20-F 1 zk1312784.htm 20-F zk1312784.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
 
FORM 20-F
 

 
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Or
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2012
 
Or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Or
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report
 
For the transition period from                  to                
 
Commission File number:   001-13128
 

 
POINTER TELOCATION LTD.
(Exact name of Registrant as specified in its charter)
 

 
N/A
ISRAEL
(Translation of Registrant’s
name into English)
(Jurisdiction of incorporation
or organization)
 
14 Hamelacha Street,
 Rosh Haayin 48091, Israel
(Address of principal executive offices)
 
 
 

 
 
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, NIS 3.00 nominal
value per share
 
NASDAQ Capital Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
 
Securities for which there is a 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.
 
5,555,558 Ordinary Shares, NIS 3.00 nominal value per share
 
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 
 
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
 
Yes  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 such shorter period that the registrant was required to submit and post such files).
 
Yes  x    No  o
 
 
2

 
 
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  o
Non-accelerated filer  x
 
Indicate by check mark which basis of accounting the registrant has 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  o
 
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 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
o Yes  o No  N/A

 
3

 
 
Table of Contents
 
 
8
8
8
8
A.
SELECTED FINANCIAL DATA
8
B.
CAPITALIZATION AND INDEBTEDNESS
11
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
11
D.
RISK FACTORS
11
30
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
30
B.
BUSINESS OVERVIEW
35
C.
ORGANIZATIONAL STRUCTURE
44
D.
PROPERTY, PLANTS AND EQUIPMENT
44
45
45
A.
OPERATING RESULTS
45
B.
LIQUIDITY AND CAPITAL RESOURCES
64
C.
RESEARCH AND DEVELOPMENT
67
D.
TREND INFORMATION
69
E.
OFF-BALANCE SHEET ARRANGEMENTS
71
F.
CONTRACTUAL OBLIGATIONS
72
73
A.
DIRECTORS AND SENIOR MANAGEMENT
73
B.
COMPENSATION
75
C.
 BOARD PRACTICES
76
D.
EMPLOYEES
83
E.
SHARE OWNERSHIP
85
86
A.
MAJOR SHAREHOLDERS
86
B.
RELATED PARTY TRANSACTIONS
87
 
 
4

 
 
C.    
INTERESTS OF EXPERTS AND COUNSEL
88
88
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
88
B.
SIGNIFICANT CHANGES
89
89
A.
OFFER AND LISTING DETAILS
89
B.
PLAN OF DISTRIBUTION
90
C.
MARKETS
90
D.
SELLING SHAREHOLDERS
90
E.
DILUTION
90
F.
EXPENSES OF THE ISSUE
90
90
A.
SHARE CAPITAL
90
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
90
C.
MATERIAL CONTRACTS
101
D.
EXCHANGE CONTROLS
103
E.       
TAXATION AND GOVERNMENT PROGRAMS
103
F.
DIVIDENDS AND PAYING AGENTS
109
G.
STATEMENT BY EXPERTS
109
H.
DOCUMENTS ON DISPLAY
109
I.
SUBSIDIARY INFORMATION
110
110
113
 
114
114
114
114
115
115
115
 
 
5

 
 
116
116
116
116
117
118
 
118
118
118
118
 
 
6

 

INTRODUCTION

As used in this Annual Report on Form 20-F, the terms "we," "us," "our" and the "Company" mean Pointer Telocation Ltd. and its subsidiaries, unless otherwise indicated. The term "Pointer" means Pointer Telocation Ltd. excluding its subsidiaries and affiliates. We conduct our operations through two main segments. Through our Cellocator segment, we design, develop and produce leading mobile resource management products, including asset tracking, fleet management, and security products, for sale to third party operators providing mobile resource management services and to our Pointer segment. Through our Pointer segment, we act as an operator by bundling our products together with a range of services, including stolen vehicle tracking, fleet management, roadside assistance, car sharing and emergency home repair services for sale to insurance companies, fleets, and individual customers. For further information, please see "Item 4 —Information on the Company".
 
This Annual Report on Form 20-F, including, without limitation, information appearing under “Item 4 – Information on the Company” and “Item 5 – Operating and Financial Review and Prospects”, 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,” “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 the Company will not lose a significant customer or customers or experience increased fluctuations of demand or rescheduling of purchase orders, that our markets will be maintained in a manner consistent with our historical experience , 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 relating to our business described in this annual report at “Item 3D—Risk Factors.”  Except as required by applicable law, including the securities laws of the United States, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
"Cellocator" is a trademark owned by us.  References in this annual report to “Dollars,” “U.S. Dollars” and “$” are to United States Dollars and references to “shekels" and “NIS” are to New Israeli Shekels, the Israeli currency.

 
7

 
 
 
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.

OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.

KEY INFORMATION
 
 
A.
SELECTED FINANCIAL DATA
 
The selected financial data is incorporated by reference to “Item 5A – Operating Results – Selected Financial Data” of this annual report and should be read in conjunction with our consolidated financial statements and the notes thereto, which are set forth in “Item 18Financial Statements” and are incorporated by reference, and the other financial information appearing in Item 5 of this annual report. We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States (US GAAP).
 
We derived the following selected consolidated financial data for each of the years ended December 31, 2012, 2011 and 2010 from our consolidated financial statements and related notes included in this annual report. The selected consolidated financial data (including balance sheet data) for the years ended December 31, 2009 and 2008 have been derived from audited financial statements not included in this annual report.
 
 
8

 
 
Selected Financial Data Under U.S. GAAP:

Year Ended December 31,
 
(in thousands of U.S. Dollars – except weighted average number of ordinary shares,
and basic and diluted income (loss) per ordinary share)

   
2012
   
2011
   
2010
   
2009
   
2008
 
Statement of Income Data:
                             
Revenues:
                             
  Products
    30,402       31,140       25,415       20,038       30,645  
  Services
    54,430       54,778       48,448       45,287       46,010  
Total Revenues
    84,832       85,918       73,863       65,325       76,655  
Cost of revenues:
                                       
   Products
    17,988       18,283       14,175       10,774       16,392  
   Services
    38,573       37,249       31,264       26,645       29,869  
  Amortization of intangible assets
    181       1,498       978       976       980  
Total Cost of Revenues
    56,742       57,030       46,417       38,395       47,241  
Gross profit
    28,090       28,888       27,446       26,930       29,414  
Operating Expenses:
                                       
    Research and development, net
        2,716           3,082           2,532           2,817           2,511  
Selling, general and administrative expenses
      18,299         20,382         16,503         15,037         15,245  
Amortization of intangible assets
      1,987         1,821         1,774         1,942         2,365  
Impairment of intangible asset
      -         6,216         -         2,959         -  
Total operating income (loss)
    5,088       (2,613 )     6,637       4,175       9,293  
Financial expenses, net
    1,628       1,779       1,976       2,070       4,054  
Other income (expenses)
    5       77       21       16       22  
Income (loss) before tax on income
      3,455       (4,469 )       4,640         2,089         5,261  
Taxes on income
    861       2,383       1,524       887       640  
Income after taxes on income
      2,594       (6,852 )       3,116         1,202         4,621  
Equity in losses (gains) of affiliate
    (38 )     1,634       1,158       677       -  
Net income (loss) from continuing operations
      2,632       (8,486 )       1,958         525         4,621  
Loss from discontinuing operations, net
      995         -         -         -         -  
Net income (loss)
      1,637       (8,486 )       1,958         525         4,621  
Net income attributable to non-controlling interest
    434       41       828       2,632       2,248  
Net income (loss) attributable to Pointer Telocation Ltd. Shareholders
    1,203       (8,527 )     1,130       (2,107 )     2,373  
Basic net earnings (loss) per share attributable to Pointer Telocation Ltd. shareholders
      0.23       (1.78 )       0.24       (0.44 )       0.51  
Diluted net earnings (loss) per share attributable to Pointer Telocation Ltd. shareholders
    0.23       (1.79 )     0.22       (0.47 )     0.50  
Basic weighted average number of shares
outstanding (in thousands)
      5,166         4,789         4,768         4,753         4,679  
Diluted weighted average number of shares
outstanding (in thousands)
      5,166         4,789         4,834         4,753         4,679  
Balance Sheet Data:
                                       
Total assets
    96,285       89,338       103,430       96,973       102,599  
Net assets (liabilities) of continuing operations
    29,748       26,594       36,868       33,809       35,815  
Working capital (deficit)
    (10,523 )     (14,928 )     (15,093 )     (12,206 )     (7,867 )
Shareholders’ equity
    35,346       31,801       43,646       41,479       41,187  
Pointer Telocation Ltd. shareholders
    29,748       26,594       36,868       33,809       35,815  
Non controlling interest
    5,598       5,207       6,778       7,670       5,372  
Share capital
    3,871       3,353       3,280       3,266       3,266  
Additional paid-in capital
    120,290       119,147       118,512       118,348       118,015  

 
9

 
 
Operating Results
 
The following table presents, for the periods indicated, certain financial data expressed as a percentage of revenues for the line items discussed below:

Year Ended December 31,
 
   
2012
   
2011
   
2010
 
Revenues
                 
Products
    36       36       34  
Services
    64       64       66  
Total Revenues
    100       100       100  
Cost of Revenues:
                       
Products
    21.2       21       19  
Services
    45.5       43       43  
Amortization of intangible
    0.2       2       1  
Total Cost of Revenues
    66.9       66       63  
Gross profit
    33.1       34       37  
Operating Expenses:
                       
Research and development costs, net
    3.2       4       3  
Selling, general and administrative expenses
    21.6       24       22  
Total operating Expenses
    24.8       28       25  
                         
Amortization of intangible assets and Impairment of long lived assets
    2.3       9       2  
Operating income (loss)
    6       (3 )     9  
Financial expenses
    2       2       3  
Other income (expenses)
    -       -       -  
Income (loss) before tax on income
    4       (5 )     6  
Taxes on income
    1       3       2  
Income (loss) after tax
    3       (8 )     4  
Equity in losses of affiliate
    -       2       1  
Loss from discontinuing operations, net
    1                  
Net income (loss) attributable to non-controlling interest
    0.5       (10 )     1  
Net income (loss) attributable to Pointer Telocation Ltd. Shareholders)
    1.5       (10 )     2  

 
10

 
 
 
B.
CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
 
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
 
D.
RISK FACTORS
 
We conduct our operations through two main segments. Through our Cellocator segment, we design, develop and produce leading mobile resource management products, that include asset tracking,  fleet management and security products for sale to third party operators providing mobile resource management  services world-wide, and to our Pointer segment. Through our Pointer segment, we act as an operator primarily in Israel, Argentina, Mexico and Brazil by bundling our products together with a range of services (which varies in each country), including stolen vehicle retrieval services and fleet management, roadside assistance, and car sharing services, in addition to emergency home repair services for sale to insurance companies, car fleets, and individual customers.

This annual report and statements that we may make from time to time may contain forward-looking information. There can be no assurance that actual results will not differ materially from our expectations, statements or projections. Factors that could cause actual results to differ from our expectations, statements or projections include the risks and uncertainties relating to our business described below.

 
11

 
 
Risk Factors relating to our Cellocator segment

Manufacturing of products by our Cellocator segment is highly complex, and an interruption by suppliers, subcontractors or vendors could adversely affect our business, financial condition or results of operations.

The products that we market, distribute and sell through our Cellocator segment are either manufactured or assembled at our own facility in Israel or, in certain cases, manufactured, surface mounted on printed circuit boards and assembled through supply agreements with third party subcontractors in Israel and abroad. Since 2010, we have been transitioning certain elements of our manufacturing and assembly process to third party subcontractors abroad and in Israel. As a result, our control over the manufacturing process has been reduced to some degree and our dependence on third party manufacturers and producers has been increased. Consequently, as this transitioning continues, the number of factors over which we have only limited control will increase, which may have an adverse affect our future production and supply capabilities. Additionally, many of our products are the result of complex manufacturing processes, and are sometimes dependent on components with a limited source of supply.  As a result, we can provide no assurances that supply sources will not be interrupted from time to time.  Furthermore, our subcontractors or vendors may fail to obtain supply components and fail to deliver our products.  As a result, a failure to deliver by our subcontractors or vendors can result in decreased revenues. Such interruption or delay of our suppliers to deliver components or interruption or delay of our vendors or subcontractors to deliver our products could affect our business, financial condition or results of operations.
 
The growth of our business depends on the success of our current and new products.

Our growth depends on the continued success of our existing products, as well as the successful design and introduction of new products. For example, 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 stolen vehicle retrieval, or SVR, or anti-theft 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 those products could adversely affect demand for our SVR and anti-theft products, which would consequently affect our revenues.

In addition, our ability to create new products and to sustain existing products is affected by whether we can successfully anticipate and respond to consumer preferences and business trends. The failure to develop and launch successful new products could hinder the growth of our business. Also, we may have to invest more resources in development than we originally intended. Marketing can be longer than expected and there is no assurance of successful development or increased returns from a potential market, which may adversely affect our business.

 
12

 

Undetected defects in our products may increase our costs and impair the market’s acceptance of our products.

The development, enhancement, implementation and manufacturing of the complex products of our Cellocator segment entail substantial risks of product defects or failures.  Despite testing by us and our customers, errors may be found in existing or future products, resulting in delay or loss of revenues, warranty expense, loss of market share or failure to achieve market acceptance, severe damage to our reputation or any other adverse effect on our business, financial condition and results of operations. Moreover, the complexities involved in implementing our products entail additional risks of performance failures. Any such occurrence could have a material adverse effect upon our business, financial condition and results of operations.
 
We rely on operators to market and deliver the products of our Cellocator segment.

Our revenues from consecutive end unit sales, future system upgrades, future infrastructure extensions and other sources, where applicable, are from countries in which third party operators, as well as the Pointer segment acting as an operator, conduct stolen vehicle recovery and fleet management services and are therefore dependent on their penetration rate and successful sale growth as well as the operators’ continuous success and their continuous decision to offer these products in their respective territories. Should we fail to maintain relationships with these third party operators, or these operators fail to successfully market and service our products, our business would be adversely affected.
 
Our Cellocator segment relies on limited suppliers to manufacture devices for our stolen vehicle retrieval and fleet management systems (also referred to as Mobile Resource Management Solutions).

While we have a diversified product base, offering customers cellular units together with GPS devices and other technology, we are still principally reliant on devices and components which we do not manufacture ourselves. Most of our components for the devices in our Cellocator products are manufactured for us by independent manufacturers abroad. Surface mounting on printed circuit boards is performed by two sub-contractors. Assembly is performed by us and by subcontractors located in Israel and abroad. There is no certainty that these subcontractors will be able to continue to provide us with manufacturing and assembly services in the future. Our reliance on independent contractors, especially those located in foreign countries, involves a number of risks, including:
 
 
·
reduced control over delivery schedules, quality assurance, manufacturing yields and cost
 
 
·
reduced manufacturing flexibility due to last moment quantity changes;
 
 
·
transportation delays;
 
 
·
political and economic disruptions;
 
 
·
the imposition of tariffs and export controls on such products;
 
 
·
work stoppages;
 
 
·
changes in government policies;
 
 
·
the loss of molds and tooling in the event of a dispute with a manufacturer; and
 
 
·
the loss of time, when attempting to switch from one assembly-manufacturer to another, thereby disrupting deliveries to customers.

 
13

 
 
Our agreements and understandings with our suppliers are generally short-term in nature and may be terminated with little or no notice. If a supplier of ours terminates its relationship with us, we may be compelled to seek additional sources to manufacture certain of the components of our systems or even to change the design of our products. Although we believe that most of the components of our systems may be readily acquired from numerous suppliers, we cannot assure you that we would be successful in entering into arrangements with other suitable independent manufacturers without significantly impairing our sales in the interim period. In addition, relying on third-party suppliers requires us to maintain solid relationships to ensure that they continue to work with us. Since we do not own these third party suppliers, we have little or no control over their methods of operation. Should we fail to maintain relationships with these third party suppliers, our business would be adversely affected.
 
We are subject to several risks as a result of obsolescence of product components.

Although we believe that most of the components of our systems may be readily acquired from numerous suppliers, a number of the components are, or are likely to become in the near term, obsolete. We cannot ensure the accessibility of substitute parts for such components. Consequently, where components become obsolete we will need to choose between entirely replacing products which contain obsolete parts or modifying existing products in a manner which will facilitate the incorporation of non-obsolete components. Both alternatives will require additional expenditure and reliance on third party manufacturers, and a failure to properly manage these additional costs and requirements could adversely affect our business.

We are subject to several risks as a result of the international sales of our Cellocator segment.

Systems based on our products are currently installed worldwide and the majority of our products are sold outside of Israel.  We are subject to the risks inherent in international business activities, including changes in the political and economic environment, unexpected changes in regulatory requirements, foreign exchange controls, tariffs and other trade barriers and burdens of complying with a wide variety of foreign laws and regulations. In addition, if for any reason, exchange, price controls or other restrictions on conversion of foreign currencies were to be imposed, the operations of our Cellocator segment could be negatively impacted. In some of our international operations, we experienced the following difficulties:

 
·
longer sales cycles, especially upon entry into a new geographic market or engaging with new customers;
 
 
·
foreign exchange controls and licenses;
 
 
·
trade restrictions;
 
 
14

 
 
 
·
changes in tariffs;
 
 
·
currency fluctuations;
 
 
·
economic or political instability;
 
 
·
international tax aspects;
 
 
·
regulation requirements; and
 
 
·
greater difficulty in safeguarding intellectual property.

We may not be able to successfully compete in the extremely competitive markets for our products.

Our Cellocator segment sells mostly GPS/GPRS based vehicle devices and radio frequency based vehicle devices. In the GPS/GPRS field there is strong competition with many manufacturers introducing vehicle devices with competitive prices and various performance features. These devices are offered to operators that provide fleet management and stolen vehicle recovery services and there is strong competition with respect to different aspects such as price, performance parameters, etc.

Should any of our competitors successfully provide a broader range of products with competitive pricing, our business results could be materially adversely affected. While we plan to continue improving our technology and products, and maintain our marketing efforts, we cannot guarantee that we will increase or maintain our customer base.

We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively in the markets in which we operate.

Our success and our ability to compete in sales of products by our Cellocator segment depend on our proprietary technology. We rely on a combination of proprietary technology, know-how and trade secret laws, together with non-disclosure agreements and licensing arrangements to establish and protect proprietary rights in our products. We cannot assure you that these efforts will successfully protect our technology due to the following factors:

 
·
the laws of certain foreign countries may not adequately protect our proprietary rights to the extent that they are protected in other countries;
 
 
·
unauthorized third parties may attempt to copy or obtain and use the technology that we regard as proprietary;
 
 
·
if a competitor were to infringe on our proprietary rights, enforcing our rights may be time consuming and costly, diverting management’s attention and our resources;
 
 
·
measures like entering into non-disclosure agreements afford only limited protection; and
 
 
·
our competitors may independently develop or patent technologies that are substantially equivalent or superior to our technology, duplicate our technologies or design around our intellectual property rights.

In addition, others may assert infringement claims against us. The cost of responding to infringement claims could be significant, regardless of whether such claims are valid.
 
 
15

 
 
We may see a decrease in demand for our products should vehicle manufacturers begin embedding tracking and communication devices in their vehicles as part of their basic vehicle offerings.

Our stolen vehicle retrieval and mobile resource management products are primarily installed before or immediately after the initial sale of private or commercial vehicles. Consequently, should vehicle manufacturers elect, or be required by governmental regulations or otherwise, to develop and embed alternative tracking and communication devices (such as E-call service devices which also designed to automatically call for assistance in the event of emergencies) in their vehicles, there may be a decrease in demand for our products.

Risk Factors relating to our Pointer segment

We may not be able to successfully compete in the extremely competitive markets for our services.

We face intense competition in every market in which we offer our services. Should any of our competitors successfully provide a broader, more efficient or otherwise attractive combination of services to insurance companies, automobile owners, fleets, and car sharing users, in addition to such services as roadside assistance or emergency home repair, our business results could be materially adversely affected. For more information on our competitors, see “Item 4B  - Competition”.

Due to the significant penetration of mobile resource management services, or MRM, such as stolen vehicle retrieval services, asset-tracking services and fleet management services, as well as the moderate overall growth of these markets in the countries in which they are provided, we anticipate that revenues from MRM sales may increase in those countries. However, as a result of intense competition in those markets, we expect that our margins may decrease.
 
We rely on third party operators to provide our services in certain countries

In countries in which our subsidiaries conduct services activities, we rely on subcontractors and police forces to provide our stolen vehicle retrieval services. This requires us to maintain solid relationships with these third party operators and governmental entities to ensure that they continue to work with us and provide effective service to our customers. Since we do not own these third party operators, we have little or no control over their effectiveness or methods of operation. Should we fail to maintain relationships with these third party operators, or should these operators fail to successfully market and service our products, including a failure to recover the stolen vehicles effectively and in a timely manner, it could negatively impact customers’ perception of the usefulness of our services and our business would be adversely affected.
 
 
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In offering our services, we use fixed price contracts with our customers while our expenses are largely variable.

Our roadside services in Israel are offered at annually or monthly fixed price contracts, according to which we are generally paid a fixed price by insurance companies for each of their customers who subscribe to receive our services. Similarly, we are paid an annual fixed price by insurance companies for our emergency home repair services. Should operational expenses rise due to factors such as a rise in the price of gasoline, labor costs or any other materials necessary for our operations, our profit margins could suffer as a result. Since it is often difficult to predict future increases in labor costs or other variable costs, our fixed price contracts may not adequately cover our future outlays. Additionally, the frequency by which subscribers may take advantage of our roadside services can vary unpredictably. Sustained adverse weather conditions, increased regional hostilities or acts of terrorism, poor road maintenance or an increased theft ratio may increase customer usage of our services in any given year, thus reducing profit margins.

Most of the stolen vehicle retrieval services, fleet management services, and services provided by our Pointer segment are offered at monthly fixed price contracts, according to which we are paid a fixed price each month by our customers who subscribe to receive our services. Should operational expenses rise due to factors such as a rise in the price of labor costs or any other materials necessary for our operations, our profit margins could suffer as a result. Since it is often difficult to predict future increases in the cost of components or labor costs, our fixed price contracts may not adequately cover our future outlays.
 
Risk Factors Relating to Our Company

Pointer Telocation Ltd. shareholders have a history of losses.

With the exception of the years 2012, 2010, 2008, 2006 and 2003, our shareholders incurred a loss in each year of the Company's existence. Our shareholders may continue to sustain net losses for the foreseeable future given the markets in which we operate. As a part of our strategy, we are focusing on the development of new businesses, products, technology and services in the territories in which we currently operate as well as in new territories. Investing in such new businesses may result in an increase in short term losses. If we continue to sustain prolonged losses or losses from continuing operations, we may have to cease our operations.
 
 
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Conditions and changes in the global economic environment may adversely affect our business and financial results.
 
The global economy continues to be adversely affected by stock market volatility, tightening of credit markets, concerns of inflation and deflation adverse business conditions and liquidity concerns and business insolvencies. These events and related uncertainty about future economic conditions, including adverse conditions in Europe, our primary Cellocator market, following the debt crisis there in 2011, could negatively impact our customers and, among other things, postpone their decision-making, decrease their spending and jeopardize or delay their ability or willingness to make payment obligations, any of which could adversely affect our business. While it appears that the financial crisis in the Euro zone may be beginning to ease, we cannot exclude a potential further deterioration of economic conditions, in particular in the event of a sovereign debt default by one or more countries.Uncertainty about current global economic conditions could also cause volatility of our share price. We cannot predict the timing, strength or duration of this global economic downturn or subsequent recovery. In addition, while there has been a certain upturn in the worldwide automotive industry, this sector is cyclical in nature and difficult to predict. These factors, among other things, could limit our ability to maintain or increase our sales or recognize revenue from committed contracts and in turn adversely affect our business, operating results and financial condition.
 
If the current uncertainty in the general economy, the European economy in particular, and the automotive industries sector does not change or improve, our business, financial condition and results of operations could be harmed.
 
Changes in practices of insurance companies in the markets in which we provide, and sell, our SVR 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 products. In Israel, most of the insurance companies either mandate the use of SVR services and products for certain cars, 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 Argentina, insurance companies purchase or lease our products directly and subsequently require their customers to subscribe to our SVR services.
 
Therefore, we rely on insurance companies’ continued practice of:
 
 
·
accepting vehicle location and recovery technology as a preferred security product; and
 
 
·
with respect to insurance companies in Argentina, deciding to purchase or lease SVR services products from us directly.
 
If any of these policies or practices change, revenues from sales of our SVR services and products could decline, which could adversely affect our revenues and growth potential.
 
A decline in sales of consumer or commercial vehicles in the markets in which we operate could result in reduced demand for our products and services.
 
Our stolen vehicle retrieval and mobile resource management products are primarily installed before or immediately after the initial sale of private or commercial vehicles.  Consequently, a reduction in sales of new vehicles could reduce our applicable market for stolen vehicle retrieval and mobile resource management products, and, consequentially, reduce the market for stolen vehicle retrieval services and mobile resource management services which utilize our products.  New vehicle sales may decline for various reasons, including an increase in new vehicle tariffs, taxes or gas prices, or an increased difficulty in obtaining credit or financing in the applicable local or global economy.  A decline in sales of new vehicles in the markets in which our Cellocator segment and Pointer segment operate could result in reduced demand for our products and services.
 
 
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A reduction in vehicle theft rates may adversely impact demand for our SVR services and products.
 
Demand for our SVR services and products, depends primarily on prevailing or expected vehicle theft rates. Vehicle theft rates may decline as a result of various factors 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 some or our entire 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 products may decline.
   
The introduction of products using new technology and the emergence of new industry standards and practices could negatively impact our business.

The wireless communications industry as a whole and specifically GPRS is characterized by rapid technological changes. The introduction of products using new technology and the emergence of new industry standards and practices could make our products less competitive and cause us to reduce the prices of our products. There are several wireless communications technologies, including HSPA, LTE, WiMax, personal communications services, specialized mobile radio and mobile satellite services which have been or may be implemented in the future for applications competitive with the applications we provide. Future implementation and technological improvements could lead to the production of systems and services which are competitive with, or superior to ours.

We cannot give any assurance that we will timely or successfully introduce or develop new or enhanced products and services, which will effectively compete with new systems available in the market. Our business will be negatively impacted if we do not introduce or develop technologically competitive products and services that respond to customer needs and are priced competitively.

The increasing availability of handheld GPRS devices may reduce the demand for our products for small fleet management.

The increasing availability of low cost handheld GPRS devices may result in a decrease in the demand for our products by managers of small autofleets or providers of low level services. The availability of such devices has expanded considerably in recent years. Any such decline could cause a decline in our revenues and profitability.

 
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We depend on a small number of customers.

Following our acquisition of the activities of Shagrir Towing Services, the customers which account for a significant part of the revenues of Shagrir Systems Ltd., or Shagrir, are Israeli insurance companies which offer our roadside assistance and towing services as part of their vehicle insurance policy packages which they sell to their customers, as well as Argentine insurance companies which require their customers to obtain stolen vehicle retrieval services as part of their vehicle insurance policy packages. Although in 2012 none of our customers comprised over 10% of our total revenues, the loss of even a small number of customers could materially affect our financial condition.
 
If the creditworthiness or the financial strength of our customers were to decline, there could be an adverse effect on our operating results and cash flows. Should geopolitical situations change in the countries where our customers operate, there could be additional credit risks.

Our operations rely on the use of information technology and any material security failure of that technology could harm our business.

Our operations, including the provision of mobile resource management services and our Cellocator segment, rely on the use of information technology and any material security failure of that technology or cyber attack could harm our business. We have implemented cyber security controls which involve the prevention, detection and recovery of data in the event of cyber security breaches. We perform regular effectiveness of control reviews of some of our systems as well as an annual external review of the degrees of effectiveness of the network security in our various departments. However, the internal controls we use over cyber security may not be sufficient to prevent significant deficiencies or material weaknesses in the future, and we may also identify other conditions that could result in significant deficiencies or material weaknesses. In the event of a cyber attack, we could experience the corruption or loss of data, misappropriation of assets or sensitive information, including customer information, or operational disruption. This could result in substantial loss of revenues, response costs and other financial loss, and may subject us to litigation and cause damage to our reputation, for which we may not be covered under our current insurance policies.

The use of our products is subject to international regulations.

The use of our products is subject to regulatory approvals of government agencies in each of the countries in which our systems are operated by our Pointer segment or by other operators, including the State of Israel. Our operators typically must obtain authorization from each country in which our systems and products are installed. While in general, operators have not experienced problems in obtaining regulatory approvals to date, the regulatory schemes in each country are different and may change from time to time. We cannot guarantee that approvals which our operators and our Pointer segment have obtained will remain sufficient in the view of regulatory authorities. In addition, we cannot assure you that operators of our systems and products will obtain licenses and approvals on a timely basis in all jurisdictions in which we wish to sell our systems or that restrictions on the use of our systems will not be unduly burdensome.
 
 
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Our future operations depend on our ability to obtain additional financing.

We have historically financed our operations through public and private placements of equity and debt securities, cash generated from the sales of our systems, grants for research and development projects, loans and bank credit lines. We believe that our current assets, together with anticipated cash generated from operations and outstanding bank credit lines, will sufficiently allow us to continue our operations as a going concern for the foreseeable future. However, we cannot assure that if we are required to raise additional financing in the future that we will be able to obtain such financing on satisfactory terms, if at all, and a financing through the issuance of shares may result in the dilution of the interests of our current shareholders. In July 2012 we completed a rights offering using our 2010 shelf registration statement to the holders of our ordinary shares, pursuant to which we issued a total of 644,034 ordinary shares to our ordinary shareholder and received, in consideration, approximately $1,867,000. For further information regarding this rights offering see Item 4 - Information on the Company and Item 5B – Liquidity and Capital Resources.

As a result of the registration statements that we currently have outstanding, many or all of our investors who hold our securities, including DBSI Investments Ltd., or DBSI, our controlling shareholder, may elect to sell some or all of our securities.

 Should such sales be significant in volume or take place over a short period of time, our share price may decline significantly, and we may find it difficult to raise additional funding through the issuance of equity or convertible debt securities. If our future capital requirements are greater than the cash we obtain from our business and available financing, if any, we may, among other things, be required to significantly reduce our research, development, product commercialization, marketing or other activities or even cease operations.

Over recent years, the securities markets in general have experienced increased volatility, which has particularly affected the securities and operations of many companies, including companies that have a significant presence in Israel. Although the volatility of these companies’ securities has often been unrelated to the operating performance of these companies, they may experience difficulties in raising additional financing required to effectively operate and grow their businesses. Such failure and the volatility of the securities markets in general may affect our ability to obtain additional financing at favorable terms.
 
 
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Pointer, Shagrir and Pointer do Brazil Commercial S.A have significant loans from banks and others which they are required to repay in accordance with strict schedules that they may not be able to meet or that limit our operating and financial flexibility.

As of December 31, 2012, Pointer do Brazil Commercial S.A, or Pointer Brazil, has in the aggregate approximately $446,000 in outstanding loans from several Brazilian banks. Should Pointer Brazil fail to repay the loans in accordance with the repayment schedule pertaining to the loans or if the bank lenders refuse to amend the relevant repayment schedule, the banks may realize certain liens that were created in their favor, which in turn may have a material adverse affect on Pointer Brazil's financial condition.

As of December 31, 2012, Shagrir has in the aggregate approximately $17 million in outstanding loans from Bank Hapoalim and Bank Leumi. Despite the fact that Shagrir is cash positive, should Shagrir fail to repay the loans in accordance with the repayment schedule pertaining to each loan or should the banks refuse to amend the relevant repayment schedule, the banks may realize certain liens that were created in its favor by Shagrir. This could result in Shagrir having to divest itself of parts of its business and may result in the impairment or cessation of its operations.

As of December 31, 2012, Pointer has in the aggregate approximately $1.9 million in outstanding loans from Bank Hapoalim and unutilized credit facilities of approximately $3 million from Bank Hapoalim and Israel Discount Bank B.M. Should Pointer fail to repay the loans in accordance with the repayment schedule pertaining to each loan or if Bank Hapoalim refuses to amend the relevant repayment schedule, Bank Hapoalim may realize certain liens that were created in its favor, which in turn may have a material adverse affect on Pointer's financial condition.

In January 2008 Pointer entered into credit facilities for an aggregate amount of $1 million with Israel Discount Bank B.M., in order to finance its working capital. As of December 31, 2012, $0.3 million of these credit facilities were utilized.

In May 2012 Pointer increased its credit facilities with Bank Hapoalim for an aggregate amount of $3.75 million, in order to finance its working capital. As of December 31, 2012, $1.6 million of these credit facilities had been utilized.

The credit facilities and loans described above contain a number of restrictive covenants that limit the operating and financial flexibility of Pointer and Shagrir. Please see Notes 11c and 11d to our consolidated financial statements for further information. The covenants are required to be met on an annual basis. Failure to comply with any of the covenants could lead to an event of default under the agreements governing some or all of the credit facilities and loans under applicable cross-default provisions, permitting the lenders to accelerate the repayment of the borrower in default. As of December 31, 2012, both Pointer and Shagrir were in compliance with the restrictive financial covenants.

Our ability to continue to comply with these and other obligations depends in part on the future performance of our business. There can be no assurance that such obligations will not materially adversely affect our ability to finance our future operations or the manner in which we operate our business. In particular, any noncompliance with performance-related covenants and other undertakings of our credit facilities could result in an acceleration of our outstanding debt under our credit facilities and restrict our ability to obtain additional funds, which could have a material adverse effect on our business, financial condition and results of operations.
 
 
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For further information on the loans described above, please see Item 5B – Liquidity and Capital Resources and Item 10Material Contracts.

We may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired.

Our balance sheet contains a significant amount of goodwill and other amortizable intangible assets in long-term assets, totaling about $49.4 million at December 31, 2012.

In 2011, we wrote-down our goodwill by an amount of $6.2 million due to the impact of changes in economic conditions and forecasted results of our Cellocator segment. Additionally, in 2011, we amortized $0.5 million of the development technology intangible assets acquired from Cellocator Ltd. in September 2007. The circumstances leading to the impairment are attributed to the obsolescence of certain older Cellocator technology.

In 2009 we amortized $3 million of customer related intangible assets attributable to our acquisition of Cellocator due to the decrease in activity of former customers of Cellocator as a result of the worldwide economic downturn.

No impairment losses were identified in 2012 and 2010.

We test goodwill for impairment at least annually and more frequently in the event that indicators for potential impairment exist. We review our finite-lived intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a sustained decline in our share price, market capitalization or future cash flows, slower growth rates in our industry, termination of contracts assumed in connection with a merger or acquisition and obsolescence of acquired technology. In particular, the nature of the current worldwide economic instability and the potential impact of this on our business and our share price could require us to record a significant charge to earnings in our financial statements due to impairment of our goodwill or amortizable intangible assets.  If that happens, then our results of operations will be negatively impacted for the period in which such determination was made.
 
 
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The Argentine government may enact or enforce measures to preempt or respond to social unrest or economic turmoil which may adversely affect our business in Argentina.

Our subsidiary, Pointer Localizacion Y Asistencia S.A., or Pointer Argentina, operates in Argentina, where government has historically exercised significant influence over the country’s economy. In 2012, Argentina faced nationwide strikes that disrupted economic activity and have heightened political tension. Future government policies to preempt, or in response to, social unrest may include expropriation, nationalization, forced renegotiation or modification of existing contracts, suspension of the enforcement of creditors’ rights, new taxation policies, customs duties and levies including royalty and tax increases and retroactive tax claims, and changes in laws and policies affecting foreign trade and investment. Such policies could destabilize the country and adversely and materially affect the economy, and thereby our business.  Additionally, due to agreements with the General Workers' Union in Argentina and the country's high inflation rate, we may be required to increase employee salaries at a rate which could adversely affect Pointer Argentina's business.
 
Any inability to comply with Section 404 of the Sarbanes−Oxley Act of 2002 regarding internal control attestation may negatively impact the report on our financial statements to be provided by our independent auditors.

We are subject to the reporting requirements of the United States Securities and Exchange Commission, or the SEC. The SEC, as directed by Section 404(a) of the United States Sarbanes−Oxley Act of 2002, adopted rules requiring public companies to include a management report assessing the Company’s effectiveness of internal control over financial reporting in its annual report on Form 20−F. Our management may conclude that our internal controls over financial reporting are not effective. Such a conclusion could result in a loss of investor confidence in the reliability of our financial statements, which could negatively impact the market price of our shares.

If it is determined that we are not in compliance with Section 404, we may be required to implement new internal control procedures and re−evaluate our financial reporting. We may experience higher than anticipated operating expenses as well as outside auditor fees during the implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel in order for us to be compliant with Section 404. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in our conclusion that our internal controls over financial reporting are not effective.

 
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Under current Israeli law, we may not be able to enforce non-compete covenants and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
 
We currently have non-competition agreements with our employees.  These agreements prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors for a certain period of time following termination of their employment agreements.  Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property.  If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
 
We may not be able to retain or attract key managerial, technical and research and development personnel that we need to succeed.

Our success has largely depended and will depend in the future on our ability to retain skilled professional and technical personnel and to attract additional qualified personnel in the future. The competition for such personnel is intense. We may not be able to retain our present personnel, or recruit additional qualified personnel, and our failure to do so would have a material adverse effect on our business, financial condition and results of operations.
 
Our major shareholder has a controlling stake in our company and is affiliated with three members of our board of directors.
 
DBSI currently owns approximately 50.31% of our issued and outstanding shares or 47.96% on a fully diluted basis. As a result, DBSI has the ability to control material decisions requiring the approval of our shareholders.

Our board of directors currently consists of 6 members, of which three are affiliated with DBSI. As a result, DBSI has the ability to affect the decisions made by our full board of directors.
 
Risk Factors Relating to our Ordinary Shares

We do not expect to distribute cash dividends.

We do not anticipate paying cash dividends in the foreseeable future. Our Board of Directors will decide whether to declare any cash dividends in the future based on the conditions then existing, including our earnings and financial condition, and subject to the provisions of the Israeli Companies Law – 1999, or the Israeli Companies Law. According to the Israeli Companies Law, a company may distribute dividends out of its profits, so long as the company reasonably believes that such dividend distribution will not prevent the company from paying all its current and future debts. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years.
 
 
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The market price of our ordinary shares has been, and may continue to be, very volatile.

The market prices of our ordinary shares have fluctuated widely. The following factors, among others, may significantly impact the market price of our ordinary shares:

 
·
changes in the global financial markets and U.S. and Israeli stock markets relating to turbulence amid stock market volatility, tightening of credit markets, concerns of inflation and deflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and general liquidity concerns;
 
 
·
macro changes and changes in market share in the markets in which we provide services and products;
 
 
·
announcements of technological innovations or new products by us or our competitors;
 
 
·
developments or disputes concerning patents or proprietary rights;
 
 
·
publicity regarding actual or potential results relating to services rendered by us or our competitors;
 
 
·
regulatory development in the United States, Israel and other countries;
 
 
·
events or announcements relating to our collaborative relationship with others;
 
 
·
economic, political and other external factors;
 
 
·
period-to-period fluctuations in our operating results; and
 
 
·
substantial sales by significant shareholders of our ordinary shares which are currently or are in the process of being registered.

In addition, the securities markets in general have experienced volatility, which has particularly affected the market prices of equity securities of companies that have a significant presence in Israel. This volatility has often been unrelated to the operating performance of such companies.

Our ordinary shares may be affected by limited trading volume and may fluctuate significantly in price.

Our ordinary shares are currently only traded on the NASDAQ Capital Market. Trading in our ordinary shares has been limited and there can be no assurance that an active trading market for our ordinary shares will develop. As a result, our shareholders' ability to sell our ordinary shares in short time periods or in large volumes may be impacted. Thinly traded shares can be more volatile than shares traded in an active public market. The average daily trading volume of our ordinary shares from January 1, 2013 to February 28, 2013 was 840 shares on the NASDAQ Capital Market and the high and low bid price of our ordinary shares from January 1, 2013 to February 28, 2013 has been $2.65 and $2.62 respectively on the NASDAQ Capital Market. Our ordinary shares have experienced, and are likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our ordinary shares without regard to our operating performance.
 
 
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Corporate governance controversies and new legislation in the United States could increase the cost of our operations.

As a result of corporate governance controversies in the United States and the legislative and litigation environment resulting from those controversies, the costs of being a public company in general have increased and may continue to increase in the near future. Legislation, such as the Sarbanes-Oxley Act of 2002, has had and may continue to have the effect of increasing the burdens and potential liabilities of being a public reporting company. This and other proposed legislation may increase the costs of compliance with this legislation and our insurance premiums.

Risk Factors Relating to Our Operations in Israel

Political, Military and Economic Conditions in Israel affect our operations.
 
We are incorporated under the laws of the State of Israel. Our headquarters, the headquarters of Shagrir and the Cellocator segment, are located in Israel, as well as the majority of the business activities of Shagrir and the manufacturing operations of our Cellocator segment, which account for the majority of our revenues. Consequentially, we are directly affected by the political, military and economic conditions affecting Israel.

Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our operations and could make it more difficult for us to raise capital.  Since September 2000, there has been a high level of violence between Israel and the Palestinians. Hamas, an Islamist movement responsible for many attacks, including missile strikes, against Israelis, won the majority of the seats in the Parliament of the Palestinian Authority in January 2006 and took control of the entire Gaza Strip by force in June 2007. Hamas has launched hundreds of missiles from the Gaza Strip against Israeli population centers, disrupting day-to-day civilian life in southern Israel. This led to an armed conflict between Israel and the Hamas during December 2008 and January 2009 and continued sporadic missile launching from the Gaza strip to Israel. Thereafter, in November 2012 there was another armed conflict, involving attacks by hundreds of missiles fired from the Gaza Strip against the Israeli population centers throughout the southern half of Israel and up to and including Tel-Aviv. Any damage to our Israeli facilities would damage our ability to manufacture our products and could otherwise damage our operation and could have an adverse effect on our business, financial condition or results of operations. More generally, any armed conflicts, terrorist activities or political instability in the region would likely negatively affect business conditions and could harm our results of operations, including following termination of such conflicts, due to a decrease in the number of tourists visiting Israel.  At the end of 2010 and during 2011 and 2012 several countries in the region, including Egypt and Syria, have been experiencing increased political instability, which led to change in government in some of these countries (including Egypt), the effects of which are currently difficult to assess.  In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons.  Iran is also believed to have a strong influence among extremist groups in areas that neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon. This situation may potentially escalate in the future to violent events which may affect Israel and us.
 
 
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Any downturn in the Israeli economy may also have a significant impact on our business. Israel’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980’s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. The revenues of Shagrir may be adversely affected if fewer vehicles are used as a result of an economic downturn in Israel, an increase in use of mass transportation, an increase in vehicle related taxes, an increase in the imputed value of vehicles provided as a part of employee compensation or other macroeconomic changes affecting the use of vehicles. In addition, our stolen vehicle retrieval services significantly depend on Israeli insurance companies mandating subscription to a service such as ours. If Israeli insurance companies cease to require such subscriptions, our business could be significantly adversely affected. We also rely on the renewal and retention of several operating licenses issued by certain Israeli regulatory authorities. Should such authorities fail to renew any of these licenses, suspend existing licenses, or require additional licenses, we may be forced to suspend or cease certain services that we provide.

Many of our employees in Israel are required to perform military reserve duty.

All non-exempt male adult permanent residents of Israel under the age of 40, including some of our office holders and employees, are obligated to perform military reserve duty and may be called to active duty under emergency circumstances. In the past there have been significant call ups of military reservists, and it is possible that there will be additional call-ups in the future.  While we have operated effectively despite these conditions in the past, we cannot assess the impact these conditions may have on us in the future, particularly if emergency circumstances occur. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of our other employees due to military service. Any disruption in our operations would harm our business.

We may be adversely affected by a change in the exchange rate of the New Israeli Shekel against the U.S. Dollar.  
 
Exchange rates between the NIS and the U.S. Dollar have fluctuated continuously in recent years. Exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our revenues and profitability and period-to-period comparisons of our results. In 2012 and 2010  the NIS appreciated in value in relation to the Dollar by 2.3% and 6%, respectively. In 2011, the NIS depreciated in value in relation to the Dollar by 7.7%. The fluctuation during 2012 was between 3.2% revaluation and 6.9% devaluation. As of December 31, 2012, our revenues in NIS accounted for approximately 75% of our total revenues in 2012. Loans and utilized credit facilities in the amount of approximately $17.5 million, constituting approximately 82% out of our total loans and credit facilities, are also denominated in NIS. Approximately 82% of our expenses (primarily labor expenses of the operations of our Cellocator segment and Shagrir in Israel) are incurred in NIS.  Additionally, certain assets, as well as a portion of our liabilities, are denominated in NIS.  On the other hand, as of December 31, 2012, our sales, including sales of the products of our Cellocator segment, are generally denominated in U.S. Dollars and to a lesser extent in Euro, Argentinean Pesos, Brazilian Real and Mexican Pesos. Loans and credit facilities in the amount of approximately $3.4 million, constituting approximately 16% out of our total loans and credit facilities, are denominated in U.S. Dollars.
 
 
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Our results may be adversely affected by the devaluation of the NIS in relation to the U.S. Dollar (or if such devaluation is on lagging basis) if our revenues in NIS are higher than our expenses in NIS and/or the amount of our assets in NIS are higher than our liabilities in NIS. Alternatively, our results may be adversely affected by appreciation of the NIS in relation to the Dollar (or if such appreciation is on a lagging basis), if the amount of our expenses in NIS are higher than the amount of our revenues in NIS and/or the amount of our liabilities in NIS are higher than our assets in NIS. We may utilize partial hedging to manage currency risk. For example, in 2012 we entered into a foreign currency hedging transaction in order to partially manage the risk related to salary expenses. Therefore, to the extent that our currency risk is not hedged or sufficient hedged, we may experience exchange rate losses which could significantly and negatively affect our business and results of operations.

There can be no assurance that we will not incur losses from such fluctuations in the future.

For further discussion of the fluctuation of the U.S. Dollar to the NIS, please see Item 5 - Impact of Exchange Rate Fluctuations on Results of Operations, Liabilities and Assets, and Item 11 - Quantitative and Qualitative Disclosures About Market Risk.
 
We may be adversely affected by a change of the Israeli and Argentine Consumer Price Index.

Our exposure to market rate risk for changes in the Israeli Consumer Price Index, or Israeli CPI, relates primarily to loans borrowed by us from banks and other lenders.  As of December 31, 2012, we had outstanding loans in the amount of $0.5 million linked to Israeli CPI. Therefore, we are exposed to the risk that the rate of Israeli CPI, which measures inflation in Israel, will exceed the rate of devaluation of the NIS in relation to the US Dollar or that the timing of this devaluation lags behind inflation in Israel. This would have the effect of increasing the Dollar cost of our borrowings.

By administrative order, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations, relating primarily to the length of the work day, minimum wages, pension contributions, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment are applicable to our employees. In accordance with these provisions, the salaries of our employees are partially indexed to the Israeli CPI. In the event that inflation in Israel will increase, we will have to increase the salaries of our employees in Israel respectively. As of December 31, 2012, we did not increase the salaries of our employees in Israel due to an increase in inflation. In Argentina, we are facing a similar situation, and accordingly, in 2012, due to an increase in inflation, we increased the salaries of some of our employees. There can be no assurance that we will not be adversely affected by such increase in salaries in the future.
 
 
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We may not be eligible for programs or to receive grants provided to us from our participation in research and development, investments and other programs or we may be restricted from manufacturing products or transferring our intellectual property outside of Israel.

We have received certain grants and programs from the Israeli Government. Some of these programs may restrict our right to manufacture products or transfer our intellectual property outside of Israel. If we do not meet certain conditions in the future, we may have to refund payments previously received under these programs or pay fines.

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. Service of process upon directors and officers of our company and the Israeli experts named herein, all of who reside outside the United States, may be difficult to effect within the United States. Furthermore, since the majority of our assets are located outside the United States, any judgment obtained against us in the United States may not be enforceable within the United States. Additionally, it may be difficult for you to enforce civil liabilities under United States federal securities laws in original actions instituted in Israel.
 
INFORMATION ON THE COMPANY
 
 
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
 
The legal and commercial name of our company is Pointer Telocation Ltd.  We were incorporated under the laws of the State of Israel on July 17, 1991 under the name Nexus Telecommunications Systems Ltd. We changed our name to Nexus Telocation Systems Ltd. in December 1997 and to Pointer Telocation Ltd. in January 2006. The principal legislation under which we operate is the Israeli Companies Law, 5759-1999, as amended.

Our principal place of business is located at 14 Hamelacha Street Afek Industrial Park, Rosh Haayin, Israel, and our telephone number is 972-3-572-3111.  Our Web site is www.pointer.com. Information on our website is not part of, nor incorporated by reference into, this annual report.
 
 
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In addition to our company's principal place of business as described above, the headquarters of our subsidiary Shagrir are located in Holon, Israel; the headquarters of our subsidiary Pointer Localization Y Asistencia, or Pointer Argentina, are located in Buenos Aires, Argentina; the headquarters of our subsidiary Pointer Recuperacion de Mexico, SA de CV, or Pointer Mexico are located in Mexico City, Mexico; the headquarters of our subsidiary Pointer do Brazil Commercial S.A or Pointer Brazil are located in Sao Paulo, Brazil; the headquarters of our subsidiary S.C. Pointer S.R.L., or Pointer Romania, are located in Bucharest, Romania; the headquarters of our subsidiary, Pointer Telocation Inc., are located in Texas, USA; the headquarters of our subsidiary, Pointer Telocation India, or Pointer India, are located in Maharashtra, India, and the headquarters of our subsidiary Car2Go Ltd. are located in Tel Aviv, Israel.

We are a leading provider of advanced command and control technologies for the automotive and insurance industries.

In 2001, the Company purchased shares in Pointer Argentina (previously known as Tracsat S.A.), a corporation incorporated in Argentina. The Company currently holds 88% of the shares in Pointer Argentina.

Until 2003, our business focused primarily on the development, manufacture and sale of stolen vehicle retrieval devices based on radio frequency and sale of software for command and control centers. In April 2003, our management decided to strategically focus on providing a range of additional services to automobile owners and insurance companies.

This strategy was implemented in the following years through several acquisitions in Israel and Argentina, and the establishment of subsidiaries and affiliates in Mexico, Romania and Brazil.

In April 2004, we purchased all of the remaining outstanding and issued share capital of Shagrir (previously known as Pointer (Eden Telecom Group) Ltd.) which was not already held by us. At the time of the purchase, Shagrir was our local Israeli operator and service provider which mainly provided stolen vehicle retrieval and other security value-added services mainly for vehicle owners through a communication network based on our technology.

In June 2004, we incorporated a Mexican company, Pointer Mexico, to serve as our local Mexican operator and service provider, and, as part of our Pointer segment, to provide stolen vehicle retrieval and fleet management services for vehicle owners using a communication network based on our technology. We currently hold 74% of the issued share capital of Pointer Mexico. In July 2009, Pointer Mexico commenced to sell the products of our Cellocator segment in Mexico as a local distributor, which became a substantial part of Pointer Mexico's revenues.

In February 2005, Shagrir purchased the assets and activities of Shagrir Towing Services, or Shagrir Towing, an Israeli company which provided roadside assistance and towing services in Israel. In order to finance Shagrir’s acquisition of Shagrir Towing, Shagrir received loans from several investors, including a convertible loan from a group of investors led by Gandyr Investments Ltd., or Gandyr. In November 2005, the group of investors led by Gandyr exercised their options to convert their loan into shares of Shagrir.
 
 
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In August 2005, we affected a 100 to 1 reverse stock split of our ordinary shares. As a result of the reverse stock split, each one hundred shares of the Company's ordinary shares with par value of NIS 0.03 were converted into one ordinary share of NIS 3.00 par value.

On November 16, 2005, Pointer's ordinary shares began trading on the NASDAQ Capital Market under the symbol NXUS.  On February 21, 2006 our shares began trading under a new symbol, PNTR.

On December 19, 2006, Pointer's ordinary shares began trading on the TASE under the symbol PNTR, and we became a dual listed company. In January 2012, we announced that our Board of Directors resolved to delist our ordinary shares from the TASE, effective as of April 17, 2012, with the last trading date on the TASE being April 15, 2012.  Please see Item 9The Offer and Listing for further information about the trading of our ordinary shares.
 
 
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In September 2007, we purchased the assets and activities of Cellocator Ltd., a private Israeli company active in the field of cellular location-based services and technology.

In June 2008, Shagrir, together with a Romanian third party, incorporated a Romanian company, Pointer Romania, to provide roadside assistance and towing services in Romania. Shagrir holds 50% of the share capital of Pointer Romania. On January 1, 2012, Shagrir signed an agreement with the Romanian shareholder, pursuant to which he transferred to Shagrir 15% of the issued share capital of the Romanian subsidiary.  As a result, Shagrir holds 65% of the share capital of Pointer Romania

In August 2008, we incorporated a company in Brazil by the name of Cellocator Commercial S.A., which was later renamed Pointer do Brazil Commercial S.A. As of December 31, 2012, we hold 48% of the share capital of Pointer Brazil with an option to acquire additional 4%.

In October 2008, we established a wholly-owned subsidiary in the United States, Pointer Telocation Inc.

On May 17, 2009 Shagrir purchased 51% of the share capital of Car2go Ltd., or Car2go, an Israeli company that offers car sharing services in urban areas in Israel. As part of the terms of the acquisition, Shagrir provided Car2go with a loan in the amount of up to $1.5 million (consisting of $241,000 in cash and $1.2 million in services). The loan was provided during 2010. The loan is linked to the Israeli CPI and bears an interest of 4%. Car2go will repay the loan in quarterly installments commencing on May 15, 2013. On February 28, 2012, Shagrir signed an agreement with the non-controlling shareholder of Car2go, pursuant to which Shagrir will invest NIS 3 million in cash or in services in consideration for 3,087 ordinary shares of Car2go. Following the issuance, Shagrir will hold 58.46% of Car2go. However, the terms of the agreement are such that if there is no additional investment in Car2go by a third party within two (2) years from signing, Shagrir's holding may be retroactively increased to 62.3%. Please see Item 4- Business Overview for further information on the activities of Car2go.

As a result of the Company's acquisition of Cellocator and following a determination by the Company's management to control and manage the results of the Company’s business by means of two operating segments, in 2008 the Company began to present its operating results in two discrete business units, the Cellocator segment and the Pointer segment. Our Cellocator segment designs, develops and produces leading mobile resource management products that include asset tracking, fleet management and security products for sale to independent operators in 45 countries, as well as to our Pointer segment. Our Pointer segment acts as an operator primarily in Israel, Argentina, Mexico, Brazil and Romania by bundling our products together with a range of services, including stolen vehicle retrieval services fleet management and asset tracking services, and also provide roadside assistance services in Israel and Romania for sale primarily to automotive and insurance companies. See Item 4.BBusiness Overview for a further description of our business segments.
 
 
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Following the acquisitions we made in Israel, the operations of Shagrir as part of our Pointer segment and the technology manufacturing of our Cellocator segment are currently the most significant operations we have, and are expected to account for the majority of our business and revenues in the foreseeable future. Please see Item 5.B. – Operating and Financial Review and Prospects – Liquidity and Capital Resources for a discussion of our capital expenditures and divestitures.

In July 2011, 903 options granted under Shagrir's employee share option plan were exercised to purchase ordinary shares of Shagrir, and in January 2012, 2,480 options were exercised. As a result, our holdings in Shagrir were diluted and we currently hold approximately 54.48% of the issued and outstanding share capital of Shagrir. There currently remain no exercisable options to purchase ordinary shares of Shagrir.

In October 2011, Shagrir signed a definitive agreement to acquire the activities, intellectual property and goodwill of K.S. Operation Centers for Vehicles Ltd., an Israeli chain of car repair garages. The consideration of NIS 12 million for the acquisition was paid in January 2012 in accordance with an amendment dated January 1, 2012. Shagrir will leverage the acquired chain of car repair garages as a complementary service for its array of road side services.

On November 24, 2011, Shagrir entered into a partnership agreement with T.M.C. Transportation Ltd., or TMC, a company specializing in providing advanced technological solutions for the collection of travel fares in taxi and transportation service fleets. TMC’s flagship product, SMARTAXI, is an advanced system which is installed in taxis and enables payment of travel fares by credit card. The partnership, T.M.C. Technologies Systems L.P., or TMC LP, commenced its activity on January 1, 2012. Shagrir previously held 51% interest in TMC LP.

As part of the transaction, TMC transferred its activities, including its rights to the SMARTAXI system, to TMC LP, and Shagrir was required to provide TMC LP with a loan of NIS 2.5 million in accordance with TMC LP’s needs. That loan carried an annual interest rate of prime plus 4% and will be repaid to Shagrir from TMC LP’s profits.

Throughout Shagrir’s involvement with TMC LP, TMC LP recorded impairment of goodwill and intangible assets related to this operation in the aggregate amount of NIS 1.3 million.

On August 1, 2012, Shagrir signed an agreement to sell TMC LP’s entire share capital to Gastech Mobile Communication Solution Ltd. ("Gastech") for its par value. In addition to selling its entire share capital in TMC LP to Gastech, Shagrir sold its right to receive payments with respect to the NIS 2.5 million loan which Shagrir provided to TMC LP.

As a result of the sale of Shagrir’s holdings in TMC LP to Gastech, TMC LP's activity was decreased and its financial consolidated statement of income for the period following the purchase by Gastech was presented at a loss, due to discontinued operations.
 
 
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Recent Developments.

Since January 1, 2012, the following material events have occurred:

Delisting from the Tel Aviv Stock Exchange

In January 2012, we announced that our Board of Directors had resolved to delist our ordinary shares from the TASE. The delisting became effective as of April 17, 2012, with the last trading date on the TASE being April 15, 2012.  The delisting from the TASE did not, and is not expected to, affect our continued listing on the NASDAQ Capital Market in the United States.

Establishment of Indian Subsidiary
 
In May 2012, we established a wholly-owned subsidiary in India, Pointer Telocation India, in order to introduce our Cellocator segment portfolio of products to the Indian market.
 
Private placement transaction between the Company and DBSI
 
In June 2012, pursuant to the approval of the shareholders of the Company, DBSI purchased 50,000 ordinary shares of the Company at a price per share of $2.95, for a total purchase price of USD 147,500 in a private placement (the “Private Placement”). Following the consummation of the Private Placement, DBSI’s holdings increased to 2,237,191 ordinary shares, constituting 45.55% of the outstanding ordinary shares of the Company.
 
Rights Offering
 
In July 2012, we completed a rights offering to the Company’s ordinary shareholders of rights to purchase an aggregate of 644,034 ordinary shares of the Company for the subscription price of $2.90, per ordinary share (the “Rights Offering”). The Rights Offering was fully subscribed and accordingly, 644,034 ordinary were issued to ordinary shareholders of the Company for aggregate gross proceeds of $1.867 million. Following the Rights Offering, DBSI’s ownership interest increased to 49.86% of the outstanding ordinary shares of the Company.
 
 
B. 
BUSINESS OVERVIEW
 
A. General

We are a leading provider of mobile resource management, or MRM products and services for the automotive and insurance industries.  Through our Cellocator segment, we design, develop and produce leading MRM products, which include devices for asset tracking, fleet management and security products for sale to third party operators providing MRM services in Europe, Latin America and Israel, as well as to our Pointer segment. For the communication systems required in our products, we utilize either radio frequency or GPRS/GSM technologies. Through our Pointer segment, we act as an operator primarily in Israel, Argentina, Mexico, Brazil and Romania by bundling our products together with a range of services including stolen vehicle retrieval services and fleet management services, and also provide roadside assistance services and emergency home repair services and garage repair for sale to insurance companies, fleets and individual customers. In 2012, revenues generated by our Cellocator segment represented 19% of our total revenues, and revenues generated by our Pointer segment represented 81% of our total revenues.

 
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Cellocator Segment

Our Cellocator segment designs, develops and produces leading MRM products, including asset tracking, fleet management, and stolen vehicle retrieval products.  Communications with our devices may be with various Radio Frequency (RF) and GSM/GPRS methods. Our Cellocator segment develops, manufactures and distributes these products to our Pointer segment in Latin America and Israel and to third party operators mainly in Europe and Latin America. These operators bundle our products with the services they provide.

Our Cellocator segment develops, manufactures and distributes the following products:
 
 
(i)
Asset tracking products

Our line of asset tracking products is designed to reduce an enterprise's financial losses incurred as a result of the often difficult task of successfully tracking cargo or equipment such as trailers, containers, construction and agriculture equipment. Our products support tracking, communication, and maintenance capabilities, providing enhanced functionality for advanced asset tracking of both mobile assets and assets without a constant power supply.

 
(ii)
Stolen vehicle retrieval, or SVR, products

Our SVR products are designed to prevent vehicles from being stolen and enable their retrieval through co-operation with law enforcement and private security agencies. Our products incorporate either a spread spectrum technology (SPSP) in the ISM frequency band, intended for self-deployed wide area networks (WAN), or  Cellular/ GPS technology communication systems in order to offer a total remote vehicle monitoring and retrieval solution.

In the event that a vehicle is stolen, our operators are either alerted by our products through sensors located in the vehicle or are informed by the owners of the vehicles.  The products transmit information to a command & control center, or CCC.  Once the CCC receives the information transmitted by the products, operators can take the necessary steps to recover the vehicle using their personnel as well as law enforcement agencies and various subcontractors. Our SVR products can also include the option of a "distress key" that can be used by q driver to alert the CCC, which in turn locates the vehicle and immediately enables operators to provide the required services.
 
 
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Our SVR products include the following remote monitoring and control solutions:
 
 
·
End units for installation in vehicles - We offer an end unit with input and output capabilities, which may be installed in a vehicle or on any asset that may be mobilized from one location to another. The end unit’s inputs are connected to sensors that may be installed in the vehicle or on the asset. Data from these inputs may be transmitted to the CCC. The CCC may send commands to the end unit activating certain outputs.  Installation and de-installation of end units in vehicles or on assets may be performed by either employees or subcontractors of the operator, usually in designated installation centers. Assets may include cargo or equipment that might not have an independent source of energy, such as (but not limited to) containers, field equipment, construction equipment, trailers and various cargo.
 
 
·
Command & Control Center - The CCC includes databases and software modules required for the execution of certain operations by the operator, as well as monitors on which the data collected from the end units is displayed and analyzed in order to determine the location of the vehicle. The CCC connects to the end units via radio frequency or cellular communications and commands can be transmitted to the end units from the CCC using either a commercial paging system or cellular networks.
 
 
·
Communication Infrastructure- Communication is accomplished by either the cellular network in each territory of operation or radio frequency infrastructure with base stations. These stations are dispersed throughout a specific territory and are connected to an existing communications infrastructure. Each base station is equipped with antennae which receives the end-unit’s signal and measures the angle from which the signal arrived for the purpose of locating the vehicle. These measurements, together with additional data received from the end units, are then converted into digital data and sent to the CCC. The location of the vehicle is established by either triangulation measurements from several base stations installed by the operator or by means of a GPS device in the vehicle.

 
(iii)
Fleet management application products

Our fleet management products enhance utilization of vehicles and other mobile resources, as well as minimize operation costs, for example, through fuel savings and efficiency. Our fleet management products include remote monitoring and control solutions that we also market as part of our SVR product line, as described above, such as the CCC and communication infrastructure. We also provide operators with end units that, when installed in a vehicle, monitor online the operating parameters of a vehicle fleet, driver behavior, retrieve data from various sensors in the vehicle utilizing a RS-232, CAN bus driver and controller, standard One-wire (Dallas) serial communication standards or analog and discrete ports, and report the results to the owners and managers of the fleet through web-based or OS-based monitoring and management location applications.

In addition, we provide the web access required for the execution of vehicular and fleet management operations, as well as  monitors on which location and other data collected from the end units is displayed, tracked, analyzed and reported, in order to determine location, utilization and certain functionalities (e.g. vehicle status and driving patterns such as speed).
 
 
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Our Cellocator segment distributes and sells its products to our services segment and to third party operators and distributors in 45 countries worldwide. Third party operators that purchase cellular monitoring units, command and control software or our fleet management application products provide their customers services that are based on our products in their designated territories and in their licensed coverage area. They control the sales and marketing of the products as well as the accompanying services to their final customers pursuant to their specific business focus.

Pointer Segment
 
Our Pointer segment currently provides the following range of services:

 
(i)
Asset tracking services

Our asset tracking services in Israel, Argentina, Mexico and Brazil provide services to resources that have an intermittent source of energy or none. This places a special energy management requirement on MRM devices and the command and control software that monitors the resources.

 
(ii)
SVR services

We provide SVR services in Israel, Argentina, Mexico and Brazil through our local subsidiaries Shagrir, Pointer Argentina, Pointer Mexico and Pointer Brazil respectively. In providing SVR services we purchase products manufactured by our Cellocator segment and by third party operators, such as alarm systems.

 
(iii)
Fleet management services

Our fleet management services in Israel, Argentina, Mexico and Brazil are predominantly based on cellular communication, GPS location tools and web-based applications providing connectivity to the vehicle via products manufactured by our Cellocator segment. Our customers monitor their fleet vehicles using a web-based application that can monitor various  parameters such as (but not limited) vehicle location, speed and other inputs, and can receive reports and alerts, either automatically or upon request, via internet, GPRS or SMS.

Shagrir, Pointer Brazil and Pointer Mexico are amongst the leading providers of fleet management services in Israel, Brazil and Mexico, respectively.

 
(iv)
Roadside assistance services
 
We also provide roadside assistance services including towing services, mobile automobile repair services, vehicle replacement services, selling and installing spare-parts and bodywork repairs.  We provide these services through our subsidiary Shagrir, which currently operates in Israel and Romania.
 
 
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As of February 2013, Shagrir owned approximately 94 service cars, mobile garages and towing vehicles and approximately 177 replacement vehicles including car sharing services. Shagrir's fleet is dispatched to the vehicle that requires assistance through a sophisticated management and monitoring software application used by Shagrir's control center and connected via remote terminals located in service cars, mobile garages and towing vehicles. The services are usually carried out by employees of Shagrir; however, during periods of high demand, Shagrir uses independent subcontractors who render these services on behalf of Shagrir.

The primary subscribers for our roadside assistance services are referred to Shagrir by Israeli insurance companies. To a lesser extent, additional subscribers are comprised of fleet vehicle customers and private customers. Upon subscription, our roadside assistance services are generally available to the subscriber twenty-four hours a day, every day, depending on the type of insurance policy and the terms of the service contract with Shagrir.

 
(v)
Car sharing services

On May 17, 2009, Shagrir purchased 51% of the share capital of Car2go, an Israeli company that offers car sharing services in urban areas in Israel. Car2go spreads cars across reserved parking spaces mainly in the Gush Dan area in Israel, allowing members of the service to access diversified vehicles by swiping their membership card near the car, and driving away. When members no longer need to use the car, they return the car to its reserved parking space. The cars can be used for a few hours or a few days, with members only paying by use and without any long term commitment.

 
(vi)
Emergency home repair and other services

As of 2007, Shagrir, through one of its operation units, provides insurance-related household plumbing repair services for insurance companies, including, among other things, installation, water damage repair, and replacement of water heaters.
 
B.  Sales and Marketing

Cellocator Segment

We employ an in-house sales and marketing team that directs the sale of the products of our Cellocator Segment to operators in various countries either directly or through distributors.
 
 
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Pointer Segment

Israel

The sales and marketing team of Shagrir directs its sales and marketing efforts to promoting subscriptions to its roadside assistance and towing services mainly through Israeli insurance companies and, to a lesser extent, fleet vehicle customers. Our stolen vehicle retrieval services in Israel are marketed primarily through vehicle importers and, to a lesser extent, through fleet vehicle operators, leasing companies and private individuals. Other value added MRM services are marketed directly to fleet vehicle operators and private individuals who have already installed our products. Our fleet management services are marketed primarily to commercial fleets through our in-house sales and marketing team.

In addition, Shagrir's sales and marketing team captures and analyzes sales data from various sources including insurance companies and agents, fleet vehicle customers and private customers, which it then uses to formulate future sales and marketing strategies.

Argentina, Mexico, Romania and Brazil

In order to execute their sales and marketing initiatives, our Argentinean Mexican, Romanian and Brazilian subsidiaries, Pointer Argentina, Pointer Mexico, Pointer Romania and Pointer Brazil, respectively, employ in-house sales and marketing teams as well as third party contractors and distributors that focus their efforts on sales and marketing either directly to insurance companies, vehicle agents, fleet operators and car manufacturers, or indirectly, through insurance agents, vehicle distributors and vehicle financing corporations in their respective designated territories.

C.  Patents and Licenses; Government Regulation

In Israel, we are not dependent on any patents or licenses that are material to our business or profitability, with the exception of the following licenses:

 
·
a business license to render towing and retrieval/extrication services under the Control of Commodities and Services (Vehicle Towing and Extrication) Order, 5734-1974, which is valid until December 31, 2013;

 
·
a license for the operation of mobile garages under the Control of Commodities and Services (Vehicle Garages and Factories) Order, 5730-1970, which is valid until December 31, 2013; and

 
·
a license to rent self-drive vehicles under the Control of Commodities and Services (Tour Transport, Special Transport and Vehicle Rental) Order, 5745-1995, which is valid until  December 31, 2013.

In May 1996, Shagrir was granted an operational license to operate our wireless messaging system over 2 MHz in the 966 to 968MHz radio spectrum band. Since 1999, this license has been renewed on a regular basis.
 
 
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Our Argentinean subsidiary, Pointer Argentina, is not dependent on any patent or license which is material to its business or profitability.
 
Most Latin American countries have dedicated a part of their radio spectrums for the ISM band for unlicensed services. However a local operator is required to obtain a specific license for its operations. As a result, Pointer Argentina obtains domestic licenses for the deployment of our systems in Argentina.

Our services through our Mexican and Brazilian subsidiaries, Pointer Mexico and Pointer Brazil, are based entirely upon Cellular Monitoring Units and therefore require no specific governmental licenses. We are currently registered by the federal commission in Mexico to provide our services.

Our Romanian subsidiary, Pointer Romania, requires and has obtained licenses to operate as a business in Romania.

Our Cellocator segment is required to obtain a license from the Israeli Ministry of Communications in order to manufacture, market and sell its products in Israel. We have received the required licenses for most of our products and are currently finalizing the process of receiving licenses for the rest of our products.

While the use of our cellular monitoring units does not require regulatory approvals, the use of our radio frequency products is subject to regulatory approvals of government agencies in each of the countries in which systems incorporating such products are operated, including Israel. Our operators typically must obtain authorization from each country in which these systems are installed.  While, in general, applicants have not experienced problems in obtaining regulatory approvals to date, the regulatory schemes in each country are different and may change from time to time. We cannot guarantee that approvals which our operators have obtained are or will remain sufficient in the view of regulatory authorities. In addition, we cannot assure you that operators of our systems will obtain licenses and approvals on a timely basis in all jurisdictions in which we wish to sell our systems or that restrictions on the use of our systems will not be unduly burdensome.

D.  Competition
 
Cellocator Segment

Many companies manufacture vehicle devices based on GPS/Cellular technology. Significant differences from one GPS/Cellular device to another are mainly a result of proprietary firmware that enables applications (for monitoring, management and sensor-data inputs) and connectivity of products to their network, and only to a lesser extent a result of hardware and packaging.

In Europe and Latin America, our Cellocator segment sells mostly GPS/Cellular based vehicle devices and radio frequency based vehicle devices. In the GPS/Cellular field there is strong competition with many manufacturers introducing vehicle devices with competitive prices and various performance features. Our primary competitors in the GPS/Cellular based vehicle device market in Latin America include Skypatrol LLC, Digital Communications Technologies LLC (Antares GPS), Maxtrac, Continental GPS Tracking Ltd. and Portman Security System International Co. Ltd. Our competitors in Europe consist mainly of GPS Tracking Network Inc. (Enfora), Uab Teltonika, Falcom GmbH, Mobile Devices, Skope Solutions, Portman and Digicore Holdings Ltd.
 
 
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Pointer Segment

In Israel, our primary competitors in providing roadside assistance and towing services are Drachim Road Side & Towing Services Ltd., Femi Premium Ltd. and Shlomo-SIXT Road Side Services & Garages Ltd. In addition, other companies which provide assistance services through insurance companies may attempt to compete with us. In the stolen vehicle retrieval and fleet management market, our main direct competitor is Ituran Location & Control Ltd., or Ituran.

Our primary competitors in the stolen vehicle retrieval services market in Argentina are LoJack Corporation, or LoJack, and Ituran. In Mexico, our primary competitors in the stolen vehicle retrieval market are LoJack, UDA and GRUPO CORPORATIVO MISANTI, SA DE CV. In Brazil, our primary competitors are LoJack, Sascar, Ituran, Carsystems and Positron, leading providers of automatic vehicle location technologies and Sascar, a leading provider of GSM technology.

Additional competitors operate in Mexico, Brazil and in Argentina, however their positioning is not as strong as LoJack, Ituran, MISTANTI and Carsystems.

Some competitors in the stolen vehicle retrieval services market offer a similar solution to ours and others, like LoJack, use VHF based messaging unit without a wide area network, which is sold to customers and is connected via radio to local law enforcement communications networks.

In the fleet management services market, our prime competitors in Argentina are Megatrans SA and Sitrack.com Argentina SA, while in Mexico, we face competition mainly from Omnistar Pty Ltd. (Omnitrack) and Orbcomm Inc. (Inmosat). In Brazil, we face competition mainly from Sascar Tecnologia E Segurança Automotiva SA, Zatix SA and Qualcomm Inc. (Omnitracs). In the fleet management services market we have many competitors for the low-entry level services for monitoring vehicles. However, at the level that requires management (management such as analysis, reporting, diagnostics, driving patterns) fewer competitors operate in these countries but overall activities in this market remain intensive.

In addition, in the markets described above and other potential markets, primary mobile resource management  service providers who directly or indirectly compete with us employ other technologies, such as a hybrid combination of Cellular GPRS with two-way satellite communications. These systems rely on GPRS communications and when these are not available, switch to two-way satellite channel, to ensure constant communication availability.
 
 
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E.  Seasonality

Our Cellocator segment is not significantly seasonal.

Our Pointer segment is not significantly seasonal.  In Israel, the demand for roadside assistance, towing services and replacement vehicles is moderately seasonal, as it is greatly impacted by weather conditions, with Shagrir usually receiving more service calls on winter and summer days and less service calls on spring and fall days. Furthermore, the demand for replacement vehicle services is greatly impacted by, and is directly proportional to, the number of vehicles being stolen and the number of car accidents in Israel. The mobile resource management services market is not seasonal in Israel. The services provided by our Pointer segment in Argentina, Mexico, Romania and Brazil are also not significantly seasonal.
 
Principal Markets

For the breakdown of our revenues by category of segments please see Item 5 - Selected financial data.  The following is a breakdown of our revenues (in US dollars) by category of activity, including the percentage of our total consolidated sales for each period:

   
2012
   
2011
   
2010
 
   
% of our total sales
   
In thousands
   
% of our total sales
   
In thousands
   
% of our total sales
   
In thousands
 
Services:
    64       54,430       64       54,778       66       48,448  
Products:
    36       30,402       36       31,140       34       25,415  
Total:
    100       84,832       100       85,918       100       73,863  

The following is a breakdown of our revenues by geographic region, including the percentage of our total consolidated sales for each period:

   
2012
   
2011
   
2010
 
   
% of our total sales
   
In thousands
   
% of our total sales
   
In thousands
   
% of our total sales
   
In thousands
 
Israel
    71       60,423       72       61,498       73       53,574  
Latin America
    15       12,611       15       12,856       16       11,483  
Europe
    12       10,289       12       10,275       10       7,553  
Other
    2       1,509       1       1,289       1       1,253  
Total
    100       84,832       100       85,918       100       73,863  
 
 
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C.
ORGANIZATIONAL STRUCTURE
 
We are organized under the laws of the State of Israel.  The following is a list of our currently active subsidiaries and affiliates, their countries of incorporation and our ownership interest in each of them:
 
JURISDICTION OF
INCORPORATION
NAME OF SUBSIDIARY
Argentina
Pointer Localización y Asistencia S.A. (1)
Israel
Shagrir System Ltd. (2)
Mexico
Pointer Recuperacion Mexico S.A. (3)
Romania
S.C. Pointer S.R.L. (4)
Brazil
Pointer do Brazil Commercial S.A.(5)
USA
Pointer Telocation Inc. (6)
India
Pointer Telocation India (7)
Israel
Car2go Ltd. (8)
 
(1)
We hold 88% of the issued and outstanding shares of Pointer Argentina.
(2)
We hold 54.48% of the issued and outstanding shares of Shagrir.
(3)
We hold 74% of the issued and outstanding shares of Pointer Mexico.
(4)
Shagrir holds 65% of the issued and outstanding shares of S.C. Pointer S.R.L.
(5)
We hold 48% of the issued and outstanding shares of Pointer do Brazil Commercial S.A.
(6)
We hold 100% of the issued and outstanding shares of Pointer Telocation Inc.
(7)
We hold 100% of the issued and outstanding shares of Pointer Telocation India.
(8)
Shagrir holds 58.46% of the issued and outstanding shares of Car2go Ltd.

 
D.
PROPERTY, PLANTS AND EQUIPMENT
 
Our executive offices, operational, research and development and laboratory facilities are located at 14 Hamelacha Street,  Rosh Ha'ayin 48091, Israel (a suburb of Tel Aviv) where we currently lease approximately 1,470 square meters with annual lease payments of approximately $286,000. Pointer Argentina’s offices and operations facility are located in Buenos Aires, Argentina. Pointer Argentina currently leases 1,200 square meters (including 480 square meters used by its installation centers) with an annual lease payment of $225,500. Shagrir’s offices and main operations facility are located in Holon, Israel. Shagrir currently leases 5,820 square meters in Holon with annual rental fees of approximately $390,000. In addition Shagrir is the owner of 2,100 square meters in Haifa, Israel, and leases an additional property in Jerusalem, Israel (approximately 155 square meters) with annual rental fees of approximately $50,000. Pointer Mexico’s offices and operations facility are located in Mexico City, Mexico. Pointer Mexico currently leases 400 square meters with an annual lease payment of $100,000. Pointer Brazil’s offices and operations facility are located in Sao Paulo, Brazil. Pointer Brazil currently leases 524.8 square meters with an annual lease payment of $30,000. Pointer Romania’s offices and operations facility are located in Bucharest, Romania. Pointer Romania currently leases 150 square meters with an annual lease payment of $31,000. As part of the purchase by Shagrir of the activity of K.S. Operation Centers for Vehicles Ltd. in October 2011, Shagrir leases a chain of car repair garages located in Holon, Raananna, Jerusalem and Ashdod, Israel, totaling 7,040 square meters, with an annual lease payment of $233,000. For further information, please see Note 14d of our consolidated financial statements.
 
 
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UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
 
A.
OPERATING RESULTS
 
The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in Item 3.D."Key Information–Risk Factors.”

Overview
 
We believe we are a leading provider of advanced mobile resource management products and services for the automotive and insurance industries. We conduct our operations through two main segments. Through our Cellocator segment, we design, develop and produce leading mobile resource management products, including asset tracking, fleet management and security products for sale to third party operators providing mobile resource management services worldwide, as well as to our Pointer segment. Through our Pointer segment, we act as an operator primarily in Israel, Romania, Argentina, Mexico and Brazil by bundling our products together with a range of services, including stolen vehicle retrieval services and fleet management services, and also provide roadside assistance services for sale to insurance companies, fleets and individual customers.

Our revenues are principally derived from (i) rendering services through our Pointer segment and (ii) sales of our systems and products through our Cellocator segment, as well as through our Pointer segment which bundles our products in the services it offers.

Our acquisition of Cellocator Ltd., a developer and manufacturer of cellular monitoring units, was intended to assist us in our objective to present new products to the market, improve our gross margin from cellular products and to achieve vertical efficiencies of scale by manufacturing our own units without being required solely to use third party subcontractors. Subsequent to the acquisition of Cellocator Ltd. in September 2007, Cellocator became a separate segment of our operations in 2008. The Cellocator segment is responsible for a significant part of our revenues.
 
 
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Following our acquisition of Shagrir in 2004, the acquisition of certain activities and assets of Shagrir Towing in 2005, and the acquisition of Cellocator Ltd. in 2007, we have expanded our operations and increased our revenues in Israel and abroad. Our revenues from customers in Israel in 2012 were $60.4 million, which constituted approximately 71% of our total revenues, in comparison to $61.5 million in 2011, which constituted approximately 72% of our total revenues. In 2012, our revenues from international customers were $24.4 million, which constituted approximately 29% of our total revenues, in comparison to $24.4 million in 2011, which constituted approximately 28% of our total revenues.

As a result of the acquisitions described above, the operations of Shagrir as part of our Pointer segment and the technology manufacturing of our Cellocator segment are currently our most significant operations, and are expected to account for the majority of our business and revenues in the foreseeable future.
 
Acquisitions and Initiatives

As part of our strategy, we have pursued and may continue to pursue acquisitions and other initiatives in order to offer new products or services to enhance our market position, globalization and strength. Our acquisitions are either acquisition of technology or of operators that provide services. As a result of our acquisitions, the total goodwill and other intangible assets in our balance sheets were $49.4 million and $47.5 million as of December 31, 2012 and 2011, respectively. See Item 4 – History and Development of the Company for further information on our acquisitions. See also Item 5 - Costs and Expenses for further discussion on the impairment loss recorded in 2011.
 
Research and Development

The research and development activities of our Cellocator segment involve the development of new products in response to an identified market demand. Research and development expenditures were $2.7 million, $3 million and $2.5 million in the fiscal years ended December 31, 2012, 2011 and 2010, respectively.

Business Challenges / Areas of Focus

Our primary areas of focus and business include:

 
·
Continuing the growth, revenues and profitability of our products and services by the subsidiaries;

 
·
Enhancing the introduction and recognition of our new products, including the products of our Cellocator segment, into the markets;

 
·
Penetrating new markets, mainly in Latin America and Europe, through the products of our Cellocator segment, and strengthening our presence in existing markets by proposing a full scope of services;
 
 
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·
Succeeding in selling diversified products in territories in which we already conduct activities, mainly in Latin America and Europe;

 
·
penetrating new territories; and

 
·
Achieving operating profitability of our Pointer segment affiliates by increasing the number of subscribers using our technology and expanding the services generated by roadside assistance, emergency home repair services and car sharing.
 
Certain Issues Affecting our Results of Operations
 
In July 2011, 903 options granted under Shagrir's employee share option plan were exercised to purchase shares of Shagrir, and in January 2012, 2,480 options were exercised. As a result, our holdings in Shagrir were diluted and we currently hold approximately 54.48% of the issued and outstanding share capital of Shagrir. There currently remain no exercisable options to purchase ordinary shares of Shagrir. Since 2006, Shagrir’s shareholder equity has become positive and we have allocated to the non-controlling interest their share in Shagrir’s net income, which materially negatively affects Pointer’s shareholders' income (loss) at such periods.
 
Revenues

Products

The majority of our revenues from sale of products are generated through our Cellocator segment's sales of products manufactured by us and by third parties to our Pointer segment subsidiaries in Israel and Latin America and to third party operators worldwide. In addition, we generate revenues through our Pointer segment from sales of products that are bundled together with our services. In 2012, as a result of very intense worldwide competition in the products market, we faced price erosion that was partially offset by operational efficiency and cost reduction. We expect continuous price erosion in this market that may affect our gross margin and the profitability of our business. In order to offset such price erosion, we are working to approach new products to the market with higher margin and continue in our cost reduction efforts of our products components.
 
Services

We generate revenues through our Pointer segment from sales of our services primarily by our subsidiaries in Israel and Latin America. The services include mainly roadside assistance and towing services, stolen vehicle retrieval services, fleet management and other value added services. A majority of our revenues consist of subscription fees paid to us by our customers, which include insurance companies, commercial companies and individuals. In 2011 and 2012, due to very intense competition in the Israeli market, we faced price erosion that was partially offset by operational efficiency and cost reduction. Due to very intense competition in the Israeli market, we expect continuous price erosion in this market that may affect our business.
 
 
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Costs and Expenses

Cost of Revenues

Cost of revenues referring to products includes expenses related to the cost of purchasing or manufacturing systems and products, including raw materials and components, salaries and employee benefits, subcontractors and consulting. Amortization and impairment of intangible assets is attributable to the Cellocator acquisition's intangible assets of developed technology. Cost of revenues referring to services consists primarily of the operational costs of our subsidiaries, which mainly include salaries and employee benefits, costs related to towing, mobile automobile repair vehicles and replacement vehicles, subcontractors, system maintenance, end unit installation, system communications, security and recovery, and the depreciation of fixed assets.

In 2011, we recorded an impairment loss in the amount $0.5 million reducing the development technology intangible assets purchased from Cellocator Ltd. in 2007 from a carrying amount of $ 701,000 to a fair value of $ 181,000. The circumstances leading to the impairment are attributed to the obsolescence of older Cellocator technology.

No impairment losses were recorded in 2012.

Operating Expenses

Research and Development Expenses.

Research and development expenses consist primarily of salaries and employee benefits, subcontractors and consulting in connection with our products.

Selling & Marketing Expenses.

Selling & marketing expenses consist primarily of expenses for salaries and employee benefits, sales commissions and other selling and marketing activities.

General and Administrative Expenses.

General and administrative expenses consist primarily of salaries and employee benefits for executive, accounting, administrative personnel, professional fees, provisions for doubtful accounts, and other general expenses.
 
 
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Amortization of intangible assets.

Finite-life intangible assets consist of customer lists and brand names. Intangible assets are amortized over their useful life using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.

Impairment of intangible asset

In 2011, we recorded an impairment loss in the amount $6.2 million reducing goodwill attributed to our acquisition of Cellocator Ltd.'s assets and activities in 2007 from a carrying amount of $8.7 million to a fair value of $2.5 million. The circumstances leading to the impairment are attributed to the changes in the economic conditions and forecasted results of our Cellocator segment.
No impairment losses were identified in 2012 and 2010.

Financial Income (Expenses), Net.

Financial expenses consist mainly of bank charges and interest expenses, foreign currency transaction adjustments, revaluation of derivative instruments and others. Financial income consists of interest on short-term bank deposits.
 
Other Expenses, Net.

Other expenses, net relate primarily to items of income or expenses outside our ordinary course of business.
 
Tax expenses.
 
Tax expenses consists of federal, state, local taxes on the income of our business, and deferred income taxes. See Item 10.ETaxation and Government Programs for further information on taxation applicable to us.
 
Loss from discontinued operations, net
 
On August 1, 2012, Shagrir signed an agreement to sell Shagrir’s entire holdings in TMC to Gastech for its par value. In addition to selling TMC LP’s entire share capital to Gastech, Shagrir sold its right to receive payments with respect to a loan which Shagrir provided to TMC LP in the amount of NIS 2.5 million.

During the period the partnership recorded Impairment of goodwill and intangible assets related to this operation in the amount of $348.

As a result of the sale of Shagrir’s holdings in TMC LP, TMC LP’s financial results, as of the sale, are presented as a loss from discontinued operations, on consolidated statement of income and comprehensive income. See Item 4 – Information on the Company for further information.
 
 
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Critical Accounting Policies
 
The consolidated financial statements include the Company’s and its subsidiaries' accounts. Intercompany transactions and balances are eliminated in consolidation.  The preparation of financial statements in conformity with U.S. GAAP requires us, in certain instances, to use estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes thereto. The actual results could differ from those estimates and the use of different assumptions would likely result in materially different results of operations. Our accounting policies are described in Note 2 to the consolidated financial statements. A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results of operations and requires management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The significant accounting policies and estimates, which we believe to be the most critical in understanding and evaluating our reported financial position and results of operations, include:

Revenue recognition
 
We generate revenues primarily from the provision of services, subscriber fees and sales of systems and products, mainly in respect of the areas of roadside assistance services, automobile repair and towing services, stolen vehicle recovery and other value added services. To a lesser extent, revenues are also derived from technical support services that we provide. We sell our systems primarily through a direct sales force as well as through resellers. Sales consummated by our sales forces and sales to resellers are considered sales to end-users.

Revenues from the sale of systems and products are recognized in accordance with Staff Accounting Bulletin, or SAB, No. 104, "Revenue Recognition" ("SAB 104"), when delivery has occurred, persuasive evidence of an agreement exists, the vendor's fee is fixed or determinable, no further obligation exists and collectability is reasonably assured.

Service revenues including subscriber fees are recognized as services are performed, over the term of the agreement.

Deferred revenue includes amounts received under maintenance and support contracts, and amounts received from customers but not yet recognized as revenues.

In accordance with ASC 605-25, "Multiple-Element Arrangements" (formerly EITF 08-1, "Revenue Arrangements with Multiple Deliverables"), revenue from certain arrangements may include multiple elements within a single contract. Our accounting policy complies with the requirements set forth in ASC 605-25, relating to the separation of multiple deliverables into individual accounting units with determinable fair values. We consider the sale of products and subscriber fees to be separate units of accounting.

When a sales arrangement contains multiple elements, such as hardware and services, the Company allocates revenue to each element based on a selling price hierarchy. The selling price for each deliverable is based on its vendor specific objective evidence ("VSOE"), if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available.
 
 
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The company uses ESP to allocate the elements

Revenues from stolen vehicle retrieval services are recognized upon success, when the related stolen vehicle is recovered, and such recovery is approved by the customer or ratably over the term of the agreement.

Revenues generated from technical support services, installation and de-installation are recognized when such services are rendered.

Generally, we do not grant rights of return. We follow ASC 605-15-25 "sales of product when right of return exists" (formerly FAS 48, "Revenue Recognition When Right of Return Exists"). Based on our experience, no provision for returns was recorded. 

Allowance for Doubtful Accounts
 
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is determined by evaluating the credit worthiness of each customer based upon specific information, including the aging of the receivables. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. In each period, we estimate the likelihood of collecting receivables and adjust the allowance accordingly.
 
Changes in the allowance for doubtful accounts during 2012 and 2011 are as follows:

   
Year ended
December 31,
 
   
2012
   
2011
 
             
Balance at beginning of the year
  $ 1,383     $ 1,439  
Deductions during the year
    (722 )     (196 )
Charged to expenses
    209       206  
Foreign currency translation adjustment
    4       (66 )
                 
Balance at end of year
  $ 874     $ 1,383  

Inventory

Inventories are stated at the lower of cost or market value. Cost is determined using the "moving average" method. Inventory consists of raw materials, work in process and finished products. Inventory write-offs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, and for market prices lower than cost.
 
 
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Valuation of Long-Lived Assets, Intangibles and Goodwill
 
 
(a)
Tangible and Intangibles Long-Lived Assets

Intangible assets consist of brand names, customer related intangibles, and developed technology. Intangible assets are stated at amortized cost. Intangible assets are amortized over their useful life using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.
 
Brand names are amortized over periods between two and nine years; customer related intangibles are amortized over periods between five and nine years; and developed technology is amortized over a five-year period.
 
We perform an impairment test for tangible and intangible long-lived assets (or assets group) whenever events or circumstances suggest that the assets may not be recoverable. Impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the assets are less than their carrying value. If the forecasted undiscounted cash flows are less than the carrying value, then we must write down the carrying value to its estimated fair value based on forecasted discounted cash flows.

We use the income approach in order to determine the fair value of intangible assets, as no quoted price in active market exists for such assets. The income approach requires management to predict forecasted cash flows, including estimates and assumptions related to revenue growth rates and operating margins, future economic and market conditions. Our estimates of market segment growth and our market segment share and costs are based on historical data, various internal estimates and certain external sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying business. If future forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

As required by ASC 820, "Fair Value Measurements" the Company applies assumptions that marketplace participants would consider in determining the fair value of long lived assets (or assets groups).

In 2011, we recorded an impairment loss in the amount $0.5 million reducing the development technology intangible assets attributed to our purchase of Cellocator Ltd.'s assets and activities in 2007 from a carrying amount of $ 701,000 to a fair value of $ 181,000. The circumstances leading to the impairment are attributed to the obsolescence of certain older Cellocator technology.  The impairment was recorded under the “cost of revenues” caption in the consolidated statement of operations. Assumptions in the fair value assessment included: the impact of changes in economic conditions and revenue forecast of Cellocator.
 
 
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No impairment losses were identified in 2012 and 2010 for the continuing operations, as for the discontinued operations see note 1k in our consolidated financial statements for additional information.
 
 
(b)
Goodwill impairment test

The company identifies several reporting units which are aggregated into two operative segments, the Cellocator segment and the Pointer segment.

As required by ASC 820, "Fair Value Measurements", the Company applies assumptions that market place participants would consider in determining the fair value of each reporting unit.

We perform our annual impairment analysis of goodwill as of December 31 of each year, or more often if there are indicators of impairment present. We perform a two-step impairment test on goodwill at the level of the reporting units. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired, and we are not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then we must perform the second step, of the impairment test in order to determine the implied fair value of goodwill. To determine the fair value used in Step 1, we use discounted cash flows. If and when we are required to perform a Step 2 analysis, determining the fair value of our net assets and our off-balance sheet intangibles would require us to make judgments that involve the use of significant estimates and assumptions.

We determined the fair value of each reporting unit using the income approach, which utilizes a discounted cash flow model, as we believe that this approach best approximates the reporting unit’s fair value at this time. Judgments and assumptions related to revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. The material assumptions used for the income approach for 2012 and 2011 and 2010 were 5 years of projected net cash flows, a discount rate of 17% and a long-term growth rate of 3%.

We considered historical rates and current market conditions when determining the discount and growth rates to use in our analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our goodwill.

We performed the annual impairment test as of December 31, 2011 and recorded goodwill impairment in the total amount of $6.2 million in connection with Cellocator reporting unit.  

No impairment losses were identified in the years 2012 and 2010 for the continuing operations, as for the discontinued operations see note 1k in our consolidated financial statements for additional information.
 
 
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We performed a sensitivity analysis for the two key assumptions used in our annual goodwill impairment test and determined that an increase in the estimated weighted average cost of capital of 2% and/or decrease of 1% in the long-term growth rate, would not result in the estimated fair value of any of the reporting units to fall below its carrying value. Based on the sensitivity analysis, none of our reporting units is at risk for goodwill impairment.

Other future events include decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, or a material negative change in our relationships with significant customers. If in the future we will be required to record an impairment of goodwill, our results of operations could be materially harmed and our equity could be decreased.
 
Share based compensation

Stock-Based Compensation Expense.

The Company applies ASC 718, "Compensation - Stock Compensation" (formerly SFAS 123(R) "Share-Based Payment"). In accordance with ASC 718, all grants of employee’s equity based stock options are recognized in the financial statements based on their grant date fair values. The fair value of graded vesting options, as measured at the date of grant, is charged to expenses, based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures.

During the years ended December 31, 2012, December 31, 2011 and December 31, 2010, the Company recognized stock-based compensation expenses related to employee stock options in the amounts of $265,000, $515,000 and $121,000, respectively. See Notes 2(q) and 15 in our consolidated financial statements for additional information.

We estimated the value of equity employee stock options on the date of grant using a Black-Scholes option-pricing valuation model. The fair value of stock options awards, as determined on the date of grant, is affected by several factors including our share price, our share price volatility, risk-free interest rate, expected dividends and the expected term of the options. If such factors change and we employ different assumptions for future grants, our compensation expense may differ significantly from what we have recorded in the current period.

In addition, our compensation expense is affected by our estimate of the number of awards that will ultimately vest. In the future, if the number of equity awards that are forfeited by employees are lower than expected, the expenses recognized in such future periods will be higher.
 
 
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Income taxes
 
The Company accounts for income taxes and uncertain tax positions in accordance with ASC 740, “Income Taxes”. This guidance prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are more likely than not to be realized.

The effect on deferred taxes of a change in tax rates is recognized in income in the period enacted.

The Company established reserves for uncertain tax positions based on the evaluation of whether or not the Company’s uncertain tax position is “more likely than not” to be sustained upon examination . As of December 31, 2012, the Company did not record any liability for uncertain tax positions. The Company's policy is to recognize, if any, tax related interest as interest expenses and penalties as general and administrative expenses. For the year ended December 31, 2012, the Company did not have any interest and penalties associated with tax positions.

Discontinued operations:
 
Under ASC 205, "Presentation of Financial Statements - Discontinued Operation" when a component of an entity, as defined in ASC 205, has been disposed of or is classified as held for sale, the results of its operations, including the gain or loss on its disposal are classified as discontinued operations and the assets and liabilities of such component are classified as assets and liabilities attributed to discontinued operations; that is, provided that the operations, assets and liabilities and cash flows of the component have been eliminated from the Company's consolidated operations and the Company will no longer have any significant continuing involvement in the operations of the component.
 
 
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Recently issued Accounting Standards in 2012:
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on the presentation of comprehensive income, which amended existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. The guidance requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company's financial statements.
 
In September 2011, the FASB amended the guidance on the annual testing of goodwill for impairment. The amended guidance will allow companies to assess qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company did not apply this guidance in 2012.
 
For more information on our selected financial data, see Item 3 – Key Information – Selected Financial Data
 
Analysis of our Operation Results for the Year ended December 31, 2012 as compared to the Year ended December 31, 2011

Revenues.  Revenues decreased by $1 million, or 1%, from $86 million in 2011 to $85 million in 2012.

The revenues from the sale of our products decreased by $0.7 million, or 2%, from $31.1 million in 2011 to $30.4 million in 2012. This decrease is primarily attributable to continuance of price erosion of our products in the Cellocator segment although there was an increase in the quantities of our products sold mainly to Europe and Latin America.

The revenues from the sale of our services decreased by $0.3 million, or 0.6%, from $54.8 million in 2011 to $54.5 million in 2012. The decrease is primarily attributable to a decrease in revenues from services provided in the Israeli market and the devaluation of the average exchange rate of the NIS against the dollar by 8%.

Revenues from our services in 2012 accounted for 64% of our total revenues same as in 2011.

Our international revenues in 2012 accounted for 26% of total revenues compared to 28% in 2011. The decrease in international sales is primarily attributable to a decrease in the sales of the Cellocator segment in 2012.  Sales to Latin America decreased from $12.9 million in 2011 to $12.6 million in 2012; sales to Europe were $10.3 million in 2012 and 2011; and sales to other countries were $1.5 million in 2012 compare to $1.3 million in 2011.
 
 
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Cost of Revenues. Our cost of revenues decreased by $0.3 million to $56.7 million for the twelve months ended December 31, 2012 as compared to $57 million for the same period in 2011. This decrease is associated with a decrease of $1 million in our revenues. In addition, during 2011 we recorded impairment loss in an amount of $0.5 million for our development technology intangible assets.

Gross Profit. Our gross profit decreased by $0.9 million from $29 million in 2011 to $28.1 million in 2012. As a percentage of total revenues gross profit accounted for 33% in 2012 compared to 34% in 2011. Our gross margin on product sales in 2012 was 41% same as in 2011. Gross margins on services were approximately 29% in 2012 same as in 2011. Price erosion for our Pointer segment services in the Israeli market and price reduction of the products sold by our Cellocator segment, both of which are attributable to an increase in competition, are the primary reasons for the decrease in gross margin on revenues.

Research and Development Costs. Research and development expenses in 2012 decreased by $0.3 million from $3 million in 2011 to $2.7 million in 2012. As a percentage of revenues from the Cellocator segment the research and development costs accounted for 12% in 2012 compared to 13% in 2011. The decrease in Research and Development costs are a result of our efficiency efforts while maintaining the same level of revenues.

Selling and Marketing Expenses. Selling and marketing costs were $9 million in 2012 and 2011.

General and Administrative Expenses. General and administrative expenses decreased by $2.2 million to $9.2 million in 2012 from $11.4 million in 2011. The decrease in 2012 costs are a result of our efficiency efforts and in addition in 2011 we faced increases in salary and stock-based compensation expenses related to management changes during 2011 expenses related to the sale of the Rider shares in July, 2011.

Amortization of intangible assets and Impairment of long lived assets. Amortization of intangible assets and impairment of long lived assets were $2 million and $8 million in 2012 and 2011, respectively.  In 2011, we recorded a goodwill impairment loss in a total amount of $6.2 million attributable to Cellocator segment

Operating Profit (loss). As a result of the foregoing, we recorded in 2012 an operating income of $5.1 million, compared to an operating loss of $2.6 million in 2011.

Financial Expenses (Net). Financial expenses decreased from $1.8 million in 2011 to $1.6 million in 2012.

Taxes on income.  Taxes on income were $0.9 million in 2012 compared to $2.4 million in 2011. In 2011 tax expenses increased due to a deferred tax liability resulting from a planned decrease in the Israeli corporate tax rate.
 
 
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Equity in losses/gains of our Brazilian affiliate. In 2012, we recorded equity in gains of the Brazilian affiliate in the amount of $38 thousands compared to equity in losses of $1.6 million in 2011 which relates to the improvement of the Brazilian affiliate's activities in 2012.

Loss from discontinued operations, net. In 2012, As a result of the sale of T.M.C. Technologies Systems L.P., we recorded loss from discontinued operation of $1 million.

Net Income (Loss). In 2012 we recorded a net income of $1.6 million, compared to a net loss of $8.5 million in 2011.

Net Income attributable to non controlling interests.  We recorded net income attributable to non-controlling interests in the amount of $0.4 million in 2012, compared to $0.04 million in 2011.
 
Net Income (Loss) attributable to Pointer shareholders. In 2012, we recorded net income of $1.2 million, compared to a net loss of $8.5 million in 2011.
 
Analysis of our Operation Results for the Year ended December 31, 2011 as compared to the Year ended December 31, 2010

Revenues.  Revenues increased by $12 million, or 16%, from $74 million in 2010 to $86 million in 2011. The increase in total revenues in 2011 as compared to 2010 is primarily attributable to an increase in sales of both our Cellocator and Pointer segments.

The revenues from the sale of our products increased by $6 million, or 24%, from $25 million in 2010 to $31 million in 2011. This increase is primarily attributable to an increase in the quantities of our products sold mainly to Europe and Latin America which was offset by a price reduction of our products in the Cellocator segment.

The revenues from the sale of our services increased by $7 million, or 14.5%, from $48 million in 2010 to $55 million in 2011. The increase is primarily attributable to an increase in revenues from services provided in the Israeli market and the revaluation of the average exchange rate of the NIS against the dollar by 4%.

Revenues from our services in 2011 accounted for 64% of our total revenues as compared with 66% in 2010. This change is primarily attributable to the increase in sales of our Cellocator segment.

Our international revenues in 2011 accounted for 28% of total revenues compared to 27% in 2010. The increase in international sales is primarily attributable to an increase in the sales of the Cellocator segment in 2011.  Sales to Latin America increased from $11.5 million in 2010 to $12.9 million in 2011; sales to Europe increased from $7.5 million in 2010 to $10.3 million in 2011; and sales to other countries were $1.3 million in 2011 and 2010.
 
 
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Cost of Revenues. Our cost of revenues increased by $10.6 million to $57 million for the twelve months ended December 31, 2011 as compared to $46.4 million for the same period in 2010. This increase of $10.6 million is primarily associated with an increase of $12 million in our revenues. In addition, during 2011 we recorded impairment loss in an amount of $0.5 million for our development technology intangible assets.

Gross Profit. Our gross profit increased by $1.6 million from $27.4 million in 2010 to $29 million in 2011. As a percentage of total revenues gross profit accounted for 34% in 2011 compared to 37% in 2010. Our gross margin on product sales in 2011 was 41% compared to 44% in 2010. Gross margins on services were approximately 32% in 2011 compared to 35% in 2010. Price erosion for our Pointer segment services in the Israeli market and price reduction of the products sold by our Cellocator segment, both of which are attributable to an increase in competition, are the primary reasons for the increase in gross profit and decrease in gross margin on services and products.

Research and Development Costs. Research and development expenses in 2011 increased by $0.5 million from $2.5 million in 2010 to $3 million in 2011. As a percentage of revenues from the Cellocator segment the research and development costs accounted for 13% in 2011 compared to 11% in 2010. The increase is primarily attributable to our efforts in 2011 to develop and launch new products in the beginning of 2012.

Selling and Marketing Expenses. Selling and marketing costs increased by $1.5 million to $8.9 million in 2011 from $7.4 million in 2010. The increase in 2011 resulted from an increase in the marketing efforts primarily of the Pointer segment in the Israeli market and penetration by the Cellocator segment of the American market.

General and Administrative Expenses. General and administrative expenses increased by $2.4 million to $11.5 million in 2011 from $9.1 million in 2010. The increase in 2011 resulted from increases in salary, stock-based compensation expenses related to management changes during 2011 and increases in expenses related to the sale of the Rider shares in July, 2011.

Amortization of intangible assets and Impairment of long lived assets. Amortization of intangible assets and impairment of long lived assets were $8 million and $1.7 million in 2011 and 2010, respectively.  In 2011, we recorded a goodwill impairment loss in a total amount of $6.2 million.

Operating Profit (loss). As a result of the foregoing, we recorded in 2011 an operating loss of $2.6 million, compared to an operating profit of $6.6 million in 2010. The decrease in 2011 is attributable to an increase in our operating expenses and the impairment of goodwill and intangible assets, as discussed above.

Financial Expenses (Net). Financial expenses decreased from $2 million in 2010 to $1.8 million in 2011.
 
 
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Taxes on income.  Taxes on income were $2.4 million in 2011 compared to $1.5 million in 2010. The increase is mainly due to an increase in deferred tax liability resulting from the recent repeal of a planned decrease in the Israeli corporate tax rate.

Equity in losses of our Brazilian affiliate. In 2011, we recorded equity in losses of the Brazilian affiliate in the amount of $1.6 million compared to $1.2 million in 2010 which relates to an increase in the Brazilian affiliate's activities in 2011.

Net Income (Loss). In 2011 we recorded a net loss of $8.5 million, compared to a net income of $2 million in 2010.

Net Income attributable to non controlling interests.  We recorded net income attributable to non-controlling interests in the amount of $0.04 million in 2011, compared to $0.8 million in 2010.
 
Net Income (Loss) attributable to Pointer shareholders. In 2011, we recorded net loss of $8.5 million, compared to a net income of $1.1 million in 2010.

Selected segment financial data:

As a result of the Company's acquisition of Cellocator in September 2007, in 2008 the Company commenced to organize its operating results into two separate business units, the Cellocator segment and the Pointer segment.  See Item 4.B – Business Overview.

The Company evaluates performance and allocates resources based on operating profit or loss. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the financial statements.
 
   
2012
   
2011
   
2010
 
   
(in thousands of U.S.Dollars)
 
Cellocator segment revenues
    22,660       24,199       23,533  
Pointer segment revenues
    68,540       68,709       58,627  
Intersegment adjustment
    (6,368 )     (6,990 )     (8,297 )
                         
Total revenue
    84,832       85,918       73,863  
                         
Cellocator Segment operating profit (loss)
    1,731       (5,366 )     2,839  
Pointer segments operating profit
    3,015       2,512       3,898  
Inter-segments adjustment
    342       241       (100 )
Total operating profit (loss)
    5,088       (2,613 )     6,637  
 
Revenues. Revenues of the Pointer segment decreased by $0.2 million to $68.5 million from $68.7 million in 2011. Pointer segment revenues derive from services and the sale of products relating to those services provided by the Pointer segment. A portion of these products is obtained from our Cellocator segment and the rest is obtained from third parties.
 
 
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Revenues of the Cellocator segment in 2012 were $22.7 million (including $6.4 million of inter-segment revenues), as compared to $24.2 million in 2011 (including $7 million of inter-segment revenues). The decrease of $1.5 million or 6% in the revenues of the Cellocator segment is primarily attributable to a price reduction of our products in the Cellocator segment although there was an increase in the quantities of our products sold mainly to Europe and Latin America.
 
Operating profit (loss).  Operating profit of the Pointer segment increased by $0.5 million, from $2.5 million in 2011 to $3 million in 2012. This increase of 20% is primarily attributable to cost reductions in 2012.
 
The operating income of the Cellocator segment in 2012 was $1.7 million, compared to an operating loss of $5.4 million in 2011. The increase is primarily attributable to a decrease in our operating expenses in 2012 and in addition in 2011 we recorded impairment of goodwill and intangible assets in an amount of $6.7 million.

Impact of Exchange Rate Fluctuations on Results of Operations, Liabilities and Assets
 
Our results of operations, liabilities and assets were mainly impacted by the fluctuations of exchange rates between the U.S. Dollar and the New Israeli Shekel ("NIS"), and to a lesser extent between the U.S. Dollar and the Argentine Peso, the Mexican Peso, the Euro and the Brazilian Real. For a discussion regarding the functional and reporting currency of each of our subsidiaries see Note 2b of our consolidated financial statements.

We accomplished two significant acquisitions in Israel. Due to the acquisition of Shagrir and the SVR/FM activities, our business in Israel currently accounts for the majority of our Pointer segment business and revenues. The business in Israel, especially the activities acquired from Shagrir Towing, is mainly denominated in NIS. On the other hand, the majority of the revenues of the Cellocator segment are generated in U.S. Dollars with some expenses such as raw materials are mainly denominated in U.S. Dollars while some expenses such as labor and rental are denominated in NIS.  See "Item 3D- Risk Factors – We may be adversely affected by a change in the exchange rate of the New Israeli Shekel against the U.S. Dollar" for a discussion of the risks relating to income and expenses in U.S. Dollars and NIS.

We believe that inflation in Israel and fluctuations in the U.S. Dollar - NIS exchange rate may have substantial effects on our business, and our net income.  Increased inflation may increase our NIS costs in Israel including among others salaries of our employees in Israel, costs of communications, subcontractors, rental, financial expenses associated with loans related to NIS and the Israeli CPI, and other expenses, which are paid in New Israeli Shekels. Regarding fluctuations in the U.S. Dollar – NIS exchange rate a devaluation of the NIS against the U.S. Dollar will reduce our NIS denominated revenues and expenses in U.S. Dollar terms and therefore may impact negatively our consolidated net income (losses). Revaluation of the NIS against the U.S. Dollar will increase our NIS denominated revenues and expenses in U.S. Dollar terms.  See "Item 3D- Risk Factors" for further information. Due to the potential off-set of the affects described above, we cannot evaluate the net impact on our results of operations.
 
 
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During 2012 and up to February 28, 2013, the exchange rate fluctuated from a low of NIS 3.663 to the U.S. Dollar to a high of NIS 4.084 to the Dollar.  The average high and low exchange rates between the NIS and U.S. Dollar during the most recent six months, as published by the Bank of Israel, were as follows:
 
MONTH
LOW
1 U.S. Dollar =
HIGH
1 U.S. Dollar =
September 2012
3.887
4.029
October 2012
3.792
3.895
November 2012
3.810
3.952
December 2012
3.726
3.835
January 2013
3.714
3.791
February 2013
3.663
3.733

The average exchange rate, using the average of the exchange rates on the last day of each month during the period, for each of the five most recent fiscal years, was as follows:

Period
Exchange Rate
Devaluation/ (Revaluation)
     
January 1, 2008 – December 31, 2008
3.5878 NIS/$1
(12.7)%
January 1, 2009 – December 31, 2009
3.9326 NIS/$1
9.6%
January 1, 2010 – December 31, 2010
3.7330 NIS/$1
(5.1)%
January 1, 2011 – December 31, 2011
3.5781 NIS/$1
(4.1)%
January 1, 2012 – December 31, 2012
3.8559 NIS/$1
7.8%
 
 
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Period
CPI
Positive Inflation
     
December 31, 2008
106.4
3.8%
December 31, 2009
110.57
3.9%
December 31, 2010
113.51
2.7%
December 31, 2011
115.97
2.2%
December 31, 2012
117.87
1.6%

In 2009, the Israeli economy recorded positive inflation of approximately 3.9%, where the NIS devalued against the U.S. Dollar by approximately 9.6%. As a result of the devaluation of the NIS, we experienced a decrease in the revenues and in the costs of our Israel operations, as expressed in U.S. Dollars in 2009. In 2010, the Israeli economy recorded positive inflation of approximately 2.7%, where the NIS revalued against the U.S. Dollar by approximately 5.1%. As a result of the revaluation of the NIS, we experienced an increase in the revenues and in the costs of our Israel operations, as expressed in U.S. Dollars in 2010. In 2011, the Israeli economy recorded positive inflation of approximately 2.2%, where the NIS revalued against the U.S. Dollar by approximately 4.1%. As a result of the revaluation of the NIS, we experienced an increase in the revenues and in the costs of our Israel operations, as expressed in U.S. Dollars, in 2011. In 2012, the Israeli economy recorded positive inflation of approximately 1.6%, where the NIS devalued against the U.S. Dollar by approximately 7.8%. As a result of the devaluation of the NIS, we experienced a decrease in the revenues and in the costs of our Israel operations, as expressed in U.S. Dollars, in 2012.

Regarding our operations in Argentina and the fact that Pointer Argentina's revenues are not denominated in U.S. Dollars, we believe that inflation in Argentina and fluctuations in the exchange rate between U.S. Dollar and Argentinean Peso may have a significant effect on the business and overall profitability of Pointer Argentina and as a consequence, on the results of our operations.

Period
Exchange Rate
ARG/$1
Yearly Increase/  (Decrease)
     
December 31, 2009
3.8
10%
December 31, 2010
3.976
4.6%
December 31, 2011
4.304
8.2%
December 31, 2012
4.918
14.3%
February 28, 2013
5.0344
2.4%

The fluctuations of the Mexican Peso, Brazilian Real and the Indian Rupee are not material to our business.

We are engaged from time to time in hedging expenses relating to foreign currency exchange rate and other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. In 2010, 2011 and 2012 we entered into a foreign currency hedging transaction to manage risk related to salary expenses in NIS. In 2010, we entered into a foreign currency hedging transaction to manage risk related to receivables in Euro from customers. We may in the future undertake such transactions if management determines that such is necessary to offset the abovementioned risks. See Item 11 for further details about our hedging activities.
 
 
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Governmental and Fiscal Policies which May Affect Our Business

In recent years the market for vehicle leasing in Israel has grown. Employers often provide vehicles to their employees as benefits mainly through operating leasing companies. Such benefits are tax deductible for the employer, while the employees pay tax on the imported value of the car placed at their disposal. The regulations which determine the method of calculation of the imputed taxable value of the use of a car by an employee were recently amended and apply to cars provided to and leased by employees on end of January 1, 2010. Whereas under the formal rules, fixed amounts of taxable income were assigned to various categories of vehicles, the new regulations determine the imputed taxable income according to a certain percentage of the purchase price of the car. With respect to some car models, the new regulations will result in a high amount of imputed income to the employees, as compared to the previous rules. This result may adversely affect the overall demand for vehicles, although it is premature to assess the impact, if any, of the new regulations since leasing arrangements are customarily for three years.

Argentina’s ongoing debt crisis since 2001 has caused the government to implement fiscal and monetary policies, making it extremely difficult to receive credit from the banks. This policy may also contribute to the volatility of the exchange rate of the U.S. Dollar against the Argentinean Peso. In 2012, the volatility in the local and global financial system had a negative impact on the Argentine economy, and could continue to adversely affect the conditions in the country in the foreseeable future.
 
 
B.
LIQUIDITY AND CAPITAL RESOURCES
 
As of December 31, 2012, we had a negative working capital of $10.5 million, our current assets to current liabilities ratio was 71% and we had cash and cash equivalents of $3.7 million and an unused credit facility of $6.5 million. We believe that we have access to sufficient capital to meet the Company's requirements for at least the next twelve months.

Our credit facilities and loans contain a number of restrictive covenants that limit the operating and financial flexibility of Pointer and Shagrir.

Since our inception, our operations have been funded through capital contributions, bank loans, private and public placements, research and development grants from the Office of the Chief Scientist in Israel, the BIRD Foundation, the European Community and cash flow from operations. We no longer receive grants from the Office of the Chief Scientist in Israel, the BIRD Foundation or the European Community.

As a result, we expect to fund our operations through positive net cash provided by operating activities, capital contributions, bank loans, private and public placements and cash flow from our operations. These sources of liquidity consist of our long-term and short-term credit facilities, and our private placements with Israeli investors or investors, the latest of which we consummated in July 2012.
 
 
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In 2012, we received a dividend from Shagrir in the amount of $1.45 million.

As of December 31, 2012, we had loans under long-term credit facilities (including current maturities) in the aggregate amount of approximately $19.3 million, of which $17.2 million was provided to our subsidiary Shagrir by Bank Hapoalim B.M., Bank Leumi and other sources. $0.7 million was provided to our subsidiary Pointer Mexico by its shareholders and $1.4 million was provided to Pointer to finance part of the Cellocator acquisition as referenced below. Of this aggregate amount, approximately $2.1 million are long-term loans in or linked to the U.S. Dollar from banks and other sources, $16.5 million are long-term loans denominated in NIS from banks and $0.7 million are long-term loans denominated in NIS and adjusted to the Israeli consumer price index from banks and other sources.
 
Pointer Brazil, our investee, received from several Brazilian banks long terms loans denominated in Brazilian Real. As of December 31, 2012 the outstanding amount of these loans was $0.4 million.

For further information regarding our consolidated long-term loans, loan maturity and interest rate structure; see Notes 11 and 12 to our consolidated financial statements.

As of December 31, 2012, we had a short-term unutilized credit facility for available credit of approximately $6.5 million.

In September 2007, we obtained a loan of $5 million and credit facilities of $2 million with Bank Hapoalim B.M. in order to finance in part our acquisition of Cellocator.  As of December 31, 2012 the outstanding amount of the loan was $1.4 million.

In January 2009, we received credit facilities of $1 million from Israel Discount Bank B.M. to finance our working capital. As of December 31, 2012, $0.3 million of the credit facility is available for use.

In December 2011, we obtained a loan of $0.5 million from Bank Hapoalim B.M. in order to finance our investment in our subsidiaries and affiliates.

In January 2012, we increased the credit facilities from Bank Hapoalim B.M. by $0.75 million to finance our investment in our subsidiaries and affiliates.

In May 2012 we increased the credit facilities from Bank Hapoalim B.M. by $1 million in order to finance our working capital. Our aggregate credit facilities from Bank Hapoalim B.M. total $3.75 million. As of December 31, 2012, $1.6 million of these credit facilities had been utilized.

In July 2012, in connection with the Rights Offering, the Company received gross proceeds in the amount of approximately $1.867 million. Part of this consideration was used to repay a $1 million bridge loan which the Company received from Bank Hapoalim B.M. on May 2, 2012.
 
 
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In 2012, net cash provided by our continuing operating activities amounted to $8.3 million as compared to net cash provided from continuing operating activities of $8.5 million in 2011.

In 2012, net cash used in our continuing investing activities was $6.3 million as compared to $5.1 million in 2011. The increase is primarily attributable to Purchase of activity in January 2012 in amount of $3.1 million offset by decrease in investments in affiliate.

In 2012, net cash used in financing activities was $0.2 million as compared to $3.9 million in 2011. The decrease is primarily attributable to proceeds from issuance of shares in amount of $1.9 million and decrease in short term bank credit.

Current liabilities decreased from $37.4 million in 2011 to $36.6 million as of December 31, 2012, mainly due to a decrease in short term bank credits as of December 31, 2012. Long-term liabilities increased from $20.2 million in December 31, 2011 to $24.4 million as of December 31, 2012 mainly due to increase in accrued severance pay.
 
For further information relating to the abovementioned acquisitions see Item 10C – Material Contracts.

We believe that our current assets, together with anticipated cash generated from operations and the bank credit lines, will be sufficient to allow us to continue our operations as a going concern until December 31, 2013. However, we cannot assure that we will be able to generate sufficient revenues from the sale of our services and products or succeed to obtain such additional sources of equity or debt financing. In raising additional funds, we may depend on receiving financial support from our principal shareholders or other external sources. We cannot assure that they will continue to provide us with funds when requested, and that such funds, if any, will be sufficient to finance our additional cash requirements.

Aside for the aforementioned long-term loans and credit facilities from banks, we have no firm commitments or arrangements for additional financing, and there can be no assurance that any such financing will be available on terms satisfactory to us, if at all. To the extent that our capital requirements exceed cash provided from operations and available financing (if any), we may, among other things, be required to reduce significantly research and development, product commercialization, marketing and/or other activities. Under certain circumstances, our inability to secure additional financing could cause us to cease our operations. Our business has also been harmed as a result of the current general duress and difficult global economic conditions in general and in particular of the automotive market and political conditions in certain countries and regions in which we operate, such as Europe.

For a discussion of certain commitments and contingent liabilities, see Note 13 to our consolidated financial statements. For further information regarding investments in our Company see Item 4 – Recent Developments and Item 10C – Material Contracts.
 
 
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Capital expenditures were $6.2 million in 2011 and $4.7 million in 2012.  In 2011, capital expenditures were used for purchasing property and equipment in the amount of $4.5 million and investment in our Brazilian affiliate, Pointer do Brazil Commercial S.A, in the amount of $1.7 million. In 2012, capital expenditures were used for purchasing property and equipment in the amount of $4 million and investment and loans to our Brazilian affiliate, Pointer do Brazil Commercial S.A, in the amount of $0.7.

We estimate that our total capital expenditures for 2013 will be approximately $6.8 million, substantially all of which will relate to fixed assets that serve our roadside assistance and mobile resource management business as well as our pursuit of new business opportunities, of which approximately 52% is estimated to be spent in Israel and 48% in Latin America. We also will need to continue to provide our cash negative subsidiaries with financing until they have sufficient cash flows to run their operations. We expect to finance these expenditures primarily from our cash and cash equivalents, operating cash flow and our credit facilities. However, the actual amount of our capital expenditures will depend on a variety of factors, including general economic conditions, changes in the demand for our products, fluctuation of the U.S. Dollar against the NIS and the risks and uncertainties involved in doing business in Israel.
 
 
C.
RESEARCH AND DEVELOPMENT
 
We invest a significant amount of our resources on our internal research and development operations. We believe that continued and timely development of new products and new applications as well as enhancements to our existing systems and products are necessary to compete effectively in the rapidly evolving market. We dedicate a significant portion of our resources to (i) introducing new products to market and advancing our products and systems; (ii) designing improvements to existing products and applications by working closely with our customer support department in order to implement suggestions received from our customers investing in improvements to our production methods and services provision in, and by working in tandem with our operation department; and (iii) improving the customer "friendliness" of our products.

In order to facilitate future growth we are focusing on expanding our ability to enhance our existing systems and products and to introducing new versions and new products on a timely basis. Since we commenced operations we have conducted extensive research and development activities and we continue to improve our products including our Pointerware network, the software platform used by our Pointer segment subsidiaries for applications and for the provision of service to their customers. Our net expenditures for research and development programs during the years ended December 31, 2012 and December 31, 2011, totaled approximately $2.7 million and $3 million respectively. We expect that we will continue to commit substantial resources to research and development in the future. As of December 2012, we employed 21 persons in research and development. Our research and development expenses constituted approximately 12% of Cellocator sales in the year ended December 31, 2012 and 13% in the year ended December 31, 2011. For additional information concerning commitments for research development programs, see Note 14 of our consolidated financial statements.
 
 
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The Government of Israel encourages research and development projects oriented towards products for export through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the State of Israel. Under the terms of Israel Government participation, a royalty of 2% to 5% of the net sales of products developed from a project funded by the Chief Scientist must be paid, beginning with the commencement of sales of products developed with grant funds and ending when 100% to 150% of the grant is repaid. The terms of the Israeli government participation also require that the manufacture of products developed with government grants be performed in Israel, unless a special approval has been granted. Separate Israeli government consent is required to transfer to third parties technologies developed through projects in which the government participates. Such restrictions do not apply to exports from Israel of products developed with such technologies. Royalty bearing grants received from the State of Israel for research and development were offset against our research and development costs.

We hold various United States patents relating to the use of Pointerware communications technology for various aspects of reverse paging and mobile location. We have not invested the annual payments required to maintain our patents, and we may lose in the near future or may have already lost our rights to this proprietary technology.

We currently have several pending patent applications. However, there can be no assurance that such patent applications will actually afford protection against competitors with similar technology. In addition, we cannot assure you that the patents issued to us will not be infringed, designed around by others or invalidated. Some foreign countries provide significantly less patent protection than the United States. Patent applications in the United States are maintained in confidence until patents are issue, and because publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we were the first creator of inventions covered by pending patent applications or the first to file patent applications on such inventions. There can also be no assurance that any application of our technologies will not infringe patents or proprietary rights of others or that licenses that might be required for our processes or products would be available on reasonable terms. Furthermore, there can be no assurance that challenges will not be instituted against the validity or enforceability of any patent owned by us or, if instituted, that such challenges will not be successful. The cost of litigation to uphold the validity and prevent infringement of a patent can be substantial.

In addition to potential patent protection, we rely on the laws of unfair competition and trade secrets to protect our proprietary rights. We attempt to protect our trade secrets and other proprietary information by non-disclosure agreements with our employees, consultants, customers, strategic partners and potential strategic partners. Although we intend to protect our rights vigorously, there can be no assurance that confidentiality obligations will be honored or that others will not independently develop similar or superior technologies or trade secrets. We believe that such measures provide only limited protection of our proprietary information, and there is no assurance that our proprietary technology will remain confidential or that others will not develop similar technology and use this technology to compete with us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. To the extent that consultants, key employees or other third parties, such as prospective joint venture partners or subcontractors, apply technological information independently developed by them or by others to our projects, disputes may arise as to the proprietary rights to such information, which may not be resolved in our favor.
 
 
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Our proprietary technology also includes software. Much of the software algorithms are also included and claimed in the patent applications for Pointerware communications technology. Although software protection is anticipated to be available in the United States, there can be no assurance that the software will have patent protection in the United States. Foreign patent protection for software is generally afforded lesser protection than in the United States. See Item 3.D – Risk Factors - We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively

 
D.
TREND INFORMATION
 
The following discussion should be read in conjunction with the selected financial data included above and our consolidated financial statements and the related notes thereto included in this annual report.

Cellocator Segment

In 2006, we introduced to the mobile resource management market third party Cellular Monitoring Units which, utilizing advanced cellular modems with GPS, provide high functionality for fleet management and vehicle security services. Following our acquisition of Cellocator in 2007, we began manufacturing, among other things, our own units through our Cellocator segment and we no longer depend on any third party for manufacturing our units. These units are sold to a wide number of customers and are in use by our Pointer segment as part of its offering of services. These units enable us to provide versatile information as well as nationwide coverage, utilizing the cellular network in each territory, and are specially designed to operate in harsh conditions inside the vehicle. The design of the Cellocator unit takes into consideration the unique vehicular environment that surrounds the unit, the temperature and vibration stress to which it is exposed, the limited and unstable power supply that characterizes car power supplies generally, and specific installation requirements of the variety of cars available on the fleet management and stolen vehicle recovery markets, in addition to other verticals such as trailers and containers. In addition, the SVR and fleet management applications have the ability to communicate with the device over the GPRS network in order to update the device software as required from time to time in favor of new feature or other. The design reflects the above requirements with a high degree of reliability and flexibility. Since 2008, we have introduced several new units aimed at our market, new vertical markets and have incorporated new functionalities such as asset tracking, cargo security, and car sharing among others. The expansion of the unit portfolio and functionalities serves as the basic means for our Cellocator segment's future growth and allows for an increase in our customer base.
 
 
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We have indentified three main trends in the Telematics device market during 2012: (i) ongoing price reduction due to increasing competition as well as the economic weakness mainly in Europe; (ii) a growing demand for technology that monitors driver behavior and provides safety and diagnostics applications; and (iii) an increase in vehicle manufacturers' involvement in the unit market due to various legislative efforts in Europe to implement that require installation of such systems as E-Call and ERA GLONASS. In order to address these trends, our Cellocator segment introduced, in 2011, new products aimed at the low cost segment and the driver behavior safety market. Through 2012 our Cellocator segment has increased its efforts to introduce lower cost products in its existing portfolio, in order to improve the Company’s ability to monitor drivers’ behaviors, drivers’ safety and to improve cost efficiency for fleet management. We also anticipate reduced use of radio frequency technology globally, and increased usage of other devices based on newer technologies such as GPRS. We anticipate that the introduction of such new products, as well as introduction of new products expected to be made in later in 2013, such as solutions for vehicle remote diagnostics, will increase our Cellocator segment's competitive edge and therefore accelerate its growth in the market.

As a result of our operations through our Cellocator segment, we are expanding our global sales of current and new devices, to both existing and new customers. As part of this approach we established our Indian subsidiary in July 2012 in order to introduce our Cellocator segment portfolio of products to the Indian market. Prices of high feature devices in the stolen vehicle retrieval market and fleet management market, such as the products sold by our Cellocator segment, are continuously decreasing due to increased competition and the reduction in the cost of components. Events affecting the global vehicle industry have a significant bearing on the demand for our products. We continue to closely monitor events affecting this industry. However, we cannot, at this point in time, estimate their impact.

Pointer Segment

During the past 5 years, our fleet management services have progressed from providing relatively simple vehicle tracking and tracing (determining the vehicle's location and  departure point) to offering sophisticated information gathering systems that can, among other things, (i) analyze sensor input to determine, among other things, engine status, door status, brakes, and transmission, (ii) analyze driving patterns, including determining acceleration, harsh braking, side turns or cornering, as well as driver’s hours of service and rest time (iii) analyze and monitor activities efficiency over time and space, plan better the way resources (human and vehicles) are utilized and maintained and (iv) trace various movable assets including cargo, field equipment, agriculture and construction equipment, which often do not have sufficient energy sources.
 
 
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Due to increased competition among service providers, there is growing demand from our significant customers for advanced services to be provided by our fleet management web-based application, including the generating of various reports and alerts which would adequately meet their specific operational requirements, as well as an increase in potential for demand for connectivity to their enterprise resource planning systems.

Such continuing demand for higher levels of professionalism and unique services for fleet management demands our continued investment in development of and adjustments to our fleet management web-based application as part of our ongoing services and to continuously provide efficient and advanced services for our significant customers. Significant customers in each region and market will base their choice of service provider on whether a provider can provide the capabilities and services which adequately meet their needs. Furthermore, our agreements with our customers generally cover a period of several years and in order to increase the chances of those customers renewing their agreements with us, we are committed to providing leading services to ensure customer satisfaction, which demands that we continuously invest in solutions and resources to maintain our services at a high level. For example, our stolen vehicle retrieval services include such additional functions as incorporating additional sensors, alarm systems, and driver identification features designed to prevent or decrease theft.

In order to provide our customers with advanced, sophisticated services that are in demand we may purchase products manufactured by our Cellocator segment and other accessories and components from third parties, and sell such products to customers as part of our services packages.

We continue to expect price erosion in Roadside assistance services including towing services, mobile automobile repair services, vehicle replacement services, market that may affect our gross margin and the profitability of our business.

As a result of Shagrir's acquisition of 51% of the share capital of Car2go in May 2009, our Pointer segment can now also offer car sharing services in urban areas in Israel. Currently Shagrir holds 58.46% of Car2Go shares.

Despite current uncertainties in the global economy, the market for our services currently projects a stable outlook of growth and deployment in other vertical markets such as helicopters and containers.
 
Our emergency home repair is still insignificant but we continue in our efforts to increase the penetration in the Israeli insurance companies.

The operations of Shagrir as part of our Pointer segment in Israel and the technology manufacturing of our Cellocator segment, which mainly sells its products internationally, are currently the most significant operations we have, and are expected to account for the majority of our business and revenues in the foreseeable future.
 
 
E.
OFF-BALANCE SHEET ARRANGEMENTS
 
The company has no off balance arrangements.
 
 
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F.
CONTRACTUAL OBLIGATIONS
 
Contractual Obligations through
December 31, 2012 (in thousands USD)
       
Less
than 1
Year
   
1-3
Years
   
3-5
Years
   
More
than 5
Year
   
Total
 
                                     
Short term debt and other current liabilities
    1       11,129       -       -       -       11,129  
Long-term debt obligations
    2       -       7,754       1,585       925       10,264  
Accrued severance pay
    3       -       -       -       1,294       1,294  
Management fees to DBSI
    4       52       -       -       -       52  
Operating lease obligations
    5       1,994       2,985       1,119       -       6,098  
Royalties to BIRD
    6       -       -       -       2,444       2,444  
Total contractual obligations
            13,175       10,739       2,704       4,663       31,281  

1 Short term debt and other current liabilities include short term bank credits and current maturities of long term loan, trade accounts payable for equipment and services that have already been supplied, deferred revenues, customer advance and other accrued expenses.
 
2 Long term loans include principal and interest payments in accordance with the terms of the agreements with banks and other third parties. For further information please see Item 5B -- Liquidity and Capital Resources.
 
3 Accrued severance pay maturity depends on the date our employees will actually cease being employed.
 
4 We pay annual fees of $180,000 in consideration for DBSI management services pursuant to an agreement with DBSI, which is automatically renewable every 12 months unless either party provides prior notice of termination three months prior to the beginning of a renewal term.
 
5 Operating lease obligations include rental payments of offices, cars, and other premises and equipment.
 
6 Royalties to BIRD include the amount received by BIRD foundation indexed as per our agreement in which we undertook to pay them specified royalties based on sales of a specific product.  The Company does not anticipate selling this product and therefore, does not anticipate paying these contingent royalties (See Note 14c to our Financial Statements).

 
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 
A.
DIRECTORS AND SENIOR MANAGEMENT
 
The executive officers, directors and key employees of the Company are as follows:

Name
Age
Position with Company
     
Yossi Ben Shalom
57
Chairman of the Board of Directors
David Mahlab
56
President and CEO
Gil Oren
61
External Director
Zvi Rutenberg
57
External Director
Barak Dotan
45
Director
Alicia Rotbard
67
Director
Nir Cohen
40
Director
Zvi Fried
48
Chief Financial Officer
David Markus
39
Chief Technology Officer
Igor Rogov
38
VP R&D of the Cellocator Division
Noam Cimand
43
VP of Sales & Marketing

Yossi Ben Shalom has served as our Chairman of the Board of Directors since April 2003. Mr. Ben Shalom was Executive Vice President and Chief Financial Officer of Koor Industries Ltd. (KOR) from 1998 through 2000. Before that, Mr. Ben-Shalom served as Chief Financial Officer of Tadiran Ltd. Mr. Ben-Shalom was an active director in numerous boards, such as at NICE Systems (NICE), (computer telephony), Machteshim Agan (chemistry), and Investec Bank, amongst others.  Mr. Ben-Shalom was an active chairman in successful turnaround programs, such as Eurocar Israel, and American Express Israel. He participated in the creation of TDA VC fund (a joint venture between Tempelton and Tadiran). He was an active Chairman of Scopus - a technology company with sales of over $30 million. Yossi is a co-founder of DBSI Investments Ltd. Mr. Ben Shalom holds BA in Economics and MA in Business Management from Tel Aviv University.

David Mahlab has served as our President and Chief Executive Officer since February 1, 2011. From 2009 until January 2011, Mr. Mahlab served as an independent business development. Mr. Mahlab is the co-founder of Scopus Video Networks (a company formerly traded on the Nasdaq Market), and served as its Chief Executive Officer from 1995 until January 2007 and its chairman of the board from January 2007 until March 2009. Mr. Mahlab holds a BSc. and a MSc. in Electrical Engineering from the Technion-Israel Institute of Technology, an MBA from Tel Aviv University and LLB from Tel Aviv University
 
 
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Gil Oren has served on our board as an external director since July 2008. Mr. Oren is an independent business advisor. During the years 2002-2007 Mr. Oren served as the Chief Executive Officer of Ytong Industries Ltd.  During such years Mr. Oren also served on the Board of Directors of Ytong Industries Ltd., Nirlat Ltd., Aloni Conglomerate Ltd., Carmit Ltd., Orlite Industries Ltd. (in addition to serving as the Chief Executive Officer of such company), Orlite Millennium Ltd., Vulcan Casting Ltd., Urdan Industries Ltd.  Mr. Oren holds a B.A in accounting and economics from Tel Aviv University and a M.B.A from Tel Aviv University. Mr. Oren is also Certified Public Accountant.
 
Zvi Rutenberg has served on our board as an external director since July 2008. Mr. Rutenberg served as the Chief Executive Officer of the industrial division of Minrav Ltd, where he served since May 2010 to April 2011. In May 2008 Mr. Rutenberg established Global Point Ltd., a company which provides management consultancy services for industrial companies.  Between May 1997 and May 2008, Mr. Rutenberg served as the Chief Executive Officer of Ashkalit Chemiprod Ltd. and from January 2004 until May 2008 he also served as the Chief Executive Officer of Ashtrom Industries' sister company, Durabond Ltd in Hungary.  Mr. Rutenberg holds a B.Sc in Industrial and Management Engineering from Ben Gurion University and holds a Business Administration Diploma Studies from the Israel Institute of Productivity in Collaboration with the Israel Management Center.
 
Barak Dotan was appointed a director on our board in April 2003. Mr. Dotan is a co-founder of DBSI Investments Ltd., a private investment company that has made various investments in private and public companies. Before establishing DBSI Investments, Mr. Dotan worked as Product Manager for Jacada (Nasdaq: JCDA), formerly CST, a software company that provides a complete software infrastructure to transform legacy systems into e-business and wireless solutions, and thereafter managed private investments in high-tech and other areas. Mr. Dotan graduated from the Hebrew University of Jerusalem summa cum laude with a B.Sc. in Computer Science and Business Management.

Alicia Rotbard, was appointed a director on our board in October 2010. In 1989 Ms. Rotbard founded DOORS Information Systems, Inc. and served as its CEO until 2002. Since 1989 Ms. Rotbard served as President and CEO of Quality Computers Ltd. and from 1980 to 1985 Ms. Rotbard served as Deputy General Manager of the Tel-Aviv Stock Exchange, where she managed the Computer Department and Operations. Ms. Rotbard holds a B.Sc. in Mathematics and Physics from the Hebrew University of Jerusalem.

Nir Cohen, was appointed a director on our board in June 2012. Currently Mr. Cohen serves as Chief Financial Officer of DBSI Investments Ltd. Before joining DBSI Investments, Mr. Cohen served as partner and CFO of Argoquest Holdings, LLC – a privately held US investment company specializing in high-tech investments. Prior to joining Argoquest, Mr. Cohen served as a senior associate at Kesselman & Kesselman, Israeli affiliate of the global accounting firm of PriceWaterhouseCoopers (PwC). Before joining PwC, Mr. Cohen worked as an auditor for the accounting firm of KPMG in Israel. Mr. Cohen holds a BA in Accounting and Business Management from the College of Management, and he is a Certified Public Accountant in Israel.

Zvi Fried was appointed our Chief Financial Officer in February 2007. Prior to his appointment Mr. Fried was Chief Financial Officer of Chim Nir (TASE: CMNR) and Finance Director for Amdocs (NASDAQ: DOX). Mr. Fried is a certified public accountant and he holds a B.A. in Economics and a degree in Accounting from Bar Ilan University.
 
 
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David Marcus is our Chief Technology Officer. Mr. Markus joined us in 2000, and since then has served in a wide range of technological and management positions. Since the acquisition of Cellocator in 2008, Mr. Markus has built and managed Cellocator’s R&D group as Cellocator VP R&D and has been responsible for our customer support and IT. Mr. Markus holds a B.Sc. in Electrical and Electronic Engineering from Tel Aviv University and a Master of Engineering in Systems Engineering from the Technion-Israel Institute of Technology.

Igor Rogov is a VP R&D of the Cellocator Division. He has been managing the Cellocator R&D team since August 2012. Mr. Rogov first joined Cellocator in 2000, and since then has served in a wide range of technological positions. Since the acquisition of Cellocator in 2008, Mr. Rogov has served as a System Architect and head of System Engineering. Mr. Rogov holds a Bachelor degree in Electrical and Electronic Engineering from Ariel University Center and a Practical Engineering in Electronic Engineering from the Technion.

Noam Cimand joined Pointer as the Vice President of Sales & Marketing in December 2007. In addition to overseeing Sales and Marketing departments, he is also responsible for the technical support department as well as Pointer's regional offices in the US & India. Prior to joining Pointer, Mr. Cimand held various Sales & Marketing positions in international companies such as Commtouch (Nasdaq: CTCH) and Telrad Connegy & Optibase (Nasdaq: OBAS). Mr. Cimand holds a B.A. degree in Business Management from the Tel Aviv Business College and MBA from the Hebrew University in Jerusalem.
 
 
B.
COMPENSATION
 
The aggregate direct remuneration paid to all persons as a group who served in the capacity of director or executive officer during the year ended December 31, 2012, was approximately $0.9 million, including amounts expended by us for automobiles made available to our officers, expenses reimbursed to officers (including professional and business association dues and expenses) and other fringe benefits commonly reimbursed or paid by companies in Israel, but excluding amounts set aside or accrued to provide pension, retirement or similar benefits, which amounted to $142,000.

Options

In November 2003 the Company adopted an Employee Share Option Plan (2003) (the "Plan").  The Board of Directors of the Company approves, from time to time, increases to the number of shares reserved under the Plan. To date, the options under the Plan are and have been granted in accordance with Section 102 to the Israeli Income Tax Ordinance in the Capital Gains Track, all subject to the provisions of the Israeli Income Tax Ordinance. The grant of options is subject to the approval of the Board of Directors of the Company. The exercise price of the options is set at the closing price of the share on the market on the date of grant.  The options usually vest over a period of four years and are valid for a period of five years from the date of grant.
 
 
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On November 30, 2011, the Board of Directors approved an amendment to the Plan whereby in the event a cash dividend is paid out to the Company’s shareholders, the Board of Directors may adjust the exercise price of any options granted prior to the record date of the dividend distribution but not exercised as of such date.

As of December 31, 2012, 432,712 options are available for future grant under the Plan.

As of December 31, 2012, our officers and directors held options to purchase an aggregate of 265,984 of our ordinary shares at exercise prices ranging from $4.80 per share to $7.00 per share. Our options vest over a period of three to four years following grant and are conditional upon continued service.

For information concerning employee share option plan, see Note 15c of our consolidated financial statements
 
 
C.
BOARD PRACTICES
 
Board of Directors

Our Articles of Association provide for a board of directors of not less than three or and not more than eleven members. Our board of directors is currently comprised of six members. Following the investment of DBSI in the Company, three of our directors are affiliated with DBSI. Each director is elected to serve until the next annual general meeting of shareholders and until his or her successor has been elected. Officers serve at the discretion of the board of directors. We are subject to the Israeli Companies Law – 1999, or the Israeli Companies Law, which entered into effect on February 1, 2000, as amended, and which requires the board of directors of a public company to determine the number of directors who shall possess accounting and financial expertise.

Under the Israeli Companies Law, a person who is already serving as a director is not permitted to act as a substitute director. Additionally, the Israeli Companies Law prohibits a person from serving as a substitute for more than one director. Appointment of a substitute director for a member of a board committee is only permitted if the substitute is a member of the board of directors and does not regularly serve as a member of such committee. If the committee member being substituted is an external director, the substitute may only be another external director who possesses the same expertise as the external director being substituted and may not be a regular member of such committee The term of appointment of a substitute director may be for one meeting of the board of directors or for a specified period or until notice is given of the cancellation of the appointment. To our knowledge, no director currently intends to appoint any other person as a substitute director, except if the director is unable to attend a meeting of the board of directors.
 
 
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External Directors

Under the Israeli Companies Law, companies registered under the laws of the State of Israel, and the shares of which have been offered to the public in or outside of Israel, are required to appoint no less than two external directors. No person may be appointed as an external director if such person or the person’s relative, partner, employer or any entity under the person’s control, has or had, on or within the two years preceding the date of the person’s appointment, any affiliation with the company or any entity controlling, controlled by or under common control with the company. The term “affiliation” includes:

 
·
an employment relationship;
 
 
·
a business or professional relationship maintained on a regular basis;
 
 
·
control; and
 
 
·
service as an office holder.

A person shall be qualified to serve as an external director only if he or she possesses accounting and financial expertise or professional qualifications. At least one external director must possess accounting and financial expertise. The conditions and criteria for possessing accounting and financial expertise or professional qualifications were recently determined in regulations promulgated by the Israeli Minister of Justice in consultation with the Israeli Securities Authority.

Under the Israeli Companies Law, an external director must either have "expertise in finance and accounting" or be "professionally qualified". Additionally, at least one of the external directors must have "expertise in finance and accounting".

A person is deemed to have “expertise in finance and accounting” if his or her education, experience and qualifications provide him or her with expertise and understanding in business matters - accounting and financial statements, in a way that allows him or her to understand, in depth, the company’s financial statements and to encourage discussion about the manner in which the financial data is presented.

The company's board of directors must evaluate the proposed external director's expertise in finance and accounting, by considering, among other things, his or her education, experience and knowledge in the following: (i) accounting and auditing issues typical to the field in which the company operates and to companies of a size and complexity similar to such company; (ii) a company's independent public accountants duties and obligations; (iii) preparing company financial statements and their approval in accordance with the Companies Law and the Israeli Securities Law.

A director is deemed to be “professionally qualified” if he or she meets any of the following criteria: (i) has an academic degree in any of the following professions: economics, business administration, accounting, law or public administration; (ii) has a different academic degree or has completed higher education in a field that is the company’s main field of operations, or a field relevant to his or her position; or (iii) has at least five years experience in any of the following, or has a total of five years experience in at least two of the following: (A) a senior position in the business management of a corporation with significant operations, (B) a senior public position or a senior position in public service, or (C) a senior position in the company's main field of operations. The board of directors here too must evaluate the proposed external director's "professional qualification" in accordance with the criteria set forth above.
 
 
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The affidavit required by law to be signed by a candidate to serve as an external director must include a statement by such candidate concerning his or her education and experience, if relevant, in order that the board of directors may properly evaluate whether such candidate meets the requirements set forth in the regulations. Additionally, the candidate should submit documents and certificates that support the statements set forth in the affidavit.

Additionally, under the Israel Companies Law, a public company's board of directors must determine the minimum number of directors who have “expertise in finance and accounting” taking into account the type of company, its size, the extent of its activities and the complexity of the company's operations, subject to the number of directors set forth in the company’s articles of association.
 
No person may serve as an external director if the person’s position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. Additionally, no person may serve as an external director if the person, the person’s relative, spouse, employer or any entity controlling or controlled by the person, has a business or professional relationship with someone with whom affiliation is prohibited, even if such relationship is not maintained on a regular basis, excepting negligible relationships, or if such person received from the company any compensation as an external director in excess of what is permitted by the Israeli Companies Law. If, at the time external directors are to be appointed, all current members of the board of directors are of the same gender, then at least one external director must be of the other gender.

External directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:

 
·
the majority of shares voted at the meeting, including at least one-third of the shares held by non-controlling shareholders voted at the meeting, vote in favor of election of the director; or
 
 
·
the total number of shares held by non-controlling shareholders voted against the election of the director does not exceed one percent of the aggregate voting rights in the company.
 
The initial term of an external director is three years and generally may be extended for two additional terms of three years (unless otherwise restricted in the articles of association to only one additional term), subject to certain conditions (which can also depend on whether the external director was nominated by the board of directors or by the shareholders). External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment, violate their duty of loyalty to the company or are found by a court to be unable to perform their duties on a full time basis. External directors may also be removed by an Israeli court if they are found guilty of bribery, fraud, administrative offenses in a company or use of inside information. Each committee of a company’s board of directors must include at least one external director.
 
 
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An external director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director.

In July 2008, Mr. Gil Oren and Mr. Zvi Rotenberg were elected to serve as the Company's external directors.

In June 2012, Mr. Nir Cohen was elected to serve as a director instead of Yoel Rosenthal.

Audit Committee

Nasdaq Requirements

Our ordinary shares are listed for quotation on the NASDAQ Capital Market and we are subject to the NASDAQ Listing Rules applicable to listed companies. Under the current NASDAQ rules, a listed company is required to have an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management expertise.  Ms. Alicia Rotbard and our two external directors, Mr. Gil Oren and Mr. Zvi Rutenberg qualify as independent directors under the current Nasdaq requirements, and all are members of the Audit Committee. Mr. Gil Oren is our “audit committee financial expert.”

Our Audit Committee assists our board in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements and the independence qualifications and performance of our independent auditors. The Audit Committee also has the authority and responsibility to oversee our independent auditors, to recommend for shareholder approval the appointment and, where appropriate, replacement of our independent auditors and to pre-approve audit engagement fees and all permitted non-audit services and fees.
 
 
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Israeli Companies Law Requirements

The Israeli Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the company’s business, approving related party transactions as required by law, classifying company transactions as extraordinary transactions or non-extraordinary transactions and as material or non-material transactions in which an officer has an interest (which will have the effect of determining the kind of corporate approvals required for such transaction), assessing the proper function of the company’s internal audit regime and determining whether its internal auditor has the requisite tools and resources required to perform his role and to regulate the company's rules on employee complaints, reviewing the scope of work of the company’s independent accountants and their fees, and implementing a whistleblower protection plan with respect to employee complaints of business irregularities.  An audit committee must consist of at least three directors, including the external directors of the company, and a majority of the members of the audit committee must be independent or external directors. The Companies Law defines independent directors as either external directors or directors who: (1) meet the requirements of an external director, other than the requirement to possess accounting and financial expertise or professional qualifications, with Audit Committee confirmation of such; (2) have been directors in the company for an uninterrupted duration of less than 9 years (and any interim period during which such person was not a director which is less than 2 years shall not be deemed to interrupt the duration); and, (3) were classified as such by the company.

The chairman of the board of directors, any director employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the audit committee.

According to the Companies Law, (1) the chairman of the audit committee must be an external director, (2) the required quorum for audit committee meetings and decisions is a majority of the committee members, of which the majority of members present must be independent and external directors, and (3) any 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 company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise, company counsel and company secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings and for the decisions if such presence is requested by the audit committee.
 
Currently, Ms. Alicia Rotbard and our two external directors, Mr. Gil Oren and Mr. Zvi Rutenberg, serve as members of our audit committee.
 
Internal Auditor
 
Under the Israeli Companies Law, the board of directors must appoint an internal auditor, recommended by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor may be an employee of the company but not an office holder (as defined below), or an affiliate, or a relative of an office holder or affiliate, and he may not be the company’s independent accountant or its representative. Daniel Schapira Certified Public Accountant (ISR) serves as our internal auditor.
 
 
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Compensation committee

Pursuant to a recent amendment to the Israeli Companies Law, which was passed in November 2012, or the Amendment 20, the board of directors of an Israeli company, whose shares or debentures are publicly traded, such as our company, are required to appoint a compensation committee that will advise the board of directors regarding the establishment of a compensation policy, pursuant to which terms of office and salaries of the company's officers will be regulated, as per the provisions of  Amendment 20 (the “Compensation Policy”).

The number of members in the compensation committee shall not be less than three and each of the company's external directors must be members of the compensation committee and they are to constitute a majority of the members of the compensation committee, with one of the external directors serving as the chairman of the compensation committee. The chairman of the board of directors, any director employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the compensation committee.

The responsibilities of the compensation committee include the following:

 
1.
To recommend to the board of directors as to the Compensation Policy for officers, as well as to recommend, once every three years to extend the compensation policy subject to receipt of the required corporate approvals;
 
 
2.
To recommend to the board of directors as to any updates to the Compensation Policy which may be required;
 
 
3.
To review the implementation of the Compensation Policy by the company;
 
 
4.
To approve transactions relating to terms of office and employment of certain company office holders, which require the approval of the compensation committee pursuant to the Israeli Companies Law; and
 
 
5.
To exempt, under certain circumstances, a transaction relating to terms of office and employment from the requirement of approval of the shareholders meeting.

Pursuant to Amendment 20, the Compensation Policy shall be determined based, inter alia, on the following parameters: (a) advancements of the goals of the company, its working plan and its long term policy; (b) creating proper incentives to its officers, by taking into consideration, among others, the company's risk management policy; (c) the company's size and its operations; (d) with respect to variable components of officers’ salaries, such as bonuses and issuance of securities, the  contribution of the respective officer to obtaining the company's goals and maximizing profits, all in accordance with a long term perspective and the position of the officer.

In addition, the Compensation Policy is to take into consideration, inter alia, the following issues: the education, skills, expertise and achievements of the officer, previous agreements with the officer, the ratio between the proposed terms to the average salary of the other employees of the company and of employees employed through third parties (manpower companies and cleaning and security services) and the effect of such gaps on the employment relationship in the company, the possibility to reduce variable components, if any, and the possibility of setting a cap on the exercise value of variable capital components that are not replaced by cash. If the terms of office and employment include grants payable upon termination then the Compensation Policy is to include reference to the term of office of the officer, the terms of employment during such period, the results of the company during said period and the officer's contribution to reaching the company's goals and maximizing its profits and the circumstances leading to the termination.

 
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In addition, the compensation policy must set forth standards and rules on the following issues: (a) with respect to variable components of compensation - basing the compensation on long term performance and measurable criteria (though an insubstantial portion of the variable components can be discretion based awards taking into account the contribution of the officer holder to the company); (b) establishing the appropriate ratio between variable components and fixed components and placing a cap on such variable components; (c) setting forth a rule requiring an office holder to return amounts paid, in the event that it is later revealed that such amounts were paid on the basis of data which prove to be erroneous and resulted in an amendment and restatement of the company’s financial statements; (d) determining minimum holding or vesting periods for equity based variable components of compensation, while taking into consideration appropriate long term incentives; and (e) setting a cap on grants or benefits paid upon termination

The board of directors of a company is obligated to adopt a Compensation Policy after considering the recommendations of the compensation committee. The final adoption of the Compensation Committee is subject to the approval of the shareholders of the company, which such approval is subject to certain special majority requirements, as set forth in Amendment 20, pursuant to which one of the following must be met:

 
(i)
the majority of the votes includes at least a majority of all the votes of shareholders who are not controlling shareholders of the company or who do not have a personal interest in the Compensation Policy and participating in the vote; abstentions shall not be included in the total of the votes of the aforesaid shareholders; or

 
(ii)
the total of opposing votes from among the shareholders described in subsection (i) above does not exceed 2% of all the voting rights in the company.

Nonetheless, even if the shareholders of the company do not approve the Compensation Policy, the board of directors of a company may approve the Compensation Policy, provided that the compensation committee and, thereafter, the board of directors resolved, based on detailed, documented, reasons and after a second review of the Compensation Policy, that the approval of the Compensation Policy is for the benefit of the company.
 
 
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Public Israeli companies are required to adopt a Compensation Policy by no later than September 12, 2013. Until such time that a company adopts a compensation policy, compensation of office holders must be approved in accordance with transition rules set forth in Amendment 20 which apply to the approval of officer compensation prior to the adoption and approval of a compensation policy by a company.

Our compensation committee, which is comprised of Ms. Alicia Rotbard, and our two external directors, Mr. Gil Oren and Mr. Zvi Rutenberg, is in the process of establishing a proposed Compensation Policy in order to procure that a Compensation Policy be approved and adopted by September 12, 2013, in accordance with Amendment 20. Until such time, management seeks corporate approvals for office holder compensation in accordance with the transition rules set forth under Amendment 20 as applicable to the particular office holder and/or the proposed compensation.

In addition, Yossi Ben Shalom and Gil Oren are members of the committee of the board of directors for approving grants of options.

We have not entered into service contracts with any of the members of our board of directors.
 
 
D.
EMPLOYEES
 
The following table sets forth the number of our employees at the end of each of the last three years:

   
Israel
   
Other
   
Total
 
2012
                 
                   
Sales and Marketing
    125       31       156  
Administration
    47       21       68  
Research and Development
    21       -       21  
Other
    418       68       486  
Total
    611       120       731  
                         
2011
                       
                         
Sales and Marketing
    124       40       164  
Administration
    44       22       66  
Research and Development
    24       -       24  
Other
    376       64       440  
Total
    568       126       694  
                         
2010
                       
                         
Sales and Marketing
    105       32       137  
Administration
    46       26       72  
Research and Development
    27       -       27  
Other
    401       75       476  
Total
    579       133       712  
 
 
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We have entered into employment contracts with substantially all of our employees, all of which contracts include non-competition, nondisclosure and confidentiality provisions relating to our proprietary information. We believe that our relations with our employees are satisfactory. We are not party to any collective bargaining agreements. However, in Israel, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists Association) are applicable to our employees by order of the Israeli Ministry of Labor. These provisions concern principally the length of the workday, minimum daily wages for professional workers, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay, and other conditions of employment. We generally provide our employees in Israel benefits and working conditions beyond the required minimums. Additionally, due to agreements with the General Workers' Union in Argentina and the country's high inflation rate, we may be required to increase employee salaries at a rate which could adversely affect Pointer Argentina's business. For more information see Item 3.D – Risk Factors, General Risks relating to our Company.
 
Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment without due cause. We currently fund our ongoing severance obligations by contributing funds on behalf of our employees to a fund known as the “Managers’ Insurance” or to pension funds. This fund provides a combination of savings plan, life insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay, if legally entitled, upon termination of employment. We decide whether each employee is entitled to participate in the plan, and each employee who agrees to participate contributes an amount equal to 5% of his or her salary and the employer contributes between 13.3% and 15.8% of the employee’s salary. In addition, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, an agency similar to the United States Social Security Administration. Since January 1, 1995, such amounts also include payments for national health insurance. The payments to the National Insurance Institute are approximately 14.5% of wages up to a specified amount, of which the employee contributes approximately 66% and the employer contributes approximately 34%.
 
 
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E.
SHARE OWNERSHIP
 
The following table details the number of our ordinary shares beneficially owned (including the shares underlying options or warrants held by such person that are exercisable within 60 days), by our directors and members of our senior management, as of February 28, 2013
 
Name
 
Title/Office
 
As a % of Outstanding Ordinary Shares Beneficially Owned(1)
   
Number of Ordinary Shares Beneficially Owned
 
Yossi Ben Shalom
 
Chairman of Board of Directors
    50.31 %     2,794,840 (2)
David Mahlab
 
President and CEO
    2.53 %     144,074  
Gil Oren
 
External Director
    *       3,000  
Zvi Rutenberg
 
External Director
    *       3,000  
Barak Dotan
 
Director
    50.31 %     2,794,840 (2)
Alicia Rotbard
 
Director
    *       2,000  
Nir Cohen
 
Director
    -       -  
Zvi Fried
 
Chief Financial Officer
    *       2,500  
David Markus
 
Chief Technology Officer
    -       -  
Igor Rogov
 
VP R&D of the Cellocator Division
    -       -  
Noam Cimand
 
VP of Sales & Marketing
    -       -  
All directors and officers as a group
        51.65 %     2,949,414  
 
* Less than 1%.
 
(1)
The percentage of outstanding ordinary shares beneficially owned is based on 5,555,558 shares outstanding as of February 28, 2013. The number of shares beneficially owned by a person includes ordinary shares subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of February 28, 2013.
(2)
As office holders of DBSI Investment Ltd., Messrs. Yossi Ben Shalom and Barak Dotan may be considered to be the beneficial holders of the 50.31% of our issued and outstanding shares held by DBSI Investment Ltd.