Company Quick10K Filing
Ituran
20-F 2019-12-31 Filed 2020-04-23
20-F 2018-12-31 Filed 2019-04-30
20-F 2017-12-31 Filed 2018-04-30
20-F 2016-12-31 Filed 2017-04-27
20-F 2015-12-31 Filed 2016-04-20
20-F 2013-12-31 Filed 2014-04-10
20-F 2012-12-31 Filed 2013-04-25
20-F 2011-12-31 Filed 2012-04-30
20-F 2010-12-31 Filed 2011-06-28
20-F 2009-12-31 Filed 2010-05-24

ITRN 20F Annual Report

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 5: Operating and Financial Review and Prospects
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 - Inventories
Note 4 - Investments in Affiliated and Other Company
Note 5 - Other Non-Current Assets
Note 6 - Property and Equipment, Net
Note 7 - Intangible Assets, Net
Note 8 - Goodwill
Note 9 - Credit From Banking Institutions
Note 10 - Other Current Liabilities
Note 11 - Contingent Liabilities
Note 12 - Stockholders' Equity
Note 13 - Other (Income) Expenses, Net
Note 14 - Financing Income, Net
Note 15 - Income Tax
Note 16 - Earnings per Share
Note 17 - Related Parties
Note 18 - Segment Reporting
Note 19 - Financial Instruments and Risks Management
EX-1.1 exhibit_1-1.htm
EX-4.8 exhibit_4-8.htm
EX-4.9(A) exhibit_4-9a.htm
EX-4.10(A) exhibit_4-10a.htm
EX-4.11(A) exhibit_4-11a.htm
EX-4.12(A) exhibit_4-12a.htm
EX-8 exhibit_8.htm
EX-11 exhibit_11.htm
EX-12.1 exhibit_12-1.htm
EX-12.2 exhibit_12-2.htm
EX-13 exhibit_13.htm

Ituran Earnings 2016-12-31

Balance SheetIncome StatementCash Flow

20-F 1 zk1719833.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, 2016
 
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 proceeding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x No
 
        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 o     Accelerated Filer x     Non-accelerated filer
 
        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


 
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
14
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
14
B.
BUSINESS OVERVIEW
16
C.
ORGANIZATIONAL STRUCTURE
28
D.
PROPERTY, PLANTS AND EQUIPMENT
29
30
30
A.
OPERATING RESULTS
30
B.
LIQUIDITY AND CAPITAL RESOURCES
41
C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
41
D.
TREND INFORMATION
45
E.
OFF-BALANCE SHEET ARRANGEMENTS
45
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
45
G.
SAFE HARBOR
45
 
i
46
A.
DIRECTORS AND SENIOR MANAGEMENT
46
B.
COMPENSATION
50
C.
BOARD PRACTICES
53
D.
EMPLOYEES
57
E.
SHARE OWNERSHIP
60
61
A.
MAJOR SHAREHOLDERS
61
B.
RELATED PARTY TRANSACTIONS
63
C.
INTERESTS OF EXPERTS AND COUNSEL
68
68
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL  INFORMATION
68
B.
SIGNIFICANT CHANGES
71
71
A.
OFFER AND LISTING DETAILS
71
B.
PLAN OF DISTRIBUTION
72
C.
MARKETS
72
D.
SELLING SHAREHOLDERS
72
E.
DILUTION
72
F.
EXPENSES OF THE ISSUE
72
72
A.
SHARE CAPITAL
72
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
73
C.
MATERIAL CONTRACTS
81
D.
EXCHANGE CONTROLS
81
E.
TAXATION
82
 
ii
F.
DIVIDENDS AND PAYING AGENTS
91
G.
STATEMENT BY EXPERTS
91
H.
DOCUMENTS ON DISPLAY
91
I.
SUBSIDIARY INFORMATION
91
91
92
92
93
93
98
98
98
98
98
98
99
99
99
99
99
100

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, 2014, 2015 and 2016, and our selected consolidated balance sheet data as of December 31,  2015 and 2016 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,  2012 and 2013, and the selected consolidated balance sheet data as of December 31, 2012,  2013 and 2014, 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,
 
 
2016
   
2015
   
2014
   
2013
   
2012
 
 
In USD
 
   
In thousands, except per share amounts
 
Revenues:
                             
 Location based services
   
141,940
     
127,683
     
133,692
     
126,951
     
114,565
 
 Wireless communications products
   
57,634
     
47,945
     
48,435
     
43,216
     
35,753
 
                                         
 Total Revenues
   
199.574
     
175,628
     
182,127
     
170,167
     
150,318
 
Cost of Revenues:
                                       
  Location based services
   
48,916
     
46,823
     
46,852
     
44,850
     
44,974
 
  Wireless communication products
   
48,627
     
38,924
     
38,142
     
36,015
     
29,786
 
                                         
Total cost of revenues
   
97,543
     
85,747
     
84,994
     
80,865
     
74,760
 
                                         
  Gross profit
   
102,031
     
89,881
     
97,133
     
89,302
     
75,558
 
                                         
  Research and development expenses
   
2,895
     
2,401
     
2,526
     
2,414
     
2,066
 
   Selling and marketing expenses
   
10,074
     
9,303
     
9,264
     
9,715
     
8,489
 
  General and administrative expenses
   
40,228
     
37,801
     
38,617
     
34,483
     
33,439
 
  Other expenses (income), net
   
836
     
(268
)
   
856
     
4,760
     
1,617
 
                                         
  Operating Income
   
47,998
     
40,644
     
45,870
     
37,930
     
29,947
 
  Other income (expenses), net
           
-
     
-
     
(166
)
   
6,755
 
Financing income, net
   
2,056
     
1,189
     
1,704
     
238
     
987
 
                                         
Income before income tax
   
50,054
     
41,833
     
47,574
     
38,002
     
37,689
 
Income tax
   
(14,877
)
   
(12,822
)
   
(14,246
)
   
(12,447
)
   
(11,690
)
Share in losses of  affiliated companies, net
   
(449
)
   
(2,439
)
   
(421
)
   
(1
)
   
(39
)
                                         
                                         
Net income for the year
   
34,728
     
26,572
     
32,907
     
25,554
     
25,960
 
Less: net income attributable to non-controlling interests
   
(2,589
)
   
(1,601
)
   
(2,478
)
   
(1,792
)
   
(1,080
)
                                         
Net income attributable to Company stockholders
   
32,139
     
24,971
     
30,429
     
23,762
     
24,880
 
                                         
Earning per share
                                       
  Basic
 
$
1.53
   
$
1.19
   
$
1.45
   
$
1.13
   
$
1.19
 
  Diluted
 
$
1.53
   
$
1.19
   
$
1.45
   
$
1.13
   
$
1.19
 
Weighted average number of shares outstanding
                                       
    Basic
   
20,968
     
20,968
     
20,968
     
20,968
     
20,968
 
    Diluted
   
20,968
     
20,968
     
20,968
     
20,968
     
20,968
 

2

 
Consolidated Balance Sheets Data
 
   
Year Ended December 31,
 
   
2016
   
2015
   
2014
   
2013
   
2012
 
   
In USD
 
   
In thousands, except per share amounts
 
Cash & Cash Equivalent; deposit in escrow (short and long term) and investment in trading marketable securities
   
31,485
     
29,051
     
40,780
     
46,679
     
34,392
 
Working Capital
   
59,096
     
50,124
     
56,910
     
57,259
     
44,145
 
Total Assets
   
178,019
     
142,003
     
152,337
     
160,542
     
147,339
 
Total Liabilities
   
69,848
     
54,182
     
57,754
     
65,057
     
55,332
 
Retained Earnings
   
71,717
     
57,739
     
49,067
     
38,831
     
32,187
 
Stockholders Equity
   
102,229
     
83,698
     
90,696
     
90,918
     
88,027
 
Dividend declared per share
   
0.86
     
0.78
     
0.98
     
0.81
     
1.71
 
 
3

Other Data:
 
   
Year Ended December 31,
 
   
2016
   
2015
   
2014
   
2013
   
2012
 
Subscribers of our location-based services(1)
   
1,057,000
     
948,000
     
817,000
     
741,000
     
667,000
 
Average monthly churn rate
   
3.1
%
   
3.3
%
   
3
%
   
2.9
%
   
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 AVL products, are primarily dependent on our relationships with insurance companies. In Israel, insurance companies drive demand for our SVR services and AVL products by encouraging and, in some cases, requiring customers to subscribe to vehicle location services and purchase vehicle location products such as ours. In Brazil and Argentina, insurance companies enter into written agreements to subscribe to our services and purchase or lease our products directly. Our inability to maintain our existing relationships or establish new relationships with insurance companies could adversely affect our revenues and growth potential.
 
4

Changes in practices of insurance companies in the markets in which we provide our SVR services and sell our AVL products could adversely affect our revenues and growth potential.
 
We depend on the practices of insurance companies in the markets in which we provide our SVR services and sell our AVL products. In Israel, insurance companies either mandate the use of SVR services and AVL products, or their equivalent, as a prerequisite for providing insurance coverage to owners of certain medium- and high-end vehicles, or provide insurance premium discounts to encourage vehicle owners to subscribe to services and purchase products such as ours. In Brazil and Argentina, insurance companies mainly lease our AVL products directly and subsequently require their customers to subscribe to our SVR services.
Therefore, we rely on insurance companies' continued practice of:

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

If any of these policies or practices change, revenues from sales of our SVR services and AVL products could decline, which could adversely affect our revenues and growth potential.
 
 A reduction in vehicle theft rates may adversely impact demand for our SVR services and AVL products.
 
 Demand for our SVR services and AVL products depends primarily on prevailing or expected vehicle theft rates. Vehicle theft rates may decline as a result of various reasons, such as the availability of improved security systems, implementation of improved or more effective law enforcement measures, or improved economic or political conditions in markets that have high theft rates. If vehicle theft rates in any or all of our existing markets decline, or if insurance companies or our other customers believe that vehicle theft rates have declined or are expected to decline, demand for our SVR services and AVL products may decline.   
 
         A decline in sales of new medium and high end cars and commercial vehicles in the markets in which we operate could result in reduced demand for our SVR services and AVL products.
 
         Our SVR services and AVL products are primarily used to protect medium- and high-end cars and commercial vehicles and are often installed before or immediately after their initial sale. Consequently, a reduction in sales of new medium- and high-end vehicles could reduce our addressable market for SVR services and AVL products. New vehicle sales may decline for various reasons, including an increase in new vehicle tariffs, taxes or gas prices. A decline in vehicle production levels or labor disputes affecting the automobile industry in the markets where we operate may also impact the volume of new vehicle sales. A decline in sales of new medium- and high-end vehicles in the markets in which we provide our SVR services or sell our AVL products could result in reduced demand for such services and products.      
 
         There is significant competition in the markets in which we offer our services and products and our results of operations could be adversely affected if we fail to compete successfully.
 
         The markets for our services and products are highly competitive. We compete primarily on the basis of the technological innovation, quality and price of our services and products. Our most competitive market is the location-based services market and the related AVL products market, due to the existence of a wide variety of competing services and products and alternative technologies that offer various levels of protection and tracking capabilities, including global positioning systems, or GPS (although we also provide services based on GPS/GPRS technology), satellite- or network-based cellular systems and direction-finding homing technologies. Some of these competing services and products, such as certain GPS-based products, are installed in new cars by vehicle manufacturers prior to their initial sale, which effectively precludes us from competing for such subscribers 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 location-based services market. Our AVL products also compete with less sophisticated theft protection devices such as standard car alarms, immobilizers, steering wheel locks and homing devices, some of which may be significantly cheaper. Some of these competing products have greater brand recognition than our AVL products, including LoJack Corporation in the United States.
 
5

        The development of new or improved competitive products, systems or technologies that compete with our wireless communications products may render our products less competitive or obsolete, which could cause a decline in our revenues and profitability.
 
        We are engaged in businesses characterized by rapid technological change and frequent new product developments and enhancements. The number of companies developing and marketing new wireless communications products has expanded considerably in recent years. The development of new or improved products, systems or technologies that compete with our wireless communications products, 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.
 
        The inability of local law enforcement agencies to timely and effectively recover the stolen vehicles we locate could negatively impact customers' perception of the usefulness of our SVR services and AVL products, adversely affecting our revenues.
 
        Our AVL products identify the location of vehicles in which our products are installed. Following a notification of an unauthorized entry, or if we receive notification of the vehicle's theft from a subscriber, we notify the relevant law enforcement agency of the location of the subscriber's vehicle and generally rely on local law enforcement or governmental agencies to recover the stolen vehicle. We cannot control nor predict the response time of the relevant local law enforcement or other governmental agencies responsible for recovering stolen vehicles, nor that the stolen vehicles, once located, will be recovered at all. In the past, some stolen vehicles in which our AVL products were installed were not recovered and the average stolen vehicle recovery time in the markets in which we operate was 20 minutes from the time an unauthorized entry is confirmed or reported to the time the vehicle is recovered. To the extent that the relevant agencies do not effectively and timely respond to our calls and recover stolen vehicles, our recovery rates would likely diminish, which may, in turn, negatively impact customers' perception of the usefulness of our SVR services and AVL products, adversely affecting our revenues.
 
        The ability to detect, deactivate, disable or otherwise inhibit the effectiveness of our AVL products could adversely affect demand for such products and our revenues.
 
        The effectiveness of our AVL products is dependent, in part, on the inability of unauthorized persons to deactivate or otherwise alter the functioning of our AVL products or the vehicle anti-theft devices that work in conjunction with our AVL products. As sales of our AVL products increase, criminals in the markets in which we operate may become increasingly aware of our AVL products and may develop methods or technologies to detect, deactivate or disable our tracking devices or the vehicle anti-theft devices that work in conjunction with our AVL products. We believe that, as is the case with any product intended to prevent vehicle theft, over time, there may be an increased ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our AVL products, although it is difficult to verify this fact. An increase in the ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our AVL products could adversely affect demand for our products and our revenues.
 
6

        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 AVL products, which would adversely affect our revenues.
 
        We license from third parties some of the technology that we need in order to provide our SVR services and market and sell some of our AVL products. In the event that such licenses were to be terminated, or if such licenses were rendered unenforceable or invalid 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 AVL products accordingly. In addition, some of the licenses we obtained from third parties are non-exclusive, which may enable other entities to obtain identical licenses from such third parties to operate in the places in which we conduct our business resulting in increased competition and could adversely affect our revenues.
 
        We depend on proprietary technology and our failure to protect and enforce our intellectual property rights or our need to defend against infringement claims could result in a significant increase in costs and decline in revenues.
 
        Our business is dependent on the uninterrupted use of proprietary technology, both owned and licensed, from third parties. If we fail to protect, enforce and maintain our intellectual property rights, we may not be able to compete and our business and operating results could be negatively impacted. We seek to protect our intellectual property rights through a combination of patents, trademarks, copyrights, trade secret laws, know-how, confidentiality procedures and licensing arrangements. Even with the intellectual property protection currently in place, we may not be able to protect our technology from misappropriation or infringement and we may lose, or the relevant owners may restrict or lose, our current rights of use of the technology that we license from such owners. Any of our existing intellectual property rights may be invalidated, circumvented, challenged or rendered unenforceable. In addition, the laws of some countries in which we operate or plan to operate, may not protect intellectual property rights to the same extent as the laws of Israel or the United States, increasing the possibility of piracy of our technology and products. It may be necessary for us to litigate in order to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others, which litigation can be time consuming, distracting to management, expensive and difficult to predict.
 
It is possible that we have or will inadvertently violate the intellectual property rights of other parties and those other parties may choose to assert infringement claims against us. If a court were to determine that our technology infringes on third parties' intellectual property, in addition to exposure to substantial damages, we could be required to expend considerable resources to modify our products, to develop non-infringing technology or to obtain licenses to permit our continued use of the technology that is the subject matter of the litigation.
 
        Our failure to protect and enforce our intellectual property rights, or our need to defend against claims of infringement of intellectual property rights of others or the loss of any such claims, could result in a significant increase in costs and decline in revenues.
 
        Our ability to sell our services and products depends upon the prior receipt and maintenance of various governmental licenses and approvals and our failure to obtain or maintain such licenses and approvals, or third-party use of the same licenses and frequencies, could result in a disruption or curtailment of our operations, a significant increase in costs and a decline in revenues.
 
        We are required to obtain specific licenses and approvals from various governmental authorities in order to conduct our operations. For example, our AVL products use radio frequencies that are licensed and renewed periodically from the Ministry of Communications in Israel and similar agencies worldwide. As we continue to expand into additional markets, we will be required to obtain new permits and approvals from relevant governmental authorities. Furthermore, once our AVL infrastructure is deployed and our AVL end-units are sold to subscribers, a change in radio frequencies would require us to recalibrate all of our antennas and replace or modify all end-units held by subscribers, which would be costly and may result in delays in the provision of our SVR services. In addition, some of the governmental licenses for radio frequencies that we currently use may be preempted by third parties. In Israel, our license is designated as a "joint" license, allowing the government to grant third parties a license to use the same frequencies, and in Brazil our license is designated as a "secondary", non-exclusive license, which allows the government to grant a third party a primary license to use such frequencies, which third-party use could adversely affect, disrupt or curtail our operations. Our inability to maintain necessary governmental licenses and frequency approvals, or third-party use of or interference with the same licenses or frequencies, could result in a significant increase in costs and decline in revenues.
 
7

        Our SVR services business model is based on the existence of certain conditions, the loss or lack of which in existing or potential markets could adversely affect our revenues generated in existing markets or our growth potential.
  
      Our SVR services business model and, consequently, our ability to provide our SVR services and sell our AVL products, relies on our ability to successfully identify markets in which:

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the rate of car theft or consumer concern over vehicle safety is high;
 
n
satisfactory radio frequencies are available to us that allow us to operate our business in an uninterrupted manner; and
 
n
insurance companies or owners of cars believe that the value of cars justifies incurring the expense associated with the deployment of SVR services.
 
The absence of such conditions, our inability to locate markets in which such conditions exist or the loss of any one of the above conditions in markets we currently serve could adversely affect our revenues generated in existing markets or our growth potential.
 
        Some of our agreements restrict our ability to expand into new markets for our SVR services, which could adversely affect our growth potential.
 
        In 2008, we entered into an agreement with Telematics, pursuant to which Ituran and Telematics designated parts of the world as their exclusive territories for selling their AVL products and SVR services using any RF location technology compatible to the RF vehicle location systems. This agreement restricts our ability to expand our business and operations and sell our products and services in certain markets, which could adversely affect our growth potential.
 
        The loss of key personnel could adversely affect our business and prospects for growth.
 
        Our success depends upon the efforts and abilities of key management personnel, including our President 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 wireless communications products, which could affect our ability to provide such products in a timely and cost-effective manner, adversely impacting our revenues and profit margins.
 
        We outsource the manufacturing of a significant part of our wireless communications products to third parties. We use one manufacturer for production of a significant portion of our wireless communications products and we do not maintain significant levels of inventories to support us in the event of an unexpected interruption in its manufacturing process.  If our principal manufacturer or any of our other manufacturers is unable to or fails to manufacture our products in a timely manner, we may not be able to secure alternative manufacturing facilities without experiencing an interruption in the supply of our products or an increase in production costs. Any such interruption or increase in production costs could affect our ability to provide our wireless communications products in a timely and cost-effective manner, adversely impacting our revenues and profit margins.
 
8

 
We rely on Telematics Wireless Ltd. (previously owned by us) and ERM (our subsidiary) 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. Termination of our agreement with Telematics in respect of such products and services could adversely affect our revenues and operations.
 
Following the sale of our subsidiary, Telematics Wireless Ltd. in 2007 to a third party and the execution of a 10-year supply agreement (with purchase orders to date are until the end of 2018). with Telematics as a result of such sale, we rely on Telematics as a single supplier of products and services. Termination of our relations with Telematics would adversely affect our operations and revenues. Risk from ERM, our other major supplier is significantly smaller due to it being our subsidiary.
 
        We depend on the use of specialized quality assurance testing equipment for the production of our wireless communications products, the loss or unavailability of which could adversely affect our results of operations.
 
        We and our third-party manufacturers use specialized quality assurance testing equipment in the production of our products. The replacement of any such equipment as a result of its failure or loss could result in a disruption of our production process or an increase in costs, which could adversely affect our results of operations.
 
        The adoption of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and could harm our results of operations.
 
        There are no established industry standards in all of the businesses in which we sell our wireless communications products. For example, vehicle location devices may operate by employing various technologies, including network triangulation, GPS, satellite-based or network-based cellular or direction-finding homing systems. The development of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and we may not be able to develop new services and products that are in compliance with such new industry standards on a cost-effective basis. If industry standards develop and such standards do not incorporate our wireless communications products and we are unable to effectively adapt to such new standards, such development could harm our results of operations.
 
        Expansion of our operations to new markets involves risks and our failure to manage such risks may delay or preclude our ability to generate anticipated revenues and may impede our overall growth strategy.
 
We anticipate future growth to be attributable to our business activities in new markets, particularly in developing countries, where we may encounter additional risks and challenges, such as longer payment cycles, potentially adverse tax consequences, potential difficulties in collecting receivables and potential difficulties in enforcing agreements or other rights in foreign legal systems. The challenges and risks of entering a new market may delay or preclude our ability to generate anticipated revenues and may impede our overall growth strategy.
 
Part of our services rely on GPS/GPRS-based technology owned and controlled by others, the loss, impairment or increased expense of which could negatively impact our immediate and future revenues from, or growth of, our services and adversely affect our results of operations.
 
Part of our business relies on signals from GPS/GPRS satellites built and maintained by third parties. If GPS/GPRS satellites become unavailable to us, or if the costs associated with using GPS/GPRS technology increase such that it is no longer feasible or cost-effective for us to use such technology, we will not be able to adequately provide our fleet management services. In addition, if one or more GPS/GPRS satellites malfunction, there could be a substantial delay before such satellites are repaired or replaced, if at all. The occurrence of any of the foregoing events could negatively impact our immediate and future revenues from, or growth of, our fleet management services and adversely affect our results of operations.
 
9

Material cyber security failure may harm our operations, which rely on use of information technology and wireless transmission.
 
Our AVL 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 AVL 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 19, 2015, Ituran Location and Control Ltd. (the "Company") received a purported class action lawsuit which was filed against the Company in the District Court of Central Region in Tel-Aviv on July 13, 2015, by one plaintiff who is a subscriber of the Company, alleging that the Company, which was declared a monopoly under the Israeli Restrictive Trade Practices Law, 1988, 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 77 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. 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.
 
For additional information on this lawsuit and for information concerning additional litigation proceedings, please refer to Item 8.A – "Consolidated Statements and other Financial Information" under the caption "Material Legal Proceedings" below.

10

 
         We have not obtained nor applied for several of the permits required for the operation of some of our base sites. To the extent enforcement is sought, the breadth, quality and capacity of our network coverage could be materially affected.
 
         The provision of our SVR services depends upon adequate network coverage for accurate tracking information. In Israel, we have installed 103 base sites that provide complete communications coverage in Israel. Similarly, we have 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, Brazil and 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 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 headquarters and sole research and development facilities are located in Israel and our key employees, officers and directors are residents of Israel. Accordingly, security, political and economic conditions in Israel directly affect our business. Over the past several decades, a number of armed conflicts have taken place between Israel and its Arab neighbors. During 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, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militant group and political party. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel. Continued or increased hostilities, future armed conflicts, political developments in other states in the region or continued or increased terrorism could make it more difficult for us to conduct our operations in Israel, which could increase our costs and adversely affect our financial results.
 
         Israel has experienced in recent years, unionized general strikes in connection with the legislation of new economic reforms. A prolonged general strike in Israel would affect our ability to provide our wireless communications products that are manufactured in Israel and would negatively impact our operations. Furthermore, there are a number of countries, primarily in the Middle East, that still restrict business with Israel or Israeli companies and as a result our company is precluded from marketing its products in these countries. Restrictive laws or policies directed toward Israel or Israeli businesses could have an adverse affect on our ability to grow our business and our results of operations.
 
11

Under Israeli law, we are considered a "monopoly" and therefore subject to certain restrictions that may negatively impact our ability to grow our business in Israel.
 
        We have been declared a monopoly under the Israeli Restrictive Trade Practices Law, 1988 (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 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 antitrust authority may also impose on us in an administrative procedure, financial sanctions in an amount of up to the lower of NIS 24.5 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 against us or any of such persons in both United States courts and other courts abroad.
 
         Additionally, there is doubt as to the enforceability of civil liabilities under United States federal securities laws in actions originally instituted in Israel or in actions for the enforcement of a judgment obtained in the United States on the basis of civil liabilities in Israel.
 
         Provisions of Israeli corporate and tax law may delay, prevent or otherwise encumber a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such transaction are favorable to us and our shareholders.
 
         Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association contain, among other things, provisions that may make it more difficult to acquire our company, such as classified board provisions and certain restrictions on the members of our board pursuant to regulatory requirements of the Israeli Ministry of Communication. Furthermore, Israeli tax considerations may make potential transaction structures involving the acquisition of our company unappealing to us or to some of our shareholders. See Item 10.B. – "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.
 
12

The rights and responsibilities of our shareholders will be governed by Israeli law and may differ in some respects from the rights and responsibilities of shareholders under United States law.
 
         We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical US-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli corporate law has undergone extensive revisions in the recent years and, as a result, there is little case law available to assist in understanding the implications of these provisions that govern shareholders' actions, which may be interpreted to impose additional obligations on holders of our ordinary shares that are typically not imposed on shareholders of US-based corporations.
 
RISKS RELATED TO 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 19.44% 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. Another significant portion of our shares (16.44%) is beneficially owned by Vulcan Value Partners, LLC.
 
13

          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 provided by law, we may be characterized as a passive foreign investment company, which we refer to as PFIC, for US federal income tax purposes. This characterization could result in adverse US tax consequences to our shareholders who are 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, holders of shares in a PFIC may not receive a "step-up" in basis on shares acquired from a decedent. U.S. shareholders 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.
 
 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 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 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        
 
We are mainly engaged in the area of location-based services, consisting of stolen vehicle recovery, fleet management services and other tracking services. We also provide wireless communication products used in connection with our location-based services and various other applications. We currently primarily provide our services as well as sell and lease our products in Israel, Brazil, Argentina and the United States.
 
14

         Ituran was initially incorporated in February 1994 in Israel as a subsidiary of Tadiran Ltd., an Israeli-based designer and manufacturer of telecommunications equipment, software and defense electronic systems, whose original business purpose was to adapt military-grade technologies for the civilian market. In July 1995, Moked Ituran Ltd. purchased us and the assets used in connection with our operations from Tadiran and Tadiran Public Offerings Ltd. The AVL infrastructure and AVL end-units for the operation of our SVR services were originally developed by an independent division of Tadiran Communications and Systems Group. These operations were later transferred to a Tadiran subsidiary, Tadiran Telematics Ltd. In November 1999, we purchased Tadiran Telematics from Tadiran and in 2002, we changed its name to Telematics Wireless.
 
         In May 1998, we completed the initial public offering of our ordinary shares in Israel and our ordinary shares began trading on the Tel-Aviv Stock Exchange. In September 2005, we publicly offered our ordinary shares in the United States. On May 25, 2016 we were delisted from Tel-Aviv Stock Exchange, and our ordinary shares are currently quoted on Nasdaq under the symbol "ITRN". The address of our principal executive office is 3 Hashikma Street, Azour 58001, Israel. Our telephone number is 972-3-557-1333. Our agent for service of process in the United States is Ituran USA Inc.1700 NW 64th ST. SUITE 100 Fort Lauderdale, Florida 33309.
 
In 2006 we acquired control of E.R.M. Electronic Systems Limited ("E.R.M"), a developer, manufacturer, and marketer of innovative vehicle security, tracking, and management GSM based communication solutions for the international market. Since such acquisition, we have been developing our fleet management services and products, which now constitute a material portion of our operations.
 
In 2007, we purchased the entire issued share capital of Mapa Group from its shareholders for US$9.9 million. In addition, we invested an additional sum of approximately US$3.1 million in Mapa Group, which was used by Mapa Group to repay shareholders' loans. Mapa Group is a provider of geographic information (GIS) in Israel and owner of geographic information database for navigation in Israel. On December 31, 2015, Mapa Internet (one the two Mapa Group members) was sold to a company not related to us, for a total consideration of NIS 2.3million (approximately US$600,000).
 
In January 2008, we entered into a 10 year Frame Product and Service Purchase Agreement with Telematics, pursuant to which the Company and Telematics shall purchase from each other certain products and services as detailed in the agreement for a price and other conditions as detailed in the agreement. In addition, each of Ituran and Telematics undertook toward one another not to compete in each other's exclusive markets in the area of RF vehicle location and tracking RF technology or similar RF terrestrial location systems and technology. The agreement is for a term of 10 years, following which it shall be renewed automatically for additional consecutive 12 months periods, unless non-renewal notice is provided by one of the parties to the other. Pursuant to the agreement, each of Telematics and Ituran granted the other party a license to use certain technology in connection with the products and services purchased from each other, which license shall survive the termination or expiration of the agreement.
 
In 2010 we launched a new line of AVL products (IturanSave), which is based on our SMART products and tailored to be installed in medium-end vehicles, a market which was not previously targeted by us, offering our customers an affordable tracking device solution. This new line of products led to an increase in our sales since then.
 
In September 2015 one of the largest global road vehicles manufacturers ("Manufacturer") has signed a four year agreement (which may be extended by the manufacturer for additional 2 years) with us to offer Ituran's services in the Brazilian market. Ituran's services includes: vehicle security, personal safety, remote diagnostic, Web and App application and Concierge. The service was launched through a joint venture with Road Track, called IRT (Ituran Road Track), which is 50% owned by Ituran. The agreement has a long-term timeframe. Ituran expects some investment and expense requirements during the initial period of contract, resulting in a loss at the joint venture in an amount which is not significant to Ituran. During 2017, the joint venture expected to become profitable, making the entire project increasingly accretive to Ituran. On October 2015 the joint venture started to deliver the services for the first Car Model. The equipment for the agreement is provided by another joint venture through a subsidiary in Uruguay which is also a joint venture with Road Track, which is held 50% by Ituran, called RTI (Road Track Ituran).

15

On May 2016,  our subsidiary in Argentina has signed a four year  agreement with the same global automaker to offer telematics services in the Argentinian market. Ituran's services includes: vehicle security, personal safety, remote diagnostic, Web and App application and Concierge. The service will be launched through a joint venture in Argentina, called IRTA (Ituran Road Track Argentina), which is 50% owned by Ituran. The agreement has a long-term timeframe. We expect some investment and expense requirements during the initial period of contract, resulting in a loss at the joint venture in an amount which is insignificant to Ituran. During 2017, the joint venture is expected to become profitable, making the entire project increasingly accretive to Ituran.
 
In December 2013 we invested $1.4 million in Bringg delivery technologies Ltd. (formerly Overvyoo Ltd.), an Israeli start-up company developing solutions for the management of mobile/field workforce. According to the agreement with Bringg, we have invested by January 2015 an additional amount of US$1.1 million. On July 2015 we invested another US$ 2 million, and during November 2015, additional investors which are not related to Ituran, invested in Bringg. On March 2017, another US$9.5 million investment round took place which included Coca-Cola, as well as venture capital firms, Alef and Pereg.  Following the completion of last investment round, Ituran holds 31.14% of Bringg and remains the largest shareholder in the company.

During March 2017, we made two additional investments in two Israeli start-up companies (from mobile app development and visual sectors), of about 1 million USD in total.

On February 24, we announced the launch of the DRIVE innovation center in Tel Aviv to promote the development of cutting edge Smart Mobility technology. The initiative is sponsored by leading partners in the field including Mayer Cars and Trucks, Hertz, Honda, Volvo Cars as well as Ituran. The innovation center is the first of its kind and will include a range of activities aimed at providing assistance to start-ups and entrepreneurs. The center incorporates a startup accelerator, advanced prototyping labs and a co-working space. DRIVE's partners will actively engage with the startups by providing expertise, optional investments, and prototyping development lab opportunities that may evolve into further business relations.
 
Capital Expenditures and Divestitures
 
         We had capital expenditures of $13.8 million in 2016, $18.5 million in 2015, and $15.1 million in 2014. We have financed our capital expenditures with cash generated from our operations.
     
         Our capital expenditures in 2016, 2015 and 2014 consisted primarily of acquisition of operational equipment for $6.2 million, $13.3 million and $11.2 million, respectively.
 
On December 31, 2015, Mapa Internet (one of the two Mapa Group members) was sold to a company not related to us, for a total consideration of NIS 2.3 million (approximately US$600,000).  For additional information concerning the sale of Mapa Internet, see Item 4.A- " History and Development of the Company" under the caption "Our history". Except the sale of Mapa Internet, we didn't have any material capital divestitures during the last three fiscal years and until the date of this report.
 
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         B. BUSINESS OVERVIEW
 
Overview
   
         We believe we are a leading provider of location-based services, consisting predominantly of stolen vehicle recovery, fleet management services and other tracking services. We also provide wireless communications products used in connection with our location-based services. We currently primarily provide our services and sell and lease our products in Israel, Brazil, Argentina and the United States. We utilize technologies that enable precise and secure high-speed data transmission and analysis. Some of the technology underlying our products was originally developed for the Israeli Defense Forces in order to locate downed pilots.
 
         We generate our revenues from subscription fees paid for our location-based services and from the sale and lease of our wireless communications products.
 
 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".
 
Location-Based Services
 
         In 2016, 71% of our revenues were attributable to our location-based services. As of December 31, 2016, we primarily provided our services in Israel, Brazil, Argentina and the United States to approximately 443,000 , 398,000, 159,000 and 57,000 subscribers, respectively.
 
Stolen vehicle recovery services
 
         Our stolen vehicle recovery and tracking services, which we refer to as SVR services, enable us to locate, track and recover stolen vehicles for our subscribers. Our customers include both individual vehicle owners who subscribe to our services directly and insurance companies that either require their customers to install a security system or offer their customers financial incentives to subscribe to SVR services such as ours. In certain countries, insurance companies directly subscribe to our SVR services and purchase automatic vehicle location products supporting these SVR services from us on behalf of their customers.
 
 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, 2016, we provided our services to approximately 159,000 end-users through 32,000 corporate customers in Israel, Brazil, Argentina and the United States.  We are currently exploring collaborations with local entities in other regions of the world for the marketing of our fleet management services and products in such regions.  By the date of this report, we have a total of 8,000 end users which are spread in various countries (except Israel, Brazil, US and Argentina).
 
Value-added services
 
         The personal locator services that we offer allow customers to protect valuable merchandise and equipment. We currently provide personal locator services in Israel, Brazil and Argentina and, as of December 31, 2016, we have few thousands subscribers to this service. In addition, through a call center, we provide 24-hour on-demand navigation guidance, information and assistance to our customers. Such services include the provision of traffic reports, help with directions and information on the location gas stations, car repair shops, post offices, hospitals and other facilities. We offer our concierge services to many of our subscribers in Israel, Argentina and Brazil.
 
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Connect- at the end of 2016, we launched a new connected car service, based on the Android platform which provides access to Android market applications (such as WAZE) and to various services from 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, distance communication with the car service provider in order to detect malfunctions, and to provide pre-emptive car, treatment booking service appointments, and additional related operational, and marketing services, as well as information analysis.
 
Wireless Communications Products
 
        In 2016, 29% of our revenues were attributable to the sale of our wireless communications products. Our wireless communications products employ short- and medium-range communication between two-way wireless modems and are used for various applications, including automatic vehicle location, which we refer to as AVL.
 
        Our AVL products enable the location and tracking of vehicles, as well as assets and persons, and are used by us primarily to provide SVR and fleet management services to our customers. Each subscriber to our SVR services has our AVL end-unit installed in his or her vehicle. Subscribers to services for locating equipment and merchandise will use our SMART products. As part of our expansion into 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. Subscribers to our fleet management services use E.R.M hardware and our proprietary software.
 
Industry Overview
 
        While we believe that the statistical data, industry data forecasts and market research discussed below are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information.
 
(a) Location-based services
 
Stolen vehicle recovery
 
        The demand for vehicle security products and services is driven by vehicle theft rates, increasing security awareness among customers and insurance companies' efforts to reduce incidents of loss. In some of our markets, demand for SVR services has been enhanced by incidents of carjacking and car-related kidnappings that have increased consumers' perceived crime risk. Additionally, theft of trucks carrying valuable or hazardous cargo (e.g., microchips and chemicals) represents a threat to commercial, industrial, public and personal safety and security.
        A wide range of vehicle security products, with varying degrees of sophistication and pricing, are available to vehicle owners today. These products can be divided roughly into two categories:

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

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

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

Security
 
Transportation
 
Telecommunication services
 
Government
Vehicle tracking
 
Fleet management
 
Maintenance vehicle tracking
 
Government vehicle tracking
Driver Behavior and Accident Notification
 
Parcel tracking
       
Personal tracking
 
Public transit
       
Asset tracking
           
     
        Currently, the main underlying technologies available for wireless location and tracking in the AVL industry are terrestrial network triangulation, GPS (in combination with wireless communication), network-based cellular communication and radio frequency-based homing.
 
n
Terrestrial network triangulation uses the wireless signals transmitted by an end-unit in the vehicle and received by a network of land-based wireless antennas (base stations) installed in the relevant coverage region in order to determine the precise location of the transmitter.
 
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n
GPS-based systems utilize specially designed GPS devices in the vehicle that receive data from three or more satellites in order to determine the location of the device. Once located, GPS-based systems require a cellular or another wireless network to communicate with a remote control center.
 
n
Network-based cellular systems utilize signals between the wireless device and the cellular operator's network of land-based antennas in order to triangulate the location of the relevant device. These systems require two-way communication between the device and antennas and, therefore, both a transmitter and receiver need to be installed in the vehicle.

n
RF-based homing systems utilize direction-finding technology based on a tracking signal transmitted by the end-unit in the vehicle, which is activated by a unique radio signal from the tracking unit once the vehicle is reported stolen.
 
Our Services and Products
 
Location-based services
 
Stolen vehicle recovery
 
        Our stolen vehicle recovery system is based on three main components: an AVL end-unit that is installed in the vehicle, a network of base stations and a 24-hour manned control center. Once the control center receives indication of an unauthorized entry into a vehicle equipped with our AVL end-unit, our operators decide whether it is a false alarm or an actual unauthorized entry. If it is determined to be an unauthorized entry, or if a notification of the vehicle's theft is received directly from the vehicle operator, our operators transmit a signal that activates the transmitter installed in the vehicle. We then pinpoint the location of the transmitter with terrestrial network triangulation technology or GPRS technology and notify the relevant law enforcement agency. In Israel, Brazil and Argentina, we also maintain private enforcement units, which work together with local police to recover the vehicle. In addition, we have the capability to immobilize vehicles remotely from our control centers.
 
Fleet management
 
        We offer our customers the ability to use a comprehensive application for fleet management both by using an Internet site and workstations. Our system allows our customers 24-hour access to information on their fleets through our active control center and 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.
 
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Value-added services
 
        Locator services. Our services allow consumers to protect valuable merchandise and equipment. We provide our locator services in Israel, Brazil and Argentina.    
 
        Concierge services. Through a call center, we provide 24-hour on-demand navigation guidance, information and assistance to our customers. Such services include the provision of traffic reports, help with directions and information on the location of gas stations, car repair shops, post offices, hospitals and other facilities. We provide our concierge services to subscribers mainly in Israel.
 
Connect: towards the end of 2017, we have launched a new service called, "Connect" . For additional information on the new service, see Item 4.B. – " Information on the Company " - "Business Overview" under the caption "Location-Based Services"
 
Wireless communications products
 
        Our wireless communications products are used for various applications in the AVL markets and primarily in connection with our location-based services described above.
 
        Our AVL products enable the location and tracking of vehicles, as well as assets or persons, and are primarily used by us in providing our SVR and fleet management services. Each subscriber to our SVR services has one of our end-units installed in his or her vehicle. Subscribers to services for locating persons or valuables will use our SMART products. Our key wireless communications products for AVL applications include: 
 
n
Base Site: a radio receiver, which includes a processor and a data computation unit to collect and send data to and from transponders and send that data to control centers as part of the terrestrial infrastructure of the location system;

n
Control Center: a center consisting of software used to collect data from various base sites, conduct location calculations and transmit location data to various customers and law enforcement agencies;

n
GPS/GPRS-based products: navigation and tracking devices installed in vehicles; and

n
SMART: a portable transmitter installed in vehicles (including motorcycles) that sends a signal to the base site, enabling the location of vehicles, equipment or an individual;
 
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
SVR
AVL
 
Fleet Management
 
 
Value-added services
 
Brazil
SVR
AVL
 
Fleet Management
 
 
Value-added services
 
Argentina
SVR
AVL
 
Fleet Management
Value-added services
 
United States
SVR
AVL
 
Fleet Management
 
 
Value-added services
Asset protection to Auto Lenders
 
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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 location-based services in the countries in which we operate:

n
Israel: We commenced operations in Israel in 1995 and we had approximately 443,000 subscribers as of December 31, 2016. We maintain 103 base stations in Israel, which provide complete coverage within the country. We also operate throughout Israel in providing fleet management services through GPS/GPRS based products and services.
 
n
Brazil: We commenced operations in Brazil in 2000 and we had approximately 398,000 subscribers as of December 31, 2016. We currently provide RF based products and services only in the metropolitan areas of Sao Paulo, Campinas, Americans and Rio de Janeiro, where we maintain 140 base stations; however we operate throughout Brazil in providing GPS/GPRS based products and services.

n
Argentina: We commenced operations in Argentina in 2002 and we had approximately159,000 subscribers as of December 31, 2016. We currently provide RF based products and services only in the metropolitan area of Buenos Aires, where we maintain 43 base sites; however, we also operate throughout Argentina in providing GPS/GPRS based products and services for fleet management.

n
United States: We commenced operations in the United States in 2000. We provide GPS/GPRS products and services throughout the United States. As of December 31, 2016, we had approximately 57,000 subscribers for our location-based services in the United States.
 
Customers, Marketing and Sales
   
        We market and sell our products and services to a broad range of customers that vary in size, geographic location and industry. In, 2014, 2015 and 2016 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, 2016, our selling and marketing team consisted of 103 employees.
 
(A) Location-based services
 
Stolen vehicle recovery
 
        Our marketing and sales efforts are principally focused on five target groups: insurance companies and agents, car manufacturers, dealers and importers, cooperative sales channels (mostly vehicle fleet operators and owners) and private subscribers.
 
        We maintain marketing and sales departments in each geographical market in which we operate. Each department is responsible for maintaining our relationships with our principal target groups. These responsibilities also include advertising and branding, sales promotions and sweepstakes.
 
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        In Israel, Brazil and Argentina, we focus our marketing efforts on insurance companies and private customers; while in Brazil, our primary focus has shifted to the retail market during recent years. In the United States, we believe that insurance companies do not constitute a material influence in the marketing of SVR services or AVL products. Most of our sales in the United States are made through car dealerships and dealers for new or used cars. Our customers in the SVR market include insurance companies as well as individual vehicle owners. As of December 31, 2016, we had a total of approximately 1,057,000 subscribers for our 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, 2016, we provided our services to approximately 159,000 end users through 32,000 corporate customers and individuals in Israel, Brazil, Argentina and the United States. We are currently exploring collaborations with local entities in other regions of the world for the marketing of our fleet management services and products in such regions.  By the date of this report, we have a total of 8,000 end users which are spread in various countries (except Israel, Brazil, US and Argentina).
 
Value-added services
 
        Our concierge services are provided to existing SVR customers. A few thousands SMART devices were installed in valuable merchandise and equipment.
 
  (B) Wireless communications products
 
        Our AVL end-units are primarily used by us in providing our location-based services, including fleet management and value-added services, in Israel, Brazil, Argentina and the United States.  
 
Competition
 
        We face strong competition for our services and products in each market in which we operate. We compete primarily on technology edge, functionality, ease of use, quality, price, service availability, geographic coverage, track record of recovery rates and response times and financial strength.
 
 (A) Location-based services
 
        We compete with a variety of companies in each of our markets. The three major technologies utilized by our competitors are GPS/cellular, network-based cellular and radio frequency-based homing systems. In addition, new competitors utilizing other technologies may continue to enter the market.
 
Stolen vehicle recovery
 
n
Israel. Our primary competitors in Israel are Pointer and Skylock Ltd.

n
Brazil. Brazil is a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated vehicle security systems). Our main competitors in Brazil are Sascar, Zatix and AutoTrack.

23

n
Argentina. Argentina is also a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated vehicle security systems). Our main competitors in Argentina are LoJack Corporation and Megatrans S.A..

n
United States. In the United States, there are several major companies offering various theft protection and recovery products that compete with our product and service offerings including LoJack Corporation which was recently purchased by Clamp , OnStar Corporation, Spireon (which also includes SysLocate and GoldStar), PassTime, Guide Point, Sky Patrol, Sky Guard, I-Metrik SVR and Position Plus. We believe that we are a leading provider of location-based 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, , Street Eagle, Navtrack, Teletrac, Trim Track, FleetBoss, PassTime and Spireon, GPS Insight as well as Network Fleet, GeoTab and FleetMatics which were purchased recently by Verizon Wireless; our major competitors in Brazil are Sascar, Zatix and AutoTrack; and our major competitors in Argentina are LoJack Corporation, Megatrans SA., G4S, Sitrac S.A., American Tracer, Ubicar S.A., Sky Cop and Prosegur.
 
 (B) Wireless communications products
 
        Our AVL 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 wireless communication), network-based cellular communication and radio frequency-based homing.
 
        Although AVL products based on GPS, network-based cellular and homing technologies do not require the construction of a separate infrastructure of base stations as with terrestrial network triangulation systems such as ours, such solutions have certain drawbacks. GPS receivers require line of sight to at least three satellites, which reduces their effectiveness in areas where the satellite signals are subject to interference and "noise" (such as urban areas, buildings or parking garages, forests and other enclosed or underground spaces). GPS and network-based cellular systems are also prone to jamming since the tracking signal receivers are located in the vehicle and can be easily tampered with. In addition, the satellites utilized by GPS devices are managed by the United States Department of Defense and can be subject to forced temporary outages. The main disadvantage of homing systems is that they provide only the general direction and not the precise location of the end-unit. In addition, homing systems require that the vehicle be reported stolen before the tracking signal can be activated, which may result in a delay between vehicle theft and recovery.
 
        Terrestrial network triangulation systems have succeeded in overcoming some of the challenges faced by systems based on other technologies. Terrestrial network triangulation technology does not require line of sight and the signals are not easily interrupted in densely populated or obstructed areas. Also, the signals are transmitted from the end-unit in the vehicle to a network of base stations. Therefore, in order to jam the system, receivers in each individual base station within range of the end-unit would have to be jammed, which is difficult to accomplish. Additionally, since the primary application of terrestrial network triangulation systems in the AVL industry is vehicle location and not continuous two-way communication, short bursts of data are sufficient for tracking purposes, which enable the network of base stations to be deployed at a much lower density in the coverage area than traditional network-based cellular base stations. Terrestrial network triangulation systems are capable of determining the precise location, and not just the general direction, of a vehicle at any moment in time. Furthermore, when connected with the existing theft protection system in the vehicle, terrestrial network triangulation systems automatically alert the control center when a vehicle is stolen and do not require that the vehicle be reported stolen, which can potentially reduce stolen vehicle recovery times to a few minutes. The main disadvantage of terrestrial network triangulation systems is the necessity to deploy a physical infrastructure, including the construction, development and deployment of a network of base stations and a control center and the need to address the various financial, legal and practical issues associated with such deployment. Any such deployment entails an investment of a sizable amount of money prior to the receipt of any revenues.
 
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Since our AVL end-units are primarily used by us in providing our location-based services, the information provided above concerning our competition in this market is applicable to the competition in the wireless communications products' market as well.
 
Manufacturing Operations and Suppliers
 
        Our wireless communications products are manufactured and assembled by a limited number of manufacturers in Israel (including our subsidiary E.R.M). We engage with our manufacturers on a full turn-key basis, where we supply detailed production files and materials list and receive a final product that we sell directly to our clients. Other than our dependency on Telematics, as described in Item 3,D, "Risk Factors" above, we do not depend on a single manufacturer for the production of our products. Our main manufacturers and assemblers are Telematics and E.R.M Electronic Systems Limited (our subsidiary). For further details of our agreement with Telematics concerning the supply of products and services see Item 4.A – History and Development of our Company under the caption "Our History" above.
 
        Our quality assurance and testing operations are performed by our manufacturers at their facilities, while using our quality assurance and testing equipment and in accordance with the test procedures designated by us. We monitor quality with respect to key stages of the production process, including the selection of components and subassembly suppliers, warehouse procedures, assembly of goods, final testing, packaging and shipping. We are ISO 9001 certified. We believe that our quality assurance procedures have been instrumental in achieving the high degree of reliability of our products.
 
        Several components and subassemblies included in our products are presently obtainable from a single source or a limited group of suppliers and subcontractors. We maintain strong relationships with our manufacturers and suppliers to ensure that we receive an adequate supply of products, components and raw materials at favorable prices and to access their latest technologies and product specifications.
 
Proprietary Rights
 
        We seek to protect our intellectual property through patents, trademarks, contractual rights, trade secrets, know-how, technical measures and confidentiality, non-disclosure and assignment of inventions agreements and other appropriate protective measures to protect our proprietary rights in the primary markets in which we operate. The continued use of some licenses granted by third parties to use their intellectual property is material to our business. Please refer to Item 3.D – Risk Factors, under the caption "We rely on some intellectual property that we license from third parties, the loss of which could preclude us from providing our SVR services or market and sell some of our AVL products, which would adversely affect our revenues" above.
 
        We typically enter into non-disclosure and confidentiality agreements with our employees and consultants. We also seek these protective agreements from some of our suppliers and subcontractors who have access to sensitive information regarding our intellectual property. These agreements provide that confidential information developed or made known during the course of a relationship with us is to be kept confidential and not disclosed to third parties, except in specific circumstances.
 
        Our stolen vehicle recovery system is based on three main components: (i) an AVL end-unit that is installed in the vehicle, (ii) (for RF technology based AVL units) a network of base stations that relay information between the vehicle location units and the control center, certain components of which were developed by third parties and are currently licensed to us and (iii) a 24-hour manned control center consisting of software used to manage communications and the exchange of information among the hardware components of the AVL system, certain components of which were developed by third parties and licensed to us. For details concerning the non-exclusive license granted by Telematics to us in respect of the RF technology incorporated in some of our products, please refer to Item 4.A. – History and Development of our Company under the caption "Our History" above.
 
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        "Ituran"and "Mr. Big" and the related logos are our trademarks, which have been registered in Israel. "Mapa" trademark and its related logos where sold as part of the sale of Mapa Internet to an unrelated party to us. For additional information concerning the sale of Mapa Internet , see Item 4.A- " History and Development of the Company" under the caption "Our history".   This report also refers to brand names, trademarks, service marks and trade names of other companies and organizations, each of which is the property of its respective holder.
 
Regulatory Environment
 
        In order to provide our SVR services in the locations where we currently operate, we need to obtain four primary types of licenses and permits: (i) for our products utilizing the RF technology - a license that allows us to use designated frequencies for broadcasting, transmission or reception of signals and information and to provide telecommunication services to our customers, (ii) for our products utilizing the RF technology - a building permit, which permits us to erect our base sites and transmit therefrom, (iii) product specific licenses (commonly known as type approvals), which enable us to use the equipment necessary for our services, and (iv) a general commerce license, which allows us to offer our services to the public.
 
        The telecommunication services and frequency license and general commerce licenses we require are granted by the applicable national agency regulating communications in the markets in which we operate, specifically, the Ministry of Communication, in Israel, Anatel – Agencia Nacional de Telecomunicatoes, in Brazil, 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 July 31, 2017. The Company will apply for license renewal in the next few month. Our frequency licenses in Brazil expire in 2019 and we are working on renewal of this license. 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. In Argentina, the SECOM (Secretary of Communication), on July 15, 1999, granted us a license to provide services and the authorization to use frequencies. These authorizations do not have any expired date.
 
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        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:

n
erection and operating permits from the Israeli Ministry of the Environment;

n
permits from the Israeli Civil Aviation Authority, in certain cases;
 
n
permits from the Israeli Defense Forces;
 
n
approval from Israel's Land Administration and/or from Civil Administration in the Territories, which usually also involves payment for the land use rights; and
 
n
building permits from local or regional zoning authorities in Israel and Brazil.
 
We are continuously in the process of obtaining the relevant permits required for the construction of our base sites in Israel, however, to date, we have been issued 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:
 
n
a permit from Anatel (National Agency for Telecommunication)
 
n
a permit from IBAMA (Environment national agency) and/or state EPAs
 
n
Municipal permits
 
n
a permit from the fire department.
 
n
and a permit from COMAR (Aviation authorities)     
 
27

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.        
 
We have been declared a monopoly under the Israeli Restrictive Trade Practices Law, 1988, in the provision of systems for the location of vehicles in Israel. This law prohibits a monopoly from abusing its market position in a manner that might reduce competition in the market or negatively affect the public. For instance, a monopoly is prohibited from engaging in predatory pricing and providing loyalty discounts, which prohibitions do not apply to other companies. The law empowers the Commissioner of Restrictive Trade Practices to instruct a monopoly abusing its market power to perform certain acts or to refrain from taking certain acts in order to prevent the abuse. Additionally, any declaration by the Israeli antitrust authority that a monopoly has abused its position in the market may serve in any suit in which it is claimed that such a monopoly engages in anti-competitive conduct, as prima facie evidence that it has engaged in anti-competitive behavior. Our declaration as a monopoly in the market of "provision of systems for the location of vehicles in Israel" was not accompanied with any instructions or special restrictions beyond the provisions of the Restrictive Trade Practices Law. Although we may be ordered to take or refrain from taking certain actions, to date we have not been subject to such restrictions.
 
C.  ORGANIZATIONAL STRUCTURE         
 
We were initially incorporated as a subsidiary of Tadiran, an Israeli-based designer and manufacturer of telecommunications equipment, software and defense electronic systems, whose original business purpose was to adapt military-grade technologies for the civilian market. In July 1995, Moked Ituran Ltd. purchased our company and the assets used in connection with its operations from Tadiran and Tadiran Public Offerings Ltd. The AVL infrastructure and AVL end-units for the operation of our SVR services were originally developed by an independent division of Tadiran Communications and Systems Group. These operations were later transferred to a Tadiran subsidiary, Tadiran Telematics Ltd. In November 1999, we purchased Tadiran Telematics from Tadiran and in 2002, we changed its name to Telematics Wireless. In December 2007 we sold our subsidiary Telematics.
 
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
%

* 88.5% of the shares are held by Ituran U.S.A. Holding Inc., which is our wholly owned subsidiary; and the remaining shares are held by employees of Ituran USA Inc.
** 98% of the shares are held by Teleran Holding Ltda; and the remaining shares held by a third party.

28

        D.   PROPERTY, PLANTS AND EQUIPMENT
 
        As of the date of this report, and other than an office building of 8 floors in the area of approximately 5,356 sqm (57,651 square feet), which was purchased by our subsidiary Ituran Sistemas de Monitoramento Ltda (Ituran Brazil) in Sao Paulo, Brazil, and was later, on December 3, 2014 sold to us, we do not own any real estate.
 
        Other than the property in Brazil, all of our offices, headquarters, control centers and facilities are leased in accordance with our specific needs in the areas in which we operate. Additionally, we lease space for our base sites, in order to operate the reception and transmission stations of the system, in each area in which we provide our SVR services.
 
        In 2016 we leased an aggregate of approximately 55,126 square feet of office space in Azour and Holon, Israel. In 2016, the annual lease payments for these facilities were approximately $763,000. 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 8,793 square feet of office space for approximately $ 71,100 annually, approximately 720 square feet for our control center for approximately $ 5,600 annually, approximately 5,253 square feet for our installation center for approximately $ 58,900 annually, approximately 2,121 square feet for our warehouse for approximately $21,900 annually, and approximately 862 square feet for our third warehouse for approximately $ 3,700 annually.
 
We lease approximately 11,060 square feet for our offices and control center in Florida for a monthly rate of $ 11,579 USD for a period of 60 months commencing March 24, 2016 and ending March 23, 2021, subject to a 3% annual increase per year starting April 1, 2017.
 
In 2016, we leased approximately 1,379 Sq. m (14,843 square feet) of office space, stores and warehouse in Brazil for approximately $133,000 annually. The lease agreements will expire and will have to be renewed on August 21, 2020, February 1, 2021 and March 31, 2019.
 
        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 103 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 140 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 117 sites are leased independently for an annual rate ranging from $200 to $550 depending on the location, size and other factors, and the typical duration for these leases is five years. In Argentina, we have 43 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.
 
29

        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.
 
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 location-based services, consisting predominantly of stolen vehicle recovery, which we refer to as SVR, and tracking services. We also provide wireless communications products used in connection with our SVR services and for various other applications. We currently provide our services and sell and lease our products in Israel, Brazil, Argentina and the United States.
 
        Our operations consist of two segments: location-based services and wireless communication products.
 
        Our location-based services segment consists of our SVR, fleet management and value-added services. We currently operate stolen vehicle recovery services throughout Israel, in Brazil (Buenos Aires) Argentina and in the United States.
 
        Our wireless communications products segment consists of our short- and medium-range two-way wireless communications products that are used for various applications, including AVL. We sell our AVL end-units to customers that subscribe to our SVR services.
 
Outlook
 
We have historically experienced significant growth in the markets in which we provide our location-based services. These markets are generally characterized by high car theft rates and insurance companies that are seeking solutions to limit their actual losses resulting from car theft, and hence the Brazilian market continues to represent growth potential for our location-based services. The growth in subscribers within our location-based services segment also has a direct impact on the sale or lease of our AVL products, as they are an integral component of our location-based services and are installed in each subscriber's vehicle. In Israel, in recent years the market experience an increased car sales which positively affect our sales as compared with previous years.
 
        As of December 31, 2016, we had approximately 398,000 subscribers in Brazil. We estimate that the total addressable market in Brazil several million vehicles, and therefore we have a significant opportunity to grow our subscriber base and increase sales of our AVL products.
 
30

        We expect growth over the next 12 months in our location-based services segment to be driven by increased demand for our services in Brazil and in Israel, as a result of our strong operating results and our customers' increased familiarity with and confidence in our services; additional insurance companies who could seek to establish relationships with us; increased direct sales of SVR services to individual subscribers in Brazil who, due to prevailing high insurance costs, are self-insured and represent an additional market opportunity for our SVR services and AVL products; and increased sales of our fleet management systems and services. In connection with such potential markets and additional growth opportunities, we constantly look to enhance our brand recognition through continuous advertising efforts.
 
Our services and products, including our line of AVL products, which is based on our SMART and GPRS products and tailored for vehicles which are considered medium to high end vehicles, have contributed to an increase in our customer base and sales in Israel, and we expect it to continue to contribute to such increase. In addition, our new product IturanSave facilitate our entry to new market segments  in Israel intended for the medium sector, which may continue to serve as the base for our ongoing growth in the Israeli market. We continue to make significant investments in our fleet management products and our value added services, and we expect such investments will assist us in our long term growth.
 
Please refer to Item 3.D. – Risk Factors above in respect of factors that could negatively impact our business.

31

 
Geographical breakdown
 
Location-based services' subscriber base
 
The following table sets forth the geographic breakdown of subscribers to our location-based services as of the dates indicated:
 
   
As of December 31,
 
   
2016
   
2015
   
2014
 
Israel
   
443,000
     
381,000
     
340,000
 
Brazil
   
398,000
     
368,000
     
298,000
 
Argentina
   
159,000
     
169,000
     
158,000
 
United States
   
57,000
     
30,000
     
21,000
 
                         
Total(1)
   
1,057,000
     
948,000
     
817,000
 
 
(1)
All numbers provided are rounded, and therefore totals may be slightly different than the results obtained by adding the numbers provided.
 
 
Revenues
 
The following table sets forth the geographic breakdown of our revenues for each of our business segments for the relevant periods indicated.
 
   
Year ended December 31,
 
   
2016
   
2015
   
2014
 
   
In USD, in Millions
 
   
Location
based
services
   
Wireless
communications
products
   
Location
based
services
   
Wireless
communications
products
   
Location
based
services
   
Wireless
communications
products
 
Israel 
   
59
     
42.2
     
54.4
     
34.2
     
56
     
33.5
 
Brazil
   
67.8
     
3.2
     
56.1
     
2.3
     
63.6
     
2.9
 
Argentina
   
14.0
     
0.8
     
15.9
     
1.4
     
12.5
     
1.3
 
United States
   
1.1
     
7.6
     
1.3
     
6.5
     
1.6
     
6
 
Others
   
--
     
3.8
     
--
     
3.5
     
--
     
4.7
 
Total(1)
   
141.9
     
57.6
     
127.7
     
47.9
     
133.7
     
48.4
 
 
 (1) We attribute revenues to countries based on the location of the customer.
 
Location-based 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, predominately subscribers in Israel, Brazil and the United States, and insurance companies in Brazil and Argentina. We recognize revenues from subscription fees on a monthly basis. Our customers are free to terminate their subscription at any time. In the absence of such termination, the subscription term continues automatically. We also generate subscription fees from our fleet management services. Assuming no additional growth in our subscriber base and based on our historical average churn rates of 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.
 
32

Wireless communications products segment         
 
We generate revenues from the sale of our AVL products to customers in Israel, Brazil, Argentina, and the United States. We currently sell or lease our AVL end-units in each of the above regions. Growth in our subscriber base is the principal driver for the sale of our AVL products. We recognize revenues from sales of our wireless communications products upon delivery.
 
Cost of revenues
 
Location-based services segment         
 
The cost of revenues in our location-based services segment consists primarily of staffing, maintenance and operation of our control centers and base stations, costs associated with our staff and costs incurred for private enforcement, licenses, permits and royalties, as well as communication costs and costs due to depreciation of leased products and installation fees. Cost of revenues for sales of our fleet management services also includes payments to a third party who markets our services.
 
Wireless communications products segment         
 
The cost of revenues in our wireless communications products segment consists primarily of production costs of our third-party manufacturers and costs associated with installation fees.
 
Operating expenses
 
Research and development         
 
Our research and development expenses consist of salaries, costs of materials and other overhead expenses, primarily in connection with the design and development of our wireless communications products. We expense all of our research and development costs as incurred.
 
Selling and marketing         
 
Our selling and marketing expenses consist primarily of advertising, salaries, commissions and other employee expenses related to our selling and marketing team and promotional and public relations expenses.
 
General and administrative         
 
Our general and administrative expenses consist primarily of salaries, bonuses, accounting and other general corporate expenses.
 
Operating Income
 
Location-based services segment         
 
Operating income in our location-based services segment is primarily affected by increases in our subscriber base and our ability to increase the resulting revenues without a commensurate increase in our corresponding costs.
 
33

Wireless communications products segment         
 
Operating income in our wireless communications products segment is primarily affected by our ability to increase sales of our AVL products.
 
Financing expenses (income), net         
 
Financing expenses (income), net, include, inter alia, short- and long-term interest expenses (income), financial commissions, and gains and losses from currency fluctuations from the conversion of monetary balance sheet items denominated in currencies other than the functional currency of each entity in the group, gains in respect of marketable securities and interest related tax positions.
 
Taxes on income         
 
Income earned from our services and product sales is subject to tax in the country in which we provide our services or from which we sell our products.
 
Critical Accounting Policies and Estimates
 
Our critical accounting policies are more fully described in Note 1 to our consolidated financial statements appearing elsewhere in this report. However, certain of our accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on a periodic basis. We base our estimates on historical experience, industry trends, authoritative pronouncements and various other assumptions that we believe to be reasonable under the circumstances. Such assumptions and estimates are subject to an inherent degree of uncertainty.         
 
The following are our critical accounting policies and the significant judgments and estimates affecting the application of those policies in our consolidated financial statements. See Note 1 to our consolidated financial statements included elsewhere in this report.
 
Revenue recognition  
 
Revenues are recognized when delivery has occurred and, where applicable, after installation has been completed, there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the related receivable is reasonably assured and no further obligations exist. In cases where delivery has occurred but the required installation has not been performed, we do not recognize the revenues until the installation is completed.
 
Revenues are recognized as follows:
 
1.
Revenues from sales are recognized when title and risk of loss of the product pass to the customer (usually upon delivery).
 
2.
We apply the provisions of ASC Topic 605-25, "Revenue Recognition - Multiple-Element Arrangements", as amended. ASC Topic 605-25 provides 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 is accounted for as a separate unit when it provides the customer value on a stand-alone basis and if an arrangement includes a right of return relative to a delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the Company. According to ASC 605-25, as amended, when neither "vendor specific objective evidence" of selling price, nor third party price exists, we are required to develop a best estimate of the selling price of the deliverables and the entire arrangement consideration is allocated to the deliverables based on the relative selling prices.
 
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 is recognized ratably on a straight-line basis over the subscription period.
 
34

3.
Amounts earned by our 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, since the amount allocated to the company, is contingent upon the delivery of the SVR services. As the insurance company is the primary obligor of the insurance component, the company recognizes only the net amounts as revenues, after deduction of amounts related to the insurance component.
 
4.
Deferred revenues include unearned amounts received from customers (mostly for the provision of installation and subscription services) but not yet recognized as revenues.  Such deferred revenues are recognized as described in paragraph 2, above.
 
5.
Extended warranty
 
Revenues from extended warranty which are provided for a monthly fee and are sold separately 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.
 
We recognize interest as interest expenses (among financing expenses) and penalties, if any, related to unrecognized tax benefits in our provision for income tax.
 
Contingencies
 
We 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, the Company records 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.
 
35

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:
 
2016
   
2015
   
2014
 
Revenues:
                 
 Location based services
   
71.1
     
72.7
     
73.4
 
 Wireless communications products
   
28.9
     
27.3
     
26.6
 
                         
Total Revenues
   
100
     
100
     
100
 
Cost of Revenues:
                       
  Location based services
   
24.5
     
26.7
     
25.7
 
  Wireless communication products
   
24.4
     
22.1
     
21
 
                         
Total cost of revenues
   
48.9
     
48.8
     
46.7
 
                         
 Gross profit
   
51.1
     
51.2
     
53.3
 
Operating Expenses:
                       
  Research and development expenses
   
1.4
     
1.4
     
1.4
 
  Selling and marketing Expenses
   
5.0
     
5.3
     
5.1
 
  General and administrative expenses, net
   
20.2
     
21.5
     
21.2
 
  Other expenses (income), net
   
0.4
     
(0.1
)
   
0.4
 
                         
Total operating expenses
   
27.0
     
28.1
     
28.1
 
Operating Income
   
24.1
     
23.1
     
25.2
 
Financing income, net
   
1.0
     
0.7
     
0.9
 
                         
Income before income tax
   
25.1
     
23.8
     
26.1
 
Income tax
   
(7.5
)
   
(7.3
)
   
(7.8
)
Share in losses of affiliated companies, net
   
(0.2
)
   
(1.4
)
   
(0.2
)
                         
Net income for the year
   
17.4
     
15.1
     
18.1
 
Less: net income attributable to non-controlling interests
   
(1.3
)
   
(0.9
)
   
(1.4
)
                         
Net income attributable to company stockholders
   
16.1
     
14.2
     
16.7
 
 
36

Analysis of our Operation Results for the Year ended December 31, 2016 as compared to the Year ended December 31, 2015
 
Revenues      

Total revenues increased from $ 175.6 million in 2015 to $199.6 million in 2016, or 13.6%. This increase consisted of an increase of $14.3 million from subscription fees from our location-based services and an increase of $9.7 million from sales of our wireless communications products.

Location-based services segment
         
Revenues in our location-based services segment increased by $14.3 million from $127.6 million in 2015 to $141.9 million in 2016, or 11.2%, due to an increase in the average annual number of subscribers from 881,000 in 2015 to 1,008,000 in 2016; however, this increase was offset by the negative impact of exchange rate fluctuations in the amount of approximately $11.4 million. If the negative impact of the exchange rate fluctuations was not accounted, our revenues would increase by $25.7 million or 20.1%.

Wireless communications products segment         

Revenues in our wireless communications products segment increased from $47.9million in 2015 to $57.6 million in 2016, or 20.3%. This increase of $9.7 million is primarily due to an increase in our products' sales, mainly in Israel, in 2016 the negative effect of exchange rates fluctuation in our revenues from product sales was minor in an amount of $0.1 million.

Cost of revenues         

Total cost of revenues increased from $85.7 million in 2015   to $97.5 million in 2016, or 13.8%. This increase consisted of an increase of $ 2.1 million in the location based services segment and  an increase of  $9.7 million in  the wireless communication product segment . As a percentage of total revenues, cost of revenues increased from 48.8% in 2015 to 48.9% in 2016.

Location-based services segment
         
Cost of revenues for our location-based services segment increased from $46.8million in 2015 to $48.9 million in 2016, or 4.5%. This increase was primarily the result of an increase in salary expenses of approximately $2.6 million, and depreciation expenses of $1.1 million and increase in other various expenses such as enforcement and installation fees etc. in total of approximately $3.5 million, which was offset by effect of exchange rates fluctuations in an amount of approximately $5.2 million. As a percentage of total revenues for this segment, cost of revenues decreased from 36.7% in 2015 to 34.5% in 2016.

Wireless communications products segment
         
Cost of revenues for our wireless communications products segment in 2016 increased from $38.9 million in 2015 to $48.6 million in 2016, or 24.9%. This increase was mainly due to the increase in our products' sales. As a percentage of total revenues for this segment, cost of revenues increased from 81.2% in 2015 to 84.4% in 2016,  mainly due to a change in the products sales mixture.

37

 
Operating expenses

Research and development
        
Our research and development expenses in 2016 increased from $2.4million in 2015 to $2.9 million in 2016. As a percentage of total revenues, research and development expenses increased slightly from 1.4% to 1.5%
 
Selling and marketing         

Our selling and marketing expenses increased from $9.3 million in 2015 to $10.1 million in 2016, or 8.6%.  As a percentage of total revenues, selling and marketing expenses decreased from 5.3 % in 2015 to 5% in 2016.

General and administrative         

General and administrative expenses increased from $37.8 million in 2015 to $40.2 million in 2016, or 6.3%. This increase was primarily due to an increase in salary expenses in the amount of $2.6 million, in allowance for doubtful accounts in amount of $0.9 million, in legal and professional services in amount of $0.5 million and in other net various expenses in amount of $0.4 million, which was offset by the effect of exchange rates fluctuation in amount of $2 million . As a percentage of total revenues, general and administrative expenses increased from 21.5 % in 2015 to 20.2% in 2016.
 
Other expenses (income), net

Other expenses (income) increased from $0.3 million income in 2015 to $0.8 million expenses in 2016, primarily due to a $1.2 million expense related to prior years expences in Ituran Brazil.

Operating income      

Total operating income increased from $40.6 million in 2015 to $48 million in 2016, or 18.2%. This increase of approximately $7.4 million reflects an increase of $7.4 million in the operating income in the location-based segment and unchanged in the operating income in the wireless communication products segment.

Location-based services segment         

Operating income in our location-based services segment increased from $38.3 million in 2015 to $45.7 million in 2016, or 19.3%. This increase was mainly attributed to a higher rate of increase in revenues from subscription fees as compared to the rate of increase of this segment's operating expenses during the period.

Wireless communications products segment         

Operating income in our wireless communications products segment remained stable, in 2015 and 2016 at operating income of $ 2.3million.
 
Financing income, net      

Financing income, net, increased from $1.2 million in 2015 to $2.1million in 2016. This increased was mainly due to an increase in interest from deposits.

Income Tax        

Income Tax increased from $12.8 million in 2015 to $14.9 million in 2016, or 16.4%. As a percentage of income before tax on income expense tax decreased from 30.7 % in 2015 to 29.7% in 2016 primarily due to a change in the income before tax mix among the group's companies.

38


Analysis of our Operation Results for the Year ended December 31, 2015 as compared to the Year ended December 31, 2014

Revenues      

Total revenues decreased from $ 182.1 million in 2014 to $175.6 million in 2015, or 3.6%. This decrease consisted of a decrease of $6 million from subscription fees from our location-based services and a decrease of $0.5 million from sales of our wireless communications products.

Location-based services segment
         
Revenues in our location-based services segment decreased by $6 million from $133.7 million in 2014 to $127.7 million in 2015, or 4.5%. while the average annual number of subscribers increased from 778,000 in 2014 to 881,000 in 2015; however, this increase was offset by the negative impact of exchange rate fluctuations in the amount of approximately $29 million. If the negative impact of the exchange rate fluctuations was not accounted, our revenues would increase by $23 million.

Wireless communications products segment         

Revenues in our wireless communications products segment decreased from $48.4 million in 2014 to $47.9 million in 2015, or 1%. This decrease of $0.5 million is primarily due to an increase of $3.8 million in our products' sales, mainly in Israel, and a negative effect of exchange rates fluctuation in an amount of $4.3 million.

Cost of revenues         

Total cost of revenues increased from $85 million in 2014 to $85.7 million in 2015, or 0.8%. This increase consisted of an increase of $0.8 million in the product segment while the location based services segment decreased slightly. As a percentage of total revenues, cost of revenues increased from 46.7% in 2014 to 48.8% in 2015.

Location-based services segment
         
Cost of revenues for our location-based services segment decreased slightly from $46.9 million in 2014 to $46.8 million in 2015, or 0.2%. This decrease was primarily the result of an increase in salary expenses of approximately $3.3 million, and depreciation expenses of $3.8 million and increase in other various expenses such as enforcement and installation fees etc. in total of approximately $1.6 million, which was offset by effect of exchange rates fluctuations in an amount of approximately $8.8 million. As a percentage of total revenues for this segment, cost of revenues increased from 35% in 2014 to 36.7% in 2015.
 
Wireless communications products segment
         
Cost of revenues for our wireless communications products segment in 2015 increased from $38.1 million in 2014 to $38.9 million in 2015, or 2.1%. 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 78.7% in 2014 to 81.2% in  2015,  mainly due to a change in the products sales mixture.

Operating expenses

Research and development
        
Our research and development expenses in 2015 decreased from $2.5 million in 2014 to $2.4 million in 2015. As a percentage of total revenues, research and development expenses remained stable at 1.4%.

39

 
Selling and marketing         

Our selling and marketing expenses remained stable in 2014 and 2015 at  $9.3 million.  As a percentage of total revenues, selling and marketing expenses increased from 5.1% in 2014 to 5.3% in 2015.

General and administrative         

General and administrative expenses decreased from $38.6 million in 2014 to $37.8 million in 2015, or 2.1%. This decrease was primarily due to the effect of exchange rates fluctuations in the amount of $8 million which was offset by an increase in salary expenses in the amount of $2.6 million and an increase in legal and professional services in amount of $1.1 million and increase in other net various expenses in amount of $3.5 million. As a percentage of total revenues, general and administrative expenses increased from 21.2% in 2014 to 21.5% in 2015.
 
Other expenses (income), net

Other expenses (income) increased from of $0.9 million expenses in 2014 to $0.3 million income in 2015, primarily due to a $1 million gain from sale of a subsidiary in 2015.,

Operating income      

Total operating income decreased from $45.9 million in 2014 to $40.6 million in 2015, or 11.5%. This decrease of approximately $5.3 million reflects a decrease of $4.3 million in the operating income in the location-based segment and a decrease of $1 million in the operating income in the wireless communication products segment.

Location-based services segment         

Operating income in our location-based services segment decreased from $42.6 million in 2014 to $38.3 million in 2015, or 10%. This decrease was mainly attributed to the devaluation of local currency against the US dollar.

Wireless communications products segment         

Operating income in our wireless communications products segment decreased from an operating income of $ 3.3 million in 2014 to an operating income of 2.3 in 2015. This decrease in the operating income is mainly attributed to devaluation of the Israeli Shekel against the US dollar.
 
Financing income, net      

Financing income, net, decreased from $1.7 million in 2014 to $1.2 million in 2015. This decrease was mainly due to a decrease in short term interest expenses and in exchange rate differences.

Income Tax        

Income Tax decreased from $14.2 million in 2014 to $12.8 million in 2015, or 9.86%. As a percentage of income before tax on income expense tax increased from 29.9% in 2014 to 30.7% in 2015 primarily due to a change in the income before tax mix among the group's companies.

Impact of Currency Fluctuations on Results of Operations, Liabilities and Assets    

Although we report our consolidated financial statements in dollars, in 2014, 2015 and 2016, a portion of our revenues and expenses was derived in other currencies. For fiscal years 2014, 2015 and 2016, we derived approximately 10%,9% and 9.1% of our revenues in dollars, 46%, 48% and 47.9% in NIS, 36.5%, 33% and 35.6% in Brazilian Reals and 7.6% ,10% and 7.4% in Argentine Pesos, respectively. In fiscal years 2014, 2015 and 2016, , 14.8%,17% and 14.9% of our expenses were incurred in dollars, 46.7%,46% and 51.4% in NIS, 30.8%,27% and 27% in Brazilian Reals and 7.7%,10% and 6.7% in Argentine Pesos, respectively.         

40

Exchange differences upon conversion from our functional currency to dollars are accumulated as a separate component of accumulated other comprehensive income under stockholders’ equity. In the year 2016, accumulated other comprehensive income increased by 5.6 million as compared to the year 2015. In 2015, accumulated other comprehensive income decreased by $14.7 million as compared to the year 2014. In 2014, accumulated other comprehensive income decreased by $13.4 million as compared to the year 2013.

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,  
   
2014
   
2015
   
2016
 
   
 
 
Actual
   
At 2013
exchange
rates(1)
   
 
 
Actual
   
At 2014
exchange
rates(1)
   
 
 
Actual
   
At 2015
exchange
rates(1
 
   
(In thousands US$)
 
                                     
Revenues
   
182,127
     
193,977
     
175,628
     
209,186
     
199,574
     
211,098
 
Gross profit
   
97,133
     
103,871
     
89,881
     
107,375
     
102,031
     
108,297
 
Operating income
   
45,870
     
49,437
     
40,647
     
50,749
     
47,998
     
52,131
 
 
(1) Non GAAP, based on average exchange rates during the period.         
 
From time to time and in order 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.
 
B.  LIQUIDITY AND CAPITAL RESOURCES

We fund our operations primarily from cash generated from operations. In 2014, 2015 and 2016, we had $40.8 million, $29.1 million and $31.5 million in cash and marketable securities and $56.9 million, $50.1 million and $59,1 million in working capital, respectively. We hold our cash and cash equivalents in US dollars or the local currency of their location.

In 2016, 2015 and 2014 we did not have any long term borrowings from banks; and in 2014, 2015 and 2016, we also had $0.5million, $0.5 million and $0.8 million respectively, available to us under existing lines of credit.  In 2014, 2015 and in 2016, we have not utilized our lines of credit.
 
For a reference concerning our use of financial instruments for hedging purposes, please see Item 5.A – Operating Results under the captions "financing expenses (income), net" and "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.         

41

We had long-term liabilities in 2014, 2015 and 2016 of $10.2 million, $10.6 million and $11.8 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 $6.6 million, $7.2 million and $7.9 million in 2014, 2015 and 2016 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, since the end of 2012, there are several government regulations applied to foreign trade that affects the Company operation. The regulations been somewhat relaxed by the new president, since the end of 2015.
 
  The global scheme is an effort of the government to stop or reduce the needs of foreign currency sending outside the country by people and corporations.

The regulations are:

  1.
Foreign Exchange Market:
 
a.
Since December 10, 2015, the dollar and other currencies float free. At present any citizen or company is authorized to purchase foreign currency without limits.
 
b.
The Dollar Exchange Rate has increased during 2016 from $ 13 pesos per US$ to 15,85 at the end of 2016.
 
c.
Exchange rate variations apply to all transactions in foreign currency at the price of the day (Collections and payments abroad, purchase of foreign exchange, etc.).
 
  2.
Importation:
 
a.
The Importing Authorization System (DJAI) was replaced by a new Information System called SIMI. The main difference is that any good 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 became available.
 
b.
Since July 2016, the additional rate of 10% Income Tax applied on dividends payments is abolished and the dividend payments are income tax free (up to the limit of the net profit after the company has paid it´s 35% Income Tax).
 
As of November 16, 2009, our dividend policy provided for an annual dividend distribution in an amount not less than 50% of our net profits, calculated based on the audited financial statements for the period ending on December 31 of the fiscal year with respect to which the relevant dividend is paid. According to the adopted dividend policy and Israeli law, an annual dividend will only be declared and paid if, in the discretion of our Board of Directors, there is no reasonable foreseeable concern that the distribution will prevent us from being able to meet the terms of our existing and contingent liabilities, as and when due, all based on our needs as will be determined from time to time and subject to the provisions of the Israeli laws concerning lawful distribution of dividends.  On February 21, 2012, we revised our dividend policy so that our dividends will be declared and distributed on a quarterly basis in an amount not less than 50% of our net profits, calculated on the basis of our reviewed quarterly financial statements each fiscal year.

42

Following the revision of our dividend policy in 2012, we declared and paid regularly quarterly dividends.  On 2016 we declared and paid such dividends as follows:
 
 On February 24, 2016 we declared a quarterly dividend in the amount of NIS 25.4 million or $6.5 million, which was paid (net of taxes at the rate of 25%) on April 6, 2016, with respect to the fourth quarter of 2015. On May 23, 2016 we declared a quarterly dividend in the amount of $3.6 million, which was paid (net of taxes at the rate of 25%)  on June 22, 2016, with respect to the first quarter of 2016. On August 11, 2016 we declared a quarterly dividend in the amount of $3.8 million, which was paid (net of taxes at the rate of 25%)  on October 6, 2016, with respect to the second quarter of 2016. On November 15, 2016 we declared a quarterly dividend in the amount of $4.1 million, which was paid (net of taxes at the rate of 25%)  on January 10, 2017, with respect to the third quarter of 2016. On February 27, 2017 we declared a quarterly dividend in the amount of $8.5 million, which was paid (net of taxes at the rate of 25%) on April 5, 2017, with respect to the fourth quarter of 2016.
 
 On February 26, 2017 we have revised our dividend policy, which will come in force starting from 2017, that our dividends will be declared and distributed on a quarterly basis in an amount of at least of 5 million USD subject to the provisions of the Israeli laws concerning lawful distribution of dividends.

Until the date of this report, we have repurchased 2,507,314 of our shares.

The following table sets forth the components of our historical cash flows for the periods indicated:

   
Year ended December 31,
 
   
2016
   
2015
   
2014
 
   
(In thousands)
 
Net cash provided by operating activities
   
41,472
     
35,914
     
37,731
 
Net cash used in investing activities
   
(19,860
)
   
(25,706
)
   
(13,244
)
Net cash used in financing activities
   
(18,234
)
   
(18,659
)
   
(22,426
)
Effect of exchange rate changes on cash and cash equivalents
   
693
     
(2,951
)
   
(5,340
)
Net increase (decrease) in cash and cash equivalents
   
4,071
     
(11,402
)
   
(3,279
)
 
Years ended December 31, 2016, December 31, 2015 and December 31, 2014
 
Net cash provided by operating activities

Our operating activities provided cash of $37.7 million in 2014, $35.9 million in 2015 and $41.5 million in 2016.
 
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The increase of approximately $5.6 million in cash from operating activities in 2016 as opposed to 2015 was due primarily to:

-
An increase in the net income for the year, excluding: depreciation, amortization and impairment of goodwill, gain from sale of subsidiary, gain from marketable securities and   increase in liabilities for employee rights upon retirement in an amount of approximately $9.6 million.   
 
 as offset by:
 
-
A decrease in share in losses of affiliated companies in an amount of $2 million.
 
-
A decrease in deferred income taxes in amount of $1 million
 
-
A decrease in changes in current assets and liabilities, net in an amount of $1 million.

The decrease of approximately $1.8 million in cash from operating activities in 2015 as opposed to 2014 was due primarily to:
 
-
An increase in other current and non-current assets in amount of $3.9 million
 
-
An increase of equity loss in amount of $2 million.
 
-
An increase in other current and non-current liabilities in amount of $3 million
 
-
An increase in accounts receivables in amount of $2 million.
 
 as offset by:
 
-
A decrease in the net income for the year, excluding depreciation, amortization and impairment of goodwill and excluding a gain from sale a subsidiary in an amount of approximately $7.5 million.   
 
-
A decrease in the outstanding inventory in amount of $1.4 million.
 
-
An increase in accounts payable of $2.1 million.
 
-
An increase in liability for employee rights upon retirement in amount of $0.9 million.
 
-
A decrease in deferred revenues in amount of $0.9 million.
 
Net cash used in investing activities
 
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 proceed from sale of marketable securities, net in amount of $1.5 million.

Net cash used in investing activities in 2015 in an amount of approximately $25.7 million, includes mainly capital expenditures in the amount of $18.7 million, and investment in affiliated companies in the amount of $ 6 million.
 
Net cash used in investing activities in 2014 in an amount of approximately $13.2 million, includes mainly capital expenditures in the amount of $15 million, an investment in marketable securities in the amount of $2.8 million and on the other hand we have exercised a deposit in escrow in the amount of $5 million.
 
Net cash used in financing activities         
 
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.

Net cash used in financing activities in 2015 in an amount of approximately $18.7million consisted primarily of a cash dividend payment in an amount of $17.6million and a cash dividend payment in an amount of approximately $1.2million paid by our subsidiary to the non-controlling interests.

44

Net cash used in financing activities in 2014 in an amount of approximately $22.4million consisted primarily of a cash dividend payment in an amount of $19.3million and a cash dividend payment in an amount of approximately $2.6million paid by our subsidiary to the non-controlling interests.
 
C.  RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
                
All of our research and development activities take place in Israel. Our Research and Design department is constantly working on upgrading the service infrastructure 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 $2.9 million in 2016, $2.4 million in 2015 and $2.5million in 2014.

D.  TREND INFORMATION
        
Please see Item 4.A. – History and Development of the Company and Item 4.B. – Business Overview above for trend information.

E.  OFF-BALANCE SHEET ARRANGEMENTS
        
We do not have off-balance sheet arrangements (as such term is defined in Item E(2) of the Form 20-F) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
 
F.  TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
Contractual obligations and commercial commitments
 
The following table summarizes our material contractual obligations as of December 31, 2016:

   
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
   
7,657
     
2,421
     
2,971
     
1,014
     
1,251
 
Long-term loans
   
-
     
-
     
-
     
-
     
-
 
Purchase Obligations
   
15,559
     
9,559
     
6,000
     
-
     
-
 
Total
   
23,216
     
11,980
     
8,971
     
1,014
     
1,251
 
 
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.
45

 
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
70
 
President and director
 
Yehuda Kahane
72
 
Director
 
Ze'ev Koren
71
 
Chairman of the Board of Directors and an independent director
 
Efraim Sheratzky
64
 
Director
 
Eyal Sheratzky
48
 
Co-Chief Executive Officer and Director
 
Nir Sheratzky
45
 
Co-Chief Executive Officer and Director
 
Gil Sheratzky
39
 
CEO of our Subsidiary, International Activity and Business Development Officer  and a Director
 
Yoav Kahane(1)(2)
43
 
Director and an independent director
 
Yigal Shani
72
 
Director
 
Israel Baron(1)(2)(3) +
63
 
External Director
 
Gidon Kotler(1)(2)(3)
76
 
External Director
 
Tal Sheratzky- Jaffa
39
 
Director and an independent director
 
Ami Saranga
53
 
Deputy Chief Executive Officer
 
Eli Kamer
50
 
Executive Vice President, Finance; Chief Financial Officer
 
Guy Aharonov
51
 
General Counsel
 
Udi Mizrahi
45
 
VP Finance

Notes:
(1Member 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 received the highest international insurance award for his lasting contribution to the theory, practice and education in insurance and risk management.  He founded and chairs the YKCenter for Preparing for the New Economy. Professor Kahane is a Professor Emeritus from the Faculty of Management, 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, 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 is a major owner of Pango Parking and 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 is involved in a large number of not-for-profit enterprises dealing with a variety of aspects of the new Economy, with the association for the visually impaired people, and is a 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. He specializes in insurance, risk management, environmental issues and technological forecasting. He is the father of Yoav Kahane.

46

 
  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 nine 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 as a Co-Chief Executive Officer since 2003. Prior to 2003, he served as an alternate Chief Executive Officer of our company in 2002 and as Vice President of Business Development during the years 1999 through 2002. Mr. Sheratzky also serves as a director of Moked Ituran and certain of our other subsidiaries, including Ituran Network. From 1994 to 1999, he served as the Chief Executive Officer of Moked Services, Information and Investments and as legal advisor to several of our affiliated companies. Mr. Sheratzky holds LLB and LLM degrees from Tel Aviv University School of Law and an Executive MBA degree from 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 cousin of Effraim Sheratzky.  

Nir Sheratzky has served as a director of our company since its acquisition from Tadiran in 1995 and as a Co-Chief Executive Officer since 2003. Prior to 2003, Mr. Sheratzky served as an alternate Chief Executive Officer of our company from 1995 to 2003. Mr. Sheratzky is also a director in Moked Ituran. He holds BA and MA degrees in Economics from Tel Aviv University. Nir is the son of Izzy Sheratzky and the brother of Eyal and Gil Sheratzky and cousin 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. Nir Sheratzky is the son of Izzy Sheratzky and the brother of Eyal Sheratzky and Nir Sheratzky and cousin 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 dizziness and Imbalance. 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.   

47


 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.
 
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 15, 2014 for additional 3-year term to serve as external director.

Gidon Kotler is an external director of our company.  He is serving since April 30, 2014 and was reelected for additional three years' term on December 28, 2016. Prior to his retirement to pension 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.

Ms. Tal Sheratzky -Jaffa was re-appointed as a member of the board, and serves as a Class A director on December 28, 2016. Ms. Sheratzky-Jaffa is a partner at the High Tech and Venture Capital Department of the law firm Amit, Pollak, Matalon and Co.(APM), specializing in the fields of mergers and acquisitions, venture capital and private equity investments, fund formation, high-tech and corporate governance. Prior to joining APM, Ms. Sheratzky-Jaffa was an associate at the New York offices of the international law firm Akin Gump Strauss Hauer & Feld. Ms. Sheratzky-Jaffa holds LL.B and B.A degrees in Economics from Haifa University and LL.M degree from Columbia University (New York) 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 auditors. Mr. Kamer is a CPA and holds a BA degree in Business Administration from the Israel College of Management and an MBA degree in business administration from Bar Ilan University.         

Guy Aharonov has served as our in-house legal counsel since 1999. Prior to joining our company, he has worked as an attorney in Cohen Lahat & Co. Mr. Aharonov holds LLB and LLM degrees from Tel Aviv University.

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Udi Mizrahi has served as our VP Finance since 2000. Mr. Mizrahi is a CPA and holds a BA degree in accounting and economics from Ruppin Academic Center, Israel.       
 
Our articles of association provide for staggered three-year terms for all of our directors (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 December 13, 2014; Izzy Sheratzky, Gil Sheratzky and Zeev Koren (class C), who were re-elected on December 24, 2015; 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 extraordinary shareholders meeting approved the extension of the term of Mr. Gidon Kotler, our external director, for additional three years (beginning April 30, 2017).
 
Shareholders Agreement and Articles of Association of Moked Ituran Ltd..        
 
On May 18, 1998, a shareholders agreement was entered into between Moked Ituran Ltd. and each of its shareholders, Moked Services, Information, Management and Investments Ltd. (38%), F.K. Generators and Equipment Ltd. (26%), Yehuda Kahane Ltd. (26%), Gideon Ezra, Ltd. (2.5%), T.S.D. Holdings Ltd. (3.75%) and G.N.S. Holdings Ltd. (3.75%). On May 18, 1998, Moked's articles of association were amended to incorporate some of the provisions of the shareholders agreement as well as other provisions governing the relationship of its shareholders. The Moked articles were amended again on September 6, 2005 to correspond to an amendment to the shareholders agreement that was entered into on such date. On September 17,  2014, F.K. Generators and Equipment Ltd rights and obligations in the shareholders agreement were terminated following the execution of their right to sell their portion in our shares as was defined in the terms of the second amendment of Moked shareholder agreement.
 
Gideon Ezra, Ltd. is a company wholly owned by Mr. Doron Ezra. Moked Services, Information, Management and Investments is a company owned by A. Sheratzky Holdings Ltd. (a company controlled by Izzy Sheratzky, 93%, and in which each of Eyal Sheratzky and Nir Sheratzky, Co-CEO's of Ituran and directors, holds 3.5%). Yehuda Kahane Ltd. is a company owned by Professor Kahane and Rivka Kahane. T.S.D. Holdings is a company controlled by Efraim Sheratzky. G.N.S. Holdings is a company controlled by Yigal Shani.
 
 The shareholders agreement (as amended) and Moked's amended articles of association provide as follows:
 
n
Prior to the time a shareholders meeting of our company takes place, a separate meeting of the shareholders of Moked will be convened.

n
At the Moked shareholders meeting, all matters included in our meeting's agenda will be discussed and voted on.

n
The required quorum in the Moked meeting will be any number of shareholders actually present. The resolutions will be adopted by a majority of the votes present and voting, based on the relative shareholdings in Moked, with the exception of Moked Services, Information, Management and Investments, which is entitled to 41.5% of the voting rights..

n
With respect to director elections, every Moked shareholder holding at least 3.5% of Moked's shares is entitled to designate one director in our annual shareholders meeting. Each Moked shareholder holding over 10% of Moked's shares may nominate an additional director for every additional 10% of Moked shares held by him or her in excess of the initial 10%. For the purpose of nominating additional directors, shareholdings may be aggregated.

49

n
Upon the expiration of the term of office of our class A directors, each of Moked Services, Information and Investment, provided it holds at least 40% of the voting rights (together with the 3.5% of the voting rights held by F.K. Generators and Equipment), Yehuda Kahane Ltd., provided it holds at least 20% of the voting rights, F.K. Generators and Equipment, provided it holds at least 20% of the voting rights, and Yigal Shani or G.N.S. Holdings, provided either of them holds at least 3.5% of the voting rights, shall be entitled to require Moked to appoint one director to class A. Upon the expiration of the term of office of our class B directors, each of Moked Services, Information and Investment, provided it holds at least 40% of the voting rights (together with the 3.5% of the voting rights held by F.K. Generators and Equipment), and Yehuda Kahane, provided it holds at least 20% of the voting rights, and F.K. Generators and Equipment, provided it holds at least 20% of the voting rights, shall be entitled to require Moked to appoint one director to class B. Upon the expiration of the term of office of our class C directors, (i) Moked Services, Information and Investment, provided it holds at least 36.5% of the voting rights shall be entitled to require Moked to appoint two directors and (ii) Efraim Sheratzky or T.S.D. Holdings, provided either of them holds at least 3.5% of the voting rights, shall be entitled to require Moked to appoint one director to class C.

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

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

n
According to Moked's articles of association, each of the shareholders of Moked may direct Moked to dispose of a portion of Moked's holdings in our company that corresponds to such shareholders' proportional holdings in Moked and to distribute the proceeds of such disposition to such directing shareholders.

This shareholders agreement is in effect only for as long as Moked holds at least 15% of our issued and outstanding share capital.
 
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, 2016 was approximately $214,000. 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 2016, we paid the sum of NIS381,000 (approximately $99,000) to our external directors, NIS200,000 (approximately $52,000) to Mr. Ze'ev Koren, NIS144,000 (approximately $38,000) to Mr. Yoav Kahane, NIS 98,000 (approximately $ 28,000) to Ms. Tal Sheratzky-Jaffa.
 
We do not have any agreements with directors providing for benefits upon termination of their respective services as such.       
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The aggregate cost to the Company of the compensation to our Co-Chief Executive Officers in 2016 were $3.8 million. The aggregate compensation paid to all Ituran officers as a group during 2016 was approximately $11.4 million. In 2016 we paid an aggregate amount of $52,000 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 2016 according to our 2016 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)
   
703
     
-
     
-
     
-
     
1,055
     
703
     
2,461
 
Eyal Sheratzky (Co-Chief Executive Officer)
   
547
     
-
     
-
     
-
     
820
     
547
     
1,914
 
Nir Sheratzky (Co-Chief Executive Officer)
   
547
     
-
     
-
     
-
     
820
     
547
     
1,914
 
Gil Sheratzky (CEO of our Subsidiary & International Activity and Business Development Officer)
   
391
     
-
     
-
     
-
     
586
     
391
     
1,368
 
Ami Saranga (Deputy Chief Executive Officer)
   
-
     
185
     
44
     
42
     
76
     
-
     
347
 
Total of our 5 highest paid officers
   
2,188
     
185
     
44
     
42
     
3,357
     
2,188
     
8,004
 
 
During 2016, we set aside $574,000 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 2016, 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.
 
 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 2016, we paid a total of $793,000 to our officers and employees pursuant to the above bonus schemes.
 
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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 renewed compensation policy for office holders, which is filed herewith as Exhibit 4.8 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, and may in certain circumstances be removed, by the majority of our shareholders. 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 on insider trading, 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. We are currently in a trial period of 3 month since the adoption of the policy, and after the completion of the trial period, the new and updated regulations will be subject to review and adjustments in order to fit better our activities.
 
External directors         

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

 n
such majority includes at least the majority of the shares held by all non-controlling shareholders or 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

53

n
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.

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.

54

Mr. Israel Baron is now serving his fifth term as an external director of the Company, who was reelected on of December 14, 2014 for a term of 3 years. Mr. Gidon 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. 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, Gidon Kotler and Yoav Kahane, all of whom are independent as required of members of the audit committee under the Nasdaq listing rules.  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.

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.
 
55

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 in charged officer 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 reapproval 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, Gidon Kotler and Yoav Kahane. 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.

56

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:

n
a person (or a relative of a person) who holds more than 5% of the company's shares or voting rights;
 
n
a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;
 
n
an executive officer, director or other affiliate of the company; or
 
n
a member of the company's independent accounting firm.
        
The role of the internal auditor is to examine, among other things, the compliance of the company's conduct with applicable law and orderly business procedures. Our internal auditor is Simon Yarel, CPA, who has served as our internal auditor since January 1999.
 
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,
 
   
2016
   
2015
   
2014
 
By area of activity:
                 
Control Center
   
395
     
379
     
401
 
Research and Development
   
40
     
39
     
54
 
Sales and Marketing
   
103
     
125
     
127
 
Technical support and IT
   
305
     
296
     
271
 
Finance, Administration and Management
   
248
     
232
     
209
 
Private enforcement and operations
   
408
     
393
     
395
 
Manufacturing
   
101
     
80
     
65
 
Total
   
1,600
     
1,544
     
1,522
 
    By geographic location (out of total):
 
Israel
   
762
     
719
     
703
 
Brazil
   
626