any historical trend is not indicative of this segment’s and your future financial condition or future operating performance, please provide the disclosure necessary to enable your investors to understand how the recent acquisition will impact the quality and potential variability of your earnings and cash flows. Refer to Commission Guidance Regarding MD&A at https;//www.sec.gov/rules/interp/33-8350.htm.
Response:
Management believes that reported financial information and historical trends for Boomerang are indicative of this segment’s future financial condition and operating performance subject to purchase accounting adjustments and interest expense on the
borrowings under the term loan used for the Boomerang acquisition. The impacts of purchase accounting adjustments and interest expense on the borrowings under the term loan were disclosed in our Form 10-K.
The Company disclosed in Note 2 that $8,440,000 of the purchase price was allocated to intangible assets comprised of trade names and trademarks of $640,000, monitoring contractual relationships of $6,400,000, and completed technology of $1,400,000. In Note 6, we also disclosed the amortization period for each of the intangibles and the estimated amortization expense for the next five years. Also disclosed in note 2, are proforma revenues, net income and net income per share.
The Company disclosed in Note 8 that borrowings under the term loan used for the Boomerang acquisition totaled CAD 30,100,000 (U.S. dollar equivalent of $24,660,000 as of October 29, 2004). In addition, the Company disclosed the quarterly principal payment schedule through 2009, the related interest payments at a variable rate, adjusted quarterly, at the Company’s option, at either the Canadian base rate or a Euro-currency denominated rate, and that the term loan allows the Company to prepay outstanding balances in whole or in part.
The Company generates positive cash flows from its domestic and international operations and expects this trend to continue in both the short term and long term. Boomerang is also expected to contribute to these positive cash flows from the sales of its products and services. The Company’s uses of cash for capital and operating needs will include Boomerang cash requirements. The Company’s sources and uses of cash from Boomerang are expected to reflect historical trends and will be included in the Company’s Consolidated Statement of Cash Flows.
In future filings, the Company will provide as warranted a more descriptive impact of the Boomerang business on our operations and, where applicable and when deemed material, a discussion of predictive factors and trends that may result from the acquisition of Boomerang.
Comment 3: We note that your Boomerang segment heavily depends on their “alliance with wireless carriers and insurance companies” and one of your key business factors is to continue to “develop relationships with insurance companies to help drive demand, where applicable.” Please tell us the nature of Boomerang’s business arrangements with insurance companies and wireless carriers.
Response:
Insurance Companies
Most insurance companies operating in the Province of Quebec require installation of stolen vehicle recovery systems as part of their underwriting guidelines for high-priced vehicles and vehicles that have a high rate of theft. Boomerang is one of several recovery systems in Quebec that qualify under these underwriting guidelines. Boomerang employs
a dedicated team of individuals that work with insurance companies to analyze (i) the operational and financial impact of vehicle theft on their business, and (ii) the effect achieved from utilization of Boomerang’s service. From time to time, Boomerang also conducts seminars for insurance industry participants on ways to reduce losses due to vehicle theft. Boomerang’s recovery team also provides assistance to insurance companies that are investigating suspected fraudulent vehicle theft claims. Boomerang believes it has good relationships with most insurance companies in Quebec.
In the Province of Ontario, insurance companies generally do not require installation of stolen vehicle recovery systems. However, certain insurance companies offer premium discounts to their Ontario customers who install stolen vehicle recovery devices like the Boomerang device. In the past, Boomerang has discussed with certain Ontario insurance companies the concept of requiring installation of stolen vehicle recovery devices as part of their underwriting guidelines. Boomerang intends to continue these discussions from time to time in the future. Boomerang also has provided, and intends to continue to provide, information and advice to Ontario insurance companies about the advantages of having a Boomerang device installed in high-priced vehicles and the benefits on the recovery of stolen assets.
We have no contractual relationships with any Canadian insurance companies.
Wireless Carriers
Our Boomerang segment has written agreements with three wireless carriers: Bell Mobility, Telus Mobility, and Cingular Wireless. The agreement with Bell Mobility relates primarily to the Provinces of Quebec and Ontario, where a vast majority of our Boomerang segment revenues are currently derived. Accordingly, since we determined this contract to be material to our operations, we attached the related agreements as exhibits 10ii. and 10jj. to our Form 10-K. (The agreement with Telus Mobility relates to the Provinces of British Columbia where revenues represent a very small percentage of our Boomerang segment revenue. The agreement with Cingular Wireless relates primarily to the sale of GSM-based Boomerang 3 devices in the United States, which have not derived any revenues).
Since our Boomerang Unit operates on a cellular platform, we require a cellular provider to have the system operate. Our cellular providers, particularly Bell Mobility, are key vendors. Wireless carriers provide us with information obtained from the carriers’ networks we use to determine dynamically the location of a stolen vehicle.
Comment 4: Please separately present revenues from product, service and other sales and their related cost of revenues. Refer to Rule 5-03(b)(1) and (2) of Regulation S-X.
Response:
Per Rule 5-03(b)(1) and (2) of Regulation S-X, “if income is derived from more than one of the subcaptions described under section 210.5.03.1, each class which is not more than
10 percent of the sum of the items may be combined with another class. If these items are combined, related costs and expenses as described under section 210.5.03.1 shall be combined in the same manner.”
For the year ended December 31, 2004, total revenues were $145,691,000 of which approximately $134,373,000, or 92%, related to product revenue. For the year ended December 31, 2003, total revenues were $125,808,000 of which approximately $116,293,000, or 92%, related to product revenue. For the year ended December 31, 2002, total revenues were $116,426,000 of which approximately $110,628,000, or 95%, related to product revenue. In accordance with the aforementioned rules, we have combined product revenue and all other revenues.
Comment 5: Tell us how you determine when royalty revenues are earned and your basis for measurement.
Response:
Our royalty revenues are generated from agreements with certain international licensees. We account for royalty revenues in accordance with SAB 104 and consider royalty revenues earned when each of the following criteria are met:
•
Persuasive evidence of an arrangement exists
•
Delivery has occurred or services have been rendered
•
The seller's price to the buyer is fixed or determinable, and
•
Collectibility is reasonably assured.
We maintain contracts with each of our licensees that provide the basis for evidence of our arrangements and we continually assess whether collection is reasonably assured. Royalty arrangements have been executed with certain distributors and such royalty payments are calculated on a monthly or quarterly basis as a percentage of the licensee’s sales or as a function of the number of units within their install base subject to certain minimum payments. The royalty revenue is recognized at the end of each calculation period. We calculate the amount of royalty revenue using the periodic sales reports received from the licensee on a monthly or quarterly basis in accordance with the individual formulas provided in each agreement, or the periodic minimum royalty per the contract, whichever is greater. The price to the licensee is considered fixed and determinable as the royalty is based upon a formula or contractual terms. All royalties are non-refundable.
Comment 6(a): Please tell us how you concluded that revenue from the sale of LoJack Early Warning units should be deferred over five years (the estimated life of vehicle ownership), whereas revenue from the sale of other LoJack units is generally recognized upon installation and the sale to a third party is recognized upon shipment. Include in your response references to the appropriate accounting literature.
Response:
Revenue recognition – LoJack Units
The Securities and Exchange Commission had previously inquired about our revenue recognition policies relating to our LoJack Unit in a February 28, 2001 letter signed by Associate Director, Barry Summer. All inquiries were addressed in various letters and ultimately finalized during a conference call with Lynn Turner, the then Chief Accountant of the SEC, and several SEC staff members on May 24, 2001. They did not object to our revenue recognition policy. Since that time, we have not changed our product or related deliverables, obligations or related revenue recognition.
Sales of the LoJack Unit are recognized upon installation because the LoJack Unit allows the consumer to take advantage of the police department’s tracking capabilities. Following are some of the key elements from our May 3, 2001 response to Mr. Summer’s February 28, 2001 letter, “...LoJack does not provide a service. It is clear to the consumer that the police will activate, track, and recover their stolen vehicle. These instructions are included in the owner’s manual, and this understanding is evidenced by the lack of interaction between the consumer and LoJack after the sale and is clear in our advertising, point of purchase material and website...Our interactions with the final consumers are limited:
•
Our customers do not have cancellation privileges or rights of return, even if the use of the system is discontinued by law enforcement agencies in the jurisdiction. We only provide warranty to the original purchaser based upon the performance of the LoJack Unit in the consumer vehicle which specifies that the limit of our liability is the original cost of the LoJack Unit;
•
We have limited information on the identity of the final consumer. The name of the end user is not a requirement for the LoJack Unit to operate: only the VIN is required. After installation of the LoJack unit, we do request the final consumer to submit an Owner Enrollment Form, although less than 50% provide us completed forms. Accordingly, the Company has no final consumer information on approximately half of all installations, and as ownership of LoJack equipped vehicles changes, our actual knowledge of LoJack owners decreases from the 50% level. The LoJack Unit stays with the car after transfer of ownership occurs, even though we have no information on the new owner’s identity...
...In summary, we sell and install a device, not a service, and it is clear to the consumer that the police will activate, track and recover their stolen vehicle. The law enforcement agencies operate the stolen vehicle recovery system to assist them in recovering stolen vehicles. In the
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CORRESP
1
filename1.htm
April 28, 2005
Mr. Larry Spirgel
Assistant Director
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re:
LoJack Corporation
Form 10-K for the fiscal year ended December 31, 2004
File Number 1-08439
Dear Mr. Spirgel:
Set forth below are the Company’s responses to the Commission’s comments contained in its letter to the Company dated March 31, 2005. The responses below are keyed to the comment number set forth in the Commission’s letter.
In responding to your comments, the Company acknowledges:
•
The Company is responsible for the adequacy and accuracy of the disclosure in the filings;
•
Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filings; and
•
The Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Comment 1: We note that you have entered into cooperative arrangements with third parties...“to increase penetration in existing markets.” Please tell us the nature of these arrangements with third parties.
Response:
Until 2003, LoJack employees performed all LoJack installations.
We came to realize that some dealers and expediters (independent businesses which call upon automobile dealers to sell and install aftermarket products such as security systems and audio or video equipment) have electronic product installation technicians who are as qualified and experienced as those employed by LoJack. As a small-scale test we allowed some dealers to install LoJack units after LoJack training and subject to LoJack quality control. We found that the quality of these installations was equal to our own.
Based on that test, LoJack adopted a program of allowing selected dealers and expediters to install LoJack units. Contracts with these third parties impose training, certification and quality control standards. This program benefits LoJack in several ways:
•
We
can sell and install LoJack units in geographic areas too dispersed for it to be cost
effective to cover travel time and other costs associated with installation by our own
personnel.
•
We
can sell to dealers who have a policy of installing all aftermarket products using their
own employees.
•
We
can sell to dealers who purchase all of their aftermarket products through expediters
with whom they have an exclusive relationship.
This program has resulted in (i) higher market penetration as a result of increasing the number of dealers and expanding installation capability further into suburban and rural areas, and (ii) lower per unit installation cost as a result of more effective utilization of LoJack installers. We do not engage in any cooperative advertising arrangements, revenue sharing, or other promotional allowances with these dealers or expediters.
In our Form 10-K we summarized by saying “We market primarily through a national sales force that routinely visits new and used car dealers to educate and train dealership personnel on the benefits of the LoJack Unit and related products. In addition, to supplement distribution efforts, we have entered into cooperative arrangements with third parties specializing in aftermarket sales and installation of vehicle accessories to increase penetration in existing markets in a cost effective manner.”
For a more detailed description of our revenue recognition policy related to these third parties, see our response to your comment #7.
Comment 2: We note that Boomerang’s annual sales based on its last fiscal year, as disclosed on page 17, if sustained or exceeded, may have a material impact on your future operations. We also note your disclosure in Note 2 that Boomerang was historically profitable. If there is a reasonable likelihood that reported financial information or any historical trend is not indicative of this segment’s and your future financial condition or future operating performance, please provide the disclosure necessary to enable your investors to understand how the recent acquisition will impact the quality and potential variability of your earnings and cash flows. Refer to Commission Guidance Regarding MD&A at https;//www.sec.gov/rules/interp/33-8350.htm.
Response:
Management believes that reported financial information and historical trends for Boomerang are indicative of this segment’s future financial condition and operating performance subject to purchase accounting adjustments and interest expense on the
borrowings under the term loan used for the Boomerang acquisition. The impacts of purchase accounting adjustments and interest expense on the borrowings under the term loan were disclosed in our Form 10-K.
The Company disclosed in Note 2 that $8,440,000 of the purchase price was allocated to intangible assets comprised of trade names and trademarks of $640,000, monitoring contractual relationships of $6,400,000, and completed technology of $1,400,000. In Note 6, we also disclosed the amortization period for each of the intangibles and the estimated amortization expense for the next five years. Also disclosed in note 2, are proforma revenues, net income and net income per share.
The Company disclosed in Note 8 that borrowings under the term loan used for the Boomerang acquisition totaled CAD 30,100,000 (U.S. dollar equivalent of $24,660,000 as of October 29, 2004). In addition, the Company disclosed the quarterly principal payment schedule through 2009, the related interest payments at a variable rate, adjusted quarterly, at the Company’s option, at either the Canadian base rate or a Euro-currency denominated rate, and that the term loan allows the Company to prepay outstanding balances in whole or in part.
The Company generates positive cash flows from its domestic and international operations and expects this trend to continue in both the short term and long term. Boomerang is also expected to contribute to these positive cash flows from the sales of its products and services. The Company’s uses of cash for capital and operating needs will include Boomerang cash requirements. The Company’s sources and uses of cash from Boomerang are expected to reflect historical trends and will be included in the Company’s Consolidated Statement of Cash Flows.
In future filings, the Company will provide as warranted a more descriptive impact of the Boomerang business on our operations and, where applicable and when deemed material, a discussion of predictive factors and trends that may result from the acquisition of Boomerang.
Comment 3: We note that your Boomerang segment heavily depends on their “alliance with wireless carriers and insurance companies” and one of your key business factors is to continue to “develop relationships with insurance companies to help drive demand, where applicable.” Please tell us the nature of Boomerang’s business arrangements with insurance companies and wireless carriers.
Response:
Insurance Companies
Most insurance companies operating in the Province of Quebec require installation of stolen vehicle recovery systems as part of their underwriting guidelines for high-priced vehicles and vehicles that have a high rate of theft. Boomerang is one of several recovery systems in Quebec that qualify under these underwriting guidelines. Boomerang employs
a dedicated team of individuals that work with insurance companies to analyze (i) the operational and financial impact of vehicle theft on their business, and (ii) the effect achieved from utilization of Boomerang’s service. From time to time, Boomerang also conducts seminars for insurance industry participants on ways to reduce losses due to vehicle theft. Boomerang’s recovery team also provides assistance to insurance companies that are investigating suspected fraudulent vehicle theft claims. Boomerang believes it has good relationships with most insurance companies in Quebec.
In the Province of Ontario, insurance companies generally do not require installation of stolen vehicle recovery systems. However, certain insurance companies offer premium discounts to their Ontario customers who install stolen vehicle recovery devices like the Boomerang device. In the past, Boomerang has discussed with certain Ontario insurance companies the concept of requiring installation of stolen vehicle recovery devices as part of their underwriting guidelines. Boomerang intends to continue these discussions from time to time in the future. Boomerang also has provided, and intends to continue to provide, information and advice to Ontario insurance companies about the advantages of having a Boomerang device installed in high-priced vehicles and the benefits on the recovery of stolen assets.
We have no contractual relationships with any Canadian insurance companies.
Wireless Carriers
Our Boomerang segment has written agreements with three wireless carriers:
Bell Mobility, Telus Mobility, and Cingular Wireless. The agreement with
Bell Mobility relates primarily to the Provinces of Quebec and Ontario,
where a vast majority of our Boomerang segment revenues are currently derived.
Accordingly, since we determined this contract to be material to our operations,
we attached the related agreements as exhibits 10ii. and 10jj. to our Form 10-K.
(The agreement with Telus Mobility relates to the Provinces of British Columbia
where revenues represent a very small percentage of our Boomerang segment revenue.
The agreement with Cingular Wireless relates primarily to the sale of GSM-based
Boomerang 3 devices in the United States, which have not derived any revenues).
Since our Boomerang Unit operates on a cellular platform, we require a cellular provider to have the system operate. Our cellular providers, particularly Bell Mobility, are key vendors. Wireless carriers provide us with information obtained from the carriers’ networks we use to determine dynamically the location of a stolen vehicle.
Comment 4: Please separately present revenues from product, service and other sales and their related cost of revenues. Refer to Rule 5-03(b)(1) and (2) of Regulation S-X.
Response:
Per Rule 5-03(b)(1) and (2) of Regulation S-X, “if income is derived from more than one of the subcaptions described under section 210.5.03.1, each class which is not more than
10 percent of the sum of the items may be combined with another class. If these items are combined, related costs and expenses as described under section 210.5.03.1 shall be combined in the same manner.”
For the year ended December 31, 2004, total revenues were $145,691,000 of which approximately $134,373,000, or 92%, related to product revenue. For the year ended December 31, 2003, total revenues were $125,808,000 of which approximately $116,293,000, or 92%, related to product revenue. For the year ended December 31, 2002, total revenues were $116,426,000 of which approximately $110,628,000, or 95%, related to product revenue. In accordance with the aforementioned rules, we have combined product revenue and all other revenues.
Comment 5: Tell us how you determine when royalty revenues are earned and your basis for measurement.
Response:
Our royalty revenues are generated from agreements with certain international licensees. We account for royalty revenues in accordance with SAB 104 and consider royalty revenues earned when each of the following criteria are met:
•
Persuasive
evidence of an arrangement exists
•
Delivery
has occurred or services have been rendered
•
The
seller's price to the buyer is fixed or determinable, and
•
Collectibility
is reasonably assured.
We maintain contracts with each of our licensees that provide the basis for evidence of our arrangements and we continually assess whether collection is reasonably assured. Royalty arrangements have been executed with certain distributors and such royalty payments are calculated on a monthly or quarterly basis as a percentage of the licensee’s sales or as a function of the number of units within their install base subject to certain minimum payments. The royalty revenue is recognized at the end of each calculation period. We calculate the amount of royalty revenue using the periodic sales reports received from the licensee on a monthly or quarterly basis in accordance with the individual formulas provided in each agreement, or the periodic minimum royalty per the contract, whichever is greater. The price to the licensee is considered fixed and determinable as the royalty is based upon a formula or
contractual terms. All royalties are non-refundable.
Comment 6(a): Please tell us how you concluded that revenue from the sale of LoJack Early Warning units should be deferred over five years (the estimated life of vehicle ownership), whereas revenue from the sale of other LoJack units is generally recognized upon installation and the sale to a third party is recognized upon shipment. Include in your response references to the appropriate accounting literature.
Response:
Revenue recognition – LoJack Units
The Securities and Exchange Commission had
previously inquired about our revenue recognition policies relating to our LoJack
Unit in a February 28, 2001 letter signed by Associate Director, Barry Summer.
All inquiries were addressed in various letters and ultimately finalized during
a conference call with Lynn Turner, the then Chief Accountant of the SEC,
and several SEC staff members on May 24, 2001. They did not object to our revenue recognition policy.
Since that time, we have not changed our product or related
deliverables, obligations or related revenue recognition.
Sales of the LoJack Unit are recognized upon installation because the LoJack Unit allows the consumer to take advantage of the police department’s tracking capabilities. Following are some of the key elements from our May 3, 2001 response to Mr. Summer’s February 28, 2001 letter, “...LoJack does not provide a service. It is clear to the consumer that the police will activate, track, and recover their stolen vehicle. These instructions are included in the owner’s manual, and this understanding is evidenced by the lack of interaction between the consumer and LoJack after the sale and is clear in our advertising, point of purchase material and website...Our interactions with the final consumers are limited:
•
Our customers do not have cancellation privileges or rights of return, even if the use of the system is discontinued by law enforcement agencies in the jurisdiction. We only provide warranty to the original purchaser based upon the performance of the LoJack Unit in the consumer vehicle which specifies that the limit of our liability is the original cost of the LoJack Unit;
•
We have limited information on the identity of the final consumer. The name of the end user is not a requirement for the LoJack Unit to operate: only the VIN is required. After installation of the LoJack unit, we do request the final consumer to submit an Owner Enrollment Form, although less than 50% provide us completed forms. Accordingly, the Company has no final consumer information on approximately half of all installations, and as ownership of LoJack equipped vehicles changes, our actual knowledge of LoJack owners decreases from the 50% level. The LoJack Unit stays with the car after transfer of ownership occurs, even though we have no information on the new owner’s identity...
...In summary, we sell and install a device, not a service, and it is clear to the consumer that the police will activate, track and recover their stolen vehicle. The law enforcement agencies operate the stolen vehicle recovery system to assist them in recovering stolen vehicles. In the