Management's Discussion of Results of Operations (Excerpts)
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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 2015, 73% of our revenues were attributable to our location-based services. As of December 31, 2015, we primarily provided our services in Israel, Brazil, Argentina and the United States to approximately 381,000, 368,000, 169,000 and 30,000 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, 2015, we provided our services to approximately 140,000 end-users through 31,000 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 3,000 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, 2015, we 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. Wireless Communications Products In 2015, 27% 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. Location-based services Stolen vehicle recovery The demand for vehicle security products and services is driven by vehicle theft rates, increasing security awareness among customers and insurance companies’ efforts to reduce incidents of loss. In addition, in Brazil, which is one of our primary markets, a regulation was adopted pursuant to which new vehicles (cars, motorcycles, trucks etc.), manufactured in Brazil or imported into the country may only be sold when equipped with a blocking (immobilizing) and GPS location system or tracking system (such as our products). However such regulation was repeatedly postponed and in our understanding this regulation will be changed completely in the future or entirely cancelled. 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: 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. More sophisticated products that include some form of remote monitoring and communication. This category can be further separated into devices that simply provide information on the general direction of the vehicle and those that enable the location, tracking and recovery of the vehicle in real time. AVL technology is typically used to report stolen vehicles to police, provide real-time location and tracking information and immobilize the vehicle if necessary. The application of AVL technology has proven to be effective in increasing the recovery rates of stolen vehicles. As a result, many insurance companies in countries such as Israel, Brazil and Argentina either offer discounts between 10% and 20% on insurance premiums for vehicles equipped with AVL systems or require customers to install such AVL systems in vehicles above a pre-determined value. Fleet management The market for fleet management services ranges from very large fleets of thousands of vehicles to very small fleets of five vehicles or less, with smaller fleets constituting a significant portion of the market given the large number of companies that maintain a fleet today. Fleet management services allow fleet operators and individuals to locate, monitor and communicate with their vehicles and employees in the field in real time. This helps them to better track loads, predict arrival times, schedule customer appointments, reduce fuel usage and manage vehicles’ maintenance schedules. By increasing efficiency and reducing costs, fleet management can provide a quantifiable return on investment for fleet operators, as well as improve customer satisfaction. In addition, fleet management services can enhance driver security and can notify the fleet operator if a vehicle leaves a prescribed geographic region, reducing theft-related liabilities. A principal factor supporting fleet management industry growth is the presence of millions of vehicles that are in commercial use but which are not yet equipped with fleet management systems. 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 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. 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. 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. 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. 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. 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: Base Site: a radio receiver, which includes a processor and a data computation unit to collect and send data to and from transponders and send that data to control centers as part of the terrestrial infrastructure of the location system; Control Center: a center consisting of software used to collect data from various base sites, conduct location calculations and transmit location data to various customers and law enforcement agencies; Fleet Management Value-added services Asset protection to Auto Lenders In each of the above countries we maintain a control center, which is operated 24 hours a day, 365 days a year. The following is a short description of key operating statistics about our location-based services in the countries in which we operate: Israel: We commenced operations in Israel in 1995 and we had approximately 381,000 subscribers as of December 31, 2015. 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. Brazil: We commenced operations in Brazil in 2000 and we had approximately 368,000 subscribers as of December 31, 2015. 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. Argentina: We commenced operations in Argentina in 2002 and we had approximately 169,000 subscribers as of December 31, 2015. 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. 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, 2015, we had approximately 30,000 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 2013, 2014 and 2015 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, 2015, our selling and marketing team consisted of 125 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. 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, 2015, we had a total of approximately 948,000 subscribers for our SVR services. Fleet management Vehicle fleet management systems are primarily marketed through vehicle fleets' departments, which form a part of our regional marketing departments. We conduct in-depth research to identify companies that will gain efficiency and cost savings through the implementation of our products and services, and conduct targeted marketing campaigns to these companies. In addition, we participate in professional conventions and advertise in professional publications and journals designed for our target customers. Our customers in the fleet management market include small-, mid- and large-size enterprises and individuals. As of December 31, 2015, we provided our services to approximately 140,000 end users through 31,000 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 3,000 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 Israel. Our primary competitors in Israel are Pointer and Skylock Ltd. Brazil. Brazil is a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated vehicle security systems). Our main competitors in Brazil are Sascar, Zatix and AutoTrack. Argentina. Argentina is also a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated vehicle security systems). Our main competitors in Argentina are LoJack Corporation and Megatrans S.A.. United States. In the United States, there are several major companies offering various theft protection and recovery products that compete with our product and service offerings, including LoJack Corporation, OnStar Corporation, 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, Network Fleet, Street Eagle, FleetMatics, Navtrack, Teletrac, Trim Track, FleetBoss, PassTime and Spireon; 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. and Sky Cop. 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. 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. “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 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. Our frequency licenses in Brazil expire in 2019. Except in Brazil, where a request for a new license may have to be filed upon expiration of the license in 2019, we have options to extend all of our frequency licenses for periods ranging from three- to ten-years. 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. In Israel and Brazil, like our competitors and most cellular operators, we are not in compliance with all relevant laws and regulations in connection with the erection of transmission antennas (our base sites). As of the date hereof, most of our base sites in Israel and Brazil are operating without local building permits. Currently, there is heightened awareness of this issue in Israel, particularly in connection with base sites of cellular providers, and possible sanctions could include fines and even the closure or demolition of these base sites. In Brazil, Brazilian authorities enforce permit requirements and impose penalties for non-compliance with such requirements. However, we do not believe this is likely. Obtaining such required permits may involve additional fees as well as payments to the Land Administration Authority. In Israel the required permits and approvals for the erection of the base sites include: erection and operating permits from the Israeli Ministry of the Environment; permits from the Israeli Civil Aviation Authority, in certain cases; permits from the Israeli Defense Forces; approval from Israel's Land Administration and/or from Civil Administration in the Territories, which usually also involves payment for the land use rights; and building permits from local or regional zoning authorities in Israel and Brazil. 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 29 of these permits (13 of them have expired). With respect to the general permit from Israel’s Land Administration, in 2005 we entered into an agreement with the Israel’s Land Administration, pursuant to which the general permit has been issued to us against an annual consideration based on the date of approval of our base sites. The agreement had expired on December 31, 2010. In the event that the Israel Land Administration claims consideration for the erection of the base sites without a permit, we may be subject to penalties and payment of annual consideration for the years of use of those base sites. In Brazil, very few providers of wireless telecommunications services obtain the required permits for the erection of transmission antennas due to the nature of the approval process. Currently we do not have such permits (except Anatel permits). In Brazil, we try to minimize our risk by locating most of our equipment in sub-leased sites which are already used by other telecommunication service providers, such as cellular operators. In Brazil the required permits for the erection of our base sites include: a permit from Anatel (National Agency for Telecommunication) 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) 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. 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. 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 2015 we leased an aggregate of approximately 48,763 square feet of office space in Azour and Holon, Israel. In 2015, the annual lease payments for these facilities were approximately $683,000. 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 $ 93,392 annually, approximately 720 square feet for our control center for approximately $ 7,487 annually, approximately 5,253 square feet for our installation center for approximately $ 82,141 annually, approximately 2,121 square feet for our warehouse for approximately $ 14,422 annually, and approximately 862 square feet for our third warehouse for approximately $ 5,017 annually. We lease approximately 7,460 square feet for our offices and control center in Florida for a monthly rate of $ 12,900 USD. As of December 31, 2015, the lease was on a month by month basis. We plan to extend the lease for an additional period of 60 months and to assume additional 1,800 square feet (on top of current 7,460 square feet). In 2015, we leased approximately 682 Sq. m 7,341 square feet) of office space and warehouse in Brazil for approximately $133,000 annually. We believe that our facilities are suitable and adequate for our operations as currently conducted. In the event that additional facilities will be required, we believe that we could obtain such facilities at commercially reasonable rates. The size of our base station sites varies from approximately 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. 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. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 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, 2015, we had approximately 368,000 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. 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. 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. 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. Wireless communications products segment Operating income in our wireless communications products segment is primarily affected by our ability to increase sales of our AVL products. Financing expenses (income), net Financing expenses (income), net, include, inter alia, short- and long-term interest expenses, financial commissions, and gains and losses from currency fluctuations from the conversion of monetary balance sheet items denominated in currencies other than the functional currency of each entity in the group, gains in respect of marketable securities and interest related tax positions. 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. 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: Revenues from sales are recognized when title and risk of loss of the product pass to the customer (usually upon delivery). 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. Amounts earned by our Brazilian subsidiary earns commissions 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, such commissions are recognized ratably on a straight-line basis over the subscription period, since the amount allocated to the company, as an agent, 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. 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. 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 its provision for income tax. Goodwill and other Intangible Assets Impairment Test Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in business combinations accounted for in accordance with the "purchase method" and is allocated to reporting units at acquisition. Goodwill is not amortized but rather tested for impairment at least annually in accordance with the provisions of ASC Topic 350, "Intangibles - Goodwill and Other". We perform goodwill annual impairment test for the reporting units at December 31 of each year, or more often if indicators of impairment are present. As required by ASC Topic 350, we choose either to perform a qualitative assessment whether the two-step goodwill impairment test is necessary or proceeds directly to the two-step goodwill impairment test. Such determination is made by us for each reporting unit on a stand-alone basis. The qualitative assessment includes various factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, earnings multiples, gross margin and cash flows from operating activities and other relevant factors. When we choose to perform a qualitative assessment and determines that it is more likely than not (more than 50 percent likelihood) that the fair value of the reporting unit is less than its carrying value, then we proceed to the two-step goodwill impairment test. If the we determine Otherwise, no further evaluation is necessary. When we decide or we required to perform the two-step goodwill impairment test, we compare the fair value of the reporting unit to its carrying value ("step 1"). If the fair value of the reporting unit exceeds the carrying value of the reporting unit net assets (including the goodwill allocated to such reporting unit), goodwill is considered not to be impaired, and no further testing is required. If the carrying value exceeds the fair value of the reporting unit, then the implied fair value of goodwill is determined by subtracting the fair value of all the identifiable net assets from the fair value of the reporting unit. An impairment loss is recorded for the excess, if any, of the carrying value of the goodwill allocated to the reporting unit over its implied fair value ("step 2"). There are a number of generally accepted methods used for valuing a reporting unit: The ‘income approach’ utilizes discounted forecasted cash flows, the ‘Market – approach which utilize pricing multiples of business entities with publicly traded securities whose business and financial risks are comparable to those of the reporting unit being valued and the ‘Asset - based approach’ which establishes a value based on the cost of reproducing or replacing the asset being valued. These methods described may be used alone or in combination with one another. We apply assumption that market participants would consider in determining the fair value of each reporting unit and the fair value of the identifiable assets and liabilities of the reporting units, as applicable. We perform a qualitative assessment for two reporting units as of December 31, 2015 and 2014, and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required, with respect to such units. For other reporting units (two in 2014, one in 2015), operating in Israel, we elected to bypass the qualitative assessment and proceeded directly to performing the first step of the goodwill impairment test. In order to determine the fair value of such reporting units, we utilized the "income approach". According to the income approach expected future cash flows are discounted to their present value using an appropriate rate of return. Judgments and assumptions related to future cash flows (projected revenues, operating expenses, and capital expenditures), future short-term and long-term growth rates, and weighted average cost of capital, which are based on management's internal assumptions, and believed to be similar to those that would be utilized by market participants under the circumstances and to represent both the specific risks associated with the business, and capital market conditions, are inherent in developing the discounted cash flow model. 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. 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 $0.7 million in the location based services segment and while the wireless communication product segment was unchanged. 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%. 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. Analysis of our Operation Results for the Year ended December 31, 2014 as compared to the Year ended December 31, 2013 Revenues Total revenues increased from $170.2 million in 2013 to $ 182.1 million in 2014, or 7%. This increase consisted of an increase of $6.7 million from subscription fees from our location-based services and an increase of $5.2 million from sales of our wireless communications products. Location-based services segment Revenues in our location-based services segment increased by $6.7 million from $127 million in 2013 to $133.7 million in 2014, or 5.3%., due to an increase in the average annual number of subscribers from 703,000 in 2013 to 778,000 in 2014; however, this increase was offset by the negative impact of exchange rate fluctuations in the amount of approximately $11.3 million. If the negative impact of the exchange rate fluctuations was not accounted, our revenues would increase by $18 million. Wireless communications products segment Revenues in our wireless communications products segment increased from $43.2 million in 2013 to $48.4 million in 2014, or 12%. This increase of $5.2 million is primarily due to an increase of $5.7 million in our products' sales, mainly in Israel, and a negative effect of exchange rates fluctuation in an amount of $0.5 million. Cost of revenues Total cost of revenues increased from $80.9 million in 2013 to $85 million in 2014, or 5.1%. This increase consisted of an increase of $2 million in the location based services segment and an increase of $2.1 million in the wireless communication product segment. As a percentage of total revenues, cost of revenues decreased from 47.5% in 2013 to 46.7% in 2014. Location-based services segment Cost of revenues for our location-based services segment increased from $44.9 million in 2013 to $46.9 million in 2014, or 4.5%. This increase was primarily the result of an increase in salary expenses of approximately $4 million, and depreciation expenses of $0.7 million and increase in other various expenses such as enforcement and installation fees etc. in total of approximately $1.8 million, which was offset by effect of exchange rates fluctuations in an amount of approximately $4.5 million. As a percentage of total revenues for this segment, cost of revenues decreased from 35.3% in 2013 to 35% in 2014. Wireless communications products segment Cost of revenues for our wireless communications products segment in 2014 increased from $36 million in 2013 to $38.1 million in 2014, or 5.8%. This increase was mainly due to the increase in our products' sales. As a percentage of total revenues for this segment, cost of revenues decreased from 83.3% in 2013 to 78.7% in 2014, mainly due to a change in the products sales mixture. Operating expenses Research and development Our research and development expenses in 2014 increased from $2.4 million in 2013 to $2.5 million in 2014. As a percentage of total revenues, research and development expenses remained stable at 1.4%. Selling and marketing Our selling and marketing expenses decreased from $9.7 million in 2013 to $9.3 million in 2014, or a decreased of 4%. As a percentage of total revenues, selling and marketing expenses decreased from 5.7% in 2013 to 5.1% in 2014. General and administrative General and administrative expenses increased from $34.5 million in 2013 to $38.6 million in 2014, or 11.9%. This increase was primarily due to an increase in salary expenses in the amount of $4.2 million and an increase in allowance for doubtful accounts in the amount of $0.9 million which was offset by the effect of exchange rates fluctuations in the amount of $2.3 million. As a percentage of total revenues, general and administrative expenses increased from 20.3% in 2013 to 21.2% in 2014. Other expenses, net Other expenses decreased from $4.8 million in 2013 to $0.9 million in 2014, primarily due to a $0.9 million impairment loss recorded in 2014, as compared to a $4.6 million impairment loss, which was recorded in 2013. Operating income Total operating income increased from $37.9 million in 2013 to $45.9 million in 2014, or 20.8%. This increase of approximately $7.9 million reflects an increase of $4.1 million in the operating income in the location-based segment and an increase of $3.8 million in the operating income in the wireless communication products segment. Location-based services segment Operating income in our location-based services segment increased from $38.5 million in 2013 to $42.6 million in 2014, or 10.6%. 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 increased from an operating loss of $0.5 million in 2013 to an operating income of $3.3 million in 2014. Our sales in this segment increased during 2014 mainly due to the increase in the volume of sale and the product mix. Other (expenses) Income, net Other expense, net of $0.2 million in 2013 was as a result of the sale of our holdings in an affiliated company. Financing income, net Financing income, net, increased from $0.2 million in 2013 to $1.7 million in 2014. This increase was mainly due to a decrease in short term interest expenses and in exchange rate differences. Income Tax Income Tax increased from $12.4 million in 2013 to $14.2 million in 2014, or 14.5%. As a percentage of income before tax on income expense tax decrease from 32.8% in 2013 to 29.9% in 2014 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 2013, 2014 and 2015, a portion of our revenues and expenses was derived in other currencies. For fiscal years 2013, 2014 and 2015, we derived approximately 8.3%, 10% and 9% of our revenues in dollars, 45.5%, 46% and 48% in NIS, 37.3%, 36.5% and 33% in Brazilian Reals and 8.9%, 7.6% and 10% in Argentine Pesos, respectively. In fiscal years 2013, 2014 and 2015, 20.1%, 14.8% and 17% of our expenses were incurred in dollars, 41%, 46.7% and 46% in NIS, 29.9%, 30.8% and 27% in Brazilian Reals and 8.9%, 7.7% and 10% in Argentine Pesos, respectively. Exchange differences upon conversion from our functional currency to dollars are accumulated as a separate component of accumulated other comprehensive income under stockholders’ equity. In the year 2015, accumulated and other comprehensive income decreased by 15.8 million as compared to the year 2014. In 2014, accumulated and other comprehensive income decreased by $11.1 million as compared to the year 2013. In 2013, accumulated and other comprehensive income decreased by $3.2 million as compared to the year 2012. 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. Year Ended December 31, Our policy remains to reduce exposure to exchange rate fluctuations by entering into foreign currency forward transactions that qualify as hedging transactions under ASC Topic 815, "Derivatives and Hedging", the results of which are reflected in our income statements as revenues or cost of revenues. The result of these transactions, which are affected by fluctuations in exchange rates, could cause our revenues, cost of revenues, gross profit and operating income to fluctuate. LIQUIDITY AND CAPITAL RESOURCES We fund our operations primarily from cash generated from operations. In 2013, 2014 and 2015, we had $46.7 million, $40.8 million and $29.1 million in cash, marketable securities and deposit in escrow (long and short term) and $57.2 million, $56.9 million and $50.1 million in working capital, respectively. We hold our cash and cash equivalents in US dollars or the local currency of their location. In 2015, 2014 and 2013 we did not have any long term borrowings from banks; and in . In 2013, 2014 and 2015, we also had $0.7 million, $0.5 million and $0.5 million respectively, available to us under existing lines of credit. In 2013 2014 and in 2015, we have not utilized our lines of credit. 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. We had long-term liabilities in 2013, 2014 and 2015 of $9.6 million, $10.2 million and $10.6 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, $6.6 million and $7.2 million in 2013, 2014 and 2015 respectively. The deposited funds include profits accumulated up to the balance sheet date and may be withdrawn upon the fulfillment of the obligation pursuant to Israeli severance pay laws or labor agreements. In Argentina, since the end of 2012, there are several government regulations applied to foreign trade that affects the Company operation. The regulations been somewhat relaxed by the new president, since the end of 2015. The global scheme is an effort of the government to stop or reduce the needs of foreign currency sending outside the country by people and corporations. Foreign Exchange Market: Since December 10, 2015, the dollar and other currencies float free, and any citizen or company is authorized to purchase up to the equivalent of US$ 2,000,000 per month. Dividends: Paying abroad dividends to shareholders is not possible. Since September 23, 2013, there is an additional rate of 10% Income Tax applied on dividends payments that should be withheld at source. 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 the adopted dividend policy and Israeli law, an annual dividend will only be declared and paid if, in the discretion of our Board of Directors, there is no reasonable foreseeable concern that the distribution will prevent us from being able to meet the terms of our existing and contingent liabilities, as and when due, all based on our needs as will be determined from time to time and subject to the provisions of the Israeli laws concerning lawful distribution of dividends. According to such dividend policy, we distributed NIS 78.8 million (approximately $21.8 million) on April 6, 2011 and NIS 96 million (approximately $25.8 million) on April 4, 2012. On February 21, 2012, we revised our dividend policy so that our dividends will be declared and distributed on a quarterly basis in an amount not less than 50% of our net profits, calculated on the basis of our reviewed quarterly financial statements each fiscal year. Following the revision of our dividend policy in 2012, we declared and paid regularly quarterly dividends in 2012, 2013, and 2015. On 2015 we declared and paid such dividends as follows: On February 2, 2015 we declared a quarterly dividend in the amount of NIS 27.3 million or $7 million, which was paid on April 8, 2015, with respect to the fourth quarter of 2014. On May 18, 2015 we declared a quarterly dividend in the amount of NIS 12.8 million or $3.4 million, which was paid on July 2, 2015, with respect to the first quarter of 2015. On August 13, 2015 we declared a quarterly dividend in the amount of NIS 11.1 million or $3.0 million, which was paid on October 7, 2015, with respect to the second quarter of 2015. On November 18, 2015 we declared a quarterly dividend in the amount of NIS 12.2 million or $3.1 million, which was paid on January 6, 2016, with respect to the third quarter of 2015. On February 24, 2016 we declared a quarterly dividend in the amount of NIS 25.4 million or $6.5 million, which was paid on April 6, 2016, with respect to the fourth quarter of 2015. Until the date of this report, we have repurchased 2,507,314 of our shares. Years ended December 31, 2015, December 31, 2014 and December 31, 2013 Net cash provided by operating activities Our operating activities provided cash of $46.7 million in 2013, $37.7 million in 2014 and $35.9 million in 2015. 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. The decrease of approximately $9 million in cash from operating activities in 2014 as opposed to 2013 was due primarily to: - an increase in the net income for the year, excluding depreciation, amortization and impairment of goodwill in an amount of approximately $3.4 million; as offset by: - an increase in other current and non-current assets in a total amount pf approximately $5.3 million; - a decrease in current and non-current liabilities in a total amount of approximately $6.8 million; Net cash used in investing activities 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 investing activities in 2013 in an amount of approximately $15.5 million, includes mainly capital expenditures in the amount of $14.2 million and an investment in an associate company in the amount of $1.4 million. Net cash used in financing activities Net cash used in financing activities in 2015 in an amount of approximately $18.7 million consisted primarily of a cash dividend payment in an amount of $17.6 million and a cash dividend payment in an amount of approximately $1.2 million paid by our subsidiary to the non-controlling interest. Net cash used in financing activities in 2014 in an amount of approximately $22.4 million consisted primarily of a cash dividend payment in an amount of $19.3 million and a cash dividend payment in an amount of approximately $2.6 million paid by our subsidiary to the non-controlling interest. Net cash used in financing activities in 2013 in an amount of approximately $17.6 million consisted primarily of a cash dividend payment in an amount of $16.1 million and a cash dividend payment in an amount of approximately $1.3 million paid by our subsidiary to the non-controlling interest. 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 $2.4 million in 2015, $2.5 million in 2014 and $2.4 million in 2013. 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.