LoJack Corporation Wall Street Analyst Forum Transcript

LoJack Corporation (LOJN)

Wall Street Analyst Forum 20th Annual Analyst Conference

June 8, 2009 11:50 am ET

Executives

Peter Ender [ph] – Wall Street Analyst Forum

Timothy O'Connor – SVP and CFO

Presentation

Peter Ender

Good morning ladies and gentlemen, my name is Peter Ender [ph] from the Wall Street Analyst Forum, and I will be hosting this room for today. At this time, I would like to ask you to turn off all cell phones or pagers or any other media devices or put into the silent mode. This is also in accordance with the University Club party. After the presentation, you may join LoJack in the adjacent room for their break out sessions.

LoJack Corporation is a premier worldwide provider of tracking and recovery systems. Where in two decades ago, LoJack created the strong vehicle recovery category and has since earned a reputation as the proven global leader in that market segment. The company delivers a 90% success rate in tracking and recovering stolen cars and trucks, and has helped recover more than $5 billion in stolen LoJack equipped global assets.

Today, LoJack’s core business comprises the tracking and recovery of variety of valuable mobile assets that include not only cars and trucks, but also construction equipment, commercial vehicles and motorcycles, all of which leveraged the company’s unrivaled recovery solutions and direct integration with law enforcement.

Additionally, LoJack is expanding and diversifying its business into newer emerging markets through licensing agreements and investments that deliver innovative offerings in areas such as cargo security and people at risk. The company offers systems in 27 states and the District of Columbia, as well as more than 30 countries throughout North America, South America, Europe, Africa and Asia.

So without further due, here is Mr. Timothy O'Connor.

Timothy O'Connor

Thanks Peter. Good morning everyone and thank you for your time today. Before I get into today’s presentation, I just like to remind you about forward-looking statement. I encourage you to read-out the facts of our forward-looking statement in our latest issue of the 10-K.

In my presentation today, I will take time to introduce the LoJack, discuss our historical and Q1 financial results, highlight for you our long term strategies for growth, and finish up by answering any questions you might have.

For those of you who are not familiar with the company, LoJack is the premier worldwide provider of stolen vehicle tracking and recovery systems. Our strong brand is supported by a superior and proven technology that delivers unsurpassed recovery rates. We have installed more than 8 million units across the United States and 30 international countries. This has led to the recovery of more than 250,000 vehicles and over $5 billion of assets globally.

Our past success as well as our future growth strategies are based on our core strengths. LoJack is an externally strong brand with over 90% unaided awareness, on par [ph] with brands like Wal-Mart, Kleenex, Yahoo, and AT&T. Our relationship with law enforcement has and will continue to be a key differentiator for LoJack. The system is used by more than 1,900 federal state counties and local law enforcement agencies. It is supported by a dedicated radio frequency, specifically for police to use in the recovery of stolen vehicles.

The system is designed to work within existing police systems and processes. The LoJack database interacts with the State Crime Information System. The LoJack tracking speeders are installed in police vehicles. LoJack has a group of more than 40 retired law enforcement individuals that support the brands. We have over 20 years of institutional knowledge and working with police and what their needs are.

RF is the most robust effective and efficient technology to track and recover stolen vehicles as it is evidenced by more than 90% success rate. It is covert, silent and does not require a clear line of tracking. There is a differentiator for LoJack is our focus on the last mile. While many companies can locate a car, it can’t recover. Little LoJack integrates with police and the RF taken in the consumers car, LoJack is effective for tracking and recovering the stolen asset.

The Federal Communications Commission granted for LoJack’s 2000 petition allowing the company to use the nationwide frequency, which previously was dedicated to stolen vehicle tracking, the diverse tracking and recovery of applications including missing people at risk, individuals of interest to law enforcement, loss for stolen cargo and hazardous materials.

Looking at our historical revenue trends prior to the current recession, LoJack had a solid track record for revenue growth driven by penetration gains across the domestic dealer channel and expansion into our international businesses. In 2008, our results for the domestic business reflect the impact of the dramatic decline in the U.S. auto sales has continued really through the first half of 2009.

We do not see the same impact for international business in 2008, which grew at 19%. As you see in the first quarter results, this was not the case in 2009. Based on our 2008 results, the domestic business accounted for 58% of total revenue or $116 million. Our international business, which is primarily licensee arrangements accounted for 32% or $64 million. Our Boomerang business in Canada accounted for the remaining 10%.

On a pro forma basis, net income followed a similar growth trend through 2007 driven by our strong sales growth both domestically and in international. Pro forma net income in 2006 has been adjusted for the impact of the stock-based compensation expense. Pro forma net income in 2008 has been adjusted for the impact of a non-cash after tax charge of approximately $38 million related to the impairment of intangible assets at Boomerang Tracking.

The net income decline in 2008 resulted from the significant decline in revenue, particularly in our domestic business, while operational costs are semi fixed in nature. In the fourth quarter of 2008, we took action to reduce the size of our operations workforce both domestically and at Boomerang, which is expected to deliver $5 million in the calendar year 2009. Net income in 2008 includes approximately 1 million restructuring charge related to this organizational change.

Our results in the first quarter continue to be severely impacted by the worst global auto market in decades. The problems with the auto industry start in the U.S., but are now being felt profoundly across the world. Revenue in the first quarter ended March 31, 2009 declined 40% to approximately $28 million from approximately $48 million in quarter one the prior year.

The operating loss for the first quarter was $6.2 million compared to operating income of $1 million for the same quarter last year. The net loss for the first quarter was $6.4 million or $0.38 per share. This is compared to a net income of $1 million or $0.05 per share for the first quarter of 2008.

Gross margin dollars for the first quarter declined 43% to approximately $14 million from approximately $24 million the prior year. Gross margin as a percentage of revenue was 49% compared to 52% in the first quarter of 2008. Excluding the impact of about $400,000 in workforce reduction related costs, gross margin in the quarter would have been 50%.

Our working capital for the quarter was approximately $81 million. We reduced our accounts receivable balance by more than $7 million compared to the prior quarter, driven by collections on our international licensees. Our domestic accounts receivables remained at relatively flat with the prior quarter, and we have not experienced any significant write-offs.

While the beginning of the recession can and has been thoroughly debated, we are clearly living in unprecedented economic times. The factors affecting the U.S. auto business in the second half of 2008 are now being felt in most regions globally. The tight credit markets continue to negatively impact the U.S. auto sales, particularly after market items such as LoJack.

While April and May sales numbers show signs of a bottoming trend, most forecasters put annual sales in 2009 at 9.5 million to 10.5 million units for the year. Despite the loss in the first quarter of 2009, we have maintained a solid foundation supported by a very strong balancing with over $56 million in cash and $81 million in networking capital.

We continue to tightly and aggressively manage our operating expenses and effectively manage our liquidity. As a result of the continued declines in our domestic business, at the end of March, we took action to reduce our domestic operations to reflect the level of the business. This reduction is an addition to the reduction that we made in the fourth quarter of 2008. Our operations are semi fixed and thus the reduction slightly lagged the decline in auto sales.

In addition, we further reduced cost through a variety of organization wide actions that include eliminating the merit increases for executives, reducing the merit increase for all other employees, suspending the company match on our 401(k) plan and eliminating the employee stock purchase plan. All of these reductions were effective April 1, 2009.

The actions we have taken in the last two quarters to reduce the operations in the U.S. and at Boomerang have resulted in approximately 20% reduction in head count. It is important to note that these head count reductions and cost reductions will save approximately $15 million in 2009.

It is important to note that we are doing this while still investing in our programs to generate long term growth. Our overall investment in technology and development will remain at $8 million to $9 million in 2009. LoJack SafetyNet, our solution for people at risk, will remain at $4 million investment for 2009. And our cargo security initiative via supply chain integrity will remain at the $2 million level for the year.

For several years now, we have executed a strategy to diversify the LoJack business and use the powerful LoJack brand into new businesses and markets. The challenges in the domestic auto market clearly demonstrate the need to do so. Our three part strategy for long-term growth includes efficiently broadening and deepening penetration of the domestic channels. This includes the auto market, the motorcycle market and construction.

We will continue to increase market penetration in international through existing licensees and entering new geographies. We will continue to develop or acquire new products in the tracking recovery space. These are the longstanding strategies based on the strong fundamental of LoJack’s business model. Despite the macroeconomic challenges globally, we are continuing to execute against these strategies.

The commission granted by the FCC is a key milestone in our diversification strategy. LoJack has grant for the right to use the same frequency we employ for stolen vehicle recovery and tracking for additional applications including tracking and recovering missing people at risk, individuals of interest to law enforcement, lost or stolen cargo, and hazardous materials.

As a result of this ruling, we can now work to extend our integration with law enforcement into these diverse applications. As with stolen recovery through a single network of operating on nationwide frequencies.

We continue to work with domestic dealers to leverage our effective programs to build the business and mitigate the challenges presented by the local situation. And dealers continue to view LoJack as one of the solutions to profitability challenges they face today. Dealers recognize our core strengths and LoJack represents a solid value proposition to consumers.

LoJack has done an effective job of addressing the dealer needs and dealing with competitive threats. We have multiple installation models including the certified dealer installation program that allows the dealers to install the product and make a higher profit margin at the same time. We have implemented an advanced ordering and scheduling system that leverages our quadrennial [ph] with many advantage and our own dealer portal.

Our business continues to track to those manufacturers that have been increasing market share in recent years such as Toyota and Honda. And we recently expanded to the State of Oklahoma in the first quarter of this year. We will continue to look at other opportunities to expand the network across the U.S.

The continued broad based domestic economics of traction has severely impacted the auto industry and our business. Domestic new vehicle sales continue to drop with 2008 reflecting the worst performance in 16 years at 13 million years [ph]. The first quarter of this year reflected a seasonally adjusted annual rate of only 9.5 million units.

The SAAR in May of this year was 9.9 million units with some industry experts are just bottoming out. We see this as a positive sign as levels will head upwards in the remainder of the year. We are clearly operating in difficult times with a near absence of credit impacting auto sales. Fewer consumers are buying vehicles and those that are buying have extended less credit than they may have historically, but the strategies I have just shared with you have not changed.

Auto industry experts don’t expect that the recovery in auto sales will be -- do expect that the recovery in auto sales will be a slow one. We believe that the reductions we have made in our cost structure positions us well to operate based on these expectations in auto sales volumes. The liquidity we have preserved will allow us to continue invest in our long term strategies through the down turn in the recovery.

We continue to invest in closing adjacencies in the U.S. and international. These segments leverage our existing infrastructure in systems as well as our relationship with law enforcement. They provide modest opportunities, which provide meaningful profit to the business.

This quarter, both motorcycle and construction businesses were impacted by the tough economy. Our motorcycle unit volume was down 45% while our commercial unit volume was down 38% compared to the prior year. As commercial and residential construction grounds were halt, these businesses will continue to be effective.

Together, the motorcycle and construction business represented 8% of the domestic revenue for the quarter. Our construction growth strategy focuses on developing under penetrated regions and markets, focusing on OEMs and large national accounts like united and rider [ph], and targeting new markets such as landscapers and agriculture. The motorcycle strategy has been impacted by the same dynamics as the auto channel, tight credit and reduced motorcycle sales.

We have refined our sales network targeting national franchise dealers and increasing credit penetration with them. We have certified dealers to install the units leveraging learning and success from the CDI [ph] model we have in the automotive channel. And we have introduced early warning product for motorcycles, again increasing the profitability for our brand and the dealers.

The international market represents an important strategic opportunity for our business today and in the future. We have experienced strong growth in the international over the last several years and that growth continued throughout 2008. International revenue for the first quarter declined 62% to $4 million from $10 million in the prior year on a 66% decline in the unit volume.

Our international unit volume and revenue reflect the impact of a widening global economic crisis. The economic uncertainty in the international markets have impacted the buying patterns of our licensees. In recent months, declines in volume from our licensees have been much more rapid than they experienced in the domestic market.

Several of our largest licensees are working to existing inventory that was purchased from us in 2008 based on optimistic expectations in 2009. From many international markets, we will continue through different licensing strategy that has resulted in the international success we’ve had to date.

We operate on the two models to drive our growth in international, our licensing model, again which has driven our success to date and an alternative model, where company owned and operated, which we have initiated in 2006 through our operation Italy. Our licensees generally operate in a one of two business models, the first is in insurance company based and the second is a hybrid of a new car dealer, manufacturer or insurance based model.

In markets where theft is a problem such as Latin America and South Africa, and insurance companies are consulted [ph] to mitigate their risks associated with the vehicle theft, our licensees work with insurance companies will mandate the consumer buy a LoJack. Actually we are working this for the cost of the insurance policy or simply promote LoJack.

In many cases, our licensees will operate free technique [ph] model -- there is a free charge for any installation. This will be for a little on no charge and then they make the revenue back on the recurring stream over the life of the multiyear contracts. This model is not dependent on new vehicle sales.

In Europe, the model is a combination of selling through new car dealers working with the manufacturers to gain factory approval and to market to insurance companies. This model like the U.S. is closely tied to new vehicle sales. Recovery methods vary country-by-country, but generally involve some degree of coordination or integration with police. Going forward, we will contingent to offer our licensees volume, variable pricing and flexible payment terms to enable their -- attempt to build their local market share. We also intend to expand geographically with the most recent opening in Peru.

We recognize our revenue base primarily on the sale of LoJack systems and related infrastructure for the international group. To a much smaller degree, we recognized fees related to royalties for the licensee to operate with stolen vehicle tracking system in their market.

Unlike the U.S., our revenue stream is not directly linked to consumer sales. Our licensees buy from us in bulk based on their demand projections, liquidity availability, and exposure to the U.S. dollar. We enter into annual purchase agreements and apply volume variable pricing based on certain volume milestones within the calendar year.

This has historically resulted in a high level of purchases in Q4 and a low level of purchases in Q1. This was exacerbated by the global economic slowdown in the first quarter of 2009.

Italy represented our first forum [ph] to operating and owning an operation internationally by the company. It allow us to create further shareholder value by tapping into the share of the recurring theme model that has been successful for our licensees. In Italy, our progress continues to be slow and has not met our expectations. Although auto sales have declined and the business climate is challenging, we have much more opportunity before us on a relatively short time selling in the market.

On a positive note, the first quarter we almost doubled our unit volume compared to the same time last year albeit on a very small base. We continue to sign new dealers, sign new customers on to service contracts, and build relationships with manufacturers and insurance companies.

Additionally, we have recently hired a local person for the business. He comes to us with solid expansion in the automotive industry and the transportation marketplace having served as President of Howard Canada [ph] and CEO of Trenitalia, the primary operator of trains in defense in Italy. We do expect that region will breakeven in Italy will take longer than originally anticipated likely sometime in 2010.

The Boomerang business was impacted in the quarter by the same economic and credit challenges as the domestic business. In addition, the Canadian auto market shifted away from high end vehicles where Boomerang has traditionally had higher penetration. In response, we have for the second time in two quarters reduced operating expenses and the team at Boomerang is developing and executing plans designed for effectively target the middle market for vehicles.

This will benefit sales in Quebec, which is an insurance driven market and Ontario which is an auto dealer market. Of note, the devaluation of the Canadian dollar, almost 20% has negatively impacted our results by about 20% in Q1 2009. We expect to breakeven at Boomerang in 2009 regardless.

LoJack SafetyNet, which is a critical market need for solutions that track and rescue people at risk of wandering including those with Alzheimer’s, Autism, down syndrome and dimension during the process of creating awareness and demand for a solution with consumers and working with private life safer international to expand the network of law enforcement and public safety agencies that conduct search and rescue operations.

With the increments of those Alzheimer’s disease, dementia and Autism and other cognitive conditions increasing, we believe there is a tremendous opportunity for LoJack. There are 5.2 million people in the U.S. with Alzheimer’s today with the expectation of about 16 million by 2050.

Wandering is the most life threatening behavior affecting 60% of those with Alzheimer’s and 45% of the time the cases of wandering have tragic outcomes if they are not recovered in 24 hours. Wandering is also a major concern for children with Autism, which is the fastest growing developmental disability in the U.S. This is clearly a market that LoJack belongs in [ph].

Globally, cargo theft is estimated by the International Cargo Security Council that cost between $10 billion and $30 billion annually. We believe supply chain integrity is comprehensive, security solution and key customer relationships will accelerate our entry into the cargo security market.

Currently, SCI has more than 150 major supply chain companies in the manufacturing, tobacco, retailing, pharmaceutical, and transportation sectors. SCI has evolved and expanded their business model by applying LoJack intrinsic technology to other valuable assets that are at risk of being stolen.

Recently, SCI signed a very high profile deal with Fujifilm to offer combined service based on Fuji technology and SCI’s LoJack intrinsic platform. The data managers increased security of data by tracking in real time location and status of sensitive removal of media cartages while they are intrinsic.

LoJack entered into preferred stock purchase agreement with SCI in October 12, 2007. In July 2008, we invested in million, an additional 1.8 million with SCI and in the process increased our ownership with 60%. We continue to believe the cargo market and SCI solution is an important investment for LoJack.

Absolute Software, a Canada based company, markets the products of recovered, stolen laptops and other portable computers. This system is proven effective and they coordinate with police for the recovery of laptops. Seven years ago, we entered into a licensing agreement relationship with them to brand their solution LoJack for laptops. The relationship has had great benefits generating additional awareness for our brand and then beneficial as we continue to diversify our business.

LoJack is currently vested and exercised three out of the five trenches of Absolute Software warrants. The value of the warrants on their data vest [ph] which becomes the basis for our deferred revenue calculation will be recognized over the remainder term of the licensing agreement.

The projected value of the trench that is expected to exercise on 07/01/09 is expected to be $800,000 based on current share price and exchange rates. As of the end of March 31, 2009 there was 2.5 million in deferred revenue on our books which we recognized over the remaining life of the licensing agreement.

We are in the process of evaluating the potential for additional licensing deals. Despite the significant volatility in the global auto industry and the credit markets, we remained focused on our mission. We believe our core strengths, the LoJack brand, superior technology and unsurpassed relationships with law enforcement support this mission.

In the short term, we will continue to closely monitor our various businesses both domestically and international, and take appropriate steps to ensure their operating cost effectively reflect revenue potential and preserve our liquidity. We will also continue to invest in our strategic programs to divest our visions and deliver long term growth and value for our shareholders.

Thank you for your time. We will now take your questions.

Question-and-Answer Session

Unidentified Participant

In short Europe, South America and (inaudible).

Timothy O'Connor

So the question was, we have showed Europe, Asia, and -- sorry Europe, Latin America and South Africa, but we do not show Asia, so was there a potential business there.

Yes, we do believe there is still a potential business there. We are on the ground and its gaining a foothold variable through a Radio Frequency and establishment business there. So we continue we would invest in China and other Asia markets. So we think it’s a big business. Yes.

Unidentified Participant

(inaudible).

Timothy O'Connor

So we haven’t seen, I am sorry, so the question was related to our penetrations I guess in the U.S. market as it relates to the cars that are not being stolen at the fast rate within the U.S. Our penetration rate is right around 6%. It varies across the country. Our highest penetration rates tend to be on the West Coast and tend to be in the Toyota’s, Honda’s of the world, but we haven’t seen -- it’s been plus or minus 6% for quite sometime actually.

Unidentified Participant

(inaudible).

Timothy O'Connor

Multiple, probably three to four years.

Unidentified Participant

Yes. Okay.

Timothy O'Connor

So we haven’t seen a significant up tick one way or another or down tick one way or another.

Unidentified Participant

On the SafetyNet initiatives, (inaudible).

Timothy O'Connor

So the question was related to our SafetyNet, what we are doing in terms of business. We literally just launched the business in February of this year, March this year. So its generating revenue, but it is a slow build.

Unidentified Participant

Yes. I mean how could that compete against cellular space location services. I don’t know no else is out here but it seems to me that (inaudible).

Timothy O'Connor

It’s not all that different when you compare it to auto recovery. The success rate on auto recovery versus some of the RF versus some of the other technology is far superior, its 90% plus. Again, it’s not just the technology, but it is the relationship, the law enforcement.

Our law enforcement, relationships really get leverage out of the RF technology in what we supply to law enforcement in terms of tracking devices. So we provide law enforcement both on the SafetyNet side and the vehicle tracking side with the equivalent to track the person or the vehicle and that’s where really we get some leverage. Yes sir.

Unidentified Participant

On the SafetyNet side, is it a cellular [ph] plant in the patient or in the person or is it what?

Timothy O'Connor

The question was, what’s the device look like for SafetyNet? It’s actually the relationship or the I think to judge my memory as the old watch, when was watch first came out its kind of a plastic band with a dial in the front of it. That’s essentially what the device looks like. It is external only and has a battery in there and constantly transmits, it’s a little different than our auto technology in that. In order for the auto device to be activated, you have to report your car to the police stolen. That’s not the case with the SafetyNet devices, it always transmitting. So you call up the service center, if someone is missing it’s automatically activated, we contact the local police and will track them with personal point. That’s (inaudible).

Unidentified Participant

(inaudible).

Timothy O'Connor

I am not sure if there was a question there, but there was a question about our law enforcement relationships in Italy.

Unidentified Participant

(inaudible).

Timothy O'Connor

The efficacy of law enforcement in Italy. So again, we’ve been overtime building those relationships with law enforcement and we are confident that we will use them as a recovery and we have thus far used them for recovery stolen vehicles. We do supplemental with our own trackers there as well, but our relationships with law enforcement are key to our growth there and so we are relying on it.

Unidentified Participant

(inaudible).

Timothy O'Connor

That was construction and motorcycle combined. That was construction and motorcycle combined with about 8%.

Unidentified Participant

How would those could breakdown?

Timothy O'Connor

It’s actually roughly 50/50. Motorcycle may be five and construction about three, but they are close to 50/50.

Unidentified Participant

(inaudible).

Timothy O'Connor

The rest of it is --

Unidentified Participant

(inaudible).

Timothy O'Connor

No, it will all be used cars. There will all be new car sales or auto sales. We do have some pretty own vehicle sales in there too, but it will be driven by auto sales, the largest majority.

Unidentified Participant

(inaudible) the decline in auto sales, how would you think about cash going forward?

Timothy O'Connor

So the question was the breakdown of our $56 million cash position and how we see it going forward. The $56 million is really cash. There is no extremely risky marketable securities in that or anything, its all market funds as well existing we can access many time we would like. We do have a net cap -- cash position of about $30 million, but we do have debt in Canada but that’s basically how our cash position is made up. We are managing our cash very, very tightly particularly for remainder of the year. We do expect to be cash positive for the year and so we will adjust our expenses accordingly as we have done in the past. That’s our plan.

Unidentified Participant

Can you talk a little bit about what manage your domestic footprint, is it inter relationships, the law enforcement relationships and then could you also describe the law enforcement relationship will then work, how that work (inaudible).

Timothy O'Connor

Sure. So the question was describe what limits our business domestically, is it dealers or is it law enforcement, and then describe the law enforcement side of the business and what the relationship looks like. So let me start with law enforcement.

The law enforcement relationships go back more than 20 years now and its started in the North East and has moved across state-by-state, agency-by-agency and its really worth in it for them is we provide the tracking device for the full law enforcement. We set out their vehicles, we set out maybe Asian equipment for them as well.

And while they are ecstatic about recovering a car, the things that lead them to recover are better deals for them whether its larger (inaudible) whether its drug interdiction whatever the case maybe, but the price for them is much larger than recovering the single stolen car. So for us, the limiting factor is not our law enforcement relationships, we feel we can build those in any state or region we would like.

We do have a pretty robust ROI model when we start talking about what states we are going to build out next. So there is a infrastructure that needs to be built in Tennyson Towers to activate the device, obviously a sales force on the ground and some other things. So there is a pretty robust model as it relates to that which is why we look at diversifying and trying to get some leverage with other product lines in that, that we are wakening up [ph] some of those other markets. I think there is one question back.

Unidentified Participant

(inaudible).

Timothy O'Connor

Yes. There is no sticker on any vehicles that we install the LoJack on because for that particular reason and there is no label on the device that says LoJack on it or anything like that. It is cohort and is placed on -- if we have five BMWs, it will be in five different locations on the BMW.

Unidentified Participant

(inaudible).

Timothy O'Connor

Don’t know, can’t comment on it. I would now (inaudible) if I had a LoJack in there that’s the sure. I think we have a question.

Unidentified Participant

(inaudible) with licensees really big markets, do you have any input on how they run their business or?

Timothy O'Connor

Sure. So the question was how much input or hands on involvement we have in our licensees in some of the bigger markets. I would say it runs the gambit. We have in the case of Argentina and Mexico, we actually have a equity position in both of those albeit very small, so above 5%. We take a more active role on those markets. That does not mean we manage the business by structured imagination, particularly in those two markets the management team is very, very strong and I would add South Africa to that as well. They have grown the business and they know that market, they have the relationships with insurance companies and in some cases auto manufacturers. So we don’t -- we are not hands-off but it does run the game but we are a little more involved in those markets versus some of the other smaller markets.

Unidentified Participant

(inaudible) how many people of your employees, how many do that focused on domestically and how many do that focused on internationally?

Timothy O'Connor

So the question was how many employees do we have focused in terms of the total organization focus on international versus domestic. I will leave Italy out of it for a second, so if you are just talking about international licensee, I would say its less than 10% of our employees are 100% dedicated to our international licensees. That doesn’t take into consideration the corporate efforts and things like that, but I am talking dedicated day-to-day operations at less than 10% of our employee base. Again we don’t do any installations for the international licensees, they do their own installations and we shipped basically FOB [ph] factoring for them as well. I wish to follow-up on it.

Unidentified Participant

(inaudible) in management, could you give me a little color about the opportunity maybe in RFID retail anything of that nature because you have almost (inaudible) in my estimate maybe at --

Timothy O'Connor

So the question was are we looking at, I will just summarize if I could, so the question is do we look at other what I will call adjacencies whether its leveraging technology, the brand, our relationships or so and so forth. And one of the questions was on RFID and retail. So as we start to look at what our strengths are so that the three cores that we look at are the brand itself, the technology itself and then our relationship with law enforcement, those are our three core businesses.

So as we look at diversification, if you take that as the core auto and we’ve kind of drawn a circle around it and said, what are the close-in adjacencies? Close-in adjacencies of the auto and the construction equipment and motorcycles, that’s close-in. And then kind of the next thing around it has been really the people at risk and the cargo piece. So that’s where we are investing and really driving our dollars today in terms of China grow those businesses. What comes after that, it could be retail RFID, it could be some other thing, but that’s really how we thought about diversifying in business and leveraging the brand, the technology and our relationship with law enforcement. Yes sir.

Unidentified Participant

(inaudible).

Timothy O'Connor

So the question was related to what impact there will be overall auto market and then particularly the dealer closings on both the Chrysler side and the GM side had on our business. I will go to the first question first, what impact has the overall auto business had? It’s been dramatic. When essentially you are at 60% level of auto sales as you were last year and really for the past decade, the past decade has been 16 million to 17 million units of sales, so that’s had a dramatic effect on us. I hate to think what would have happened if we weren’t already following a diversification strategy at the same time. So we do feel like we are a little bit ahead of the game as it relates to that, but we do much better for 12 million or 13 million units of sales for the year and we have action to address that.

The second part on both the Chrysler and the GM closings, I will give you some anecdotal and then I will give you some fact. On the anecdotal side, most of the dealers that we seen are either overlapping dealers or old [ph] dealers where we typically don’t have penetration anyway, and GM and Chrysler tend to be the two brands where we don’t have high penetration on. So in that case, we don’t feel there is a big impact. If we sell them 10 million cars, our penetration is going to be around 6%, doesn’t matter how many dealers are out there. That’s one anecdotal side.

On the fast base [ph] side, based on the list of closures we have seen on the Chrysler side, our impact on an AR perspective is less than $50,000 and that’s where we think the risk is. Revenue is obviously a little bit higher than that, but that’s where we think the risk is. We don’t -- we think those in some cases, those deals will be bought by other groups or convert over to other brand for cars. So we haven’t seen a big impact yet.

Unidentified Participant

(inaudible).

Timothy O'Connor

I am sorry, could you just restate the question again.

Unidentified Participant

(inaudible).

Timothy O'Connor

The cost factor. On the SafetyNet device?

Unidentified Participant

(inaudible).

Timothy O'Connor

I can’t, we haven’t disclosed anything on the cost factor, but I can tell you with the business model looks like if that’s (inaudible). So the question was what’s the cost factor on our SafetyNet device?

It is our first foray domestically into a recurring revenue model. So there is an application fee upfront of $99 and then there is a monthly recurring fee of $30 a month and that includes the changing of the strap and the battery on a monthly basis at the moment. So what is a recurring theme model and requires us to sign up some agencies to do a recovery and supply those recovery agencies with equipment. The payback is pretty quick. You don’t need to pick up too many subscribers in a particular market once you set out a police or safety agency to do the recovery.

Unidentified Participant

(inaudible).

Timothy O'Connor

There is no cost base for us. Its straight royalties based on the warrants. So there is no hardware that we install into the laptops. Yes sir.

Unidentified Participant

(inaudible).

Timothy O'Connor

So the question was how did we choose Italy as our first owned and operated market and how do we think about it going forward? I don’t have a good answer for you on why we chose Italy. I guess that was about five years ago. I would imagine it has to do with the density of the population, the fact rates and the cost to build up the network and the relationship with law enforcements we can hopefully attain. So that’s basically how we have looked at it thus far, so I would imagine the same thing held through for Italy.

As we think about it going forward, success of Italy would do a lot to extent that strategy. So right now we have not -- we don’t have any plans in place to build an owned and operated model in any markets outside the U.S. and outside Canada and Italy at the moment. We are building to our licensees and looking at other opportunities with them and other opportunities in other markets with new licensees. We don’t have any plans today to extend that owned and operated model into other markets.

Unidentified Participant

(inaudible).

Timothy O’Connor

We haven’t drawn that conclusion yet. Yes.

Unidentified Participant

(inaudible).

Timothy O'Connor

We haven’t taken it as the fine strategy to go out to other services. In fact, in most in a lot of cases, if you look at what our internal installations base was in terms of employees about three years ago, roughly its falling 80% plus by our own employees. We’ve moved away from that and gone to expatiators [ph] or dealers installing it because we don’t want that to have core competency of ours if you will. So we’ve moved away from that overtime. We don’t think there is a big competing one-on-one with the dealers for a service is probably not a good model for us at the moment.

Unidentified Participant

(inaudible).

Timothy O'Connor

Yes, actually we do have our early warning device does some of that. So that’s the subscription model, if you will, that we sign up. It’s in addition to our LoJack that we put in there today and it is basically a key (inaudible) because it can do a bunch of other things along with it. But that’s certainly an area that we will continue to look at. Yes.

Unidentified Participant

How about the child prophet [ph] locators?

Timothy O'Connor

The question was how about the child prophet locators. That certainly in adjacency we have looked at, it’s sort of in that outer circle, but that market every kind of look at the size of that market its just amazingly the size of the market. I don’t know what it is from a location standpoint or location tracking standpoint, I think its going to be a device challenge and I am not sure it leverages our law enforcement relationships. It may send it the other way. I am not sure how many police forces want to go around chasing dogs and cats but the market is huge, you are absolutely right. So we haven’t gone after that, but certainly it’s in our sites. Yes.

Unidentified Participant

What are the pluses and minuses of the RF technology versus GPS technology?

Timothy O'Connor

Sure. The question was what’s the pluses and minuses of GPS versus RF. I will go with RF first, so the and I will use the whole device rather than just a technology itself, but the device as we said again, is silent, its covert, so its hidden in the car that people cant find. It does leverage a network that in most cases is not jam able anything can be jammed but certainly when you drive into a tunnel it premiers the tunnel, it premiers cargo containers, we have had a couple of recoveries on the Long Beach area that have penetrated through the steel cargo containers. So that for us is a big benefit.

The minuses on it is really the cost of the infrastructure if you will, so you have to build out a particular market, put in Tennyson Towers so that the vehicle can be activated or the device can be activated. So it is a cost -- it is a higher cost rate and that we own the technology, we own the network and we have to build it out. So that’s on the RF side.

On the GPS side, there is no network that you have to build out because the networks already build and supported by the Air Force and the government. The trouble with it is the -- it does -- it can be jammed quite easily, it does not, it needs a clear line of site for tracking, the recovery model itself does not leverage any law enforcement relationships. So that’s the big difference between the two of them, but there is no huge capital investment to build out a particular market. Yes sir.

Unidentified Participant

(inaudible).

Timothy O'Connor

It’s by country. The question was is our coverage by country or is it globally? It is by country. Yes.

Unidentified Participant

(inaudible).

Timothy O'Connor

Sure. The question was really around the mandate in Brazil to install a vehicle tracking recovery system in every car. The law actually defines it as a GPS device that needs to be installed. There are some -- there recently has been a stay on that law. We don’t know how long it is going to be enforced, the stay will be enforced or if it is going to be enacted or if it is not going to be enacted, and I can’t speculate on what will happen with the Brazilian government. I can give you an anecdote on Mexico. Mexico I believe it was about three years ago had a similar mandate and lasted roughly three days because consumers did not want to pay the additional 250, $300 to buy the car because that cost is going to get passed on to the consumer.

If it does get mandated and implemented, our relationship with our licensing in Brazil is quite good and they are a service provider. They are one of the largest service providers in the country. There are some (inaudible) for the law that says you can’t be the device provider, the service provider and the firmware provider all at once. So as those things work themselves out, we will still have a good piece of the business there. It’s just a matter of whether the law gets enacted and what ways they perform, but we won’t be locked out if that (inaudible). Yes.

Unidentified Participant

(inaudible).

Timothy O'Connor

Sure. The question was how much do we average on capital spent for R&D. Our total CapEx on an annual basis is roughly $6 million to $7 million and I call a third of that is due to maintenance whether that’s infrastructure software or software for dealing with the customers or consumers, we will back them operation. So roughly $3 million or $4 million is what our product development capital expenditures are on an annual basis.

Okay. Anything else? Thank you very much.

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