20-F 1 zk1312991.htm 20-F zk1312991.htm


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 20-F
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2012
 
Commission file no. 001-32618
 
 
ITURAN LOCATION AND CONTROL LTD.
(Exact name of Registrant as specified in its charter and
translation of Registrant’s name into English)
 
Israel
(Jurisdiction of incorporation or organization)
 
3 Hashikma Street, Azour, Israel
(Address of principal executive offices)
 
Eli Kamer, Chief Financial Officer, 3 Hashikma Street, Azour, Israel, Tel: 972-3-5571314, Facsimile: 972-3-5571327
(Name, Telephone, E-mail and/or Facsimile number and Address of Company contact person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Name of each exchange on which registered
 
 
Ordinary Shares, par value NIS 0.331/3 per share
Nasdaq Global Select Market
 

Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
(Title of Class)
 
Securities for which there is reporting obligation pursuant to Section 15(d) of the Act:
 
None
 
        Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
 
23,475,431 Ordinary Shares
 
 
 

 
 
        Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
 
Yes o No x
 
        If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Yes o No x
 
        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 proceeding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x No o
 
         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
 
Yes o No o
 
         Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (check one):
 
Large Accelerated Filer o     Accelerated Filer x     Non-accelerated filer o
 
         Indicate by check mark which basis of accounting the registrant had used to prepare the financial statements included in this filing:
 
U.S. GAAP x
International Financial Reporting Standards as issued by the International Accounting Standards Board o
Other o

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:
 
Item 17 o Item 18 x
 
        If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x
 
[APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS]
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1034 subsequent to the distribution of securities under a plan confirmed by a court.
 
 Yes o No o
 
 
 

 

 
TABLE OF CONTENTS
 
   
Page
 
     
 
USE OF CERTAIN TERMS
iii
     
 
FORWARD LOOKING STATEMENTS
iii
     
PART I
   
     
1
     
1
     
1
     
A.
SELECTED FINANCIAL DATA
1
B.
CAPITALIZATION AND INDEBTEDNESS
4
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
4
D.
RISK FACTORS
4
     
14
     
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
14
B.
BUSINESS OVERVIEW
16
C.
ORGANIZATIONAL STRUCTURE
26
D.
PROPERTY, PLANTS AND EQUIPMENT
27
     
28
     
28
     
A.
OPERATING RESULTS
39
B.
LIQUIDITY AND CAPITAL RESOURCES
42
C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES,ETC.
42
D.
TREND INFORMATION
42
E.
OFF-BALANCE SHEET ARRANGEMENTS
42
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
42
G.
SAFE HARBOR
42
     
43
     
A.
DIRECTORS AND SENIOR MANAGEMENT
43
B.
COMPENSATION
45
C.
BOARD PRACTICES
49
D.
EMPLOYEES
52
E.
SHARE OWNERSHIP
54
     
56
     
A.
MAJOR SHAREHOLDERS
56
B.
RELATED PARTY TRANSACTIONS
57
C.
INTERESTS OF EXPERTS AND COUNSEL
59
 
 
 

 

59
     
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
59
B.
SIGNIFICANT CHANGES
61
     
62
     
A.
OFFER AND LISTING DETAILS
62
B.
PLAN OF DISTRIBUTION
63
C.
MARKETS
63
D.
SELLING SHAREHOLDERS
63
E.
DILUTION
63
F.
EXPENSES OF THE ISSUE
63
     
63
     
A.
SHARE CAPITAL
63
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
63
C.
MATERIAL CONTRACTS
71
D.
EXCHANGE CONTROLS
71
E.
TAXATION
72
F.
DIVIDENDS AND PAYING AGENTS
79
G.
STATEMENT BY EXPERTS
80
H.
DOCUMENTS ON DISPLAY
80
I.
SUBSIDIARY INFORMATION
80
     
80
     
81
     
PART II
 
  
     
82
     
82
     
82
     
 
     
85
     
85
     
85
     
85
     
86

 
ii

 
 
USE OF CERTAIN TERMS
 
As used herein, and unless the context suggests otherwise, the terms “we”, “us”, “our” or “Ituran” refer to Ituran Location and Control Ltd. and its consolidated subsidiaries.
 
We have prepared our consolidated financial statements in US Dollars. Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All references herein to “dollars” or “$“or “USD” are to United States dollars, and all references to “NIS” are to New Israeli Shekels.
 
FORWARD LOOKING STATEMENTS
 
This Annual Report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The use of the words “projects,” “believes,” “expects,” “may,” “plans” or “intends,” or words of similar import, identifies a statement as “forward-looking.” The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on the assumption that we will not lose a significant customer or customers or experience increased fluctuations of demand or rescheduling of purchase orders, that our markets will continue to grow, that our products will remain accepted within their respective markets and will not be replaced by new technology, that competitive conditions within our markets will not change materially or adversely, that we will retain key technical and management personnel, that our forecasts will accurately anticipate market demand, and that there will be no material adverse change in our operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. In addition, our business and operations are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties described in this annual report in Item 3: Risk Factors. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statements or other information contained in this report, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in our reports on Form 6-K filed with the U.S. Securities and Exchange Commission (“SEC”).
 
 
iii

 

PART I
 
 
Not applicable.
 

Not applicable.


        A.       SELECTED FINANCIAL DATA
      
We have provided selected financial data under generally accepted accounting principles in the U.S. (U.S. GAAP). You should read the selected consolidated financial data presented in this Item together with Item 5 – Operating and Financial Review and Prospects and with our consolidated financial statements included elsewhere in this annual report.
 
        Our selected consolidated statements of income data for the years ended December 31, 2010, 2011 and 2012 and our selected consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our consolidated financial statements, included elsewhere in this report. The selected consolidated statements of income data for each of the years ended December 31, 2008 and 2009 and the selected consolidated balance sheet data as of December 31, 2008, 2009 and 2010 are derived from other audited financial statements not included in this report.
 
 
 

 
Selected Financial Data Under U.S. GAAP:
 
Consolidated Statements of Income

   
Year Ended December 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
In USD
 
   
In thousands, except per share amounts
 
Revenues:
                             
 Location based services
    114,565       120,410       108,101       91,574       86,051  
 Wireless communications products
    35,753       39,757       39,724       29,807       46,565  
                                         
 Total Revenues
    150,318       160,167       147,825       121,381       132,616  
Cost of Revenues:
                                       
  Location based services
    46,371       50,977 *     42,137 *     34,748 *     32,655 *
  Wireless communication products
    29,786       29,758 *     33,037 *     26,074 *     36,342 *
                                         
Total cost of revenues
    76,157       80,735       75,174       60,822       68,997  
                                         
  Gross profit
    74,161       79,432       72,651       60,559       63,619  
                                         
  Research and development expenses
    669       631       481       372       408  
   Selling and marketing expenses
    8,489       8,543       8,675       7,684       9,628  
  General and administrative expenses
    33,439       34,984       31,671       27,213       27,505  
  Other expenses, net
    1,617       8,691       1,156       908       418  
                                         
  Operating Income
    29,947       26,583       30,668       24,382       25,660  
  Other income (expenses)
    6,755       (819 )     (14,745 )     -       (1,617 )
Financing income (expenses), net
    987       2,100       139       1,604       (166 )
                                         
Income before income tax
    37,689       27,864       16,062       25,986       23,877  
Income tax
    (11,690 )     (5,655 )     (6,286 )     (7,139 )     (7,896 )
Share in income (losses) of  affiliated companies, net
    (39 )     (23 )     (3 )     13       (25 )
                                         
Net income for the year
    25,960       22,186       9,773       18,860       15,956  
Less: net income attributable to non-controlling interest
    (1,080 )     (908 )     (1,071 )     (668 )     (1,074 )
                                         
Net income attributable to Company stockholders
    24,880       21,278       8,702       18,192       14,882  
                                         
Earning per share
                                       
  Basic
  $ 1.19     $ 1.01     $ 0.42     $ 0.87     $ 0.69  
  Diluted
  $ 1.19     $ 1.01     $ 0.42     $ 0.87     $ 0.69  
Weighted average number of shares outstanding
                                       
    Basic
    20,968       20,968       20,968       20,968       21,431  
    Diluted
    20,968       20,968       20,968       20,977       21,440  
 
*Reclassified

 
2

 
 
Consolidated Balance Sheets Data
 
   
Year Ended December 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
In USD
 
   
In thousands, except per share amounts
 
                               
Cash & Cash Equivalent; deposit in escrow (short and long term) and investment in trading marketable securities
      34,392         40,226          61,279         78,093         55,668  
Working Capital
    44,145       48,474       48,594 *     72,825       60,073  
Total Assets
    147,339       157,457       188,344       185,868       157,899  
Total Liabilities
    55,332       52,105       73,181       52,025       45,220  
Retained Earnings
    32,187       43,185       43,689       66,607       51,981  
Stockholders Equity
    88,027       101,194       110,771       130,126       109,555  

*Reclassified from short term liabilities to long term liabilities.
 
Other Data:

   
Year Ended December 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
(unaudited)
 
       
Subscribers of our location-based services(1)
    667,000       623,000       604,000       562,000       511,000  
Average monthly churn rate
    3 %     3.2 %     2.8 %     2.1 %     2.0 %
 
(1) number of subscribers is approximate.

 
3

 

        B.       CAPITALIZATION AND INDEBTEDNESS

Not applicable.
 
        C.       REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.
 
        D.       RISK FACTORS

        Our business, operating results and financial condition could be seriously harmed due to any of the following risks, among others. If we do not successfully address the risks to which we are subject, we could experience a material adverse effect on our business, results of operations and financial condition and our share price may decline, which may result in a loss of all or part of your investment . We cannot assure you that we will successfully address any of these risks. You should carefully consider the following factors as well as the other information contained and incorporated by reference in this annual report before taking any investment decision with respect to our securities. See “Forward Looking Statements” on page iii above.
 
RISKS RELATED TO OUR BUSINESS
 
        Failure to maintain our existing relationships or establish new relationships with insurance companies could adversely affect our revenues and growth potential.
 
        Revenues from our stolen vehicle recovery services, which we refer to as SVR services, and automatic vehicle location products, which we refer to as AVL products, are primarily dependent on our relationships with insurance companies. In Israel, insurance companies drive demand for our SVR services and AVL products by encouraging and, in some cases, requiring customers to subscribe to vehicle location services and purchase vehicle location products such as ours. In Brazil and Argentina, insurance companies enter into written agreements to subscribe to our services and purchase or lease our products directly. Our inability to maintain our existing relationships or establish new relationships with insurance companies could adversely affect our revenues and growth potential.
 
        Changes in practices of insurance companies in the markets in which we provide our SVR services and sell our AVL products could adversely affect our revenues and growth potential.
 
        We depend on the practices of insurance companies in the markets in which we provide our SVR services and sell our AVL products. In Israel, insurance companies either mandate the use of SVR services and AVL products, or their equivalent, as a prerequisite for providing insurance coverage to owners of certain medium- and high-end vehicles, or provide insurance premium discounts to encourage vehicle owners to subscribe to services and purchase products such as ours. In Brazil and Argentina, insurance companies mainly lease our AVL products directly and subsequently require their customers to subscribe to our SVR services.
 
Therefore, we rely on insurance companies’ continued practice of:

 n
accepting vehicle location and recovery technology as a preferred security product;
 n
requiring or providing a premium discount for using location and recovery services and products;
 n
mandating or encouraging use of our SVR services and AVL products, or similar services and products, for vehicles with the same or similar threshold values and for the same or similar required duration of use; and
 n
with respect to insurance companies in Brazil and Argentina, deciding to lease SVR services and AVL products from us directly.

 
4

 
If any of these policies or practices change, revenues from sales of our SVR services and AVL products could decline, which could adversely affect our revenues and growth potential.
 
        A reduction in vehicle theft rates may adversely impact demand for our SVR services and AVL products.
 
        Demand for our SVR services and AVL products depends primarily on prevailing or expected vehicle theft rates. Vehicle theft rates may decline as a result of various reasons, such as the availability of improved security systems, implementation of improved or more effective law enforcement measures, or improved economic or political conditions in markets that have high theft rates. If vehicle theft rates in any or all of our existing markets decline, or if insurance companies or our other customers believe that vehicle theft rates have declined or are expected to decline, demand for our SVR services and AVL products may decline.   
 
        A decline in sales of new medium and high end cars and commercial vehicles in the markets in which we operate could result in reduced demand for our SVR services and AVL products.
 
        Our SVR services and AVL products are primarily used to protect medium- and high-end cars and commercial vehicles and are often installed before or immediately after their initial sale. Consequently, a reduction in sales of new medium- and high-end vehicles could reduce our addressable market for SVR services and AVL products. New vehicle sales may decline for various reasons, including an increase in new vehicle tariffs, taxes or gas prices. A decline in vehicle production levels or labor disputes affecting the automobile industry in the markets where we operate may also impact the volume of new vehicle sales. A decline in sales of new medium- and high-end vehicles in the markets in which we provide our SVR services or sell our AVL products could result in reduced demand for such services and products.      
 
        There is significant competition in the markets in which we offer our services and products and our results of operations could be adversely affected if we fail to compete successfully.
 
        The markets for our services and products are highly competitive. We compete primarily on the basis of the technological innovation, quality and price of our services and products. Our most competitive market is the location-based services market and the related AVL products market, due to the existence of a wide variety of competing services and products and alternative technologies that offer various levels of protection and tracking capabilities, including global positioning systems, or GPS (although we also provide services based on GPS/GPRS technology), satellite- or network-based cellular systems and direction-finding homing technologies. Some of these competing services and products, such as certain GPS-based products, are installed in new cars by vehicle manufacturers prior to their initial sale, which effectively precludes us from competing for such subscribers. Furthermore, providers of competing services or products may extend their offerings to the locations in which we operate or new competitors may enter the location-based services market. Our AVL products also compete with less sophisticated theft protection devices such as standard car alarms, immobilizers, steering wheel locks and homing devices, some of which may be significantly cheaper. Some of these competing products have greater brand recognition than our AVL products, including LoJack Corporation in the United States.
 
        The development of new or improved competitive products, systems or technologies that compete with our wireless communications products may render our products less competitive or obsolete, which could cause a decline in our revenues and profitability.
 
        We are engaged in businesses characterized by rapid technological change and frequent new product developments and enhancements. The number of companies developing and marketing new wireless communications products has expanded considerably in recent years. The development of new or improved products, systems or technologies that compete with our wireless communications products may render our products less competitive and we may not be able to enhance our technology in a timely manner. In addition to the competition resulting from new products, systems or technologies, our future product enhancements may not adequately meet the requirements of the marketplace and may not achieve the broad market acceptance necessary to generate significant revenues. Any of the foregoing could cause a decline in our revenues and profitability.
 
 
5

 
 
        The inability of local law enforcement agencies to timely and effectively recover the stolen vehicles we locate could negatively impact customers’ perception of the usefulness of our SVR services and AVL products, adversely affecting our revenues.
 
        Our AVL products identify the location of vehicles in which our products are installed. Following a notification of an unauthorized entry, or if we receive notification of the vehicle’s theft from a subscriber, we notify the relevant law enforcement agency of the location of the subscriber’s vehicle and generally rely on local law enforcement or governmental agencies to recover the stolen vehicle. We cannot control nor predict the response time of the relevant local law enforcement or other governmental agencies responsible for recovering stolen vehicles, nor that the stolen vehicles, once located, will be recovered at all. In the past, some stolen vehicles in which our AVL products were installed were not recovered and the average stolen vehicle recovery time in the markets in which we operate was 20 minutes from the time an unauthorized entry is confirmed or reported to the time the vehicle is recovered. To the extent that the relevant agencies do not effectively and timely respond to our calls and recover stolen vehicles, our recovery rates would likely diminish, which may, in turn, negatively impact customers’ perception of the usefulness of our SVR services and AVL products, adversely affecting our revenues.
 
        The ability to detect, deactivate, disable or otherwise inhibit the effectiveness of our AVL products could adversely affect demand for such products and our revenues.
 
        The effectiveness of our AVL products is dependent, in part, on the inability of unauthorized persons to deactivate or otherwise alter the functioning of our AVL products or the vehicle anti-theft devices that work in conjunction with our AVL products. As sales of our AVL products increase, criminals in the markets in which we operate may become increasingly aware of our AVL products and may develop methods or technologies to detect, deactivate or disable our tracking devices or the vehicle anti-theft devices that work in conjunction with our AVL products. We believe that, as is the case with any product intended to prevent vehicle theft, over time, there may be an increased ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our AVL products, although it is difficult to verify this fact. An increase in the ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our AVL products could adversely affect demand for our products and our revenues.
 
        We rely on some intellectual property that we license from a third party, the loss of which could preclude us from providing our SVR services or market and sell some of our AVL products, which would adversely affect our revenues.
 
        We license from third parties some of the technology that we need in order to provide our SVR services and market and sell some of our AVL products. In the event that such licenses were to be terminated, or if such licenses were rendered unenforceable or invalid, we would not be able to license similar technology from other parties, which would require us, at a minimum, to obtain rights to a different technology and reconfigure our AVL products accordingly. In addition, some of the licenses we obtained from third parties are non-exclusive, which may enable other entities to obtain identical licenses from such third parties to operate in the places in which we conduct our business resulting in increased competition and could adversely affect our revenues.
 
 
6

 
        We depend on proprietary technology and our failure to protect and enforce our intellectual property rights or our need to defend against infringement claims could result in a significant increase in costs and decline in revenues.
 
        Our business is dependent on the uninterrupted use of proprietary technology, both owned and licensed, from third parties. If we fail to protect, enforce and maintain our intellectual property rights, we may not be able to compete and our business and operating results could be negatively impacted. We seek to protect our intellectual property rights through a combination of patents, trademarks, copyrights, trade secret laws, know-how, confidentiality procedures and licensing arrangements. Even with the intellectual property protection currently in place, we may not be able to protect our technology from misappropriation or infringement and we may lose, or the relevant owners may restrict or lose, our current rights of use of the technology that we license from such owners. Any of our existing intellectual property rights may be invalidated, circumvented, challenged or rendered unenforceable. In addition, the laws of some countries in which we operate or plan to operate, may not protect intellectual property rights to the same extent as the laws of Israel or the United States, increasing the possibility of piracy of our technology and products. It may be necessary for us to litigate in order to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others, which litigation can be time consuming, distracting to management, expensive and difficult to predict.
 
        It is possible that we have or will inadvertently violate the intellectual property rights of other parties and those other parties may choose to assert infringement claims against us. If a court were to determine that our technology infringes on third parties’ intellectual property, in addition to exposure to substantial 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.
 
        Our failure to protect and enforce our intellectual property rights, or our need to defend against claims of infringement of intellectual property rights of others or the loss of any such claims, could result in a significant increase in costs and decline in revenues.
 
        Our ability to sell our services and products depends upon the prior receipt and maintenance of various governmental licenses and approvals and our failure to obtain or maintain such licenses and approvals, or third-party use of the same licenses and frequencies, could result in a disruption or curtailment of our operations, a significant increase in costs and a decline in revenues.
 
        We are required to obtain specific licenses and approvals from various governmental authorities in order to conduct our operations. For example, our AVL products use radio frequencies that are licensed and renewed periodically from the Ministry of Communications in Israel and similar agencies worldwide. As we continue to expand into additional markets, we will be required to obtain new permits and approvals from relevant governmental authorities. Furthermore, once our AVL infrastructure is deployed and our AVL end-units are sold to subscribers, a change in radio frequencies would require us to recalibrate all of our antennas and replace or modify all end-units held by subscribers, which would be costly and may result in delays in the provision of our SVR services. In addition, some of the governmental licenses for radio frequencies that we currently use may be preempted by third parties. In Israel, our license is designated as a “joint” license, allowing the government to grant third parties a license to use the same frequencies, and in Brazil our license is designated as a “secondary”, non-exclusive license, which allows the government to grant a third party a primary license to use such frequencies, which third-party use could adversely affect, disrupt or curtail our operations. Our inability to maintain necessary governmental licenses and frequency approvals, or third-party use of or interference with the same licenses or frequencies, could result in a significant increase in costs and decline in revenues.
 
        Our SVR services business model is based on the existence of certain conditions, the loss or lack of which in existing or potential markets could adversely affect our revenues generated in existing markets or our growth potential.
 
        Our SVR services business model and, consequently, our ability to provide our SVR services and sell our AVL products, relies on our ability to successfully identify markets in which:

n
the rate of car theft or consumer concern over vehicle safety is high;
 
 
7

 
n
satisfactory radio frequencies are available to us that allow us to operate our business in an uninterrupted manner; and
n
insurance companies or owners of cars believe that the value of cars justifies incurring the expense associated with the deployment of SVR services.
 
        The absence of such conditions, our inability to locate markets in which such conditions exist or the loss of any one of the above conditions in markets we currently serve could adversely affect our revenues generated in existing markets or our growth potential.
 
        Some of our agreements restrict our ability to expand into new markets for our SVR services, which could adversely affect our growth potential.
 
        In 2008, we entered into an agreement with Telematics, pursuant to which Ituran and Telematics designated parts of the world as their exclusive territories for selling their AVL products and SVR services using any RF location technology compatible to the RF vehicle location systems. This agreement restricts our ability to expand our business and operations and sell our products and services in certain markets, which could adversely affect our growth potential.
 
        The loss of key personnel could adversely affect our business and prospects for growth.
 
        Our success depends upon the efforts and abilities of key management personnel, including our President, our Co-Chief Executive Officers. Loss of the services of one or more of such key personnel could adversely affect our ability to execute our business plan. In addition, we believe that our future success depends in part upon our ability to attract, retain and motivate qualified personnel necessary for the development of our business. If one or more members of our management team or other key technical personnel become unable or unwilling to continue in their present positions, and if additional key personnel cannot be hired and retained as needed, our business and prospects for growth could be adversely affected.
 
        We rely on third parties to manufacture our wireless communications products, which could affect our ability to provide such products in a timely and cost-effective manner, adversely impacting our revenues and profit margins.
 
        We outsource the manufacturing of most of our wireless communications products to third parties. Furthermore, we use one manufacturer for production of a significant portion of our wireless communications products and we do not maintain significant levels of inventories to support us in the event of an unexpected interruption in its manufacturing process. If our principal manufacturer or any of our other manufacturers is unable to or fails to manufacture our products in a timely manner, we may not be able to secure alternative manufacturing facilities without experiencing an interruption in the supply of our products or an increase in production costs. Any such interruption or increase in production costs could affect our ability to provide our wireless communications products in a timely and cost-effective manner, adversely impacting our revenues and profit margins.
 
        We rely on Telematics Wireless Ltd. (previously owned by us) to supply us with various products and services as single supplier of such products and services. Termination of our agreement with Telematics in respect of such products and services could adversely affect our revenues and operations.
 
        Following the sale of our subsidiary, Telematics Wireless Ltd. in 2007 to a third party and the execution of a 10-year supply agreement with Telematics as a result of such sale, we rely on Telematics as single supplier of products and services. Termination of our relations with Telematics would adversely affect our operations and revenues.
 
        We depend on the use of specialized quality assurance testing equipment for the production of our wireless communications products, the loss or unavailability of which could adversely affect our results of operations.
 
        We and our third-party manufacturers use specialized quality assurance testing equipment in the production of our products. The replacement of any such equipment as a result of its failure or loss could result in a disruption of our production process or an increase in costs, which could adversely affect our results of operations.
 
 
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        The adoption of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and could harm our results of operations.
 
        There are no established industry standards in all of the businesses in which we sell our wireless communications products. For example, vehicle location devices may operate by employing various technologies, including network triangulation, GPS, satellite-based or network-based cellular or direction-finding homing systems. The development of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and we may not be able to develop new services and products that are in compliance with such new industry standards on a cost-effective basis. If industry standards develop and such standards do not incorporate our wireless communications products and we are unable to effectively adapt to such new standards, such development could harm our results of operations.
 
        Expansion of our operations to new markets involves risks and our failure to manage such risks may delay or preclude our ability to generate anticipated revenues and may impede our overall growth strategy.
 
        We anticipate future growth to be attributable to our business activities in new markets, particularly in developing countries, where we may encounter additional risks and challenges, such as longer payment cycles, potentially adverse tax consequences, potential difficulties in collecting receivables and potential difficulties in enforcing agreements or other rights in foreign legal systems. The challenges and risks of entering a new market may delay or preclude our ability to generate anticipated revenues and may impede our overall growth strategy.
 
        Part of our services rely on GPS/GPRS-based technology owned and controlled by others, the loss, impairment or increased expense of which could negatively impact our immediate and future revenues from, or growth of, our services and adversely affect our results of operations.
 
        Part of our business relies on signals from GPS/GPRS satellites built and maintained by third parties. If GPS/GPRS satellites become unavailable to us, or if the costs associated with using GPS/GPRS technology increase such that it is no longer feasible or cost-effective for us to use such technology, we will not be able to adequately provide our fleet management services. In addition, if one or more GPS/GPRS satellites malfunction, there could be a substantial delay before such satellites are repaired or replaced, if at all. The occurrence of any of the foregoing events could negatively impact our immediate and future revenues from, or growth of, our fleet management services and adversely affect our results of operations.
 
        Due to the already high penetration of SVR services and AVL products in Israel and moderate overall growth of the addressable market in Israel, our prospects for growth in such market may be limited.
 
        Our AVL products are primarily installed in medium- and high-end cars and commercial vehicles. Therefore, our ability to increase demand for our SVR services and revenues from sales of our AVL products is limited by the number of potential vehicles in which our products can be installed in each relevant market. We estimate that our AVL products are installed in a significant portion of the medium- and high-end cars and commercial vehicles in Israel. We anticipate that revenues from sales of our SVR services and AVL products in Israel will not increase significantly due to the already high penetration of SVR services and AVL products in Israel and moderate overall growth of the addressable market in Israel, which could adversely affect our prospects for growth in such markets.
 
 
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        Some of our employees in our subsidiaries in Brazil and Argentina are members of labor unions and a dispute between us and any such labor union could result in a labor strike that could delay or preclude altogether our ability to generate revenues in the markets where such employees are located.
 
        Some of our employees in our subsidiaries in Brazil and Argentina are members of labor unions. If a labor dispute were to develop between us and our unionized employees, such employees could go on strike and we could suffer work stoppage for a significant period of time. A labor dispute can be difficult to resolve and may require us to seek arbitration for resolution, which arbitration can be time consuming, distracting to management, expensive and difficult to predict. The occurrence of a labor dispute with our unionized employees could delay or preclude altogether our ability to generate revenues in the markets where such employees are located.
 
        We are subject to litigation that could result in significant costs to us.
 
        On July 13, 2010 the State Revenue Services of São Paulo issued a tax deficiency notice against our subsidiary in Brazil, Ituran Sistemas de Monitoramento Ltda., claiming that the vehicle tracking and monitoring services provided by our subsidiary should be classified as telecommunication services and therefore subject to the imposition of State Value Added Tax – ICMS, resulting in an imposition of 25% state value added tax on all revenues of our subsidiary during the period between August 2005 and December 2007. The tax deficiency notice was at the time of serving upon us the notice, in the amount of R$36,499,984 (approximately US$22.1 million) plus interest in the amount of R$30,282,420 (approximately US$18.2 million) and penalties in the amount of R$66,143,446 (approximately US$40 million). On March 2, 2012 the Administrative Court of the State of São Paulo dismissed the State Revenue Services of São Paulo's claims and resolved in our favor. The State of São Paulo filed an administrative appeal to the full bench session at the Administrative Court and we are currently awaiting the decision of the Administrative Court. In case the State of São Paulo is successful at the Administrative appeal, we are entitled to challenge the Administrative Court's decision in a court of law. We received a legal opinion from a law firm in Brazil that the merits of the case are overwhelmingly favorable to us.  We believe, based on the legal opinion of the subsidiary's Brazilian legal counsel that the chances of success are highly probable.
 
        While we cannot predict the outcome of this litigation at this time, if we are not successful in defending ourselves, this could result in significant costs to us, adversely affecting our results of operations.

        For additional information concerning the above claim and additional litigation proceedings, please refer to Item 8.A – “Consolidated Statements and other Financial Information” under the caption “Legal Proceedings” below.
 
        We have not obtained nor applied for several of the permits required for the operation of some of our base sites. To the extent enforcement is sought, the breadth, quality and capacity of our network coverage could be materially affected.
 
        The provision of our SVR services depends upon adequate network coverage for accurate tracking information. In Israel, we have installed 103 base sites that provide complete communications coverage in Israel. Similarly, we have established complete communications coverage in Sao Paulo and Rio, Brazil, Buenos Aires, Argentina. The installation and operation of most of our base sites require building permits from local or regional zoning authorities as well as a number of additional permits from governmental and regulatory authorities.
 
        Currently most of our base sites in Israel and Brazil and some of our base sites in Argentina operate without local building permits or the equivalent. Although relevant authorities in Israel, Brazil and Argentina have not historically enforced penalties for non-compliance with certain permit regulations, following ongoing press coverage and actions by various public interest groups, relevant Israeli, Brazilian and Argentine authorities have recently begun seeking enforcement of permit regulations, especially with respect to antennas constructed for cellular phone operators. Some possible enforcement measures include the closure or demolition of existing base sites or the imposition of limitation on erection of new base stations. Should these enforcement measures be imposed upon us in Israel, Brazil or Argentina, the extent, quality and capacity of our network coverage and, as a result, our ability to provide SVR services, may be adversely affected.
 
 
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        Currency fluctuations may result in valuation adjustments in our assets and liabilities and could cause our results of operations to decline.
 
        The valuation of our assets and liabilities and our revenues received and the related expenses incurred are not always denominated in the same currency. This lack of correlation between revenues and expenses exposes us to risks resulting from currency fluctuations. These currency fluctuations could have an adverse effect on our results of operations. In addition, fluctuations in currencies may result in valuation adjustments in our assets and liabilities which could cause our results of operations to decline.
 
RISKS RELATED TO OUR OPERATIONS IN ISRAEL
 
        We are headquartered in Israel and therefore our results of operations may be adversely affected by political, economic and military instability in Israel.
 
        Our headquarters and sole research and development facilities are located in Israel and our key employees, officers and directors are residents of Israel. Accordingly, security, political and economic conditions in Israel directly affect our business. Over the past several decades, a number of armed conflicts have taken place between Israel and its Arab neighbors. During November 2012, Israel was engaged in an armed conflict with a militant group and political party who control the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militant group and political party. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel. Continued or increased hostilities, future armed conflicts, political developments in other states in the region or continued or increased terrorism could make it more difficult for us to conduct our operations in Israel, which could increase our costs and adversely affect our financial results.
 
        Israel has experienced in recent years, unionized general strikes in connection with the legislation of new economic reforms. A prolonged general strike in Israel would affect our ability provide our wireless communications products that are manufactured in Israel and would negatively impact our operations. Furthermore, there are a number of countries, primarily in the Middle East, that still restrict business with Israel or Israeli companies and as a result our company is precluded from marketing its products in these countries. Restrictive laws or policies directed toward Israel or Israeli businesses could have an adverse affect on our ability to grow our business and our results of operations.
 
        Under Israeli law, we are considered a “monopoly” and therefore subject to certain restrictions that may negatively impact our ability to grow our business in Israel.
 
        We have been declared a monopoly under the Israeli Restrictive Trade Practices Law, 1988, in the market for the provision of systems for the location of vehicles. Under Israeli law, a monopoly is prohibited from taking certain actions, such as predatory pricing and the provision of loyalty discounts, which prohibitions do not apply to other companies. The Israeli antitrust authority may further declare that we have abused our position in the market. Any such declaration in any suit in which it is claimed that we engage in anti-competitive conduct would serve as prima facie evidence that we are a monopoly or that we have engaged in anti-competitive behavior. Furthermore, we may be ordered to take or refrain from taking certain actions, such as set maximum prices, in order to protect against unfair competition. Restraints on our operations as a result of being considered a “monopoly” in Israel could adversely affect our ability to grow our business in Israel.
 
 
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        It may be difficult and costly to enforce a judgment issued in the United States against us, our executive officers and directors, or to assert United States securities laws claims in Israel or serve process on our officers and directors.
 
        We are incorporated and headquartered in Israel. As a result, our executive officers and directors are non-residents of the United States and a substantial portion of our assets and the assets of these persons are located outside of the United States. Therefore, service of process upon any of these officers or directors may be difficult to effect in the United States. Furthermore, it may be difficult to enforce a judgment issued against us in the United States against us or any of such persons in both United States courts and other courts abroad.
 
        Additionally, there is doubt as to the enforceability of civil liabilities under United States federal securities laws in actions originally instituted in Israel or in actions for the enforcement of a judgment obtained in the United States on the basis of civil liabilities in Israel.
 
        Provisions of Israeli corporate and tax law may delay, prevent or otherwise encumber a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such transaction are favorable to us and our shareholders.
 
        Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association contain, among other things, provisions that may make it more difficult to acquire our company, such as classified board provisions and certain restrictions on the members of our board pursuant to regulatory requirements of the Israeli Ministry of Communication. Furthermore, Israeli tax considerations may make potential transaction structures involving the acquisition of our company unappealing to us or to some of our shareholders. See Item 10.B. – “Our Corporate Practices under Israeli Law” under the caption “Approval of Transactions under Israeli law” and Item 10.E. – “Taxation” under the caption “Israeli Tax Considerations” for additional discussion about some anti-takeover effects of Israeli law. These provisions of Israeli law and our articles of association may delay, prevent or otherwise encumber a merger with, or an acquisition of, our company or any of our assets, which could have the effect of delaying or preventing a change in control of our company, even when the terms of such a transaction could be favorable to our shareholders.
 
        The rights and responsibilities of our shareholders will be governed by Israeli law and may differ in some respects from the rights and responsibilities of shareholders under United States law.
 
        We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical US-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli corporate law has undergone extensive revisions in the recent years and, as a result, there is little case law available to assist in understanding the implications of these provisions that govern shareholders’ actions, which may be interpreted to impose additional obligations on holders of our ordinary shares that are typically not imposed on shareholders of US-based corporations.
 
RISKS RELATED TO THE MARKET AND OUR ORDINARY SHARES
 
        Future sales of our ordinary shares could reduce the market price of our ordinary shares.
 
        If we or our shareholders sell substantial amounts of our ordinary shares, either on the Tel Aviv Stock Exchange or the Nasdaq Global Select Market, the market price of our ordinary shares may decline.
 
 
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        The market price of our ordinary shares is subject to fluctuation, which could result in substantial losses for our investors.
 
        The stock market in general, and the market price of our ordinary shares in particular, are subject to fluctuation, and changes in our share price may be unrelated to our operating performance. The market price of our ordinary shares has fluctuated in the past, and we expect it will continue to do so, as a result of a number of factors, including:

n
the gain or loss of significant orders or customers;
n
recruitment or departure of key personnel;
n
the announcement of new products or service enhancements by us or our competitors;
n
quarterly variations in our or our competitors' results of operations;
n
announcements related to litigation;
n
changes in earnings estimates, investors' perceptions, recommendations by securities analysts or our failure to achieve analysts' earning estimates;
n
developments in our industry; and
n
general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors.
 
These factors and price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses to our investors.
 
        A significant portion of our ordinary shares are held by a small number of existing shareholders and you may not agree with some or all of the decisions taken by such shareholders.
 
        Our directors and officers, in the aggregate, currently beneficially own or control approximately 30.51% of our outstanding ordinary shares (not including treasury stock held by us). Other than applicable regulatory requirements under applicable law, these shareholders are not prohibited from selling a controlling interest in our company to a third party. These shareholders, acting together, could exercise significant influence over our operations and business strategy and may use their voting power to influence all matters requiring approval by our shareholders, including the ability to elect or remove directors, to approve or reject mergers or other business combination transactions, the decision to raise additional capital and the amendment of our articles of association that govern the rights attached to our ordinary shares. In addition, this concentration of ownership may delay, prevent or deter a change in control, or deprive our shareholders of a possible premium for ordinary shares as part of a sale of our company.
 
        US investors in our company could suffer adverse tax consequences if we are characterized as a passive foreign investment company.
 
        If, for any taxable year, our passive income or our assets that produce passive income exceed levels provided by law, we may be characterized as a passive foreign investment company, which we refer to as PFIC, for US federal income tax purposes. This characterization could result in adverse US tax consequences to our shareholders who are US Holders. See Item 10.E. – “Taxation” under the caption “United States Tax Considerations” below, for more information about which shareholders may qualify as US Holders. If we were classified as a PFIC, a US Holder could be subject to increased tax liability upon the sale or other disposition of our ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under such rules, the excess distribution and any gain would be allocated ratably over the US Holder’s holding period for the ordinary shares and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. In addition, holders of shares in a PFIC may not receive a “step-up” in basis on shares acquired from a decedent. US shareholders should consult with their own US tax advisors with respect to the United States tax consequences of investing in our ordinary shares as well as the specific application of the “excess distribution” and other rules discussed in this paragraph. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see Item 10.E. – “Taxation” under the caption “United States Tax Considerations–Passive foreign investment company considerations”.
 
 
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        Our ordinary shares are traded on more than one market and this may result in price variations.
 
        Our ordinary shares are traded on the Nasdaq Global Select Market and the Tel Aviv Stock Exchange. Trading in our ordinary shares on these markets takes place in different currencies (dollars on the Nasdaq Global Select Market and NIS on the Tel Aviv Stock Exchange), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares on the other market.
 
        Securities we issue to fund our operations or in connection with acquisitions could dilute our shareholders ownership or impact the value of our ordinary shares.
 
        We may decide to raise additional funds through a public or private debt or equity financing to fund our operations or finance acquisitions. If we issue additional equity securities, the percentage of ownership of our shareholders will be reduced and the new equity securities may have rights superior to those of our ordinary shares, which may, in turn, adversely affect the value of our ordinary shares.
 
        Impact of credit crunch on local and global economy may negatively impact our business.
 
        The current credit crunch will affect both the local economy and global economy. The current market conditions may affect our ability to obtain further financing to support our network expansion in the future. Failure to do so will negatively impact our business and slow down our expansion of operations. The economic downturn may also dampen the demand for SVR services or affect our customers’ ability to continue with existing services.
 
        Economic downturns could reduce the level of consumer spending and available credit within the automobile industry, which could adversely affect demand for our products and services and negatively impact our financial results.
 
        Current and future economic conditions could adversely affect consumer spending in the automobile industry, as such spending is often discretionary and may decline during economic downturns when consumers have less disposable income. Consequently, changes in general economic conditions resulting in a significant decrease in dealer automobile sales or in a tightening of credit in financial markets could adversely impact our future revenue and earnings. Such decreases could also affect the financial security of the automobile dealers with whom we do business. The delayed payment from or closure of our larger dealer groups could affect our ability to collect on our receivables. Given the volatile nature of the current market disruption, we may not timely anticipate or manage existing or new risks. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.


        A.       HISTORY AND DEVELOPMENT OF THE COMPANY
 
Our History        
 
        We are mainly engaged in the area of location-based services, consisting of stolen vehicle recovery and tracking services. We also provide wireless communication products used in connection with our location-based services and various other applications. We currently provide our services as well as sell and lease our products in Israel, Brazil, Argentina and the United States.
 
 
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        Ituran was initially incorporated in February 1994 in Israel as a subsidiary of Tadiran Ltd., an Israeli-based designer and manufacturer of telecommunications equipment, software and defense electronic systems, whose original business purpose was to adapt military-grade technologies for the civilian market. In July 1995, Moked Ituran Ltd. purchased us and the assets used in connection with our operations from Tadiran and Tadiran Public Offerings Ltd. The AVL infrastructure and AVL end-units for the operation of our SVR services were originally developed by an independent division of Tadiran Communications and Systems Group. These operations were later transferred to a Tadiran subsidiary, Tadiran Telematics Ltd. In November 1999, we purchased Tadiran Telematics from Tadiran and in 2002, we changed its name to Telematics Wireless.
 
        In May 1998, we completed the initial public offering of our ordinary shares in Israel and our ordinary shares began trading on the Tel-Aviv Stock Exchange. In September 2005, we began trading on the New York Stock Exchange and our ordinary shares are quoted on Nasdaq under the symbol “ITRN”. The address of our principal executive office is 3 Hashikma Street, Azour 58001, Israel. Our telephone number is 972-3-557-1333. Our agent in the United States is Ituran USA Inc.1700 NW 64th ST. SUITE 100 Fort Lauderdale, Florida 33309.
 
        In 2007, we purchased the entire issued share capital of Mapa Group from its shareholders for US$9.9 million. In addition, we invested an additional sum of approximately US$3.1 million to Mapa Group, which was used by Mapa Group to repay shareholders’ loans to its shareholders. Mapa Group is a provider of geographic information (GIS) in Israel and owner of geographic information database for navigation in Israel.
 
        On December 31, 2007, we completed the sale of our subsidiary, Telematics Wireless Ltd., to ST (Infocomm). Pursuant to the sale transaction, we sold our entire shareholdings, constituting 93.93% of Telematics Wireless to ST (Infocomm), for an enterprise value of US$90 million (following repurchase of our shares in Telematics for the aggregate sum of US$5 million). Pursuant to an adjustment mechanism as detailed in the agreement and following arbitration proceedings with ST, the purchase price was adjusted by US$4.4 Million.  For details regarding the arbitration proceedings related to sale of Telematics to ST (Infocomm), please refer to Item 8.A. – “Consolidated Statements and other Financial Information” under the caption “Legal Proceedings” below.
 
        In January 2008, we entered into a 10 year Frame Product and Service Purchase Agreement with Telematics, pursuant to which the Company and Telematics shall purchase from each other certain products and services as detailed in the agreement for price and other conditions as detailed in the agreement. In addition, each of Ituran and Telematics undertook toward one another not to compete in each other’s exclusive markets in the area of RF vehicle location and tracking RF technology or similar RF terrestrial location systems and technology. The agreement is for a term of 10 years, following which it shall be renewed automatically for additional consecutive 12 months period, unless non-renewal notice is provided by one of the parties to the other. Pursuant to the agreement, each of Telematics and Ituran granted the other party a license to use certain technology in connection with the products and services purchased from each other, which license survives the termination or expiration of the agreement.
 
        Concurrently with the sale of Telematics, the Company and Telematics entered into a revenue sharing agreement, pursuant to which Ituran shall be entitled to a share of the sales revenues of Telematics in the Republic of Korea and in China from sale of end products and base stations to customers in such territories as well as from royalties received from customers of Telematics in such territories relating to the AVL applications. The revenue sharing scheme shall continue for a term of five (5) years from January 2008 and shall be paid on a quarterly basis. The agreement expired with no revenues received by us as of the date of this report.
        
        In 2010 we launched a new line of AVL products (IturanSave), which is based on our SMART products and tailored to be installed in medium-end vehicles, a market which was not previously targeted by us, offering our customers an affordable tracking device solution, which led to an increase in our sales in 2011 and in 2012.
 
        On July 28, 2010, our wholly owned subsidiary, Ituran Cellular Communication Ltd. obtained a mobile virtual network operator (MVNO) license from the Israeli Ministry of Communication. Ituran Cellular entered into an agreement with Pelephone Communications Ltd., one of Israel's reputable mobile phone operators, in order to service the MVNO's customers and operations. In April 2012 we sold our entire holding in Ituran Cellular to a third party against payment of NIS 600,000 and repayment of our shareholder's loan in the amount of approximately NIS 3.08 million (approximately US$834,688) from which approximately $326,000 was actually paid on account of the shareholder's loan and the remainder was not paid due to the fact that third party entered into liquidation proceedings by creditors. We are currently undergoing legal proceedings in order to claim the unpaid amount. We do not believe that our chances of succeeding in reclaiming the amount owed to us are high.

 
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        On April 9, 2012, we entered into agreement with General Motors Brazil (“GMB”) through a Brazilian company controlled by us. According to the agreement, GMB will offer its customers immobilization, location and Telematics services for the Chevrolet range of vehicles it sells in Brazil through Ituran’s Brazilian company. The sale and the installation of the anti-theft device will not be carried out by us. For the purposes of the agreement entered with GMB, we incorporated a new brazilian subsidiary in which we own 51% of the issued share capital.
 
Capital Expenditures and Divestitures
 
        We had capital expenditure of $9.7 million in 2012, $16.5 million in 2011 and $18.6 million in 2010. We have financed our capital expenditure with cash generated from our operations.
 
        Our capital expenditures in 2012, 2011 and 2010 consisted primarily from acquisition of operational equipment for $5.6 million, $10.9 million and $11.9 million, respectively.
 
        B.       BUSINESS OVERVIEW

OVERVIEW
 
        We believe we are a leading provider of location-based services, consisting predominantly of stolen vehicle recovery and tracking services. We also provide wireless communications products used in connection with our location-based services. We currently provide our services and sell and lease our products in Israel, Brazil, Argentina and the United States. We utilize technologies that enable precise and secure high-speed data transmission and analysis. Some of the technology underlying our products was originally developed for the Israeli Defense Forces in order to locate downed pilots.
 
        We generate our revenues from subscription fees paid for our location-based services and from the sale and lease of our wireless communications products.
 
Location-Based Services
 
        In 2012, 76.2% of our revenues were attributable to our location-based services. As of December 31, 2012, we provided our services in Israel, Brazil, Argentina and the United States to approximately 276,000, 238,000, 131,000 and 22,000 subscribers, respectively.
 
Stolen vehicle recovery services
 
        Our stolen vehicle recovery and tracking services, which we refer to as SVR services, enable us to locate, track and recover stolen vehicles for our subscribers. Our customers include both individual vehicle owners who subscribe to our services directly and insurance companies that either require their customers to install a security system or offer their customers financial incentives to subscribe to SVR services such as ours. In certain countries, insurance companies directly subscribe to our SVR services and purchase automatic vehicle location products supporting these SVR services from us on behalf of their customers.
 
 
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Fleet management services
 
        Our fleet management services enable corporate and individual customers to track and manage their vehicles in real time. Our services improve appointment scheduling, route management and fleet usage tracking, thereby increasing efficiency and reducing operating costs for our customers. We market and sell our services to a broad range of vehicle fleet operators and individual vehicle owners in different geographic locations and industries. As of December 31, 2012, we provided our services to approximately 81,000 end-users through 21,000 corporate customers in Israel, Brazil, Argentina and the United States.
 
Value-added services
 
        Personal locator services, which we offer allow customers to protect valuable merchandise and equipment. In addition, through a call center we provide 24-hour on-demand navigation guidance, information and assistance to our customers. We currently provide personal locator services in Israel, Brazil and Argentina and, as of December 31, 2012, we had approximately 7,500 subscribers to this service. In addition, through a call center, we provide 24-hour on-demand navigation guidance, information and assistance to our customers. Such services include the provision of traffic reports, help with directions and information on the location gas stations, car repair shops, post offices, hospitals and other facilities. We provide our concierge services to our subscribers in Israel, Argentina and Brazil. As of December 31, 2012, we had approximately 128,000 subscribers to our concierge service.
 
Wireless Communications Products
 
        In 2012, 23.8% of our revenues were attributable to the sale of our wireless communications products. Our wireless communications products employ short- and medium-range communication between two-way wireless modems and are used for various applications, including automatic vehicle location, which we refer to as AVL.
 
        Our AVL products enable the location and tracking of vehicles, as well as assets and persons, and are used by us primarily to provide SVR and fleet management services to our customers. Each subscriber to our SVR services has our AVL end-unit installed in his or her vehicle. Subscribers to services for locating equipment and merchandise will use our SMART products. As part of our expansion into new markets, in 2006 we acquired control of E.R.M. Electronic Systems Limited (“ERM”), a developer, manufacturer, and marketer of innovative vehicle security, tracking, and management GSM based communication solutions for the international market.
 
Industry Overview and Trends
 
        While we believe that the statistical data, industry data forecasts and market research discussed below are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information.
 
(a) Location-based services
 
Stolen vehicle recovery
 
        The demand for vehicle security products and services is driven by vehicle theft rates, increasing security awareness among customers and insurance companies’ efforts to reduce incidents of loss. In addition, in Brazil, which is one of our primary markets, new regulation was adopted pursuant to which new vehicles (cars, motorcycles, trucks etc.), manufactured in Brazil or imported into the country may only be sold when equipped with a blocking (immobilizing) and GPS location system or tracking system (such as our products). In some of our markets, demand for SVR services has been further enhanced by incidents of carjackings and car-related kidnappings that have increased consumers’ perceived crime risk. Additionally, theft of trucks carrying valuable or hazardous cargo (e.g., microchips and chemicals) represents a threat to commercial, industrial, public and personal safety and security.
 
 
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        A wide range of vehicle security products, with varying degrees of sophistication and pricing, are available to vehicle owners today. These products can be divided roughly into two categories:

1)
Traditional products, such as locks, alarms and traditional immobilizers. These devices are limited in their effectiveness as most can be disarmed easily and typically require the driver to activate the device upon leaving the vehicle. Also, unmonitored alarms that set off sirens are routinely ignored by people as the incidence of false alarms has been historically high. Furthermore, these products can only help in preventing theft and not in recovering the vehicle once it is stolen.

2)
More sophisticated products that include some form of remote monitoring and communication. This category can be further separated into devices that simply provide information on the general direction of the vehicle and those that enable the location, tracking and recovery of the vehicle in real time.

        AVL technology is typically used to report stolen vehicles to police, provide real-time location and tracking information and immobilize the vehicle if necessary. The application of AVL technology has proven to be effective in increasing the recovery rates of stolen vehicles. As a result, many insurance companies in countries such as Israel, Brazil and Argentina either offer discounts between 10% and 20% on insurance premiums for vehicles equipped with AVL systems or require customers to  install such AVL systems in vehicles above a pre-determined value.
 
Fleet management
 
        The market for fleet management services ranges from very large fleets of thousands of vehicles to very small fleets of five vehicles or less, with smaller fleets constituting a significant portion of the market given the large number of companies that maintain a fleet today. Fleet management services allow fleet operators and individuals to locate, monitor and communicate with their vehicles and employees in the field in real time. This helps them to better track loads, predict arrival times, schedule customer appointments, reduce fuel usage and manage vehicles’ maintenance schedules. By increasing efficiency and reducing costs, fleet management can provide a quantifiable return on investment for fleet operators, as well as improve customer satisfaction. In addition, fleet management services can enhance driver security and can notify the fleet operator if a vehicle leaves a prescribed geographic region, reducing theft-related liabilities.
 
        A principal factor supporting fleet management industry growth is the presence of millions of vehicles that are in commercial use but which are not yet equipped with fleet management systems.
 
(b) Wireless communications products
 
Automatic vehicle location
 
        AVL is one of the many possible applications for wireless location technology and is an umbrella term used for communication equipment and services that facilitate wireless tracking of vehicles, as well as assets and persons.
 
Typical AVL applications include:

Security
 
Transportation
 
Telecommunication
services
 
Government
Vehicle tracking
 
Fleet management
 
Maintenance vehicle tracking
 
Government vehicle tracking
Personal tracking
 
Parcel tracking
       
Asset tracking
 
Public transit
       

 
18

 
 
        Currently, the main underlying technologies available for wireless location and tracking in the AVL industry are terrestrial network triangulation, GPS (in combination with wireless communication), network-based cellular communication and radio frequency-based homing.
 
n
Terrestrial network triangulation uses the wireless signals transmitted by an end-unit in the vehicle and received by a network of land-based wireless antennas (base stations) installed in the relevant coverage region in order to determine the precise location of the transmitter.
 
n
GPS-based systems utilize specially designed GPS devices in the vehicle that receive data from three or more satellites in order to determine the location of the device. Once located, GPS-based systems require a cellular or another wireless network to communicate with a remote control center.

n
Network-based cellular systems utilize signals between the wireless device and the cellular operator’s network of land-based antennas in order to triangulate the location of the relevant device. These systems require two-way communication between the device and antennas and, therefore, both a transmitter and receiver need to be installed in the vehicle.
 
n
RF-based homing systems utilize direction-finding technology based on a tracking signal transmitted by the end-unit in the vehicle, which is activated by a unique radio signal from the tracking unit once the vehicle is reported stolen.
 
Products
 
Location-based services
 
Stolen vehicle recovery
 
        Our stolen vehicle recovery system is based on three main components: an AVL end-unit that is installed in the vehicle, a network of base stations and a 24-hour manned control center. Once the control center receives indication of an unauthorized entry into a vehicle equipped with our AVL end-unit, our operators decide whether it is a false alarm or an actual unauthorized entry. If it is determined to be an unauthorized entry, or if a notification of the vehicle’s theft is received directly from the vehicle operator, our operators transmit a signal that activates the transmitter installed in the vehicle. We then pinpoint the location of the transmitter with terrestrial network triangulation technology or GPRS technology and notify the relevant law enforcement agency. In Israel, Brazil and Argentina, we also maintain private enforcement units, which work together with local police to recover the vehicle. In addition, we have the capability to immobilize vehicles remotely from our control centers.
 
Fleet management
 
        We offer our customers the ability to use a comprehensive application for fleet management both by using an Internet site and workstations. Our system allows our customers 24-hour access to information on their fleets through our active control center and also provides alerts on vehicle temperature and driver emergencies.
 
Value-added services
 
        Locator services. Our services allow consumers to protect valuable merchandise and equipment. We provide our locator services in Israel, Brazil and Argentina.       
 
        Concierge services. Through a call center, we provide 24-hour on-demand navigation guidance, information and assistance to our customers. Such services include the provision of traffic reports, help with directions and information on the location of gas stations, car repair shops, post offices, hospitals and other facilities. We provide our concierge services to subscribers mainly in Israel.
 
 
19

 
Wireless communications products
 
        Our wireless communications products are used for various applications in the AVL markets.
 
Automatic vehicle location
 
        Our AVL products enable the location and tracking of vehicles, as well as assets or persons, and are primarily used by us in providing our SVR and fleet management services. Each subscriber to our SVR services has one of our end-units installed in his or her vehicle. Subscribers to services for locating persons or valuables will use our SMART products. Our key wireless communications products for AVL applications include:  
 
n
Base Site: a radio receiver, which includes a processor and a data computation unit to collect and send data to and from transponders and send that data to control centers as part of the terrestrial infrastructure of the location system;
 
n
Control Center: a center consisting of software used to collect data from various base sites, conduct location calculations and transmit location data to various customers and law enforcement agencies.

n
GPS/GPRS-based products: navigation and tracking devices installed in vehicles
 
 
n
SMART: a portable transmitter installed in vehicles (including motorcycles) that sends a signal to the base site, enabling the location of vehicles, equipment or an individual;

The following table lists the key services and products that we currently sell or lease in different regions of the world:
 
Country
 
Services offered
 
Products sold
Israel
 
SVR
 
AVL
   
Fleet management
   
   
Value-added services
   
Brazil
 
SVR
 
AVL
   
Fleet management
   
   
Value-added services
   
Argentina
 
SVR
 
AVL
   
Fleet management
Value-added services
   
United States
 
SVR
 
AVL
   
Fleet management
   
   
Value-added services
   

The following is a short description of key operating statistics about our location-based services in the countries in which we operate:
 
n
Israel: We commenced operations in Israel in 1995 and we had approximately 276,000 subscribers as of December 31, 2012. We maintain 103 base stations in Israel, which provide complete coverage within the country. Our control center operates 24 hours a day, 365 days a year and is located in Azour.
 
 
n
Brazil: We commenced operations in Brazil in 2000 and we had approximately 238,000 subscribers as of December 31, 2012. We currently provide RF based products and services only in the metropolitan areas of Sao Paulo, Campinas, Americans and Rio de Janeiro; however we operate throughout Brazil in providing GPS/GPRS based products and services.

 
20

 
n
Argentina: We commenced operations in Argentina in 2002 and we had approximately 131,000 subscribers as of December 31, 2012. We currently operate only in the metropolitan area of Buenos Aires with the RF technology, however, we operate throughout Argentina in providing GPS/GPRS based products and services for fleet management.
 
 
n
United States: We commenced operations in the United States in 2000. We provide GPS/GPRS products and services throughout the United States. As of December 31, 2012, we had approximately 22,000 subscribers for our location-based services in the United States.
 
Customers, Marketing and Sales
 
        We market and sell our products and services to a broad range of customers that vary in size, geographic location and industry. In 2010, 2011 and 2012 no single customer or group of related customers comprised more than 10% of our total annual revenues.
 
(A) Location-based services
 
Stolen vehicle recovery
 
        Our marketing and sales efforts are principally focused on five target groups: insurance companies and agents, car manufacturers, dealers and importers, cooperative sales channels (mostly vehicle fleet operators and owners) and private subscribers.
 
        We maintain marketing and sales departments in each geographical market in which we operate. Each department is responsible for maintaining our relationships with our principal target groups. These responsibilities also include advertising and branding, sales promotions and sweepstakes.
 
        In Israel, Brazil and Argentina, we focus our marketing efforts primarily on insurance companies and private customers. In the United States, we believe that insurance companies do not constitute a material influence in the marketing of SVR services or AVL products. Most of our sales in the United States are made through car dealerships and dealers for new or used cars. Our customers in the SVR market include insurance companies as well as individual vehicle owners. As of December 31, 2012, we had approximately 667,000 subscribers.
 
Fleet management
 
        Vehicle fleet management systems are marketed through a vehicle fleets department, which is a part of our marketing department. We conduct in-depth research to identify companies that will gain efficiency and cost savings through the implementation of our products and services, and conduct targeted marketing campaigns to these companies. In addition, we participate in professional conventions and advertise in professional publications and journals designed for our target customers. Our customers in the fleet management market include small-, mid- and large-size enterprises and individuals. As of December 31, 2012, we provided our services to approximately 81,000 end users through 21,000 corporate customers and individuals in Israel, Brazil, Argentina and the United States.
 
Value-added services
 
        Our concierge services are provided to existing SVR customers. As of December 31, 2012, we had approximately 128,000 subscribers to our concierge service in Israel, Argentina and Brazil and approximately 7,500of our SMART devices were installed in valuable merchandise and equipment.
 
(B) Wireless communications products
 
        Our AVL end-units are primarily used by us in providing our location-based services in Israel, Brazil, Argentina and the United States.   
 
 
21

 
 
        Our selling and marketing objective is to achieve broad market penetration through targeted marketing and sales activities. As of December 31, 2012, our selling and marketing team consisted of 96 employees.
 
Competition
 
        We face strong competition for our services and products in each market in which we operate. We compete primarily on technology edge, functionality, ease of use, quality, price, service availability, geographic coverage, track record of recovery rates and response times and financial strength.
 
(A) Location-based services
 
        We compete with a variety of companies in each of our markets. The three major technologies utilized by our competitors are GPS/cellular, network-based cellular and radio frequency-based homing systems. In addition, new competitors utilizing other technologies may continue to enter the market.
 
Stolen vehicle recovery
 
n
Israel. Our primary competitors in Israel are Eden Telecom Ltd. (Pointer) and Skylock Ltd.

n
Brazil. Brazil is a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated vehicle security systems). Our main competitors in Brazil are Sascar, LoJack Corporation and Car System.
 
 
n
Argentina. Argentina is also a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated vehicle security systems). Our principal competitor in Argentina is LoJack Corporation.
 
 
n
United States. In the United States, there are several major companies offering various theft protection and recovery products that compete with our product and service offerings, including LoJack Corporation, OnStar Corporation, Sky Link Corporation, Spireon, (also includes SysLocate andGoldStar), PassTime, Guide Point, Sky Patrol, Sky Guard and I-Metrik.
 
        We are unable to provide market share information other than our market share information for the vehicle location market in Israel for various reasons, including the broad range of services and products that compete in these markets, the non-existence of trade publications with respect to the products and services we offer in such markets and the lack of meaningful or accurate market research or data available to us.
 
Fleet Management
 
        The vehicle fleet management market is highly fragmented with many corporations offering location products and services. Our major competitors in the United States are GPS Insight, Trimble, Network Fleet, Street Eagle, FleetMatics, Navtrack, Teletrac, Trim Track and FleetBoss. In Brazil, our main competitors are Sascar, Onixsat, Autotrac and Omnilink. In Argentina our major competitors are LoJack Corporation and Hawk Corporation.
 
(B) Wireless communications products
 
Automatic vehicle location
 
        Our AVL system is based on terrestrial network triangulation technology and primarily competes with companies that use one of three main technologies: GPS/GPRS (in combination with wireless communication), network-based cellular communication and radio frequency-based homing.
 
        Although AVL products based on GPS, network-based cellular and homing technologies do not require the construction of a separate infrastructure of base stations as with terrestrial network triangulation systems such as ours, such solutions have certain drawbacks. GPS receivers require line of sight to at least three satellites, which reduces their effectiveness in areas where the satellite signals are subject to interference and “noise” (such as urban areas, buildings or parking garages, forests and other enclosed or underground spaces). GPS and network-based cellular systems are also prone to jamming since the tracking signal receivers are located in the vehicle and can be easily tampered with. In addition, the satellites utilized by GPS devices are managed by the United States Department of Defense and can be subject to forced temporary outages. The main disadvantage of homing systems is that they provide only the general direction and not the precise location of the end-unit. In addition, homing systems require that the vehicle be reported stolen before the tracking signal can be activated, which may result in a delay between vehicle theft and recovery.
 
 
22

 
 
        Terrestrial network triangulation systems have succeeded in overcoming some of the challenges faced by systems based on other technologies. Terrestrial network triangulation technology does not require line of sight and the signals are not easily interrupted in densely populated or obstructed areas. Also, the signals are transmitted from the end-unit in the vehicle to a network of base stations. Therefore, in order to jam the system, receivers in each individual base station within range of the end-unit would have to be jammed, which is difficult to accomplish. Additionally, since the primary application of terrestrial network triangulation systems in the AVL industry is vehicle location and not continuous two-way communication, short bursts of data are sufficient for tracking purposes, which enable the network of base stations to be deployed at a much lower density in the coverage area than traditional network-based cellular base stations. Terrestrial network triangulation systems are capable of determining the precise location, and not just the general direction, of a vehicle at any moment in time. Furthermore, when connected with the existing theft protection system in the vehicle, terrestrial network triangulation systems automatically alert the control center when a vehicle is stolen and do not require that the vehicle be reported stolen, which can potentially reduce stolen vehicle recovery times to a few minutes. The main disadvantage of terrestrial network triangulation systems is the necessity to deploy a physical infrastructure, including the construction, development and deployment of a network of base stations and a control center and the need to address the various financial, legal and practical issues associated with such deployment. Any such deployment entails an investment of a sizable amount of money prior to the receipt of any revenues.
 
Manufacturing Operations and Suppliers
 
        Our wireless communications products are manufactured and assembled by a limited number of manufacturers in Israel (including our subsidiary ERM). We engage with our manufacturers on a full turn-key basis, where we supply detailed production files and materials list and receive a final product that we sell directly to our clients. Other than our dependency on Telematics, as described in Item 3, “Risk Factors” above, we do not depend on a single manufacturer for the production of our products. Our main manufacturers and assemblers are Telematics and E.R.M Electronic Systems Limited (our subsidiary). For further details of our agreement with Telematics concerning the supply of products and services see Item 4.A – History and Development of our Company under the caption “Our History” above.
 
        Our quality assurance and testing operations are performed by our manufacturers at their facilities, while using our quality assurance and testing equipment and in accordance with the test procedures designated by us. We monitor quality with respect to key stages of the production process, including the selection of components and subassembly suppliers, warehouse procedures, assembly of goods, final testing, packaging and shipping. We are ISO 9001 certified. We believe that our quality assurance procedures have been instrumental in achieving the high degree of reliability of our products.
 
        Several components and subassemblies included in our products are presently obtainable from a single source or a limited group of suppliers and subcontractors. We maintain strong relationships with our manufacturers and suppliers to ensure that we receive an adequate supply of products, components and raw materials at favorable prices and to access their latest technologies and product specifications.
 
Proprietary Rights
 
        We seek to protect our intellectual property through patents, trademarks, contractual rights, trade secrets, know-how, technical measures and confidentiality, non-disclosure and assignment of inventions agreements and other appropriate protective measures to protect our proprietary rights in the primary markets in which we operate. The continued use of some licenses granted by third party to use their intellectual property is material to our business. Please refer to Item 3.D – Risk Factors, under the caption "We rely on some intellectual property that we license from a third party, the loss of which could preclude us from providing our SVR services or market and sell some of our AVL products, which would adversely affect our revenues" above.
 
 
23

 
 
        We typically enter into non-disclosure and confidentiality agreements with our employees and consultants. We also seek these protective agreements from some of our suppliers and subcontractors who have access to sensitive information regarding our intellectual property. These agreements provide that confidential information developed or made known during the course of a relationship with us is to be kept confidential and not disclosed to third parties, except in specific circumstances.
 
        Our stolen vehicle recovery system is based on three main components: (i) an AVL end-unit that is installed in the vehicle, (ii) (for RF technology based AVL units) a network of base stations that relay information between the vehicle location units and the control center, certain components of which were developed by third parties and are currently licensed to us and (iii) a 24-hour manned control center consisting of software used to manage communications and the exchange of information among the hardware components of the AVL system, certain components of which were developed by third parties and licensed to us. For details concerning the non-exclusive license granted by Telematics to us in respect of the RF technology incorporated in some of our products, please refer to Item 4.A. – History and Development of our Company under the caption “Our History” above.
 
        “Ituran”, “Mr. Big”, “Mapa” and the related logos are our trademarks, which have been registered in Israel. This report also refers to brand names, trademarks, service marks and trade names of other companies and organizations, each of which is the property of its respective holder.
 
Regulatory Environment
 
        In order to provide our SVR services in the locations where we currently operate, we need to obtain four primary types of licenses and permits: (i) for our products utilizing the RF technology - a license that allows us to use designated frequencies for broadcasting, transmission or reception of signals and information and to provide telecommunication services to our customers, (ii) for our products utilizing the RF technology - a building permit, which permits us to erect our base sites and transmit therefrom, (iii) product specific licenses (commonly known as type approvals), which enable us to use the equipment necessary for our services, and (iv) a general commerce license, which allows us to offer our services to the public.
 
        The telecommunication services and frequency license and general commerce licenses we require are granted by the applicable national agency regulating communications in the markets in which we operate, specifically, the Ministry of Communication, in Israel, Anatel – Agencia Nacional de Telecomunicatoes, in Brazil, the Comision Nacional de Comunicaciones, in Argentina, and the Federal Communications Commission, in the United States. The product specific licenses we require are granted in Israel by the Ministry of Communication, in Brazil by IBRACE (the Instituto Brasileiro de Certificatao de Productos para Telecominicatoes), in Argentina by the National Technological Institute of Argentina and in the United States by the Federal Communications Commission.
 
        In Brazil, the general commerce licenses, such as the city permits, are granted by the local municipalities and other specific entities, depending on the licenses required.
 
        Our frequency licenses in all of the locations where we operate are “secondary” or “joint”, which means that the government may grant another person or persons, typically a cellular operator, a primary license to the same frequencies and, to the extent our operations interfere with the operations of the other person, we would have to modify our operations to accommodate the joint use of the frequencies. All of these licenses are also subject to revocation, alteration or limitation by the respective authority granting them. While any events that would cause us to change frequencies or to modify our operations could have a material adverse effect on us, we do not believe that this is a likely event in any of the locations where we provide our SVR services.
 
 
24

 
 
        Our frequency license in Israel was renewed for a term of five (5) years until July 31, 2017. Our frequency licenses in Brazil expire in 2019. Except in Brazil, where a new license may have to be filed for upon expiration of the license in 2019, we have options to extend all of our frequency licenses for periods ranging from three- to ten-year periods.
 
        In Israel and Brazil, like our competitors and most cellular operators, we are not in compliance with all relevant laws and regulations in connection with the erection of transmission antennas (our base sites). As of 2012, most of our base sites in Israel and Brazil are operating without local building permits. Currently, there is heightened awareness of this issue in Israel, particularly in connection with base sites of cellular providers, and possible sanctions could include fines and even the closure or demolition of these base sites. In Brazil, Brazilian authorities enforce permit requirements and impose penalties for non-compliance with such requirements. However, we do not believe this is likely. Obtaining such required permits may involve additional fees as well as payments to the Land Administration Authority.
 
        In Israel the required permits and approvals include:
 
n
erection and operating permits from the Israeli Ministry of the Environment;
 
n
permits from the Israeli Civil Aviation Authority, in certain cases;
 
n
permits from the Israeli Defense Forces;
 
n
approval from Israel's Land Administration and/or from Civil Administration in the Territories , which usually also involves payment for the land use rights; and
 
n
building permits from local or regional zoning authorities in Israel and Brazil.
 
        We are continuously in the process of obtaining the relevant permits required for the construction of our base sites in Israel, however, to date, we have been issued 28 of these permits. With respect to the general permit from Israel’s Land Administration, in 2005, we entered into an agreement with the Israel’s Land Administration, pursuant to which the general permit has been issued to us against an annual consideration based on the date of approval of our base sites. The agreement had expired on December 31, 2010. In the event that the Israel Land Administration claim consideration for the erection of the base sites without a permit, we may be subject to penalties and payment of annual consideration for the years of use of those base sites.
 
        In Brazil, very few providers of wireless telecommunications services obtain the required permits due to the nature of the approval process. Currently we do not have such permits. In Brazil, we try to minimize our risk by locating most of our equipment in sub-leased sites which are already used by other telecommunication service providers, such as cellular operators. In Brazil the required permits include:
 
n
Anatel (National Agency for Telecommunication)
n
IBAMA (Environment national agency) and/or state EPAs
n
Municipal permits
n
Fire department.
n
COMAR (Aviation authorities)
 
        ANATEL permits are required only for sites where we have transmission equipment and we have obtained all the permits required with this agency. Special IBAMA permits need to be obtained only for ground sites which are located in certain preservation areas. We have few sites of this kind, most of them are collocated sites where we pay for the right of use and permits are undertaken by the landowner. Fire Department permits are required only for equipment rooms and we have not applied for any as of this time. COMAR permits are needed only for a very few of our sites, most of which are collocated.        
 
 
25

 
 
We have been declared a monopoly under the Israeli Restrictive Trade Practices Law, 1988, in the provision of systems for the location of vehicles in Israel. This law prohibits a monopoly from abusing its market position in a manner that might reduce competition in the market or negatively affect the public. For instance, a monopoly is prohibited from engaging in predatory pricing and providing loyalty discounts, which prohibitions do not apply to other companies. The law empowers the Commissioner of Restrictive Trade Practices to instruct a monopoly abusing its market power to perform certain acts or to refrain from taking certain acts in order to prevent the abuse. Additionally, any declaration by the Israeli antitrust authority that a monopoly has abused its position in the market may serve in any suit in which it is claimed that such a monopoly engages in anti-competitive conduct, as prima facie evidence that it has engaged in anti-competitive behavior. Our declaration as a monopoly in the market of “provision of systems for the location of vehicles in Israel” was not accompanied with any instructions or special restrictions beyond the provisions of the Restrictive Trade Practices Law. Although we may be ordered to take or refrain from taking certain actions, to date we have not been subject to such restrictions.
       
        C.       ORGANIZATIONAL STRUCTURE         
 
        We were initially incorporated as a subsidiary of Tadiran, an Israeli-based designer and manufacturer of telecommunications equipment, software and defense electronic systems, whose original business purpose was to adapt military-grade technologies for the civilian market. In July 1995, Moked Ituran Ltd. purchased our company and the assets used in connection with its operations from Tadiran and Tadiran Public Offerings Ltd. The AVL infrastructure and AVL end-units for the operation of our SVR services were originally developed by an independent division of Tadiran Communications and Systems Group. These operations were later transferred to a Tadiran subsidiary, Tadiran Telematics Ltd. In November 1999, we purchased Tadiran Telematics from Tadiran and in 2002, we changed its name to Telematics Wireless. In December 2007 we sold our subsidiary Telematics – for further information please refer to Item 4.A. – “History and Development of the Company” under the caption “Our History” above.
 
List of Significant Subsidiaries
 
Name of Subsidiary
 
Country of Incorporation
 
Proportion of
Ownership Interest
             
Ituran USA Holdings Inc.
 
USA
   
100
%*
Ituran NY Corporation
 
USA
   
100
%**
Ituran Beheer B.V.
 
The Netherlands
   
100
%
Ituran USA Inc.
 
USA
   
88.5
%***
Ituran License Corp.
 
USA
   
100
%****
Ituran de Argentina S.A.
 
Argentina
   
100
%
Ituran Sistemas de Monitoramento Ltda.
 
Brazil
   
97.5
%*****
Ituran Instalacoes Ltda.
 
Brazil
   
97.5
%******
Teleran Holding Ltda.
 
Brazil
   
99.99
%*******
E.R.M. Electronic Systems Limited
 
Israel
   
51
%
Mapa Internet Ltd.
 
Israel
   
100
%
Mapa Mapping & Publishing Ltd.
 
Israel
   
100
%
 
*previously known as Ituran USA Inc.
** a wholly owned subsidiary of Ituran USA Holding Inc. which is our wholly owned subsidiary.
*** Previously known as Ituran Florida Corporation. 88.5% of the shares are held by Ituran U.S.A. Holding Inc. which is our wholly owned subsidiary, the remaining shares are held by employees of Ituran USA Inc.
**** our shares are held through Ituran U.S.A. Holding Inc., which is our wholly owned subsidiary.
***** we indirectly hold 97.5% of the shares (out of which one share is being held by Mr. Avner Kurz, the President of Teleran Holding Ltda.)
****** we indirectly hold 97.5% of the shares.
******* one share (quota) is held by the Mr. Avner Kurz, President of Teleran Holding Ltda.

 
26

 
 
         D.      PROPERTY, PLANTS AND EQUIPMENT
 
        As of the date of this report, and other than an office building of 8 floors in the area of approximately 5,356 sqm (57,651 square feet), which was purchased by our subsidiary Ituran Sistemas de Monitoramento Ltda (Ituran Brazil) in Sao Paulo, Brazil, we do not own any real estate.
 
        Other than the property in Brazil acquired by Ituran Brazil, all of our offices, headquarters, control centers and facilities are leased in accordance with our specific needs in the areas in which we operate. Additionally, we lease space for our base sites, in order to operate the reception and transmission stations of the system, in each area in which we provide our SVR services.
 
        In 2012 we leased an aggregate of approximately 41,475 square feet of office space in Azour, Israel. In 2012, annual lease payments for this facility were approximately $511,000. This lease expires on March 31, 2013. These premises include our executive offices and the administrative and operational centers for our operations as well as our customer service, value-added services and technical support centers for the Israeli market.  
 
        In Buenos Aires, Argentina, we lease approximately 2,252 square feet of office space for approximately $ 75,605 annually, approximately 241 square feet for our control center for approximately $ 8,095 annually and approximately 1,542 square feet for our own installation center for approximately $ 111,000 annually and approximately 558 square feet for our own warehouse for approximately $ 16,000 annually, and approximately 262 square feet for third warehouses for approximately $ 6,000 annually.
 
        We lease approximately 7,460 square feet for our offices and control center in Florida for an approximate monthly rate of $ 8,700 for the first 51 months, subject to a 7% annual increase in the following 12 months and a 3.3% increase for the last 12 months.
 
        In 2012, we leased approximately 12,091 square feet of office space and warehouse in Brazil for approximately $ 190,000 annually.
 
        We believe that our facilities are suitable and adequate for our operations as currently conducted. In the event that additional facilities will be required, we believe that we could obtain such facilities at commercially reasonable rates.
 
        The size of our base station sites varies from approximately one to eight square feet. In Israel, we have 103 base stations and we rent most base station sites independently for a monthly rate ranging from $200 to $2,500 per site depending on the location, size and other factors; for certain sites we do not pay any rent. The typical duration of a lease agreement for our base stations in Israel is five years and we generally have a right to renew the term of the lease agreements for a period ranging between two and five years. In Brazil, we have 134 base station sites, of which 34 sites are leased from the same entity for a monthly rate ranging from $937 to $2,100 per site and the duration of each lease is 12 years and ended in September 2012. We are currently negotiating the renewal of the lease for the 34 aforementioned sites for a term of 15 years. The remaining 100 sites are leased independently for an annual rate ranging from $300 to $1200 depending on the location, size and other factors, and the typical duration for these leases is five years. In Argentina, we have 37 base station sites, all of which are leased from three entities for a monthly rate ranging from $308 to $1,050 per site. The duration of the lease ranges from one to two years.
 
        We do not believe that we have a legal retirement obligation associated with the operating leases for our base sites pursuant to the relevant accounting standards, since we do not own any real property. However, we are obligated pursuant to certain of the operating leases for our base sites, mainly for base sites in Israel, Brazil and Argentina, to restore facilities or remove equipment at the end of the lease term. Since the restoration is limited to any construction or property installed on the property, which in our case is only the installed antennas, we do not believe that these obligations, individually or in the aggregate, will result in us incurring a material expense.
 
 
27

 

Not applicable

 
        A.       OPERATING RESULTS
 
        The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this report.
 
Introduction
 
        We believe we are a leading provider of location-based services, consisting predominantly of stolen vehicle recovery, which we refer to as SVR, and tracking services. We also provide wireless communications products used in connection with our SVR services and for various other applications. We currently provide our services and sell and lease our products in Israel, Brazil, Argentina and the United States.
 
        Our operations consist of two segments: location-based services and wireless communication products.
 
        Our location-based services segment consists of our SVR, fleet management and value-added services. We currently operate stolen vehicle recovery services throughout Israel, in Brazil, Buenos Aires, Argentina and in the United States.
 
        Our wireless communications products segment consists of our short- and medium-range two-way wireless communications products that are used for various applications, including AVL. We sell our AVL end-units to customers that subscribe to our SVR services.
 
Outlook
 
        We have historically experienced significant growth in the markets in which we provide our location-based services. These markets are generally characterized by high car theft rates and insurance companies that are seeking solutions to limit their actual losses resulting from car theft, and hence the Brazilian market continues to represent growth potential for our location-based services. The growth in subscribers within our location-based services segment also has a direct impact on the sale or lease of our AVL products, as they are an integral component of our location-based services and are installed in each subscriber’s vehicle. In Israel, improvements in the economy in 2010 have led to increased car sales which positively affected our sales as compared with previous years. In Brazil, new legislation (Supplementary Law CONTRAN no. 245) which is expected to enter into effect (following a few postponements) on June 30, 2013, that provides for a mandatory anti-theft devices to be installed in new vehicles, may contribute to our sales growth, however, given the numerous postponements to date, there is no certainty as to the effective date on which the new legislation will come into force.
 
        As of December 31, 2012, we had approximately 369,000 subscribers in Brazil and Argentina. We estimate that the total addressable market in Brazil and Buenos Aires, Argentina is several million vehicles, and therefore we have a significant opportunity to grow our subscriber base and increase sales of our AVL products.
 
        We expect growth over the next 12 months in our location-based services segment to be driven by increased demand from existing insurance company customers and retail customers in Brazil, as a result of our strong operating results and their increased familiarity with and confidence in our services, as well as additional insurance companies who could seek to establish relationships with us, as well as increased direct sales of SVR services to individual subscribers in Brazil who, due to prevailing high insurance costs, are self-insured and represent an additional market opportunity for our SVR services and AVL products. In connection with such potential markets and additional growth opportunities, we constantly look to enhance our brand recognition through continuous advertising efforts. Our new line of AVL products (Ituran Save), which is based on our SMART products and tailored for vehicles which are considered medium to high end vehicles has contributed to an increase in our customer base and increase our sales, in Israel and we expect it to continue to contribute to such increase.
 
 
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        Please refer also to Item 3.D. – “Risk Factors” above in respect of the impact of the credit crunch on local and global economy which may negatively impact our business, including reducing demand for SVR services or affecting our current customers’ ability to continue with existing services.
 
Geographical breakdown
 
Location-based services subscriber base
        
        The following table sets forth the geographic breakdown of subscribers to our location-based services as of the dates indicated:
 
   
As of December 31,
 
   
2012
   
2011
   
2010
   
2009
 
Israel
    276,000       256,000       230,000       216,000  
Brazil
    238,000       219,000       232,000       209,000  
Argentina
    131,000       123,000       121,000       119,000  
United States
    22,000       25,000       21,000       18,000  
                                 
Total(1)
    667,000       623,000       604,000       562,000  
                                 
(1)
All numbers provided are rounded, and therefore totals may be slightly different than the results obtained by adding the numbers provided.
 
 
Revenues
 
The following table sets forth the geographic breakdown of our revenues for each of our business segments for the relevant periods indicated.
 
   
Year ended December 31,
 
   
2012
   
2011
   
2010
 
   
In USD, in Millions
 
   
Location
based
services
   
Wireless
communications
products
   
Location
based
services
   
Wireless
communications
products
   
Location
based
services
   
Wireless
communications
products
 
                                     
Israel 
    45.3       25.4       47.4       32.8     $ 41.2     $ 30.0  
Brazil
    55.4       2.8       60.0       2.4       55.3       5.8  
Argentina
    12.3       1.1       11.3       1.1       9.8       1.1  
United States
    1.7       3.2       1.7       2.4       1.8       1.9  
Others
    -       3.2       -       1.1       -       0.9  
Total(1)
  $ 114.6     $ 35.7     $ 120.4     $ 39.8     $ 108.1     $ 39.7  
 
(1) We attribute revenues to countries based on the location of the customer.
 
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Revenues
 
Location-based services segment         
 
        We generate revenues from sales and lease of our SVR, fleet management and value-added services. A majority of our revenues represent subscription fees paid to us by our customers, predominately subscribers in Israel, Brazil and the United States, and insurance companies in Brazil and Argentina. We recognize revenues from subscription fees on a monthly basis. Our customers are free to terminate their subscription at any time. In the absence of such termination, the subscription term continues automatically. We also generate subscription fees from our fleet management services. Assuming no additional growth in our subscriber base and based on our historical average churn rates of 2.5% per month in this segment, we can anticipate that at least 90% of our subscription fees generated in a prior quarter will recur in the following quarter.
 
Wireless communications products segment         
 
        We generate revenues from the sale of our AVL products to customers in Israel, Brazil, Argentina, and the United States. We currently sell or lease our AVL end-units in each of the above regions. Growth in our subscriber base is the principal driver for the sale of our AVL products. We recognize revenues from sales of our wireless communications products upon delivery.
 
Cost of revenues
 
Location-based services segment         
 
The cost of revenues in our location-based services segment consists primarily of staffing, maintenance and operation of our control centers and base stations, costs associated with our staff and costs incurred for private enforcement, licenses, permits and royalties, as well as communication costs and costs due to depreciation of leased products and installation fees. Cost of revenues for sales of our fleet management services also includes payments to a third party who markets our services.
 
Wireless communications products segment         
 
        The cost of revenues in our wireless communications products segment consists primarily of production costs of our third-party manufacturers and costs associated with royalties and installation fees.
 
Operating expenses
 
Research and development         
 
        Our research and development expenses consist of salaries, costs of materials and other overhead expenses, primarily in connection with the design and development of our wireless communications products. We expense all of our research and development costs as incurred.
 
Selling and marketing         
 
        Our selling and marketing expenses consist primarily of advertising, salaries, commissions and other employee expenses related to our selling and marketing team and promotional and public relations expenses.
 
General and administrative         
 
        Our general and administrative expenses consist primarily of salaries, bonuses, accounting and other general corporate expenses.
 
 
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Operating Income
 
Location-based services segment         
 
        Operating income in our location-based services segment is primarily affected by increases in our subscriber base and our ability to increase the resulting revenues without a commensurate increase in our corresponding costs.
 
Wireless communications products segment         
        
        Operating income in our wireless communications products segment is primarily affected by our ability to increase sales of our AVL products.
 
Financing expenses (income), net         
 
        Financing expenses (income), net, include, inter alia, short- and long-term interest expenses, financial commissions, and gains and losses from currency fluctuations from the conversion of monetary balance sheet items denominated in currencies other than the functional currency of each entity in the group, gains in respect of marketable securities and interest related tax positions. Financing expenses, net, also include gains or losses from currency swaps and other derivatives that do not qualify for hedge accounting under ASC Topic 815, "Derivatives and Hedging", or which have not been designated as hedging instruments.
 
Taxes on income         
 
        Income earned from our services and product sales is subject to tax in the country in which we provide our services or from which we sell our products.
 
Critical Accounting Policies and Estimates         
 
        Our critical accounting policies are more fully described in Note 1 to our consolidated financial statements appearing elsewhere in this report. However, certain of our accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on a periodic basis. We base our estimates on historical experience, industry trends, authoritative pronouncements and various other assumptions that we believe to be reasonable under the circumstances. Such assumptions and estimates are subject to an inherent degree of uncertainty.         
 
        The following are our critical accounting policies and the significant judgments and estimates affecting the application of those policies in our consolidated financial statements. See Note 1 to our consolidated financial statements included elsewhere in this report.
 
Revenue recognition
 
        Revenues are recognized when delivery has occurred and, where applicable, after installation has been completed, there is persuasive evidence of an agreement, the fee is fixed or determinable and collection of the related receivable is reasonably assured and no further obligations exist. In cases where delivery has occurred but the required installation has not been performed, we do not recognize the revenues until the installation is completed.
 
        Revenues are recognized as follows:
 
 
n
Revenues from sales of wireless communications product are recognized when title and risk of loss of the product pass to the customer (usually upon delivery).
 
 
n
Revenues from subscription fees and installation services which have been determined not to have value on the stand-alone basis to the customers, in accordance with ASC Topic 605-25 "Multiple Elements Arrangements" are recognized ratably on a straight-line basis over the subscription period.
 
 
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n
Deferred revenues include unearned amounts received from customers (mostly for the provision of installation and subscription services) but not yet recognized as revenues.
 
 
n
Sale and leaseback transactions. We account for sale and leaseback transactions in accordance with the provisions of ASC Topic 840-40, "Sale-Leaseback Transactions". Accordingly, with respect of a certain leaseback transaction that was determined to be an operating lease and involving the use of more than a minor part but less than substantially all of the assets sold, the entire profit on the sale was deferred and is amortized in proportion to rental payments over the term of the lease. There was no recognition of any profit at the date of the sale since the present value of the minimum lease payments exceeded the amount of the profit.
 
Accounting for income taxes         
 
        As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and make an assessment of temporary differences resulting from differing treatment of items, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of income. Significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that we generate taxable income in the jurisdictions in which we operate and in which we have net operating loss carry-forwards, we may be required to adjust our valuation allowance.
 
        We follow the provisions of ASC Topic 740-10, "Income Taxes" which clarify the accounting for uncertainty in tax positions. ASC Topic 740-10 requires that we recognize in our financial statements the impact of a tax position, if that position will more likely than not be sustained upon examination, based on the technical merits of the position, without regard the likelihood that the tax position may be challenged.  If an uncertain tax position meets the "more-likely-than-not" threshold, the largest amount of tax benefit that is greater than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded.
 
        We recognize interest as interest expenses (among financing expenses) and penalties, if any, related to unrecognized tax benefits in its provision for income tax.
 
Goodwill Impairment Test
 
        Goodwill acquired in a business combination is deemed to have indefinite life and is not to be amortized but rather tested at least annually for impairment. As required by ASC Topic 350, as amended by ASU No. 2011-08, “Testing for Impairment”, which amendment was early adopted in our annual consolidated financial statements for the year ended December 31, 2011, we required to choose either to perform a qualitative assessment wheatear the two-step goodwill impairment test is necessary or to proceed directly to the two-step goodwill impairment test. Such determination is made for each reporting unit on a stand-alone basis. The qualitative assessment includes various factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, earning multiples, gross margin and cash flows from operating activities and other relevant factors.
 
 
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        When we choose to perform a qualitative assessment and determine that it is more likely than not (a more than 50 percent likelihood) that the fair value of the reporting unit is less than its carrying value, then we proceed to the two-step goodwill impairment test. If we determine otherwise, no further evaluation is necessary.
 
        When we implement the goodwill impairment test, we follow the following two step process:  firstly, we compare the fair value of each reporting unit to its carrying value ("step 1"). If the fair value exceeds the carrying value of the reporting unit net assets, goodwill is considered not to be impaired, and no further testing is required. If the carrying value exceeds the fair value of the reporting unit, then the implied fair value of goodwill is determined by subtracting the fair value of all the identifiable net assets from the fair value of the reporting unit. An impairment loss is recorded for the excess, if any, of the carrying value of the goodwill allocated to the reporting unit over its implied fair value ("step 2").
 
         As required by ASC Topic 820, "Fair Value Measurements", starting 2009, we apply assumptions that market participants would consider in determining the fair value of each reporting unit. We perform the annual goodwill impairment test for our reporting units at December 31 of each year, or more often if indicators of impairment are present. Fair value is determined using the income approach. Significant estimates used in the methodologies included estimates of future cash flows and estimates of discount rates. We have performed impairment tests on our goodwill and other intangible assets. In 2011 and 2012, we wrote impairment losses of US$0.9 million and US$0.7 million, respectively. As of December 31, 2011 and 2012, we reported a total goodwill of $8.5 million and $8 million, respectively, on our consolidated balance sheet. In assessing the recoverability of our goodwill and other intangible assets, we must make assumptions regarding the estimated future cash flows (including, projected revenues, operating expenses and capital expenditures), future short-term and long-term growth rates and weighted average cost of capital which are based on management's internal assumptions, and believed to be similar to those of market participants and represent both the specific risks associated with the business, and capital market conditions. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.
 
Contingencies
 
        From time to time we are subject to claims arising in the ordinary course of our business, and in connection with certain agreements with third parties, as more fully described in Item 8.A. – “Consolidated Statements and other Financial Information” under the caption “Legal Proceedings” below. In determining whether liabilities should be recorded for pending litigation claims (including claims that are under arbitration proceedings), we assess the allegations made and the likelihood that we will be able to defend against the claim successfully. When we believe that it is probable that we will not prevail in a particular matter and when the amount thereof is estimable, we estimate the amount of such liability and its likelihood.
 
 
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Results of Operations         
 
The following table sets forth for the periods indicated selected items from our consolidated statements of income as a percentage of our total revenues.
 
   
Year Ended December 31,
 
   
2012
   
2011
   
2010
 
Consolidated statements of operations data:                  
Revenues:
                 
 Location based services
    76.2 %     75.2 %     73.1 %
 Wireless communications products
    23.8       24.8       26.9  
                         
 Total Revenues
    100       100       100  
Cost of Revenues:
                       
  Location based services
    30.9       31.8       28.5  
  Wireless communication products
    19.8       18.7       22.3  
                         
Total cost of revenues
    50.7       50.5       50.8  
                         
  Gross profit
    49.3       49.5       49.2  
Operating Expenses:
                       
  Research and development expenses
    0.4       0.4       0.3  
  Selling and marketing Expenses
    5.6       5.3       5.9  
  General and administrative expenses, net
    22.2       21.8       21.4  
  Other expenses, net
    1.1       5.4       0.8  
                         
Total operating expenses
    29.3       32.9       28.4  
Operating Income
    20.0       16.6       20.8  
Other income (expenses)
    4.5       (0.5 )     (10.0 )
Financing income, net
    0.7       1.3       0.1  
                         
Income before taxes on income
    25.2       17.4       10.9  
Income tax
    (7.9 )     (3.5 )     (4.3 )
Share in losses of affiliated companies, net
    -       -       -  
                         
Net income for the year
    17.3       13.9       6.6  
Less: net income attributable to non-controlling interest
    (0.7 )     (0.6 )     (0.7 )
                         
Net income attributable to company stockholders
    16.6 %     13.3 %     5.9 %

Analysis of our Operation Results for the Year ended December 31, 2012 as compared to the Year ended December 31, 2011

Revenues         
      
        Total revenues decreased from $160.2 million in 2011 to $150.3 million in 2012, or 6.2%. This decrease consisted of a decrease of $5.9 million from subscription fees from our location-based services and a decrease of $4 million from sales of our wireless communications products.

 
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Location-based services segment
         
        Revenues in our location-based services segment decreased from $120.4 million in 2011 to $114.6 million in 2012, or 4.8%. The decrease of $5.9 million from subscription fees from our location-based services is primarily due to the negative impact of exchange rate fluctuations of approximately $13.3 million offset by an increase in subscription fees of approximately $7.4 million due to an increase in the average annual number of subscribers from 613,000 in 2011 to an average of 645,000 subscribers in 2012.

Wireless communications products segment         
 
        Revenues in our wireless communications products segment decreased from $39.8 million in 2011 to $35.8 million in 2012. This decrease of $4 million is primarily due to the effects of exchange rates fluctuation in an amount of $2.9 million and the effect of a major licensing transaction undertaken by MAPA for a consideration of approximately $2.5 million which was effectuated in 2011.

Cost of revenues         
 
        Total cost of revenues decreased from $80.7 million in 2011 to $76.2 million in 2012, or 5.6%. This decrease consisted of a decrease of $4.5 million in the location based services segment. As a percentage of total revenues, cost of revenues increased slightly from 50.4% in 2011 to 50.7% in 2012.

Location-based services segment
         
        Cost of revenues for our location-based services segment decreased from $51 million in 2011 to $46.4 million in 2012, or 9.2%. This decrease was primarily due exchange rates fluctuations in an amount of approximately $5.5 million and increase in salary expenses of approximately $1.9 million. As a percentage of total revenues for this segment, cost of revenues decreased from 40.9% in 2011 to 40.5% in 2012.

Wireless communications products segment
         
        Cost of revenues for our wireless communications products segment in 2012, of $29.8 million remained the same as in 2011.As a percentage of total revenues for this segment, cost of revenues decreased from 74.8% in 2011 to 83.3% in 2012, primarily due to the changes in the mixture of product’s sales and due to the major licensing transaction undertaken by MAPA in 2011 at a high gross profit margin.

Operating expenses

Research and development
        
        Our research and development expenses in 2012 increased from $0.6 Million in 2011 to $0.7 Million in 2012.

Selling and marketing         
 
        Our Selling and marketing expenses in 2011 and 2012 were $8.5 million. As a percentage of total revenues, selling and marketing expenses increased from 5.3% in 2011 to 5.6% in 2012.

General and administrative         
 
        General and administrative expenses decreased from $35.0 million in 2011 to $33.4 million in 2012, or 4.6%. This decrease includes the effect of exchange rates fluctuations of $3.9 million. This decrease was primarily due to a decrease in salary expenses. As a percentage of total revenues, general and administrative expenses increased from 21.8% in 2011 to 22.2% in 2012.

 
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Other expenses
 
        Other expenses decreased from $8.7 million in 2011 to $1.6 million in 2012 primarily due to a extraordinary legal expenses incurred by us  in 2011 relating to the State Revenue Services of São Paulo's claims in Brazil . For further information concerning the Brazil claim, please refer to Item 8 under the caption "Legal Proceedings" below.
 
Operating income         
 
        Total operating income increased from $26.6 million in 2011 to $29.9 million in 2012, or 12.4%. This increase of approximately $3.3 million reflects an increase of $7.1 million in the operating income in the location-based segment and a decrease of $3.8 million in the operating income in the wireless communication products segment.

Location-based services segment         
 
Operating income in our location-based services segment increased from $22.5 million in 2011 to $29.6 million in 2012 or 31.5%. This increase was mainly attributed to a decrease in legal expenses related to litigation in Brazil.

Wireless communications products segment         
 
        Operating income in our wireless communications products segment decreased from an operating gain of $4.1 million in 2011 to an operating gain of $0.3 million in 2012. This decrease was primarily attributed to a major licensing transaction that took place in 2011 by Mapa, having a high gross profit margin.
 
Other expenses (Income), net
 
        Other expenses (Income), net decreased from other expenses, net of $0.8 million in 2011 to other income, net of $6.8 million in 2012, due to an adjustment made to litigation expenses of $0.7 million pursuant to the Israeli district court's decision in the Leonardo litigation case, given on June 13, 2011 and in 2012 return of funds in the sum of $6.7 million under a settlement agreement reached between the parties to said litigation. For further details please refer to Item 8.A – “Consolidated Statements and other Financial Information” under the caption “Legal Proceedings” below.

Financing expenses (income), net         
 
        Financing income, net, decreased from $2.1 million in 2011 to $1.0 million in 2012. This decrease was mainly due to an increase in financing expenses as a result of exchange rates fluctuations.

Income Tax        
 
        Income Tax increased from $5.7 million in 2011 to $11.7 million in 2012, or 205%. As a percentage of income before tax on income expense tax increased from 20% in 2011 to 31% in 2012 primarily due to the fact that in 2011 we recorded an income tax benefit in respect of prior years.

Analysis of our Operation Results for the Year ended December 31, 2011 as compared to the Year ended December 31, 2010

Revenues         
 
        Total revenues increased from $147.8 million in 2010 to $160.2 million in 2011, or 8.4%. This increase consisted of an increase of $12.3 million from subscription fees from our location-based services and increase of $0.1 million from sales of our wireless communications products.

 
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Location-based services segment
         
        Revenues in our location-based services segment increased from $108.1 million in 2010 to $120.4 million in 2011, or 11.4%. The increase of $12.3 million from subscription fees from our location-based services is primarily due to an increase in the average annual number of subscribers from 583,000 in 2010 to 613,000 subscribers in 2011 and due to the effect of exchange rates fluctuations of $4.8 million as well as an increase of approximately $ 4 million resulting from attributing installation fees in respect of installation of our products to the location-based services segment which were attributed in 2010 to our wireless communication products segment.

Wireless communications products segment         
 
        Revenues in our wireless communications products segment increased from $39.7 million in 2010 to $39.8 million in 2011. This minor increase of $0.1 million is primarily due to a decrease in sales of our wireless communications products offset by the effects of exchange rates fluctuation. In addition the increase is also the result of a recording of installation fees in an amount of $4 Million in 2011 in our location based services segment which were recorded in 2010 in our wireless communication products segment.

Cost of revenues         
 
        Total cost of revenues increased from $75.2 million in 2010 to $80.7 million in 2011, or 7.3%. This increase consisted of an increase of $8.8 million in the location based services segment and a decrease of $3.2 million in the wireless communications products segment. As a percentage of total revenues, cost of revenues decreased from 50.8% in 2010 to 50.5% in 2011.

Location-based services segment
         
        Cost of revenues for our location-based services segment increased from $42.1 million in 2010 to $51 million in 2011, or 20.6%. This increase was primarily due to recording in our financial statements of installation expenses which were previously recorded as cost of good sold in 2010 and is recorded as operating expenses in 2011, an increase in depreciation and salary expenses, as well as effects of exchange rates fluctuations of $1.8 million. As a percentage of total revenues for this segment, cost of revenues increased from 38.9% in 2010 to 42.3% in 2011.

Wireless communications products segment
         
        Cost of revenues for our wireless communications products segment decreased from $34.3 million in 2010 to $29.8 million in 2011, or 9.7%. This decrease was primarily due to changes in the mixture of products' sales including a sale of a license by Mapa, our subsidiary, to a map provider, having a higher margin of gross profit as well as a decrease in the price of products purchased by us. As a percentage of total revenues for this segment, cost of revenues decreased from 83.1% in 2010 to 74.8% in 2011, primarily due to the changes in the mixture of product’s sales and effects of exchange rates fluctuation.

Operating expenses

Research and development
        
        Our research and development expenses in 2011 increased from $0.5 Million in 2010 to $0.6 Million in 2011.

Selling and marketing         
 
        Selling and marketing expenses decreased from $8.7 million in 2010 to $8.5 million in 2011, or1.5%. As a percentage of total revenues, selling and marketing expenses decreased from 5.9% in 2010 to 5.3% in 2011. The decrease in the Selling and Marketing expenses was mainly due to a decrease in the advertising and promotion expenses in 2011.

 
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General and administrative         
 
        General and administrative expenses increased from $31.7 million in 2010 to $35.0 million in 2011, or 10.5%. This increase includes the effect of exchange rates fluctuations of $1.3 million (without taking into account the effects of exchange rates fluctuations, the general and administrative expenses are $33.7 million). This increase was primarily due to an increase in salary expenses and legal fees. As a percentage of total revenues, general and administrative expenses increased from 21.4% in 2010 to 21.8% in 2011.

Other expenses
 
        Other expenses increased from $1.2 million in 2010 to $8.7 million in 2011. This increase was the result of incurring legal expenses in 2011 related to litigation proceedings in Brazil and a success fee paid to our legal counsel as a result of the dismissal by the Administrative Court of the State of São Paulo of the State Revenue Services of São Paulo's claims.

Operating income         
 
        Total operating income decreased from $30.7 million in 2010 to $26.6 million in 2011, or 13.3%. This decrease was mainly attributed to a decrease of $9.5 million in the operating income in the location-based services segment and an increase of $5.4 million in the wireless communications products segments.

Location-based services segment         
 
        Operating income in our location-based services segment decreased from $32 million in 2010 to $22.5 million in 2011 or 30%. This decrease was mainly attributed to an increase in legal expenses related to litigation in Brazil.

Wireless communications products segment         
 
        Operating income in our wireless communications products segment increased from an operating loss of $1.3 million in 2010 to an operating gain of $4.1 million in 2011. This increase was primarily due to a licensing transaction in 2011 by Mapa, our subsidiary to a map provider and a decrease in the cost of products purchased by us from our suppliers.

Other expenses, net
 
        Other expenses, net decreased from $14.7 million in 2010 to $0.8 million in 2011, due to the Israeli district court's decision in the Leonardo litigation case, given on June 13, 2011. For further details please refer to Item 8.A – “Consolidated Statements and other Financial Information” under the caption “Legal Proceedings” below.

Financing expenses (income), net         
 
        Financing income, net, increased from $0.1 million in 2010 to $2.1 million in 2011. This increase was mainly due to an increase in gains from short cash deposits resulting from an increase in cash in 2011.

Income Tax        
 
        Income Tax increased from $6.3 million in 2010 to $5.7 million in 2011, or 10%. As a percentage of income before tax on income expense tax decreased from 39.1% in 2010 to 20% in 2011. This decrease was primarily due to a change in the profitability mix of our subsidiaries that have a varying income tax rate.

 
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Impact of Currency Fluctuations on Results of Operations, Liabilities and Assets    
 
        Although we report our consolidated financial statements in dollars, in 2010, 2011 and 2012, a portion of our revenues and expenses was derived in other currencies. For fiscal years 2010, 2011 and 2012, we derived approximately 8.3%, 8.9% and 8.7% of our revenues in dollars, 43.1%, 44.5% and 43.6% in NIS, 41.3%, 39.0% and 38.7% in Brazilian Reals and 7.3%, 7.7% and 9% in Argentine Pesos, respectively. In fiscal years 2010, 2011 and 2012, 17%, 14.1% and 18% of our expenses were incurred in dollars, 37.9%, 35.2% and 38.5% in NIS, 38.5%, 43.9% and 34.4% in Brazilian Reals and 6.7%, 6.8% and 9.1% in Argentine Pesos, respectively.         
 
        Exchange differences upon conversion from our functional currency to dollars are accumulated as a separate component of accumulated other comprehensive income under stockholders’ equity. In 2012, accumulated and other comprehensive income decreased by $2.2 million compared to the year 2011. In 2011, accumulated and other comprehensive income decreased by $9.1 million compared to the year 2010. In 2010, accumulated and other comprehensive income increased by $5.1 million compared to the year 2009. Exchange differences upon conversion from the functional currency from our other selling and marketing subsidiaries to dollars are reflected in our income statements under financing expenses, net.         
 
        The fluctuation of the other currencies in which we incur our expenses or generate revenues against the NIS or the dollar has had the effect of increasing or decreasing (as applicable) reported revenues, cost of revenues and operating expenses in such foreign currencies when converted into dollars from period to period. The following table illustrates the effect of the changes in exchange rates on our revenues, gross profit and operating income for the periods indicated:
 
    Year Ended December 31,  
   
2010
   
2011
   
2012
 
   
Actual
   
At 2009
exchange
rates(1)
   
Actual
   
At 2010
exchange
rates(1)
   
Actual
   
At 2011
exchange
rates(1)
 
    (In thousands)  
                                     
Revenues
  $ 147,825     $ 140,521     $ 160,167     $ 154,864     $ 150,318     $ 166,475  
Gross profit
    72,651       68,574       79,432       76,284       74,161       83,538  
Operating income
    30,668       28,775       26,583       25,557       29,947       34,496  
 
(1) Based on average exchange rates during the period.         
 
        Our policy remains to reduce exposure to exchange rate fluctuations by entering into foreign currency forward transactions that qualify as hedging transactions under ASC Topic 815, "Derivatives and Hedging", the results of which are reflected in our income statements as revenues or cost of revenues. The result of these transactions, which are affected by fluctuations in exchange rates, could cause our revenues, cost of revenues, gross profit and operating income to fluctuate.         
 
        In addition, due to increased fluctuations in the exchange rate of the US dollar vis-a-vis the Israeli Shekel, we commenced acquiring derivative financial instruments. Gains or losses from such derivative financial instruments do not qualify for hedge accounting under ASC Topic 815, "Derivatives and Hedging" and are reflected in financing expenses, net. See also Note 1K and Note 20 to our consolidated financial statements appearing elsewhere in this report.

        B.       LIQUIDITY AND CAPITAL RESOURCES
 
        We fund our operations primarily from cash generated from operations. In 2010 2011 and 2012, we had $61.3 million, $40.2 million and $34.4 million in cash, marketable securities and deposit in escrow (long and short term) and $48.6 million, $48.5 million and $44.1 million in working capital, respectively. In each of the years 2010, 2011 and 2012, our long term borrowings from banks amounted to $0.2 million. In 2010, 2011 and 2012, we also had $2.1 million, $2.1 million, and $0.6 million respectively, available to us under existing lines of credit of which we were utilizing $0.1 million in 2010, $0.4 million in 2011 and $0.2 million in 2012.         

 
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        We believe that our cash flow from operations, availability under our lines of credit and cash and marketable securities will be adequate to fund our capital expenditures, contractual commitments and other demands and commitments for the foreseeable future as well as for the long-term. We believe that cash flow generated from operations and cash available to us from our credit facilities will be sufficient to cover future expansion of our various businesses into new geographical markets or new products, as currently contemplated and as we describe below. However, if existing cash and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek financing elsewhere by selling additional equity or debt securities or by obtaining additional credit facilities.         
 
        We had long-term liabilities in 2010, 2011 and 2012 of $6.5 million, $6.9 million and $7.9 million, respectively, for employee pension costs for certain of our employees that become payable upon their retirement. Our Israeli employees are entitled to one month’s salary, equal to the applicable monthly salary at the time of such employee’s retirement, for each year of employment, or a portion thereof, upon retirement. This liability is partially funded by deposit balances maintained for these employee benefits in the amount of $4.5 million, $4.7 million and $5.5 million in 2010, 2011 and 2012 respectively. The deposited funds include profits accumulated up to the balance sheet date and may be withdrawn upon the fulfillment of the obligation pursuant to Israeli severance pay laws or labor agreements.
 
        As from November 16, 2009, our dividend policy provides for an annual dividend distribution in an amount not less than 50% of our net profits, calculated based on the audited financial statements for the period ending on December 31 of the fiscal year with respect to which the relevant dividend is paid. According the adopted dividend policy and Israeli law, an annual dividend will only be declared and paid if, in the discretion of our Board of Directors, there is no reasonable foreseeable concern that the distribution will prevent us from being able to meet the terms of our existing and contingent liabilities, as and when due all based on our needs as will be determined from time to time and subject to the provisions of the Israeli laws concerning lawful distribution of dividends. According to our dividend policy, we distributed NIS117.2 million (approximately $31.6 million) on April 7, 2010, NIS 78.8 million (approximately $21.8 million) on April 6, 2011 and NIS 96 million (approximately $25.8 million) on April 4, 2012.
 
        On February 21, 2012, we revised our dividend policy so that our dividends will be declared and distributed on a quarterly basis in an amount not less than 50% of our net profits, calculated on the basis of our reviewed quarterly financial statements each fiscal year.
 
        Following the revision of our dividend policy in 2012, on February 16, 2010, we declared a dividend in the amount equal to NIS 117.2 million, or $31.6 million. Such dividend was paid on April 7, 2010. On February 28, 2011 we declared a dividend in the amount equal to NIS 78.8 million, or $21.8 million. Such dividend was paid on April 6, 2011. Following the revision of our dividend policy in 2012, on February 21, 2012, we declared a dividend in the amount equal to NIS 96 million or $25.8 million, which was paid on April 4, 2012. On May 29, 2012, we declared a dividend in the amount equal to NIS 9.7 million or $2.5 million, which was paid on June 27, 2012. On August 14, 2012 we declared a dividend in the amount equal to NIS 20 million or $5.2 million, which was paid on October 10, 2012 and on November 18, 2012 we declared a dividend in the amount equal to NIS 9.7 million, or $2.6 million, which was paid on January 9, 2013. On February 17, 2013, we declared a dividend in the amount equal to NIS 25.4 million or $7 million, which was paid on April 4, 2013.
 
        As of the date of this report, we repurchased 2,507,314 of our shares. The following table sets forth the components of our historical cash flows for the periods indicated:

   
Year ended December 31,
 
   
2012
   
2011
   
2010
 
   
(In thousands)
 
                   
Net cash provided by operating activities
  $ 32,541     $ 45,852     $ 33,479  
Net cash provided by (used in) investing activities
    (9,885 )     (10,809 )     (14,974 )
Net cash used in financing activities
    (27,341 )     (44,715 )     (33,842 )
Effect of exchange rate changes on cash and cash equivalents
    (1,132 )     (1,732 )     1,198  
Net increase (decrease) in cash and cash equivalents
  $ (5,817 )   $ (11,404 )   $ (14,139 )
 
 
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Years ended December 31, 2012, December 31, 2011 and December 31, 2010
 
Net cash provided by operating activities
 
        Our operating activities provided cash of $33.5 million in 2010, $45.9 million in 2011 and $32.2 million in 2012.
 
        The decrease of approximately $13.4 million in cash from operating activities in 2012 as opposed to 2011 was due primarily to:
 
Cash used for operating activities as follows:

-      Decrease in other current assets of approximately $3.8 million;
-      Decrease in other current liabilities of approximately $9.8 million;
-      Increase in accounts receivable of approximately $3.9 million

The decrease in cash from operating activities was offset by a decrease in deferred income tax of approximately $3.9 million.
 
        The increase of approximately $12.4 million in cash from operating activities in 2011 as opposed to 2010 was due primarily to:
 
Cash used for operating activities as follows:

-      Increase in our net profit of approximately $12.4 million;
-      Increase in depreciation and amortization expenses of approximately $1.9 million;
-      Decrease in accounts receivable of approximately $8.3 million

The increase in cash from current operations as stated above was offset by a decrease in litigation obligation in respect of the Leonardo litigation of approximately $14.7 million;
 
Net cash provided by (used in) investing activities
 
        Net cash used in investment activities in 2012 in an amount of approximately $9.5 million, includes mainly capital expenditure in an amount of $9.7 million.
 
        Net cash used in investment activities in 2011 in an amount of approximately $10.8 million, includes mainly capital expenditure in an amount of $16.2 million and sale of trading and marketable securities in an amount of approximately $ 1.4 million as well as release from escrow account of an amount of $8.2 million of which $3.5 million was transferred to us and a sum of $4.7 million was transferred to ST under settlement and arbitration proceedings with ST.
 
        Net cash provided by investment activities in 2010 in an amount of approximately $15.0 million, includes mainly capital expenditure in an amount of $18.3 million and sale of trading and marketable securities less investment in marketable securities in an amount of approximately US$2.9 million.
 
Net cash provided by (used in) financing activities         
 
        Net cash used in financing activities in 2012 in an amount of approximately $27.3 million consisted primarily of a cash dividend payment in an amount of $33.3 million and a cash dividend payment in an amount of approximately $1.1 million paid by our subsidiary to the non-controlling interest and funds in an amount of approximately $7.5 million received pursuant to a settlement agreement in the Leonardo litigation.
 
 
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        Net cash used in financing activities in 2011 in an amount of approximately $44.7 million consisted primarily of a cash dividend payment in an amount of $21.8 million and payment of the sum of $22.4 million pursuant to the District Court's decision in the Leonardo Case.
 
        Net cash used in financing activities in 2010 in an amount of approximately $33.8 million consisted primarily of a cash dividend payment in an amount of $31.6 million and an acquisition of the minority interest in one of our subsidiaries an amount of $2.25 million.
 
        C.       RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
                
       All of our research and development activities take place in Israel. Our Research and Design department is constantly working on upgrading the service infrastructure, introducing new services and replacing the majority of the existing fleet management applications (utilizing both internal development staff and outsourcing such activities from third parties as well as developing new service platforms for cellular/GPS based devices).
 
        Expenditures for research and development activities engaged by us were approximately $0.7 million in 2012, $0.6 million in 2011 and $0.5 million in 2010.
 
        D.       TREND INFORMATION
        
        Please see Item 4.A. – History and Development of the Company” and Item 4.B. – “Business Overview” above for trend information.

        E.       OFF-BALANCE SHEET ARRANGEMENTS
        
        We do not have off-balance sheet arrangements (as such term is defined in Item E(2) of the Form 20-F) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

        F.       TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
Contractual obligations and commercial commitments
 
The following table summarizes our material contractual obligations as of December 31, 2012:
 
   
Payments due by period
 
Contractual obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
After 5 years
 
   
(In USD thousands)
 
       
Operating leases
    5,913       1,790       1,997       1,094       1,032  
Long-term loans
    176       176       -       -       -  
Purchase Obligations
    1,763       1,763       -       -       -  
Total
    7,852       3,729       1,997       1,094       1,032  
 
            G.       SAFE HARBOR

The safe harbor provided in Section 27A of the Securities Act and Sections 21E of the Exchange Act shall apply to forward looking information provided in Items 5.E and F.

 
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        A.       DIRECTORS AND SENIOR MANAGEMENT
        
The following persons are our directors, senior management and employees upon whose work we are dependent:

 
Name
Age
 
Position
         
 
Izzy Sheratzky
66
 
President and director
 
Yehuda Kahane
68
 
Director
 
 Ze'ev Koren
67
 
Chairman of the Board of Directors
 
Avner Kurz
59
 
Director
 
Amos Kurz
56
 
Director
 
Yigal Shani
68
 
Director
 
Eyal Sheratzky
44
 
Co-Chief Executive Officer and Director
 
Nir Sheratzky
40
 
Co-Chief Executive Officer and Director
 
Gil Sheratzky
35
 
Director
 
Yoav Kahane(1)(2)(3)
39
 
Director
 
Orna Ophir(1)(2)(3)(4)
62
 
Director
 
Israel Baron(1)(2)(3)(4) +
59
 
Director
 
Ami Saranga
49
 
Deputy Chief Executive Officer
 
Eli Kamer
46
 
Executive Vice President, Finance; Chief Financial Officer
 
Guy Aharonov
47
 
General Counsel
 
Udi Mizrahi
41
 
VP Finance

Notes:
(1)Member of audit committee
(2) Member of compensation committee
(3) Member of examination of financial statements committee
(4) External director elected in accordance with the Israeli Companies Law
+Chairperson of all committees
        
        Izzy Sheratzky is a co-founder of our company and has served as the Chairman of our Board of Directors, which in our company constitutes both an officer and director position, ever since our company was acquired from Tadiran in 1995. Recently Mr. Sheratzky ceased to serve as the Chairman of our Board of Directors (remaining a director in our company) and continues to serve as our President. Until 2003, Mr. Sheratzky also served as our Chief Executive Officer. Mr. Sheratzky also serves as the Chairman of the Board of Directors of Moked (1973) Investigations Company Ltd., Moked Services, Information and Investments Ltd., and Moked Ituran. He also serves as a director in Tikal Document Collection Ltd. Mr. Sheratzky is the father of Eyal, Nir and Gil Sheratzky.         
 
        Yehuda Kahane is a co-founder of our company and has served as a director since its acquisition from Tadiran in 1995. Professor Kahane is a Professor Emeritus at the Faculty of Management, Tel Aviv University and heads the Akirov Institute for Business and the Environment at Tel-Aviv University. Professor Kahane founded and served as the first Dean of the Israeli Academic School of Insurance until 2000. In addition, he was the co-founder and co-owner of the managing firm of the first balanced pension fund in Israel, Teshura, a co-owner of the technological incubators Weizman, Ofakim and Katzrin, and is involved in the formation, seed investment and management of start-up companies. Professor Kahane serves as an actuarial consultant to various companies and organizations and has been providing financial consulting services to our company since 1998. Professor Kahane is a director in Capital Point Ltd. and in a large number of private technological companies unrelated to us. He is the chairman of an association for the visually impaired of Hertzelia and Sharon District and a board member of the umbrella organization for the visually impaired in Israel. Professor Kahane holds a BA degree in Economics and Statistics, an MA degree in Business Administration and a PhD in Finance from the Hebrew University of Jerusalem. He is the father of Yoav Kahane.         

 
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        Zeev Koren has served as a director of our company since 2006 and as of 2011 serves as the Chairman of the Board of Directors of the Company. In 1988 Brigadier Gen. (Res) Koren retired from the Israel Defense Forces after a career of 25 years, where in his final position he served as the head of human resources planning for the general staff division. Since then he has served in senior capacity in companies in the fields of international forwarding and medical services. During the past five years he also served as the general manager of a Provident Management Company. He holds a B.A. in Political Science and Criminology from Bar Ilan University.   
 
         Avner Kurz has served as a director of our company since its acquisition in 1995. Mr. Kurz is the Chairman of the Board of directors and director of F.K. Generators & Equipment Ltd. Mr. Kurz also serves as a director in El-Ram, Moked Ituran, Totam Plus, Expandis and several other private companies abroad. Mr. Kurz is the brother of Amos Kurz.
       
        Amos Kurz has served as a director of our company since its acquisition in 1995. Mr. Kurz also serves as Chief Executive Officer and director of F.K. Generators & Equipment. Mr. Kurz is the brother of Avner Kurz.         
       
        Yigal Shani has served as a director of our company since its acquisition in 1995. Mr. Shani is an insurance agent and a partner in the insurance agency Tzivtit Insurance Agency (1998), Ltd., which provides insurance services to our company.
       
        Eyal Sheratzky has served as a director of our company since its acquisition in 1995 and as a Co-Chief Executive Officer since 2003. Prior to such date, he served as an alternate Chief Executive Officer of our company in 2002 and as Vice President of Business Development during the years 1999 through 2002. Mr. Sheratzky also serves as a director of Moked Ituran and certain of our other subsidiaries, including Ituran Network. From 1994 to 1999, he served as the Chief Executive Officer of Moked Services, Information and Investments and as legal advisor to several of our affiliated companies. Mr. Sheratzky holds LLB and LLM degrees from Tel Aviv University School of Law and an Executive MBA degree from Kellogg University. Mr. Sheratzky is the son of Izzy Sheratzky, the brother of Nir and Gil Sheratzky.         
 
        Nir Sheratzky has served as a director of our company since its acquisition in 1995 and as a Co-Chief Executive Officer since 2003. Prior to such date, Mr. Sheratzky served as alternate Chief Executive Officer of our company from 1995 to 2003. Mr. Sheratzky is also a director in Moked Ituran. He holds BA and MA degrees in Economics from Tel Aviv University. Nir is the son of Izzy Sheratzky, the brother of Eyal and Gil Sheratzky.         
 
        Gil Sheratzky has served as a director of our company and as our advertising officer since 2003. Since January 23, 2007, he has served as well as CEO of our subsidiary, E-Com Global Electronic Commerce Ltd. Prior to such date, he worked in our control center during the years 2000 and 2001, and during the years 2001 and 2002 he worked in an advertising agency. Mr. Sheratzky holds an MBA degree from the University of Chicago – Booth School of Business. Mr. Sheratzky is the son of Izzy Sheratzky, the brother of Eyal and Nir Sheratzky.         
 
        Yoav Kahane has served as director of our company since 1998 and as of 2011 also serves as a member of our audit committee. Since 2006 Mr. Kahane has worked for Enzymotec in various managerial positions including Director of Business Development, VP Sales & Marketing, Infant Nutrition Business Unit Manager and served as CEO of Advanced Lipids AB a joint venture of AAK AB and Enzymotec, specializing in nutritional ingredients to the infant nutrition industry. In addition, Mr. Kahane is serving as CEO of Spot-On Therapeutics Ltd., a startup company that develops a medical device for the treatment of dizziness. During the years 2004-2005, Mr. Kahane served as Vice President of Sales and Marketing in Elbit Vision Systems Ltd. During the years 2001 and 2002, he served as Manager of Business Development in Denver Holdings and Investments Ltd. In 2000, Mr. Kahane established Ituran Florida Corp. and served as its Chief Executive Officer until 2001. Mr. Kahane holds BA degree in Life Sciences form Tel-Aviv University, a BA degree in Insurance and an MBA degree from the University of Haifa. Yoav Kahane is the son of Professor Kahane.  

 
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        Orna Ophir has been serving as an external director of our company since 2003 and is a member of our audit committee. Dr. Ophir has been serving as Medical Director of Assuta hospital in Israel since November 2004 and as Chief Executive Officer of the Golden Tower Hospital (Bat Yam, Israel) since 2001. Prior to such date, Dr. Ophir served as Executive Vice President of Assuta Hospital (Tel Aviv, Israel) during the years 1997 to 2000. In addition, Dr. Ophir is a director of Maccabi Health Services, one of the principal health providers in Israel. Dr. Ophir holds MD and MAH degrees from Tel Aviv University.         
 
        Israel Baron has been serving as an external director of our company since 2003 and is the Chairman of our audit committee and our compensation committee. Mr. Baron serves as a director in Poalim Trust Services Ltd., a fully owned subsidiary of Bank Hapoalim Ltd. In addition, Mr. Baron has been serving as Chief Executive Officer of several public sector employee retirement and saving plans since 2003. Prior to such date, Mr. Baron managed an organizational consulting firm, served as an investment manager in the Isaac Tshuva group during the years 1999 to 2001 and as Chief Executive Officer of Gmulot Investment Company Ltd. Mr. Baron serves as director of Quality Baron Management Services Ltd. and until 2004 he served as a director of Brill Shoe Industries Ltd. Mr. Baron is a certified CPA and holds a BA degree in Economics and Accounting.        
       
        Ami Saranga has been serving as Deputy chief executive officer of our company since 2011. Prior to that Mr. Saranga served as our VP Marketing since 2008. Prior to 2008, Mr. Saranga managed the SME division of Pelephone Communications Ltd., one of Israel's largest telecommunication network operators. Mr. Saranga holds a BA degree in business administration from Ruppin Academic Center, Israel.
 
        Eli Kamer has served as Executive Vice President, Finance and Chief Financial Officer of our company since 1999, after serving as its Finance Department Manager since 1997. Prior such date, Mr. Kamer worked as an accountant in Fahn Kanne & Co., our independent auditors. Mr. Kamer is a CPA and holds a BA degree in Business Administration from the Israel College of Management and an MBA degree in business administration from Bar Ilan University.         
 
        Guy Aharonov has served as our in-house legal counsel since 1999. Prior to joining our company, he has worked as an attorney in Cohen Lahat & Co. Mr. Aharonov holds LLB and LLM degrees from Tel Aviv University.
 
        Udi Mizrahi has served as our VP Finance since 2000. Mr. Mizrahi is a CPA and holds a BA degree in accounting and economics from Ruppin Academic Center, Israel.       
 
        Our articles of association provide for staggered three-year terms for all of our directors. The directors on our Board (excluding the external directors) are divided into three classes, and each class of directors will serve for a term of three years. Our independent directors who also qualify as external directors under the Israeli Companies Law, Orna Ophir and Israel Baron, are serving three-year terms in accordance with Israeli law. On December 13, 2011, our general meeting of shareholders approved the extension of term of office of our external directors, for an additional term of three years (until June 3, 2015). On January 21, 2010, our general meeting of shareholders approved the extension of term of office of Izzy Sheratzky, Gil Sheratzky and Zeev Koren as directors, for an additional term until the third consecutive annual general meeting of the shareholders. On December 29, 2010, our general meeting of shareholders approved the extension of term of office of Eyal Sheratzky, Amos Kurz, Yoav Kahane and Yigal Shani, for an additional term until the third consecutive annual general meeting of the shareholders. On December 13, 2011, our general meeting of shareholders approved the extension of term of office of Nir Sheratzky, Avner Kurz and Yehuda Kahane, for an additional term until the third consecutive annual general meeting of the shareholders.
 
        B.       COMPENSATION
 
        The aggregate direct compensation we paid to our directors who are not officers for their services as directors as a group for the year ended December 31, 2012 was approximately $172,000. Directors are reimbursed for expenses incurred in connection with their attendance of board or committee meetings.         
 
 
45

 
 
The aggregate compensation paid to our Co-Chief Executive Officers in 2012 was $1,320,000. Our four highest paid officers in 2012, other than our Co-Chief Executive Officers, were the active President, who was paid $2,212,000 in 2012, and our Vice President Systems Operation, Vice President of Finance and Vice Chief Executive Officer, who were paid $262,000, $240,000 and $233,000, respectively. The aggregate compensation paid to all Ituran officers as a group during 2012 was approximately $5,683,000. In 2012 we paid an aggregate amount of $442,000 to three directors who either provided us with services or were employed by us as officers. These compensation amounts include amounts attributable to automobiles made available to our officers and other fringe benefits commonly reimbursed or paid by companies in Israel. Employee directors do not receive additional fees for their services as directors. During 2012, we set aside $411,000 for the benefit of our officers for pension, retirement or similar benefits. We do not set aside any funds for the benefit of our directors who are not employees for any pension, retirement or similar benefits. All numbers in this paragraph are rounded to the nearest thousand.         
 
Messrs. Izzy Sheratzky, Eyal Sheratzky and Nir Sheratzky provide their services as President and Co-Chief Executive Officers, respectively, as independent contractors pursuant to services agreements between the company and A. Sheratzky Holdings Ltd., a company controlled by Izzy Sheratzky. Mr. Gil Sheratzky is employed as CEO of one of our subsidiaries, E-Com Global Electronic Commerce Ltd. See Item 7.B. – “Related Parties Transactions” under the caption “Transactions with Related Parties” below.         
 
The compensation paid to Mr. Izzy Sheratzky included a bonus in an amount equal to 5% of our profits before tax (including the share of affiliated companies net), on a consolidated basis, based on our audited consolidated financial statements for the relevant year, to which Mr. Izzy Sheratzky is entitled pursuant to his services agreement with the company. The compensation paid to each of our Co-Chief Executive Officers, Eyal Sheratzky and Nir Sheratzky, includes a bonus in an amount equal to 1% of our profits before tax (including the share of affiliated companies net), on a consolidated basis, based on our audited consolidated financial statements for the relevant year, granted pursuant to a resolution of our Board of Directors from January 2004. The compensation paid to Gil Sheratzky by our subsidiary E-Com Global Electronic Commerce Ltd. includes a bonus in an amount equal to 2% of the annual increase in that company’s profits before tax, (up to a maximum amount of 1% of that company’s profits before tax) based on its audited consolidated financial statements for the relevant year, beginning January 1, 2007 .See Item 7 – “Related Parties Transactions” under the caption “Transactions with our directors and principal officers” below.
 
In January 2006, our compensation committee adopted a resolution to pay our managers (not including managers who also serve as our directors) a quarterly bonus as of the first quarter of 2006 at the rate of 1.5% of our consolidated profit before tax and after shares in gains (losses) of affiliated companies, net and non-controlling interest, which is paid to 13 of our managers in different proportions based on their seniority, level of global and domestic involvement and contribution to our operations and other criteria set by the compensation committee. In April 2010, our compensation committee adopted a resolution to change the bonus scheme so the bonus applicable to seven managers, whose work involves consultation and cooperation with our subsidiaries abroad, shall based on our consolidated profit before tax and after shares in gains (losses) of affiliated companies, net and non-controlling interest and for the bonus applicable to the remaining managers shall be calculated based on the results of operations in Israel only (i.e. based on the operating profits of Ituran, not on a consolidated basis, including the profit attributed to the activities of our subsidiary, E-Com Global Electronic Commerce Ltd. relating to value added services provided by E-Com).
 
In November 2011 our board of directors appointed Mr. Yoav Kahane as a member of our audit committee in place of Mr. Ze'ev Koren. On such date, our audit committee and board of directors approved compensation for Yoav Kahane for serving as a member of our audit committee and compensation for Mr. Ze'ev Koren for serving as the Chairman of our board of directors, with such compensation to equal the compensation awarded and paid to each of our external directors as promulgated under the Israeli laws. In 2011 and 2012, we paid the sum of NIS 321,000 (approximately $90,000) and NIS 331,000 (approximately $86,000) respectively to our external directors.
 
We do not have any agreements with directors providing for benefits upon termination of their respective employment.
 
 
46

 
 
In December 2012, an amendment to the Israeli Companies Law (“Amendment 20”) became effective, requiring companies to appoint a compensation committee. Our existing compensation committee meets this requirement, as applicable to us. See “Compensation Committee” below.
 
Amendment 20 also requires that companies adopt a compensation policy by September 11, 2013, which will set forth company policy regarding the terms of office and employment of office holders, including compensation, equity awards, severance and other benefits, exemption from liability and indemnification (“Terms of Office and Employment”). The term “office holder,” as defined in the Israeli Companies Law, includes directors, executive officers and any manager directly subordinate to the chief executive officer. The compensation policy must be approved by the board of directors, after considering the recommendations of the compensation committee. The compensation policy must also be approved by a majority of the company’s shareholders, provided that (i) such majority includes at least a majority of the shareholders who are not controlling shareholders and who do not have a personal interest in the matter, present and voting (abstentions are disregarded), or (ii) the non-controlling shareholders and shareholders who do not have a personal interest in the matter who were present and voted against the policy hold two percent or less of the voting power of the company. The compensation policy must be approved by the board of directors and the shareholders every three years. If the compensation policy is not approved by the shareholders, the compensation committee and the board of directors may nonetheless approve the policy, following further discussion of the matter and for specified reasons.
 
Under Amendment 20, the Terms of Office and Employment of office holders require the approval of the compensation committee and the board of directors. The Terms of Office and Employment of directors and the chief executive officer must also be approved by shareholders.
 
Changes to existing Terms of Office and Employment of office holders (other than directors) can be made with the approval of the compensation committee only, if the committee determines that the change is not substantially different from the existing terms. Under certain circumstances, the compensation committee and the board of directors may approve an arrangement that deviates from the compensation policy, provided that such arrangement is approved by the special majority of the company’s shareholders mentioned above. Such shareholder approval will also be required with respect to determining the Terms of Office and Employment of a director or the chief executive officer during the transition period until the company adopts a compensation policy. Notwithstanding the foregoing, a company may be exempted from receiving shareholder approval with respect to the Terms of Office and Employment of a candidate for chief executive officer if such candidate meets certain independence criteria, the terms are in line with the compensation policy and the compensation committee has determined for specified reasons that shareholder approval would prevent the engagement.
 
Under the Israeli Companies Law and related regulations, the compensation payable to external directors is subject to certain further limitations. See “—External Directors" below.
 
Shareholders Agreement and Articles of Association of Moked Ituran         
 
On May 18, 1998, a shareholders agreement was entered into between Moked Ituran Ltd. and each of Moked’s shareholders, Moked Services, Information, Management and Investments Ltd. (38%), F.K. Generators and Equipment Ltd. (26%), Yehuda Kahane Ltd. (26%), Gideon Ezra, Ltd. (2.5%), T.S.D. Holdings Ltd. (3.75%) and G.N.S. Holdings Ltd. (3.75%). On May 18, 1998, Moked’s articles of association were amended to incorporate some of the provisions of the shareholders agreement as well as other provisions governing the relationship of its shareholders. The Moked articles were amended again on September 6, 2005 to correspond to an amendment to the shareholders agreement that was entered into on such date.         
 
Gideon Ezra, Ltd. is a company wholly owned by Mr. Doron Ezra. Moked Services, Information, Management and Investments is a company owned by A. Sheratzky Holdings Ltd. (a company controlled by Izzy Sheratzky 93%) and in which each of Eyal Sheratzky and Nir Sheratzky, Co-CEO's of Ituran and directors, hold 3.5%). F.K. Generators and Equipment is a company controlled by Perfect Quality Trading Ltd. (51%), a company owned by Avner Kurz and Amos Kurz in equal parts. Yehuda Kahane Ltd. is a company owned by Professor Kahane and Rivka Kahane. T.S.D. Holdings is a company controlled by Efraim Sheratzky. G.N.S. Holdings is a company controlled by Yigal Shani.        
 
 
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The shareholders agreement (as amended) and Moked’s amended articles of association provide as follows:
 
n
Prior to the time a shareholders meeting of our company takes place, a separate meeting of the shareholders of Moked will be convened.
 
 
n
At the Moked shareholders meeting, all matters included in our meeting’s agenda will be discussed and voted on.

n
The required quorum in the Moked meeting will be any number of the shareholders actually present. The resolutions will be adopted by a majority of the votes present and voting is based on the relative shareholdings in Moked, with the exception of Moked Services, Information, Management and Investments, which is entitled to 41.5% of the voting rights, thereby decreasing the voting rights of F.K. Generators and Equipment to 22.5% on the vote of any matter other than issues in which Izzy Sheratzky has a direct or indirect interest.
 
 
n
With respect to director elections, every Moked shareholder holding at least 3.5% of Moked’s shares is entitled to designate one director in our annual shareholders meeting. Each Moked shareholder holding over 10% of Moked’s shares may nominate an additional director for every additional 10% of Moked shares held by him or her in excess of the initial 10%. For the purpose of nominating additional directors, shareholdings may be aggregated.

n
As discussed in “Board of Directors” in Item 6.C – “Board Practices” below, our directors (excluding the external directors) are divided into three classes as follows: class A – Amos Kurz, Yoav Kahane, Eyal Sheratzky and Yigal Shani (with their term of office renewed on December 29, 2010 until the third consecutive annual general meeting of the shareholders at which time they may stand for reelection), class B – Yehuda Kahane, Avner Kurz and Nir Shertazky (with their term of office renewed on January 22, 2009 until the third consecutive annual general meeting of the shareholders at which they stand for reelection); and class C –Gil Sheratzky, Zeev Koren and Izzy Sheratzky (with their term of office renewed on January 21, 2010 until the third consecutive annual general meeting of the shareholders at which time they may stand for reelection).
 
 
n
Upon the expiration of the term of office of our class A directors, each of Moked Services, Information and Investment, provided it holds at least 40% of the voting rights (together with the 3.5% of the voting rights held by F.K. Generators and Equipment), Yehuda Kahane Ltd., provided it holds at least 20% of the voting rights, F.K. Generators and Equipment, provided it holds at least 20% of the voting rights, and Yigal Shani or G.N.S. Holdings, provided either of them holds at least 3.5% of the voting rights, shall be entitled to require Moked to appoint one director to class A. Upon the expiration of the term of office of the directors in class B, each of Moked Services, Information and Investment, provided it holds at least 40% of the voting rights (together with the 3.5% of the voting rights held by F.K. Generators and Equipment), and Yehuda Kahane, provided it holds at least 20% of the voting rights, and F.K. Generators and Equipment, provided it holds at least 20% of the voting rights, shall be entitled to require Moked to appoint one director to class B. Upon the expiration of the term of office of the directors in class C, (i) Moked Services, Information and Investment, provided it holds at least 36.5% of the voting rights shall be entitled to require Moked to appoint two directors and (ii) Efraim Sheratzky or T.S.D. Holdings, provided either of them holds at least 3.5% of the voting rights, shall be entitled to require Moked to appoint one director to class C.

n
Moked has agreed to vote all of its shares at our shareholders meetings in accordance with the resolutions adopted at the Moked shareholders meeting or, with regard to director elections, as described above. In the event of a tie with respect to a certain issue, Moked has agreed to vote its shares against the relevant resolution at our shareholders meeting.

 
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n
Moked’s shareholders have a right of first refusal on any sale of our shares by Moked. This right does not apply to open market sales by Moked of up to 2% of the issued share capital of our company in any given calendar year.

n
According to Moked’s articles of association, each of the shareholders of Moked may direct Moked to dispose of a portion of Moked’s holdings in our company that corresponds to such shareholders’ proportional holdings in Moked and to distribute the proceeds of such disposition to such directing shareholders.
 
This shareholders agreement is in effect only for as long as Moked holds at least 20% of our issued and outstanding share capital.
 
        C.        BOARD PRACTICES

Board of Directors        

Pursuant to our articles of association as presently in effect, our Board of Directors consists of twelve directors, including three independent directors in accordance with the listing requirements of the Nasdaq of whom two directors are external directors in accordance with Israeli law. Pursuant to our articles of association, other than the external directors, for whom special election requirements apply (see “External directors” below), our directors are elected and may in certain circumstances be removed by the majority of our shareholders. Our articles of association provide for staggered three-year terms for all of our directors. The directors on our Board (excluding the external directors) are divided into three classes, and each class of directors will serve for a term of three years. The term of office of the directors assigned to class A has expired at our annual meeting of shareholders held in 2010 and was renewed for a further term until the third succeeding annual meeting of shareholders, and at each third succeeding annual meeting thereafter. The term of office of the directors assigned to class B has expired at the annual meeting of shareholders held in 2012 and was renewed for a further term until the third succeeding annual meeting of shareholders, and at each third succeeding annual meeting thereafter. The term of office of the directors assigned to class C has expired at the annual meeting of shareholders held in 2009 and was renewed for a further term until the third succeeding annual meeting of shareholders, and at each third succeeding annual meeting thereafter. This classification of the Board of Directors may delay or prevent a change of control of our company or in our management. The external directors, under Israeli law, serve a three-year term which may be extended for an additional term of three years. Following an extension of their tenure for an additional three year period, the shareholders may elect, if the board of directors and Audit Committee have approved and concluded that the external directors have special expertise and contribution to the board of directors and its committees, to reelect the external directors to serve in that capacity for additional three year terms. Our directors may at any time and from time to time appoint any other person as a director to fill a vacancy until the general meeting of shareholders in which the term of service of the replaced director was scheduled to expire. External directors may be removed from office pursuant to the terms of the Israeli Companies Law, 5759 – 1999, which we refer to as the Israeli Companies Law. See “External directors” below.         

Pursuant to the Israeli Companies Law, our chairman convenes and presides over the meetings of the Board. In addition, any two directors may convene a meeting of the Board of Directors. A quorum consists of a majority of the members of the Board, and decisions are taken by a vote of the majority of the members present. Our articles of association provide that such quorum will in no event be less than two directors.         

The Israeli Companies Law provides that an Israeli company may, under certain circumstances, exculpate an office holder from liability with respect to a breach of fiduciary duties.         

We are incorporated in Israel and in addition to being listed on the Nasdaq Global Select Market, we are also listed on the Tel Aviv Stock Exchange, and therefore subject to various corporate governance requirements pursuant to Israeli law relating to external directors, our audit committee and our internal auditor.

 
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External directors         
 
        Under Israeli law, the board of directors of companies whose shares are publicly traded are required to include at least two members who qualify as external directors. External directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:

 n
such majority includes at least the majority of the shares held by all non-controlling shareholders or having personal interest in the nomination, except personal interest which is not resulting from connections with controlling shareholder, present and voting at such meeting; or

n
the total number of shares voted against the election of the external director and held by shareholders other than controlling shareholders must not exceed 2.0% of the shares whose holders are entitled to vote at any meeting of shareholders.

        External directors are generally elected to serve an initial term of three years and may be reelected to serve in that capacity for an additional three years, and with regard to companies whose securities are listed on recognized foreign exchanges, such as Nasdaq, may be extended for additional three – year terms, subject to the approval of the audit committee and the Board of Directors, presented to the general meeting, that such directors’ expertise and special contribution to the operation of the Board of Directors warrant that his appointment for an additional period is in the best interests of the Company, as provided in the Israeli Companies Regulations (Allowances for Companies with Securities Listed on an Exchange Outside Israel), 2000. The approval of the general meeting for the extension for additional three-year periods shall require that the majority of votes include the majority of the non-controlling shareholders present at the meeting, or alternatively, that the total of the opposing votes does not exceed 2% of the voting rights. External directors may be removed from office by the same percentage of shareholders required for their election or by a court, in each case, only under limited circumstances, including ceasing to meet the statutory qualification for their appointment or violating the duty of loyalty to the company.
 
        If all directors are of the same gender, the next external director elected must be of the other gender.
 
        Each committee of the board of directors must include at least one external director, except that the audit committee must include all external directors then serving on the board of directors. Israeli law regulating the compensation of external directors prohibits external directors from receiving, directly or indirectly, any compensation other than for services as an external director pursuant to the provisions and limitations set forth in the regulations promulgated under the Israeli Companies Law.         
 
        Israeli law provides that a person is not qualified to serve as an external director if, at any time during the two years preceding his or her appointment, that person, a relative, partner or employer of that person, or any entity under that person’s control has had any affiliation or business relationship with the company, any entity controlling the company or an entity that, as of the date of appointment, or at any time during the two years preceding that date, is controlled by the company or by any entity controlling the company, any affiliation with a relative of the controlling shareholder and if there is no controlling shareholders, with any of the chairman or the board, the general manager, a significant shareholder or the most senior financial officer, or any business or professional relations with any of the foregoing persons or with the persons listed above unless such business or professional relations are negligible. In addition, no person may serve as an external director if that person’s professional activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as a director. In addition, a company, controlling shareholder and any other entity controlled by the controlling shareholder may not grant to such external director, its spouse or child, any benefits, directly or indirectly, and the external director, its spouse or child may not be appointed to serve in any position, may not be employed by and may not, directly or indirectly, render any professional services to the company, such controlling shareholder or any other entity controlled by the controlling shareholder, during the first two years following such external director’s termination of tenure of office, and with respect to a relative who is not the external director’s spouse or child – during the first year following such termination.       

 
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        Dr. Ophir and Mr. Baron have been elected as our external directors through 2006, and in November 2011, were re-elected by our shareholders to serve as our external directors for an additional term of three years until January 2015.

Audit committee         
 
        Under Israeli law, the board of directors of a public company must appoint an audit committee. The audit committee must comprise of at least three directors, including all of the external directors and the chairman of the audit committee must be an external director. The audit committee may not include the chairman of the board, any director who is employed by the company or regularly provides services to the company (other than as a board member), a controlling shareholder or any relative of such person. All audit committee decisions must be made by a majority of the committee members of which the majority of members present are independent and external directors. Furthermore, a person who is not eligible to serve on the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a certain matter, provided however, that the company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not in the actual votes and likewise, company counsel and secretary who are not controlling shareholders or relatives of such shareholders may be present in meetings and decisions of such present is requested by the audit committee.        
 
        Our Board of Directors has formed an audit committee that is empowered to exercise the powers of the Board of Directors for our accounting, reporting and financial control practices. The members of the audit committee are Dr. Orna Ophir and Messrs. Israel Baron and Yoav Kahane. Our Board of Directors has determined that Mr. Israel Baron is qualified as “financial expert,” as such term is defined by the Nasdaq rules and the Securities and Exchange Commission and the Israeli regulations.

        Pursuant to the Israeli Companies Regulations (Provisions and Conditions regarding the Financial Statements’ Authorization Process), 2010, a reporting entity, except for a reporting entity that is subject to Chapter E(3) of the Israeli Securities Act, is required to establish a committee of the board of directors for the examination of financial statements. Commencing with the 2010 year-end financial statements, financial reports of a public company may be brought for discussion and authorization of the board of directors only after such committee for the examination of financial statements has discussed and formulated recommendations to the board of directors in connection with: the estimates used in connection with the financial statements; the internal audits related to financial reporting; the completeness and appropriateness of disclosure in the financial statements; the accounting policy adopted and accounting treatment applied in the material matters of the company; valuations, including the assumptions and estimates underlying them, on which bases data in the financial statements is provided. The members of the committee for the examination of financial statements must be directors who meet certain independence requirements, and, among other things, must be able to read and understand financial statements, with at least one of the members being an accounting and financial expert (as defined under the regulations). Since we are a reporting entity under Chapter E(3), we are not obliged to constitute a committee for the examination of financial statements. Notwithstanding the aforesaid, during 2012 and to date, we continued to hold meetings of the examination of financial statements committee.

Compensation committee         
 
        The Israeli Companies Law mandates the appointment of a compensation committee comprising at least three directors. Under the Israeli Companies Law, the compensation committee must include all of the statutory independent directors, one of which must serve as the chairman of the committee, and the committee must include only additional members that satisfy the criteria for remuneration applicable to the external directors. Our compensation committee includes only independent directors, as defined by the SEC and Nasdaq regulations.
 
        Under the Israeli Companies Law, the compensation committee is responsible for: (i) making recommendations to the board of directors with respect to the approval of the Compensation Policy and any extensions thereto; (ii) periodically reviewing the implementation of the Compensation Policy and providing the board of directors with recommendations with respect to any amendments or updates thereto; (iii) reviewing and resolving whether or not to approve arrangements with respect to the Terms of Office and Employment of office holders; and (iv) determining whether or not to exempt a transaction with a candidate for chief executive officer from shareholder approval.

 
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        Furthermore, our compensation committee oversees, on behalf of the Board, the management of Ituran's compensation and other human resources-related issues and otherwise carries out on behalf of the Board its responsibilities relating to these issues. The committee is responsible for establishing annual and long-term performance goals and objectives for our executive officers, as well as reviewing Ituran's overall compensation philosophy and policies and the implementation thereof, including with respect to executive officers and directors. In addition, the compensation committee reviews and approves any arrangement as to the terms of service and/or employment of executive officers or directors.
 
        The members of our compensation committee are Dr. Orna Ophir, Israel Baron and Yoav Kahane.

Internal auditor         
 
        Under the Israeli Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. An internal auditor may not be:

n
a person (or a relative of a person) who holds more than 5% of the company's shares;
n
a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;
n
an executive officer, director or other affiliate of the company; or
n
a member of the company's independent accounting firm.
        
        The role of the internal auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business procedures. Our internal auditor is Simon Yarel, CPA, who has served as our internal auditor since January 1999.
 
        See Item 16.G. – "Corporate Governance" below for additional information concerning compliance with the Nasdaq Marketplace Rules and exemptions therefrom.
 
        D.       EMPLOYEES
 
        The following table sets forth the total number of our subsidiaries’ employees at the end of each of the past three years, and a breakdown of persons employed by main category of activity and geographic location:
 
   
Year Ended December 31,
 
   
2012
   
2011
   
2010
 
By area of activity:
                 
Control Center
    346       351       325  
Research and Development
    27       33       32  
Sales and Marketing
    96       83 *     101 *
Technical support and IT
    234       242       272  
Finance, Administration and Management
    217       198       201  
Private enforcement and operations
    353       318 *     333 *
Manufacturing
    47       52       51  
Total
    1,320       1,277       1,315  
                         
By geographic location (out of total):
 
Israel
    599       588       561  
Brazil
    519       483       550  
Argentina
    171       175       174  
United States
    31       31       30  
Total 
    1,320       1,277       1,315  
  
        * information amended
 
 
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        We consider our relations with our employees to be satisfactory and have no ongoing major labor disputes or material labor-related litigation. Our employees are subject to local labor laws and regulations, which in some countries are more stringent than others. Some of our senior executives also have employment agreements that may grant them rights in excess of those provided by the applicable laws.

Israel         
 
        Our employees in Israel are subject to Israeli labor laws and regulations and employment customs. The applicable labor laws and regulations principally concern matters such as paid annual vacation, paid sick days, length of the workday, payment for overtime and severance pay. Israeli law generally requires severance pay equal to one month’s salary for each year of employment upon retirement or death of an employee or termination of employment without cause. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Since January 1, 1995, these amounts also include payments for national health insurance.
 
        In 2006, our remuneration committee adopted a resolution to pay our managers (not including managers who are directors) a quarterly bonus equal to 1.5% of our consolidated profit before tax and after equity and minority profits, which was paid at that time to 13 of our managers in different proportions based on their seniority, level of global and domestic involvement in our operations and other criteria set by the committee. In April 2010, our compensation committee resolved to grant a bonus in the aggregate sum equal to 0.9% of the operating profit of Ituran (not on a consolidated basis), including the profit attributed to the activities of our subsidiary, E-Com Global Electronic Commerce Ltd. relating to value added services provided by E-Com, which will be distributed between some of our employees (including some of our managers who received bonuses under the 2006 plan and in lieu of such bonuses) ranging from medium to junior levels of management, commencing as of the third quarter of 2010 and will be reflected in our results of operations from the second quarter of 2010. In 2012, we paid the approximately the aggregate sum of $582,000 in bonuses to our employees under the plan.
 
Brazil
 
        Our employment agreements in Brazil are subject to Brazilian labor laws and regulations, to collective labor agreements or bargaining arrangements with unions and contract. The laws and regulations in Brazil govern almost all aspects of an employment relationship and do not leave much room to be negotiated with the employee. Still, employment contracts create obligations to the parties if they are in compliance with the law. The Labor Code mainly governs the employees’ right to paid annual vacation, paid sick days, the maximum length of a workday, minimum payment for overtime and statutory severance pay. Brazilian law generally requires severance pay equal to 50% of the balance of the employee’s FGTS account (a mandatory fund to guarantee severance and unemployment). The FGTS can also be withdrawn when the employee retires, dies or his employment is terminated without cause, among others. Brazilian employers are required to purchase health insurance for employees only in the event it is set forth by the applicable collective labor agreement, contract or company policy, and are required to cover employees’ food and travel costs whenever a business trip is required, and to make deposits into the a Guarantee Severance Fund (the so-called “FGTS”). Furthermore, Brazilian employees and employers are required to make contributions to the National Insurance Institute (“INSS”), similar to the United States Social Security Administration. Our collections to the National Insurance Institute amount to 34.8% to 39.8% of the payrolls, out of which 8% to 11% (limited to R$4,159,000 of individual salary) corresponds to contributions by the employees deducted from salaries and 26.8% is the fixed part we pay. Our contribution of 26.8% includes mandatory contribution to the Public Insurance for Labor Accidents and Diseases (SAT). According to Decree Law 6957/2009 such portion, which varies from 1% to 3% of payroll, should be multiplied by another factor (FAP) from 0.5 to 2 in order to reduce or increase our burden to reflect statistics of occupational accidents and diseases in our business.
 
 
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        All of our employees in Brazil, excluding the chief executive officer, some directors (VPs) and one manager, are represented by a labor union and the employees’ mandatory contributions to their union are paid by us. The law authorizes us to deduct mandatory contributions to unions from the respective salaries.

Argentina
         
        Our employees in Argentina are subject to Argentine labor laws and regulations and other special practices and employment customs. The laws and regulations in Argentina control all aspects of labor relations and designate a general Employment Contract with which all employees and employers must comply. This general Employment Contract adopts by reference the provisions of the Labor Law which principally concerns matters such as paid annual vacation, paid sick days, the length of the workday, and payment for overtime and severance pay. Argentinean law generally requires severance pay equal to one month per year of service upon the termination of employment without a justified cause. Argentine employers are also required to contribute for the following items: (a) Pension funds 17% (b) health insurance for employees 6% (c) occupational accident insurance 2.59%; and (d) Retirement fund insurance 3.5% (only this item is for Union Employees). All the rates should be applied on the gross salary.         
 
        Our employees in Argentina, excluding the chief executive officer and a number of other employees, are members of a labor union and the employee member fees are paid by them.
 
United States   
 
        We have no collective bargaining agreements with any of our employees in the United States and none of our employees are members of a union.

        E.       SHARE OWNERSHIP
        
        The following sets forth, as of April 15, 2013 the share ownership of our directors and executive officers. All of the information with respect to beneficial ownership by our directors and executive officers has been furnished by the respective director or executive officer, as the case may be.

Name of Director/Officer(1)
 
Number of
Ordinary Shares
Beneficially Owned (2)
   
Percentage of beneficial ownership*
 
             
Izzy Sheratzky(3)
    5,647,747       26.93  
Professor Yehuda Kahane (4)
    2,028,539       9.67  
Zeev Koren
    -       -  
Avner Kurz (5)
    1,445,205       6.89  
Amos Kurz (6)
    1,445,205       6.89  
Yigal Shani (7)
    347,131       1.65  
Eyal Sheratzky
    -       -  
Nir Sheratzky
    -       -  
Gil Sheratzky
    -       -  
Yoav Kahane
    -       -  
Orna Ophir
    -       -  
Israel Baron
    -       -  
Ami Saranga
    -       -  
Eli Kamer
    -       -  
Guy Aharonov
    -       -  
Udi Mizrahi
    -       -  
 
 
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*not including 2,507,314 treasury shares.
 
(1)
This table includes only current directors and officers that beneficially hold our shares.
(2)
Amounts in this column are based on 23,475,431 ordinary shares outstanding as of April 15, 2013. ‘Beneficial ownership’ is determined in accordance with the rules of the Securities and Exchange Commission (as defined in Rule 13d – 3 under the Securities Exchange Act of 1934) and shares deemed beneficially owned by virtue of the right of any person or group to acquire such ordinary shares within 60 days are treated as outstanding only for the purposes of determining the percent owned by such person or group. To our knowledge, the persons and entities named in the table above are believed to have sole voting and investment power with respect to all ordinary shares shown as owned by them, except as described below.
(3)
Shares beneficially owned include: (a) 139,430 shares directly owned by Mr. Sheratzky and an entity wholly owned by him; (b) 5,506,952 shares owned by Moked Ituran Ltd., which Mr. Sheratzky beneficially owns due to his shared voting and investment power over such shares in accordance with a certain shareholders agreement, dated May 18, 1998, among Moked Ituran and its shareholders, which we refer to as the Moked Shareholders Agreement. For further information concerning the Moked Shareholders Agreement see the discussion under Item 6.B. – “Compensation” under the caption “Shareholders agreement and articles of association of Moked Ituran” above; (c) 1,365 shares that are directly held by Mr. Sheratzky’s wife, Maddie Sheratzky.
(4)
Shares beneficially owned include: (a) 447,782 shares directly owned by Professor Kahane jointly with his wife, Rivka Kahane; (b) 148,950 shares owned by Yehuda Kahane Ltd., which Professor Kahane may be considered to beneficially own by virtue of his shared voting and investment control of the company through his 50% shareholdings thereof, the other 50% being owned by his wife, Rivka Kahane; and (c) 1,431,807 shares owned by Moked Ituran Ltd., which Professor Kahane may be considered to beneficially own by virtue of his