10-K 1 lojn201310-k.htm 10-K LOJN 2013 10-K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM 10-K
 
þ
 
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
For the fiscal year ended December 31, 2013
 
 
or                             
¨
 
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 001-08439
 
LOJACK CORPORATION
(Exact Name of Registrant as Specified in its Charter) 
 
 
Massachusetts
 
04-2664794
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
40 Pequot Way
 
02021
Canton, Massachusetts
(Address of Principal Executive Offices)
 
(Zip Code)
(781) 302-4200
(Registrant’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, $.01 par value
Preferred Share Purchase Rights
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  þ
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  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.    þ



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 the definitions 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
  
Smaller reporting company    o
 
  
 
  
(Do not check if smaller reporting company)
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨    No þ

The aggregate market value of our common stock, $.01 par value per share, held by non-affiliates was approximately $53,431,000 as of June 30, 2013. The aggregate market value of common stock indicated is based upon the last traded price of the common stock as reported by NASDAQ on June 30, 2013.

As of March 3, 2014, there were 18,802,386 shares of our common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III of this Annual Report on Form 10-K is incorporated by reference to our to be filed definitive Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held on May 22, 2014.
 




LOJACK CORPORATION AND SUBSIDIARIES
Table of Contents
 
 
 
 
 
 
Page
PART I
ITEM 1.
Business
ITEM 1A.
Risk Factors
ITEM 1B.
Unresolved Staff Comments
ITEM 2.
Properties
ITEM 3.
Legal Proceedings
ITEM 4.
Mine Safety Disclosures
 
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
ITEM 6.
Selected Financial Data
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 8.
Financial Statements and Supplementary Data
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A.
Controls and Procedures
ITEM 9B.
Other Information
 
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance
ITEM 11.
Executive Compensation
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
ITEM 14.
Principal Accountant Fees and Services
 
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
SIGNATURES
In this Annual Report on Form 10-K, the terms “LoJack”, “the Company”, “we”, “us”, or “our”, include LoJack Corporation and its consolidated subsidiaries unless otherwise expressly stated or the context otherwise requires.
In as much as the calculation of shares of our voting stock held by non-affiliates requires a calculation of the number of shares held by affiliates, such figure, as shown on the cover page hereof, represents our best good faith estimate for purposes of this Annual Report on Form 10-K. All outstanding shares beneficially owned by our executive officers and directors were considered for purposes of this disclosure to be held by affiliates.
 
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This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in the section titled “Risk Factors,” appearing in Part I - Item 1A of this Annual Report.
PART I
 
ITEM 1 — BUSINESS
 
OVERVIEW
LoJack delivers vehicle-related after-market safety and security through a broad suite of products, services and timely and relevant information. The Company, a global leader in tracking and recovery systems for nearly 30 years, has been built upon strong and open relationships with law enforcement, licensees and automotive dealers. Working in collaboration with and service of the larger driving community, LoJack is evolving towards a future of connecting people with information and technology that is tailored to their individual lives and will increase the control of their vehicle security.
LoJack’s proprietary wireless technology network has led to the recovery of over 400,000 vehicles globally. In 2013, LoJack began offering fleet telematics solutions designed for monitoring and managing fleets ranging from 5 to 5,000 vehicles. These solutions can be customized to meet the safety, security and protection needs of a wide-range of companies in the world of the "connected car." The term "connected car" refers to vehicles which are enabled to allow communication with devices and services both inside and outside the vehicle.
SEGMENT OPERATIONS
We have three separately reported business segments: North America, International and All Other. Our North America segment is comprised of our domestic operation, which sells products that operate in 28 states and the District of Columbia in the United States, and our Canadian operation, which provides recovery products and services in the Provinces of Ontario and Quebec. Our International segment sells products and licenses or owns and operates LoJack proprietary vehicle recovery technology in 30 countries and territories throughout Europe, Africa and Latin America and through our wholly owned subsidiary in Italy, LoJack Italia, SRL, or LoJack Italia. Our All Other segment includes LoJack SafetyNet Inc., or SafetyNet, which provides technology for the tracking and rescue of people at risk of wandering, or people at risk, and LoJack SC-Integrity, Inc., or SCI, which provides technology for the tracking and recovery of valuable cargo and business information.
For financial information about our segments, and for information reported by geographic area, see Note 12 to our consolidated financial statements contained in this Annual Report at Item 8.
THE LOJACK SYSTEM
The LoJack Stolen Vehicle Recovery System
The LoJack Stolen Vehicle Recovery System, or the LoJack System, is based on very high frequency, or VHF, technology. In the United States, the LoJack System is comprised of three components: (1) a Registration System, which we maintain and operate; (2) a Sector Activation System, or SAS, and Vehicle Tracking Units, which we collectively refer to as the Law Enforcement Components, each of which is maintained by us and operated by law enforcement officials; and (3) a LoJack Unit, which is installed in customers’ vehicles or equipment. In the North America and Italy, the LoJack System is designed to be integrated with existing law enforcement computer systems and telecommunication systems and procedures. If a vehicle equipped with a LoJack Unit is stolen, its owner reports the theft to the local police department. If the theft is reported in a jurisdiction where the LoJack System is operational, a unique radio signal is automatically transmitted to the LoJack Unit in the stolen vehicle, activating its tracking signal. The Vehicle Tracking Unit, installed in police patrol cars and aircraft in the coverage areas (for detail see the section titled "Global Presence" below), is used by law enforcement officers to lead them to the stolen vehicle using VHF direction-finding technology to locate the LoJack Unit emitting the tracking signal. In Canada and Italy, the tracking of stolen LoJack equipped vehicles is currently performed by our personnel or by private parties under contract with us, and once a LoJack equipped stolen vehicle is located by our tracking team, we rely on local law enforcement agencies for the actual recovery.
Pursuant to agreements with state and local governmental agencies, we furnish the Law Enforcement Components to state, county and municipal law enforcement agencies at no cost to the agencies. The installation, testing and maintenance of the Law Enforcement Components are primarily our responsibility. Local law enforcement agencies operate the Law Enforcement Components pursuant to the terms of our agreements with states, counties or municipalities, as the case may be. The agreements with applicable law enforcement agencies generally are for initial terms of up to five years. Substantially all such agreements that would have expired have been formally renewed or informally continued upon completion of their initial term. The renewal or extension of any such agreement may be subject to competitive bidding. We have no legal obligation to customers to provide ongoing systems support and maintenance or to refund any of the purchase price if these agreements expire and are not renewed, or are terminated either by us or by the local law enforcement agencies.



We believe that the benefits to consumers from the LoJack System include the following:
Approximately 90% historical recovery rate for cars and light trucks in the United States;
Covert installation of the LoJack Unit which decreases the chance of discovery and system disablement;
VHF based technology that penetrates buildings and containers to facilitate tracking and recovery of vehicles that are hidden from view;
Direct integration with law enforcement in the United States and in some foreign jurisdictions, which results in the automatic activation of the LoJack Unit upon a report of theft to police and tracking and recovery by police; and
Insurance premium discounts which are mandated or offered in some foreign markets and some states within the United States.
Additionally, we believe that the LoJack System benefits law enforcement agencies by providing an extremely effective tool for combating vehicle theft and helping to apprehend the suspects behind such crimes.
The LoJack Fleet Management System Powered by TomTom
In January of 2013, we entered into a Value Added Distributor and Reseller Agreement with TomTom to provide certain TomTom products and services. Under the agreement, we have been appointed as a non-exclusive dealer in the U.S., Mexico and Canada to promote, market, activate and sell certain TomTom products. LoJack Fleet Management powered by TomTom is a comprehensive GPS-based advanced telematics system designed for tracking and managing fleets ranging from 5 to 5,000 vehicles. It can be customized to fit the business needs of a wide range of companies in diverse industries.  
LoJack Fleet Management provides business intelligence that allows fleet managers to achieve a wide range of operational efficiencies including maximizing fuel economy, minimizing driver/labor costs, extending fleet vehicle life cycle, optimizing customer service, and ultimately, increasing business productivity and profitability.
We believe that the specific benefits of LoJack Fleet Management include the following:
Increase profitability
Easily locate vehicles and dispatch the closest driver to a jobsite. Money is saved on fuel when drivers are dispatched based on proximity to job sites and using the TomTom navigation system for optimized routes. The business is able to respond to customers more quickly and efficiently which can result in better customer service, increased referrals and higher resource productivity.
Improve driver safety while controlling vehicle maintenance costs
Active Driver Feedback prompts drivers to stay safe and fuel efficient behind the wheel. Better driving can save money with fewer service appointments.
Facilitate better customer service
Dispatch the closest vehicle to a job and provide customers with accurate estimated arrival times to keep them informed. Enables a competitive advantage by offering customers smaller service windows.
Improve security controls
Eliminate unauthorized use and respond to a theft immediately upon receiving an alert if your vehicle leaves a pre-set area.  The Stolen Vehicle Recovery upgrade option (available in certain areas) uses very high frequency technology to help police track stolen vehicles in places where other technologies may not work.
Provide electronic driver logs
Provides an automatic online logbook of jobs and working hours to keep the most accurate records with data from vehicles reported in real-time.
Record information as you drive, reducing paperwork at the end of the day.
Allow for mobile management
Customers can manage their fleet from an iPhone or Android smartphone or tablet. The WEBFLEET application allows customers to see their fleet on a map, monitor orders and manage fleet resources more effectively.
The LoJack Canada Boomerang System
The legacy Boomerang Tracking System, or Boomerang System, sold in Canada prior to the transition to the LoJack System during 2011, is based on VHF and cellular technology and uses tracking devices internally developed by LoJack and the wireless network of a major Canadian telecommunications company for locating and tracking stolen assets. The cellular coverage area for

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LoJack Canada’s tracking of stolen assets includes most of North America; however, its service area is primarily in certain Canadian provinces. The Boomerang System consists of the Boomerang Unit that is installed in a consumer’s vehicle, the cellular network, the LoJack Canada Security Center and Vehicle Tracking Units. If a vehicle equipped with a Boomerang Unit is stolen, the vehicle owner is instructed to report the theft to the local police department and the LoJack Canada Security Center. When the Security Center is advised of a theft, it obtains the approximate location of the Boomerang Unit via a secure connection with the cellular carrier and then transmits a unique code causing the Boomerang Unit to transmit a tracking signal. Upon transmission of a tracking signal by the Boomerang Unit, a tracking vehicle, equipped with a Vehicle Tracking Unit, is dispatched to the approximate location of the Boomerang Unit. In Canada, we use our own employees and third parties to perform tracking of Boomerang Units. The Vehicle Tracking Units use direction-finding technology to locate the source of the tracking signal emitted by the Boomerang Unit which, with the integration and/or assistance of local law enforcement personnel, leads to the recovery of the stolen vehicle.
LOJACK ADVANTAGES FOR STOLEN VEHICLE RECOVERY
Unlike systems based on Global Positioning System, or GPS, technology, our technologies can penetrate buildings and containers for the effective tracking and recovery of stolen mobile assets hidden from view, while GPS technology is easily jammed by such interferences. We differ from such GPS products in that our products are covert without any visible antennas or markings on the vehicle indicating presence of the LoJack System. Additionally, the direct integration of the LoJack System with law enforcement in the United States results in the automatic activation of the LoJack Unit upon the vehicle owner’s report of the theft to police and, therefore, no third-party intermediaries are involved in the activation or tracking process.
PRODUCTS AND TECHNOLOGY
LoJack® 
The LoJack Unit is the component of the LoJack System that is installed in a consumer’s vehicle. The LoJack Unit consists of a VHF transponder with a hidden antenna, microprocessor and power supply and contains a set of secret codes unique to the LoJack Unit. The LoJack Unit’s transmitter is activated upon receipt of its unique activation code from the Sector Activation System. In the United States, the entry of a stolen vehicle report into law enforcement information systems in jurisdictions where the LoJack System is operational causes the Sector Activation System to broadcast the unique activation code to the LoJack Unit in the stolen vehicle, in turn causing the LoJack Unit to transmit a signal. An activated LoJack Unit will continue to broadcast until it receives a properly coded message to stop. The deactivation command is automatically sent to the LoJack Unit upon entry of theft recovery information in the law enforcement information system. All transmissions are made on a nationwide very high frequency allocated by the Federal Communications Commission, or FCC, for a variety of law enforcement tracking and recovery applications, including tracking and recovery of stolen vehicles, people at risk, individuals of interest to law enforcement, lost or stolen cargo and hazardous materials.
LoJack Early Warning®, sold as an optional component of the LoJack System, provides early notification to a vehicle or motorcycle owner in the event of operation by an unauthorized user. LoJack Early Warning consists of a uniquely coded key pass and a motion sensor that works with the LoJack Unit to monitor vehicle movement and detect the presence of the registered owner’s key pass. Should the vehicle move without the registered owner’s key pass present, a communication from the LoJack Unit in the vehicle is transmitted to the LoJack Control Center, a company-maintained database that provides automatic notification to the registered vehicle owner via e-mail, text message and/or phone call.
LoJack for Construction Equipment is designed specifically for installation on heavy equipment. It functions similarly to the traditional LoJack Unit, but has been modified to meet the Society of Automotive Engineers design standards for use on heavy-duty vehicles.
LoJack for Motorcycles is designed specifically for installation in “on road” motorcycles. It functions similarly to the traditional LoJack Unit, but has been modified and reduced in size so that it can be more covertly installed in the limited space of a motorcycle. LoJack Early Warning is a standard feature in most markets on LoJack for Motorcycles.
We also offer warranty products that may be purchased as a supplement to the original purchaser’s warranty. These warranty products include: LoJack Extended Limited Recovery Warranty, LoJack Guarantee Plus 5000 (offered in all U.S. states except New York) and LoJack Protection Plus 5000 (New York only). For more information on our warranty products, see the section titled "Product Warranty" below.
We license to Absolute Software Inc., a Vancouver, British Columbia company, or Absolute, the right to market its portable computer theft recovery products under the brand name LoJack for Laptops®. When a computer with LoJack for Laptops® is reported stolen and subsequently connects to the internet, the computer sends a signal to Absolute’s monitoring center to identify its location and provide certain other information. Absolute then works with local law enforcement and internet service providers to recover the computer.
In July 2013, Absolute announced the release of LoJack for Mobile Devices. LoJack for Mobile Devices is the first Consumer theft recovery solution for Android smartphones and available for purchase through the LoJack for Mobile Devices website.

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Leveraging the same technology used in LoJack for Laptops®, the solution cannot be removed by a factory reset once the app is installed by the user and activated. When a protected smartphone is stolen, Absolute then works with local law enforcement and internet service providers to recover the device. Users can also remotely lock, locate their device or delete sensitive files to prevent identity theft.
Fleet Management Powered by TomTom
The LoJack Fleet Management system is comprised of a GPS-based location device; a Software as a Service, or SAAS, based application used for tracking, monitoring and reporting from desktop browser to smartphones and tablets; and optional dash mounted navigation devices enabling interactive communications with the driver as well as turn-by-turn directions, optimized routing based upon traffic conditions, and delivery instructions.
The fleet management GPS device, which can be installed either covertly or in the open, and the optional navigation device can be installed by either LoJack’s installation resources or the customer.
We also offer a number of options ranging from a simple monitoring and tracking solution to a solution complete with on-board navigation devices, as well as live traffic and vehicle and driver behavior data. For those businesses looking for integration with existing systems or who need a specialized solution, we offer integration API’s for applications such as dispatching, temperature monitoring, proof of delivery, fuel cards, route optimization, mobile worker applications, vehicle maintenance, and billing/invoicing.
Boomerang® 
The Boomerang Unit is the component of the Boomerang System that is installed in a customer’s vehicle. The Boomerang Unit consists of a cellular band VHF transponder with antenna, microprocessor and power supply. We continue to support the Boomerang Units sold prior to the transition to LoJack Units during 2011; however, we no longer offer the Boomerang Unit products for sale. For a listing of the Boomerang Unit product suite previously offered, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
If a vehicle equipped with a Boomerang Unit is stolen, the vehicle owner reports the theft to the local police department and the LoJack Canada Security Center. When the Security Center is advised of a theft and after a police report has been filed, the Security Center locates the approximate location of the Boomerang Unit via a secure connection with the cellular carrier network and then sends a unique code causing the Boomerang Unit to transmit a tracking signal. A tracking vehicle, equipped with a Vehicle Tracking Unit is dispatched to the general area reported by the Boomerang Unit. The Vehicle Tracking Units use sophisticated direction-finding technology to locate the source of the tracking signal emitted from the Boomerang Unit. Upon location of the stolen vehicle, Vehicle Tracking personnel notify local law enforcement, who recovers the vehicle.
SafetyNet
The SafetyNet System is comprised of a transmitter, worn on the wrist of the subscriber, a Search and Rescue, or SAR, Receiver used by public safety agencies, a database of key information about the subscribers to assist in the search and rescue, and training of law enforcement and public safety agencies in the use of our technology in the search and rescue process. The transmitter constantly emits a VHF signal which can be tracked by trained search and rescue agencies using a SAR Receiver. The VHF signal enables the police to pinpoint the precise location of a missing subscriber using a handheld, portable SAR Receiver.
SCI
We own approximately 64% of SCI. We license to SCI the use of the LoJack brand name for its cargo tracking and recovery solution, called LoJack InTransit. LoJack InTransit uses three technologies (VHF, GPS and Global System for Mobile Communication, or GSM) in combination to deliver a comprehensive solution for the prevention, detection, investigation and recovery of stolen cargo.
GLOBAL PRESENCE
As of December 31, 2013, the LoJack System was operational in 28 states and the District of Columbia in the United States. We have available statewide coverage, defined as coverage of at least 80% of the state population, in Arizona, California, Connecticut, the District of Columbia, Maryland, Massachusetts, Michigan, New Jersey and Rhode Island. We have coverage available in major metropolitan areas, cities and high crime areas in Colorado, Delaware, Florida, Georgia, Illinois, Louisiana, Nevada, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia and Washington. We became operational in the state of New Mexico in early 2014. We identify and define coverage areas based on a qualitative analysis of population density, new car sales and geography.
We operate Canada’s leading stolen vehicle recovery provider, with sales concentrated in the provinces of Quebec and Ontario. In 2011, we transitioned the Canadian business from the sale of Boomerang Units to LoJack Units. Our stolen vehicle recovery technology is also operational in 30 other countries and territories around the world. Internationally, we have a licensed

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presence in countries located in Latin America, Europe and Africa. In 2006, we began commercial activities in Italy through a wholly-owned subsidiary, and now have a national presence in Italy.
BUSINESS MODEL
North America Segment
Our revenue in the United States is derived primarily from the sale of LoJack Units, LoJack Early Warning Units and related products and extended product and recovery warranties to automobile dealers, which include automobile dealers, dealer groups, and automotive accessory retailers, who resell the units to consumers. There are no additional monthly fees or service contracts associated with the sale of LoJack Units, LoJack Early Warning Units or extended product and recovery warranties. Approximately 85% of our revenue in the United States during 2013 originated through this distribution network of automobile dealers. Expansion into additional markets beyond the automotive market through products such as LoJack for Construction Equipment and LoJack for Motorcycles leverages our existing network and requires no additional infrastructure. Approximately 10% of our revenue in the United States was derived from the sale of LoJack for Construction Equipment units and LoJack for Motorcycles units during 2013.
We contract with and certify select dealers and other third parties to install our products. In 2013, 53% of our products sold in the United States were installed by third parties, compared to 61% in 2012 and 60% in 2011. We monitor the quality of these installations through an extensive quality control process.
Our revenue in Canada is derived primarily from the sale of LoJack Units and from service contracts related to the monitoring and recovery of legacy Boomerang Units. Customers who purchased a legacy Boomerang Unit (prior to the transition to LoJack Units) were required to enter into a service contract with LoJack Canada. The terms of service contracts offered ranged from 12 to 60 months and were generally payable in full upon the activation of the related unit or renewal of a previous service contract. Customers were also offered a month-to-month option. Beginning in 2011, we introduced the LoJack technology in Canada and the business model and product offerings are now similar to those of the United States. Approximately 35% of our revenue in Canada during 2013 was derived from the unit sales through automotive accessory retailers and automobile dealers, while the remaining 65% of revenue during 2013 was derived from associated service contracts. As of December 31, 2013, there was approximately $1,977,000 of deferred revenue resulting from approximately 15,000 active service contracts in Canada. As we continue to transition the customer base in Canada to LoJack Units, we expect the number of service contracts and related deferred revenue to decrease correspondingly. As of December 31, 2013, there was also approximately $1,002,000 of deferred revenue on LoJack Unit sales in Canada.
Certain insurance companies in Quebec and Ontario offer rebates to customers who install a stolen vehicle recovery product in their vehicles, and in some instances, insurance companies require installation of a stolen vehicle recovery product in such vehicles.
Revenue from the North America segment accounted for 71%, 74% and 68% of our consolidated revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
International Segment
LoJack technology is operational in 30 countries and territories outside of the North America segment. We have developed our technology such that the LoJack System can be used by local law enforcement, by our licensees’ own security organizations, or by a combination of both. International revenue is derived from the sale of LoJack Units, system infrastructure components, royalties, licensing fees and subscription and installation services. International licensing agreements are denominated primarily in U.S. dollars and are structured with up-front licensing fees. Our license agreements provide that we supply components and products at prices to be determined from time to time and/or receive royalties based upon the licensees’ LoJack based revenue. Approximately 90% of our international revenue was from the sale of LoJack Units during 2013.
At December 31, 2013, we held a 12.5% equity investment, with a carrying value of $1,541,000, in our Mexican licensee; a 5.5% equity investment, with a carrying value of $276,000, in our French licensee; and a 17.5% equity investment with a carrying value of $496,000, in our Benelux licensee. In addition, we hold a 5% equity interest in our licensee in Argentina, for which we have no carrying value in our financial statements.
We have commercial operations in Italy through LoJack Italia. Since 2005, we have invested approximately $33,000,000 (comprised of LoJack network build-out and operating losses) in LoJack Italia. We estimate this business will require an additional investment of approximately $500,000 to $1,000,000 over the next two to three years.
Our revenue in Italy is derived primarily from the sale and installation of LoJack Units and related service contracts. Purchasers of LoJack Units in Italy are required to enter into a service contract with LoJack Italia. The majority of service contracts offered have terms which range from 12 to 60 months and are generally payable in full upon activation of the related unit or renewal of a previous service contract. Customers are also offered a month-to-month option. Approximately 44% of our revenue in Italy during 2013 was derived from the sale of LoJack Units, while the remaining 56% of revenue during 2013 was derived from

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associated service contracts. As of December 31, 2013, there was approximately $2,794,000 of deferred revenue resulting from approximately 33,600 active service contracts in Italy.
Revenue from the International segment accounted for 26%, 23%, and 30% of our consolidated revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
All Other Segment
Revenue in our All Other segment is derived primarily from SCI and SafetyNet and accounted for 3% of total revenue in 2013. SCI revenue is derived from the sale, lease or service of tracking devices as well as subscription fees for monitoring service alerts and activity reporting. At December 31, 2013, there was approximately $83,000 of deferred revenue relating to SCI subscription based services.
SafetyNet revenue is derived primarily from the sale of transmitters, replacement parts and monthly service fees. The SafetyNet business model is a fulfillment and service model, which provides the SafetyNet offering to caregivers and consumers for an upfront product fee, followed by a monthly service fee. As part of this business model, we provide SAR Receivers directly to participating law enforcement agencies at no cost.
VEHICLE, ASSET THEFT AND PEOPLE AT RISK
North America Segment
According to the most recent Federal Bureau of Investigation Uniform Crime Report for 2012, a motor vehicle is stolen in the United States every 44 seconds. These reports also indicated that in 2012, vehicle theft rose for the first time in 8 years. In 2012, total motor vehicle theft in the United States was approximately 721,000 vehicles, with an estimated value of $4.3 billion. Most auto theft is carried out by sophisticated thieves, rather than amateur thieves. Thieves typically steal vehicles because of the profit potential of the vehicle’s components sold on the black market. Also, in the United States, the national recovery rate for stolen vehicles has declined from 67% in 1999 to 54% in 2012, near a 30-year low. The National Insurance Crime Bureau also reported that approximately 46,000 motorcycles were stolen in the United States in 2012. Of those motorcycles stolen, only 39% were recovered by law enforcement, making motorcycle owners and the insurance industry vulnerable to loss.
According to Statistics Canada, a federally commissioned statistics bureau, approximately 78,000 vehicles were stolen in Canada during 2012. Of those, approximately 50% of stolen vehicles end up in chop shops, where stolen cars are dismantled for parts to be sold off separately. The Insurance Bureau of Canada reported that each year such crimes cost auto insurers and their policyholders approximately CAD $542 million and, when considering emergency response, court, policing, legal and out-of-pocket expenses, such as deductibles, the annual costs of auto theft in Canada approach $1 billion.
International Segment
Interpol, which provides services for the law enforcement community to optimize the international effort to combat crime, indicated in a recent report that approximately 7.2 million vehicles were stolen globally in 2012.
All Other Segment
In the cargo security market, it is estimated that $10 to 30 billion in merchandise is stolen from cargo ships, trucks, ports, railroads and highways annually in the United States.
According to the Alzheimer's Association, it is estimated that 5.2 million Americans suffer from Alzheimer’s disease and that there will be 13.8 million Americans affected by 2050. Wandering, the most life-threatening behavior associated with Alzheimer’s disease, affects 60% of such patients, and approximately 50% of the cases where the person is not located within 24 hours end in death. Additionally, the Center for Disease Control and Prevention, or CDC, estimates that about one in every 88 children in the United States has been identified as on the autism spectrum and 49% of children with autism are prone to wandering.
SALES AND MARKETING
North America Segment
Our sales and marketing activities in the United States focus on the automotive channel, through which automobile dealers offer the LoJack Stolen Vehicle Recovery Unit as well as our LoJack Early Warning and Extended Warranty products as options for both their new and used car sales. We market our products to these dealers primarily through a national sales force, which we supplement with independent sales representatives and inside sales representatives. Our salespeople routinely visit new and used car dealers to educate and train dealership personnel on the benefits of the LoJack Stolen Vehicle Recovery System and related products. In certain dealerships, LoJack sales personnel present programs such as the pre-install selling model, and educate the dealership personnel on how installing LoJack Units on every car on their lot can lead to a strong value proposition for the dealer. We also utilize a direct response program to sell the LoJack product in specific markets, such as the market for classic cars, and to sell extended warranty and related products to our installed end customers. In order to ensure that the LoJack Stolen Vehicle

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Recovery Unit and related products can be financed as a part of the purchase price of the vehicle, we continue to develop arrangements with major finance companies to help improve the availability of credit for the end consumers.
The LoJack brand has an aided brand awareness of approximately 81% in the United States according to a brand study performed by us in 2011. This brand awareness is beneficial to all existing sales channels and product lines, including automotive, commercial, motorcycle and laptops and may prove beneficial to channels and product lines we may enter in the future.
Building on our already high brand awareness, we continue to drive engagement with dealers and consumers through our digital and direct marketing efforts. We invest proactively in our digital marketing efforts. In 2012, we completely redesigned LoJack.com website, which receives approximately one million visits annually; autotheftblog.com, which highlights the real life effectiveness of our products as well as our positive impact on consumers, dealers and law enforcement; and our newly developed consumer applications for iPhone® and Android phones which provide users with parking location support, a "mobile glovebox" for storing important vehicle information and stolen vehicle recovery process assistance. We have also released an iPad® application for use as an educational and sales tool for dealership personnel as well as consumers and developed a comprehensive multi-media dealership sales training program with leaders in the dealership training industry. With a high number of consumers in the United States who are concerned about car theft, the ability to reach these consumers directly, as well as through well-trained dealership sales personnel, is a key component of our sales and marketing plans. During 2012 and 2013, we also invested in the development of integrated marketing processes and systems to support dealer and consumer sales and marketing.
To supplement installation efforts, we have cooperative arrangements with third parties specializing in after-market sales and installation of vehicle accessories to increase penetration in existing markets in a cost effective manner.
We also market LoJack for Construction Equipment directly to owners of commercial equipment and to consumers, using a sales force that calls on construction equipment owners and manufacturers, telemarketing representatives and direct mail.
We license the LoJack brand name to Absolute for use in connection with theft recovery products for laptop computers. All sales and marketing efforts associated with the LoJack for Laptops and LoJack for Mobile Devices products are controlled and funded by Absolute.
Our Canadian sales and marketing efforts are focused on the provinces of Quebec and Ontario. We completed our expansion into Ontario in January 2012, where we leverage the LoJack brand, technology and law enforcement model. In Quebec, we partner with insurance companies that mandate and/or give rebates on insurance costs for a stolen vehicle recovery system on high priced or high risk of theft vehicles. We maintain a direct sales force in Quebec, which works directly with insurance companies, insurance brokers and local resellers of the LoJack System. We also sell these products directly to consumers and commercial businesses through a company-owned distribution center and through traveling sales representatives. Subscribers in Quebec accounted for 73% of our total subscribers in Canada in 2013. We maintain a direct sales force in Ontario whose primary focus is the automotive dealer channel.
In 2013, our Fleet Management solution was sold through our existing commercial sales force. We are currently in the process of building a dedicated team of outbound and field-based fleet sales people that are located throughout the country. In addition to typical marketing efforts, we currently market through automotive dealership referrals and through our LoJack stolen vehicle recovery sales force direct to automotive dealerships.
International Segment
In territories where our licensees operate, the business, including the sales and marketing efforts, is typically controlled and funded by our international licensees and their respective management teams.
In Italy, our sales and marketing approach is focused on the automotive channel, fleet operators and participants in the insurance segment. In the automotive channel, LoJack Units, LoJack Early Warning and extended warranties are offered as options on new and used vehicle sales. We use a direct sales force, supplemented by outside sales agents, to visit automotive dealerships and to educate and train dealership personnel on the benefits of the LoJack System and related products. We engage with insurance companies, agents and brokers to provide premium discounts and to facilitate the distribution of LoJack products and services. We continue to use public relations campaigns and cooperative advertising initiatives with certain car dealers to promote consumer awareness of our product in Italy.
All Other Segment
SCI’s sales and marketing efforts are currently concentrated in the United States and target global businesses and customers who transport high value cargo by truck or rail. In addition, SCI’s sales efforts target companies who want to integrate valuable business information between multiple locations and cargo integrity data for compliance reporting and risk mitigation.
Our sales and marketing efforts for SafetyNet are concentrated in select markets in the United States, specifically major metropolitan areas within Massachusetts, Florida and Pennsylvania. We are marketing SafetyNet directly to caregivers of those with Alzheimer’s, autism and other cognitive disorders through non-profit and public service agencies.

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GROWTH STRATEGY
Our mission is to develop LoJack as the preeminent global brand providing after-market safety, security and protection products and services for the "connected car." We plan to accomplish this through internal and partner-based new product development, market expansion, relationships with new and established distributors and the global development of the LoJack brand. In addition, if appropriate, we may make acquisitions as a means to add channels of distribution for the LoJack brand or as a way to acquire new technology or products, which could be sold through our existing channels of distribution.
North America Segment
Our growth strategy in North America includes developing a segmented approach to the market which is expected to increase growth while improving the efficiency and effectiveness of our sales and market investments; bringing new products and services to the market to take advantage of consumer and dealer demand in the "connected car" space while leveraging our sales, installation and law enforcement networks; continuing to build on our functional and technical excellence to ensure we have the foundational processes, systems and people to enable growth; and building on the breadth and depth of the LoJack brand among consumers and automotive dealers.
Market Segmentation
We have traditionally utilized our own field sales organization for account coverage. Over the past year, we have focused our field sales resources on large accounts in order to increase the depth and breadth of coverage within these accounts, increased our focus on the use of agent sales representatives to cover mid-size accounts within their established territories and increased coverage of our inside sales organization. All three areas are focused on dealership acquisition, retention and mutual profitability.
New Products and Services
In January 2013, we entered into a strategic alliance with TomTom, through which we offer fleet telematics solutions to small and medium sized businesses, commercial fleets, automotive dealerships and law enforcement agencies. Our strategic alliance with TomTom allows us to build upon our global stolen vehicle recovery network technology and quickly go to market with a wider range of solutions that add value to our customers and partners. We believe that significant market opportunities exist relating to the "connected car" concept, and that our alliance with TomTom will enable us to have a unique and important position in this market by leveraging our complementary capabilities. LoJack contributes to the alliance our brand strength, global commercial distribution, stolen vehicle recovery system network, installation network, automotive after-market leadership and unique law enforcement relationships. TomTom offers leadership in navigation and location-based services and technology, a successful "Software as a Service," or SaaS, business model and extensive experience in handling large amounts of data. Together, we expect to introduce and scale new products and services for existing and new markets, creating additional value for our customers and partners.
Our internal product development team released our beta version of a wireless protocol which will enable other devices, such as vehicle immobilizers, GPS/CELL units, etc., to communicate with and through the LoJack Stolen Vehicle Recovery Network. In addition, we have released new network components which enable lower cost expansion of the recovery network. All of these products may be utilized by both our wholly owned operations and licensees.
Functional and Technical Excellence
Partnering and technology are two key components of our growth strategy. We believe that having the right resources in place to support our growth strategies is crucial to our success. In 2012, we announced the creation of a Vice President of Corporate Development position to help accelerate our growth initiatives. The strategic alliance with TomTom was facilitated by this addition. To address our focus on expanding our technology platform, we added the position of Chief Technology Officer in 2013. These two positions play a significant role in developing and executing a product cycle plan for delivering value-added products to market quickly.
We are currently in the process of redesigning our enterprise resource planning systems, which can enable us to simplify our business processes, increase integration with consumers and dealers, support a SaaS subscription revenue business model and automate many of our existing processes, resulting in an improved customer experience. We expect this system to be implemented in 2014.
Brand Development
We believe that increased market coverage, new products and services, and a broader technical platform can increase the value of the LoJack brand by expanding its relevance to consumers and dealers through broader connections and deeper relationships.
During 2012 and 2013, we invested in our digital marketing efforts, including the completely redesigned lojack.com website, which receives approximately one million visits annually; autotheftblog.com, which highlights the real life

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effectiveness of our products, as well as our positive impact on consumers, dealers and law enforcement; and our newly developed consumer applications for iPhone® and Android phones which provides users with parking location support, a "mobile glovebox" for storing important vehicle information and stolen vehicle recovery process assistance. We have also released an iPad® application for use as an educational and sales tool for dealership personnel as well as consumers and developed a comprehensive multi-media dealership sales training program with leaders in the dealership training industry.
International Segment
Our international growth strategy is to increase sales in countries where the LoJack System presently operates while continuing to identify new territories.
We work with our licensees to apply best practices from other successful LoJack markets, to support new business models to address market opportunities and to leverage multi-territorial business opportunities. Our new territory development activities are focused primarily on those countries which have characteristics that are similar to our successful licensed territories. We generally target those territories in which the combination of new vehicle sales, existing cars on the road, population density and the incidence of vehicle theft is significant. Market expansion may be in the form of licensing the use of the LoJack technology and/or making strategic investments in or acquisitions of businesses.
From time to time, we may make direct strategic investments in international licensees, some of which may be substantial. Our investment strategy has focused on those markets which we believe represent the best opportunities for revenue generation or where we can positively impact market penetration and revenue growth.
We have a common global platform which utilizes the same basic unit to operate on the varying global frequencies used for stolen vehicle recovery. This common platform has contributed to growth in our international business due, in large part, to reduced product costs achieved through manufacturing efficiencies.
In order to support our international growth and further development of our global brand, we are developing integrated business processes and systems to improve our ability to collaborate and work together across all functional areas. To accelerate progress in these areas, we have created two globally focused teams: the Global Operations Group and the Global Sales Planning and Sales Operations Group.
Our Global Operations Group integrates our U.S. and international field engineering, product support, installation and quality control teams to better serve our global customer base. Integration of these teams into one group is intended to improve our market development practices and our global market expansion efforts through the development and sharing of best practices. With the creation of the Global Operations Group, our engineering mission will evolve from purely maintaining our very high frequency technology portfolio to collaborating with other technology companies to develop a new set of innovative products and services that our partners and customers value.
Our Global Sales Planning and Sales Operations Group extends our sales planning and analytics activities to cover our international markets in addition to this group's past coverage of our domestic market, and is intended to increase integration of our sales and marketing functions. The goals of this group include the development of improved plans and programs leading to better results, more efficient use of resources and faster time to market for new initiatives.
Creation of these new groups and their increased focus on integrating our global activities are designed to reinforce our efforts to develop and strengthen our global brand. We intend to leverage these initiatives, and future initiatives, to create a strong and consistent brand culture across all of our markets as well as a global structure that will support delivery of the LoJack brand promise to our customers.
In Italy, our growth strategy is to use our internal and external sales and marketing resources to penetrate the stolen vehicle recovery market through the automotive dealership channel, automobile manufacturers, fleet operators and participants in the insurance segment.
Our International segment headquarters is located in Dublin, Ireland. Our subsidiary LoJack Equipment Ireland Limited, or LoJack Ireland, supports business development, administrative and distribution activities for our International segment and provides support to our wholly-owned business in Italy and our international licensees in the Americas, Africa and Europe.
All Other Segment
SCI’s growth strategy focuses on the expansion of its nationwide sales efforts through channel and strategic partners and targets companies who transport valuable cargo by ocean, truck, air or rail to, from, and in the United States, Canada, Mexico, Europe and Africa. Our customers are generally companies in the electronics, tobacco, pharmaceutical and retail industries that want to protect the integrity of their supply chain and reduce risk on their high value shipments.
SafetyNet’s growth strategy focuses on creating consumer awareness of our technology to assist in the search and rescue process for people at risk in select markets, specifically targeted at major metropolitan areas within Massachusetts, Rhode Island,

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Florida and Pennsylvania. Going forward, we have decided to concentrate our efforts on sustaining and expanding our subscriber base within these select markets, and have discontinued, at least temporarily, our efforts to expand our market reach more broadly. We have also decided to concentrate our marketing efforts on publicizing successful search and rescue results, and have discontinued our proactive marketing outreach efforts. We continue to explore strategic alternatives for our SafetyNet business.
PRODUCT DEVELOPMENT
Our product development efforts focus on identifying, designing and creating product solutions that fulfill our brand promise of providing after-market safety, security and protection products and services for the "connected car." Additionally, we seek to leverage our knowledge of the processes and systems used by law enforcement operations to facilitate the tracking and recovery or rescue process and ensure that our product road map continues to support our direct integration with law enforcement in the United States and in some foreign jurisdictions. Our products and services are developed either internally or in conjunction with third parties.
In 2013, we expanded our product line by partnering with TomTom and introduced the LoJack Fleet Management Powered by TomTom product. As we enter 2014, we are preparing various telematics system solutions which will include hardware, applications, back-end services and user interfaces for the Insurance, Dealer, and OEM markets.
The eighth generation LoJack Unit is currently under development and will continue to expand on our proprietary power management and wireless protocols. This next-generation product will consolidate new technologies which will allow us to significantly reduce both the size and power consumption of the LoJack Unit. By reducing the size and power consumption of the unit, we are creating a product which can be leveraged into various recovery solution offerings. In addition to standard LoJack Units, the new technology will create embeddable modules which can be incorporated into other third party products. The reduced size of the eighth generation solution allows for installation in more covert locations within various vehicle types. The development of a self-powered product for the domestic vehicle market is anticipated to be completed in 2014, with the roll-out to continue for our international markets throughout 2015. In 2014, we will commence scaling the platform further into the standard recovery unit products in preparation for an expected roll-out in 2015 and 2016.
In 2013, we began the process of re-architecting the next-generation base station, which is part of the Sector Activation System component of the LoJack Recovery System. As with our LoJack Unit, the next-generation base station design will leverage a platform core approach. The platform approach will help to ensure that our base stations maintain a high degree of reliability and flexibility while incorporating the latest advances in radio technology. In 2014, we expect to have completed initial prototypes and commenced field testing.
We coordinate the research and development efforts for our North America and International segments. It is our objective to establish a center of excellence to capture global market requirements and, in turn, develop superior products that will delight our customers.
Costs for product development are expensed as incurred and include salaries, fees to consultants, and other related costs associated with the development of new products. Product development expenses totaled $5,434,000, $5,410,000 and $5,318,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
GOVERNMENT REGULATION AND APPROVAL
North America Segment
The FCC-allocated frequency used by the LoJack System in the United States is set aside for nationwide use by state and local law enforcement and public safety agencies for stolen vehicle recovery, the tracking and recovery of stolen or missing cargo and hazardous materials, the tracking and rescue of people at risk and people of interest to law enforcement when established boundaries are violated, automatic notifications of vehicle fires or collisions, and carjacking alerts. Law enforcement and public safety agencies in jurisdictions where we operate have been granted authority by the FCC to use this frequency.
In connection with our domestic operations, we must obtain the cooperation of law enforcement or public safety agencies for implementation of the LoJack System before sales of LoJack Units may commence in a given jurisdiction. This process may be time consuming and costly and is subject to considerations generally affecting the process of governmental decision-making. In some jurisdictions, governmental participation may be terminable at the convenience of the executive or legislative body. Any such termination could have a material adverse effect on future sales in such jurisdictions.
If we were to seek to charge more than nominal prices for the Law Enforcement Components, governmental appropriation of funds would be required. Most government agencies have established, by policy, statute or regulation, a process requiring competitive bidding for all acquisitions of products and equipment. This process may cause us additional delay and expense. To date, we have not sought to charge law enforcement agencies for the Law Enforcement Components and do not expect to do so in the near future.
The expansion of the LoJack technology into Canada required approval by Industry Canada of equipment and authorization from Industry Canada for LoJack to transmit in Canada on the same VHF allocated by the FCC for the LoJack System in the

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United States. The necessary equipment and transmission approvals have been obtained, and LoJack is currently fully operational in Quebec and Ontario.
The legacy Boomerang tracking beacon operates on an unlicensed frequency and does not require specific government approval. In Canada, the tracking of stolen LoJack or Boomerang equipped vehicles is performed by our personnel or by private parties under contract with us. Although specific governmental licensing and approval are not required, once a LoJack or Boomerang equipped stolen vehicle is located by our tracking team, we rely on local law enforcement agencies for the actual recovery. As a result, establishing and maintaining a good relationship with law enforcement agencies is important to our business in Canada.
International Segment
Our international licensees and LoJack Italia are each subject to government regulation and approval risks similar to those in our North America segment.
All Other Segment
The FCC granted us a Rule and Order to use our existing frequency for the tracking and recovery of stolen or missing cargo and hazardous materials, the tracking and rescue of people at risk and people of interest to law enforcement when established boundaries are violated, automatic notifications of vehicle fires or collisions, and carjacking alerts. As a result of this ruling, we are able to leverage our technical infrastructure and extend our integration with law enforcement and public safety agencies beyond stolen vehicles to include the other diverse applications. This Rule and Order complements our efforts to diversify the LoJack business, including the introduction of SafetyNet and our efforts to penetrate the cargo space, through our investment in SCI.
PRODUCT WARRANTY
North America Segment
LoJack Limited Warranty. This limited warranty is provided at no cost to the original retail purchaser of a LoJack Unit or a LoJack Unit with Early Warning. This warranty provides the following two benefits:
LoJack Parts & Labor Warranty.    This warranty repairs or replaces LoJack Units (excluding the Early Warning Key Pass and batteries) that are defective in material or workmanship for up to two years after the warranty commencement date. This warranty also provides for the repair or replacement of an Early Warning Key Pass that is defective in material or workmanship for up to ninety days of the warranty commencement date. This warranty does not apply to the Early Warning Key Pass batteries.
LoJack Limited Recovery Warranty.    This warranty refunds the purchase price of a LoJack Unit up to the manufacturer's suggested retail price, if the vehicle is stolen and not recovered within twenty-four hours of the official report of the theft to the police. 
LoJack Extended Limited Warranty.    This warranty is a one year or five year extended limited warranty which may be purchased with the purchase of a LoJack Unit. The coverage term commences with the expiration of the LoJack Limited Warranty (discussed above) and provides for both the LoJack Parts & Labor Warranty and LoJack Limited Recovery Warranty described above.
LoJack Protection Plus 5000. This product may be purchased with the purchase of a LoJack Unit and provides the following benefits:
LoJack Protection Plus 5000 (all U.S. states in which we do business other than New York).    This warranty provides that if within the five year coverage period, the vehicle is stolen and not recovered within thirty days of the official theft report, or stolen and recovered but deemed a total loss, the lesser of actual cash value of the vehicle or $5,000 will be paid to the customer.
LoJack Protection Plus 5000 (New York only).    This warranty provides that, if within the five year coverage period, the vehicle is stolen and not recovered within thirty days of the official theft report or if the vehicle is recovered but deemed a total loss, then a total loss benefit of up to $2,500 will be paid, consisting of up to $1,000 primary insurance deductible plus expenses incurred as a direct result of the total loss of the vehicle that are not reimbursed by the vehicle's primary insurance carrier. This coverage also pays the difference between the purchase price of a replacement vehicle and the actual cash value of the stolen vehicle at the time of loss, up to $2,500, if the replacement vehicle is purchased from the dealer from whom the stolen vehicle was originally purchased by the customer. The replacement benefit is reduced by negative equity, service contracts or other agreements refundable to the customer.
LoJack Protection Plus 5000 (Florida only). This warranty provides that, if within the five year coverage period, the vehicle is stolen and not recovered within thirty days of the official theft report or is recovered and deemed a total loss, the customer will be paid up to $5,000 in Vehicle Protection Expenses, not to exceed the actual cash value of the vehicle. Vehicle Protection Expenses incurred by the customer as a result of the theft of the vehicle include insurance deductible expenses, temporary vehicle rental expenses, sales tax and registration fees, expenses for a comparable replacement

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vehicle and other incidental expenses allowed by law. However, Vehicle Protection Expenses may not duplicate any benefits paid or payable under the customer's primary insurance policy.
Boomerang Parts & Labor Warranty.    This warranty provides to original purchasers of Boomerang Units that the unit will be free from defects in material or workmanship for a period of two years from the date of purchase. If the product proves to be defective in material or workmanship during such period, we will, at our option, replace or repair the product or reimburse the purchase price paid.
Boomerang Limited Recovery Warranty.    This warranty provides to purchasers of Boomerang Units that if a Boomerang equipped vehicle is stolen and not recovered within sixty days of the reported theft, we will pay the consumer an amount equal to the actual purchase price of the unit, the installation fees and service fees for the current contract term, up to a maximum of CAD $1,000 for Boomerang Units and CAD $2,000 for Boomerang Units with automatic theft notification.
LoJack Limited Recovery Warranty (Canada only).    This warranty provides to purchasers of LoJack Units in Canada that if a LoJack equipped vehicle is stolen and not recovered within thirty days (fourteen days for Early Warning products) of the reported theft, the customer will have the option of receiving from LoJack Canada: (1) the reimbursement of the equipment purchase and installation costs, up to a maximum amount of CAD $1,000 for vehicles equipped with an Espion or LoJack C Tracking System or a maximum amount of CAD $1,500 for vehicles equipped with an Espion Alert or Espion Alert Plus Tracking System, subject to the presentation by the customer of purchase, installation and services invoices in support of the claim; or (2) new equipment, including installation, for vehicles equipped with an Espion, LoJack C, Espion Alert or Espion Alert Plus Tracking System, at no cost to the customer.
Limited Warranty for LoJack Fleet Management System powered by TomTom.  This limited warranty provides to customers that the hardware in the LoJack Fleet Management System will be free from defects in material or workmanship under normal use for the warranty period of one year for purchased units or the term of the rental agreement (generally 36 months) and any renewals for leased units.  If the hardware proves to be defective in material or workmanship during such period, we will, at our option, replace or repair the hardware.  This warranty does not cover any related software.
All Other Segment
SCI warrants its hardware devices to be free of defects in materials or workmanship for a period of one year after the date of purchase. Any hardware item covered by SCI’s warranty and found to be defective during the warranty period will be repaired or replaced at SCI’s discretion.
We warrant to consumers that the SafetyNet transmitter will be free from defects in material, workmanship or design for a period of one year from the date of purchase. If the product proves to be defective in material, workmanship or design within that period, we will replace the transmitter. Under the SafetyNet warranty, our maximum liability may not exceed $500.
PATENTS, TRADEMARKS AND LICENSES
North America Segment
Our strategy regarding intellectual property in our North America segment is multifaceted. We register our trademarks and apply for patents for our inventions after considering a number of factors including but not limited to the scope and extent of our portfolio of patents. We protect certain intellectual property as confidential information or trade secrets. We are actively involved in protecting our intellectual property and have undertaken administrative and legal measures against companies, which, in our opinion, have infringed on our rights.
We hold a patent portfolio that covers vehicle tracking, security and recovery technology. The portfolio includes United States Patent Nos. 5,917,423, 6,229,988, 6,522,698, 8,013,735 and 8,350,695 which expire in 2015, 2018, 2017, 2030 and 2031, respectively, each of which covers portions of the LoJack System. Each of these patents adds to the predecessor patents by adding functionality that we believe yields a competitive advantage. United States Patent No. 7,973,649 covers LoJack Early Warning and expires in 2030. Our portfolio further comprises additional patents and patent applications that protect important aspects of our products including, but not limited to, power management in our products, efficient operation of the LoJack network, and also potential future products. In addition, we hold unpatented confidential information or trade secrets that are integral to the operation of the LoJack System. We believe that protection of the unpatented intellectual property will continue beyond the expiration of the stated patents.
In Canada, we hold a patent portfolio that covers location, tracking and recovery using an existing network, vehicle location using a kinetic network, our two-way tracking beacon and anti-jamming technology. The portfolio includes Canadian Patent No. 2,203,302 which expires in 2017 (corresponding to United States Patent No. 5,895,436 which expires in 2016), a Canadian patent application No. 2,435,839 (corresponding to United States Patent No. 7,091,835 which expires in 2023) and Canadian Patent No. 2,395,843 (corresponding to United States Patent No. 6,498,565, expiring in 2021) which expires in 2021.
Although management believes the patents and trade secrets have value, there can be no assurance such patents and trade secrets will effectively deter others from manufacturing and marketing a competitive stolen vehicle recovery system.

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The LoJack name and logo are registered trademarks in the United States and many other countries. We believe that the LoJack trademark and other trademarks have sufficient recognition to give us a competitive advantage.
We have registered or filed for the registration of our trademarks Boomerang, Boomerang2, Boomerang & Design (logo), BoomerangXpress, Boomerang Espion and Boomerang Espion Alert in Canada. We believe these trademarks have sufficient recognition to give us a competitive advantage in the Canadian market.
We license to Absolute the use of our trademark for their consumer mobile device theft recovery and data protection products which are marketed under the name LoJack for Laptops®. We have a registered trademark for LoJack for Laptops® in several jurisdictions.
International Segment
In addition to the portfolio described above, we hold patents corresponding to United States Patent Nos. 5,917,423, 6,229,988B1 and 6,522,698B1 in a number of jurisdictions that generally expire in the same year. Additional patent applications corresponding to pending United States applications are pending in various countries where we or our licensees either currently do business or intend to do business. In addition, we protect internationally the unpatented trade secrets that are integral to the operation of the LoJack System. We believe that protection of the unpatented intellectual property will continue beyond the expiration of the stated patents, and we license those patents and our trade secrets to our international licensees.
The LoJack name and logo are registered trademarks in many countries internationally.
All Other Segment
SafetyNet and SCI have unpatented intellectual property which we believe is valuable to their respective businesses which we protect as trade secrets. Additionally, United States Patent No. 8,013,735B2 noted above is material to SCI’s business, and our portfolio includes patents material to the SafetyNet business, particularly United States Patent No. 8,350,695.
COMPETITION
North America Segment
We believe that we have several competitive advantages in the United States, including our proprietary VHF technology and two-way tracking beacon, our distribution networks, our distributed installation capacity, our well-known brand and our integration with law enforcement. Our VHF technology is proven to be effective for the tracking and recovery of stolen vehicles and mobile assets. We hold a patent portfolio that covers vehicle tracking, security and recovery. We have developed a network in the United States that would be very expensive for a competitor to replicate. We have an established distribution network in the automotive, motorcycle and construction channels in the United States. Additionally, in the United States, we have a distributed installation capacity which allows us to go to the customer, rather than requiring the customer to come to us. Based on a brand study performed by us in 2011, we have a well-known brand with an aided brand awareness of approximately 81% in the United States, which provides us a strong competitive advantage. The LoJack System is directly integrated with law enforcement in the United States and, as a result, we have a detailed understanding of law enforcement systems and procedures. We are unaware of any competitor who provides a system capable of being operated or actively monitored exclusively by law enforcement agencies. We believe these competitive advantages present substantial barriers to competitive entry into our existing markets.
We market the LoJack System as a stolen vehicle recovery device. Our management believes, however, that makers of auto theft prevention devices and GPS devices view the LoJack System as competitive, and, consequently, we face competition from companies that sell vehicle security and theft prevention devices. To the extent that OEMs develop and market their own products for the recovery of stolen vehicles, we would also face competition from these companies. Some of the competitors and potential entrants into the vehicle tracking market have greater resources than we do. In addition, there can be no assurance that a competitor will not develop a system of theft detection or recovery which would compete with or be superior to the LoJack System.
We believe that we face competition in both the United States and Canada from companies selling GPS products, technologies offering concierge types of services, vehicle alarms and third party warranty and insurance products; not because the products are comparable to the products we offer, but because they are competing for the same available consumer funds in the automobile security products after-market space. Several competitors or potential competitors are marketing or have announced the development of products, including those that are based on GPS technology, which claim to have stolen vehicle tracking features that may compete directly with the LoJack System. To our knowledge, none of these products are directly integrated with law enforcement systems or operated and monitored exclusively by law enforcement agencies, as is the LoJack System.
Competition for our Fleet Management solution differs significantly from our stolen vehicle recovery solution, with a large number and highly fragmented group of competitors going to market in largely similar ways. The current structure of the industry is a function of the large addressable market for fleet management solutions, the relatively low market penetration of the addressable market, and relatively low barriers to entry. Competition in this market is based upon a large number of factors including installation capability and capacity, brand and reputation, distribution channels, financial resources, and product functionality.

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International Segment
We believe that we have several competitive advantages in the International segment, including an established network through our licensees and wholly owned operations in Italy. Several competitors or potential competitors are marketing or have announced the development of products, including those that are based on VHF technology, cellular technology, GPS technology or some combination of these technologies, which claim to have stolen vehicle tracking features that may compete directly with the LoJack System in our International segment. In addition, to the extent that OEMs develop and market their own products for the recovery of stolen vehicles in international markets, we would also face competition from these companies. In some instances, competitors have a market share comparable or larger than that of our licensees.
The competitive environment in regions with relatively high rates of auto theft, such as many countries in South America and parts of Africa is generally more intense than in regions with lower rates of theft. For instance, the transportation department of the government of Brazil has adopted a regulation requiring all new vehicles be equipped with a tracking device operating on a cellular phone network and utilizing GPS technology. While the law requires vehicles to be equipped with a tracking device, there is no mandate requiring activation of the tracking device. Implementation of this regulation has been delayed on a number of occasions and is expected to be implemented during 2014. Implementation of this regulation may negatively affect demand for LoJack Units in Brazil. However, we believe that the LoJack VHF direction finding technology will continue to provide a superior stolen vehicle recovery solution due to the covert and randomized nature of installation, and the susceptibility of cellular networks and GPS receivers to jamming.
Competition in Europe has become more intense, with many competitors offering stolen vehicle tracking devices that utilize cellular and GPS technologies. In addition, certain competitors have established relationships with automobile manufacturers and distributors to promote or incorporate their product offerings.
All Other Segment
We believe SCI and SafetyNet face competition from companies selling GPS and cellular phone systems which market themselves as solutions for cargo tracking and tracking and rescuing people as a service offering. We believe that our integration with law enforcement and public safety agencies as well as our VHF technology, which allows for recovery in areas where other technologies may fail, including concrete structures or densely wooded areas, create unique competitive advantages for both SCI and SafetyNet within their relevant markets.
CONTRACT MANUFACTURING ARRANGEMENTS AND INVENTORY
We have a contract manufacturing arrangement for the LoJack Unit and other LoJack System components sold in the North America and International segments with Celestica LLC. We believe that several companies have the capability to manufacture LoJack Units.
In the North America segment, we generally seek to maintain a supply of LoJack Units which we believe is sufficient to install units within days of receiving orders from our various distribution channels, including car dealers, and typically maintain no order backlog. These high service levels in our North America segment require moderate levels of inventory to accommodate our product mix and rapid conversion from stock to install. In the International segment, because of the uneven buying patterns of our licensees, we tend to produce the LoJack Units based upon forecasts and confirmed orders provided by our international licensees relating to our international markets. In some instances, we build units to stock when we have predictable demand from our international licensees in order to level load our contract manufacturer’s production schedule.
We maintain an inventory of certain LoJack System Law Enforcement Components beyond our current requirements in order to facilitate expansion into additional markets and replace obsolete equipment.
In the past, we have experienced some seasonal fluctuation in the business, primarily with respect to the International segment. In prior years, sales in many of our international markets have tended to be higher in the fourth quarter of the year due primarily to the impact of annual volume pricing to our international licensees. First quarter sales have tended to be the lowest.
EMPLOYEES
As of February 2014, we had a total of 685 full-time employees, 604 of whom were working in the North America segment, 40 of whom were working in the International segment and 41 of whom were working in the All Other segment.
INTERNET ADDRESS AND SEC REPORTS
We maintain a website with the address www.lojack.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission, or the SEC. We also include our corporate governance guidelines, certain

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policies and the charters for each of the major committees of our board of directors on our website and intend to update these documents if amended as soon as reasonably practicable. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, and the address of that site is www.sec.gov.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our executive officers is set forth below.
Name
 
Age
 
Title
Randy L. Ortiz
 
56

 
President and Chief Executive Officer
Donald R. Peck
 
56

 
Executive Vice President and Chief Financial Officer
Emad S. Isaac
 
48

 
Senior Vice President and Chief Technology Officer
Harold E. Dewsnap
 
53

 
Senior Vice President and General Manager (U.S. Sales)
Jose M. Oxholm
 
47

 
Senior Vice President, General Counsel and Secretary
Mr. Ortiz was appointed as LoJack’s Chief Executive Officer and President effective November 1, 2011. Prior to joining LoJack, Mr. Ortiz served as Chief Executive Officer of Carmoza LLC from November 2010 to October 2011, and as director of Carmoza LLC from April 2010 to October 2011. From 2007 through March 2010, Mr. Ortiz served as General Manager, Ford and Lincoln-Mercury Sales Operations, a division of Ford Motor Company. From 2002 to 2006, Mr. Ortiz served as General Sales Manager, Ford Customer Service Division, General Manager, Ford Worldwide Export Operations and held various other management positions with Ford Motor Company from 1982 to 2002.
Mr. Peck joined LoJack in October 2011 as our Executive Vice President and Chief Financial Officer. Prior to joining LoJack, Mr. Peck served as Executive Vice President, Chief Financial Officer and Treasurer at Satcon Technology Corporation from March 2010 to May 2011. From September 2007 through January 2010, Mr. Peck served as Executive Vice President, Chief Financial Officer and Treasurer at Egenera, Inc. He also served as Executive Vice President, Chief Financial Officer, Secretary and Treasurer of The First Marblehead Corporation from 2003 through 2007.
Mr. Isaac joined LoJack in February 2013 as our Senior Vice President and Chief Technology Officer. Prior to joining LoJack, Mr. Isaac served as Senior Vice President and Chief Technology Officer at Rand McNally, where he created product roadmaps and portfolios for the telematics, navigation, and digital media businesses. He also was responsible for the overall technology direction, manufacturing operations and strategy, advising the CEO and board of directors on technology matters and product offerings. Prior to Rand McNally, Mr. Isaac was Chief Technology Officer at Morey Corporation, an electronics manufacturing services company, from 2005 to 2011. From 2000 to 2005, Mr. Isaac was Systems Architect and Distinguished Member of the Technical Staff at Motorola and has also has served in engineering roles at Navistar International, CAE Electronics and Paramax.
Mr. Dewsnap joined LoJack in January 2013 as our Senior Vice President and General Manager of U.S. Sales. Prior to joining the Company, he served as Regional Sales, Service and Parts Manager of Boston for the Ford Motor Company covering New England. From 2005 to 2010, Mr. Dewsnap was Ford’s Los Angeles Regional Sales Manager, responsible for overall sales and market representation operations in the state of California. In addition, Mr. Dewsnap has served as Ford’s Vice President and District Manager in Puerto Rico and Marketing Manager for the Middle East District for Ford’s Worldwide Direct Market Operations.
Mr. Oxholm joined LoJack in April 2012 as our Senior Vice President, General Counsel and Secretary. Most recently, Mr. Oxholm was the Associate General Counsel for The Goodyear Tire & Rubber Company from October 2005 to April 2012, where he primarily focused on legal affairs for Latin America. Before joining Goodyear, Mr. Oxholm held various legal counsel positions at Ford Motor Company between September 2000 and September 2005, serving clients in the United States, Europe, Middle East, Africa and Latin America. Before entering the corporate environment, Mr. Oxholm served at the law firms of Akin, Gump, Strauss, Hauer & Feld, LLP in New York and Thompson Hine LLP in Cleveland.
There are no arrangements or understandings pursuant to which any executive officer was or is to be selected for appointment, election or reelection. There are no family relationships among any directors or executive officers.

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ITEM 1A — RISK FACTORS
RISKS RELATING TO OUR BUSINESS
Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer and the trading price of our equity securities could decline. Our shareholders should consider the following risks and the information contained under the heading “Warning Regarding Forward-Looking Statements” in Item 7 before deciding to invest in our securities.
Our business and results of operations are substantially dependent on new vehicle sales levels in the United States and the sales of LoJack products in our particular geographic markets.
Our business depends on the automotive industry for new vehicle sales in the United States and sales of LoJack products in our particular geographic markets. For instance, a great majority of our domestic gross unit sales for the year ended December 31, 2013 were made through a distribution network consisting of automobile dealers that offer LoJack Units as an option on both their new and used automobiles. Sales levels in the automotive industry may be impacted by, among other things:
Changing economic conditions, such as the unfavorable economic conditions which have affected the United States recently, including low economic growth, high unemployment, and the decline in wealth resulting from depressed housing and equity markets;
Concerns over sovereign debt levels in the United States and/or Europe, and the possible negative implications to banks and the global economy arising out of the European debt crisis, which could have an adverse effect on the U.S. economy, credit availability, consumer confidence and the demand for new and used vehicles;
Changes in interest rates or in the availability of financing for vehicles and accessories, which can significantly impact new vehicle sales due to the direct relationship between interest rates and monthly loan payments and the impact on customers' borrowing capacity and disposable income; and
Consumer spending in the automotive industry, as such spending is often discretionary and may decline during economic downturns when consumers have less disposable income.
We believe that these factors, among others such as fuel prices, manufacturer incentives (and consumers' reactions to such offers), inventory availability, product quality and affordability and innovation, could affect vehicle sales levels and sales of LoJack products. Our product sales may differ from overall automotive industry sales due to particular economic conditions and other factors in the geographic markets in which we operate. A decline in the automotive industry or in new or used vehicle sales in our markets could have a material adverse effect on our business and results of operations.
Any negative impact on the sales, licensing and marketing efforts of our principal products could adversely affect our business and results of operations.
Our business depends primarily on the sale, licensing and market acceptance of our principal product, the LoJack System and related products and services, in the United States, Canada and 30 foreign countries. Because our revenue is dependent on the success of our principal products, any factor affecting their marketability could have a material adverse affect on our business and results of operations. Factors that could harm the successful sale and licensing of the products include, among others:
If automobile dealers with whom we have relationships stop selling or emphasizing our products in connection with their vehicle sales;
If we become over-weighted in low growth vehicle brands or models and/or under-weighted in high growth vehicle brands or models;
If law enforcement agencies who currently utilize our LoJack System in the United States do not renew our service contracts or if such law enforcement agencies grant service contracts to our competitors;
If we are unable to maintain the FCC frequency used for operation of the LoJack System;
If we are unable to fully develop and sustain a market for our products and services in Italy;
If we are unable to gain acceptance in the consumer market for our LoJack products and services in Canada;
If our foreign licensees are unable to establish or maintain a market for our products in their jurisdictions;
If we are unable to develop enhancements to our products as required by market demand;
If we are unable to protect our proprietary rights;
If one or more of our competitors introduces a product or system that renders our products obsolete or less competitive;

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If third parties are able to locate or impair the function of LoJack Units or Boomerang Units in vehicles or impair the functioning of the LoJack or Boomerang Systems, potentially adversely affecting our recovery rates; or
If vehicle manufacturers adopt practices, implement new technologies or create systems which adversely affect the efficacy of or the need for the LoJack System.
Our inability to maintain and grow sales from our pre-install program could adversely affect our business and results of operations.
We achieved a significant portion of our domestic sales in 2013 through our pre-install program with certain automobile dealerships. Pre-install sales accounted for 47% of our unit sales in the domestic dealer channel for the year ended December 31, 2013. This program provides for LoJack Units to be installed on automobiles in a dealer’s inventory in advance of the sale or lease of such automobiles to customers. The dealer makes a profit upon the sale of the LoJack unit through to the customer at the time of sale or lease of the pre-loaded vehicle. Decreased vehicle margins resulting from price transparency and increased brand competition have put pressure on dealerships to increase profit contributions in other areas of the dealership, including after-market products such as the LoJack System. These factors have contributed to increased dealer receptivity to our pre-install program and increased volumes within selling dealers during 2013. Negative changes in the automotive industry or the market for after-market products could result in an unwillingness of dealers to participate in our pre-install program because of the increased financial exposure that they may face from LoJack Units not being sold through to customers. In addition, dealers may decide not to participate in our pre-install program if we are unable to successfully execute and support all phases of the program, including installation of the LoJack Units and training of dealer employees. A decrease in sales through our pre-install program could have a material adverse effect on our business and results of operations.
Unfavorable results of pending legal proceedings could materially adversely affect us.
We are subject to various legal proceedings and claims that have arisen which are not yet resolved and additional claims may arise in the future. Some of these matters are described in greater detail in “Item 3 — Legal Proceedings” below. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention. Should we fail to prevail in certain matters, we may be faced with significant monetary damages or injunctive relief that could materially adversely affect our business and financial condition and operating results.
We face significant competition from OEMs and makers of location based services and automobile products to be sold by automobile dealers, which could make our products less effective or obsolete, and harm our business.
We compete with other makers of stolen vehicle recovery devices, but more significantly, we also face competition from all products which are sold by automobile dealers in the after-market space, including vehicle security devices, GPS products and navigation systems, as such products compete with us for consumer funds in the automobile products after-market. We also face competition from OEMs, including divisions of well-known automobile manufacturers, who have diversified their product offerings and place increased sales pressure on dealers to purchase OEM-supplied or approved equipment and products. Our ability to adequately respond to changes in the automotive market and to compete effectively is key to our success, and there can be no assurance that we will be able to respond successfully to market changes in the future.
Our growth depends in part on the development, production and market acceptance of new products and sales channels which we cannot assure will happen successfully.
To maintain competitiveness in our industry, we must support and enhance our existing products and develop new products in response to market demands. Product development involves a high degree of risk and uncertainty due to unforeseen difficulties and costs. We may not be successful in developing, marketing and releasing new products that we believe are necessary to respond to technological developments, evolving industry standards, increasing sophistication and complexities in vehicles or changing customer preferences. In addition, our new product enhancements may not adequately meet the requirements of the marketplace and may not achieve the broad market acceptance necessary to generate significant revenue. If the release date of any future products or enhancements is delayed, or if these products or enhancements fail to achieve market acceptance when released, we may not be able to recover our research and development costs and our competitive position in the marketplace may be harmed.
If we are unable to maintain our brand and product quality, it may damage our reputation which could have an adverse effect on our business, financial condition and results of operations.
We have established a strong reputation for the quality and effectiveness of our products in the tracking and recovery of stolen mobile assets. Our continued success depends on our ability to market our products and develop sales techniques tailored to the needs of our customers, maintain our brand image for our existing products and effectively establish brand image for new products and brand extensions. Brand value is largely based on consumer perceptions. Even isolated business incidents that erode consumer trust can significantly reduce brand value. Product quality issues could tarnish the image of the LoJack brand and may reduce demand for our products and cause consumers to choose other products. Poor product quality, poor installation practices,

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or low recovery rates could affect our profitability and could negatively affect brand image and our reputation. Damage to our reputation or loss of consumer confidence in our products for any of these reasons could have a material adverse effect on our business, financial condition and results of operations, as well as require additional resources to rebuild our reputation.
We are dependent upon the success and continued relationships with the large regional or national dealer groups in the United States which currently sell our products.
Our revenue in the United States is derived primarily from the sale of LoJack Units, LoJack Early Warning Units and related products and extended product and recovery warranties to automobile dealers and retailers who resell the units to consumers. In 2013, approximately 85% of our revenue in the United States originated through this distribution network of automobile dealers which is geographically diverse, but which includes several large national dealer groups. Our business could be materially adversely impacted by the loss of business with any of the large regional or national dealer groups with whom we conduct business. To the extent that these dealer groups are affiliated with certain automobile brands, our business could also be adversely impacted by a decline in consumer demand for these brands.
We are subject to financial and reputational risks due to product recalls resulting from product quality and liability issues.
We rely on third-party manufacturers of our LoJack Units and critical components of LoJack Units. Product quality and liability issues present significant risks. Our efforts and the efforts of our third party suppliers to maintain product quality may not be successful. From time to time, we receive reports from our customers, licensees or partners regarding potential quality issues with respect to our products or components of our products. As of the date of this Annual Report on Form 10-K, we are continuing our investigation of reports from some of our international licensees that some of the batteries in self-powered LoJack Units they have purchased from us appear to be losing their power prematurely. As a result of this battery investigation or other potential quality issues, we may incur expenses in connection with, for example, replacing inventory, initiating product recalls and/or defending lawsuits, and our brand image and reputation may suffer. Any material expenses, product recall or lawsuit seeking significant monetary damages could have a material adverse effect on our business, results of operations and financial condition. A product recall could generate substantial negative publicity about our products and business, and could interfere with our manufacturing plans and product delivery obligations as we seek to replace or repair affected products. Although we may have product liability insurance with respect to certain of our products, a number of criteria need to be met in order for our coverage to apply. If we do not have insurance sufficient to cover the costs associated with a product recall, the expenses we would incur in connection with a product recall could have a material adverse effect on our operating results.
We depend on a limited number of third parties to manufacture and supply quality infrastructure components for our principal products. If our suppliers cannot provide the components or services we require and in such quality as we expect, our ability to market and sell our products could be harmed.
We rely on third-party manufacturers of our LoJack Units, a critical component of our LoJack System. If our suppliers fail to supply these components in a timely manner that meets our quantity, quality, cost requirements, or technical specifications, we may not be able to access alternative sources of these components within a reasonable period of time or at commercially reasonable rates. Our manufacturers are located outside the United States and their facilities are geographically concentrated in a specific region. We outsource much of the transportation and logistics management and while these arrangements may lower operating costs, they reduce our direct control over production and distribution. Such diminished control may reduce our flexibility and ability to quickly respond to changing conditions. A reduction or interruption in the supply of LoJack Units, or a significant increase in the price of these units, could have a material adverse effect on our marketing and sales initiatives, which could adversely affect our financial results domestically and internationally. Our agreements with our manufacturers include warranties and quality control measures, but any unanticipated product defect or warranty liability, whether pursuant to arrangements with contract manufacturers or otherwise, could have a material adverse effect on our reputation, financial condition and operating results.
During 2013, a sample of batteries produced by one of our component suppliers failed to meet our lot acceptance testing standards. The production of our batteries was modified such that we are no longer experiencing failures in our acceptance testing standards; however, no assurances can be given that we will not experience such failures in the future. Moreover, we may introduce new component suppliers from time to time, including battery manufacturers. Any disruption in the production of batteries or other components for LoJack Units, failure of any batteries or other components to meet our specifications or other issues in the introduction of a new supplier could cause us to incur material cost increases or create supply disruptions to our customers, which could have a material adverse effect on sales of LoJack Units and our results of operations.

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We may need additional financing in the future, which could be difficult to obtain on acceptable terms or at all. Any such financing could also dilute shareholder value.
We may require additional financing to make future investments in new technologies, products, or international markets, to acquire complementary businesses, or to provide additional working capital. While we believe the lenders participating in our revolving credit facility will be willing and able to provide financing in accordance with their contractual obligations, the economic environment may adversely impact the availability and cost of credit in the future. Furthermore, if our current business does not generate sufficient cash flow from operations, we may fail to comply with our loan covenants and such failure could result in an event of default that, if not cured or waived, could adversely impact our financial condition. In the future, we may decide to raise additional funds through public or private debt or equity financings to fund our activities. If we issue additional equity securities, shareholder value will be diluted and the new equity securities may have rights, preferences or privileges senior to those of our common stock. In addition, if we raise funds through debt financings, we will have to pay interest and may be subject to restrictive and other covenants, which could negatively impact our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to make strategic investments, develop or enhance our products, take advantage of acquisition and other opportunities, or otherwise respond to competitive challenges or unanticipated industry changes, any of which could have a material adverse effect on our business.
If we are unable to hire or retain key employees, it could have a negative impact on our business.
Our success as a company depends substantially on the contributions and abilities of our executive officers. We must continue to recruit, retain and motivate management and other employees sufficient to maintain our current business and support our strategic initiatives. Our operating results could be adversely affected by increased costs due to greater competition for employees, higher employee turnover or increased employee benefit costs. Any unplanned turnover could diminish our institutional knowledge base and erode our competitive advantage.
Failure to procure and maintain contracts with local law enforcement agencies would materially adversely affect the marketability of the LoJack System and would inhibit sales in the United States and Italy.
In the United States and Italy, the LoJack System is designed to be integrated into existing law enforcement computer systems and telecommunication systems and procedures. A LoJack Unit will not be effective if the vehicle in which it is installed is located outside a covered jurisdiction where we have procured an agreement with local law enforcement agencies. We have agreements covering 28 states and the District of Columbia in the United States and certain geographical areas of Italy. These agreements are generally for terms of up to five years. Renewal or extension of any of these agreements, either formally or informally, may be subject to competitive bidding. We cannot guarantee that we will be able to renew or extend our existing agreements with local law enforcement agencies or obtain agreements in new target jurisdictions in the future. Our competitors may seek agreements with local law enforcement agencies and if they obtain such agreements, we may be adversely affected. Furthermore, if we are unable to procure and maintain contracts with local law enforcement agencies in our existing and target markets, our financial results will be materially and adversely affected.
Regulations applicable to the sale of extended warranty products could materially impact our business and results of operations.
We offer warranty products that may be purchased as a supplement to the original purchaser’s warranty.  These products are sold primarily through the Financing and Insurance, or F&I, departments of automobile dealers and are subject to complex federal and state laws and regulations.  There can be no assurance that regulatory authorities in the jurisdictions in which these products are offered will not seek to regulate or restrict these products.  Failure to comply with applicable laws and regulations could result in fines or other penalties including orders by state regulators to discontinue sales of the warranty products in one or more jurisdictions.  Such a result could materially and adversely affect our business, results of operations and financial condition. 
We currently transfer the majority of the administration and liability obligations associated with these warranty products to a third party upon purchase by the consumer.  State laws and regulations, however, may limit or condition our ability to transfer these administration and liability obligations to third parties, which could in turn impact the way revenue is recognized from these products. Failure to comply with these laws could result in fines or other penalties, including orders by state regulators to discontinue sales of these product offerings as currently structured. Such a result could materially and adversely affect our business, results of operations and financial condition. 
Regulations that restrict the importation of our products in certain countries could materially impact our business and results of operations.
We face uncertainty regarding developing governmental regulations in Argentina that may affect sales to our licensee in that country. In February 2012, Argentine authorities began requiring all importers to request and receive approval from the Argentine Tax and Customs Authority prior to each import transaction. As a result, from February through December 2012, we did not ship any units to Argentina. Our Argentine licensee has informed us that it and its affiliates have developed several commodity export

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programs with the expectation that our licensee will be permitted to import a dollar amount of goods approximately equivalent to the dollar amount of exports our licensee and its affiliates generate. We have been informed that our Argentine licensee has completed initial exports of commodities. Subsequently, we were able to make several shipments of product to our licensee in Argentina in the second, third and fourth quarters of 2013. However, the amount of these shipments remains less than the dollar amount that our licensee has told us it has generated to date in exports. In 2014, LoJack’s ability to fulfill our licensee’s orders based on this demand will remain contingent upon the ability of our licensee to comply with Government trade policies regulating the importation of manufactured goods. If our Argentine licensee and its affiliates are unable to generate significant exports or if the government changes its policies, we may not be able to ship products to Argentina at all or in volumes consistent with prior years. Any regulations in Argentina or other countries in which our licensees are located that prevent or limit our ability to sell products to our licensees in those countries could have a material adverse effect on our business, results of operations or financial condition.
Economic, political and other risks associated with the operations in our International Segment could adversely affect our revenue and earnings.
Our revenue and profit growth is partially dependent on the continuation of our license agreements with our international licensees and the success of their operations. Changes to our licensees’ existing management teams, or failure of our licensees to meet their working capital needs or execute fully on their existing business plans, could negatively impact: (1) the value of our equity investments; (2) the collectability of our receivables; and (3) our target revenue and profits from our International segment; and could also delay or preclude altogether our ability to generate revenue in key international markets. Moreover, our licensees’ operations and our own international operations expose us to risks inherent in doing business outside of the United States including:
Potentially weak protection of intellectual property rights;
Economic and geo-political instability and fluctuations;
Import or export licensing requirements;
Trade or currency restrictions;
Business models that are more heavily weighted towards periodic payments rather than receiving full payment upon sale of the product;
Changes in regulatory requirements, tariffs or government mandates;
Seasonal reductions in business activities in some parts of the world, such as during the summer months in Europe;
In-country pricing which may be adversely impacted by fluctuations in exchange rates;
Potentially adverse tax consequences;
Limited access to capital to invest in infrastructure, hire and train employees; and
Uncertainties related to product acceptance.
In addition, we have entered into long-term and evergreen agreements with several of our international licensees. The extended term of these agreements could affect our ability to negotiate changes or amendments to our relationships with these licensees should market conditions so warrant or business concerns arise. Furthermore, some of our international licensees represent our interests in several international jurisdictions. Difficulties or disputes with our licensees concerning a particular international jurisdiction could impact our ability to do business successfully in other jurisdictions in which those licensees represent our interests.
Any of these factors could harm the operations of our licensees and, consequently, adversely affect our business and operating results.
If we fail to protect and enforce our intellectual property rights, our competitiveness could be impeded and our business and operating results could be harmed.
We seek to protect our intellectual property rights through patents, trademarks, copyrights, trade secret laws, confidentiality agreements and licensing arrangements, but we may not be able to adequately protect our technology from misappropriation or infringement. We cannot ensure that our existing intellectual property rights will not be invalidated, circumvented, challenged or rendered unenforceable. In addition, the laws of some countries in which we offer or plan to offer our products through our international licensees may not protect our intellectual property rights to the same extent as the laws of the United States and/or Canada, increasing the possibility of piracy of our technology which could adversely affect our business and operating results.
We may litigate to enforce our intellectual property rights and to protect our trade secrets. Such litigation can be time consuming and expensive, with outcomes often difficult to predict. Our failure to successfully protect or enforce our intellectual property rights could have an adverse effect on our business and results of operations.

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If a court determines that our technology infringes on third parties’ intellectual property, we will likely face significant costs and we may lose our rights to the technology, which would harm our business.
We may inadvertently violate the intellectual property rights of other parties and those third parties may choose to assert infringement claims against us. If we are unsuccessful in any litigation based on a claim of infringement, in addition to exposure to substantial monetary damages, we could be required to expend considerable resources to modify our products, to develop non-infringing technology or to obtain licenses to permit our continued use of the technology that is the subject matter of the litigation. If we are unsuccessful in these endeavors, we may be enjoined from using the technology subject to the infringement claim which could cause us to incur substantial liabilities and could adversely affect our operating results, perhaps significantly.
Our failure to successfully integrate businesses that we may acquire could disrupt our business and negatively impact our future financial condition and operating results.
We may make strategic acquisitions of complementary companies, products or technologies, and such acquisitions could disrupt our business, divert our management’s attention from our core business objectives or involve unforeseen difficulties and costs. We may not be able to successfully integrate the business, technology or personnel that we have acquired or those we might acquire in the future in a timely manner, or at all, and this could harm our financial condition and operating results. Any of these risks could negatively impact our ability to fully realize the expected benefits of our acquisitions. Moreover, we may be unable to find attractive acquisition opportunities or may lose these opportunities to competitors, some of whom may have greater resources than we do.
If we do not successfully manage our strategic alliance with TomTom and other strategic relationships, we may not realize the expected benefits from such relationships and we may experience delays in product development.
In January 2013, we entered into a strategic alliance with TomTom, through which we intend to offer fleet telematics solutions to small and medium-sized businesses, commercial fleets, automotive dealerships and law enforcement agencies. There can be no assurance that we will realize the expected benefits from this strategic alliance or other strategic relationships that we may enter into in the future. Management of such relationships may adversely affect or disrupt our core business, decrease our profitability, cause us to incur significant expenses, or divert management resources that otherwise would be available for other initiatives. In addition, parties to such arrangements may fail to fully perform their obligations or meet our expectations or cooperate with us satisfactorily for various reasons, and there may be conflicts or other collaboration failures and inefficiencies between us and the other parties. If we encounter difficulties in integrating the other party’s technology with our technology or these relationships otherwise fail to materialize as expected, we could suffer delays in product development or other operational difficulties.
Moreover, we cannot assure you that we will be able to maintain our relationship with TomTom or to develop additional strategic relationships with other parties. In particular, our agreement with TomTom has an initial term of 36 months, and either party may terminate the agreement for breach or if the other party ceases to carry on its business or similar events. TomTom also may terminate the agreement if a competitor of TomTom acquires greater than fifty percent of our capital stock or we fail to meet certain minimum sales levels. If this agreement were to be terminated, we would lose our right to offer fleet management solutions utilizing TomTom’s technology, which could have a material adverse effect on our future business and results of operations.
Expansion into the fleet telematics business could subject us to increased costs and risks and may not achieve the intended results.
We have invested, and in the future intend to invest, in the fleet telematics business through our alliance with TomTom. There can be no assurance that these investments will be successful or profitable and will not negatively impact our business, results of operations and financial condition. Expanding our business activities into fleet telematics could subject us to various risks that differ from the ones we have faced in the past, including:
Distraction of management and other personnel from our stolen vehicle recovery business;
Inexperience in the telematics market and with a software-as-a-service, or SaaS, business model;
Competitive challenges in the telematics market, which is highly fragmented and rapidly changing and has low barriers to entry;
Failure of small and medium-sized businesses, commercial fleets, automotive dealerships and/or law enforcement agencies to adopt fleet management solutions;
Difficulties in selling fleet management solutions to small and medium-sized businesses, which generally have limited budgets and are price sensitive and difficult to reach with targeted sales campaigns;
Challenges in retaining customers, including as a result of high failure rates among small and medium-sized businesses and ease in switching among solutions;

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Inability to meet minimum service level commitments to customers;
Failure to attract and retain highly qualified sales personnel for these products and services;
Disruption, failure or increase in the costs associated with the use of GPS networks;
Failure of the solutions we offer to keep pace with technological developments and other changes in the telematics industry; and
Evolving regulation and changes in applicable laws relating to data privacy that may apply to the collection, management or storage of data related to fleet management.
Our failure to successfully execute on our ongoing investments could disrupt our business and negatively impact our future financial condition and operating results.
In 2012, we began the process of redesigning our enterprise resource planning systems. Since 2012, we have invested $3,549,000 in this initiative and expect that it will continue to require significant financial resources and senior management focus, which may impact our core business. There can be no assurance that this investment will enable us to simplify our business processes and automate many of our existing processes significantly enough to provide an acceptable return on the investment.
A failure of our information systems or any security breach or unauthorized disclosure of confidential information could have a material adverse effect on our business.
Our business is dependent upon the efficient operation of our information systems. In particular, we rely on our information systems to effectively manage our pricing strategy and tools, sales, inventory, and installation efforts, the preparation of our consolidated financial and operating data, and customer information. The failure of our information systems to perform as designed or the failure to maintain and enhance or protect the integrity of these systems could disrupt our business operations, impact sales and results of operations, expose us to customer or third-party claims, or result in adverse publicity. We are in the process of upgrading our enterprise resource planning system, and any problems associated with the implementation of our new platform or the failure to complete such implementation on a timely basis could adversely affect our business and results of operations.
Additionally, we collect, process, and retain sensitive and confidential customer information in the normal course of our business. Despite the security measures we have in place and any additional measures we may implement in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, whether by us directly or our third-party service providers, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business, or otherwise affect our results of operations.
RISKS RELATING TO OUR COMMON STOCK
There are risks inherent in owning our common stock.
The market price and volume of our common stock have been, and may continue to be, subject to significant fluctuations. These may arise from general stock market conditions, the impact of the risk factors described above on our financial condition and results of operations, a change in sentiment in the market regarding us or our business prospects, the general lack of liquidity in the trading market for our common stock, or from other factors.
Sizeable future sales of our common stock may depress the share price for our common stock or prevent or delay our ability to sell equity investments in our Company at competitive rates.
If we or our shareholders sell sizeable amounts of shares of our common stock, including shares issued upon the exercise of options, or if the perception exists that we or our shareholders may sell a substantial number of shares of our common stock, the market price of our common stock may fall. In addition, any substantial sales of these securities in the public market might make it more difficult for us to sell equity or equity related securities in the future at a time and in a place we deem appropriate or necessary for our business objectives.
The foregoing risk factors may be considered forward-looking statements. We undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

ITEM 1B — UNRESOLVED STAFF COMMENTS
None.

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ITEM 2 — PROPERTIES
Our corporate headquarters is located in Canton, Massachusetts, the lease for which expires in February 2022. In addition, we lease facilities for our sales and operations personnel in California and Georgia under operating leases that expire in 2016 and 2018, respectively. SCI operates out of a single facility in Texas, the lease for which expires in 2017.
The Canadian executive office, marketing, sales, customer care and installation activities are carried out in a single facility located in leased premises in Montreal, Quebec. The Montreal lease expires in 2017.
We also maintain facilities in Dublin, Ireland and Rome and Milan, Italy for our administrative, sales and operations personnel under leases that expire in 2019, 2014 and 2017, respectively.
We do not own any real estate.
Because our operations do not require any special facilities, we do not anticipate any difficulty in finding space adequate for our purposes at reasonable rates, should the need arise. We believe that our current facilities are adequate for our current operations.

ITEM 3 — LEGAL PROCEEDINGS
As of December 31, 2013, we were subject to various legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. The results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters, our financial condition and results of operations could be materially adversely affected.
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, or the New York Court, alleging breach of contract, misrepresentation, and violation of the New York franchise law, violation of Mass. Gen. Laws c. 93A and the Robinson-Patman Act, among other claims. The plaintiff sought damages of $10,000,000, punitive damages, interest and attorney's fees, and treble damages. The Company filed a motion to dismiss all counts. Thereafter, G.L.M. moved to amend its complaint and to add a claim for breach of fiduciary duty. The Company then filed an opposition to G.L.M.'s motion to amend and sought dismissal of all counts.
On September 30, 2011, the New York Court ruled on the motions referenced above and denied, as futile, the plaintiff's request to amend the complaint with respect to the misrepresentation, New York franchise law, violation of Mass. Gen. Laws c. 93A and breach of fiduciary duty claims. The New York Court granted the plaintiff permission to re-plead the tortious interference with business relations and Robinson-Patman Act claims. The breach of contract and breach of covenant of good faith and fair dealing claims also remained viable.
On October 14, 2011, the plaintiff filed a motion for reconsideration of the dismissal of the violation of Mass. Gen. Laws c. 93A and the violation of the New York franchise law claims. The Company opposed this motion.
On November 21, 2011, the plaintiff filed its First Amended Complaint, alleging breach of contract, breach of the covenant of good faith and fair dealing, tortious interference with business relations, violation of the New York Franchise Act, violation of Mass. Gen. Laws c. 93A and the Robinson-Patman Act, among other claims. On December 5, 2011, the Company moved to strike the First Amended Complaint in its entirety, including those portions of the First Amended Complaint previously dismissed or subject to the pending motion for reconsideration, and in the alternative for dismissal of some or all claims.
On September 28, 2012, the New York Court entered a Memorandum & Order deciding all of the pending motions. The Court dismissed the plaintiff's claims for tortious interference and violation of the Robinson-Patman Act. The Court denied plaintiff's motion for reconsideration of the previously dismissed claim for violation of the New York Franchise Act. The Court also struck plaintiff's request for punitive damages and attorney's fees in connection with its breach of contract and duty of good faith and fair dealing claims. The Court reconsidered its prior decision and allowed plaintiff's Mass. Gen. Laws c. 93A claim to proceed on a limited basis.
The case will proceed on plaintiff's theories of breach of contract, breach of the duty of good faith and fair dealing and a limited claim of violation of Mass. Gen. Laws c. 93A. The Company has also asserted counterclaims against the plaintiff for breach of contract as well as additional claims.
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. However, the Company believes that it has substantial legal and factual defenses to these three remaining claims and intends to defend its interests vigorously.

23


Brazilian Licensee Litigation
On September 27, 2011, LoJack Ireland received a demand for arbitration filed in the International Centre for Dispute Resolution of the American Arbitration Association, or ICDR, by Tracker do Brasil LTDA, which licenses the LoJack technology in Brazil. The demand for arbitration was made by the licensee following the stipulation by the parties to the entry of an order in Norfolk Superior Court in Massachusetts that the licensee's dispute be re-filed for arbitration with the ICDR, or the Arbitration Order. The filing alleges interference with contractual relations, fraud/intentional misrepresentation, negligent misrepresentation, breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of Mass. Gen. Laws c. 93A relating to product pricing and the fulfillment of purchase orders to the licensee. The claimant seeks, among other things, $55,000,000 in actual damages, treble damages, and attorneys' fees, and also declaratory and injunctive relief.
On November 22, 2011, LoJack Ireland brought a counterclaim against Tracker do Brasil LTDA in the ICDR. The counterclaim asserts Tracker do Brasil LTDA's breach of contract, breach of the implied covenant of good faith and fair dealing, business defamation, negligent misrepresentation, and violation of Mass. Gen. Laws c. 93A, and seeks recovery of monetary damages from past and continuing economic injury as well as damages and reasonable attorneys' fees and costs under Mass. Gen. Laws c. 93A.
On April 19, 2013, LoJack Ireland submitted an Amended Counterclaim pursuant to an ICDR ruling, which permitted LoJack Ireland to amend its counterclaims, asserting that Tracker do Brasil LTDA is selling or leasing competitive non-LoJack products. The Amended Counterclaim reasserts LoJack Ireland's prior counterclaims and alleges Tracker do Brasil LTDA's additional violations of the Lanham Act, Mass. Gen. Laws c. 266, § 91, and the Massachusetts common law, as well as additional grounds for Tracker do Brasil LTDA's breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of Mass. Gen. Laws c. 93A. In addition to monetary damages from past and continuing economic injury and reasonable attorneys' fees and costs, LoJack Ireland seeks injunctive relief, disgorgement of all profits and/or pecuniary gain derived directly or indirectly from Tracker do Brasil LTDA's trademark infringement, unfair competition, and trademark dilution, and a declaratory judgment that the License Agreement with Tracker do Brasil LTDA is terminated as a result of Tracker do Brasil LTDA's material breaches thereof.
On December 24, 2013, the panel issued a preliminary injunction against Tracker do Brasil LTDA, enjoining Tracker do Brasil LTDA and its officers, employees and agents from using, publishing, disseminating or circulating LoJack trademarks, trade names, copyrights or other intellectual property or confidential information to advertise, market, sell or lease non-LoJack products, or in any other way representing that a non-LoJack product is a LoJack product. In addition, to the extent Tracker do Brasil LTDA uses the “LoJack” name or intellectual property in any advertising or marketing communications for stolen vehicle recovery products, such name or intellectual property may only be associated with, and related to, those products that are manufactured or licensed by LoJack. Further, to the extent Tracker do Brasil LTDA advertises, markets or offers to sell, lease or otherwise disseminate other stolen vehicle recovery products, Tracker do Brasil LTDA must clearly state and identify the manufacturer, licensor or distributor of such non-LoJack products with at least the same prominence that is used to name and identify LoJack products and in such a manner that the non-LoJack products cannot be confused as being LoJack products.
The hearings on the liability phase and the Amended Counterclaim of the arbitration were completed in March 2013 and in November 2013, respectively, and the parties have submitted post-hearing briefs and reply briefs to the arbitrators.  We are currently awaiting the panel's ruling on the original claims and counterclaims. Given the current stage of this matter, we cannot predict the outcome of the case nor estimate the possible loss or range of loss, if any, we could incur if there was an unfavorable outcome with respect to this litigation. However, the Company believes that it has substantial legal and factual defenses to these claims and intends to defend its interests and pursue its counterclaims vigorously.
ICMS Tax Assessment
On November 11, 2011, our subsidiary, LoJack do Brasil LTDA, or LoJack do Brasil, received notification of an inspection by the tax authorities of the state of São Paulo, Brazil regarding the payment of ICMS (State Value Added Tax, or VAT) tax. The notification concerns imports which were carried out by trading companies on behalf of LoJack do Brasil and which occurred during the time period from January 1, 2007 through December 31, 2009. In May 2012, the state tax authority issued an assessment against LoJack do Brasil in the amount of BRL R$17,371,487 (USD $7,415,473), including penalties and interest that are generally imposed on similar types of tax assessments in Brazil. The assessment arises from a long running dispute between the Brazilian states of Espírito Santo and São Paulo regarding to which state companies like LoJack do Brasil should pay ICMS tax on imports. LoJack do Brasil filed an administrative defense with the São Paulo state tax authority arguing, among other things, that it should not be required to pay ICMS tax to the state of São Paulo, contending that the trading companies were the effective importers of record, that the imported products were physically received in the state of Espírito Santo before they were sent to the state of São Paulo, and that all required ICMS taxes were paid to the state of Espírito Santo.
On March 28, 2013, the São Paulo tax authority rendered its decision in relation to the assessment, finding in favor of the state of São Paulo and confirming that the tax is owed to the state of São Paulo. On April 23, 2013, the Company filed an administrative appeal of that decision. On June 4, 2013, the Company also filed a petition with the Executive Board of São Paulo's

24


Tax Administration (DEAT) requesting the recognition of ICMS payments that were made to the state of Espírito Santo and, consequently, the cancellation of the tax liability with the state of São Paulo.
The Company believes that it has substantial legal and factual defenses and plans to defend its interests vigorously. While we believe a loss is not probable, as of the date hereof, we estimate that the range of possible loss related to this assessment is from $0 to $700,000.

ITEM 4 — MINE SAFETY DISCLOSURES
Not applicable.

25


PART II
ITEM 5 —
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol: LOJN.
Stockholders
On March 1, 2014, there were approximately 1,700 record holders of our common stock. We believe the actual number of beneficial owners of our common stock is approximately 4,600 because a large number of the shares of our common stock are held in custodial or nominee accounts for the benefit of persons other than the record holders.
Dividends
We have never paid a dividend, and have no current intention to pay a dividend. At the present time we expect that future earnings will be retained for use in our business. The payment of dividends is permitted per the terms of our credit agreement and is limited only to the extent such payments affect our ability to meet certain financial performance measures.
Issuer Purchases of Equity Securities
On February 28, 2006, our Board of Directors authorized our stock repurchase plan, or the Repurchase Plan. The Repurchase Plan authorized us to purchase up to 2,000,000 shares of our outstanding common stock on or before February 25, 2008. From the date of the adoption of the Repurchase Plan through December 18, 2006, we repurchased 1,244,566 shares. On December 19, 2006, our Board of Directors increased the remaining authorization to 2,000,000 shares. On February 15, 2008, our Board of Directors authorized 1,000,000 shares to be repurchased under the Repurchase Plan, pursuant to a plan intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and renewed the 2006 management discretionary authority to repurchase 2,000,000 shares, for a total repurchase authorization of 3,000,000 shares. In November 2011, we resumed our repurchase activity under the Repurchase Plan. For the year ended December 31, 2013, we repurchased 35,358 shares under the Repurchase Plan at an average price of $3.15 per share. As of December 31, 2013, there were 1,205,129 shares available for repurchase under the Repurchase Plan.
Repurchase activity for the quarter ended December 31, 2013 was as follows:
 
Period
 
Total Number of
Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased as  Part of Publicly
Announced Plans or
Programs (1)
 
Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs
October 1 to October 31, 2013
 

 

 

 
1,205,129

November 1 to November 30, 2013
 
265

 
$
4.56

 

 
1,205,129

December 1 to December 31, 2013
 
646

 
4.04

 

 
1,205,129

Total
 
911

 
$
4.19

 

 
1,205,129

(1)
All share repurchases in the fourth quarter of 2013 were shares acquired from our employees or directors in accordance with our 2008 Stock Incentive Plan as a result of share withholdings to pay income tax related to the lapse of restrictions on restricted stock and, thus, did not impact the shares available for repurchase under the Repurchase Plan.

Unregistered Sales of Equity Securities
None.

26


Common Stock Sales Price Information
The following table sets forth the range of the high and low sales price information for our common stock for the periods indicated, as reported by the NASDAQ Global Select Market. This information reflects inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily reflect actual transactions.
 
 
 
High
 
Low
Year Ended December 31, 2013
 
 
 
 
First Quarter
 
$
3.42

 
$
2.77

Second Quarter
 
3.57

 
3.07

Third Quarter
 
3.50

 
3.01

Fourth Quarter
 
4.75

 
3.25

Year Ended December 31, 2012
 
 
 
 
First Quarter
 
$
4.49

 
$
3.06

Second Quarter
 
4.10

 
2.70

Third Quarter
 
3.51

 
2.18

Fourth Quarter
 
2.94

 
1.75

Stock Performance Graph
The following line graph compares the yearly percentage change in the cumulative shareholder return on our common stock to the NASDAQ Composite Index and a Company-selected peer group index over the five-year period beginning December 31, 2008 and ending December 31, 2013. Cumulative shareholder return has been measured on a weighted-average basis based on market capitalizations of the component companies comprising the peer group index at the close of trading on the last trading day preceding the beginning of each year assuming an initial investment of $100 and reinvestment of dividends.
During 2012, our human resources department partnered with an executive compensation consultancy to compile executive compensation data which included a comparison of composite data of companies of similar size in our industry. As a result of this study, we constructed a new peer group for fiscal year 2013 based on company size and industry and including a mix of service and product-based companies. Our new peer group is comprised of the following companies: Anaren, Inc., CalAmp Corp., Cobra Electronics Corporation, Digi International Inc., Identive Group, Inc., KVH Industries, Inc., NAPCO Security Technologies, Inc., PCTEL, Inc., Sparton Corporation, STRATTEC Security Corporation and VASCO Data Security International, Inc.
In 2012, our peer group was comprised of the following companies: Applied Signal Technology Inc., Audiovox Corporation, CalAmp Corporation, EMS Technologies Inc., Herley Industries Inc., iRobot Corporation, Sparton Corporation, STRATTEC Security Corporation, TiVo Inc. and Universal Electronics Inc.
Our peer group may change from time to time to reflect changes in the market. The stock price performance shown on the graph is not necessarily indicative of future performance.

27


COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among LoJack Corporation, the NASDAQ Composite Index, Old Peer Group, and New Peer Group
Source:    Returns were derived from Research Data Group, Inc.
 
Note: The stock price performance shown on the graph above is not necessarily indicative of future price performance. This graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language in such filing.

28


ITEM 6 — SELECTED FINANCIAL DATA
The selected condensed consolidated financial data set forth below are derived from our audited consolidated financial statements. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” at Item 7 and the consolidated financial statements and notes thereto included in this annual report at Item 8.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS:
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(In thousands, except share and per share information)
Revenue
 
$
140,207

 
$
132,528

 
$
140,821

 
$
146,635

 
$
135,013

Cost of goods sold
 
63,037

 
61,358

 
67,932

 
72,961

 
64,096

Gross profit
 
77,170

 
71,170

 
72,889

 
73,674

 
70,917

Costs and expenses(1)
 
76,537

 
78,317

 
70,324

 
74,059

 
101,065

Impairment of intangible assets and goodwill(2)
 

 
472

 

 

 
14,038

Operating income (loss)
 
633

 
(7,619
)
 
2,565

 
(385
)
 
(44,186
)
Other income (expense)
 
162

 
(197
)
 
1,389

 
(823
)
 
1,133

Income (loss) before provision (benefit) for income taxes and net income (loss) of noncontrolling interest
 
795

 
(7,816
)
 
3,954

 
(1,208
)
 
(43,053
)
Provision (benefit) for income taxes(3)
 
(2,518
)
 
472

 
2,566

 
17,428

 
(7,771
)
Net income (loss)
 
3,313

 
(8,288
)
 
1,388

 
(18,636
)
 
(35,282
)
Less: Net income (loss) attributable to the noncontrolling interest
 
146

 
95

 
(41
)
 
(330
)
 
(621
)
Net income (loss) attributable to LoJack Corporation
 
$
3,167

 
$
(8,383
)
 
$
1,429

 
$
(18,306
)
 
$
(34,661
)
Basic earnings (loss) per share attributable to LoJack Corporation
 
$
0.18

 
$
(0.48
)
 
$
0.08

 
$
(1.06
)
 
$
(2.02
)
Diluted earnings (loss) per share attributable to LoJack Corporation
 
$
0.18

 
$
(0.48
)
 
$
0.08

 
$
(1.06
)
 
$
(2.02
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
17,712,002

 
17,515,903

 
17,607,347

 
17,348,433

 
17,170,492

Diluted
 
18,051,090

 
17,515,903

 
17,967,394

 
17,348,433

 
17,170,492


CONDENSED CONSOLIDATED BALANCE SHEET DATA:
 
 
December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(In thousands)
Working capital
 
$
35,536

 
$
44,032

 
$
48,896

 
$
48,874

 
$
58,766

Total assets
 
86,776

 
101,928

 
114,283

 
122,311

 
147,490

Long-term debt
 
6,000

 
13,820

 
11,013

 
8,798

 
13,375

Total liabilities
 
50,767

 
71,682

 
77,502

 
87,935

 
95,556

Total equity
 
36,009

 
30,246

 
36,781

 
34,376

 
51,934

 
(1)
In the years ended December 31, 2013, 2012, 2011 and 2010, we recognized income due to a change in estimated costs of $623,000 and charges of $6,930,000, $1,434,000 and $750,000, respectively, related to a settlement agreement with the named plaintiffs in certain California wage-and-hour class and collective action lawsuits, discussed in detail in Part II, Item

29


1, "Legal Proceedings" of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013. In the year ended December 31, 2011, we also recognized a charge of $435,000 relating to a legal settlement entered into in 2011 for the California Consumer Claims litigation discussed in Part 1, Item 3, "Legal Proceedings" of our 2011 Annual Report on Form 10-K. In the year ended December 31, 2009, we recognized a charge of $18,250,000 related to a legal settlement entered into with our former licensee in China discussed in Part I, Item 3, "Legal Proceedings" of our 2009 Annual Report on Form 10-K.

(2)
For the year ended December 31, 2012, we determined that lower than previously projected operating profitability at our SafetyNet reporting unit caused triggering events that resulted in our assessment of the carrying value of this reporting unit. As a result of this assessment, for the year ended December 31, 2012, we recognized impairment charges of $472,000 relating to SafetyNet's goodwill. For the year ended December 31, 2009, we determined that lower than previously projected operating profitability at our LoJack Canada reporting unit caused triggering events that resulted in our assessment of the carrying value of this reporting unit. As a result of these assessments, for the year ended December 31, 2009, we recognized impairment charges of $411,000 relating to LoJack Canada’s intangible assets consisting of monitoring contracts, completed technology and trade name and trademark. In the second quarter of 2009, we also incurred impairment charges of $13,627,000 relating to LoJack Canada’s goodwill. As a result of these impairments, operating income decreased by $14,038,000 for the year ended December 31, 2009. No impairments were recorded in the years ended December 31, 2013, 2010 or 2011.

(3)
At December 31, 2013, we maintain a full valuation allowance against our worldwide deferred tax assets, net of deferred tax liabilities, with the exception of Ireland, which has deferred tax assets of zero. Reflected in our consolidated financial statements and in our effective tax rate reconciliation, the valuation allowance increased by approximately $15,426,000, and primarily due to the effect of reserving the tax benefit of losses generated in foreign jurisdictions and the derecognition of a $15,304,000 capital loss that had been tracked and upheld by the 2009 IRS Audit and offset by a valuation allowance. 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, stock compensation and net operating loss carryforwards. 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. We will maintain a full valuation allowance on our net U.S. and non-Irish foreign subsidiaries' deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

ITEM 7 —
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear in Item 8 in this Annual Report on Form 10-K.
WARNING REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 and other federal securities laws contain certain safe harbors regarding forward-looking statements. From time to time, information we provide or statements made by our employees may contain “forward-looking” information, which involves risk and uncertainty. Any statements in this report that are not statements of historical fact are forward-looking statements (including, but not limited to, statements concerning the characteristics and growth of our markets and customers, our expected investments in LoJack Italia, SCI, and SafetyNet, our strategies for addressing changes in the automotive market, our growth strategies and strategic goals and objectives, our plans for future operations and products, the expected benefits of our alliance with TomTom, our expected operating expenses, our expected capital expenditures and our expected liquidity and capital resources). Forward-looking statements can often be identified by words such as “anticipate”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “will”, “should”, “would”, “could”, “potential”, “continue”, “ongoing”, or similar expressions and variations or negatives of these words. 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. Risk factors that may cause such differences are described in Part I, Item 1A — Risk Factors.
Overview
We are a leading global provider of technology products and services for the tracking and recovery or rescue of valuable mobile assets and people at risk of wandering. Our proprietary technology, wireless network and unique integration with law enforcement agencies in the United States provide an effective means for the tracking and recovery or rescue of stolen vehicles, construction equipment, motorcycles, cargo and people at risk.

30


We have three separately managed and reported business segments: North America, International and All Other.
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. In 2013, approximately 85% of such sales in the United States market were made through a distribution network consisting of dealers of new and used vehicles. We believe that 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 volumes with certified dealers and other third parties. We monitor the quality of these installations through the use of an expanded quality control process.
We also offer warranty products at the point of sale to new customers and through direct sales efforts to our existing customers.
We record additions to deferred revenue for the automated notification service related to our LoJack Early Warning product and for certain warranty products for which we are the primary obligor of the underlying contract. We typically receive full payment within 60 days of the transaction, but recognition of the deferred revenue is recognized over the estimated life of the product or service. These payments are a significant component of our cash flow from operations. In the United States, additions to deferred revenue, net of deferred costs, were $4,815,000 for the year ended December 31, 2013, compared to additions of $5,178,000 for the year ended December 31, 2012.
A significant portion of our revenue in Canada is derived from the recognition of revenue from service contracts for Boomerang Units. However, as discussed above, we have completed our transition of the selling model in the Canadian market from the Boomerang Unit to the LoJack Unit model. Certain insurance companies in Quebec and Ontario offer rebates to customers who install a stolen vehicle recovery product in their vehicles, and in some instances, insurance companies require installation of a stolen vehicle recovery product in such vehicles.
Those who purchased Boomerang Units were also required to enter into a service contract. The terms of service contracts offered range from 12 to 60 months and are generally payable in full upon activation of the related unit or renewal of a previous service contract. Customers are also offered a month-to-month option. As of December 31, 2013, there was approximately $1,977,000 of deferred revenue, compared to $3,900,000 as of December 31, 2012, resulting from approximately 15,000 active Boomerang Unit service contracts.
Concurrent with the migration from Boomerang technology to LoJack technology in the Canadian market during the second quarter of 2011, we have transitioned the selling model in that market from a subscription based model to a product based model. Therefore, as the LoJack Unit becomes a larger component of the LoJack Canada installed base, we expect this transition to have a positive impact on our revenue recognition in Canada, as we expect the proportion of revenue recognized as product revenue to increase. As of December 31, 2013, there was approximately $1,002,000 of deferred revenue on LoJack Unit sales.
International Segment
Internationally, our licensed stolen vehicle recovery technology is operational in 30 countries and territories around the world. We have licensed our stolen vehicle recovery technology in Latin America, the Caribbean, Europe and Africa. Revenue from this segment consists of product sales to our licensees, royalties, licensing fees, and subscription and installation services. Revenue from the international segment accounted for approximately 26% of consolidated revenue for the year ended December 31, 2013, compared to 23% and 30% in 2012 and 2011, respectively.
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 in the year it is earned.
Italy is the only country outside the United States and Canada where we own and operate a stolen vehicle recovery network. Customers who purchase LoJack Units in Italy are also required to enter into a service contract with LoJack Italia. The terms of service contracts offered range from 12 to 84 months and are payable in full upon activation of the related unit or renewal of a previous service contract. Customers are also offered a month-to-month option. At December 31, 2013 and 2012, there was approximately $2,794,000 and $2,784,000, respectively, of deferred revenue relating to LoJack Italia service contracts.
All Other Segment
SCI revenue is derived from the sale, lease or service of tracking devices as well as subscription fees for monitoring service alerts and activity reporting. At December 31, 2013, there was approximately $83,000 of deferred revenue relating to SCI subscription based services.

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SafetyNet revenue in 2013 was primarily comprised of the sale of transmitters and replacement parts. In 2013, the SafetyNet business model was primarily a fulfillment and service model providing the SafetyNet solution to caregivers and consumers for a monthly fee. As part of this business model, we provide SAR Receivers directly to participating public safety and law enforcement agencies at nominal or no cost.
Key Economic Factors and Trends Affecting our Business
Economic and market data and industry statistics and forecasts used throughout this Annual Report are based upon management's review of independent industry publications, reports by market research firms and other independent and publicly available sources. Although we believe that these third-party sources are reliable, we do not guarantee the accuracy or completeness of this information and have not independently verified this information.
During 2013, global economic growth slowed to approximately 3% as a result of the economic issues in Europe and a slowdown of economic activity in several key newly-developed and emerging markets. The impact on the light vehicle automotive market was varied. European Union light vehicle sales declined by approximately 2%, and our licensee market in Brazil experienced an approximate decline of 1%. Argentina, South Africa and Mexico’s light vehicle markets all realized positive growth of approximately 11%, 6% and 8%, respectively. The U.S. light vehicle automotive market posted growth of approximately 8% compared with the prior year.
During 2014, global economic growth is expected to increase slightly to approximately 3.7%, led primarily by continued fiscal recovery among advanced economies, namely the United States. Emerging economies are also expected to experience stronger growth in 2014, driven by fiscal stimulus and export growth into the recovering United States and European Union. The United States is expected to realize moderate growth of 2.8%, while European economies are expected to achieve a nominal increase of 1.0%. International automotive growth for 2014 is estimated to continue to be varied. Growth in the European Union is expected to be between 2% and 3% for the full year as large markets in Italy, France and Spain bottom and return to positive territory. Our key emerging market licensee territories of Brazil, South Africa and Mexico are expected to grow between 2% and 5%, while the Argentina market is expected to decline by 12%. U.S. retail automotive growth is expected to be in line with the U.S. economy; analysts are estimating light vehicle sales volume growth between 2% and 3%.
North America Segment
Our focus on the U.S. automotive business resulted in significant performance improvement during 2013, with unit sales in the dealer channel increasing 25% as compared to the prior year. In the fourth quarter of 2013, our unit sales exceeded retail market performance by 19 percentage points, or 26% growth.
The U.S. automotive industry continued its solid growth in 2013, remaining one of the more positive stories in the U.S. retail economy, with 2013 growth significantly exceeding that of the U.S. economy as a whole. Retail vehicle sales grew 9.1%, with total light vehicle sales increasing 7%. Factors which contributed to this strong industry performance included pent-up consumer demand for new vehicles, an average vehicle age of almost 11 years, an annual scrappage rate of over 13 million vehicles, historically low interest rates, continually increasing credit availability, adequate inventories of new vehicles and new vehicle models being added to manufacturers' product lines. These factors, in addition to limited used vehicle inventories and higher used car prices, combined to make new car purchases an attractive option for consumers. There continued to be variability in growth rates and changes in market share among vehicle brands, the most impactful being Ford, General Motors and Chrysler, which all benefited from demand for new model introductions and the growth in the sale of pickup trucks.
Industry experts are projecting the automotive industry to grow in line with the U.S. economy in 2014, with growth in the 2% to 4% range. Although all of the 2013 growth factors are expected to remain factors into 2014, strong comparable sales volumes against 2013, and lower demand from the most accessible pool of buyers has weakened growth expectations as compared to 2013. Pent-up demand for light vehicles remains strong across all socio-economic segments, but the economy has not yet improved to a point where the means to buy has returned to all of those hurt by the latest Recession. Buying from low income households and small businesses is expected to continue to lag the rest of the market, as sluggish economic growth and high unemployment impacts these consumers' access to the market.
Two key factors positively impacted demand for our products in 2013. The first factor was the strong and sustained auto demand experienced during 2013. The 2013 fiscal year was the fourth year in a row of solid U.S. automotive industry growth, and 2014 is projected to remain positive. The second factor was the increasing need for profitable, value-add products within Financing and Insurance departments at automotive dealers. Decreased vehicle margins resulting from price transparency and increased brand competition have put pressure on dealerships to increase profit contributions in other areas of the dealership. Our well-known brand and long history of delivering on our consumer value proposition, coupled with a strong value proposition for the dealer, make the LoJack Stolen Vehicle Recovery system an attractive alternative to other after-market products available to the dealership. These two factors have contributed to increased dealer receptivity to our pre-install programs and increased volumes

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within selling dealers during 2013. Sluggish U.S. employment growth, lackluster GDP growth and European economic headwinds continue to be obstacles to sustaining this industry optimism.
Demand for our commercial stolen vehicle recovery product remained strong throughout 2013, and there has been a high level of interest in our ruggedized self-powered product, which was recognized as one of Equipment Today's 2012 Contractors' Top 50 New Products. Construction spending increased approximately 7% in 2013. Construction starts are expected to outpace economic growth in 2014 at 9%. As the rebound in the construction market continues, rental revenue for construction and industrial equipment is forecast to grow between 6% and 9% in 2014 and accelerate thereafter, resulting in a compounded annual growth rate of almost 9% from 2013 to 2016.
In our Canadian business, we have increased our emphasis in both the commercial and dealer channels as well as on our expansion into the Ontario market. Increased competition and fewer insurance mandates have challenged our growth within the insurance market in the province of Quebec. Demand for our commercial product in the Canadian market has been strong to date, particularly in the province of Ontario. In addition, our re-entry into the automotive dealership channel in Ontario with LoJack technology has been met with favorable responses from dealers.
International Segment
Shipments in our international business increased in 2013 compared to the same period last year primarily due to an increase in shipments to our licensees in South Africa and Argentina. In the past, we have experienced quarterly fluctuations in purchases in the International segment, with sales in many of our international markets tending to be higher in the fourth quarter of the year as licensees seek to achieve lower pricing with higher annual unit purchases. We also are experiencing downward pricing pressure and reductions in unit volumes in a number of our markets due to a variety of factors that vary from country to country. Those factors include the relative maturity of the stolen vehicle recovery market in certain highly developed territories, re-use of our products in certain territories, declining theft rates in certain territories, and increasing competitive pressures by both very high frequency, or VHF, and GPS based tracking systems. We also are faced with uncertainty regarding developing governmental policies and enforcement actions in Argentina that have affected, and may continue to affect, sales to our licensee in that country, as well as uncertainty regarding the timing and potential impact of the Brazilian regulation mandating the installation of tracking devices using GPS positioning and mobile communications technologies.
In South Africa, our licensee has had recent success in expanding its target markets to include a direct marketing campaign wherein they market and sell stolen vehicle recovery devices to consumers through call center representatives. Our South African licensee plans to continue these direct marketing efforts for the foreseeable future. Our volume of units sold to our South African licensee in 2013 increased approximately 40% over what we sold in 2012. Revenue from our South African licensee increased 30% over 2012, from $11,682,000 to $15,225,000 for the year ended December 31, 2013.
In Argentina, government controls restricting the importation of goods and the exchange of Argentine Pesos for U.S. Dollars continue to make the exportation of goods from any country to Argentina more difficult. On February 1, 2012, Argentine authorities began requiring all importers to request and receive approval from the Argentine Tax and Customs Authority, or AFIP, prior to each import transaction. While the official processing time is 15 days for such requests, some requests have been put on hold for indefinite periods of time for review. In some cases, importers have been asked to match imports on a dollar-for-dollar basis with exports prior to receiving authorization from AFIP to import goods. Several states and governmental bodies, including the U.S., Japan and the European Union, have submitted complaints and formal requests for the World Trade Organization, or WTO, to establish a Panel to rule on the legality of Argentina's trade measures. The WTO's Director-General composed such a Panel on May 27, 2013. Should the WTO Panel rule in favor of these complainants, Argentina could be ordered to remove the restrictions, or possibly face punitive tariffs from its foreign trading partners. Currently, it is unclear whether these proceedings with the WTO will result in changes to Argentina's trade policies that are favorable to our business.
During 2012, our Argentine licensee did not receive permission to import our products following their adoption of the pre-approval requirement in February 2012. As a result, from February through December 2012 we did not ship any units to Argentina. Our Argentine licensee has informed us that it and its affiliates have developed several commodity export programs with the expectation that our licensee will be permitted to import a dollar amount of goods approximately equivalent to the dollar amount of exports our licensee and its affiliates generate. We have been informed that our Argentine licensee has completed initial exports of commodities. Subsequently, we were able to make several shipments of product to our licensee in Argentina in the second, third and fourth quarters of 2013. However, the amount of these shipments remains less that the dollar amount that our licensee has told us it has generated to date in exports. Our Argentine licensee continues to indicate that there is strong market demand for our product, supported by strong vehicle sales growth and insurance company mandates requiring customers to use an SVR product. In 2014, LoJack’s ability to fulfill our licensee’s orders based on this demand will remain contingent upon the ability of our licensee to comply with government trade policies regulating the importation of manufactured goods. If our Argentine licensee and its affiliates are unable to generate significant exports or if the government changes its trade policies, we may not be able to ship products to Argentina in volumes consistent with prior years.

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In Brazil, our licensee did not purchase any units during the first five months of 2012, but restarted purchases in June 2012 and continued to purchase units during the first quarter of 2013. We did not ship any units to our Brazilian licensee during the last nine months of 2013.We are in communication with our Brazilian licensee to determine the level of demand for 2014; however, our sales in 2014 could be impacted by the results of our legal dispute (see Part 1, Item 3, "Legal Proceedings" for detail on the Brazilian licensee litigation).
Certain of our European territories are experiencing an economic downturn deepened by government wage and pension reductions, rising unemployment and tight consumer credit availability. These conditions have led to declines in consumer spending and are adversely affecting the sale of new vehicles. In 2013, certain European automobile industry trade associations have indicated that light vehicle sales in the European Union declined by approximately 2%. The effect of lower vehicle sales has been mitigated in part by a positive market response to our new self-powered product.
Our business in Italy continued to grow in total number of subscribers during 2013, and our revenues grew by 9% compared to 2012 primarily due to a larger subscriber base. We entered 2013 with approximately 27,900 subscribers in Italy, and continued growing the number of subscribers, adding approximately 5,700 net new subscribers in 2013. As of December 31, 2013, our business in Italy had a total of approximately 33,600 subscribers. While we continue to grow our subscriber base in Italy, our overall performance is slower than planned in part due to the overall weakness in the Italian economy, tightened access to credit by both our channel partners and consumers, and the continuing decline in new vehicle registrations. During 2013, new car registrations were reported to have declined by 7% as compared to the same period in 2012. Certain auto industry analysts are projecting light vehicle registrations in Italy to grow between 3% and 4% in 2014.
All Other Segment
During the year, the incidents of cargo theft continued to trend upward along with commodity product line value increases and reported loss amounts. As a result of this trend, combined with the true direct and indirect replacement costs of lost shipments and increased regulatory emphasis on shipping condition integrity, brand owners and manufacturers continue to seek the type of visibility, risk reduction, prevention, control and recovery capability that SCI provides, both in the U.S. and for the international segments of its clients' supply chains.  Supply chain extension into global markets is a trend that continues to build and we believe that SCI is positioned to capitalize on this trend. 
Key Factors of our Business
We embarked upon a critical evaluation of our business during 2011 and developed a strategy designed to stabilize the business financially and to control growth. During 2012, we improved our internal processes and continued to explore opportunities to expand our core businesses in the United States and internationally. Our focus on the U.S. automotive business resulted in significant improvement in performance during 2012, with unit sales in the dealer channel increasing 11% as compared to the prior year, and unit sales in the fourth quarter exceeding retail market performance by 9.5 percentage points, or 21% growth. We continued the expansion of our U.S. business in 2013, most particularly within the expansion of our pre-install program. Our unit sales in the U.S. dealer channel grew 25% as compared to 2012, exceeding the increase in the retail U.S. automotive market by approximately 15 percentage points. Pre-installed units accounted for 47% of our units sold in the domestic dealer channel in 2013, compared to 35% for the prior year.
In our international business we face a number of challenges and opportunities. In particular, during 2012 the Argentine government imposed significant trade restrictions on imports that have precluded our licensee in that country from purchasing product from us. The restrictions continued during 2013, and while we were successful in exporting some units to Argentina in 2013, our licensee in that country was unable to arrange for governmental approval to purchase the amount of product commensurate with the demand for stolen vehicle recovery products in Argentina and its market share. Our European business has also been impacted by ongoing recessionary pressures. In South Africa, our licensee has had recent success in expanding its target markets and plans to continue to explore this opportunity. We continue to explore opportunities to expand into new territories and to meet the demand for our products in our existing markets.
We believe that our continued focus on executing our strategic goals for 2014 will enable us to continue our growth efforts and:
Build on the momentum established in 2013 to restore our domestic business to profitable growth;
Grow our existing core licensee business while identifying new international go-to-market opportunities;
Expand our products and service offerings through our strategic alliances, the first of which is with TomTom;
Increase our investment in those businesses that we view as potential significant sources of future revenue and profit;
Streamline and simplify our business processes to improve the overall experience for our customers and continue to aggressively manage our cost structure and discretionary spending; and
Develop and maintain highly differentiated products and services in each line of our business while broadening our knowledge of the industry, current markets and potential new markets to pursue going forward.

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Critical Accounting Policies and Estimates
The consolidated financial statements include the accounts of LoJack, our wholly-owned subsidiaries and our majority interest in SCI. We consolidate entities which we own or control. All intercompany transactions and balances have been eliminated in consolidation. Management is required, in certain instances, to use estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes included in this report. The actual results could differ from those estimates. Our accounting policies are described in Note 1 to the consolidated financial statements included herein at Item 8. A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operations and requires management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The significant accounting policies and estimates, which we believe to be the most critical in understanding and evaluating our reported financial position and results of operations, include:
Revenue Recognition and Deferred Revenue. We earn revenue primarily from the domestic sale and installation of LoJack Units and LoJack Early Warning, the sale of products and components to international licensees, royalties, the sale of extended warranty programs and the sale of our LoJack Canada products and service contracts.
We recognize revenue on domestic sales of LoJack Units upon installation, or upon shipment to our installation partners and distributors when all revenue recognition criteria have been met.
In Canada, sales of a LoJack Unit constitute a multiple element arrangement under Accounting Standards Codification, or ASC, 605 subtopic 25, Revenue Recognition: Multiple Element Arrangements. The LoJack Unit includes LoJack Unit hardware, installation service and the tracking and recovery service, which is provided by the Company over the period of vehicle ownership.
The delivered elements of a multiple element arrangement (LoJack Unit hardware and installation service) must meet certain criteria to qualify each component of the combined LoJack Unit for separate accounting. Management performed an analysis and has determined that each of the delivered elements in the arrangement qualify for separate accounting based on the applicable guidance.
In the United States and Canada, sales of a combined LoJack and Early Warning Unit constitute a multiple element arrangement under ASC 605 subtopic 25. The combined LoJack and Early Warning Unit includes LoJack Unit hardware, Early Warning hardware, installation service, and an Early Warning ongoing automated notification service, which is provided by the Company over the period of vehicle ownership.
The delivered elements of a multiple element arrangement (LoJack Unit hardware and Early Warning hardware and installation service) must meet certain criteria to qualify each component of the combined LoJack and Early Warning Unit for separate accounting. We performed an analysis and determined that each of the delivered elements in the arrangement qualify for separate accounting based on the applicable guidance.
The guidance establishes a selling price hierarchy for determining the selling price of a deliverable in a multiple element arrangement. The selling price for each deliverable is based on vendor-specific objective evidence, or VSOE, if available, third-party evidence, or TPE, if VSOE is not available, or management’s best estimated selling price, or BESP, if neither VSOE nor TPE are available. The residual method of allocation is no longer permitted under the relevant guidance and thus we are required to allocate consideration at the inception of the arrangement to all deliverables using the relative selling price allocation method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of the deliverable’s estimated fair value. We determined an estimated fair value for each element in the arrangement as follows: (i) LoJack Unit hardware selling price has been determined using VSOE; (ii) Early Warning hardware selling price has been determined based on BESP; (iii) installation service selling price has been determined using TPE; (iv) Early Warning ongoing notification service selling price has been determined based on BESP; and (v) Canadian tracking and recovery service selling price has been determined based on BESP. We analyze the selling prices used in our allocation of arrangement consideration, at a minimum, on an annual basis. Selling prices would be analyzed on a more frequent basis if a significant change in the business necessitates a more timely analysis or if we experience significant variances in our selling prices.
The LoJack and Early Warning hardware and installation service components of each sale are considered to have met delivery requirements for revenue recognition upon installation of the LoJack and Early Warning Unit; however, revenue from the ongoing notification service, as well as the tracking and recovery service in Canada, are deferred and recognized over an estimated life of new vehicle ownership, which management estimates is five years. Management continually monitors and evaluates this estimate based on published industry data. If the estimated life of new vehicle ownership proves to vary materially from the estimates we use, we would be required to change our estimates, which could result in material differences in the amount of revenue recognized in any given period. Historically, we have not made any changes to our five-year estimate.
Revenue relating to the sale of service contracts associated with our Boomerang product line is recognized over the life of the contract. The term of service contracts offered ranges from 12 to 60 months and are generally payable in full upon initial activation of the Boomerang Unit or on renewal of a service contract. Customers are also offered a month-to-month option.

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We sell several types of extended warranties. For those warranties for which a third party, and not LoJack, is the primary obligor, we recognize payments for these insurance contracts in revenue at the time of sale. For warranties for which we are the primary obligor, revenue is deferred and recognized over the estimated term of the warranties, determined to be equivalent to the estimated life of new vehicle ownership, which is five years. If the estimated life of new vehicle ownership varies significantly from the estimates we use, material differences in the amount of revenue recognized in any given period could result. Incremental costs directly related to the provision of such warranties are deferred and charged to expense proportionately as the revenue is recognized. Any remaining warranty costs relating to actual claims made are recognized when incurred. We believe the likelihood of material changes to the average estimated life of vehicle ownership is low.
In December 2011, we transferred the servicing and liability obligations for a portion of our extended warranty contracts originated in 2010 to a third party, eliminating any additional services or liability exposure as the primary obligor for those contracts. As a result, approximately $2,586,000 of previously recorded deferred revenue that was being recognized over time was accelerated and recognized as current revenue during the fourth quarter of 2011. During the first quarter of 2012, we transferred the servicing and liability obligations for the majority of our extended warranty contracts originated in 2011 to the same third party. As a result, approximately $3,134,000 of previously recorded deferred revenue that was being recognized over time was accelerated and recognized as current revenue during the first quarter of 2012. Beginning in 2012, the majority of all servicing and liability obligations associated with new contracts sold are being transferred to the third party upon purchase by the consumer. As such, for the majority of extended warranty contracts originated after 2011, we will recognize revenue upon delivery as opposed to deferring the revenue and recognizing it over the life of the contract.
For those warranties for which a third party, and not LoJack, is the primary obligor, we record revenue on a gross basis, with related unit costs being included in cost of goods sold. We considered the factors for gross and net revenue recording and determined that despite not being the primary obligor for the majority of these arrangements, gross revenue reporting was appropriate based on the relevant accounting guidance. Specifically, we have latitude in establishing price; we can change the product offering; we have discretion in supplier selection; we are involved in the determination of product or service specifications; we bear the credit risk; and the amount that we earn on each contract is not fixed. During the years ended December 31, 2013, 2012 and 2011, we recognized $6,435,000, $10,216,000 and $5,772,000, respectively, of revenue related to the sale of our extended warranty products for which we are not the primary obligor. We recognized cost of goods sold of $1,084,000, $1,293,000 and $1,032,000 during the years ended December 31, 2013, 2012 and 2011, respectively.
Accounts Receivable and Allowance for Doubtful Accounts.    In our North America segment, our customers, primarily automobile dealerships in the United States, are billed for product sales either via bulk sale or at the time of installation. The customer base is principally automobile dealers that are geographically dispersed. Payment terms for LoJack performed installations are generally 10 days. Payment terms for bulk product sales to LoJack certified dealer installers and expeditors range from 30 to 90 days. Except for contract termination due to misconduct or insolvency, which requires the return of all LoJack Units and materials, all LoJack Unit sales to these parties are final with no right of return.
Accounts receivable related to our Canadian customers consists of payments due from our commercial accounts, automotive dealers, accessory retailers and, in limited situations, consumers. Payment terms range from 30 to 60 days from shipment or invoicing. Initial service contracts and subsequent renewals are generally recognized as deferred revenue upon payment via credit card and as a result there is no significant collection risk for a substantial portion of our revenue in Canada.
If the creditworthiness or the financial strength of our dealers were to decline, there could be an adverse effect on our operating results and cash flows. We provide specific reserves for known losses and supplement that estimate with additional reserves based on our historical loss experience. There have been no changes to our North America segment’s billing and returns policy for the periods presented.
Our international customers or licensees are billed for product sales, royalties and in some cases, license fees. Payment terms for our international licensees vary, depending on the length of the supply chain, the financial strength of the licensee and the business climate in the market our licensee operates and are generally longer than our North America business. We mitigate the credit risk in our International segment by obtaining, in many cases, private trade credit insurance for our large international customers. Changes in the geopolitical situation in the countries where we have international customers could create additional credit risk and bad debt exposure. Sales of LoJack Units and component systems to international customers are final with no right of return.
In our All Other segment, our customers are billed for product sales generally at the time of shipment. Payment terms range from 30 to 90 days and all sales are final with no right of return.

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The following table presents accounts receivable and the related allowance for doubtful accounts by our segments (dollars in thousands):
 
 
December 31, 2013
 
Segment %
of Accounts
Receivable, net
 
December 31, 2012
 
Segment %
of  Accounts
Receivable, net
North America — Gross
 
$
12,996

 
 
 
$
10,974

 
 
Allowance for doubtful accounts
 
(1,396
)
 
 
 
(1,321
)
 
 
 
 
11,600

 
44
%
 
9,653

 
48
%
International — Gross
 
14,935

 
 
 
10,755

 
 
Allowance for doubtful accounts
 
(627
)
 
 
 
(1,277
)
 
 
 
 
14,308

 
54
%
 
9,478

 
47
%
All Other — Gross
 
617

 
 
 
907

 
 
Allowance for doubtful accounts
 

 
 
 
(1
)
 
 
 
 
617

 
2
%
 
906

 
5
%
Accounts receivable, net
 
$
26,525

 
100
%
 
$
20,037

 
100
%
In the normal course of business, we monitor the financial condition of our customers and limit the amount of credit extended when deemed necessary. We maintain reserves for estimated potential credit losses. We have established an allowance for doubtful accounts that corresponds to the creditworthiness of our customers, historical trends and economic circumstances. Changes to these estimates are possible and could result in a material effect on our reported results of operations. At both December 31, 2013 and 2012, approximately 83% of the North America segment’s gross accounts receivable balances were less than 60 days old.
As of December 31, 2013, two international licensees accounted for 14% and 16% of accounts receivable. As of December 31, 2012, one international licensee accounted for 18% of accounts receivable. For the year ended December 31, 2013, our South African licensee, Tracker South Africa, accounted for 11% of revenue. For the years ended December 31, 2012 and December 31, 2011, no international licensee accounted for more than 10% of revenue.
Income Taxes and Deferred Taxes.    Our annual tax rate is based on our income (loss), statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions.
We file federal and state income tax returns in the United States and tax returns in 8 international jurisdictions. We estimate our income tax expense after considering, among other factors, differing tax rates between jurisdictions, allocation factors, tax credits, nondeductible items and changes in enacted tax rates.
Deferred taxes arise because of differences in treatment between financial statement accounting and tax accounting, known as temporary differences. The tax effects of these temporary differences are recorded as deferred tax assets and deferred tax liabilities on the consolidated balance sheet. Deferred tax assets generally result in tax deductions or credits subsequent to the period in which the related item was recorded in the consolidated statement of operations. At December 31, 2013, we maintain a full valuation allowance against our worldwide deferred tax assets, net of deferred tax liabilities, with the exception of Ireland, which has deferred tax assets of $0. If sufficient evidence of our ability to generate future taxable income in any of the jurisdictions in which we currently maintain a valuation allowance becomes more likely than not, we may reduce our valuation allowance, which would result in an income tax benefit being recorded in our consolidated statement of operations.
Due to complexity within and diversity among the various jurisdictions in which we do business, there is a risk that a governmental agency may disagree with the manner in which we have computed our taxes. Additionally, due to the lack of uniformity among all of the foreign and domestic taxing authorities, there may be situations where the tax treatment of an item in one jurisdiction is different from the tax treatment in another jurisdiction or that a transaction causes a tax liability to arise in another jurisdiction.
As of December 31, 2013, we had no material unrecognized tax benefits. As of December 31, 2012, we had $18,629,000 of gross unrecognized tax benefits (excluding accrued interest), of which approximately $15,304,000, if recognized, would not affect the Company's tax rate and would result in an increase in capital loss and net operating loss carryforwards which would be subject to a full valuation allowance. The liability amounts (excluding accrued interest) related to the unrecognized tax benefits recorded at December 31, 2013 and 2012 were $0 and $3,325,000, respectively.
We recognize interest and penalties related to income tax matters within income tax expense. At December 31, 2013 and December 31, 2012, we had accrued interest related to our uncertain tax positions of zero and $643,000, respectively.
We are subject to U.S. federal income tax, as well as income tax in multiple state and foreign jurisdictions. We have substantially concluded all U.S. federal tax matters through 2009 and state income tax matters for years through 2006. Additionally,

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in August 2013 the Internal Revenue Service opened an audit of the Company's 2010 U.S. federal tax return. All material foreign income tax matters through 2008 have been substantially concluded as well.

Effective January 1, 2006, LoJack Ireland commenced operations. As a result of this business structure, a substantial part of our international business activities are supported by LoJack Ireland. LoJack Ireland’s business activities are taxed at a rate of 12.5%.
In general, it is the practice and intention of the Company to indefinitely reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2013, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $20,093,000 of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries because such earnings are considered to be indefinitely reinvested in the business. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.
Recently Adopted Accounting Guidance and Accounting Guidance Issued But Not Yet Adopted
See Note 1 to the accompanying consolidated financial statements included herein at Item 8, for accounting standards adopted recently and issued but not yet adopted.
RESULTS OF OPERATIONS
Revenue
For the year ended December 31, 2013, consolidated revenue increased $7,679,000, or 6%, as compared to 2012. Consolidated revenue for the year ended December 31, 2012 decreased $8,293,000, or 6%, as compared to 2011. The following table presents revenue by our segments (dollars in thousands):
 
 
 
 
 
 
 
 
Percentage Change
 
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
North America
 
$
99,266

 
$
98,565

 
$
95,837

 
1
%
 
3
 %
International
 
36,485

 
29,842

 
41,886

 
22
%
 
(29
)%
All Other
 
4,456

 
4,121

 
3,098

 
8
%
 
33
 %
Total revenue
 
$
140,207

 
$
132,528

 
$
140,821

 
6
%
 
(6
)%
North America Segment
Revenue related to our North America segment increased $701,000, or 1%, in 2013 as compared to 2012 and increased $2,728,000, or 3%, in 2012 as compared to 2011.
In 2013, revenue in our North America segment for our dealer channel increased 3% as compared to the same period in 2012. Revenue in our North America segment from our heavy equipment, or commercial, channel increased 27% over the same period in 2012. Our motorcycle and direct distribution channels in the United States market saw revenue declines of 40% and 15%, respectively, as compared to the same period in 2012.
In 2012, revenue in our North America segment for our dealer channel increased 5% as compared to the same period in 2011. Revenue in our North America segment from our heavy equipment, or commercial, channel increased 43% over the same period in 2011. Our motorcycle and direct distribution channels in the United States market saw revenue declines of 22% and increases of 9%, respectively, as compared to the same period in 2011.
The activity which resulted in the increase in our North America segment revenue for the year ended December 31, 2013 as compared to the same period in 2012 was primarily attributable to:
An increase of $10,106,000, or 16%, in revenue from the sale of LoJack Units due to a 25% increase in unit volume during 2013 as compared to 2012, partially offset by a 7% decrease in average revenue per unit; partially offset by
A decrease of $4,928,000, or 38%, in revenue from our warranty products. The decrease is primarily the result of the transfer of the servicing and liability obligations for the majority of our extended warranty contracts originated in 2011 to a third party as the primary obligor during March 2012, thus eliminating any additional services or future liability for us from those contracts. As a result, approximately $3,134,000 of previously recorded deferred revenue that was being recognized over time was accelerated and recognized as current revenue during the first quarter of 2012. Additionally, in 2013 we experienced a decrease in the number of warranty products sold as compared to 2012, largely due to the success of our pre-install program;

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A decrease of $732,000 in all other revenue, primarily the result of a $323,000 increase in sales referral discounts offered to our dealers, a $222,000 increase in promotions offered, a $367,000 decrease in revenue from recourse agreements, partially offset by a $132,000 increase in revenue from repairs and inspections;
A decrease of $2,029,000, or 22%, in revenue from our Canadian business, driven by a $2,472,000, or 34%, decrease in service revenue primarily resulting from a 31% decline in the average number of subscribers to 30,000 subscribers for the year ended December 31, 2013, partially offset by a $443,000, or 21%, increase in unit revenue driven by a 13% increase in the number of base units sold and a 7% increase in the average revenue per unit;
A decrease of $1,139,000, or 10%, in revenue from our Early Warning products; and
A decrease of $581,000, or 40%, in revenue from the sale of motorcycle products, including units and warranty products.
The activity which resulted in the increase in our North America segment revenue for the year ended December 31, 2012 as compared to the same period in 2011 was primarily attributable to:
An increase of $3,256,000, or 6%, in revenue from the sale of LoJack Units due to a 14% increase in unit volume during 2012 as compared to 2011, partially offset by a 7% decrease in average revenue per unit;
An increase of $1,741,000, or 16%, in revenue from our warranty products. The increase was due in large part to the fact that, beginning in 2012, the majority of all servicing and liability obligations associated with new extended warranty contracts sold are transferred to the third party upon purchase by the consumer. As such, for the majority of extended warranty contracts originated in 2012, we recognized revenue upon delivery as opposed to deferring the revenue and recognizing it over the life of the contract as was done in previous years. The increase is also the result of the transfer of the servicing and liability obligations for the majority of our extended warranty contracts originated in 2011 to a third party as the primary obligor during March 2012, thus eliminating any additional services or future liability for us from those contracts. As a result, approximately $3,134,000 of previously recorded deferred revenue that was being recognized over time was accelerated and recognized as current revenue during the first quarter of 2012. This increase was partially offset by the transfer of the servicing and liability obligations for a portion of our extended warranty contracts to a third party as the primary obligor during December 2011, resulting in approximately $2,586,000 of previously recorded deferred revenue that was being recognized over time being accelerated and recognized as current revenue during the fourth quarter of 2011; and
An increase of $495,000 in all other revenue, primarily the result of a $455,000 decrease in sales referral discounts offered to our dealers; partially offset by
A decrease of $1,724,000, or 16%, in revenue from our Canadian business, driven by a $2,564,000, or 26%, decrease in service revenue resulting from a 23% decline in the average number of subscribers to 43,000 subscribers for the year ended December 31, 2012, partially offset by an $840,000, or 64%, increase in unit revenue driven by a 47% increase in the number of base units sold and a 12% increase in the average revenue per unit;
A decrease of $581,000, or 5%, in revenue from our Early Warning products; and
A decrease of $406,000, or 22%, in revenue from the sale of motorcycle products, including units and warranty products.
International Segment
Revenue related to our International segment increased $6,643,000, or 22%, in 2013 as compared to 2012, while International segment revenue decreased $12,044,000, or 29%, in 2012 as compared to 2011.
The increase in International segment revenue for 2013 as compared to 2012 was primarily attributable to:
An increase of $6,112,000, or 25%, in product revenue from our licensees as a result of a 22% increase in the number of units sold and a 2% increase in average revenue per unit;
An increase of $222,000, or 13%, in revenue from the sale of infrastructure components, royalty, license fee, and other revenue from our licensees; and
An increase of $309,000, or 9%, in revenue from our Italy business.
The decrease in International segment revenue for 2012 as compared to 2011 was primarily attributable to:
A decrease of $12,670,000, or 34%, in product revenue from our licensees as a result of a 32% decrease in the number of units sold and a 3% decrease in average revenue per unit; partially offset by
An increase of $340,000, or 24%, in revenue from the sale of infrastructure components, royalty, license fee, and other revenue from our licensees; and
An increase of $285,000, or 9%, in revenue from our Italy business.

39


All Other Segment
Revenue related to our All Other segment increased $335,000, or 8%, in 2013 as compared to 2012, and $1,023,000, or 33%, in 2012 as compared to 2011.
The increase in All Other segment revenue from 2012 to 2013 was primarily the result of a $300,000, or 8%, increase in revenue from SCI. The increase in All Other segment revenue from 2011 to 2012 was primarily the result of a $952,000, or 33%, increase in revenue from SCI due to increased demand for cargo tracking services.
Cost of Goods Sold
The following table presents cost of goods sold by our segments (dollars in thousands):
 
 
 
 
 
 
 
 
Percentage Change
 
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
North America
 
$
48,010

 
$
47,017

 
$
47,424

 
2
 %
 
(1
)%
International
 
14,063

 
13,006

 
19,374

 
8
 %
 
(33
)%
All Other
 
964

 
1,335

 
1,134

 
(28
)%
 
18
 %
Total cost of goods sold
 
$
63,037

 
$
61,358

 
$
67,932

 
3
 %
 
(10
)%
As a percentage of total revenue, total cost of goods sold was 45%, 46% and 48% in 2013, 2012 and 2011, respectively.
North America Segment
As a percentage of North America segment revenue, North America segment cost of goods sold was 48%, 48% and 49% in 2013, 2012 and 2011, respectively.
The decrease in cost of goods sold as a percentage of revenue from 2011 to 2012 was primarily attributable to:
The recognition in the first quarter of 2012 of $3,134,000 of previously deferred revenue upon the transfer of the servicing and liability obligations for the majority of our extended warranty contracts originated in 2011 to a third party as the primary obligor during March 2012, partially offset by the recognition during the fourth quarter of 2011 of $2,586,000 of previously deferred revenue upon the transfer of the servicing and liability obligations of a portion of our extended warranty contracts to a third party as the primary obligor during December 2011;
Decreased product costs, largely the result of cost efficiencies realized in our contract manufacturing operations; and
Decreased promotional spending, which is accounted for as contra-revenue; partially offset by
A 7% decrease in average revenue per unit.
International Segment
As a percentage of International segment revenue, International segment cost of goods sold was 39%, 44% and 46% in 2013, 2012 and 2011, respectively. The decrease in cost of goods sold as a percentage of revenue from 2012 to 2013 was primarily driven by a 2% increase in average revenue per unit and decreased product costs due to a change in product mix. The decrease in cost of goods sold as a percentage of revenue from 2011 to 2012 was primarily driven by decreased product costs.
All Other Segment
As a percentage of All Other segment revenue, All Other segment cost of goods sold was 22%, 32% and 37% in 2013, 2012 and 2011, respectively.
The decrease in cost of goods sold as a percentage of revenue from 2012 to 2013 was primarily the result of the release of a previously recorded warranty provision in our SafetyNet business as well as lower fixed cost of goods sold per unit at SCI due to increased volume.
The decrease in cost of goods sold as a percentage of revenue from 2011 to 2012 was primarily due to an increase in volume at SCI, resulting in lower fixed cost of goods sold per unit.

40


Operating Expenses
The following table presents our consolidated operating expenses (dollars in thousands):
 
 
 
 
 
 
 
 
Percentage Change
 
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
Product development
 
$
5,434

 
$
5,410

 
$
5,318

 
 %
 
2
 %
Sales and marketing
 
32,005

 
29,018

 
26,880

 
10
 %
 
8
 %
General and administrative
 
35,840

 
32,546

 
30,189

 
10
 %
 
8
 %
Legal settlement
 
(623
)
 
6,930

 
1,869

 
(109
)%
 
271
 %
Depreciation and amortization
 
3,881

 
4,413

 
6,068

 
(12
)%
 
(27
)%
Impairment of goodwill
 

 
472

 

 
(100
)%
 
100
 %
Total operating expenses
 
$
76,537

 
$
78,789

 
$
70,324

 
(3
)%
 
12
 %
Product Development
As a percentage of total revenue, product development expenses were 4% in 2013, 2012 and 2011. Product development expense increased $24,000 in 2013 as compared to 2012 and increased $92,000 in 2012 as compared to 2011. The increase in 2013 was primarily due to a $318,000 decrease in consulting expenses, a $163,000 decrease in research and development expenses and various other decreases in other product development expenses, offset by a $566,000 increase in compensation expense. The increase in 2012 was primarily due to a $414,000 increase in consulting expenses, partially offset by a $184,000 decrease in rent expense and decreases in various other product development expenses.
We expect product development expenses as a percentage of revenue in 2014 to remain consistent with 2013.
Sales and Marketing
As a percentage of total revenue, sales and marketing expenses were 23%, 22% and 19% in 2013, 2012 and 2011, respectively. Sales and marketing expenses increased $2,987,000 in 2013 as compared to 2012 and increased $2,138,000 in 2012 as compared to 2011.
The increase in 2013 as compared to 2012 was attributable to:
Increased compensation expense of $2,807,000, including $1,067,000 of increased salary expense, a $342,000 increase in benefits expense and a $1,405,000 increase in sales commissions;
Increased bad debt expense of $104,000; and
Increased market research expenses of $697,000; partially offset by
Decreased consulting expenses of $352,000;
Decreased production agency expenses of $170,000; and
Decreased rent expense of $203,000.
The increase in 2012 as compared to 2011 was attributable to:
Increased compensation expense of $1,445,000, including $1,080,000 of increased salary expense, a $245,000 increase in benefits expense and a $158,000 increase in sales commissions as we increased our field sales force during the year;
Increased travel expense of $444,000 due to the larger field sales force;
Increased consulting expense of $276,000 incurred on new consumer and brand marketing initiatives;
Increased bad debt expense of $99,000; partially offset by
Decreased rent expense of $136,000.
We expect sales and marketing expenses as a percentage of revenue to increase slightly in 2014 to support our planned investment in Fleet personnel and continued branding of LoJack SVR and Fleet products.
General and Administrative
As a percentage of total revenue, general and administrative expenses were 26%, 25% and 21% in 2013, 2012 and 2011, respectively. General and administrative expenses increased by $3,294,000 in 2013 as compared to 2012 and increased by $2,357,000 in 2012 as compared to 2011.
The increase in 2013 as compared to 2012 was primarily attributable to:

41


Increased compensation expense of $946,000, primarily related to a $249,000 increase in benefits expense, a $1,131,000 increase in bonus expense and a $239,000 increase in severance expense, partially offset by a $481,000 decrease in stock based compensation expense and a $200,000 decrease in expenses relating to temporary employees;
An increase of $236,000 primarily relating to increased general and administrative expense at SCI;
An increase of $605,000 in consulting expense;
An increase of $912,000 in outside legal expense;
An increase of $626,000 in maintenance contracts;
An increase of $127,000 in facilities related expenses; and
An increase of $205,000 in insurance related expenses; partially offset by
A decrease of $119,000 in accounting expenses;
A decrease of $206,000 in moving expenses; and
A decrease of $263,000 in bad debt expense.
The remaining increase related to smaller changes in various other general and administrative expense accounts.
The increase in 2012 as compared to 2011 was primarily attributable to:
Increased compensation expense of $381,000, primarily related to an increase of $775,000 in salary expense, a $401,000 increase in benefits expense and a $118,000 increase in other compensation, partially offset by a $567,000 decrease in expense related to temporary employees, a $242,000 decrease in severance expense and a $105,000 decrease in bonus expense;
An increase of $530,000 primarily relating to increased general and administrative expense at SCI to support the revenue growth achieved during 2012;
An increase of $480,000 in consulting expense, incurred primarily to support business development initiatives;
An increase of $402,000 in sales tax expense due to a reversal recorded during the first quarter of 2011 of an accrual for estimated customs tariffs no longer owed;
An increase of $264,000 in outside legal expense;
An increase of $154,000 in travel expense;
An increase of $129,000 in accounting expense;
An increase of $200,000 in maintenance contracts;
An increase of $135,000 in product giveaways and donations; and
An increase of $108,000 in property tax expense; partially offset by
A decrease of $625,000 in facilities related expenses; and
A decrease of $386,000 in bad debt expense as we recovered fully reserved accounts receivable from one of our international licensees.
The remaining increase related to smaller changes in various other general and administrative expense accounts.
General and administrative expenses as a percentage of revenue are expected to decrease in 2014 due to reduced litigation and related legal expenses.
Legal Settlement
On October 18, 2012, we entered into a settlement agreement with the named plaintiffs in the wage and hour litigation in California discussed in Part II, Item 1, "Legal Proceedings" of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013. During the year ended December 31, 2012, we recorded an accrual of $6,930,000 with respect to our potential obligations under the settlement agreement. The settlement agreement was subject to both preliminary and final approval by the Superior Court. The Superior Court granted preliminary approval on December 3, 2012, and the notice of the settlement was distributed to class members in January 2013. The Superior Court then granted final approval on April 30, 2013, and the settlement became final on July 1, 2013. Based on the number of settlement shares claimed, the Company's total obligation for the State Court Case was $7,477,000, which was $623,000 less than the maximum possible settlement payment previously accrued for. As a result, in June 2013, we reversed approximately $623,000 of the original accrual based on the actual number of settlement shares claimed as discussed above. During the year ended December 31, 2011, we recognized expenses related to the potential settlement in the amount of $1,434,000. During the year ended December 31, 2011, we also recorded a charge of $435,000 relating to the settlement

42


terms of the California Consumer Claims litigation discussed in Part 1, Item 3, "Legal Proceedings" of our 2011 Annual Report on Form 10-K.
Depreciation and Amortization
As a percentage of total revenue, depreciation and amortization expense was 3%, 3% and 4% in 2013, 2012 and 2011, respectively.
Depreciation and amortization expense decreased by $532,000 in 2013 as compared to 2012 and decreased by $1,655,000 in 2012 as compared to 2011. The decreases in both 2013 and 2012 were primarily related to the retirement of assets and certain assets becoming fully depreciated during the years ended December 31, 2013 and 2012.
Depreciation and amortization expense as a percentage of revenue in 2014 is expected to remain consistent with 2013.  We expect capital expenditures for 2014 to be between $4,400,000 and $6,600,000.
Impairment of Goodwill
Our annual measurement date for impairment testing is November 30 for SCI and SafetyNet. Tests for impairment are also performed on an interim basis if there are triggering events identified. On each measurement date a qualitative analysis is first performed, assessing the likelihood that it is more-likely-than-not that the fair value of the reporting unit is less than the carrying value. If it is determined that this is more likely than not, a further analysis is performed which compares the carrying value of the reporting unit to its estimated fair value. An impairment charge is measured based upon the excess of the carrying value of goodwill over the implied fair value if impairment is indicated.
At November 30, 2012, we conducted our review of the SafetyNet reporting unit to determine if a triggering event had occurred. As part of this review, management noted that SafetyNet had continuously missed revenue and subscription objectives, despite the greatly reduced targets established. After assessing the totality of events and circumstances on a qualitative basis, it was determined that it was more likely than not that the fair value of the reporting unit was less than its carrying amount and thus the first step of the goodwill impairment test was performed. Upon performing step one and step two of the goodwill impairment test, it was determined that the implied fair value of the goodwill was “de minimis.” As a result, during the year ended December 31, 2012, we recorded a goodwill impairment charge of $472,000, which eliminated the goodwill balance of the SafetyNet reporting unit going forward. No impairment charges were recorded for the years ended December 31, 2013 or 2011.
Other Income (Expense)
The following table presents our other income and expenses (dollars in thousands):
 
 
 
 
 
 
 
 
Percentage Change
 
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
Interest income
 
$
97

 
$
141

 
$
1,005

 
(31
)%
 
(86
)%
Interest expense
 
(943
)
 
(730
)
 
(638
)
 
29

 
14

Other income (loss)
 
1,008

 
392

 
1,022

 
157

 
(62
)
Total other income (expense)
 
$
162

 
$
(197
)
 
$
1,389

 
(182
)%
 
(114
)%
Other income (expense) for 2013 increased by $359,000, or 182%, as compared to 2012. This increase is largely attributable to the following:
Increased other income of $616,000, which is primarily attributable to a $591,000 gain realized upon the sale of our shares of Absolute Software common stock; partially offset by
Increased interest expense of $214,000, primarily due to increased borrowing during the year.
Other income (expense) for 2012 decreased by $1,586,000, or 114%, as compared to 2011. This decrease is attributable to the following:
Decreased interest income of $863,000, due in large part to a decrease in interest realized on the outstanding accounts receivable balances of some of our international licensees;
Decreased other income of $630,000, which is primarily attributable to a $367,000 decrease in gains related to foreign currency transactions, a $145,000 decrease in dividend income, and a decrease of $222,000 in the income associated with our marketable securities, primarily due to a decrease in gains related to our investment in Absolute, partially offset by an increase in the value of the investments in our deferred compensation plan; and
Increased interest expense of $92,000.

43


Provision (Benefit) for Income Taxes
We recorded a $2,518,000 benefit for income taxes for the year ended December 31, 2013. This amount is primarily related to discrete tax benefits of $2,450,000 and $997,000, due to the release of tax reserves associated with the settlement of tax examinations and an expiration of a statute of limitations during the second and third quarters, respectively.
The effective tax rate is higher than the U.S. statutory rate as a result of recording a significant tax benefit associated with the release of tax reserves during the second and third quarters. Furthermore, we recorded a tax provision on our year-to-date Irish profits and are recording no tax benefit for the year-to-date losses of the remaining entities of our worldwide group. We continue to maintain a full valuation allowance against the net deferred tax assets of the U.S. and our non-Irish foreign subsidiaries at December 31, 2013.
Deferred taxes arise because of differences in treatment between financial statement accounting and tax accounting, known as temporary differences. The tax effects of these temporary differences are recorded as deferred tax assets and deferred tax liabilities on the consolidated balance sheet. Deferred tax assets generally result in tax deductions or credits subsequent to the period in which the related item was recorded in the consolidated statement of operations. At December 31, 2013, we maintain a full valuation allowance against our worldwide deferred tax assets, net of deferred tax liabilities, with the exception of Ireland, which has deferred tax assets of $0. If sufficient evidence of our ability to generate future taxable income in any of the jurisdictions in which we currently maintain a valuation allowance becomes more likely than not, we may reduce our valuation allowance, which would result in an income tax benefit being recorded in our consolidated statement of operations.
The provisions for income taxes for 2012 and 2011 were $472,000 and $2,566,000, respectively. This decrease was substantially due to the 2012 larger than expected losses in our tax paying Irish subsidiary and principally due to general business losses and legal fees associated with legal issues in Brazil.
Net Income (Loss) Attributable to LoJack Corporation and Income (Loss) Per Share
As a result of the foregoing, for the years ended December 31, 2013, 2012 and 2011, net income (loss) attributable to LoJack Corporation and fully diluted income (loss) per share were as follows (dollars in thousands, except for per share amounts):
 
 
 
 
 
 
 
 
Percentage Change
 
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
Net income (loss) attributable to
LoJack Corporation
 
$
3,167

 
$
(8,383
)
 
$
1,429

 
(138
)%
 
(687
)%
Diluted income (loss) per share attributable to LoJack
Corporation
 
$
0.18

 
$
(0.48
)
 
$
0.08

 
(137
)%
 
(700
)%
Weighted average shares — diluted
 
18,051,090

 
17,515,903

 
17,967,394

 
3
 %
 
(3
)%
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity is primarily contingent on working capital generated by continued customer demand for our products and services and continuing our existing relationships with automobile dealers, insurance companies, international licensees and certain law enforcement agencies. We believe that we will be able to keep pace with required technological changes in our products and expect that our sales and marketing initiatives will continue to drive demand.
On August 10, 2010, SCI issued a one year, 11% interest Convertible Promissory Note totaling $400,000 to its shareholders. On October 14, 2011, a new 11% Convertible Promissory Note totaling $752,000 and maturing on October 1, 2012, was issued, replacing the outstanding principal and interest under the original note. On November 5, 2012, an amendment to the new note was issued, extending the maturity date to October 1, 2013. On September 30, 2013, an additional amendment extended the maturity date to October 1, 2014. The amendments did not alter any terms of the note other than the maturity date. The amount of the note due to noncontrolling shareholders of SCI, $274,000, is classified as short-term debt on our consolidated balance sheet.
On December 29, 2009, we entered into our multicurrency revolving Credit Agreement, or the Credit Agreement, with RBS Citizens, N.A., as Lender, Administrative Agent and Lead Arranger, and TD Bank, N.A., as a Lender and Issuing Bank. The Credit Agreement provides for a multicurrency revolving credit facility in the maximum amount of USD $30,000,000, subject to a borrowing base calculation (or its equivalent in alternate currencies). We have the right to increase the aggregate amount available to be borrowed under the Credit Agreement to USD $50,000,000, subject to certain conditions, including consent of the lenders.
On December 21, 2012, we entered into a letter agreement related to the Credit Agreement, by and among the Company, the Borrowers and Guarantors listed therein, the Lenders listed therein, and RBS Citizens, National Association, as Administrative Agent. The letter agreement provides that we may utilize proforma credits for certain settlement costs and legal expenses associated with our wage-and-hour class action lawsuits for purposes of calculating Consolidated EBITDA and determining compliance with certain financial covenants included in the Credit Agreement. The credits applied for the calculation periods ending December

44


31, 2012, March 31, 2013, June 30, 2013 and September 30, 2013, varied by period depending upon when the expenses were expected to be incurred, and were in an aggregate amount of up to $6,900,000 for settlement expenses and an aggregate amount of up to $3,000,000 for legal expenses over the calculation periods.
As of December 31, 2013, we had total outstanding borrowings of $6,000,000 under the Credit Agreement. The interest rate on borrowings under the Credit Agreement varies depending on our choice of interest rate and currency options, plus an applicable margin. The interest rate in effect as of December 31, 2013 was 3.41%. As of December 31, 2013, we also had two outstanding irrevocable letters of credit in the aggregate amount of $717,000. These letters of credit reduce our outstanding borrowing availability under the Credit Agreement.
The Credit Agreement contains limitations on capital expenditures, repurchases of common stock, certain investments, acquisitions and/or mergers and prohibits disposition of assets other than in the normal course of business. Additionally, we are required to maintain certain financial performance measures including maximum leverage ratio, minimum cash flow coverage ratio, minimum quick ratio and maximum capital expenditures. The payment of dividends is permitted under the Credit Agreement but only to the extent such payments do not affect our ability to meet certain financial performance measures. Failure to maintain compliance with covenants could impair the availability of loans under the facility. At December 31, 2013, we had borrowing availability of $23,009,000, which was not limited by the results of our borrowing base calculation for the year then ended, and were in compliance with all financial covenants in the Credit Agreement.
The Credit Agreement terminates on July 31, 2015, at which time all amounts outstanding under the revolving credit facility are due. The Credit Agreement is guaranteed by our United States domestic subsidiaries and is secured by all domestic assets, including our intellectual property, and a pledge of 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. 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 October 18, 2012, the Company entered into a settlement agreement with the named plaintiffs in certain California wage-and-hour class and collective action lawsuits.  Under the terms of the settlement agreement, based on the number of settlement shares claimed, the Company's total obligation was $7,477,000, which was $623,000 less than the maximum possible settlement payment. The Company made its first payment of $3,511,000 on July 11, 2013 and its second and final payment of $3,966,000 on July 25, 2013. We have considered the impact that the settlement agreement has had on our liquidity and cash flows and have determined that our existing cash and cash flow from operations are sufficient to allow us to continue to fund our operations and meet future obligations.
On February 15, 2008, our Board of Directors authorized the repurchase of 1,000,000 shares of our common stock under the Repurchase Plan and additionally renewed the remaining management discretionary authority to repurchase an incremental 2,000,000 shares, for a total repurchase authorization of 3,000,000 shares. In November 2011, we resumed our repurchase activity under the Repurchase Plan. For the year ended December 31, 2013, we repurchased 35,358 shares under the Repurchase Plan at an average price of $3.15 per share. As of December 31, 2013, there were 1,205,129 shares available for repurchase under the Repurchase Plan.
We expect our continuing operation, international expansion and new product initiatives, 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 Credit Agreement.
We expect capital expenditures for 2014 to be between $4,400,000 and $6,600,000 which we expect to fund out of our existing working capital, which was $35,536,000 as of December 31, 2013. Non-discretionary capital expenditures budgeted for 2014 include $2,000,000 to $3,400,000 for enhancement of our core tracking and recovery technology.  Discretionary expenditures for 2014, which could be delayed to a future period, include $2,200,000 to $3,200,000 for our investments in our Enterprise Resource Planning system and additional hardware infrastructure.  However, we currently have no plans to delay these projects or reduce these spending levels. For the year ended December 31, 2013, we had capital expenditures of $5,176,000.
We earn a significant amount of our operating income outside the United States, which is deemed to be indefinitely reinvested in foreign jurisdictions. As a result, $16,161,000 of cash and cash equivalents are held by foreign subsidiaries at December 31, 2013. Of the $16,161,000 of cash and cash equivalents held by foreign subsidiaries, $14,854,000, or 92%, is held in USD denominated accounts, with the remaining $1,307,000 held in foreign currency denominated accounts. We do not provide for U.S. federal income and foreign withholding taxes on the $20,093,000 of undistributed earnings from non-U.S. operations as of December 31, 2013 because we intend to reinvest such earnings indefinitely outside of the U.S. If we were to distribute these earnings, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. We currently do not intend to repatriate these funds. We expect existing domestic cash, cash equivalents, short-term investments, cash flows from operations and our borrowing capacity under our Credit Agreement to continue to be sufficient to fund our domestic operating activities and

45


cash commitments for investing and financing activities, such as material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. In addition, we expect existing foreign cash, cash equivalents, short-term investments, and cash flows from operations to continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.
In 2012, our U.S. parent company received a one-time dividend of $10,000,000 from our Irish subsidiary to assist with legal expenses and the settlement costs associated with the California wage-and-hour litigation discussed Part II, Item 1, "Legal Proceedings" of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, which were paid in 2013. No domestic tax provision was recorded due to the release of valuation allowance against attributes which could be utilized to fully offset our domestic taxable income. Although it is not our intention, if we require more capital in the U.S. than is generated by our domestic operations, for example to fund significant discretionary activities, we could elect to repatriate funds from foreign jurisdictions or to borrow funds under our existing Credit Agreement discussed above. These alternatives, however, would result in increased cash outflows due to higher effective tax rates or increased interest expense.
Our cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the following table (dollars in thousands):
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
(7,331
)
 
$
(258
)
 
$
1,875

Investing activities
 
(2,408
)
 
(2,917
)
 
(4,746
)
Financing activities
 
(6,771
)
 
2,107

 
1,385

Effect of exchange rate changes on cash
 
(99
)
 
15

 
(658
)
Decrease in cash and cash equivalents
 
$
(16,609
)
 
$
(1,053
)
 
$
(2,144
)
Operating activities used $7,331,000 of cash during the year ended December 31, 2013, as compared to using $258,000 of cash during the same period in 2012. This $7,073,000 increase in cash used was due to a decrease of $15,961,000 in cash from working capital items, partially offset by an $8,888,000 decrease in net losses after non-cash reconciling items. The decrease in cash from working capital items reflects our payment of $7,477,000 related to the settlement agreement with the named plaintiffs in certain California wage-and-hour class and collective action lawsuits. 
Investing activities used $2,408,000 of cash during the year ended December 31, 2013, as compared to using $2,917,000 of cash during the same period in 2012. This $509,000 decrease in cash used by investing activities was primarily due to $2,468,000 in cash proceeds from the sale of our shares of the common stock of Absolute Software, partially offset by an increase in capital expenditures of $2,227,000.
Financing activities used $6,771,000 of cash during the year ended December 31, 2013, as compared to providing $2,107,000 of cash during the same period in 2012. The $8,878,000 change in cash provided by financing activities was due primarily to $9,407,000 increase in repayments, net of proceeds, of our borrowings under our existing Credit Agreement, partially offset by a $264,000 increase in cash received for the exercise of stock options and a $171,000 decrease in tax withholdings related to stock grants and lapses.
We do not enter into financial instrument transactions for trading or speculative purposes. We do not intend to establish any special purpose entities for financing purposes.
We will continue to monitor our foreign currency exposure and will implement a hedging strategy if we feel that we are materially at risk and that the hedge is cost effective.
To date, inflation has not had a material impact on our financial results.

46


CONTRACTUAL OBLIGATIONS
We have fixed contractual obligations under various operating lease agreements relating to our office locations, computer and office equipment, vehicles and tower infrastructure locations. Other contractual obligations include long-term debt and non-cancelable inventory purchase commitments. Contractual obligations and commercial commitments existing at December 31, 2013 were as follows (dollars in thousands):
 
 
Payments Due by Period
 
 
Total
 
Less Than
1  Year
 
1-3 Years
 
3-5 Years
 
More than
5  Years
Short term debt obligations
 
$
274

 
$
274

 
$

 
$

 
$

Long term debt obligations
 
6,000

 

 
6,000

 

 

Interest on long term debt obligations(1)
 
312

 
201

 
111

 

 

Operating lease obligations
 
17,558

 
4,850

 
7,064

 
3,256

 
2,388

Purchase obligations
 
4,454

 
3,457

 
977

 
20

 

Total
 
$
28,598

 
$
8,782

 
$
14,152

 
$
3,276

 
$
2,388

 
(1)
Borrowings under the Credit Agreement bear interest at a variable rate, adjustable quarterly, at our option. Interest has been calculated assuming the interest rate prevailing as of December 31, 2013, which was 3.41%.
OFF BALANCE SHEET ARRANGEMENTS
We have no material off balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).
ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have limited exposure to market risk due to the nature of the financial instruments carried on our consolidated balance sheet. Our financial instruments as of December 31, 2013 consisted of cash and cash equivalents, restricted cash, marketable securities, other assets, accounts receivable, accounts payable, accrued liabilities, long-term debt and credit facilities. Our financial position is subject to market risk, including, but not limited to, changes in the value of financial instruments including those resulting from changes in interest rates, foreign currency exchange rates and market valuation. As of December 31, 2013, the fair value of these financial instruments approximated their carrying values.
We are exposed to changes in interest rates primarily through amounts outstanding under our Credit Agreement. As of December 31, 2013, we analyzed the effect of interest rates on our variable-rate Credit Agreement, for which there was $6,000,000 of outstanding borrowings as of December 31, 2013. Based on the outstanding borrowings under the agreement at December 31, 2013, a 1% increase in the interest rate would result in an additional $60,000 of annual interest expense.
We are subject to foreign currency risk through our international operations. As of December 31, 2013, we carry cash denominated in foreign currencies, primarily in the Euro, Canadian Dollar, and Brazilian Real. These assets accounted for approximately 4% of the total cash and cash equivalents at December 31, 2013. We translate accounts for subsidiaries whose functional currency is not the U.S. dollar using exchange rates in effect at period-end for assets and liabilities and exchange rates averaged over the period for results of operations. The related translation adjustments are reported in accumulated other comprehensive income in equity. Transaction gains and losses are reported in the consolidated statement of operations. As a result, both positive and negative currency fluctuations against the U.S. dollar may affect our results of operations and accumulated other comprehensive income. Our exposure to foreign currency exchange risk is minimized in relation to our results of operations since a significant portion of our International segment revenue is denominated in U.S. dollars. This situation may change in the future if revenue earned and expenses incurred denominated in foreign currencies increases.
We manage future foreign exchange risk exposures that cause both earnings and cash volatility by utilizing a hedging strategy if the exposure is material and the hedge is cost effective. As of December 31, 2013, we had no derivative contracts outstanding. We do not enter into financial instrument transactions for trading or speculative purposes. We have not established any special purpose entities and do not have any material off balance sheet financing transactions. We will continue to monitor our foreign currency exposure and will implement a hedging strategy if we feel that we are materially at risk and that the hedge is cost effective.
We are exposed to market valuation risks related to securities we hold that are carried at fair value. Our marketable securities previously consisted of 366,500 shares of Absolute common stock which was accounted for as an available-for-sale security and was valued at the quoted closing price on its market exchange as of the reporting date. Unrealized gains or losses on available-for-sale securities are included, net of tax, in accumulated other comprehensive income in equity until the disposition of the security. Prior to January 1, 2013, our investment in Absolute common stock was accounted for as a trading security and changes in fair value were recorded in the consolidated statement of operations as other income (expense). During the year ended December 31, 2013, we sold our 366,500 shares, our cost basis for which was $1,877,000. Our cost basis was calculated using the per share value of our investment as of January 1, 2013. Prior to January 1, 2013, these securities were classified as trading securities and

47


thus any changes in fair value prior to 2013 were recorded in the consolidated statement of operations as other income (expense). As a result of the sale, during the year ended December 31, 2013, gross realized gains of $591,000 have been reclassified from accumulated other comprehensive income to other income (expense).
Our other assets include our investment in our French licensee, in the form of a publicly-traded common stock, accounted for as an available-for-sale security and valued at the quoted closing price on its market exchange as of the reporting date. Unrealized gains or losses on available-for-sale securities are included, net of tax, in accumulated other comprehensive income in equity until the disposition of the security. During the year ended December 31, 2013, we recorded $224,000 in unrealized losses in accumulated other comprehensive income. Realized gains and losses on available-for-sale securities are included in other income (expense). No realized gains or losses were recorded for the year ended December 31, 2013.
As of December 31, 2013, we held $31,983,000 of cash and cash equivalents. Of this balance, $1,307,000, or 4%, is denominated in foreign currencies, including the Canadian Dollar, Euro and Brazilian Real. The remaining $30,676,000, or 96%, is denominated in U.S. dollars. At December 31, 2013, $17,646,000, or 55%, of our total cash and cash equivalents balance was held in money market accounts, with the remaining $14,337,000 held in traditional deposit accounts.

48


ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets as of December 31, 2013 and 2012
 
Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011
 
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2012 and 2011
 
Consolidated Statements of Changes in Equity for the years ended December 31, 2013, 2012 and 2011
 
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
 
Notes to Consolidated Financial Statements
 

49


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
LoJack Corporation:

We have audited the accompanying consolidated balance sheets of LoJack Corporation and subsidiaries as of December 31, 2013 and December 31, 2012 and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited LoJack Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). LoJack Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LoJack Corporation and subsidiaries as of December 31, 2013 and December 31, 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, LoJack Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/    KPMG LLP
Boston, Massachusetts
March 10, 2014



50


LOJACK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
 
 
2013
 
2012
 
 
(In thousands, except
share and per share amounts)
ASSETS
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
31,983

 
$
48,592

Restricted cash
 
47

 
225

Marketable securities at fair value
 

 
1,877

Accounts receivable, net of allowances of $2,023 and $2,599, respectively
 
26,525

 
20,037

Inventories
 
7,226

 
7,123

Prepaid expenses and other
 
2,253

 
2,917

Prepaid and receivable income taxes
 
186

 
1,319

Deferred income taxes
 
10

 
586

Total current assets
 
68,230

 
82,676

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $49,235 and $49,250, respectively
 
12,600

 
11,686

DEFERRED INCOME TAXES
 

 
145

INTANGIBLE ASSETS — NET
 
90

 
100

GOODWILL
 
1,245

 
1,245

OTHER ASSETS — NET
 
4,611

 
6,076

TOTAL
 
$
86,776

 
$
101,928

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
 
 
 
 
Short term debt
 
$
274

 
$
274

Accounts payable
 
6,875

 
5,979

Accrued and other liabilities
 
9,048

 
15,827

Current portion of deferred revenue
 
10,270

 
13,274

Accrued compensation
 
6,227

 
3,290

Total current liabilities
 
32,694

 
38,644

LONG TERM DEBT
 
6,000

 
13,820

DEFERRED REVENUE
 
10,648

 
13,395

DEFERRED INCOME TAXES
 
10

 
586

OTHER ACCRUED LIABILITIES
 
84

 
3,994

ACCRUED COMPENSATION
 
1,331

 
1,243

Total liabilities
 
50,767

 
71,682

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, 18,741,253 at December 31, 2013 and 18,187,703 at December 31, 2012
 
187

 
182

Additional paid-in capital
 
25,022

 
23,261

Accumulated other comprehensive income
 
6,875

 
6,191

Retained earnings
 
3,904

 
737

Total LoJack Corporation equity
 
35,988

 
30,371

Noncontrolling interest in subsidiary
 
21

 
(125
)
Total equity
 
36,009

 
30,246

TOTAL
 
$
86,776

 
$
101,928

The accompanying notes are an integral part of the consolidated financial statements.

51


LOJACK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
 
(In thousands, except share and per share amounts)
Revenue
 
$
140,207

 
$
132,528

 
$
140,821

Cost of goods sold
 
63,037

 
61,358

 
67,932

Gross profit
 
77,170

 
71,170

 
72,889

Costs and expenses:
 
 
 
 
 
 
Product development
 
5,434

 
5,410

 
5,318

Sales and marketing
 
32,005

 
29,018

 
26,880

General and administrative
 
35,840

 
32,546

 
30,189

Legal settlement
 
(623
)
 
6,930

 
1,869

Depreciation and amortization
 
3,881

 
4,413

 
6,068

Impairment of goodwill
 

 
472

 

Total
 
76,537

 
78,789

 
70,324

Operating income (loss)
 
633

 
(7,619
)
 
2,565

Other income (expense):
 
 
 
 
 
 
Interest income
 
97

 
141

 
1,005

Interest expense
 
(943
)
 
(730
)
 
(638
)
Other, net
 
1,008

 
392

 
1,022

Total
 
162

 
(197
)
 
1,389

Income (loss) before (benefit) provision for income taxes and net income (loss) attributable to the noncontrolling interest
 
795

 
(7,816
)
 
3,954

(Benefit) Provision for income taxes
 
(2,518
)
 
472

 
2,566

Net income (loss)
 
3,313

 
(8,288
)
 
1,388

Less: Net income (loss) attributable to the noncontrolling interest
 
146

 
95

 
(41
)
Net income (loss) attributable to LoJack Corporation
 
$
3,167

 
$
(8,383
)
 
$
1,429

Income (loss) per share attributable to LoJack Corporation:
 
 
 
 
 
 
Basic
 
$
0.18

 
$
(0.48
)
 
$
0.08

Diluted
 
$
0.18

 
$
(0.48
)
 
$
0.08

Weighted average shares:
 
 
 
 
 
 
Basic
 
17,712,002

 
17,515,903

 
17,607,347

Diluted
 
18,051,090

 
17,515,903

 
17,967,394

The accompanying notes are an integral part of the consolidated financial statements.


52


LOJACK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
 
(In thousands)
Net income (loss)
 
$
3,313

 
$
(8,288
)
 
$
1,388

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Foreign currency translation adjustments
 
909

 
(391
)
 
(318
)
Unrealized gains (losses) on marketable securities
 
(225
)
 
147

 
40

Total comprehensive income (loss)
 
3,997

 
(8,532
)
 
1,110

Less: Comprehensive income (loss) attributable to the noncontrolling interest
 
146

 
95

 
(41
)
Comprehensive income (loss) attributable to LoJack Corporation
 
$
3,851

 
$
(8,627
)
 
$
1,151


The accompanying notes are an integral part of the consolidated financial statements.



53


LOJACK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
 
LoJack Corporation Equity
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Other
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
Number  of Shares
 
Amount
 
 
Retained
Earnings
 
 
 
Noncontrolling
Interest in
Subsidiary
 
Total
Equity
 
Comprehensive
Income (Loss)
 
 
 
 
Total
 
 
 
(In thousands, except share amounts)
Balance, January 1, 2011
18,296,959

 
$
183

 
$
19,968

 
$
6,713

 
$
7,691

 
$
34,555

 
$
(179
)
 
$
34,376

 
 
Net income (loss)
 
 
 
 
 
 
 
 
1,429

 
1,429