Company Quick10K Filing
Quick10K
Ituran Location & Control
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.42 23 $761
20-F 2018-12-31 Annual: 2018-12-31
20-F 2017-12-31 Annual: 2017-12-31
20-F 2016-12-31 Annual: 2016-12-31
20-F 2015-12-31 Annual: 2015-12-31
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CXKJ CX Network 0
ITRN 2018-12-31
Item 17 O Item 18 ☐
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4.A. Unresolved Staff Comments
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Descriptions of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14.A Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Changes in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 1 - Summary of Significant Accounting Policies
Note 2 - Other Current Assets
Note 3 - Acquisition of Business
Note 4 - Inventories
Note 5 - Investments in Affiliated and Other Companies
Note 6 - Other Non-Current Assets
Note 7 - Property and Equipment, Net
Note 8 - Intangible Assets, Net
Note 9 - Goodwill
Note 10 - Credit From Banking Institutions
Note 11 - Other Current Liabilities
Note 12 - Contingent Liabilities
Note 13 - Stockholders' Equity
Note 14 - Other (Income) Expenses, Net) Non-Operational(
Note 15 - Financing Income (Expenses), Net
Note 16 - Income Tax
Note 17 - Earnings per Share
Note 18 - Related Parties
Note 19 - Segment Reporting
Note 20 - Financial Instruments and Risks Management
EX-4.13 exhibit_4-13.htm
EX-8 exhibit_8.htm
EX-12.1 exhibit_12-1.htm
EX-12.2 exhibit_12-2.htm
EX-13 exhibit_13.htm
EX-14.1 exhibit_14-1.htm
EX-14.2 exhibit_14-2.htm

Ituran Location & Control Earnings 2018-12-31

ITRN 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 zk1922960.htm 20-F


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 20-F
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2018
 
Commission file no. 001-32618
ITURAN LOCATION AND CONTROL LTD.
(Exact name of Registrant as specified in its charter and
translation of Registrant’s name into English)
 
Israel
(Jurisdiction of incorporation or organization)
 
3 Hashikma Street, Azour, Israel
(Address of principal executive offices)
 
Eli Kamer, Chief Financial Officer, 3 Hashikma Street, Azour, Israel, Tel: 972-3-5571314, Facsimile: 972-3-5571327
(Name, Telephone, E-mail and/or Facsimile number and Address of Company contact person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Name of each exchange on which registered
 
 
 
   
 
Ordinary Shares, par value NIS 0.331/3 per share
Nasdaq Global Select Market
 

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

 
        Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
 
Yes o No
 
        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
 
        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
 
        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
 
Yes x No
 
        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
Accelerated Filer
Non-accelerated filer
Emerging growth company 
 
If you are an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
 
        Indicate by check mark which basis of accounting the registrant had used to prepare the financial statements included in this filing:
 
U.S. GAAP
International Financial Reporting Standards as issued
by the International Accounting Standards Board
Other
 
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
 
        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
 
[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.
 
 Yes o No
 
The Annual Report of Ituran, together with the Financial Condition and Results of Operations covering that 12 month period, are incorporated by reference into Ituran registration statement on Form F-3 (File No. 333-222289).
 

 
TABLE OF CONTENTS
 
IV
IV
1
1
1
A.
SELECTED FINANCIAL DATA
1
B.
CAPITALIZATION AND INDEBTEDNESS
4
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
4
D.
RISK FACTORS
4
12
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
12
B.
BUSINESS OVERVIEW
13
C.
ORGANIZATIONAL STRUCTURE
21
D.
PROPERTY, PLANTS AND EQUIPMENT
22
23
23
A.
OPERATING RESULTS
23
B.
LIQUIDITY AND CAPITAL RESOURCES
34
C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
36
D.
TREND INFORMATION
36
E.
OFF-BALANCE SHEET ARRANGEMENTS
36
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
37
G.
SAFE HARBOR
37
38
A.
DIRECTORS AND SENIOR MANAGEMENT
38
B.
COMPENSATION
41
C.
BOARD PRACTICES
43
D.
EMPLOYEES
47
E.
SHARE OWNERSHIP
49
 
i

 
 
50
A.
MAJOR SHAREHOLDERS
50
B.
RELATED PARTY TRANSACTIONS
51
C.
INTERESTS OF EXPERTS AND COUNSEL
55
55
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL  INFORMATION
55
B.
SIGNIFICANT CHANGES
57
57
A.
OFFER AND LISTING DETAILS
57
B.
PLAN OF DISTRIBUTION
58
C.
MARKETS
58
D.
SELLING SHAREHOLDERS
58
E.
DILUTION
58
F.
EXPENSES OF THE ISSUE
58
58
A.
SHARE CAPITAL
58
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
58
C.
MATERIAL CONTRACTS
65
D.
EXCHANGE CONTROLS
65
E.
TAXATION
65
ii

 
79
79
79
79
79
79
79
79
80
80
81
 
iii

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

PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3.
KEY INFORMATION
 
A.        SELECTED FINANCIAL DATA
 
The selected consolidated financial data below is provided under generally accepted accounting principles in the U.S. (U.S. GAAP). You should read the selected consolidated financial data presented in this Item together with Item 5 – Operating and Financial Review and Prospects and with our consolidated financial statements included elsewhere in this annual report.
 
Our selected consolidated statements of income data for the years ended December 31, 2016, 2017 and 2018, and our selected consolidated balance sheet data as of December 31, 2017 and 2018 have been derived from our consolidated financial statements included elsewhere in this report. The selected consolidated statements of income data for each of the years ended December 31, 2014 and 2015, and the selected consolidated balance sheet data as of December 31, 2014, 2015 and 2016, are derived from our audited consolidated financial statements not included in this report.
 
1

 
Selected Financial Data Under U.S. GAAP:
 
Consolidated Statements of Income Data
 
   
Year Ended December 31,
 
   
2018
   
2017
   
2016
   
2015
   
2014
 
   
In USD
 
   
In thousands, except per share amounts
 
Revenues:
                             
Telematics services
   
181,357
     
169,752
     
141,940
     
127,683
     
133,692
 
Telematics products
   
71,978
     
64,884
     
57,634
     
47,945
     
48,435
 
                                         
Total Revenues
   
253,335
     
234,636
     
199,574
     
175,628
     
182,127
 
Cost of Revenues:
                                       
Telematics services
   
70,329
     
60,256
     
50,633
     
47,875
     
47,938
 
Telematics products
   
55,678
     
54,996
     
46,910
     
37,872
     
37,056
 
                                         
Total cost of revenues
   
126,007
     
115,252
     
97,543
     
85,747
     
84,994
 
                                         
Gross profit
   
127,328
     
119,384
     
102,031
     
89,881
     
97,133
 
                                         
Research and development expenses
   
6,223
     
3,160
     
2,895
     
2,401
     
2,526
 
Selling and marketing expenses
   
11,340
     
12,246
     
10,074
     
9,303
     
9,264
 
General and administrative expenses
   
47,693
     
47,590
     
40,228
     
37,801
     
38,617
 
Other expenses (income), net
   
(306
)
   
(147
)
   
836
     
(268
)
   
856
 
                                         
Operating Income
   
62,378
     
56,535
     
47,998
     
40,644
     
45,870
 
Other income (expenses), net
   
13,138
     
-
     
-
     
-
     
-
 
Financing income (expenses), net
   
717
     
(989
)
   
2,056
     
1,189
     
1,704
 
                                         
Income before income tax
   
76,233
     
55,546
     
50,054
     
41,833
     
47,574
 
Income tax
   
(17,273
)
   
(17,705
)
   
(14,877
)
   
(12,822
)
   
(14,246
)
Share in gains (losses) of affiliated companies, net
   
4,219
     
8,520
     
(449
)
   
(2,439
)
   
(421
)
                                         
Net income for the year
   
63,179
     
46,361
     
34,728
     
26,572
     
32,907
 
Less: net income attributable to non-controlling interest
   
(2,504
)
   
(2,567
)
   
(2,589
)
   
(1,601
)
   
(2,478
)
                                         
Net income attributable to Company stockholders
   
60,675
     
43,794
     
32,139
     
24,971
     
30,429
 
                                         
Earning per share
                                       
Basic
 
$
2.88
     
2.09
   
$
1.53
   
$
1.19
   
$
1.45
 
Diluted
 
$
2.88
     
2.09
   
$
1.53
   
$
1.19
   
$
1.45
 
Weighted average number of shares outstanding
                                       
Basic
   
21,077
     
20,968
     
20,968
     
20,968
     
20,968
 
Diluted
   
21,077
     
20,968
     
20,968
     
20,968
     
20,968
 
 
 
2

 
Consolidated Balance Sheets Data
 
   
Year Ended December 31,
 
   
2018
   
2017
   
2016
   
2015
   
2014
 
   
In USD
 
   
In thousands, except per share amounts
 
                               
Cash & Cash Equivalent; deposit in escrow (short and long term) and investment in trading marketable securities
   
53,295
     
40,465
     
31,485
     
29,051
     
40,780
 
Working Capital          
   
84,214
     
71,360
     
55,062
     
50,124
     
56,910
 
Total Assets          
   
373,792
     
215,159
     
178,019
     
142,003
     
152,337
 
Total Liabilities          
   
213,592
     
81,930
     
69,848
     
54,182
     
57,754
 
Retained Earnings          
   
129,580
     
92,065
     
71,717
     
57,739
     
49,067
 
Stockholders Equity          
   
153,693
     
125,790
     
102,229
     
83,698
     
90,696
 
Dividend declared per share          
   
0.95
     
1.12
     
0.86
     
0.78
     
0.98
 
 
3

Other Data:
 
   
Year Ended December 31,
 
   
2018
   
2017
   
2016
   
2015
   
2014
 
Subscribers of telematics services (1)
   
1,770,000
     
1,160,000
     
1,057,000
     
948,000
     
817,000
 
Average monthly churn rate
   
2.8
%
   
3.2
%
   
3.1
%
   
3.3
%
   
3
%
 
(1) number of subscribers are rounded to the nearest thousand.
 
B.          CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
C.          REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
D.          RISK FACTORS
 
Our business, operating results and financial condition could be seriously harmed due to any of the following risks, among others. If we do not successfully address the risks to which we are subject, we could experience a material adverse effect on our business, results of operations and financial condition and our share price may decline, which may result in a loss of all or part of your investment. We cannot assure you that we will successfully address any of these risks. You should carefully consider the following factors as well as the other information contained and incorporated by reference in this annual report before taking any investment decision with respect to our securities. See “Forward Looking Statements” on page iv above.
 
RISKS RELATED TO OUR BUSINESS
 
Failure to maintain our existing relationships or establish new relationships with insurance companies could adversely affect our revenues and growth potential.
 
Revenues from our stolen vehicle recovery services, which we refer to as SVR services, and automatic vehicle location products, which we refer to as telematics products, are primarily dependent on our relationships with insurance companies. In Israel, insurance companies drive demand for our SVR services and telematics products by encouraging and, in some cases, requiring customers to subscribe to vehicle location services and purchase vehicle location products such as ours. In certain subsidiaries in Brazil and Argentina, insurance companies enter into written agreements to subscribe to our services and purchase or lease our products directly. Our inability to maintain our existing relationships or establish new relationships with insurance companies could adversely affect our revenues and growth potential.
 
Changes in practices of insurance companies in the markets in which we provide our SVR services and sell our telematics 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 telematics products. In Israel, insurance companies either mandate the use of SVR services and telematics products, or their equivalent, as a prerequisite for providing insurance coverage to owners of certain medium- and high-end vehicles or provide insurance premium discounts to encourage vehicle owners to subscribe to services and purchase products such as ours. In certain subsidiaries in Brazil and Argentina, insurance companies mainly lease our telematics 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;
§
requiring or providing a premium discount for using location and recovery services and products;
§
mandating or encouraging use of our SVR services and telematics products, or similar services and products, for vehicles with the same or similar threshold values and for the same or similar required duration of use; and
 
If any of these policies or practices change, revenues from sales of our SVR services and telematics products could decline, which could adversely affect our revenues and growth potential.
 
A reduction in vehicle theft rates may adversely impact demand for our SVR services and telematics products.
 
Demand for our SVR services and telematics products depends primarily on prevailing or expected vehicle theft rates. Vehicle theft rates may decline as a result of various reasons, such as the availability of improved security systems, implementation of improved or more effective law enforcement measures, or improved economic or political conditions in markets that have high theft rates. If vehicle theft rates in any or all of our existing markets decline, or if insurance companies or our other customers believe that vehicle theft rates have declined or are expected to decline, demand for our SVR services and telematics products may decline.
 
4

 
A decline in sales of new cars at the markets in which we operate could result in reduced demand for our SVR services and telematics products.
 
Our SVR services and telematics products are primarily used to protect cars and are often installed before or immediately after their initial sale. Consequently, a reduction in sales of vehicles could reduce our addressable market for SVR services and telematics products. New vehicle sales may decline for various reasons, including an increase in new vehicle tariffs, taxes or gas prices. A decline in vehicle production levels or labor disputes affecting the automobile industry in the markets where we operate may also impact the volume of new vehicle sales. A decline in sales of new vehicles in the markets in which we provide our SVR services or sell our telematics products could result in reduced demand for such services and products.
 
There is significant competition in the markets in which we offer our services and products and our results of operations could be adversely affected if we fail to compete successfully.
 
The markets for our services and products are highly competitive. We compete primarily on the basis of the technological innovation, quality and price of our services and products. Our most competitive market is the telematics services market and the related telematics products market, due to the existence of a wide variety of competing services and products and alternative technologies that offer various levels of protection and tracking capabilities, including global positioning systems, or GPS (although we also provide services based on GPS/GPRS technology), satellite- or network-based cellular systems and direction-finding homing technologies. Some of these competing services and products, such as certain GPS-based products, are installed in new cars by vehicle manufacturers prior to their initial sale, which effectively precludes us from competing for such subscribers in the SVR market. Furthermore, providers of competing services or products may extend their offerings to the locations in which we operate or new competitors may enter the telematics services market. Our telematics products also compete with less sophisticated theft protection devices such as standard car alarms, immobilizers, steering wheel locks and homing devices, some of which may be significantly cheaper. Some of these competing products have greater brand recognition than our telematics products, including LoJack Corporation in the United States.
 
The development of new or improved competitive products, systems or technologies that compete with our telematics products may render our products less competitive or obsolete, which could cause a decline in our revenues and profitability.
 
We are engaged in businesses characterized by rapid technological change and frequent new product developments and enhancements. The number of companies developing and marketing new telematics products has expanded considerably in recent years. The development of new or improved products, systems or technologies that compete with our telematics products, for both our SVR and fleet management services, may render our products and services less competitive and we may not be able to enhance our technology in a timely manner. In addition to the competition resulting from new products, systems or technologies, our future product enhancements may not adequately meet the requirements of the marketplace and may not achieve the broad market acceptance necessary to generate significant revenues. Any of the foregoing could cause a decline in our revenues and profitability.
 
We face risks associated with our recent acquisition of a majority of the shares of Road Track Holding S.L. ("Road Track"), a telematics company operating primarily in the Latin American region, and if we fail to integrate its business successfully, our operating results will be negatively affected.
 
On September 13, 2018, we acquired a majority of the shares of Road Track Holding S.L. (today: Ituran Spain Holding S.L., (“Road Track”), a telematics company operating primarily in the Latin American region. The success of this acquisition will depend, in part, on our ongoing process of integrating Road Track and the Road Track brand with our historical business, which will be time consuming and require optimization and allocation of resources.  The compatibility of the technologies and operations being integrated and combining disparate corporate cultures present potentially significant challenges.  Continuing the successful integration of Road Track will require us to  retain the current key management and other personnel, incorporate the acquired products and capabilities into our product offerings from a sales and marketing perspective, integrate and support pre-existing supplier, distribution and customer relationships, combine or centralize back office accounting, order processing, purchasing and support functions and establish and maintain proper internal control over financial reporting.  If we cannot overcome these challenges in a timely and efficient manner, or at all, we may not realize the anticipated benefits from our acquisition of Road Track and the Road Track brand, or it may take longer to realize these benefits than we currently expect, either of which could materially harm our business or results of operations.
 
The inability of local law enforcement agencies to timely and effectively recover the stolen vehicles we locate could negatively impact customers’ perception of the usefulness of our SVR services and telematics products, adversely affecting our revenues.
 
Our telematics products identify the location of vehicles in which our products are installed. Following a notification of an unauthorized entry, or if we receive notification of the vehicle’s theft from a subscriber, we notify the relevant law enforcement agency of the location of the subscriber’s vehicle and generally rely on local law enforcement or governmental agencies to recover the stolen vehicle. We cannot control nor predict the response time of the relevant local law enforcement or other governmental agencies responsible for recovering stolen vehicles, nor that the stolen vehicles, once located, will be recovered at all. In the past, some stolen vehicles in which our telematics products were installed were not recovered on timely manner, from the time an unauthorized entry is confirmed or reported to the time the vehicle is recovered. To the extent that the relevant agencies do not effectively and timely respond to our calls and recover stolen vehicles, our recovery rates would likely diminish, which may, in turn, negatively impact customers’ perception of the usefulness of our SVR services and telematics products, adversely affecting our revenues.
 
5

 
The ability to detect, deactivate, disable or otherwise inhibit the effectiveness of our telematics products could adversely affect demand for such products and our revenues.
 
The effectiveness of our telematics products is dependent, in part, on the inability of unauthorized persons to deactivate or otherwise alter the functioning of our telematics products or the vehicle anti-theft devices that work in conjunction with our telematics products. As sales of our telematics products increase, criminals in the markets in which we operate may become increasingly aware of our telematics products and may develop methods or technologies to detect, deactivate or disable our tracking devices or the vehicle anti-theft devices that work in conjunction with our telematics products. We believe that, as is the case with any product intended to prevent vehicle theft, over time, there may be an increased ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our telematics products, although it is difficult to verify this fact. An increase in the ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our telematics products could adversely affect demand for our products and our revenues.
 
We rely on some intellectual property that we license from third parties, the loss of which could preclude us from providing our SVR services or market and sell some of our telematics products, which would adversely affect our revenues.
 
We license from third parties some of the technology that we need in order to provide our SVR services and market and sell some of our telematics products. In the event that such licenses were to be terminated, or if such licenses were rendered unenforceable or invalid and we would not be able to license similar technology from other parties, it would require us, at a minimum, to obtain rights to a different technology and reconfigure our telematics products accordingly. In addition, some of the licenses we obtained from third parties are non-exclusive, which may enable other entities to obtain identical licenses from such third parties to operate in the places in which we conduct our business resulting in increased competition and could adversely affect our revenues.
 
We depend on proprietary technology and our failure to protect and enforce our intellectual property rights or our need to defend against infringement claims could result in a significant increase in costs and decline in revenues.
 
Our business is dependent on the uninterrupted use of proprietary technology, both owned and licensed, from third parties. If we fail to protect, enforce and maintain our intellectual property rights, we may not be able to compete and our business and operating results could be negatively impacted. We seek to protect our intellectual property rights through a combination of patents, trademarks, copyrights, trade secret laws, know-how, confidentiality procedures and licensing arrangements. Even with the intellectual property protection currently in place, we may not be able to protect our technology from misappropriation or infringement and we may lose, or the relevant owners may restrict or lose, our current rights of use of the technology that we license from such owners. Any of our existing intellectual property rights may be invalidated, circumvented, challenged or rendered unenforceable. In addition, the laws of some countries in which we operate or plan to operate, may not protect intellectual property rights to the same extent as the laws of Israel or the United States, increasing the possibility of piracy of our technology and products. It may be necessary for us to litigate in order to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others, which litigation can be time consuming, distracting to management, expensive and difficult to predict.
 
It is possible that we have or will inadvertently violate the intellectual property rights of other parties and those other parties may choose to assert infringement claims against us. If a court were to determine that our technology infringes on third parties’ intellectual property, in addition to exposure to substantial damages, we could be required to expend considerable resources to modify our products, to develop non-infringing technology or to obtain licenses to permit our continued use of the technology that is the subject matter of the litigation.
 
Our failure to protect and enforce our intellectual property rights, or our need to defend against claims of infringement of intellectual property rights of others or the loss of any such claims, could result in a significant increase in costs and decline in revenues.
 
Our ability to sell some of our services and products depends upon the prior receipt and maintenance of various governmental licenses and approvals and our failure to obtain or maintain such licenses and approvals, or third-party use of the same licenses and frequencies, could result in a disruption or curtailment of our operations, a significant increase in costs and a decline in revenues.
 
We are required to obtain specific licenses and approvals from various governmental authorities in order to conduct our operations. For example, some of our telematics products use radio frequencies that are licensed and renewed periodically from the Ministry of Communications in Israel and similar agencies worldwide. As we continue to expand into additional markets, we will be required to obtain new permits and approvals from relevant governmental authorities. Furthermore, once our telematics infrastructure is deployed and our telematics end-units are sold to subscribers, a change in radio frequencies would require us to recalibrate all of our antennas and replace or modify all end-units held by subscribers, which would be costly and may result in delays in the provision of our SVR services. In addition, some of the governmental licenses for radio frequencies that we currently use may be preempted by third parties. In Israel, our license is designated as a “joint” license, allowing the government to grant third parties a license to use the same frequencies, and in Brazil our license is designated as a “secondary”, non-exclusive license, which allows the government to grant a third party a primary license to use such frequencies, which third-party use could adversely affect, disrupt or curtail our operations. Our inability to maintain necessary governmental licenses and frequency approvals, or third-party use of or interference with the same licenses or frequencies, could result in a significant increase in costs and decline in revenues.
 
6


Our SVR services business model is based on the existence of certain conditions, the loss or lack of which in existing or potential markets could adversely affect our revenues generated in existing markets or our growth potential.
 
Our SVR services business model and, consequently, our ability to provide our SVR services and sell our telematics products, relies on our ability to successfully identify markets in which:
 
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the rate of car theft or consumer concern over vehicle safety is high;
§
satisfactory radio frequencies are available to us that allow us to operate our business in an uninterrupted manner; and
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insurance companies, car manufactures or owners of cars believe that the value of cars justifies incurring the expense associated with the deployment of SVR services.
 
The absence of such conditions, our inability to locate markets in which such conditions exist or the loss of any one of the above conditions in markets we currently serve could adversely affect our revenues generated in existing markets or our growth potential.
 
Some of our agreements restrict our ability to expand into new markets with RF technology for our SVR services, which could adversely affect our growth potential.
 
In 2008, we entered into a ten (10) years agreement with Telematics Wireless Ltd., pursuant to which Ituran and Telematics Wireless Ltd. designated parts of the world as their exclusive territories for selling their telematics products and SVR services using any RF location technology compatible to the RF vehicle location systems. This agreement restricts our ability to expand our business and operations and sell our products and services in certain markets, which could adversely affect our growth potential. The abovementioned agreement was terminated on December 31st, 2017. The Agreement is automatically renewed for additional consecutive 12-month periods, unless either party notifies the other with 30 business days prior written notice that the Agreement will not be so renewed.
 
The loss of key personnel could adversely affect our business and prospects for growth.
 
Our success depends upon the efforts and abilities of key management personnel, including our President and our Co-Chief Executive Officers. Loss of the services of one or more of such key personnel could adversely affect our ability to execute our business plan. In addition, we believe that our future success depends in part upon our ability to attract, retain and motivate qualified personnel necessary for the development of our business. If one or more members of our management team or other key technical personnel become unable or unwilling to continue in their present positions, and if additional key personnel cannot be hired and retained as needed, our business and prospects for growth could be adversely affected.
 
We rely on third parties to manufacture our telematics products, which could affect our ability to provide such products in a timely and cost-effective manner, adversely impacting our revenues and profit margins.
 
We outsource the manufacturing of a significant part of our telematics products to third parties. We use one manufacturer for production of a significant portion of our telematics products and we do not maintain significant levels of inventories to support us in the event of an unexpected interruption in its manufacturing process. If our principal manufacturer or any of our other manufacturers is unable to or fails to manufacture our products in a timely manner, we may not be able to secure alternative manufacturing facilities without experiencing an interruption in the supply of our products or an increase in production costs. Any such interruption or increase in production costs could affect our ability to provide our telematics products in a timely and cost-effective manner, adversely impacting our revenues and profit margins.
 
We rely on three major suppliers to supply us with various products and services. Each of these suppliers supply us with different type of products and services and act as single supplier of such products and services.
 
We rely on three major suppliers to supply us with various products and services, one of them is our subsidiary. Each of these suppliers supply us with different type of products and services and act as single supplier of such products and services.
Termination of relations with one of our major suppliers (except with our subsidiary) would adversely affect our operations and revenues.
 
We depend on the use of specialized quality assurance testing equipment for the production of our telematics products, the loss or unavailability of which could adversely affect our results of operations.
 
We and our third-party manufacturers use specialized quality assurance testing equipment in the production of our products. The replacement of any such equipment as a result of its failure or loss could result in a disruption of our production process or an increase in costs, which could adversely affect our results of operations.
 
7

 
The adoption of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and could harm our results of operations.
 
There are no established industry standards in all of the businesses in which we sell our telematics products. For example, vehicle location devices may operate by employing various technologies, including network triangulation, GPS, satellite-based or network-based cellular or direction-finding homing systems. The development of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and we may not be able to develop new services and products that are in compliance with such new industry standards on a cost-effective basis. If industry standards develop and such standards do not incorporate our telematics products and we are unable to effectively adapt to such new standards, such development could harm our results of operations.
 
Expansion of our operations to new markets involves risks and our failure to manage such risks may delay or preclude our ability to generate anticipated revenues and may impede our overall growth strategy.
 
We anticipate future growth to be attributable to our business activities in new markets, particularly in developing countries, where we may encounter additional risks and challenges, such as longer payment cycles, potentially adverse tax consequences, potential difficulties in collecting receivables and potential difficulties in enforcing agreements or other rights in foreign legal systems. The challenges and risks of entering a new market may delay or preclude our ability to generate anticipated revenues and may impede our overall growth strategy.
 
Part of our services rely on GPS/GPRS-based technology owned and controlled by others, the loss, impairment or increased expense of which could negatively impact our immediate and future revenues from, or growth of, our services and adversely affect our results of operations.
 
Part of our business relies on signals from GPS/GPRS satellites built and maintained by third parties. If GPS/GPRS satellites become unavailable to us, or if the costs associated with using GPS/GPRS technology increase such that it is no longer feasible or cost-effective for us to use such technology, we will not be able to adequately provide our services. In addition, if one or more GPS/GPRS satellites malfunction, there could be a substantial delay before such satellites are repaired or replaced, if at all. The occurrence of any of the foregoing events could negatively impact our immediate and future revenues from, or growth of, our fleet management services and adversely affect our results of operations.
 
Material cyber security failure may harm our operations, which rely on use of information technology and wireless transmission.
 
Our telematics and SVR services, relies on the use of information technology which under a major cyber security breach, could harm our operations. We are using physical services, wireless transmitting stations, GPRS/GPS, and in lesser account cloud computing to provide our services. There are risks associated with storing and transmitting data, which due to cyber security breach may be corrupted, and the store data on remote servers may be destroyed, damaged, seized, or otherwise no longer accessible, which may temporary decrease our ability to deliver telematics and SVR services.
 
We implemented cyber security controls – which consists of three pillars: prevention, detection and response (data recovery in the event of a cyber breach). We perform an ongoing review of our systems and an annual external review of our cyber security controls and their implementation. However, such cyber security controls may not be able to prevent all unexpected 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 response costs and various 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 and may lead to substantial loss of revenues.
 
Some of our employees in our subsidiaries in Brazil and Argentina are members of labor unions and a dispute between us and any such labor union could result in a labor strike that could delay or preclude altogether our ability to generate revenues in the markets where such employees are located.
 
Some of our employees in our subsidiaries in Brazil and Argentina are members of labor unions. If a labor dispute were to develop between us and our unionized employees, such employees could go on strike and we could suffer work stoppage for a significant period of time. A labor dispute can be difficult to resolve and may require us to seek arbitration for resolution, which arbitration can be time consuming, distracting to management, expensive and difficult to predict. The occurrence of a labor dispute with our unionized employees could delay or preclude altogether our ability to generate revenues in the markets where such employees are located.
 
We are subject to litigation that could result in significant costs to us.
 
On July 13, 2015, we received a purported class action lawsuit which was filed against the Company in the District Court of Central Region in Tel-Aviv by one plaintiff who is a subscriber of the Company, alleging that the Company, which was declared a monopoly under the Israeli Antitrust Law, unlawfully abused its power as a monopoly and discriminated between its customers. The lawsuit is yet to be approved as a class action. The total amount claimed if the lawsuit is approved as a class action was estimated by the plaintiff to be approximately NIS 300 million (approximately USD 80 million). Based on an opinion of its legal counsels, the Company believes that the lawsuit lacks substantiation, and that the Company has good defense arguments in respect of claims made by the plaintiff and that the chances that the suit will not be approved as a class action lawsuit are higher than it will be approved. Court hearing will take place on June 2019. Notwithstanding the aforesaid, at this preliminary stage, the Company is unable to assess the lawsuit's chances of success. While we cannot predict the outcome of this case, if we are not successful in defending our claim, we could be subject to significant costs, adversely affecting our results of operations.
 
8


On July 19, 2018 we received two class action lawsuits that were filed against the Company, alleging that the Company violated the Protection of Privacy Law, 5741 – 1981 and the Protection of Privacy Regulations (Data Security) 5777-2017. The plaintiffs  request that the lawsuits will be approved as a class action and allege  that we did not secure customer information properly, as required by the law, and that the lack of information security procedures allowed hacking into the company's website, which caused  exposure of customers sensitive personal information. The lawsuits are yet to be approved as a class actions. The total amount claimed if the lawsuits are to be approved as a class action were estimated by the plaintiffs to be approximately NIS 600 million (approximately USD 160 million). Our defense against the approval of the class action lawsuits was filed on December 13, 2018.
 
        While we cannot predict the outcome of this case, if we are not successful in defending our claim, we could be subject to significant costs, adversely affecting our results of operations.
 
For additional information on these lawsuits and for information concerning additional litigation proceedings, please refer to Item 8.A – “Consolidated financial Statements and other Financial Information” under the caption “Material Legal Proceedings” below.
 
We have not applied nor obtained for several of the permits required for the operation of some of our base sites. To the extent enforcement is sought, the breadth, quality and capacity of our network coverage could be materially affected.
 
The provision of our SVR services depends upon adequate network coverage for accurate tracking information. In Israel, we have installed 98 base sites that provide complete communications coverage in Israel. Similarly, we have communications coverage in Sao Paulo and Rio, Brazil and Buenos Aires, Argentina. The installation and operation of most of our base sites require building permits from local or regional zoning authorities as well as a number of additional permits from governmental and regulatory authorities.
 
Currently most of our base sites in Israel and Brazil and some of our base sites in Argentina operate without local building permits or the equivalent. Although relevant authorities in Israel, Brazil and Argentina have not historically enforced penalties for non-compliance with certain permit regulations, following ongoing press coverage and actions by various public interest groups, relevant Israeli and Argentine authorities have begun seeking enforcement of permit regulations, especially with respect to antennas constructed for cellular phone operators. Some possible enforcement measures include the closure or demolition of existing base sites or the imposition of limitation on erection of new base stations. Should these enforcement measures be imposed upon us in Israel or Argentina, the extent, quality and capacity of our network coverage and, as a result, our ability to provide SVR services, may be adversely affected. In Israel we are in process of achieving compliance with the regulation of our base stations, such process can take several years.
 
Currency fluctuations may result in valuation adjustments in our assets and liabilities and could cause our results of operations to decline.
 
The valuation of our assets and liabilities, our revenues received and the related expenses incurred are not always denominated in the same currency. This lack of correlation between revenues and expenses exposes us to risks resulting from currency fluctuations. These currency fluctuations could have an adverse effect on our results of operations, such currency fluctuations take place in Argentina, Brazil, Mexico, Colombia and Israel which affects our operation results in these countries. In addition, fluctuations in currencies may result in valuation adjustments in our assets and liabilities which could cause our results of operations to decline.
 
RISKS RELATED TO OUR OPERATIONS IN ISRAEL
 
We are headquartered in Israel and therefore our results of operations may be adversely affected by political, economic and military instability in Israel.
 
Our headquarter is located in Israel and most our key employees, officers and directors are residents of Israel. Accordingly, security, political and economic conditions in Israel directly affect our business. Over the past several decades, a number of armed conflicts have taken place between Israel and its Arab neighbors. During July-August 2014 and November 2012, Israel was engaged in an armed conflict with a militant group and political party who control the Gaza Strip. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel. Continued or increased hostilities, future armed conflicts, political developments in other states in the region or continued or increased terrorism could make it more difficult for us to conduct our operations in Israel, which could increase our costs and adversely affect our financial results.
 
9

 
Israel has experienced in recent years, unionized general strikes in connection with the legislation of new economic reforms. A prolonged general strike in Israel would affect our ability to provide our telematics products that are manufactured in Israel and would negatively impact our operations. Furthermore, there are a number of countries, primarily in the Middle East, that still restrict business with Israel or Israeli companies and as a result our company is precluded from marketing its products in these countries. Restrictive laws or policies directed toward Israel or Israeli businesses could have an adverse effect on our ability to grow our business and our results of operations.
 
Under Israeli law, we are considered a “monopoly” and therefore subject to certain restrictions that may negatively impact our ability to grow our business in Israel.
 
We have been declared a monopoly under the Israeli Economy competition Law (formerly known as Restrictive Trade Practices Law, 1988 (the “Israeli Antitrust Law”), in the market for the provision of systems for the location of vehicles. Under Israeli law, a monopoly is prohibited from taking certain actions, such as predatory pricing and the provision of loyalty discounts, which prohibitions do not apply to other companies. The Israeli antitrust authority (under its new name - Competition Authority) may further declare that we have abused our position in the market. Any such declaration in any suit in which it is claimed that we engage in anti-competitive conduct would serve as prima facie evidence that we are a monopoly or that we have engaged in anti-competitive behavior. Furthermore, we may be ordered to take or refrain from taking certain actions, such as set maximum prices, in order to protect against unfair competition. If we breach certain provisions of the Israeli Antitrust Law, including as a monopoly, the Israeli Competition authority may also impose on us in an administrative procedure, financial sanctions in an amount of up to the lower of NIS 100 million (approximately US$27 million) or 8% of our annual revenues for the last financial year prior to such breach. Restraints on our operations as a result of being considered a “monopoly” in Israel could adversely affect our ability to grow our business in Israel.
 
It may be difficult and costly to enforce a judgment issued in the United States against us, our executive officers and directors, or to assert United States securities laws claims in Israel or serve process on our officers and directors.
 
We are incorporated and headquartered in Israel. As a result, our executive officers and directors are non-residents of the United States and a substantial portion of our assets and the assets of these persons are located outside of the United States. Therefore, service of process upon any of these officers or directors may be difficult to effect in the United States. Furthermore, it may be difficult to enforce a judgment issued against us in the United States or any of such persons in both United States courts and other courts abroad.
 
Additionally, there is doubt as to the enforceability of civil liabilities under United States federal securities laws in actions originally instituted in Israel or in actions for the enforcement of a judgment obtained in the United States on the basis of civil liabilities in Israel.
 
Provisions of Israeli corporate and tax law may delay, prevent or otherwise encumber a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such transaction are favorable to us and our shareholders
 
We may be subject to Israeli corporate law which regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association contain, among other things, provisions that may make it more difficult to acquire our company, such as classified board provisions and certain restrictions on the members of our board pursuant to regulatory requirements of the Israeli Ministry of Communication. Furthermore, Israeli tax considerations may make potential transaction structures involving the acquisition of our company unappealing to us or to some of our shareholders. See Item 10.B. – “Memorandum and Articles of Association” - “Our Corporate Practices under the Israeli Companies Law” under the caption “Approval of Transactions under Israeli law” and Item 10.E. – “Taxation” under the caption “Israeli Tax Considerations” for additional discussion of some anti-takeover effects of Israeli law. These provisions of Israeli law and our articles of association may delay, prevent or otherwise encumber a merger with, or an acquisition of, our company or any of our assets, which could have the effect of delaying or preventing a change in control of our company, even when the terms of such a transaction could be favorable to our shareholders.
 
The rights and responsibilities of our shareholders will be governed by Israeli law and may differ in some respects from the rights and responsibilities of shareholders under United States law.
 
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical US-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli corporate law has undergone extensive revisions in the recent years and, as a result, there is little case law available to assist in understanding the implications of these provisions that govern shareholders’ actions, which may be interpreted to impose additional obligations on holders of our ordinary shares that are typically not imposed on shareholders of US-based corporations.
 
10

 
RISKS RELATED TO OUR ORDINARY SHARES AND THE ECONOMY
 
Future sales of our ordinary shares could reduce the market price of our ordinary shares.
 
If we or our shareholders sell substantial amounts of our ordinary shares on the Nasdaq Global Select Market, the market price of our ordinary shares may decline.
 
The market price of our ordinary shares is subject to fluctuation, which could result in substantial losses for our investors.
 
The stock market in general, and the market price of our ordinary shares in particular, are subject to fluctuation, and changes in our share price may be unrelated to our operating performance. The market price of our ordinary shares has fluctuated in the past, and we expect it will continue to do so, as a result of a number of factors, including:
 
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the gain or loss of significant orders or customers;
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recruitment or departure of key personnel;
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the announcement of new products or service enhancements by us or our competitors;
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quarterly variations in our or our competitors' results of operations;
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announcements related to litigation;
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changes in earnings estimates, investors' perceptions, recommendations by securities analysts or our failure to achieve analysts' earning estimates;
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developments in our industry; and
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general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors.
 
These factors and price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses to our investors.
 
Somewhat significant portion of our ordinary shares are held by a small number of existing shareholders and our articles of association provide for a staggered board, which may hinder change of control.
 
Moked Ituran Ltd., currently beneficially owns approximately 19.37% of our outstanding ordinary shares (not including treasury stock held by us). Other than applicable regulatory requirements under applicable law, Moked Ituran Ltd., is not prohibited from selling a interest in our company to a third party. In addition, our articles of association provide for a staggered board which may delay, prevent or deter a change in control. For additional information concerning our staggered board, see Item 6.A – Directors and Senior Management.
 
U.S. investors in our company could suffer adverse tax consequences if we are characterized as a passive foreign investment company.
 
If, for any taxable year, our passive income or our assets that produce passive income exceed levels established by the Internal Revenue Code, we may be characterized as a passive foreign investment company, which we refer to as PFIC, for US federal income tax purposes. This characterization could result in adverse US tax consequences to our shareholders who are U.S. Holders. See Item 10.E. – “Taxation” under the caption “United States Tax Considerations” below, for more information about which shareholders may qualify as U.S. Holders. If we were classified as a PFIC, a U.S. Holder could be subject to increased tax liability upon the sale or other disposition of our ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under such rules, the excess distribution and any gain would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. In addition, U.S holders of shares in a PFIC may not receive a “step-up” in basis on shares acquired from a decedent. U.S. Holders should consult with their own U.S. tax advisors with respect to the United States tax consequences of investing in our ordinary shares as well as the specific application of the “excess distribution” and other rules discussed in this paragraph. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see Item 10.E. – “Taxation” under the caption “United States Tax Considerations–Passive foreign investment company considerations”.
 
Securities we issue to fund our operations or in connection with acquisitions could dilute our shareholders ownership or impact the value of our ordinary shares.
 
We may decide to raise additional funds through a public or private debt or equity financing to fund our operations or finance acquisitions. If we issue additional equity securities, the percentage of ownership of our shareholders will be reduced and the new equity securities may have rights superior to those of our ordinary shares, which may, in turn, adversely affect the value of our ordinary shares.
 
11

 
Global and local economic downturns could reduce the level of consumer spending and available credit within the automobile industry, which could adversely affect demand for our products and services and negatively impact our financial results.
 
Current and future economic conditions could adversely affect consumer spending in the automobile industry, as such spending is often discretionary and may decline during economic downturns when consumers have less disposable income. Consequently, changes in general economic conditions resulting in a significant decrease in dealer automobile sales or in a tightening of credit in financial markets, such as the 2007 U.S. subprime mortgage crisis and resulting credit crunch, could adversely impact our future revenue and earnings. Such decreases could also affect the financial security of the automobile dealers and manufactures with whom we do business. The delayed payment from or closure of our larger dealer groups could affect our ability to collect on our receivables. Similar effects could result from local economic downturns in either one of our main markets of operations, i.e. Israel, Brazil, Mexico, Colombia, Ecuador and Argentina. Given the volatile nature of the current market disruption, we may not timely anticipate or manage such existing or new risks. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.
 
ITEM 4.              INFORMATION ON THE COMPANY
 
A.       HISTORY AND DEVELOPMENT OF THE COMPANY
 
Our History
 
        Our legal name is Ituran Location and Control Ltd. and we were incorporated under the laws of the State of Israel on February 1994 as a subsidiary of Tadiran Ltd., an Israeli-based designer and manufacturer of telecommunications equipment, software and defense electronic systems, whose original business purpose was to adapt military-grade technologies for the civilian market. 
 
We are mainly engaged in the area of Telematics services, consisting of stolen vehicle recovery, fleet management services and other tracking services. We also provide telematics products used in connection with our Telematics services and various other applications. We currently primarily provide our services as well as sell and lease our products in Israel, Brazil, Argentina, Mexico, Ecuador, Colombia and the United States.
 
In May 1998, we completed the initial public offering of our ordinary shares in Israel and our ordinary shares began trading on the Tel-Aviv Stock Exchange. In September 2005, we publicly offered our ordinary shares in the United States. On May 25, 2016 our shares were delisted from the Tel Aviv stock exchange, and our ordinary shares are currently quoted only on Nasdaq under the symbol “ITRN”.
 
On September 13, 2018 we closed the acquisition of 81.3% of the shares of Road Track Holding S.L, a telematics’ company operating primarily in the Latin American region ("RTH Transaction").
 
We paid the shareholders of Road Track Holding S.L $91.7 million for 81.3% of the company valuing the company at approximately $113 million. Of this, $75.7 million was paid in cash, through a debt facility provided by Ituran’s lending bank. An additional $12 million was paid in our shares (373,489 shares). The remaining $4 million will be paid out of the company’s equity as a bonus over the coming three years to the senior management of Road Track Holding S.L who will remain with us through the end of that period. The final consideration paid to the sellers was subject to downward adjustments depending on the full year 2018 performance of the Road Track business. Based on the aforementioned mechanism, during April 2019 an amount of 300,472 shares (approximately valued at $ 11 million) were transferred to our ownership. Following three years of joint operations, we will purchase the remainder of Road Track’s shares at a price based on a valuation that will be made at that time.
 
We are subject to the provisions of the Israeli Companies Law, 5759-1999. Our principal executive offices are located at 3 Hashikma Street, Azour 58001, Israel, and our telephone number is +972-3-557-1333. Our website address is www.ituran.com (the information contained therein or linked thereto shall not be considered incorporated by reference in this annual report). Our agent for service of process in the United States Ituran USA Inc.1700 NW 64th ST. SUITE 100 Fort Lauderdale, Florida 33309, and its telephone number is +1 (866) 543-5433.

Principal Capital Expenditures
 
We had capital expenditures of $21.4million in 2018, $16.3 million in 2017, and $13.8 million in 2016. We have financed our capital expenditures with cash generated from our operations.
 
Our capital expenditures in 2018, 2017 and 2016 consisted primarily of acquisition of operational equipment for $13.7 million, $7.3 million and $6.2 million, respectively.

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B.          BUSINESS OVERVIEW
 
Overview
 
We believe we are a leading provider of telematics services, consisting predominantly of stolen vehicle recovery, fleet management services and other tracking services as well as connected car and UBI (usage base insurance). We also provide telematics products used in connection with our telematics services. We currently primarily provide our services and sell and lease our products in Israel, Brazil, Argentina, Mexico, Ecuador, Colombia, United States, Canada and other regions through our distributers. We utilize technologies that enable precise and secure high-speed data transmission and analysis. Some of the technology underlying our products was originally developed for the Israeli Defense Forces in order to locate downed pilots.
 
We generate our revenues from subscription fees paid for our telematics services and from the sale and lease of our telematics products.
 
We describe below the principal markets in which we compete. For a breakdown of total revenues by category of activity and geographic market for each of the last three financial years, please see Item 5.A - Operating Results under the caption “Revenues”.
 
Telematics Services
 
In 2018, 71.6 % of our revenues were attributable to our telematics services. As of December 31, 2018, we primarily provided our services in Israel, Brazil, and other Countries to approximately 551,000, 555,000, and 664,000 subscribers, respectively.
 
RTH's contribution following the acquisition mentioned in item 4A. is included only from the acquisition date, September 13, 2018. Following RTH Transaction we have direct agreements with 2 major car manufacturers and our products developed by RTH subsidiary are embedded in the cars or otherwise approved by the car manufacturer. This connection requires us to stand up for the highest car manufacturer automotive standards.
 
Stolen vehicle recovery services
 
Our stolen vehicle recovery and tracking services, which we refer to as SVR services, enable us to locate, track and recover stolen vehicles for our subscribers. Our customers include both individual vehicle owners who subscribe to our services directly and insurance companies that either require their customers to install a security system or offer their customers financial incentives to subscribe to SVR services such as ours. In certain countries, insurance companies directly subscribe to our SVR services and purchase automatic vehicle location products supporting these SVR services from us on behalf of their customers.
 
Fleet management services
 
Our fleet management services enable corporate and individual customers to track and manage their vehicles in real time. Our services improve appointment scheduling, route management and fleet usage tracking, thereby increasing efficiency and reducing operating costs for our customers. We market and sell our services to a broad range of vehicle fleet operators and individual vehicle owners in different geographic locations and industries. As of December 31, 2018, we provided our services to approximately 230,000 end-users through 40,000 corporate customers in Israel, Brazil, Argentina, Mexico, Ecuador, Colombia, United States and through distributers in other regions.
 
Value-added services
 
The locator services that we offer allow customers to protect valuable merchandise and equipment. We currently provide locator services in Israel, Brazil, Mexico, Colombia, Ecuador and Argentina. In addition, through a call center, we provide 24-hour on-demand navigation guidance, information and assistance to our customers. Such services include the provision of traffic reports, help with directions and information on the location gas stations, car repair shops, post offices, hospitals and other facilities. We offer our concierge services to our subscribers in Israel, Argentina, Ecuador, Colombia and Brazil.
 
"Connected Car"- at the end of 2016, we launched a new connected car service. The service platform includes a back office application, a telematics device installed in the vehicle, mobile apps for both IOS and Android and an interface using the car infotainment screen, based on the Android platform which provides access to Android applications (such as WAZE) and to various services, based on information derived from the car systems and remote communications with the car service provider and/or manufacturer via the special manufacturer interface. Such services include information on car service history, information on some car systems, remote communication with the car in order to detect malfunctions, and to provide pre-emptive car maintenance alerts for both mechanical failures and operational issues such as a low tire pressure alert. The system also enables booking service appointments, both from the infotainment system interface in the system and from the user's mobile app and additional related operational, and marketing services, as well as information analysis.

13


Telematics Products
 
In 2018 28.4 % of our revenues were attributable to the sale of our telematics products. Our telematics products employ short- and medium-range communication between two-way wireless modems and are used for various applications, including automatic vehicle location, which we refer to as telematics products.
 
Our telematics products enable the location and tracking of vehicles, as well as assets, and are used by us primarily to provide SVR and fleet management services to our customers. Each subscriber to our SVR services has our telematics end-unit installed in his or her vehicle. Subscribers to services for locating equipment and merchandise will use our SMART and GPS/GPRS products. As part of our expansion into additional markets, in 2006 we acquired control of E.R.M. Electronic Systems Limited (“ERM”), a developer, manufacturer, and marketer of innovative vehicle security, tracking, and management GSM based communication solutions for the international market.
 
Our Services and Products
 
Telematics services
 
Stolen vehicle recovery
 
        Our stolen vehicle recovery system is based on three main components: a telematics end-unit that is installed in the vehicle, a network of base stations and a 24-hour manned control center. Once the control center receives indication of an unauthorized entry into a vehicle equipped with our telematics end-unit, our operators decide whether it is a false alarm or an actual unauthorized entry. If it is determined to be an unauthorized entry, or if a notification of the vehicle’s theft is received directly from the vehicle operator, our operators transmit a signal that activates the transmitter installed in the vehicle. We then pinpoint the location of the transmitter with terrestrial network triangulation technology or GPRS technology and notify the relevant law enforcement agency. In Israel, Brazil, Mexico, Colombia, Ecuador and Argentina, we also maintain private enforcement units, which work together with local police to recover the vehicle. In addition, we have the capability to immobilize vehicles remotely from our control centers.
 
Fleet management
 
        We offer our customers the ability to use a comprehensive application for fleet management both by using an Internet site and workstations. Our system allows our customers 24-hour access to information on their fleets through our active control center and we are able to tailor our system to our customers’ specific needs.
 
        Our solutions allow our subscribers to effectively manage and control their fleet, and thereby to reduce their operating costs, optimize work hours and appointment scheduling and improve their services and operations. Our system includes the following features:
 
the ability to locate the fleet’s vehicles;
 
continuous data communication with the fleet’s vehicles;
 
real-time vehicle status indicators: speed, distance driven, direction of travel, driver name, motion start/stop, engine start/stop, speeding, diagnostic alerts, driver behavior and more;
 
recording of determined events and analysis of data over time to improve driving and vehicle use;
 
remote monitoring and processing of data, such as temperature control in refrigerated or chilled compartments, time stamp, tire pressure and heat and other complementary data;
 
connection to standard organization systems;
 
accident notification;
 
driver’s behavior; and
 
task management optimization.
 
Value-added services
 
         Locator services. Our services allow consumers to protect valuable merchandise and equipment. We provide our locator services in Israel, Brazil and Argentina.
 
        Concierge services. Through a call center, we provide 24-hour on-demand navigation guidance, information and assistance to our customers. Such services include the provision of traffic reports, help with directions and information on the location of gas stations, car repair shops, post offices, hospitals and other facilities. We provide our concierge services to subscribers in Brazil, Argentina, Ecuador, Colombia and Israel.
 
        "Connected Car". towards the end of 2016, we have launched a new service called, “Connected Car”. For additional information on the new service, see Item 4.B. – “Information on the Company “- “Business Overview” under the caption “Telematics Services”
 
14

 
Telematics products
 
Our telematics products are used for various applications in the telematics markets and primarily in connection with our telematics services described above.
 
Our telematics products enable the location and tracking of vehicles, as well as assets or persons, and are primarily used by us in providing our SVR and fleet management services. Each subscriber to our SVR services has at least one of our end-units installed in his or her vehicle. Subscribers to services for locating persons or valuables will use our SMART and GPS/GPRS products. Our key telematics products for telematics applications include:
 
Base Site: a radio receiver, which includes a processor and a data computation unit to collect and send data to and from transponders and send that data to control centers as part of the terrestrial infrastructure of the location system;
 
Control Center: a center consisting of software used to collect data from various base sites, conduct location calculations and transmit location data to various customers and law enforcement agencies;
 
GPS/GPRS-based products: navigation and tracking devices installed in vehicles; and
 
SMART: a portable transmitter installed in vehicles (including motorcycles) that sends a signal to the base site, enabling the location of vehicles, equipment or an individual;
 
Geographical Information
 
The following table lists the key services and products that we currently sell or lease in different regions of the world:
 
Country
 
Services offered
 
Products sold
Israel, Brazil, Argentina,
 
SVR
 
Telematics Products
Mexico, Ecuador, Colombia
 
Fleet Management
   
   
Value-added services
   
   
"Connected Car"
   
United States
 
SVR
 
Telematics Products
   
Fleet Management
   
   
Value-added services
Asset protection to Auto Lenders
   
 
In each of the above countries we maintain a control center, which is operated 24 hours a day, 365 days a year. The following is a short description of key operating statistics about our telematics services in the countries in which we operate (including through RTH subsidiaries):
 
Israel: We commenced operations in Israel in 1995 and we had approximately 551,000 subscribers as of December 31, 2018. We operate throughout Israel in providing fleet management services through GPS/GPRS based products and services.
 
Brazil: We commenced operations in Brazil in 2000 and we had approximately 555,000 subscribers as of December 31, 2018. We currently provide RF based products and services only in the metropolitan areas of Sao Paulo, Campinas, Americans and Rio de Janeiro. However, we operate throughout Brazil in providing GPS/GPRS based products and services.
 
Argentina: We commenced operations in Argentina in 2002. We currently provide RF based products and services only in the metropolitan area of Buenos Aires. However, we also operate throughout Argentina in providing GPS/GPRS based products and services for fleet management.
 
United States: We commenced operations in the United States in 2000. We provide GPS/GPRS products and services throughout the United States.
 
Mexico: We acquired the operations in Mexico in September 2018 as part of the RTH Transaction. We currently provide GPS/GPRS based products and services for fleet management.
 
Ecuador: We acquired the operations in Ecuador in September 2018 as part of the RTH Transaction. We currently provide GPS/GPRS based products and services for fleet management.
 
Colombia: We acquired the operations in Colombia in September 2018 as part of the RTH Transaction. We currently provide GPS/GPRS based products and services for fleet management.
 
In all the abovementioned countries (except of Israel and Brazil) we had approximately 664,000 subscribers as of December 31, 2018.
 
15

 
Customers, Marketing and Sales
 
We market and sell our products and services to a broad range of customers that vary in size, geographic location and industry. In 2016, 2017 and 2018 no single customer or group of related customers comprised more than 10% of our total annual revenues.
 
Our selling and marketing objective is to achieve broad market penetration through targeted marketing and sales activities. As of December 31, 2018, our selling and marketing team consisted of 428 employees.
 
 (A) Telematics services
 
Stolen vehicle recovery
 
Our marketing and sales efforts are principally focused on five target groups: insurance companies and agents, car manufacturers, dealers and importers, cooperative sales channels (mostly vehicle fleet operators and owners) and private subscribers.
 
We maintain marketing and sales departments in each geographical market in which we operate. Each department is responsible for maintaining our relationships with our principal target groups. These responsibilities also include advertising and branding, sales promotions and sweepstakes.
 
In Israel, we focus our marketing efforts on insurance companies and agents, dealers and importers, cooperative sales channels (mostly vehicle fleet operators and owners) and private subscribers. In Brazil and Argentina our marketing and sales efforts are principally focused in all five target groups, as described above. In the United States, we believe that insurance companies do not constitute a material influence in the marketing of SVR services or telematics products. Most of our sales in the United States are made through car dealerships and dealers for new or used cars and cooperative sales channels (mostly vehicle fleet operators and owners).  In Mexico, Colombia and Ecuador we focus our marketing efforts on dealers and importers, cooperative sales channels (mostly vehicle fleet operators and owners), private subscribers and car manufactures.
 
Our customers in the SVR market include insurance companies, car manufactures and individual vehicle owners. As of December 31, 2018, we had a total of approximately 1,770,000 subscribers for our SVR services.
 
Fleet management
 
Vehicle fleet management systems are primarily marketed through vehicle fleets’ departments, which form a part of our regional marketing departments. We conduct in-depth research to identify companies that will gain efficiency and cost savings through the implementation of our products and services and conduct targeted marketing campaigns to these companies. In addition, we participate in professional conventions and advertise in professional publications and journals designed for our target customers. Our customers in the fleet management market include small-, mid- and large-size enterprises and individuals. As of December 31, 2018, we provided our services to approximately 230,000 end users through 40,000 corporate customers and individuals in Israel, Brazil, Argentina, United States, Mexico, Colombia, Ecuador and through distributers in other regions.
 
Value-added services
 
Our concierge services are provided to existing SVR customers. A few thousands SMART devices were installed in valuable merchandise and equipment.
 
"Connected Car"- at the end of 2016, we launched a new connected car service. The service platform includes a back office application, a telematics device installed in the vehicle, mobile apps for both IOS and Android and an interface using the car infotainment screen, based on the Android platform which provides access to Android applications (such as WAZE) and to various services, based on information derived from the car systems and remote communications with the car service provider and/or manufacturer via the special manufacturer interface. Such services include information on car service history, information on some car systems, remote communication with the car in order to detect malfunctions, and to provide pre-emptive car maintenance alerts for both mechanical failures and operational issues such as a low tire pressure alert. The system also enables booking service appointments, both from the infotainment system interface in the system and from the user's mobile app, and additional related operational, and marketing services, as well as information analysis.
 
(B) Telematics products
 
Our telematics end-units are primarily used by us in providing our telematics services, including, SVR, fleet management, "Connected Car" and value-added services, at the regions we operate.
 

16

 
Competition
 
We face strong competition for our services and products in each market in which we operate. We compete primarily on technology edge, functionality, ease of use, quality, price, service availability, geographic coverage, track record of recovery rates and response times and financial strength.
 
(A) Telematics services
 
We compete with a variety of companies in each of our markets. The three major technologies utilized by our competitors are GPS/cellular, network-based cellular and radio frequency-based homing systems. In addition, new competitors utilizing other technologies may continue to enter the market.
 
Stolen vehicle recovery
 
Israel. Our primary competitors in Israel are Pointer and Skylock Ltd.
 
Brazil. Brazil is a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated vehicle security systems). Our main competitors in Brazil are Sascar, Zatix, CEABS and AutoTrack.
 
Argentina. Argentina is also a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated vehicle security systems). Our main competitors in Argentina are LoJack Corporation and Megatrans S.A..
 
United States. In the United States, there are several major companies offering various theft protection and recovery products that compete with our product and service offerings, including LoJack Corporation, OnStar Corporation, Advantage GPS/Procon Analytics, Sarekon GPS, Calamp, Spireon (which also includes SysLocate and GoldStar), PassTime, Guide Point, Sky Patrol and I-Metrik SVR.
 
We believe that we are a leading provider of telematics services in Israel, as we are deemed a monopoly in this field; however, we are unable to provide specific market share information in the markets of our operations for various reasons, including the broad range of services and products that compete in these markets, the non-existence of trade publications with respect to the products and services we offer in such markets and the lack of meaningful or accurate market research or data available to us.
 
Fleet Management
 
The vehicle fleet management market is highly fragmented with many corporations offering location products and services. Our major competitors in Israel are Pointer, ISR, Traffilog and Skylock; our major competitors in the United States are GPS Insight, Trimble, Network Fleet, Street Eagle, FleetMatics, Navtrack, Teletrac, Trim Track, FleetBoss, PassTime, Verizon, AT&T, Geotab, Fleet-Complete and Spireon; our major competitors in Brazil are Sascar, Zatix, CEABS and AutoTrack;  our major competitors in Argentina are LoJack Corporation, Megatrans SA., G4S, Sitrac S.A., American Tracer, Ubicar S.A.,Sky Cop. and Prosegur S.A ,our major competitors in Mexico are LoJack Corporation, Encotrack and Easytrack,our major competitors in Ecuador are Hunter (LoJack Corporation), Tracklink and Sherlock, our major competitors in Colombia are Carlink and Detector.
 
(B) Telematics products
 
Our telematics system for automatic vehicle location is based on terrestrial network triangulation technology and primarily competes with companies that use one of three main technologies: GPS/GPRS (in combination with telematics), network-based cellular communication and radio frequency-based homing.
 
Telematics products based on GPS, network-based cellular and homing technologies do not require the construction of a separate infrastructure of base stations as with terrestrial network triangulation systems.
 
 GPS receivers require line of sight to at least three satellites, which reduces their effectiveness in areas where the satellite signals are subject to interference and “noise” (such as urban areas, buildings or parking garages, forests and other enclosed or underground spaces). GPS and network-based cellular systems are also prone to jamming since the tracking signal receivers are located in the vehicle and can be easily tampered with. In addition, the satellites utilized by GPS devices are managed by the United States Department of Defense and can be subject to forced temporary outages. The main disadvantage of homing systems is that they provide only the general direction and not the precise location of the end-unit. In addition, homing systems require that the vehicle be reported stolen before the tracking signal can be activated, which may result in a delay between vehicle theft and recovery.
 
The GPS technology can receive and transmit a massive capacity of data which enable us to provide a better data analysis and variety of additional services.
 
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Terrestrial network triangulation system does not require line of sight and the signals are not easily interrupted in densely populated or obstructed areas. Also, the signals are transmitted from the end-unit in the vehicle to a network of base stations. Therefore, in order to jam the system, receivers in each individual base station within range of the end-unit would have to be jammed, which is difficult to accomplish. Additionally, since the primary application of terrestrial network triangulation systems in the telematics industry is vehicle location and not continuous two-way communication, short bursts of data are sufficient for tracking purposes, which enable the network of base stations to be deployed at a much lower density in the coverage area than traditional network-based cellular base stations. Terrestrial network triangulation systems are capable of determining the precise location, and not just the general direction, of a vehicle at any moment in time. Furthermore, when connected with the existing theft protection system in the vehicle, terrestrial network triangulation systems automatically alert the control center when a vehicle is stolen and do not require that the vehicle be reported stolen, which can potentially reduce stolen vehicle recovery times to a few minutes. The main disadvantage of terrestrial network triangulation systems is the necessity to deploy a physical infrastructure, including the construction, development and deployment of a network of base stations and a control center and the need to address the various financial, legal and practical issues associated with such deployment. Any such deployment entails an investment of a sizable amount of money prior to the receipt of any revenues.
 
Since our telematics end-units are primarily used by us in providing our telematics services, the information provided above concerning our competition in this market is applicable to the competition in the telematics products’ market as well.
 
Manufacturing Operations and Suppliers
 
Our telematics products are manufactured and assembled by a limited number of manufacturers in Israel (including our subsidiary E.R.M) and in China. We engage with our manufacturers on a full turn-key basis, where we supply detailed production files and materials list and receive a final product that we sell directly to our clients. Other than our dependency on manufacturing suppliers, as described in Item 3D. - “Risk Factors” above, we do not depend on a single manufacturer for the production of our products. Our quality assurance and testing operations are performed by our manufacturers at their facilities, while using our quality assurance and testing equipment and in accordance with the test procedures designated by us. We monitor quality with respect to key stages of the production process, including the selection of components and subassembly suppliers, warehouse procedures, assembly of goods, final testing, packaging and shipping. We are ISO 9001 certified. Some of our products are within the highest car manufacture automotive standard. We believe that our quality assurance procedures have been instrumental in achieving the high degree of reliability of our products.
 
Several components and subassemblies included in our products are presently obtainable from a single source or a limited group of suppliers and subcontractors. We maintain strong relationships with our manufacturers and suppliers to ensure that we receive an adequate supply of products, components and raw materials at favorable prices and to access their latest technologies and product specifications.
 
Proprietary Rights
 
We seek to protect our intellectual property through patents, trademarks, contractual rights, trade secrets, know-how, technical measures and confidentiality, non-disclosure and assignment of inventions agreements and other appropriate protective measures to protect our proprietary rights in the primary markets in which we operate. The continued use of some licenses granted by third parties to use their intellectual property is material to our business. Please refer to Item 3D. – Risk Factors, under the caption “We rely on some intellectual property that we license from third parties, the loss of which could preclude us from providing our SVR services or market and sell some of our telematics products, which would adversely affect our revenues” above.
 
We typically enter into non-disclosure and confidentiality agreements with our employees and consultants. We also seek these protective agreements from some of our suppliers and subcontractors who have access to sensitive information regarding our intellectual property. These agreements provide that confidential information developed or made known during the course of a relationship with us is to be kept confidential and not disclosed to third parties, except in specific circumstances.
 
Our stolen vehicle recovery system is based on three main components: (i) an telematics end-unit that is installed in the vehicle, (ii) (for RF technology based  telematics units) a network of base stations that relay information between the vehicle location units and the control center, certain components of which were developed by third parties and are currently licensed to us and (iii) a 24-hour manned control center consisting of software used to manage communications and the exchange of information among the hardware components of the telematics system, certain components of which were developed by third parties and licensed to us.
 
“Ituran” and “Mr. Big” and the related logos are our trademarks, the former has been registered in Israel, Hong Kong and as a European Union and the latter has been registered in Israel. “Mapa” trademark and its related logos where sold as part of the sale of Mapa to an unrelated party to us.

 
18

 
Regulatory Environment
 
In order to provide our SVR services in the locations where we currently operate, we need to obtain four primary types of licenses and permits: (i) for our products utilizing the RF technology - a license that allows us to use designated frequencies for broadcasting, transmission or reception of signals and information and to provide telecommunication services to our customers, (ii) for our products utilizing the RF technology - a building permit, which permits us to erect our base sites and transmit therefrom, (iii) product specific licenses (commonly known as type approvals), which enable us to use the equipment necessary for our services, and (iv) a general commerce license, which allows us to offer our services to the public.
 
The telecommunication services and frequency license and general commerce licenses we require are granted by the applicable national agency regulating communications in the markets in which we operate, specifically, the Ministry of Communication, in Israel, Anatel – Agencia Nacional de Telecomunicatoes, in Brazil, Ministerio de Comunicaciones, in Argentina, and the Federal Communications Commission, in the United States. The product specific licenses we require are granted in Israel by the Ministry of Communication, in Brazil by IBRACE (the Instituto Brasileiro de Certificatao de Productos para Telecominicatoes), in Argentina by the Autoridad Federal de Tecnologias de la Información y las Comunicaciones and in the United States by the Federal Communications Commission.
 
In Brazil, the general commerce licenses, such as the city permits, are granted by the local municipalities and other specific entities, depending on the licenses required.
 
Our frequency licenses in all of the locations where we operate are “secondary” or “joint”, which means that the government may grant another person or persons, typically a cellular operator, a primary license to the same frequencies and, to the extent our operations interfere with the operations of the other person, we would have to modify our operations to accommodate the joint use of the frequencies. All of these licenses are also subject to revocation, alteration or limitation by the respective authority granting them. While any events that would cause us to change frequencies or to modify our operations could have a material adverse effect on us, we do not believe that this is a likely event in any of the locations where we provide our SVR services.
 
Our frequency license in Israel was renewed for a term of five (5) years until January 31, 2023. Our frequency licenses in Brazil will expire in 2019. Except in Brazil, where a request for a new license may have to be filed upon expiration of the license in 2019, we have options to extend all of our frequency licenses for periods ranging from three- to ten-years. A renewal application in Brazil will be submitted 6 months before the frequency license expiration date, to provide us a new license for a period of ten (10) years. In Argentina, on July 15, 1999, the SECOM (Secretary of Communication dependent of Economy Ministry) granted us a license to provide services in a Secondary Band. On December 2015, SECOM was converted into the Modernization Ministry, with ENACOM (National Communication Entity) which is a decentralized entity that works within the scope of the Modernization Ministry.
 
Nevertheless, our frequency is still authorized, there is new entrant with ENACOM Authorization to provide LTE service. If this entrant starts the activity, we will face an incompatibility situation. We received the authorization from ENACOM to use a 12-month trial in 902-905 947-950 MHz bands additionally to our current frequencies. During this period, we will perform a test to obtain a definitive authorization.
 
On December 9, 2016, we were informed that one of the cellular providers in Argentina, which shares some of our frequencies, intends to implement on them 4G cellular service. Such service may cause Interference that may impede the provision of our SVR service in Argentina. We are negotiating with ENACOM to define new frequency which we will migrate into. Subject to the applicable laws, and ENACOM decision, the migration process may take few years, and will be determined by ENACOM.
 
In Israel and Brazil, like our competitors and most cellular operators, we are not in compliance with all relevant laws and regulations in connection with the erection of transmission antennas (our base sites). As of the date hereof, most of our base sites in Israel and Brazil are operating without local building permits. Currently, there is heightened awareness of this issue in Israel, particularly in connection with base sites of cellular providers, and possible sanctions could include fines and even the closure or demolition of these base sites. In Brazil, Brazilian authorities enforce permit requirements and impose penalties for non-compliance with such requirements. However, we do not believe this is likely. Obtaining such required permits may involve additional fees as well as payments to the Land Administration Authority.

In Israel the required permits and approvals for the erection of the base sites include:
 
erection and operating permits from the Israeli Ministry of the Environment;
 
permits from the Israeli Civil Aviation Authority, in certain cases;
 
permits from the Israeli Defense Forces;
 
approval from Israel’s Land Administration and/or from Civil Administration in the Territories, which usually also involves payment for the land use rights; and
 
building permits from local or regional zoning authorities in Israel and Brazil.
 
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We are continuously in the process of obtaining the relevant permits required for the construction of our base sites in Israel, however, to date, we have been issued only 15 of these permits (13 of them have expired). With respect to the general permit from Israel’s Land Administration, in 2005 we entered into an agreement with the Israel’s Land Administration, pursuant to which the general permit has been issued to us against an annual consideration based on the date of approval of our base sites. The agreement had expired on December 31, 2010. In the event that the Israel Land Administration claims consideration for the erection of the base sites without a permit, we may be subject to penalties and payment of annual consideration for the years of use of those base sites.
 
In Brazil, very few providers of wireless telecommunications services obtain the required permits for the erection of transmission antennas due to the nature of the approval process. Currently we do not have such permits (except Anatel permits). In Brazil, we try to minimize our risk by locating most of our equipment in sub-leased sites which are already used by other telecommunication service providers, such as cellular operators.
 
In Brazil the required permits for the erection of our base sites include:
 
·
a permit from Anatel (National Agency for Telecommunication)
 
·
a permit from IBAMA (Environment national agency) and/or state EPAs
 
·
Municipal permits
 
·
a permit from the fire department; and a
 
·
permit from COMAR (Aviation authorities)
 
ANATEL permits are required only for sites where we have transmission equipment and we have obtained all the permits required with this agency. Special IBAMA permits need to be obtained only for ground sites which are located in certain preservation areas. We have few sites of this kind, most of them are collocated sites where we pay for the right of use and permits are undertaken by the landowner. Fire Department permits are required only for equipment rooms and we have not applied for any as of this date. COMAR permits are needed only for a very few of our sites, most of which are collocated.
 
In Argentina, the installation of an antenna support structure requires the authorization of the owner of the building or the land in which it is intended to be install. The Municipalities regulate through specific Municipal Ordinances are granting urban licenses for our base stations installation.
 
The regulation referred to the civil work of the support structure of the antenna, (masts / towers / anchors / bracing, etc.) is not the competence of ENACOM (National Communication Entity), so it cannot exercise jurisdiction over it. This situation is determined in articles 39, 40 and 41 of the National Law 19798/72, and in Resolution No. 795 CNT / 92, ratified by Resolution 302 SC / 99. Therefore, the claims and queries related to the installation, the deterioration or poor conditions or related to the support structures, should be addressed to the municipalities.It should be noted that the owner of a station in operation assumes responsibility for the works and accessory facilities that must be executed to install a radio station, attributing the technical responsibility of a civil work, to the designer and the director of the same, being this situation framed in what is established in articles 1273 and following of the Civil and Commercial Code of the Nation.
 
We are not in compliance with all relevant laws and regulations in connection with the erection of antennas; some of them in the pasts were closure by Municipalities. As of the date hereof, most of our base sites operating without local Municipality permits, possible sanctions could include fines and even the closure of those sites. In Argentina authorities enforce permit requirements and impose penalties for non-compliance with such requirements. Obtaining such required permits may involve additional fees as well as payments to Municipality Authority.
 
We have been declared a monopoly under the Israeli Antitrust Law, 1988, in the provision of systems for the location of vehicles in Israel. This law prohibits a monopoly from abusing its market position in a manner that might reduce competition in the market or negatively affect the public. For instance, a monopoly is prohibited from engaging in predatory pricing and providing loyalty discounts, which prohibitions do not apply to other companies. The law empowers the Commissioner of Competition to instruct a monopoly abusing its market power to perform certain acts or to refrain from taking certain acts in order to prevent the abuse. Additionally, any declaration by the Israeli Competition authority that a monopoly has abused its position in the market may serve in any suit in which it is claimed that such a monopoly engages in anti-competitive conduct, as prima facie evidence that it has engaged in anti-competitive behavior. Our declaration as a monopoly in the market of “provision of systems for the location of vehicles in Israel” was not accompanied with any instructions or special restrictions beyond the provisions of The Economic Competition Law. Although we may be ordered to take or refrain from taking certain actions, to date we have not been subject to such restrictions.
 
In Colombia we have to pay 1% of our Hardware sales to the Ministry of Information Technologies and Communications for use of telecommunication spectrum.
 
In Ecuador and Mexico there are no levies imposed on our activities.
 
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                C.          ORGANIZATIONAL STRUCTURE
 
We were initially incorporated as a subsidiary of Tadiran, an Israeli-based designer and manufacturer of telecommunications equipment, software and defense electronic systems, whose original business purpose was to adapt military-grade technologies for the civilian market. In July 1995, Moked Ituran Ltd. purchased our company and the assets used in connection with its operations from Tadiran and Tadiran Public Offerings Ltd. The telematics infrastructure and telematics end-units for the operation of our SVR services were originally developed by an independent division of Tadiran Communications and Systems Group. These operations were later transferred to a Tadiran subsidiary, Tadiran Telematics Ltd. In November 1999, we purchased Tadiran Telematics from Tadiran and in 2002, we changed its name to Telematics Wireless. In December 2007 we sold our subsidiary Telematics.
 
List of Significant Subsidiaries
 
Name of Subsidiary
 
Country of Incorporation
 
Proportion of Ownership Interest
 
           
Ituran USA Holdings Inc
 
USA
   
100
%
Ituran USA Inc
 
USA
   
88.5
%
Ituran de Argentina S.A
 
Argentina
   
100
%
Ituran Sistemas de Monitoramento Ltda
 
Brazil
   
98
%
Ituran Instalacoes Ltda
 
Brazil
   
98
%
Teleran Holding Ltda
 
Brazil
   
99.99
%
Ituran servicos Ltda
 
Brazil
   
98
%
E.R.M. Electronic Systems Limited
 
Israel
   
51
%
Mapa Mapping & Publishing Ltd
 
Israel
   
100
%
Ituran Spain Holding S.L
 
Spain
   
81.3
%
Ituran Road Track Monitaramento de Veiculos LTDA
 
Brazil
   
90.65
%
Ituran Road Track Argentina, S.A
 
Argentina
   
90.65
%
Global Telematics Solutions HK, Limited
 
Hong Kong
   
90.65
%
Road Track De Colombia S.A.S
 
Colombia
   
81.3
%
Road Track Ecuador, S.A.
 
Ecuador
   
81.3
%
Road Track Mexico S.A. De C.V
 
Mexico
   
81.3
%
Road Track HK Telematics Limited
 
Hong Kong
   
81.3
%
E.D.T.E – Drive Technology Ltd
 
Israel
   
81.3
%
 
21

 
D.
PROPERTY, PLANTS AND EQUIPMENT
 
As of the date of this report, we don’t own any real estate other than the following properties:  An office building of 8 floors in the area of approximately 5,356 sqm (57,651 square feet), which was purchased by our subsidiary Ituran Sistemas de Monitoramento Ltda (Ituran Brazil) in Sao Paulo, Brazil, and was later, on December 3, 2014 sold to us, A building located in Rua Joao pessoa 450, Sao Caetano do Sul, Estado de Sao Paulo in Sao Paulo, Brazil in the area of approximately 36,936 square feet which was purchased by our subsidiary Ituran Road Track Monitoramento de Veiculos, Ltda which serve as an Operating center, A building located in Avenida del Taller No.36 Col. Transito in Mexico in the area of approximately 21,132 square feet which was purchased by our subsidiary Road Track Mexico, S.A de C.V which serve as an Operating center, a building located in Manuel Najas Oel 81 and Juan de Selis in Quito , Ecuador in the area of approximately 23,875 square feet which was purchased by our subsidiary Road Track Ecuador, S.A which serve as an Operating center, and a building located in Keren Ha' Yesod 15, Tirat Ha'Carmel, Israel at the area of approximately 5,025 square feet which was purchased by our subsidiary E.D.T.E – Drive Technology Ltd which serve as an Office space and a warehouse.
 
Other than the property in Brazil, Ecuador and Mexico and israel, all of our offices, headquarters, control centers and facilities are leased in accordance with our specific needs in the areas in which we operate. Additionally, we lease space for our base sites, in order to operate the reception and transmission stations of the system, in each area in which we provide our SVR services.
 
In 2018 we leased an aggregate of approximately 62,310 square feet of office space in Azour and Holon, Israel. In 2018, the annual lease payments for these facilities were approximately $1,052,000. The initial term of the primary lease (in Azour) expired on March 31, 2013; and we renewed the lease until 2020. These premises include our executive offices and the administrative and operational centers for our operations as well as our customer service, value-added services and technical support centers for the Israeli market.
 
In Buenos Aires, Argentina, we lease approximately 17,687 square feet for office space for the total amount of $ 147,906 annually, approximately 720 square feet for our control center for $ 5,295 annually, approximately 5,253 square feet for our installation center for $ 52,163 annually, approximately 2,121 square feet for our warehouse for $ 17,588 annually, and approximately 862 square feet for our third warehouse for $ 1,709 annually.
 
In Bogota, Colombia, we lease approximately 9,035 square feet for office space and Operating center for the amount of $ 83,500 annually, and additional 2,403 square feet for Operating center for the amount of $ 20,920 annually.
 
In Mexico City, Mexico, we lease approximately 3,875 square feet for Corporate Office for the amount of $ 36,000 annually.
 
In Sao Paulo, Brazil, we lease approximately 7,535 square feet for Parking lot for the amount of $ 55,000 annually.
 
In Guayaquil, Ecuador, we lease approximately 7,829 square feet for Warehouse for the amount of $ 57,000 annually. In Quito, Ecuador, we lease approximately 538 square feet for Warehouse for the amount of $ 30,000 annually. In Cuenca, Ecuador, we lease approximately 538 square feet for Warehouse for the amount of $ 3,399 annually. In Ibarra, Ecuador, we lease approximately 3,875 square feet for Corporate Office for the amount of$ 36,000 annually.
 
We lease approximately 9,260 square feet for our offices and control center in Florida for a monthly rate of $ 11,575 for period of 60 months commentating March 24, 2016 and ending March 23, 2021, subject to a 3% annual increase per year starting April 1, 2017.
 
In 2018, we leased approximately 6,754 square feet of office space, stores and warehouse in Brazil for approximately $500,000 annually. The lease agreements will expire and will have to be renewed on August 21, 2020, December, 2020, and December, 2026, as applicable to each engagement.
 
We believe that our facilities are suitable and adequate for our operations as currently conducted. In the event that additional facilities will be required, we believe that we could obtain such facilities at commercially reasonable rates.
 
The size of our base station sites varies from approximately 11 to 44 square feet. In Israel, we have 98 base stations and we rent most base station sites independently for a monthly rate ranging from $200 to $2,000 per site depending on the location, size and other factors; for certain sites we do not pay any rent. The typical duration of a lease agreement for our base stations in Israel is five years and we generally have a right to renew the term of the lease agreements for a period ranging between two and five years. In Brazil, we have 147 base station sites, of which 23 sites are leased from the same entity under a 15 years-contract, (commencing from 2012) for a monthly rate ranging from $500 to $1,750 per site. The remaining 124 sites are leased independently for an annual rate ranging from $200 to $550 (except of one site in Rio de Janeiro that costs around $ 950 approximately) depending on the location, size and other factors, and the typical duration for these leases is five years. In Argentina, we have 44 base station sites, all of which are leased from six entities for a monthly rate ranging from $300 to $1,300 per site. The duration of the lease ranges from one to two years.
 
We do not believe that we have a legal retirement obligation associated with the operating leases for our base sites pursuant to the relevant accounting standards, since we do not own any real property. However, we are obligated pursuant to certain of the operating leases for our base sites, mainly for base sites in Israel, Brazil and Argentina, to restore facilities or remove equipment at the end of the lease term. Since the restoration is limited to any construction or property installed on the property, which in our case is only the installed antennas, we do not believe that these obligations, individually or in the aggregate, will result in us incurring a material expense.

22

 
ITEM 4.A.          UNRESOLVED STAFF COMMENTS
 
Not applicable
 
ITEM 5:             OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
A.
OPERATING RESULTS
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this report.
 
Introduction
 
We believe we are a leading provider of telematics services, consisting predominantly of stolen vehicle recovery, which we refer to as SVR, and tracking services. We also provide telematics products used in connection with our SVR services and for various other applications. We currently provide our services and sell and lease our products in Israel, Brazil, Argentina and the United States and since September 2018 also in Colombia, Mexico and Ecuador.
 
Our operations consist of two segments: Telematics services and telematics products.
 
Our telematics services segment consists of our SVR, "Connected Car" fleet management and value-added services. We currently operate our telematics services throughout the regions we operate.
 
Our telematics products segment consists of our short- and medium-range two-way telematics products. We sell our telematics end-units to customers that subscribe to our telematics services.
 
Outlook
 
We have historically experienced growth in most of the markets in which we provide our telematics services. These markets are generally characterized by high car theft rates, insurance companies and car manufactures that are seeking solutions to limit their actual losses resulting from car theft and increase their sales by adding additional value to the customer, and hence the Brazilian market continues to represent growth potential for our telematics services. The growth in subscribers within our telematics services segment also has a direct impact on the sale or lease of our telematics products, as they are an integral component of our telematics services and are installed in each subscriber’s vehicle. In Israel, in recent years the market experienced an increased car sales which positively affect our sales as compared with previous years.
 
Please refer to Item 3D. – Risk Factors above in respect of factors that could negatively impact our business.
 
Geographical breakdown
 
Telematics services’ subscriber base
 
The following table sets forth the geographic breakdown of subscribers to our telematics services as of the dates indicated:
 
   
As of December 31,
 
   
2018
   
2017
   
2016
 
Israel
   
551,000
     
501,000
     
443,000
 
Brazil
   
555,000
     
438,000
     
398,000
 
 Others
   
664,000
     
221,000
     
216,000
 
                         
Total(1)
   
1,770,000
     
1,160,000
     
1,057,000
 
 
(1) All numbers provided are rounded, and therefore totals may be slightly different than the results obtained by adding the numbers provided.
 
23

 
Revenues
 
The following table sets forth the geographic breakdown of our revenues for each of our business segments for the relevant periods indicated.
 
   
Year ended December 31,
 
   
2018(2)
   
2017
   
2016
 
   
In USD, in Millions
 
   
Telematics services
   
Telematics products
   
Telematics services
   
Telematics products
   
Telematics services
   
Telematics products
 
Israel
   
72.0
     
44.2
     
69.2
     
47.3
     
59
     
42.2
 
Brazil
   
86.3
     
4.6
     
85.1
     
4.4
     
67.8
     
3.2
 
Others
   
23.1
     
23.2
     
15.5
     
13.2
     
15.1
     
12.2
 
Total(1)
   
181.4
     
72.0
     
169.8
     
64.9
     
141.9
     
57.6
 
 
(1) We attribute revenues to countries based on the location of the customer.
 
(2) The revenues include RTH results from the closing date, September 13, 2018.
 
Telematics services segment
 
We generate revenues from sales and leases of our SVR, fleet management and value-added services. A majority of our revenues represent subscription fees paid to us by our customers. We recognize revenues from subscription fees on a monthly basis. Our customers are free to terminate their subscription at any time. In the absence of such termination, the subscription term continues automatically. We also generate subscription fees from our fleet management services. Assuming no additional growth in our subscriber base and based on our historical average churn rates of 3% per month in this segment, we can anticipate that at least 90% of our subscription fees generated in a prior quarter will recur in the following quarter.

Telematics products segment
 
We generate revenues from the sale of our telematics products to customers in Israel, Brazil, Argentina, Mexico, Colombia, Ecuador and the United States. We currently sell or lease our telematics end-units in each of the above regions. Growth in our subscriber base is the principal driver for the sale of our telematics products. We recognize revenues from sales of our telematics products upon transfer of control to the customer (usually upon delivery).
 
Cost of revenues
 
Telematics services segment
 
The cost of revenues in our telematics services segment consists primarily of staffing, maintenance and operation of our control centers and base stations, costs associated with our staff and costs incurred for private enforcement, licenses, permits and royalties, as well as communication costs and costs due to depreciation of leased products and installation fees. Cost of revenues for sales of our fleet management services also includes payments to a third party who markets our services.
 
Telematics products segment
 
The cost of revenues in our telematics products segment consists primarily of production costs of our third-party manufacturers and costs associated with installation fees.
 
Operating expenses
 
Research and development
 
Our research and development expenses consist of salaries, costs of materials and other overhead expenses, primarily in connection with the design and development of our telematics products. We expense some of our research and development costs as incurred. Subject to certain criteria we capitalize software development costs. For further information see Note 1S to our consolidated Financial statements.
 
Selling and marketing
 
Our selling and marketing expenses consist primarily of advertising, salaries, commissions and other employee expenses related to our selling and marketing team and promotional and public relations expenses.

24

 
General and administrative
 
Our general and administrative expenses consist primarily of salaries, bonuses, accounting and other general corporate expenses.
 
Operating Income
 
Telematics services segment
 
Operating income in our telematics services segment is primarily affected by increases in our subscriber base and our ability to increase the resulting revenues without a commensurate increase in our corresponding costs.
 
Telematics products segment
 
Operating income in our telematics products segment is primarily affected by our ability to increase sales of our telematics products.

Financing expenses (income), net
 
Financing expenses (income), net, include, inter alia, short- and long-term interest expenses, financial commissions, and gains and losses from currency fluctuations from the translation of monetary balance sheet items denominated in currencies other than the functional currency of each entity in the group, gains in respect of marketable securities and expenses related to tax positions.
 
Taxes on income
 
Income earned from our services and product sales is subject to tax in the country in which we provide our services or from which we sell our products.
 
Critical Accounting Policies and Estimates
 
Our critical accounting policies are more fully described in Note 1 to our consolidated financial statements appearing elsewhere in this report. However, certain of our accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on a periodic basis. We base our estimates on historical experience, industry trends, authoritative pronouncements and various other assumptions that we believe to be reasonable under the circumstances. Such assumptions and estimates are subject to an inherent degree of uncertainty.
 
The following are our critical accounting policies and the significant judgments and estimates affecting the application of those policies in our consolidated financial statements. See Note 1 to our consolidated financial statements included elsewhere in this report.
 
Revenue recognition
 
We and our subsidiaries generate revenue from subscriber fees for the provision of services and sales of systems and products, mainly in respect of fleet management services, stolen vehicle recovery services and other value-added services. To a lesser extent, revenues are also derived from technical support services. We and our subsidiaries sell the systems primarily through their direct sales force and indirectly through resellers.
 
Revenue recognition accounting policy applied until December 31, 2017 (prior to the adoption of ASC Topic 606);
 
Revenues were recognized when delivery has occurred and, where applicable, after installation has been completed, there was persuasive evidence of an arrangement, the fee was fixed or determinable and collection of the related receivable was reasonably assured and no further obligations existed. In cases where delivery has occurred but the required installation has not been performed, we did   not recognize the revenues until the installation was completed.
 
Our revenues were recognized as follows:
 
1.
Revenues from sales were recognized when title and risk of loss of the product passed to the customer (usually upon delivery).
 
2.
We applied the provisions of ASC Topic 605-25, "Revenue Recognition - Multiple-Element Arrangements", as amended. ASC Topic 605-25 provided guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. For such arrangements, each element of the contract was accounted for as a separate unit when it provided the customer value on a stand-alone basis and if an arrangement included a right of return relative to a delivered item, delivery or performance of the undelivered item or items was considered probable and substantially in the control of us. According to ASC 605-25, as amended, when neither "vendor specific objective evidence" of selling price, nor third party price existed, we were required to develop a best estimate of the selling price of the deliverables and the entire arrangement consideration was allocated to the deliverables based on the relative selling prices.
 
25

 
Revenues from SVR services subscription fees and from installation services, sold to customers within a single contractually binding arrangement were accounted for revenue recognition purposes, as a single unit of accounting in accordance with ASC Topic 605-25, since the installation services element was determined not to have a value on a stand-alone basis to the customer. Accordingly, the entire contract fee for the two deliverables was recognized ratably on a straight-line basis over the subscription period.
 
3.
Amounts earned by the Brazilian subsidiary for arranging a bundle transaction of SVR services subscription and installation services together with insurance services to be supplied by a third party insurance company, were recognized ratably on a straight-line basis over the subscription period, since the amount allocated to the company, was contingent upon the delivery of the SVR services. As the insurance company was the primary obligor of the insurance component, the company recognized only the net amounts as revenues, after deduction of amounts related to the insurance component.
 
4.
Deferred revenues included unearned amounts received from customers (mostly for the provision of installation and subscription services) but not yet recognized as revenues.  Such deferred revenues were recognized as described in paragraph 2, above.
 
5.      Extended warranty
 
Revenues from extended warranty which were provided for a monthly fee and were sold separately, were recognized over the duration of the warranty periods.
 
Revenue recognition accounting policy applied from January 1, 2018 (following the adoption of ASC Topic 606);
 
On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to all contracts, using the modified retrospective method.  Under such method of adoption, the results for reporting periods beginning after January 1, 2018 are presented in accordance with ASC Topic 606, while prior period amounts were not adjusted and are reported in accordance with the previous accounting treatment required under ASC Topic 605.
 
The cumulative impact of the adoption in an amount of approximately US$3 million (net of tax), was recognized as an adjustment to retained earnings as of January 1, 2018.
 
In accordance with ASC 606, we determine revenue recognition through the following five steps:
 
·
Identification of the contract, or contracts, with a customer;
 
·
Identification of the performance obligations in the contract;
 
·
Determination of the transaction price;
 
·
Allocation of the transaction price to the performance obligations in the contract; and
 
·
Recognition of revenue when, or as, we satisfy a performance obligation.
 
A contract with a customer exists when all of the following criteria are met: the parties to the contract have approved it (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations, We  can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”), we  can determine the transaction price for the goods or services to be transferred, the contract has commercial substance and it is probable that we  will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
 
Upon each contract inception, we assess the goods or services promised in a contract with a customer and identifies the performance obligations. With respect to contracts that are determined to have multiple performance obligations, such as contracts that combine product with services (mostly SVR services) customer support, we  allocate the contract’s transaction price to each performance obligation using its best estimate of the relative standalone selling price of each distinct good or service in the contract. The primary method used to estimate the relative standalone selling price is expected costs of satisfying a performance obligation and an appropriate margin for that distinct good or service. In assessing whether to allocate variable consideration to a specific part of the contract, we consider the nature of variable payment (if any) and whether it relates specifically to its efforts to satisfy a specific part of the contract.
 
Revenues are recognized when, or as, control of services or products is transferred to the customers at a point in time or over time, as applicable to each performance obligation.
 
Revenues are recorded in the amount of consideration to which we expect to be entitled in exchange for performance obligations upon transfer of control to the customer, excluding amounts collected on behalf of other third parties and sales taxes.
 
We do not adjust the amount of consideration for the effects of a significant financing component since we  expect, at contract inception, that the period between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services to be generally one year or less, based on the practical expedient. Our credit terms to customers are, on average, between thirty and ninety days.
 
26

 
In accordance with ASC 606, our revenues are recognized as follows:

1.
Revenues from sales of AVL products are recognized when the control of the product passed to the customer (usually upon delivery).
 
2.
Revenues from provision of SVR services are recognized over time, as the customers simultaneously receive and consume the benefits provided by our performance.
 
3.
For arrangements that involve the delivery or performance of multiple products (mostly, AVL products), services (such as SVR services) and/or rights to use assets, we analyze whether the goods or services that were promised to the customer are distinct. A good or service promised to a customer is considered ‘distinct’ if both of the following criteria are met: 1. The customer can benefit from the good or service, either on its own or together with other resources that are readily available to the customer; and, 2. our promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. When the above criteria are met the revenue recognition for the related products and/or services are recognized as described in 1 and 2 above, as applicable.
 
With respect to arrangement that are determined to have multiple performance obligations that are distinct, we  allocate the contract’s transaction price to each performance obligation using its best estimate of the relative standalone selling price of each distinct good or service in the contract. The primary method used to estimate the relative standalone selling price is the expected costs of satisfying the performance obligation with an appropriate margin for that distinct good or service.
 
Revenues from SVR services subscription fees and from installation services, sold to customers within a single contractually binding arrangement were accounted for revenue recognition purposes, as a single performance obligation, since the installation services element was determined not to be ‘distinct’. Accordingly, the entire contract fee for the two deliverables was recognized over time, on a straight-line basis over the subscription period.
 
4.
Amounts earned by certain Brazilian subsidiary for arranging a bundle transaction of SVR services subscription and installation services together with insurance services to be supplied by a third party insurance company, are recognized ratably on a straight-line basis over the subscription period (see 3 above), since the amount allocated to the company (for the SVR services subscription, installation services and for arranging the transaction), was contingent upon the delivery of the SVR services. As the insurance company is acting as a principal with respect to the insurance component, the company recognized only the net amounts as revenues, after deduction of amounts related to the insurance component.
 
5.
Deferred revenues include unearned amounts received from customers (mostly for the provision of installation, future subscription services and extended warranty) but not yet recognized as revenues.  Such deferred revenues are recognized as described in paragraph 2 above or paragraph 6 below, as applicable.
 
6.      Extended warranty
 
In the majority of countries, in which we operate, the statutory warranty period is one year, and the extended warranty covers periods beyond year one. Revenues from extended warranty include warranty services which were sold separately for a monthly fee, or warranty services that were determined to represent a separate performance obligation and were sold together with an AVL unit. Such revenues are recognized over the duration of the warranty periods.
 
Accounting for income taxes
 
 We account for income taxes in accordance with ASC Topic 740-10, "Income Taxes". According to this guidance, deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law.  Deferred tax balances are computed using the tax rates expected to be in effect at the time when these differences reverse. Valuation allowances in respect of the deferred tax assets are provided for if, based upon the weight of available evidence, it is more likely than not that all or a portion of the deferred income tax assets will not be realized.
 
US GAAP provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is "more-likely-than-not" to be sustained were to be challenged by a taxing authority.  The assessment of a tax position is based solely on the technical merits of the position, without regard the likelihood that the tax position may be challenged.  If an uncertain tax position meets the "more-likely-than-not" threshold, the largest amount of tax benefit that is greater than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded.
 
Contingencies
 
We and our subsidiaries are involved in certain legal proceedings that arise from time to time in the ordinary course of their business and in connection with certain agreements with third parties. Except for income tax contingencies, we record accruals for contingencies to the extent that the management concludes that the occurrence is probable and that the related liabilities are estimable. Legal expenses associated with contingencies are expensed as incurred.
 
Our material legal proceedings are fully described in Item 8.A. – “Consolidated Statements and other Financial Information” under the caption “Material Legal Proceedings” below.
 
27

 
Goodwill and intangible assets
 
1.
Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in business combinations accounted for in accordance with the "purchase method" and is allocated to reporting units at acquisition.  Goodwill is not amortized but rather tested for impairment at least annually in accordance with the provisions of ASC Topic 350, "Intangibles - Goodwill and Other".
 
As required by ASC Topic 350, we choose either to perform a qualitative assessment whether the two-step goodwill impairment test is necessary or proceeds directly to the two-step goodwill impairment test. Such determination is made for each reporting unit on a stand-alone basis.  The qualitative assessment includes various factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, earnings multiples, gross margin and cash flows from operating activities and other relevant factors. When we choose to perform a qualitative assessment and determines that it is more likely than not (more than 50 percent likelihood) that the fair value of the reporting unit is less than its carrying value, then we proceed to the two-step goodwill impairment test. If we determine otherwise, no further evaluation is necessary.
 
When we decide or is required to perform the two-step goodwill impairment test, we compare the fair value of the reporting unit to its carrying value ("step 1"). If the fair value of the reporting unit exceeds the carrying value of the reporting unit net assets (including the goodwill allocated to such reporting unit), goodwill is considered not to be impaired, and no further testing is required. If the carrying value exceeds the fair value of the reporting unit, then the implied fair value of goodwill is determined by subtracting the fair value of all the identifiable net assets from the fair value of the reporting unit. An impairment loss is recorded for the excess, if any, of the carrying value of the goodwill allocated to the reporting unit over its implied fair value ("step 2").
 
We apply assumptions that market participants would consider in determining the fair value of each reporting unit and the fair value of the identifiable assets and liabilities of the reporting units, as applicable.
 
As of December 31, 2018, we had two reporting units that include goodwill (two in 2017 and two in 2016). We did not complete the assignment of goodwill resulted from the acquisition which is expected to be allocated to new reporting units under the existing reporting units.
 
We performed a qualitative assessment for two reporting units as of December 31, 2018 and 2017, and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required, with respect to such units.
 
2.
Intangible assets with finite lives (as of December 31, 2018, the balance of intangible assets consist of customer relationship, technology and others) are amortized using the straight-line basis over their useful lives, to reflect the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.

As a part of the acquisition of describe in Note 3 to the consolidated financial statements we got control over intangible assets in a fair value of approximately US$ 38,583 thousand.
 
As of December 31, 2018, the intangible assets are amortized over a period of 5 - 8 years.
 
Recoverability of intangible assets is measured as described in Note 1L to the consolidated financial statements.
 
Obligation to purchase non-controlling interests
 
An obligation to acquire shares of a subsidiary held by Non-controlling interests at a stated future date, represents liability under ASC Topic 480. Upon initial recognition such liability is measured at fair value in accordance with ASC Topic 480-10-30-3 at the amount of cash that would be paid under the conditions specified in the contract if the shares were purchased immediately and in subsequent periods at the amount of cash that would be paid under the conditions specified in the contract if settlement occurred at the reporting date with any change in value from the previous reporting date recognized as interest cost. In addition, the Non-controlling interests subject to such obligation are not recognized and no earnings are allocated to them.
 
28

 
Results of Operations
 
The following table sets forth for the periods indicated selected items from our consolidated statements of income as a percentage of our total revenues.
 
   
Year Ended December 31,
 
   
%
 
Consolidated statements of operations data:
 
2018
   
2017
   
2016
 
Revenues:
                 
Telematics services
   
71.6
     
72.3
     
71.1
 
Telematics product
   
28.4
     
27.7
     
28.9
 
                         
Total Revenues
   
100
     
100
     
100
 
Cost of Revenues:
                       
Telematics services
   
27.8
     
25.7
     
25.4
 
Telematics products
   
21.9
     
23.4
     
23.5
 
                         
Total cost of revenues
   
49.7
     
49.1
     
48.9
 
                         
Gross profit
   
50.3
     
50.9
     
51.1
 
Operating Expenses:
                       
Research and development expenses
   
2.4
     
1.3
     
1.4
 
Selling and marketing Expenses
   
4.5
     
5.2
     
5.0
 
General and administrative expenses, net
   
18.8
     
20.2
     
20.2
 
Other expenses (income), net
   
(0.1
)
   
(0.1
)
   
0.4
 
                         
Total operating expenses
   
25.6
     
26.6
     
27.0
 
Operating Income
   
24.7
     
24.1
     
24.1
 
Financing income (expenses), net
   
0.3
     
(0.4
)
   
1.0
 
Other income (expenses), net
   
5.1
     
-
     
-
 
                         
Income before income tax
   
30.1
     
23.7
     
25.1
 
Income tax
   
(6.8
)
   
(7.5
)
   
(7.5
)
Share in gains (losses) of affiliated companies, net
   
1.7
     
3.6
     
(0.2
)
                         
Net income for the year
   
25.0
     
19.8
     
17.4
 
Less: net income attributable to non-controlling interests
   
(1.0
)
   
(1.1
)
   
(1.3
)
                         
Net income attributable to company stockholders
   
24.0
     
18.7
     
16.1
 

 
29

 
Analysis of our Operation Results for the Year ended December 31, 2018 as compared to the Year ended December 31, 2017
 
(Please take into consideration that 2018 operation results include RTH Results from the closing date, September 13, 2018)
 
Revenues
 
Total revenues increased from $234.6 million in 2017 to $253.3 million in 2018, or 8%. This increase consisted of an increase of $ 11.6 million from subscription fees from our telematics services and an increase of $ 7.1 million from sales of our telematics products.
 
Telematics services segment
 
Revenues in our telematics services segment increased by $ 11.6 million from $169.7 million in 2017 to $181.3 million in 2018, or 6.8 % mainly due to an increase in our average annual number of subscribers from 1,110,000 subscribers in 2017 to 1,475,000 in 2018. However, this increase was offset by the negative impact of exchange rate fluctuations of non US dollar revenue in an amount of approximately $ 28 million. If the negative impact of the exchange rate fluctuation wasn’t accounted, our revenue would increase by $ 39.6 million or 23.3%.
 
Telematics products segment
 
Revenues in our telematics products segment increased from $ 64.9 million in 2017 to $ 72.0 million in 2018, or 10.9 %. This increase of $ 7.1 million is primarily due to expanding our business activities following RTH acquisition and consolidating  RTH  Financial Statements. However this increase was offset by decrease in sales in the Israeli market, as well as, by a negative impact of exchange rate fluctuations of non US dollar revenue in an amount of approximately $ 0.5 million. If the negative impact of the exchange rate fluctuation wasn’t accounted, our revenue would increase by $ 7.6 million or 11.7%.
 
Cost of revenues
 
Total cost of revenues increased from $115.2 million in 2017 to $126.0 million in 2018, or 9.4%. This increase consisted of an increase of $ 10.1 million in the Telematics services segment and an increase of $ 0.7 million in the telematics product segment. As a percentage of total revenues, cost of revenues increased from 49.1% in 2017 to 49.7% in 2018.
 
Telematics services segment
 
Cost of revenues for our Telematics services segment increased from $60.2 million in 2017 to $70.3 million in 2018, or 16.8 %. This increase was primarily due an increase in salary expenses of approximately $ 5.9 million, depreciation expenses of $0.7 million and as a result of consolidating RTH expenses, which all abovementioned were offset by effect of exchange rate fluctuations in an amount of approximately $ 6.0 million. As a percentage of total revenues for this segment, cost of revenues increased from 35.5% in 2017 to 38.8% in 2018.
 
Telematics products segment
 
Cost of revenues for our telematics products segment increased from $ 55.0 million in 2017 to $ 55.7 million in 2018, or 1.3 %. This increase was mainly due to the increase in our products’ sales following RTH acquisition. As a percentage of total revenues for this segment, cost of revenues decreased from 84.8% in 2017 to 77.4 % in 2018, mainly due to a change in the mixture of products sales.
 
Operating expenses
 
Research and development
 
Our research and development expenses increased from $3.2 million in 2017 to $ 6.2 million in 2018. As a percentage of total revenues, research and development expenses increased from 1.3% in 2017 to 2.4 % in 2018 mostly due to RTH acquisition.

Selling and marketing
 
Our selling and marketing expenses decreased from $12.2 million in 2017 to $ 11.3 million in 2018. As a percentage of total revenues, selling and marketing expenses decreased from 5.2% in 2017 to 4.5 % in 2018.
 
General and administrative
 
General and administrative expenses increased slightly from $47.6 million in 2017 to $47.7 million in 2018, or 0.2%.
 
The increase was mainly due to RTH contribution in an amount of $3.8 million, an increase in allowance for doubtful accounts in the amount of $1.3 million and increase in depreciation expenses in amount of $0.6 million. The abovementioned were offset primarily by a decrease in salary expenses in the amount of  $ 2.1 million (mainly due to decreased in cash grant based on the company’s Share Yield based on the compensation policy) and by the effect of exchange rate fluctuations  in amount of  $ 2.9 million. As a percentage of total revenues, general and administrative expenses decreased from 20.2% in 2017 to 18.8% in 2018.
 
30

 
Other expenses (income), net
 
Other income, net in 2017 were $ 0.1 million compared with $ 0.3 million in 2018.
 
Operating income
 
Total operating income increased from $ 56.5 million in 2017 to $ 62.4 million in 2018, or 10.4%. This increase of approximately $ 5.9 million reflects increase of $ 1.9 million in the operating income in the telematics service segment and an increase of $ 4.0 million in the operating income in the telematics products segment.
 
Telematics services segment
 
Operating income in our telematics services segment increased from $55.0 million in 2017 to $56.9 million in 2018, or 3.5%. This increase was mainly attributed to the increase of our average base of subscribers from 1,110,000 subscribers in 2017 to 1,475,000 subscribers in 2018 due to RTH consolidation, which was offset mainly by the effect of exchange rates fluctuation.
 
Telematics products segment
 
Operating income in our telematics products segment increased from $ 1.5 million in 2017 to $ 5.5 million in 2018. This increase in the operating income was primarily due to a change in the products sales mixture.
 
Other income, net (non-operational)
 
In 2018, as a result of the acquisition of RTH, the Company gained control over certain companies that previously were accounted in accordance with the equity method and started to consolidate their financial statement. Following the abovementioned, the Company recorded a one-time gain in the amount of approximately $14.7 million from measurement of the previous investment in those affiliated companies at the acquisition date to fair value. 
 
Financing income (expenses), net
 
Financing income (expenses), net, was $ 1 million expenses in 2017 compared with an income of $ 0.7 million in 2018. This shift in the amount of $ 1.7 million was mainly due to a decrease in interest incurred on tax assessment for previous years in Israel and Brazil in an amount of $ 2.4 million, which was offset by an increase in interest with respect of long-term loans in the amount of $ 0.5 million.
 
Income Tax
 
Income Tax expenses decreased from $17.7 million in 2017 to $ 17.3 million in 2018, or 2.3%.  As a percentage of income before tax, income tax expenses decreased from 31.9% in 2017 to 22.7% in 2018 primarily due to:
 
1.
In 2018 we recorded nontaxable income in amount of $14.7 million related to RTH Transaction.
 
2.
In 2017 we had tax payment assessment for previous years in the amount of $ 3.3 million.
 

31

 
Analysis of our Operation Results for the Year ended December 31, 2017 as compared to the Year ended December 31, 2016
 
Revenues
 
Total revenues increased from $ 199.6 million in 2016 to $234.6 million in 2017, or 17.5%. This increase consisted of an increase of $27.8 million from subscription fees from our telematics services and an increase of $7.2 million from sales of our telematics products.
 
Telematics services segment
 
Revenues in our telematics services segment increased by $27.8 million from $141.9 million in 2016 to $169.7 million in 2017, or 19.6% mainly due to an increase in our average annual number of subscribers from 1,008,000 subscribers in 2016 to 1,110,000 in 2017 and due to a positive net impact of the exchange rate fluctuations of non US dollar revenue in an amount of $8.9 million.
 
Telematics products segment
 
Revenues in our telematics products segment increased from $57.7 million in 2016 to $64.9 million in 2017, or 12.5%. This increase of $7.2 million is primarily due to an increase of $3.8 million in our products’ sales, mainly in Israel, and a positive net impact effect of exchange rates fluctuation of non US dollar revenue in an amount of $3.4 million.
 
Cost of revenues
 
Total cost of revenues increased from $97.5 million in 2016 to $115.3 million in 2017, or 18.3%. This increase consisted of an increase of $ 9.7 million in the telematics services segment and an increase of $8.1 million in the telematics product segment. As a percentage of total revenues, cost of revenues increased from 48.9% in 2016 to 49.1% in 2017.
 
Telematics services segment
 
Cost of revenues for our telematics services segment increased from $ 50.6 million in 2016 to $ 60.3 million in 2017, or 19.0 %. This increase was primarily the result of an increase in salary expenses of approximately $4 million, and depreciation expenses of $0.6 million. The effect of exchange rates fluctuations also contributed to the cost of revenues an amount of approximately $2.8 million. As a percentage of total revenues for this segment, cost of revenues decreased from 35.7% in 2016 to 35.5% in 2017.
 
Telematics products segment
 
Cost of revenues for our telematics products segment increased from $46.9 million in 2016 to $55.0 million in 2017, or 17.2%. This increase was mainly due to the increase in our products’ sales in local currencies and product mixture. As a percentage of total revenues for this segment, cost of revenues increased from 81.4% in 2016 to 84.8% in 2017, mainly due to a change in the products sales mixture.
 
Operating expenses
 
Research and development
 
Our research and development expenses in 2017 increased from $2.9 million in 2016 to $3.2 million in 2017. As a percentage of total revenues, research and development expenses decreased slightly from 1.4% in 2016 to 1.3% in 2017.

Selling and marketing
 
Our selling and marketing expenses increased from $10.1 million in 2016 to $12.2 million in 2017. As a percentage of total revenues, selling and marketing expenses increased from 5% in 2016 to 5.2% in 2017.
 
General and administrative
 
General and administrative expenses increased from $40.2 million in 2016 to $47.6 million in 2017, or 18.4%. This increase was primarily due to the effect of exchange rates fluctuations in the amount of $2.6 million, an increase in salary expenses in the amount of $2.3 million and increase in other net various expenses in amount of $2.5 million. As a percentage of total revenues, general and administrative expenses remain stable at 20.2% in 2016 and in 2017.
 
Other expenses (income), net
 
Other expenses (income), net in 2016 were $0.8 million expenses compared with $0.1 million income in 2017, this shift was primarily due to a onetime $1.2 million expense related to the repurchase, by the Company, of former employee’s options in our subsidiary - Ituran Brazil in 2016.
 
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Operating income
 
Total operating income increased from $48.0 million in 2016 to $56.5 million in 2017, or 17.7%. This increase of approximately $8.5 million reflects increase of $11 million in the operating income in the location-based segment and a decrease of $2.5 million in the operating income in the wireless communication products segment.
 
Telematics services segment
 
Operating income in telematics services segment increased from $44 million in 2016 to $55 million in 2017, or 25%. This increase was mainly attributed to the increase of our average base of subscribers from 1,008,000 subscribers in 2016 to 1,110,000 subscribers in 2017.
 
Telematics products segment
 
Operating income in our telematics products segment decreased from $ 4 million in 2016 to $ 1.5 million in 2017. This decrease in the operating income was primarily due to change in the products sales mixture.
 
Financing income (expenses), net
 
Financing income (expenses), net, were income of $2.1 million in 2016 compared with an expenses of $1 million in 2017. This shift was mainly due to interest incurred on tax assessments of previous years in Israel and Brazil.
 
Income Tax
 
Income Tax increased from $14.9 million in 2016 to $17.7 million in 2017, or 18.8%. As a percentage of income before tax on income expense tax increased from 29.7% in 2016 to 31.9% in 2017 primarily due to tax payment made during 2017 in respect of previous years mainly in Brazil and Israel.
 
Impact of Currency Fluctuations on Results of Operations, Liabilities and Assets
 
Although we report our consolidated financial statements in dollars, in 2016, 2017 and 2018, a portion of our revenues and direct expenses was derived in other currencies. For fiscal years 2016, 2017 and 2018, we derived approximately 16.5%, 14.6% and 19.8% of our revenues in dollars and other currencies, 47.9%, 47.9% and 45.9% in NIS, 35.6%, 37.5% and 34.3% in Brazilian Reals. In fiscal years 2016, 2017 and 2018, 21.6%, 20.4% and 16.6% of our expenses were incurred in dollars and other currencies, 51.4%, 51.5% and 58.9 % in NIS and 27%, 28.1% and 24.5% in Brazilian Reals.
 
Exchange differences upon conversion from our functional currency to dollars (presentation currency) are accumulated as a separate component of accumulated other comprehensive income under stockholders’ equity. In the year 2018, accumulated other comprehensive income decreased by $12.8 million as compared to the year 2017. In 2017, accumulated other comprehensive income increased by $4.2 million as compared to the year 2016. In 2016, accumulated other comprehensive income increased by $5.6 million as compared to the year 2015.

The fluctuation of the other currencies in which we incur our expenses or generate revenues against the dollar has had the effect of increasing or decreasing (as applicable) reported revenues, cost of revenues and operating expenses in such foreign currencies when converted into dollars from period to period. The following table illustrates the effect of the changes in exchange rates on our revenues, gross profit and operating income for the periods indicated:
 
   
Year Ended December 31,
 
   
2016
   
2017
   
2018
 
   
Actual
   
At 2015
exchange
rates (1)
   
Actual
   
At 2016
exchange
rates (1)
   
Actual
   
At 2017
exchange
rates (1)
 
   
(In thousands of US$)
 
Revenues
   
199,574
     
211,098
     
234,636
     
221,925
     
253,335
     
267,398
 
Gross profit
   
102,031
     
108,297
     
119,384
     
113,369
     
127,328
     
134,854
 
Operating income
   
47,998
     
52,131
     
56,535
     
52,838
     
62,378
     
67,340
 
 
(1) Based on average exchange rates during the period. Those columns are Non GAAP information
 
Our policy remains to reduce exposure to exchange rate fluctuations by entering into foreign currency forward transactions that qualify as hedging transactions under ASC Topic 815, “Derivatives and Hedging”, the results of which are reflected in our income statements as revenues or cost of revenues. The result of these transactions, which are affected by fluctuations in exchange rates, could cause our revenues, cost of revenues, gross profit and operating income to fluctuate.

33

 
B.          LIQUIDITY AND CAPITAL RESOURCES
 
We fund our operations primarily from cash generated from operations. As of December, 31 2016, 2017 and 2018, we had $31.5 million, $40.5 million and $53.3 million in cash and marketable securities and $55.1 million, $71.4 million and $84.2 million in working capital, respectively. We hold our cash and cash equivalents in US dollars or the local currency of their location.
 
As of December, 2018 we had a long term loan from an Israeli bank at the amount of $62.6 million and a short term loans from banks at the amount of $10.6 million. As of December 31, 2016, 2017 and 2018, we also had $0.8 million, $0.8 million and $3.8 million respectively, available to us under existing lines of credit. As of December 31, 2016, 2017, we did not utilize our lines of credit. As of December 31, 2018, we utilize $1.9 million from our line of credit.
 
For a reference concerning our use of financial instruments for hedging purposes, please see Item 5.A – Operating Results under the captions “Impact of Currency Fluctuations on Results of Operations, Liabilities and Assets.”
 
We believe that our cash flow from operations, availability under our lines of credit and cash and marketable securities will be adequate to fund our capital expenditures, contractual commitments and other demands and commitments for the foreseeable future as well as for the long-term. We believe that cash flow generated from operations and cash available to us from our credit facilities will be sufficient to cover future expansion of our various businesses into new geographical markets or new products, as currently contemplated and as we describe herein. However, if existing cash and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek financing elsewhere by selling additional equity or debt securities or by obtaining additional credit facilities.
 
As of December 31, 2016, 2017 and 2018 we had long-term liabilities of $11.8 million, $14.1 million and $14.8 million, respectively, for employee rights upon retirement for certain of our employees that become payable upon their retirement. Our Israeli employees are entitled to one month’s salary, equal to the applicable monthly salary at the time of such employee’s retirement, for each year of employment, or a portion thereof, upon retirement. This liability is partially funded by deposit balances maintained for these employee benefits in the amount of $7.9 million, $9.6 million and $9.5 million as of December 31, 2016, 2017 and 2018 respectively. The deposited funds include profits accumulated up to the balance sheet date and may be withdrawn upon the fulfillment of the obligation pursuant to Israeli severance pay laws or labor agreements.
 
In Argentina, as a result of the flexibilization process of the foreign exchange market that began in December 2015, the exchange operations are currently governed by new regulation of Foreign and Exchange regulations which as follow:
 
The regulations are:
 
1.
Foreign currency market
 
a.
All human or corporations, assets and other entities can operate freely in the exchange market, whether residents or non-residents.
 
b.
Transactions will be carried out at the exchange rate freely agreed by the parties.
 
c.
Financial and exchange entities can operate without a time limit.
 
d.
It is no longer required to sign exchange tickets or an affidavit, except the Local Currency Payment System (SML). Likewise, the entities will continue to comply with the requirements for customer identification and the registration of operations.
 
2.
Importation:
 
a.
The Importing Authorization System (DJAI) was replaced by a new Information System called SIMI. The main difference is that any goods can be imported freely without the requirement of prior government authorization.
 
b.
The importation of Services and their payment is also unregulated.
 
c.
Both type of imports (goods and services) request previous registration and compliance with Transferring Prices and Tax regulations.
 
3.
Dividends:
 
a.
Paying abroad dividends to shareholders is admitted.
 
b.
Dividends related with profit obtained by a local company until December 2017, will be free of withholding tax (hence the company has already paid 35% of Income Tax).

34

 
In Ecuador, there are two unique Laws which are relevant to our activities:
 
1.
Remittance tax (Impuesto a la Salida de Divisas) - Remittance tax of 5% is imposed on the transfer of money abroad in cash or through pay checks, transfers, or courier of any nature carried out with or without the mediation of the Ecuadorian financial system, including transfer from foreign bank accounts. Dividends are exempt from this tax, under certain considerations.
 
2.
Labor profit sharing - Although it is not considered a tax, companies are obligated to pay 15% of their pre-tax earnings to their employees. This payment is considered a deductible expense for CIT computation purposes.
 
In Mexico, All Mexican employers, whether individuals or entities, are required to calculate and pay mandatory profit sharing payments to employees within 60 days following the filing of their annual Mexican tax return. The obligation for employers to make such payments is based on the legal provisions in Section IX of Article 123 of the Political Constitution of the United Mexican States, which establishes that employees shall have the right to participate in their employer’s profits in the amount of 10% of such employer’s taxable income. As such, the following types of employees have the right to receive profit sharing payments: (a) permanent employees hired to carry out normal, long-term work for an employer, without regard to the number of days worked during the January 1 through December 31, 2012 fiscal year; (b) eventual permanent employees who have worked for an employer fewer than 60 days, whether continuously or sporadically, during the fiscal year referred to above; (c) former employees who have the right to claim profit sharing payments, when such rights have not lapsed.
 
Following the revision of our dividend policy in 2012, we declared and paid regularly quarterly dividends in 2016, 2017, and 2018.
 
On February 26, 2017 we have revised our dividend policy, which came in force starting from 2017, that our dividends will be declared and distributed on a quarterly basis in an amount of at least 5 million USD subject to the provisions of the Israeli laws concerning lawful distribution of dividends.

 In 2017 we declared and paid such dividends as follows:
 
On May 17, 2017 we declared a quarterly dividend in the amount of $5 million, which was paid (net of taxes at the rate of 25%) on July 11, 2017, with respect to the first quarter of 2017. On August 16, 2017 we declared a quarterly dividend in the amount of $5 million, which was paid (net of taxes at the rate of 25%) on October 10, 2017, with respect to the second quarter of 2017. On November 15, 2017 we declared a quarterly dividend in the amount of $5 million, which was paid (net of taxes at the rate of 25%) on January 10, 2018, with respect to the third quarter of 2017. On February 27, 2018 we declared a quarterly dividend in the amount of $5 million, which was paid (net of taxes at the rate of 25%) on April 11, 2018 with respect to the fourth quarter of 2017.
 
In 2018 we declared and paid such dividends as follows:
 
In May 23, 2018 we declared a quarterly dividend in the amount of $5 million, which was paid (net of taxes at the rate of 25%) on July 11, 2018, with respect to the first quarter of 2018. On August 30, 2018 we declared a quarterly dividend in the amount of $5 million, which was paid (net of taxes at the rate of 25%) on October 10, 2018, with respect to the second quarter of 2018. On November 26, 2018 we declared a quarterly dividend in the amount of $5 million, which was paid (net of taxes at the rate of 25%) on January 9, 2019, with respect to the third quarter of 2018. On March 11, 2019 we declared a quarterly dividend in the amount of $5 million, which was paid (net of taxes at the rate of 25%) on April 10, 2019 with respect to the fourth quarter of 2018.
 
Until the date of this report, we have repurchased 2,507,314 of our shares, out of these shares 373,489 shares were resold as part of the consideration in the RTH Transaction. As part of the RTH Transaction price adjustment 300,472 shares were returened to us in April 2019. As of the date of this report the updated quantity of treasury shares is 2,434,297.
 
The following table sets forth the components of our historical cash flows for the periods indicated:

   
Year ended December 31,
 
   
2018
   
2017
   
2016
 
   
(In thousands)
 
                   
Net cash provided by operating activities
   
53,264
     
43,907
     
41,472
 
Net cash used in investing activities
   
(84,854
)
   
(14,685
)
   
(19,860
)
Net cash provided by (used in) financing activities
   
49,769
     
(24,266
)
   
(18,234
)
Effect of exchange rate changes on cash and cash equivalents
   
(3,687
)
   
863
     
693
 
Net increase (decrease) in cash and cash equivalents
   
14,492
     
5,819
     
4,071
 
 

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Years ended December 31, 2018, December 31, 2017 and December 31, 2016
 
Net cash provided by operating activities
 
Our operating activities provided cash of $41.5 million in 2016, $43.9 million in 2017 and $53.3 million in 2018.
 
The increase of approximately $ 9.4 million in cash from operating activities in 2018 as opposed to 2017 was due primarily to:
 
- An increase in net income at the amount of $ 16.9 million
 
- An increase in depreciation and amortization at the amount of $ 1.1 million.
 
- An increase in deferred income taxes, net at the amount of $ 2.9 million.
 
- A decrease in the Company's share in gains of affiliated companies, net at the amount of $ 4.3 million
 
 This amount was offset by a capital gain on acquisition of non-controlling interest of $14.7 million. And decrease in working capital items net in amount of $ 0.9 million.

Net cash used in investing activities
 
Net cash used in investing activities in 2018 in an amount of approximately $84.9 million, includes acquisition of subsidiary in the amount of $69.0 million, and capital expenditure in the amount of $ 21.7 million.
 
Net cash used in investing activities in 2017 in an amount of approximately $14.7 million, includes mainly capital expenditures in the amount of $16.2 million, investment in other companies in the amount of $1.3 million, and investments in marketable securities net in an amount of $3.3 million. These investments were offset by repayments of loans from affiliated companies, net, in an amount of $6.1 million.
 
Net cash used in investing activities in 2016 in an amount of approximately $19.9 million, includes mainly capital expenditures in the amount of $13.6 million, and investment in affiliated companies, net in the amount of $ 7.4 million which was offset by proceeds from sale of marketable securities, net in amount of $1.5 million.
 
Net cash provided by (used in) financing activities
 
Net cash provided by financing activities in 2018 in an amount of approximately $49.8 million consisted primarily of a receipt of a loan in an amount of $81.7 million, repayment of short and long term credit from financial institution in amount of $ 9.0 million, cash dividend payment in an amount of approximately $20.2 million and a cash dividend payment in an amount of approximately $ 2.7 million paid by our subsidiary to the non- controlling interests.
 
Net cash used in financing activities in 2017 in an amount of approximately $24.3 million consisted primarily of a cash dividend payment in an amount of $22.6 million and a cash dividend payment in an amount of approximately $1.6 million paid by our subsidiary to the non-controlling interests.
 
Net cash used in financing activities in 2016 in an amount of approximately $18.2 million consisted primarily of a cash dividend payment in an amount of $17.1 million and a cash dividend payment in an amount of approximately $1 million paid by our subsidiary to the non-controlling interests.
 
C.          RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
 
Most of our research and development activities take place in Israel and Ecuador. Our Research and Design department is constantly working on upgrading the service infrastructure and improving our fleet management applications, including by introducing new services and uses of the system, while utilizing both internal development staff and outsourcing such activities to third parties, as well as developing new service platforms for cellular/GPS based devices.
 
Expenditures for research and development activities undertaken by us were approximately $ 6.2 million in 2018, $ 3.2 million in 2017 and $ 2.9 million in 2016.
 
D.          TREND INFORMATION
 
Please see Item 4.A. – History and Development of the Company and Item 4.B. – Business Overview above for trend information.
 
E.          OFF-BALANCE SHEET ARRANGEMENTS
 
We do not have off-balance sheet arrangements (as such term is defined in Item 5E. of the Form 20-F) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 
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         F.          TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
Contractual obligations and commercial commitments
 
The following table summarizes our material contractual obligations as of December 31, 2018:

   
Payments due by period
 
Contractual obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
After 5 years
 
   
(In USD thousands)
 
                               
Operating leases
   
14,936
     
6,145
     
4,749
     
1,952
     
2,090
 
Purchase Obligations
   
5,474
     
5,474
     
-
     
-
     
-
 
Obligation to purchase non-controlling interests     16,272      
-
      16,272      
-
     
-
 
Long – term debt obligations
   
70,972
     
8,350
     
33,400
     
29,222
     
-
 
Total
   
107,654
     
19,969
     
54,421
     
31,174
     
2,090
 
 
G.          SAFE HARBOR
 
The safe harbor provided in Section 27A of the Securities Act and Sections 21E of the Exchange Act shall apply, among other things, to forward looking information provided in Item 5. F.
 
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ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
A.
DIRECTORS AND SENIOR MANAGEMENT
 
The following persons are our directors, senior management and employees upon whose work we are dependent:
 
Name
Age
Position
     
Izzy Sheratzky
72
President and director
Yehuda Kahane
74
Director
Ze’ev Koren
74
Chairman of the Board of Directors and an independent director
Efraim Sheratzky
66
Director
Eyal Sheratzky
50
Co-Chief Executive Officer and Director
Nir Sheratzky
47
Co-Chief Executive Officer and Director
Gil Sheratzky
41
CEO of our Subsidiary, International Activity and Business Development Officer and a Director
Yoav Kahane(1)(2)
45
Director and an independent director
Yigal Shani
74
Director
Israel Baron (1)(2)(3)
65
External Director
Gidon Kotler (1)(2)(3)
78
External Director
Tal Sheratzky- Jaffa
41
Director and an independent director
Ami Saranga
55
Deputy Chief Executive Officer
Eli Kamer
52
Executive Vice President, Finance; Chief Financial Officer
Guy Aharonov
53
General Counsel
Udi Mizrahi
47
Deputy Chief Executive Officer International Operation and VP of Finance
 
Notes:
(1) Member of audit committee
(2) Member of compensation committee
(3) External director elected in accordance with the Israeli Companies Law
+ Chairperson of all committees
 
Izzy Sheratzky is a co-founder of our company and its President. He has previously served as the Chairman of our Board of Directors, which in our company constitutes both an officer and director positions, ever since our company was acquired from Tadiran in 1995. Until 2003, Mr. Sheratzky also served as our Chief Executive Officer. Mr. Sheratzky also serves as the Chairman of the Board of Directors of Moked (1973) Investigations Company Ltd., Moked Services, Information and Investments Ltd., and Moked Ituran. He also serves as a director in Tikal Document Collection Ltd. Mr. Sheratzky is the father of Eyal, Nir and Gil Sheratzky, Brother of Efraim Sheratzky and uncle of Tal Sheratzky-Jaffa.
 
Yehuda Kahane is a co-founder of our company and has served on our board since 1995. Professor Kahane is an entrepreneur in both the academic and business arenas. He is a Fellow of the World Academy of Art and Science. He received the 2011 highest international award for his lasting contribution to the theory, practice and education in insurance and risk management, as well as a lifetime achievements award by the Israeli Insurance industry. He is a co-founder and chairperson of the YK Center for Preparing for the New Economy. Kahane is a Professor (Emeritus) from the Coller Business, Tel Aviv University where he headed the Institute for Business and the Environment. He taught at many business schools around the world, including the Wharton School, the University of Texas (Austin), the University of Toronto and the University of Florida, and has founded and served as the first Dean of the Israeli Academic School of Insurance. Professor Kahane chairs and is a major owner of Capital Point Ltd., and is active in the formation, seed investment and management of start-up companies and technological incubators, unrelated to our company. He chairs the association for the visually impaired people in Herzlia and Sharon district, and a board member of the Center for Blind People in Israel (The Umbrella organization). He is an honorary member of the Israel-Brazil Chamber of Commerce. Professor Kahane holds a BA degree in Economics and Statistics, an MA degree in Business Administration and a PhD in Finance from the Hebrew University of Jerusalem and is a Fellow of the Israeli Association of Actuaries. He specializes in insurance, risk management, environmental issues and technological forecasting. He is the father of Yoav Kahane.
 
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Zeev Koren has served as a director of our company since 2006 and since 2011 serves as the Chairman of the Board of Directors of the Company. In 1988 Brigadier Gen. (Res) Koren retired from the Israel Defense Forces after a career of 25 years, where in his final position he served as the head of human resources planning for the general staff division. Since then he has served in a senior capacity in companies in the fields of international forwarding and medical services. During the past ten years he has also served as the general manager of a Provident Management Company. He holds a B.A. in Political Science and Criminology from Bar Ilan University.
 
Efraim Sheratzky was appointed to the board on February 9, 2015 to replace Mr. Amos Kurz, as a Class A Director. Efraim Sheratzky studied insurance in the Israeli Insurance College. Efraim Sheratzky owns together with Yigal Shani, Tzivtit Insurance Agency (1998) Ltd. Efraim Sheratzky served as our director from 1999 and until 2005. Efraim Sheratzky is the brother of Izzy Sheratzky and the uncle of Eyal, Nir and Gil Sheratzky and father of Ms. Tal Sheratzky-Jaffa.
 
Eyal Sheratzky has served as a director of our company since its acquisition from Tadiran in 1995 and currently serves as a Co-Chief Executive Officer since 2003. Prior to 2003, he served as Vice President of Business Development during the years 1999 through 2002. Mr. Sheratzky also serves as a director of Moked Ituran and certain of our other subsidiaries, including Ituran Network. From 1994 to 1999, he served as the Chief Executive Officer of Moked Services, Information and Investments and as legal advisor to several of our affiliated companies. Mr. Sheratzky holds LLB and LLM degrees from Tel Aviv University School of Law and an Executive MBA degree from the Kellogg School of Management at Northwestern University, USA. Mr. Sheratzky is the son of Izzy Sheratzky and the brother of Nir and Gil Sheratzky and nephew of Effraim Sheratzky.
 
Nir Sheratzky has served as a director of our company since its acquisition from Tadiran in 1995 and currently serves as a Co-Chief Executive Officer since 2003. Prior to 2003, Mr. Sheratzky served as an Executive Officer in our company from 1995 to 2003. Mr. Sheratzky is also a director in Moked Ituran. He holds BA and MA degrees in Economics from Tel Aviv University. Nir is the son of Izzy Sheratzky and the brother of Eyal and Gil Sheratzky and nephew of Effraim Sheratzky.
 
Gil Sheratzky serves as a director of our company and since 2013 as our International Activity and Business Development Officer. Mr. Sheratzky has been serving since January 23, 2007 as the Chief Executive Officer of our subsidiary, E-Com Global Electronic Commerce Ltd. From 2003 and until 2013 Mr. Sheratzky served as our advertising officer. During the years 2000 - 2001 Gil worked in our control center, and during the years 2001 - 2002 he worked in an advertising agency. Mr. Sheratzky holds a BA in Business Administration from the Herzliya Interdisciplinary Center, and an MBA degree from the Booth School of Business at Chicago University, USA. Gil Sheratzky is the son of Izzy Sheratzky and the brother of Eyal Sheratzky and Nir Sheratzky and nephew of Effraim Sheratzky.
 
Yoav Kahane has served as director of our company since 1998. Mr. Kahane is serving as the Chief Executive Officer of Spot-On Therapeutics Ltd., a startup company that develops a non-invasive brain stimulation technology for the treatment of balance disorders, falls prevention and ADHD. During 2006-2014, Mr. Kahane has worked for Enzymotec in various managerial positions including Director of Business Development, VP Sales & Marketing, Infant Nutrition Business Unit Manager, Chief Executive Officer and Chairman of Advanced Lipids AB, a joint venture of AAK AB and Enzymotec, specializing in nutritional ingredients to the infant nutrition industry. During the years 2004-2005, Mr. Kahane served as Vice President of Sales and Marketing in Elbit Vision Systems Ltd. During the years 2001 and 2002, he served as Manager of Business Development in Denver Holdings and Investments Ltd. In 2000, Mr. Kahane established Ituran Florida Corp. and served as its Chief Executive Officer until 2001. Mr. Kahane holds a BA degree in Life Sciences form Tel-Aviv University, a BA degree in Insurance and an MBA degree from the University of Haifa. Yoav Kahane is the son of Professor Yehuda Kahane.
 
Yigal Shani has served as a director of our company since its acquisition from Tadiran in 1995. Mr. Shani is an insurance agent and a partner in the insurance agency Tzivtit Insurance Agency (1998) Ltd. together with Efraim Sheratzky, which provides insurance services to our company. Mr. Shani, has resigned on March 13, 2014 in order to allow compliance with the provisions of the Israeli Companies Law, which require that the board of directors to include at least one female and was reappointed on February 9, 2015 to replace Mr. Avner Kurz, as a Class B Director. Mr. Shani was reelected on November 9, 2017.
 
Israel Baron has been serving as an external director of our company since 2003 and is the Chairman of our board’s committees. Mr. Baron serves as a director in Poalim Trust Services Ltd., a fully owned subsidiary of Bank Hapoalim Ltd. In addition, Mr. Baron has been serving as Chief Executive Officer of several public sector employee retirement and saving plans since 2003. Prior to 2003, Mr. Baron managed an organizational consulting firm, served as an investment manager in the Isaac Tshuva group during the years 1999 to 2001 and as Chief Executive Officer of Gmulot Investment Company Ltd. Mr. Baron serves as a director of Quality Baron Management Services Ltd. and until 2004 he served as a director of Brill Shoe Industries Ltd. Mr. Baron is a certified CPA and holds a BA degree in Economics and Accounting from the Bar-Ilan University in Ramat-Gan, Israel. Israel Baron was reelected on December 21, 2017 for additional 3-year term to serve as external director.
 
Gidon Kotler is an external director of our company. He was nominated on April 30, 2014. Prior to his retirement on 2016, Mr. Kotler has been serving as the assets manager of Strauss-Group Ltd., one of Israel’s largest public companies, since 1997. Prior to that, Mr. Kotler has served for 3 years as the chief executive officer of the Tel-Aviv New Central Bus Station, and for 14 years as the chief executive officer of the Dizengof Center’s management company. Mr. Kotler has served as an external director of Elran Real Estate Ltd. from 2007 until 2010. On December 28, 2016, an annual general shareholders meeting approved the extension of the term of Mr. Gideon Kotler, our external director, for additional three years (beginning April 30, 2017)
 
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Ms. Tal Sheratzky -Jaffa was appointed as a member of the board and serves as a Class A director until December 28, 2019. 
 
Ms. Sheratzky-Jaffa is a Strategy and Development Manager at Reality Investment Funds, Israeli value-add real estate fund. 
 
Prior to joining Reality Investment Funds, Ms. Sheratzky-Jaffa was a Partner at the Israeli law firm Amit, Pollak, Matalon and Co., specializing in the fields of investment funds, mergers and acquisitions, high-tech and corporate governance, and an associate at the New York offices of the US law firm Akin Gump Strauss Hauer & Feld. 
 
Ms. Sheratzky-Jaffa holds LL.M degree from Columbia University (New York), LL.B from Haifa University and B.A (economics) from Haifa University, and is a member of the Israeli Bar Association and the New York State Bar. 
 
Ms. Sheratzky-Jaffa is the nephew of Izzy Sheratzky and the cousin of Eyal, Nir and Gil Sheratzky and the daughter of Efraim Sheratzky.
 
Ami Saranga has been serving as the Deputy Chief Executive Officer of our company since 2011. Prior to that Mr. Saranga served as our VP Marketing since 2008. Prior to 2008, Mr. Saranga managed the SME division of Pelephone Communications Ltd., one of Israel’s largest telecommunication network operators. Mr. Saranga holds a BA degree in Business Administration from Ruppin Academic Center, Israel.
 
Eli Kamer has served as Executive Vice President, Finance and Chief Financial Officer of our company since 1999, after serving as its Finance Department Manager since 1997. Prior such date, Mr. Kamer worked as an accountant in Fahn Kanne & Co., our independent registered public accountant. Mr. Kamer is a CPA and holds a BA degree in Business Administration from the Israel College of Management and an MBA degree in business administration from Bar Ilan University.
 
Guy Aharonov has served as our in-house legal counsel since 1999. Prior to joining our company, he has worked as an attorney in Cohen Lahat & Co. Mr. Aharonov holds LLB and LLM degrees from Tel Aviv University.

Udi Mizrahi has served as our VP Finance since 2000. On his current position Mr. Mizrahi serve as a Deputy Chief Executive Officer International Operation and VP of Finance. Mr. Mizrahi is a CPA and holds a BA degree in accounting and economics from Ruppin Academic Center, Israel.
 
Our articles of association provide for staggered three-year terms for all of our directors (except our external directors, who are elected in accordance with the provisions of the Israeli Companies Law). The directors on our board (excluding the external directors) are divided into three classes, and each class of directors serves for a term of three years, as follows: Nir Sheratzky, Yigal Shani and Yehuda Kahane (class B), who were re-elected on November 9, 2017; Izzy Sheratzky, Gil Sheratzky and Zeev Koren (class C), who were re-elected on December 12, 2018; and Eyal Sheratzky, Efraim Sheratzky, Tal Sheratzky-Jaffa and Yoav Kahane (class A), who were re-elected on December 28, 2016. This classification of the board of directors may delay or prevent a change of control of our company.
 
On December 28, 2016, an annual general shareholders meeting approved the extension of the term of Mr. Gideon Kotler, our external director, for additional three years (beginning April 30, 2017). On December 21, 2017, an annual general and special shareholders meeting approved the re-election of Mr. Israel Baron, our external director, for additional three years.
 
Shareholders Agreement and Articles of Association of Moked Ituran Ltd.

Pursuant to Moked Ituran Ltd's articles of association and agreement (as amended) between its shareholders, there is a mechanism in place with regard to directors to be designated and voted for election by Moked ituran Ltd in each of our annual shareholdings meeting for the relevant class of directors (four directors in class A and B and three in class C).The aforementioned is in effect only for as long as Moked Ituran Ltd holds at least 15% of our issued and outstanding share capital.
 
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B.
COMPENSATION
 
The aggregate direct compensation we paid to our directors who are not officers for their services as directors as a group for the year ended December 31, 2018 was approximately $249,000 Directors are reimbursed for expenses incurred in connection with their attendance of board or committee meetings. The compensation payable to external directors is determined in accordance with regulations promulgated under the Israeli Companies Law. See Item 6.C - Board Practices under the caption “External directors” below. Our audit committee and board of directors approved compensation for Mr. Ze’ev Koren, for serving as the Chairman of our board of directors, and for Mr. Yoav Kahane, for serving as a member of our board committees, such that they shall be compensated in the same manner as our external directors are compensated, annually and per meeting, in accordance with the Companies Regulations (Rules for the Compensation and Expenses of an External Director), 2000-5760. In 2018, we paid the sum of NIS 422,000 (approximately $118,000) to our external directors, NIS 200,000 (approximately $56,000) to Mr. Ze’ev Koren, NIS159,000 (approximately $ 44,000) to Mr. Yoav Kahane, NIS 115,000 (approximately $ 32,000) to Ms. Tal Sheratzky-Jaffa.
 
We do not have any agreements with directors providing for benefits upon termination of their respective services as such.
 
The aggregate costs to the Company of the compensation to our Co-Chief Executive Officers in 2018 were $2.9 million. The aggregate compensation paid to all of our officers as a group during 2018 was approximately $9.8 million. In 2018 we paid an aggregate amount of $61,000 to one director who provided us with services. The above compensation amounts include amounts attributable to automobiles made available to our officers and other fringe benefits commonly reimbursed or paid by companies in Israel. Employee directors do not receive additional fees for their services as directors.
 
The following table sets forth the breakdown of the compensation of our 5 highest paid officers in 2018 according to our 2018 financial reports:
 
   
Management
fees
   
Wage
   
Social
components
   
Car value
   
Bonus
(results based)
   
Bonus (Share
yield based)
   
Total
 
   
Compensation components (in thousand US Dollars)
 
Izzy Sheratzky (President)          
   
742
     
-
                 
1,077
     
-
     
1,819
 
Eyal Sheratzky (Co-Chief Executive Officer)
   
577
     
-
                 
876
     
-
     
1,453
 
Nir Sheratzky (Co-Chief Executive Officer)
   
577
     
-
                 
876
     
-
     
1,453
 
Gil Sheratzky (CEO of our Subsidiary. International Activity and Business Development Officer)
   
413
     
-
                 
626
     
-
     
1,039
 
Ami Saranga (Deputy Chief Executive Officer)
           
200
     
37
     
32
     
111
     
-
     
380
 
                                                         
Total of our 5 highest paid officers
   
2,309
     
200
     
37
     
32
     
3,566
     
-
     
6,144
 
 
During 2018, we set aside $ 419,000 for the benefit of our officers for pension, retirement or similar benefits. We do not set aside any funds for the benefit of our directors who are not employees for any pension, retirement or similar benefits.
 
All numbers in this section are rounded to the nearest thousand.
 
During 2018, Messrs. Izzy Sheratzky, Eyal Sheratzky, Nir Sheratzky and Gil Sheratzky provided their services as President, Co-Chief Executive Officers and CEO of our Subsidiary & International Activity and Business Development Officer respectively, as independent contractors pursuant to services agreements, which were adopted by our shareholders meeting in January 2014, which terms correspond to our compensation policy as described below. Such agreements were extended subject to the approval of our next general shareholders meeting, for additional three years, with accordance to the provisions of Israeli Company Law and Israeli Companies Regulations (Relaxations in Transactions with Interested Parties) 5760-2000, and were approved accordingly by our compensation committee and our board of directors on February 26, 2017.
 
On November 9, 2017 our annual general meeting of shareholders approved the extension of service agreements as independent contractors, of Messrs. Izzy Sheratzky, Eyal Sheratzky, Nir Sheratzky and Gil Sheratzky for a period of additional three years.
 
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For further details concerning such terms of service, please see Item 7.B – Related Parties Transactions under the caption “Transactions with our directors and principal officers.”
 
In 2006, our compensation committee has devised a bonus scheme pursuant to which some of our officers and employees received shares of our profit before tax on a consolidated basis, based on their seniority, level of global and domestic involvement, contribution to our operations and other criteria set by the compensation committee. In 2010, our compensation committee resolved that additional managers shall be entitled to receive bonuses under this bonus scheme and that some of the grantees should continue to receive a bonus based on our consolidated results and some should receive a bonus based only on our solo financial statements. During 2018, we paid a total of $ 916,000 to our officers and employees pursuant to the above bonus schemes.
 
Our compensation policy for office holders
 
In December 2012, amendment no. 20 to the Israeli Companies Law became effective. Among other things, this amendment requires Israeli public companies to set forth their policy regarding their office holders’ terms of office, including fixed compensation, target-based incentives, equity awards, severance and other benefits. The amendments also set forth the considerations that should be applied when devising a compensation policy for office holders.
 
The term “office holder” is defined in the Israeli Companies Law, to mean the chief executive officer, chief business officer, deputy chief executive officer, vice chief executive officer, any other person fulfilling such position even if his title is different, as well as a director or a manager directly subordinate to the chief executive officer.
 
The compensation policy must be approved every three years by the board of directors, after considering the recommendations of the compensation committee; and generally requires the approval of the company’s general meeting of shareholders by a special majority of shareholders who are not controlling shareholders and who do not have a personal interest in the approval of the policy; or, alternatively, that the non-controlling shareholders and shareholders who do not have a personal interest in the matter who are present and vote against the policy hold two percent or less of the voting power of the company.
 
The compensation policy does not intend to amend any officer’s existing terms of office; nor to bestow any officer with a right to receive the compensation, or any element thereof set forth therein. However, generally, once the compensation policy is approved, all future terms of service of office holders should conform to its provisions. The specific terms of office of each officer shall be separately determined in accordance with the relevant provisions of the Israeli Companies Law and the regulations promulgated thereunder.
 
Our general shareholders meeting approved our compensation policy for office holders on October 31, 2013, and on November 7, 2016 approved a renewal and several minor amendments in our compensation policy (in order to reflect several changes in Israeli Company Law). The policy applies to office holders of the Company (see definition above), who serve as the Company’s President, Chief Executive Officer(s) and other executives who are deemed office holders of the Company, as well as office holders of the Company’s Israeli wholly owned subsidiaries, provided they report to the chief executive officer. The policy also applies to directors of the Company.
 
Our compensation policy for office holders was formulated in view of our belief that our business success is the result of the excellence of our human resources and their devotion to the achievement of our company’s goals. Therefore, it is aimed at offering our officers with a competitive compensation package that will align their incentives with those of our company and our shareholders, and at motivating them to achieve the goals of our company, while avoiding undue pressure to take excessive risks. Among other factors, our compensation committee and board of directors have considered, as required by amendment no. 20 to the Israeli Companies Law and as reflected in the policy: (a) the advancement of the company’s goals, its business plan and its policy with a long-term view; (b) the creation of appropriate incentives for office holders, considering the company’s risk management policy; (c) the size of the company and the nature of its business; (d) with respect to variable components of the terms of office – the contribution of the office holders to the achievement of the company’s goals and to the maximization of its profits, with a long-term view and in accordance with the position of the office holder.
 
The compensation policy incorporates all matters required to be included in a compensation policy as mandated by amendment 20 to the Israeli Companies Law, including (without limitation): (a) the requirement to consider the office holders’ education, skills, professional experience, expertise, position and past compensation agreements; (b) consideration of the ratios between overall compensation of the officers and the average and median salary of the other employees of the Company; (c) the board’s right to reduce variable compensation; (d) the determination of a maximum period for advanced and transition periods upon termination of services; (e) basing variable components of compensation on key performance indicators and on measurable criteria; (f) determining the ratio between fixed and variable components of compensation and setting forth caps on the amount of variable compensation payable; and (g) a claw-back provision with respect to restatements of financial statements. For further details, see our full compensation policy for office holders, which is filed herewith as Exhibit 4.24 under Item 19 – Exhibits.

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C.
BOARD PRACTICES
 
Board of Directors
 
Pursuant to our articles of association as presently in effect, our board of directors generally consists of twelve directors, including at least three independent directors in accordance with the listing rules of Nasdaq concerning the composition of audit committees, of whom two directors are external directors as required by Israeli law. Our independent directors, as such term is defined under the Nasdaq listing rules, are Mr. Baron, Mr. Kotler, Mr. Koren, Mr. Yoav Kahane and Ms. Tal Sheratzky - Jaffa, Pursuant to our articles of association, other than the external directors, for whom special election requirements apply (see “External directors” below), our directors are elected, by majority of our shareholders and may be removed by special majority. However, see Item 6.A – Directors and Senior Management for a description of our staggered board and the shareholders agreement and articles of association of Moked Ituran Ltd. Our board of directors may at any time and from time to time appoint any other person as a director to fill a vacancy until the general meeting of shareholders in which the term of service of the replaced director was scheduled to expire.
 
Pursuant to the Israeli Companies Law, our chairman convenes and presides over the meetings of the board. In addition, any two directors may convene a meeting of the board of directors, as well as a director who becomes aware of a company’s matter that allegedly involves a breach of the law or an improper business conduct. A quorum consists of a majority of the members of the board, and decisions are taken by a vote of the majority of the members present. Our articles of association provide that such quorum will in no event be less than two directors.
 
We are incorporated in Israel and are therefore subject to the provisions of the Israeli Companies Law, including certain corporate governance provisions. Our ordinary shares are listed on the Nasdaq Global Select Market (Our shares were delisted from the Tel Aviv stock exchange on May 25, 2016, for additional information see Item 9.A – Price History of Our Shares), and we are therefore subject to certain provisions of the Israeli securities laws, the U.S. securities Law and the Nasdaq listing rules. See also Item 16.G. – Corporate Governance below for additional information concerning our compliance with the Nasdaq listing rules and exemptions therefrom.
 
According to our Articles of Association, some of our officers and employees (including the chairman of our board and at least one third member of the Board) should be citizens and residents of Israel and receive clearance approval from the Israeli General Security Service. All the members of our board comply with these requirements.
 
On February 26, 2017 our board has adopted an Internal Compliance policy, which following review of our internal process included a comprehensive update of our internal regulations and codification of our internal regulations, all pursuant to the applicable Israeli laws.

External directors
 
Under Israeli law, the board of directors of companies whose shares are publicly traded are required to include at least two members who qualify as external directors. External directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:
 
§
Such majority includes at least the majority of the shares held by all non-controlling shareholders or those having personal interest in the nomination, except personal interest which is not resulting from connections with controlling shareholders, present and voting at such meeting; or
 
§
The total number of shares voted against the election of the external director and held by shareholders other than controlling shareholders or those having personal interest in the nomination, except personal interest which is not resulting from connections with controlling shareholders, must not exceed 2% of the shares whose holders are entitled to vote at any meeting of shareholders.
 
External directors are generally elected to serve an initial term of three years and may be re-elected to serve in that capacity for two additional three-year terms; however, companies whose securities are listed on recognized foreign exchanges, such as Nasdaq, may extend the service terms of their external directors for additional unlimited terms, each of no more of than three years , subject to the approval of the audit committee and the board of directors that such extension is for the benefit of the company in view of the directors’ expertise and special contribution to the operation of the board and its committees and these reasons together with the term served by the external director were presented to the shareholders prior to their approval (see the Israeli Companies Regulations (Allowances for Companies with Securities Listed on an Exchange Outside Israel), 2000-5760). The appointment of an external director for additional terms may be brought for the approval of the shareholders either by the board of directors or by a shareholder that holds at least 1% of the company’s voting rights, provided that the nominee is not a related or competing shareholder (as defined below) or a relative thereof, at the time of the appointment, and does not have an affinity to such shareholder (as defined below) at the time of the appointment or the two years preceding such appointment. The term “related or competing shareholder” means the shareholder who proposed the appointment or a 5% shareholder of the company if, at the time of the appointment, his controlling person or a company controlled by either of them, has business relations with the company, or if he, his controlling person or a company controlled by either of them are competitors of the company. The term “affinity” means the on-going existence of work relationship, business or professional relationship or control and the service as an officer.
 
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External directors may generally be removed from office by the same majority of shareholders required for their election or by a court, in each case, only under limited circumstances, including if they cease to meet the statutory qualification for their appointment or violate the duty of loyalty to the company.
 
If at the time of the appointment of an external director, all directors who are not controlling persons or their relatives are of the same gender, then the elected external director must be of the other gender.
 
Each committee of the board of directors that is vested with an authority of the board must include at least one external director, except that the audit committee and compensation committee must include all external directors then serving on the board of directors. The Israeli Companies Law prohibits external directors from receiving, directly or indirectly, any compensation other than for services as an external director pursuant to the provisions and limitations set forth in the applicable regulations promulgated under the Israeli Companies Law.
 
Israeli law provides that a person is not qualified to serve as an external director if he is a relative (as defined in the Israeli Companies Law) of the company’s controlling person, or if, at the time of his/her appointment and/or at any time during the two years preceding his or her appointment, that person, a relative, partner or employer of that person, or any entity under that person’s control, has or has had an affinity (as defined above) to the company, its controlling person or its relative or to any entity that, as of the date of appointment, or at any time during the two years preceding that date, is controlled by the company or by its controlling person. In addition, no person may serve as an external director if that person’s professional activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as a director; and, a person already serving as a director of one company may not be appointed as an external director of the company if at that time a director of the company is serving as an external director of the first company. In addition, a company, controlling shareholder and any other entity controlled by the controlling shareholder may not grant to such external director, its spouse or child, any benefits, directly or indirectly, and the external director, its spouse or child may not be appointed to serve in any position, may not be employed by and may not, directly or indirectly, render any professional services to the company, such controlling shareholder or any other entity controlled by the controlling shareholder, during the first two years following such external director’s termination of tenure of office, and with respect to a relative who is not the external director’s spouse or child – during the first year following such termination.
 
Mr. Israel Baron is now serving his sixth term as an external director of the Company, who was reelected on of December 21, 2017 for a term of 3 years. Mr. Gideon Kotler was appointed on April 30, 2014 by an extraordinary shareholders meeting as our new external director, following the death of our former external director, Dr. Orna Ophir, in January 2014 and was reelected by our general shareholders meeting on December 28, 2016, for his second term, of additional 3 years term starting from April 30, 2017.
 
Audit committee
 
Under Israeli law, the board of directors of a public company must appoint an audit committee. The audit committee must comprise of at least three directors, including all of the external directors and the chairman of the audit committee must be an external director. In addition, the majority of the members of the audit committee must be independent directors. Under the Israeli Companies Law, a director is considered “independent” if he/she is an external director or if he/she meets the qualifications of an external director, has not served as a director of the company for over 9 consecutive years, and has been classified as such. Under Israeli regulations a director who serves more than 9 consecutive years as a director may still be deemed as "independent director" provided the Audit committee and thereafter the board of directors resolved that his-her tenure as a director for an extend term is for the benefit of the company based on his/her expertise and unique contribution to the board and its committees. Our Audit committee and board of directors so resolved with regard to Messrs. Israel Baron and Yoav Kahane. The audit committee may not include the chairman of the board, any director who is employed by the company or regularly provides services to the company (other than as a board member), a controlling shareholder or any relative of such person. All audit committee decisions must be approved by a majority of the committee members of which the majority of members present are independent directors. Furthermore, a person who is not eligible to serve on the audit committee is restricted from participating in its meetings and votes, unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a certain matter, provided however, that the company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not in the actual votes and likewise, company counsel and secretary who are not controlling shareholders or relatives of such shareholders may be present in meetings and decisions of such present is requested by the audit committee.
 
Our audit committee must also meet the requirements of the Nasdaq listing rules concerning audit committees.
 
Our board of directors has formed an audit committee that is empowered, among other things, to exercise the powers of the board of directors concerning our accounting, reporting and financial control practices. Our audit committee operates in accordance with a charter, which complies with the provisions of the Israeli Companies Law and the Nasdaq listing rules. The members of the audit committee are currently Messrs. Israel Baron, Gideon Kotler and Yoav Kahane, all of whom are independent as required of members of the audit committee under the Nasdaq listing rules. Mr. Gideon Kotler was appointed on April 30, 2014 to replace Dr. Orna Ophir who passed away in January 2014. Our board of directors has determined that Mr. Israel Baron possesses financial sophistication as required by Rule 5605(c)(2) under the Nasdaq listing rules, and that both Mr. Baron and Mr. Kotler possess accounting and financial expertise as defined by Israeli regulations.
 
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Pursuant to the Israeli Companies Regulations (Provisions and Conditions regarding the Financial Statements’ Authorization Process), 2010, a reporting entity, except for a reporting entity that is subject to Chapter E(3) of the Israeli Securities Act, is required to establish a committee of the board of directors for the examination of financial statements. Since we are a reporting entity under Chapter E(3), we are not obliged to constitute a committee for the examination of financial statements; and therefore, commencing with the financial statements for the first quarter of 2013, we ceased holding meetings of the examination of financial statements committee; and instead, our audit committee considers the financial statements prior to their approval by the board.
 
Pursuant to the 22nd amendment in the Israeli Company law, which was set to define new rules to approve transaction of the public company with its controlling shareholders, or the transaction in which the controlling shareholder has interest. The law requires from our Audit committee to set up rules to define the criteria for classification of transactions, which are neither Insignificant Transactions nor extraordinary transactions, and their procedures of approval that will be determined per each year in advance. In addition, the law requires from the Audit Committee to set methods of examining transactions with the controlling shareholders, in order to enable their classification and their comparison to the conditions in the free market. The Audit Committee resolved on September 29, 2014 as follows:
 
1.
Transaction that is neither extraordinary, nor insignificant.
Definition: the relevant criteria that is calculated for the transaction is such transaction which is higher than 0.25% of the equity of the company according its last combined financial reports, or higher than 1% of average net revenue of the past 3 years of the company in their absolute value, in the last 2 calendar years prior to the date of the transaction is being reported according the last financial report of the company.
Methods of approval: approval by the senior management of the company (from vice chief executive officer and higher) and report to the Board. The following transactions will require also the approval of the Audit Committee:
(1)
Transaction which is higher than 4.5% of the equity of the company according its last combined financial reports which were published prior to the approval of the transaction.
(2)
Transaction that involves risks or significant exposure beyond mere monetary liabilities or obligations.
(3)
Transaction in which the company enters a new activity field or exits from an existing activity field.
2.
Insignificant transaction:
Definition: such transaction which is not higher than 0.25% of the equity of the company according its last combined financial reports or is not higher than 1% of average net revenue of the past 3 years of the company in their absolute value, in the last 2 calendar years prior to the date of the transaction is being reported according the last financial report of the company.
Methods of approval: Approval by the management of the company or by the officer in charge in the company (vice chief executive officer, other officer or other in charged body in the company according the decisions of the company).
3.
General rules:
(1)
Any transaction with a controlling shareholder or any transaction that a controlling shareholder has an interest in, will be brought before the Audit Committee, which will determine its type and decide on case by case basis on defining it as an insignificant transaction or other kind of transaction, and will decide on its review and on its approval.
(2)
According the adopted criteria, transactions with Tzivtit Insurance Agency (1998) Ltd. and with Rinat Yogev Nadlan Ltd. shall be classified as insignificant transactions. If the extent of such transactions will remain similar during the following years, our management shall be deemed qualified to approve such transactions and to report them to the Audit Committee.
(3)
Every year the criteria for classifying transactions as set up above shall be brought for re-approval by the Audit Committee.
 
Compensation committee
 
The Israeli Companies Law mandates the appointment of a compensation committee comprising of at least three directors. The compensation committee must include all of the external directors, who shall constitute the majority of the members thereof, and its remaining members shall be directors whose terms of service comply with the provisions promulgated concerning the remuneration of external directors. The chairman of the committee must be an external director. The members of the Compensation committee are currently Israel Baron, Gideon Kotler and Yoav Kahane. Mr. Gideon Kotler was appointed on April 30, 2014 to replace Dr. Orna Ophir who passed away in January 2014. All members of our compensation committee are independent directors as defined by the Nasdaq listing rules, and all of whom meet the composition requirements under the Israeli Companies Law. Since February 2016, the Israeli Companies Law permits that Audit Committee can serve also as a Compensation committee, provided that it will comply with requirements of the Compensation Committee as explained above.

Under the Israeli Companies Law, the compensation committee is responsible for: (i) making recommendations to the board of directors with respect to the approval of the compensation policy for office holders and any extensions thereto; (ii) periodically reviewing the implementation of the compensation policy and providing the board of directors with recommendations with respect to any amendments or updates thereto; (iii) reviewing and resolving whether or not to approve arrangements with respect to the terms of office of office holders; and (iv) determining whether or not to exempt a transaction with a candidate for chief executive officer from shareholders' approval.
 
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Furthermore, our compensation committee oversees, on behalf of the Board, the management of Ituran’s compensation and other human resources-related issues and otherwise carries out on behalf of the Board its responsibilities relating to these issues. The committee is responsible for establishing annual and long-term performance goals and objectives for our executive officers. In addition, as required under the Nasdaq listing rules, our compensation committee is responsible for the appointment, compensation and oversight of the work of any compensation consultant, legal counsel and other adviser retained by the committee; and may retain such advice only after taking into account the considerations set forth in the Nasdaq listing rules in this respect. Our compensation committee operates in accordance with a charter, which complies with the provisions of the Israeli Companies Law and the Nasdaq listing rules.
 
According to our compensation committee charter, the compensation committee, among its other duties, is responsible on reviewing the disclosure in this form which concerns the Compensation Policy and the sections describing the Terms of Service of Officers, controlling persons and their relatives.
 
Internal auditor
 
Under the Israeli Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. An internal auditor may not be:
 
§
a person (or a relative of a person) who holds more than 5% of the company’s shares or voting rights;
§
a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;
§
an executive officer, director or other affiliate of the company; or
§
a member of the company’s independent accounting firm.
 
The role of the internal auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business procedures. Our internal auditor is Simon Yarel, CPA, who has served as our internal auditor since January 1999.
 
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D.
EMPLOYEES
 
The following table sets forth the total number of our employees at the end of each of the past three years, and a breakdown of such employees by main category of activity and by geographic location: 
 
   
Year Ended December 31,
 
   
2018
 
2017
 
2016
 
By area of activity:
             
Control Center
 
532
 
460
 
395
 
Research and Development
 
162
 
51
 
40
 
Sales and Marketing
 
428
 
104
 
103
 
Technical support and IT
 
652
 
346
 
305
 
Finance, Administration and Management
 
385
 
260
 
248
 
Private enforcement and operations
 
853
 
366
 
408
 
Manufacturing
 
160
 
131
 
101
 
Total
 
3,172
 
1,718
 
1,600
 
               
By geographic location (out of total):
             
Israel
 
855
 
843
 
762
 
Brazil
 
990
 
694
 
626
 
Argentina
 
263
 
146
 
175
 
United States
 
34
 
35
 
37
 
Mexico
 
473
 
-
 
-
 
Ecuador
 
345
 
-
 
-
 
Colombia
 
212
 
-
 
-
 
               
Total
 
3,172
 
1,718
 
1,600
 
 
We consider our relations with our employees to be satisfactory and have no ongoing major labor disputes or material labor-related litigation. Our employees are subject to local labor laws and regulations, which in some countries are more stringent than others. Some of our senior executives also have employment agreements that may grant them rights in excess of those provided by the applicable laws.
 
Israel
 
Our employees in Israel are subject to Israeli labor laws and regulations and employment customs. The applicable labor laws and regulations principally concern matters such as paid annual vacation, paid sick days, length of the workday, payment for overtime and severance pay. Israeli law generally requires severance pay equal to one month’s salary for each year of employment upon retirement or death of an employee or termination of employment without cause. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Since January 1, 1995, these amounts also include payments for national health insurance.
 
Israeli labor laws impose on employers increased liability, including monetary sanctions and criminal liability, in cases of violations of certain labor laws and certain violations by contractors providing maintenance, security and cleaning services.
 
Brazil
 
Our employment agreements in Brazil are subject to Brazilian labor laws and regulations, to collective labor agreements or bargaining arrangements with unions and contract. The laws and regulations in Brazil govern almost all aspects of an employment relationship and do not leave much room to be negotiated with the employee. Still, employment contracts create obligations to the parties if they are in compliance with the law. The Labor Code mainly governs the employees’ right to paid annual vacation, paid sick days, the maximum length of a workday, minimum payment for overtime and statutory severance pay. Brazilian law generally requires severance pay equal to 50% of the balance of the employee’s FGTS account (a mandatory fund to guarantee severance and unemployment). The FGTS can also be withdrawn when the employee retires, dies or his employment is terminated without cause, among others. Brazilian employers are required to purchase health insurance for employees only in the event it is set forth by the applicable collective labor agreement, contract or company policy, and are required to cover employees’ food and travel costs whenever a business trip is required, and to make deposits into a Guarantee Severance Fund (the so-called “FGTS”). Furthermore, Brazilian employees and employers are required to make contributions to the National Insurance Institute (“INSS”), similar to the United States Social Security Administration. Our collections to the National Insurance Institute amount to 34.8% to 39.8% of the payrolls, out of which 8% to 11% (limited to R$5,839.45 of individual salary) corresponds to contributions by the employees deducted from salaries and 26.8% is the fixed part we pay. Our contribution of 26.8% includes mandatory contribution to the Public Insurance for Labor Accidents and Diseases (SAT). According to Decree Law 6957/2009 such portion, which varies from 1% to 3% of payroll, should be multiplied by another factor (FAP) from 0.5 to 2 in order to reduce or increase our burden to reflect statistics of occupational accidents and diseases in our business.
 
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All of our employees in Brazil, excluding the chief executive officer, some directors (VPs) and three managers, are represented by a labor union and the employees’ mandatory contributions to their union are paid by us. The law no. 13.467/2017, which entered into force on November 11, 2017, made the labor union contribution optional (i.e., discounted only upon the employees’ consent).
 
Argentina
 
Our employees in Argentina are subject to Argentine labor laws and regulations and other special practices and employment customs. The laws and regulations in Argentina control all aspects of labor relations and designate a general Employment Contract with which all employees and employers must comply. This general Employment Contract adopts by reference the provisions of the Labor Law which principally concerns matters such as paid annual vacation, paid sick days, the length of the workday, and payment for overtime and severance pay. Argentinean law generally requires severance pay equal to one month per year of service upon the termination of employment without a justified cause. Argentine employers are also required to contribute for the following items: (a) Pension funds 20.70 % which will decrease in next years (*as describe in the table below) (b) health insurance for employees 6% (c) occupational accident insurance 1.70 %; and (d) Retirement fund insurance 3.5% (only this item is for Union Employees). All the rates should be applied on the gross salary.
 
(*) the rate of company contribution for pension funds was 20.70 % until December 31, 2018. It will decrease respectively in the following years until 2022 and will stand on a rate of 19.5%, as follows:
 
Until
31/12/2018
Until
31/12/19
Until
31/12/2020
Until
31/12/2021
From
1/1/2022 on
20.70%
20.40%
20.10%
19.80%
19.50%
 
Our employees in Argentina, excluding the chief executive officer and a number of other employees, are members of a labor union and the employee member fees are paid by them.
 
United States
 
We have no collective bargaining agreements with any of our employees in the United States and none of our employees are members of a union.
 
Mexico
 
The hiring of employees in Mexico is subject to the regulations of the Federal Labor Law, the Social Security Law, the Infonavit Law, the Income Tax Law, Afore, and Infonacot In these laws both workers and employers have obligations and rights ; the percentage corresponding to the employer is 40% in Payroll and Employee Tax depending on their level of income. The working relationship between employer and employee is regulated by the Individual work contract .In Mexico we have several modalities of types of Labor Contract, according to the permanence and type of contract, example: Contract for a Determined Time, Permanent Contract, and Contract for Determined Work. In these Contracts the conditions of the work are specified. Within our company we also have working relationships through outsourcing, where our employees have the same rights and obligations and adhere to the same internal and legal guidelines. Contract terminations without cause by the employer require the payment of 3 months' salary as a concept of damages.
 
Ecuador
 
Our employees in Ecuador are subject by the Ecuadorian Labor Code. The Labor Code provides for a 40-hour work week, 15 calendar days of annual paid vacation, restrictions and sanctions for those who employ child labor, general protection of worker health and safety, minimum wages and bonuses, maternity leave, and employer-provided benefits. The 2008 Constitution bans child labor, requires hiring workers with disabilities, and unpaid internships are not permitted in Ecuador. The law also mandates that employees’ thirteenth and fourteenth month bonuses, which are required by law, be paid in installments throughout the year instead of in lump sums. Employees have the option to opt out of this change and continue to receive the payments in lump sums. The law eliminates fixed-term employee contracts and replaced them with indefinite contracts, which shortens the allowable trial period for employees to 90 days. The Law for Labor Justice and Recognition of Work in the Home, which included several changes related to labor and social security, took effect in April 2015. The law limits the yearly bonus paid to employees, which is equal to 15 percent of companies’ profits and is required by law, to 24 times the minimum wage. Most workers in the private sector have the constitutional right to form trade unions and local law allows for unionization of any company with more than 30 employees. Private employers are required to engage in collective bargaining with recognized unions. The Labor Code provides for resolution of conflicts through a tripartite arbitration and conciliation board process. The Code also prohibits discrimination against union members and requires that employers provide space for union activities.
 
48

 
Colombia
 
Our employees in Colombia are subject to Colombian labor laws and regulations. All employees have an indefinite term employment contract and the law determines a minimum monthly salary (SMM), which is increased annually by the government and used to calculate labor obligations. 48 hours are the maximum hours for a week. All employees are affiliated with the Social Security System (Health, Pension and Occupational Risks), a percentage is paid by the company and the other by the employee, the calculation depends on the salary. The law determines additional benefits called social benefits payable by the company: Holidays: 15 working days for each year worked; Premium corresponds to the payment of 15 days of salary per semester worked or fraction; Unemployment corresponds to the payment of 30 days of salary per year worked or fraction; Unemployment interest corresponds to 12% of severance pay; Employees who earn less than 2 SMM must be given 3 times a year clothing and footwear or equivalent in bonuses. Termination of employment relationship by the company without a justified reason, is coupled with compensation to the employee. Additionally, for every 20 employees, the company must hire an apprentice who will receive financial support from 1 SMM, and who will be employed for a period of 6 months. Currently the company doesn't have any unionized employee.

E.
SHARE OWNERSHIP
 
The following sets forth, as of April 30, 2019 the share ownership of our directors and executive officers listed in Item 6.A above. All of the information with respect to beneficial ownership by our directors and executive officers has been furnished by the respective director or executive officer, as the case may be.
 
Name of Director/Officer (1)
 
Number of
Ordinary
Shares
Beneficially
Owned (2)
   
Percentage of
beneficial
ownership (3)
 
Izzy Sheratzky(4)          
   
4,077,317
     
19.38
 
Professor Yehuda Kahane (5)          
   
1,451,137
     
6.90
 
Zeev Koren          
   
-
     
-
 
Efraim Sheratzky (6)          
   
240,508
     
1.14
 
Yigal Shani (7)          
   
246,552
     
1.17
 
Eyal Sheratzky          
   
-
     
-
 
Nir Sheratzky          
   
-
     
-
 
Gil Sheratzky          
   
-
     
-
 
Yoav Kahane          
   
-
     
-
 
Tal Sheratzky- Jaffa          
   
*
     
*
 
Israel Baron          
   
-
     
-
 
Gidon Kotler          
   
*
     
*
 
Ami Saranga          
   
-
     
-
 
Eli Kamer          
   
-
     
-
 
Guy Aharonov          
   
-
     
-
 
Udi Mizrahi          
   
-
     
-
 
 
* Own less than one percent of our shares.
 
(1)
This table includes only current directors and officers that beneficially hold our shares.
(2)
Beneficial ownership’ is determined in accordance with the rules of the Securities and Exchange Commission (as defined in Rule 13d – 3 under the Securities Exchange Act of 1934) and shares deemed beneficially owned by virtue of the right of any person or group to acquire such ordinary shares within 60 days are treated as outstanding only for the purposes of determining the percent owned by such person or group. To our knowledge, the persons and entities named in the table above are believed to have sole voting and investment power with respect to all ordinary shares shown as owned by them, except as described below.
(3)
Amounts in this column are based on 23,475,431 ordinary shares outstanding as of April 30, 2019, less 2,434,297 treasury shares held by us.
 
49

 
(4)
Shares beneficially owned include: (a) 4,075,952 shares owned by Moked Ituran Ltd., which Mr. Sheratzky is deemed to beneficially owns due to his shared voting and investment power over such shares in accordance with that certain shareholders agreement, dated May 18, 1998 as amended on September 6, 2005 and on September 17, 2014, among Moked Ituran and its shareholders, which we refer to as the Moked Shareholders Agreement. For further information concerning the Moked Shareholders Agreement see the discussion under Item 6.A. – Directors and Senior Management under the caption “Shareholders Agreement and Articles of Association of Moked Ituran Ltd.” above; (b) 1,365 shares that are directly held by Mr. Sheratzky’s wife, Maddie Sheratzky.
(5)
Shares beneficially owned include: (a) 13,264 shares directly owned by Professor Kahane jointly with his wife, Rivka Kahane;(b) 5,782 shares owned by Yehuda Kahane Ltd., which Professor Kahane may be considered to beneficially own by virtue of his shared voting and investment control of the company through his 50% shareholdings thereof, the other 50% being owned by his wife, Rivka Kahane; and (c) 1,432,091 shares owned by Moked Ituran Ltd., which Professor Kahane may be considered to beneficially own by virtue of his right to direct the disposition of such shares in accordance with Moked’s articles of association. Professor Kahane has shared voting and investment control over Yehuda Kahane Ltd., a holder of 26% of the shares of Moked Ituran.
 (6)
Shares beneficially owned include: (a) 3,956 shares directly owned by Efraim Sheratzky, (b) 30,000 shares owned by Tzivtit Insurance Agency (1998) Ltd., which Efraim Sheratzky may be considered to beneficially own by virtue of his shared voting and investment control over such shares through his 50% ownership thereof, the other 50% of the shares held by Yigal Shani, and (c) 206,552 shares owned by Moked Ituran, which Mr. Sheratzky may be considered to beneficially own by virtue of his right to direct the disposition of such shares in accordance with Moked’s articles of association. Mr. Sheratzky may be considered to beneficially own such shares by virtue of his sole voting and investment control over his wholly owned G T.S.D. Holdings Ltd, the holder of 3.75% of Moked’s shares.
(7)
Shares beneficially owned include: (a) 10,000 shares directly owned by Yigal Shani, (b) 30,000 shares owned by Tzivtit Insurance Agency (1998) Ltd., which Yigal Shani may be considered to beneficially own by virtue of his shared voting and investment control over such shares through his 50% ownership thereof, the other 50% of the shares held by Efraim Sheratzky, and (c) 206,552 shares owned by Moked Ituran, which Mr. Shani may be considered to beneficially own by virtue of his right to direct the disposition of such shares in accordance with Moked’s articles of association. Mr. Shani may be considered to beneficially own such shares by virtue of his sole voting and investment control over his wholly owned G.N.S. Holdings, the holder of 3.75% of Moked’s shares
 
ITEM 7.              MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
A.
MAJOR SHAREHOLDERS
 
The following table shows the number of our ordinary shares beneficially owned by (a) the shareholders known to us as of April 30, 2019, to beneficially own more than 5% of our outstanding ordinary shares and (b) all of our directors and executive officers as a group.
 
Please also see Item 6.E above.
 
There are no shares underlying options or warrants held by such persons.
 
The shareholders listed below do not have any different or special voting rights from any other shareholders of our company. Except where otherwise indicated, we believe, based on information furnished by the owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such shares.
 
   
Number of
       
   
Ordinary
       
   
Shares
       
   
Beneficially
       
Shareholder
 
Owned
   
% Voting
 
Moked Ituran Ltd. (1)*          
   
4,075,952
     
19.37
 
All directors and executive officers as a group (2).          
   
4,140,319
     
19.68
 
Vulcan Value Partners (3)          
   
2,012,135
     
9.56
 
FMR LLC. (4)          
   
1,288,564
     
6.12
 
Renaissance Technologies LLC. (5)          
   
1,363,121
     
6.48
 
Treasury shares*          
   
2,434,297
     
-
 
 
(1) Moked’s articles of association provides that each of Moked’s shareholders shall have the right to direct Moked to dispose of such number of our shares corresponding to his or her relative shareholdings in Moked. In addition, ownership of all shares held by Moked are attributed to Mr. Izzy Sheratzky by virtue of his holdings in Moked. Please see Item 6.E above for the ownership of our shares attributed to Moked’s shareholders. For further information please see Item 6.A – Directors and Senior Management under the caption “Shareholders Agreement and Articles of Association of Moked Ituran Ltd.” above.
 
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(2) Includes shares held by Moked Ituran Ltd., which ownership are attributed to some of these directors and executive officers.
(3) The information presented herein is based on Form 13G filed by Vulcan Value Partners, LLC (“Vulcan”) on February 14, 2019. According to the information presented on such Form 13G, Vulcan is an investment adviser, and various persons, including the investment companies and owners of the separate accounts to which Vulcan serves as investment adviser, have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the Company’s securities that are the subject of Form 13G. As of April 30, 2019, Vulcan Value Partners Small Cap Fund, an investment company advised by Vulcan, owned 9.56% of the outstanding shares of the Company.
(4) The information presented herein is based on Form 13G filed by FMR LLC. (“FMR”) on February 13, 2019. According to the information presented on such Form 13G, the shares are beneficially owned by members of the Johnson family, including Abigail P. Johnson, are the predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC. For further information on the beneficial ownership by the portfolio accounts, please refer to Form 13G filed by FMR on February 13, 2019.
(5) The information presented herein is based on Form 13G filed by Renaissance Technologies LLC. (“RTC”) on February 13, 2019. According to the information presented on such Form 13G, the shares are beneficially owned by RTC. For further information on the beneficial ownership by the portfolio accounts, please refer to Form 13G filed by RTC on February 13, 2019.
 
As of April 30, 2019, we had a total of 4 shareholders (including the Depository Trust Company) of record in the United States with registered addresses in the United States. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees.
 
* On December 26, 2017, we filed a registration statement on F-3 Form for Moked Ituran shares and our treasury shares. On January 9, 2018, our registration statement for Moked Ituran shares and our Treasury shares became effective.
 
         B.         RELATED PARTY TRANSACTIONS
 
Transactions with our directors and principal officers
 
We purchase our insurance policies, including our directors’ and officers’ insurance, through Tzivtit Insurance Agency (1998) Ltd., an insurance agency owned by Efraim Sheratzky a director of the company and a shareholder of Moked, the brother of the President of our company and the uncle of both of our Co-Chief Executive Officers, and by Yigal Shani, who is one of our directors and is a shareholder of Moked. We pay an annual aggregate amount of NIS 1,118,000 or $ 311,000, for our basic insurance policies and NIS 820,000, or $ 228,000 for our directors’ and officers’ insurance policy. During 2018 Tzivtit Insurance Agency was entitled to commissions in an aggregate amount of NIS 340,000 or $ 95,000 which is paid by the insurance company on account of these policies.
 
We have entered into indemnification agreements with each of our directors and officers and the officers and directors of our subsidiaries providing them with indemnification for liabilities or expenses incurred as a result of acts performed by them in their capacity as our directors and officers. Our general meeting of shareholders approved on January 28, 2014 an amendment to these indemnification agreements and the grant thereof to office holders, including controlling persons and their relatives, who serve at our company and its subsidiaries from time to time. For the full indemnification agreements as so approved, please see Exhibit 4.19 under Item 19 – Exhibits.
 
Our general meeting of shareholders has also approved on January 28, 2014 the procurement from time to time of directors’ and officers’ insurance policies covering the liability of office holders, including controlling persons and their relatives, who serve at the Company and its subsidiaries from time to time, under the following terms: (a) the principal terms of the D&O insurance policies shall not materially deviate from the terms of our current directors’ and officers’ insurance policy; or (b) to the extent that the Company shall desire to procure a D&O insurance policy, which a material term thereof adversely deviates ( from our company’s point of view) from the terms of the current policy, then our company’s board of the directors shall confirm that, notwithstanding such deviation, our procurement of such policy is compatible with market terms and does not materially affect our profitability, assets or liabilities.
 
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In February 2014, following the approval of our general meeting of shareholders on January 28, 2014, we entered into service agreements, setting forth the terms of service of our President and Co-Chief Executive Officers in compliance with our compensation policy for office holders; and E-Com entered into a service agreement setting forth the terms of service of its Chief Executive Officer in compliance with our compensation policy for officer holders. The principal terms of these agreements are as follows:
 
Mr. Izzy Sheratzky shall provide his services as an independent contractor through A. Sheratzky Holdings Ltd., which shall be entitled to a monthly payment of NIS 225,000 (or $ 60,000) plus VAT, linked to the consumer price index for December 2013. At the request of the service provider, part of the fixed monthly pay may be granted through benefits, such as the provision of a company car for the use o/f Mr. Sheratzky and the payment of its maintenance costs and the cost of tax resulting there from the fixed monthly pay shall also include Mr. Sheratzky’s entitlement for a 25 days’ vacation and sick days as provided by law. The service provider shall also be entitled to payment or reimbursement of expenses, including hosting expenses, subsistence allowance abroad and participation in work-related home telephone expenses. The service provider shall be entitled to Target-based Cash Incentives and Excess Return Cash Incentives as detailed below. The agreement shall be in force for a period of 3 years and may be terminated upon 180 days’ advance notice of termination; however, the company may terminate the agreement without an advance notice and without compensation if the following shall occur: (a) Mr. Sheratzky is convicted of a criminal offense involving moral turpitude; (b) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has breached his fiduciary duty towards the company; (c) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has materially breached the agreement through the unauthorized disclosure of company’s secrets or competition with the company. The aggregate amounts paid to A. Sheratzky according this new service agreement in 2016, 2017 and 2018 were approximately $ 1,874,000, $ 3,202,000 and $ 2,859,000 respectively (the numbers include value added tax).

Mr. Eyal Sheratzky shall provide his services as an independent contractor through ORAS Capital Ltd. which shall be entitled to a monthly payment of NIS 175,000 (or $ 47,000) plus VAT, linked to the consumer price index for December 2013. At the request of the service provider, part of the fixed monthly pay may be granted through benefits, such as the provision of a company car for the use of Mr. Sheratzky and the payment of its maintenance costs and the cost of tax resulting therefrom. The fixed monthly pay shall also include Mr. Sheratzky’s entitlement for a 25 days’ vacation and sick days as provided by law. The service provider shall also be entitled to payment or reimbursement of expenses, including hosting expenses and subsistence allowance abroad. The service provider shall be entitled to Target-based Cash Incentives and Excess Return Cash Incentives as detailed below. The agreement shall be in force for a period of 3 years and may be terminated upon 180 days’ advance notice of termination; however, the company may terminate the agreement without an advance notice and without compensation if the following shall occur: (a) Mr. Sheratzky is convicted of a criminal offense involving moral turpitude; (b) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has breached his fiduciary duty towards the company; (c) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has materially breached the agreement through the unauthorized disclosure of company’s secrets or competition with the company. The aggregate amount paid to ORAS Capital Ltd in 2016, 2017 and 2018 was approximately $ 1,672,000, $ 2,337,000 and $ 2,224,000 respectively (the number includes value added tax).
 
Mr. Nir Sheratzky shall provide his services as an independent contractor through Galnir Management and Investments Ltd., which shall be entitled to a monthly payment of NIS 175,000 (or $ 47,000) plus VAT, linked to the consumer price index for December 2013. At the request of the service provider, part of the fixed monthly pay may be granted through benefits, such as the provision of a company car for the use of Mr. Sheratzky and the payment of its maintenance costs and the cost of tax resulting therefrom. The fixed monthly pay shall also include Mr. Sheratzky’s entitlement for a 25 days’ vacation and sick days as provided by law. The service provider shall also be entitled to payment or reimbursement of expenses, including hosting expenses and subsistence allowance abroad. The service provider shall be entitled to Target-based Cash Incentives and Excess Return Cash Incentives as detailed below. The agreement shall be in force for a period of 3 years and may be terminated upon 180 days’ advance notice of termination; however, the company may terminate the agreement without an advance notice and without compensation if the following shall occur: (a) Mr. Sheratzky is convicted of a criminal offense involving moral turpitude; (b) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has breached his fiduciary duty towards the company; (c) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has materially breached the agreement through the unauthorized disclosure of company’s secrets or competition with the company. The aggregate amount paid to Galnir Management and Investments Ltd, in 2016, 2017 and 2018 was approximately $ 1,478,000, $ 2,312,000 and $ 2,208,000 respectively (the number includes value added tax).
 
Mr. Gil Sheratzky shall provide his services as an independent contractor through ZERO-TO-ONE S.B.L. INVESTMENTS LTD., which shall be entitled to a monthly payment of NIS 125,000 (or $ 33,000) plus VAT, linked to the consumer price index for December 2013. At the request of the service provider, part of the fixed monthly pay may be granted through benefits, such as the provision of a company car for the use of Mr. Sheratzky and the payment of its maintenance costs and the cost of tax resulting therefrom. The fixed monthly pay shall also include Mr. Sheratzky’s entitlement for a 25 days’ vacation and sick days as provided by law. The service provider shall also be entitled to payment or reimbursement of expenses, including hosting expenses and subsistence allowance abroad. The service provider shall be entitled to Target-based Cash Incentives and Excess Return Cash Incentives as detailed below. The agreement shall be in force for a period of 3 years and may be terminated upon two months’ advance notice of termination; however, E-Com may terminate the agreement without an advance notice and without compensation if the following shall occur: (a) Mr. Sheratzky is convicted of a criminal offense involving moral turpitude; (b) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has breached his fiduciary duty towards E-Com; (c) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has materially breached the agreement through the unauthorized disclosure of E-Com’ and/or company’s secrets or competition with E-Com and/or the company. The aggregate amount paid to ZERO-TO-ONE S.B.L. INVESTMENTS LTD, in 2016, 2017 and 2018 according to this new service agreement, were approximately $ 1,118,000, $ 1,379,000 and $ 1,039,000 respectively (the numbers include value added tax).
 
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Each of the above agreements also provides that the executives may request to provide their services to the company as an employee, and not through a service provider, and in such event, the they shall execute an employment agreement with the company, in lieu of the above service agreements, which shall also set forth the provisions of social security and other benefits that the company usually grants its senior executive officers (which may not deviate from the provisions of the Compensation Policy in this respect). In any event, it was agreed that the nature of the agreement pursuant to which the services are provided shall not affect the cost to us of the provision of the services as set forth in the service agreements.
 
The aforementioned agreements were extended on February 26, 2017 subject to the approval of our next general shareholders meeting, for additional three years, with accordance to the provisions of Israeli Company Law and Israeli Companies Regulations (Relaxations in Transactions with Interested Parties) 5760-2000, and were approved accordingly by our compensation committee and our board of directors.
 
All agreements mentioned above are in compliance with our amended compensation policy as approved on November 7, 2016, by the Company’s general meeting of shareholders, which sets forth the principles of our office holders’ compensation. On November 9, 2017 our shareholders general meeting approved the aforementioned agreements for an additional three years.
 
The terms of the Cash Incentives applicable to each of Messrs. Izzy Sheratzky, Eyal Sheratzky, Nir Sheratzky and Gil Sheratzky (the “Executive Office Holders”), as set forth in their agreements referred to above (the “Agreements”), are as follows:
 
“Target-based Cash Incentives” means a cash incentive awarded to the Executive Office Holders for the company’s achievement of the following Profit-Before-Tax targets in each calendar year following the effective date of the above agreements, in which the Minimum Threshold (as defined below) has been achieved:
 
Company’s Profit-Before-Tax Targets
(in USD thousands)
Level of Incentive - As a Percentage of the Executive Office Holder’s Annual Cost of Pay
24,001 - 27,500
20%
27,501-31,000
45%
31,001-35,000
75%
35,001-39,000
110%
Above 39,001
150%
 
“Minimum Threshold” means, with respect to a particular calendar year, a Minimum Company’s Return on Equity (as defined below) of 15%, and a minimum company’s Profit before Tax of USD 24 million.
 
“Return on Equity” means, with respect to a particular calendar year, the ratio between the net income for such year and the average of the shareholders’ equity at the beginning of such calendar year and at the end of each calendar quarter of such year; calculated in accordance with the company’s audited or reviewed consolidated financial statements for such year, as the case may be, after taking into account Executive Officers’ compensation, but excluding adjustments of the value of assets and obligations to their fair value in accordance with accounting standards.

 “Profit-Before-Tax” means, with respect to a particular calendar year, the company’s profit before tax for such year in accordance with the company’s audited consolidated financial statements for such year, after taking into account Executive Officers’ compensation, but excluding adjustments of the value of assets and obligations to their fair value in accordance with accounting standards.
 
“Executive Officers” means Office Holders of the Company (“Nosei Misra”, as such term is defined in the Companies Law) who serve as the company’s President, Co-CEOs and other executives who are deemed Office Holders of the company, as well as Office Holders of the company’s Israeli wholly owned subsidiaries, provided they report to the CEO.
 
“Cost of Pay” means, with respect to independent contractors – their invoice amount plus company car and related expenses; and with respect to employees - their base pay (i.e. fixed gross amount payable to the employee in return for his services, excluding expenses, benefits and bonuses) plus 40% thereof.
 
Target-based Cash Incentives shall become payable upon the lapse of 30 days from the date of publication of the company’s audited annual financial statements (the “Entitlement Date”); and such cash incentive shall be paid on such date. However, if an Executive Office Holder’s Target-based Cash Incentives exceed an amount equal to 100% of such Executive Office Holder’s annual Cost of Pay (the “100% Threshold”), then 20% of the amount by which the Target-based Cash Incentives exceed the 100% Threshold (the “Deferred Portion”) shall not be paid on their Entitlement Date, but rather shall be deferred and paid in two equal installments on the first and second anniversary of the Entitlement Date, provided that the Minimum Threshold was achieved during the first calendar year (for the first installment) and during the second calendar year (for the second installment) following the Entitlement Date, respectively. The Deferred Portion shall be linked to the consumer price index known on the Entitlement Date.
 
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The company may pay to the Executive Office Holders advances on account of expected Target-based Cash Incentives, based on the company’s reviewed financial statements, prior to the Entitlement Date; provided that if on the Entitlement Date, it turns out that such advances exceed the Target-based Cash Incentives to which the Executive Office Holders are entitled, then the excess amounts shall be returned to the Company or shall be deducted from the payment of the remainder Target-based Cash Incentives on the Entitlement Date, as the case may be.
 
Excess Return Cash Incentives” means a cash grant based on the company’s Stock Yield as compared to the Russell 2000 Index’s Yield, as set forth below.
 
Company’s Stock Yield” means the percentage of increase or decrease of the company’s stock price on Nasdaq over an Examined Period (as defined below), as adjusted for dividend distribution, calculated based on the average adjusted closing price of the company’s shares on the Nasdaq during the 5 business days prior to and the 5 business days after the commencement and end of such Examined Period.
 
Russell 2000 Index’s Yield” means the percentage of increase or decrease of the Russell 2000 Index over an Examined Period, calculated based on the average Russell 2000 Index closing quotes during the 5 business days prior to and the 5 business days after the commencement and end of such Examined Period.
 
At the end of each calendar year, the company shall examine the Company’s Stock Yield since January 1 of such year or, with respect to the first year of such grant – since the date of its approval (an “Examined Period”), as compared to the Russell 2000 Index’s Yield over such Examined Period; and to the extent that the Company’s Stock Yield exceeds the Russell 2000 Index’s Yield for such period, each of the Executive Office Holders shall receive an amount equal to 50% of his monthly Cost of Pay for each 1% of excess return (in percentage points’ terms), or a relative amount in the event of a partial excess return. For the avoidance of doubt, in the event that the Company’s Stock Yield during such period is negative, no grant shall be awarded.

The Excess Return Cash Incentive for each year shall not exceed an amount equal to the Executive Officer Holder’s annual Cost of Pay.
 
In the event that an Agreement is terminated during a calendar year, the company’s compensation committee and board of directors shall determine the relative amounts out of the Target-based Cash Incentives and/or Excess Return Cash Incentives to which the relevant Executive Office Holder is entitled for the portion of the year during which the Agreement was in force; and these amounts shall be paid within 30 days after the termination of service/employment, as the case may be.
 
On the date of determination of each Executive Office Holder’s entitlement for a Target-based Cash Incentive for a particular year, the company’s compensation committee shall examine whether the total amount of grants to which Executive Officers are entitled with respect to such calendar year and which constitute variable components of their terms of services (the “Total Amount of Grants to Executive Officers”), exceed an amount equal to 10% of the Company’s EBITDA for such year (the “EBITDA’s Threshold”), as calculated in accordance with data extracted from the company’s audited consolidated annual financial statements, after taking into account the Executive Officers’ fixed compensation but excluding their variable compensation. In such event, the amount by which the Total Amount of Grants to Executive Officers exceeds the EBITDA’s Threshold shall be referred to as the “Excess Amount”.
 
In the event that the Total Amount of Grants to Executive Officers exceeds the EBITDA’s Threshold, then the Target-based Cash Incentive and the Excess Return Cash Incentive to which an Executive Office Holder is entitled (together, the “Grants”) shall be reduced by an amount equal to the Executive Office Holder’s Rate of Grants (as defined below) out of the Excess Amount. The term “Executive Office Holder’s Rate of Grants” means, with respect to a particular Executive Office Holder, the percentage which such Executive Office Holder’s Grants constitute out of the Total Amount of Grants to Executive Officers.
 
The company’s board of directors shall have the right, under special circumstances at its discretion, to reduce the amount of Grants to which the Executive Office Holders are entitled, upon a 60 days prior notice.
 
The Executive Office Holder shall be required to return any compensation paid to them on the basis of results included in financial statements that turned out to be erroneous and were subsequently restated in the company’s financial statements published during the three year period following publication of the erroneous financial statements; to the extent they would not have been entitled to the compensation actually received had it been determined based on the restated financial statements. In such case, compensation amounts will be returned within 60 days from the date of publication of the restated financial statements, net of taxes that were withheld thereon. If the Executive Office Holder has a right to reclaim such tax payments with respect to Grants which were paid in excess, from the relevant tax authorities, then the Executive Office Holder shall reasonably act to reclaim such amounts from the tax authorities and upon their receipt, shall remit them to the company.
 
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        In 2018 Executive Office Holders were eligible to Target based cash incentives at the maximum rate of (150%) as follows (which is included in the aforementioned payments according to the above new service agreements):

Executive Office Holders
 
Target-based Cash Incentive
   
Deferred Portion for the next 2 years
   
Deferred Portion from last 2 years
   
Total to be paid for 2018:
 
   
(In US$ thousands)
 
Izzy Sheratzky          
   
1,077
     
(75
)
   
75
     
1,077
 
Eyal Sheratzky          
   
876
     
(58
)
   
58
     
876
 
Nir Sheratzky          
   
876
     
(58