Commission File No. 1-4212
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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, 2004
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AMERICAN ISRAELI PAPER MILLS LTD.
(Exact name of Registrant as specified in its charter and translation of
Registrant's name into English)
---------------------------------
Israel
(Jurisdiction of incorporation or organization)
P.O. Box 142, Hadera 38101, Israel
(Address of principal executive offices)
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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 .01 per share American Stock Exchange
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
None
(Title of Class) Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
(Title of Class)
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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:
3,996,674 Ordinary Shares, par value NIS .01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes |X| No |_|.
Indicate by check mark which financial statement item the registrant has elected
to follow: Item 17 |_| Item 18 |X|
PART I
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable to Annual Reports
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable to Annual Reports
ITEM 3 - KEY INFORMATION
A. Selected Financial Data
American Israeli Paper Mills Ltd. ("AIPM" or the "Company") prepares
its financial statements in accordance with Israeli GAAP. Israeli GAAP and U.S.
GAAP vary in certain respects, as described in ITEM 18 below.
The following selected financial data is derived from the audited consolidated
financial statements of the Company.
The financial data is presented in New Israeli Shekel (NIS) as follows:
AIPM made a transition to reporting in nominal New Israeli Shekels (NIS) in
2004, pursuant to the directives of Standard 12 of the Financial Accounting
Standards Board in Israel. In the past AIPM's reports were in NIS, adjusted to
changes in the exchange rate of the U.S. dollar against the NIS.
The comparison figures for the years 2000 - 2003 are the dollar
figures, as reported in the past, multiplied by the exchange rate of the U.S.
dollar as at December 31, 2003, the day of the transition to NIS-based reporting
pursuant to Standard 12 ($1 = NIS 4.379). See also note 1b to the financial
statements.
2
Five Fiscal Year Financial Summary
According to Israeli GAAP
(In Thousands of NIS Except Per Share Amounts) Year Ended December 31
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Income Statement data: 2004 2003 2002 2001 (1) 2000
--------- --------- --------- --------- ---------
Net Sales 482,854 465,092 455,775 469,708 745,946
Operating Income 53,930 46,584 36,455 20,526 63,212
Share in profits of associated companies, net 25,072 35,549 16,727 15,011 36,034
Net Income (2)62,732 60,047 37,460 34,447 (2)84,445
Selected balance sheet data:
Total Assets 1,162,387 1,253,274 1,052,123 1,052,141 1,058,901
Property, Plant & Equipment (net) 324,406 325,641 325,837 311,168 311,872
Long-term Debt 261,269 268,052 70,257 79,611 93,510
Shareholders' Equity 575,313 614,230 650,950 634,472 603,200
Per Share Data:
Shares Outstanding at End of Year 3,996,674 3,968,295 3,918,710 3,918,710 3,890,561
Net Income per NIS 1 Par value:
Primary 1,544 1,494 947 873 2,137
Fully Diluted 1,544 1,494 947 873 2,137
Dividend per share (3)25.12 (3)25.12 (3)5.30 - 13.79
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(1) The consolidated financial statements since 2000 were influenced
significantly by the following transactions:
(a) The finalization of the joint venture with Neusiedler AG (NAG), an
Austrian corporation, under which a company named Neusiedler Hadera Paper (NHP),
was formed, effective January 1, 2000 (by purchasing AIPM's operations in
printing and writing paper), and in which NAG holds 50.1% and AIPM holds 49.9%
of the shares. Consequently, as of that date, the results of NHP's operations
are no longer consolidated with the results of the Company. Since January 1,
2000, AIPM's share in NHP's results is included in the Company's statement of
income under the item "Company's share in profits of associated companies." In
the balance sheets, AIPM's share in the shareholders' equity of NHP is included
in "Investments in associated companies". NHP was renamed in November 2004 and
it is now called Mondi Business Paper Hadera Ltd. ("Mondi Hadera").
(b) On March 31, 2000, Kimberly-Clark Corporation (KC) exercised the
option that was granted to it in January 2000 and acquired from AIPM 0.2% of the
shares in Hogla-Kimberly Ltd. (hereinafter H-K) in return for $5 million,
thereby increasing its holdings in H-K to 50.1%. Consequently, as of the second
quarter of 2000, the results of H-K are no longer consolidated with AIPM's
consolidated results and AIPM's share in the results of operations of H-K
(49.9%) is included in the item "Company's share in the profits of associated
companies." AIPM's share in the shareholders' equity of H-K is included in the
balance sheets under "Investments in associated companies."
(2) The net income includes a material non-reoccurring gain in the year
2000, (in the sum of NIS 20,086 thousands, originated from the changes in
holdings described above) and in the year 2004 (in the sum of NIS 14,440
thousands, originated from certain tax benefits - see "net profit" on page 21)
(3) Dividend for 2001, in the sum of NIS 5.30 per share ($1.21 per
share) was declared in March 2002 and paid in April 2002.
Dividend for 2002, in the sum of NIS 6.31 per share ($1.44 per share)
was declared in March 2003 and paid in April 2003.
Dividend paid in 2003 includes a special dividend for 2003 in the sum
of NIS 18.81 per share ($4.29 per share). Dividend for 2003 in the sum of NIS
25.12 per share ($5.54 per share) was declared in August 2004 and paid in
September 2004.
3
According to U.S. GAAP
(In Thousands of re-measured NIS except per share amounts)
Year ended December 31
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Income Statement and balance sheet data: 2004 2003 2002 2001 * 2000
--------- --------- --------- ------- -------
Sales 482,854 481,491 492,990 451,152 705,884
Operating Income 63,974 53,688 53,751 25,723 61,189
Share in profits of associated companies, net 29,213 20,972 27,464 22,993 37,967
Net Income (1)58,720 (1)38,469 54,624 49,876 (1)79,853
Total Assets 1,107,725 1,189,215 1,026,083 966,747 926,362
Property, Plant & Equipment (net) 285,851 283,831 279,077 245,949 243,656
Long-term Debt 261,269 268,052 76,001 80,284 86,292
Shareholders' Equity 520,482 550,354 602,675 569,920 512,988
Per Share Data: (re-measured NIS)
Shares Outstanding at End of Year 3,996,674 3,968,295 3,918,710 3,918,710 3,890,561
Net Income Per Share:
Basic 14.76 9.77 13.94 12.75 20.52
Diluted 14.52 9.69 13.81 12.66 20.16
Dividend per share (2)25.12 (2)25.55 (2)5.77 (2)- 12.84
For further information about the effect of application of U.S. GAAP, see Item
18.
Exchange Rates
The exchange rate between the NIS and U.S. dollar published by the Bank
of Israel was NIS 4.416 to the dollar on May 31, 2005. The high and low exchange
rates between the NIS and the U.S.
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* See page 3 (footnote 1) explanation of changes in the consolidated
statements, resulting in the de-consolidation of Mondi Hadera (as of
January 1, 2000) and of H-K (as of March 31, 2000) and their becoming
associated companies.
(1) The net income includes a material non-reoccurring loss in the year
2003, in the sum of NIS 16,986 thousands, [representing other than
temporary impairment of an investment in an associated company (see
Item 18-e)]. A material non-reoccurring gain was included in the year
2000, in the sum of NIS 18,500 thousands, originated from the changes
in holdings described above.
A material non-reoccurring gain was included in the year 2004, in the
sum of NIS 14,440 thousands, originated from certain tax benefits (see
"net profit" on page 21).
(2) Dividend for 2001, in the sum of NIS 5.77 per share ($1.21 per share)
was declared in March 2002 and paid in April 2002.
Dividend for 2002, in the sum of NIS 6.61 per share ($1.44 per share)
was declared in March 2003 and paid in April 2003.
Dividend paid in 2003 includes a special dividend for 2003 in the sum
of NIS 19.04 per share ($4.29 per share).
Dividend for 2003 in the sum of NIS 25.12 per share ($5.54 per share)
was declared in August 2004 and paid in September 2004.
4
dollar during the six months of December 2004 through May 2005, as published by
the Bank of Israel, were as follows:
Month High Low
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1 U.S. dollar = 1 U.S. dollar =
December 2004 4.374 NIS 4.308 NIS
January 2005 4.414 NIS 4.308 NIS
February 2005 4.392 NIS 4.357 NIS
March 2005 4.379 NIS 4.299 NIS
April 2005 4.395 NIS 4.360 NIS
May 2005 4.416 NIS 4.348 NIS
The average exchange rate between the NIS and U.S. dollar, using the
average of the exchange rates on the last day of each month during the period,
for each of the five most recent fiscal years was as follows:
Period Exchange Rate
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January 1, 2000 - December 31, 2000 4.067 NIS/$1
January 1, 2001 - December 31, 2001 4.219 NIS/$1
January 1, 2002 - December 31, 2002 4.736 NIS/$1
January 1, 2003 - December 31, 2003 4.512 NIS/$1
January 1, 2004 - December 31, 2004 4.483 NIS/$1
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 "1934 Act")
(collectively, the "Safe Harbor Provisions"). These are statements that are not
historical facts and include statements about our beliefs and expectations.
These statements contain potential risks and uncertainties and actual results
may differ significantly. Forward-looking statements are typically identified by
the words "believe", "expect", "intend", "estimate" and similar expressions.
Such statements appear in this Annual Report and include statements regarding
the intent, belief or current expectation of the Company or its directors or
officers. Actual results may differ materially from those projected, expressed
or implied in the forward-looking statements as a result of various factors
including, without limitation, the factors set forth below under the caption
"Risk Factors" (the Company refers to these factors as "Cautionary Statements").
Any forward-looking statements contained in this Annual Report speak only as of
the date hereof, and the Company cautions potential investors not to place undue
reliance on such statements. The Company undertakes no obligation to update or
revise any forward-looking statements. All subsequent written or oral
forward-looking statements attributable to the company or persons acting on the
company's behalf are expressly qualified in their entirety by the Cautionary
Statements.
5
B. Capitalization and indebtedness
Not applicable.
C. Reason for the offer and use of proceeds
Not applicable.
D. Risk factors
Macro-economic risk factors
A slowdown in the market may result in a reduction of profitability
A slowdown in the global markets as well as in the Israeli market may
cause: a decrease in the demand for the Company's and its associated companies'
products, an increase in the competition with imported products and a decrease
in the profitability of export and that could result in a reduction in the
Group's* sales and a decline in its profitability.
Future legal restriction may negatively affect the results of operations
The Company's activities and its subsidiaries and associated companies'
activities are imposed by legal restrictions (such as government policy on
various subjects, different demands made by the authorities supervising
environmental regulations and governmental decisions to raise minimum wages) .
These restrictions may affect the results of operations of these companies.
Any future rise in the inflation rate may negatively affect business
Since the Company possesses a significant amount of CPI-linked
liabilities, a high inflation rate may cause significant financial expenses.
Consequently, the Company makes hedges from time to time to cover the exposure
due to the liabilities. A high inflation rate may also affect wage expenses,
which, at the long run, tend to be adjusted to the changes in the CPI.
Changes in the foreign exchange rates may cause erosion in profitability
The Company, its subsidiaries and associated companies are exposed to
risks due to changes in the foreign exchange rates, either due to importing raw
materials and finished products or due to exporting to international markets.
Change in the foreign exchange rates of the different currencies compared to the
New Israeli Shekel may cause erosion in profitability and cash flow, especially
in the associated companies.
Risk Factors relating to the Company
The company faces significant competition in the markets the Company operates in
The Company operates in the packaging paper and office supplies
industries, both of which are highly competitive. In the packaging paper
industry the Company faces competition from imported paper. In the office
equipment sector the Company faces competition from many suppliers that operate
in the Company's markets. The associated companies are also exposed to
competition in all of their operations. This competition may negatively affect
the future results.
For further information see pg. 12 - competition.
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* The Group - The Company and its subsidiaries and associated companies
6
The Company is exposed to increases in the cost of raw materials.
The increase in the activity of the paper machines, which are based on
paper waste as a recycled fiber, makes it necessary to increase collection of
paper waste and to add more expensive resources. The lack of enforcement of the
Israeli recycling laws, which require waste recycling, makes it difficult to
find alternative resources at a competitive cost.
There is an exposure in the associated companies resulting from
fluctuation of prices of raw material and of the imported products, which arrive
to Israel without customs or entry barriers. Exceptional price increase of raw
materials and imported products may have an adversary effect on these Companies'
profitability.
The Company is dependent on energy prices.
AIPM's activities are highly dependent on the consumption of energy and
therefore are influenced by fuel and electricity prices. AIPM's profitability
may suffer if there is an exceptional increase in energy prices.
Credit Risks
Most of the Company's and its subsidiaries' sales are made in Israel to
a large number of customers. Part of the sales is made without full security of
payment. The exposure to credit risks relating to trade receivables is usually
limited, due to the relatively large number of our customers. The Company
performs ongoing credit evaluations of its customers to determine the required
amount of allowance for doubtful accounts. An appropriate allowance for doubtful
accounts is included in the financial statements.
The operations in Turkey may suffer as a result of the Turkish economy.
The Company is exposed to various risks related to its activities in
Turkey, where H-K operates through its subsidiary, Ovisan. These risks result
from economic instability and high inflation rates, which have characterized the
Turkish economy during the past years, and may be repeated and adversely affect
Ovisan's activities.
For further information, see "Item 11 - Quantitative and Qualitative
Disclosure about Market Risk".
ITEM 4 - INFORMATION ON THE COMPANY
A. History and Development of the Company
The Company was incorporated in 1951 under the laws of the State of
Israel, and, together with its subsidiaries and associated companies (which
together with the Company are referred to as the "Group") is Israel's largest
manufacturer of paper and paper products.
The Company's principal executive offices are located at 1 Meizer St.,
Industrial Zone, P.O. Box 142, Hadera, Israel, Tel: (972-4) 634-9349, fax:
(972-4) 633-9740.
The organizational structure of the Company and certain subsidiaries
was changed as of January 1, 1999. This change was intended to result in an
operational separation between various activities, especially in the paper and
board divisions, to allow for better business focus, greater operating
efficiency and the formulation of business strategies that facilitate the
establishment of additional international strategic alliances.
7
Within the framework of the organizational changes, different fields of
operations were defined and separated, including printing and writing paper and
packaging paper. For each of them a separate management team was assigned.
Over the last few years, the Group has created several new joint
ventures as follows:
1. In July 1992, the Group purchased 25% of the shares of Carmel
Container Systems Ltd. ("Carmel"), a leading Israeli designer, manufacturer and
marketer of containers, packaging materials and related products. As of May 31,
2005, the Group held 26.25% of the shares of Carmel. Other major shareholders in
this company are Rand Whitney Inc. (35.46%) and Ampal Ltd. (21.75%). Carmel
shares were traded in AMEX and are currently in a process of deregistration and
delisting.
2. In 1996, KC acquired 49.9% of the shares of Hogla, a wholly-owned
subsidiary of the Company and a leading Israeli consumer products company, which
was then renamed Hogla-Kimberly Ltd (H-K). H-K is engaged in the production and
marketing of household paper products, hygiene products, disposable diapers and
complementary kitchen products. The partnership was intended to expand the local
production base in Israel, in order to serve both local and regional demand, and
to offer H-K access to international markets. In 1999, H-K purchased Ovisan, a
Turkish manufacturer and marketer of diapers and paper products. On March 31,
2000, KC increased its holdings in H-K to 50.1%.
3. Effective January 1, 2000, AIPM entered into a joint venture
agreement with NAG, pursuant to which NAG acquired 50.1% of AIPM's printing and
writing paper operations. The printing and writing paper operation was separated
from AIPM upon the completion of this transaction and was sold to NHP, a
subsidiary that was established for this purpose. In return for the acquisition
of 50.1% of the shares of the new company, NAG paid to NHP $10 million in cash
and lent to NHP $10 million. NHP was renamed in 2004 and is now called Mondi
Business Hadera Paper (Mondi Hadera).
4. Amnir Recycling Industries Ltd. (Amnir) (a wholly owned subsidiary
of AIPM), which is engaged in the collection and recycling of paper and plastic
waste and in the confidential data destruction, acquired in 1997 and 1998 20%
and 10%, respectively, of Cycle-Tec Recycling Technologies Ltd. (Cycle-Tec), a
research and development company which develops a process for manufacturing of a
high strength / low cost composite material, based on recycled post consumer
plastic and paper, treated with special chemical additives,. As of May 31, 2005,
Amnir owned 30.18% of Cycle-Tec.
In 2004 Amnir established a new company in Switzerland for data
destruction through the operation of mobile shredder trucks at customers sites,
in which the Group holds 75% together with a partner that holds 25%. Amnir is
exploring the feasibility of penetrating this sector of operation in Europe.
5. In July 1998, the Company signed an agreement with a strategic
partner, Compagnie Generale d'Entreprises Automobiles (CGEA), for the sale of
51% of the operations of Amnir Industries and Environmental Services Ltd. (Amnir
Environment) in the field of solid waste management (waste disposal and
management of transfer stations and landfills) for a purchase price of $7.8
million. CGEA is an international French company, which is part of the Veolia
group and one of the world's leading companies in the field of environmental
services. The agreement did not apply to Amnir's operations in collecting and
recycling paper and plastic.
6. In March 2000, AIPM and CGEA, on the one hand, and Tamam Integrated
Recycling Industries Ltd. (T.M.M) and its controlling shareholders, on the other
hand, entered into an agreement pursuant to which AIPM and CGEA acquired through
a joint company from T.M.M.'s controlling shareholders 62.5% of the share
capital of T.M.M., a leading Israeli company in the solid waste management
field, for $15.85 million. Simultaneously therewith, 100% of Amnir Environment's
shares were transferred to T.M.M. in return for an allocation of 35.3% of the
shares of T.M.M to the shareholders of Amnir Environment. Following such
transaction, AIPM and CGEA owned, together, 75.74% of the shares of T.M.M. In
August and September 2000, T.M.M. acquired approximately 3% of its own share
capital. In December 2001, and in August 2003 AIPM and CGEA acquired additional
8
shares of T.M.M.'s share capital through a joint company (Barthelemi Holdings
Ltd.), resulting in an increase in the ownership of shares of T.M.M. by AIPM and
CGEA to 88.02% as of May 31, 2005. AIPM holds directly and indirectly 41.6% of
TMM's shares and CGEA holds 46.4% of TMM's shares.
Capital Expenditures and Divestitures
The following data is derived from the consolidated financial statements
2004:
The investments in fixed assets of the Company totaled about NIS 31.0 million in
2004 (about $6.9 million). These investments included:
- Investments of approximately NIS 2.2 million ($0.5 million) in
environmental issues.
- An investment of approximately NIS 2.2 million ($0.5 million) in a
machine for the manufacturing of cores based on Cycle-Tec technology.
- Investments totaling NIS 26.6 million ($5.9 million) in buildings,
equipment, transportation and Information Technology.
2003:
The investments in fixed assets of the Company totaled about NIS 29.2 million in
2003 (about $6.7 million). These investments included:
- Investments of approximately NIS 2.6 million ($0.6 million) in
environmental issues, mainly in the process of purification of waste
from water.
- An investment of approximately NIS 2.6 million ($0.6 million) in the
expansion of the output of the packaging paper machine.
- Investments totaling NIS 24 million ($5.5 million) in buildings,
equipment, transportation and Information Technology.
2002:
The investments in fixed assets totaled about NIS 46.8 million (about $10.7
million). These investments included:
- The payment of approximately NIS 26.8 million ($6.1 million) in
connection with the extension of the lease for property from the Tel
Aviv Municipality, for an additional period ending during 2059.
- The completion of the investment in the anaerobic installation in
Hadera, Israel as part of the Group's environmental operations. The
additional investment in 2002 totaled NIS 3.5 million ($0.8 million).
- Investments totaling NIS 16.6 million ($3.8 million) in the renovation
of manufacturing and transport equipment.
B. Business Overview
I. The Group's Operations and Principal Activities
The Company is engaged through its subsidiaries in the manufacture and
sale of packaging paper, in the collection and recycling of paper and plastic
waste and in the marketing of office supplies, mainly to the institutional and
business sector. The Company also holds interests in associated companies that
deal in the manufacture and marketing of printing and writing paper, household
paper products, hygiene products, disposable diapers, complementary kitchen
products, corrugated board containers and
9
packaging for consumer goods and the handling of solid waste.
In order to serve the paper production activities, the Company, through
a wholly owned subsidiary, is supplying engineering services, maintenance, steam
and energy, water supply, sewage treatment etc. to the different paper machines
located in the main site of the Company in Hadera in return for cost sharing.
The Company operates in its main production site in Hadera according to
the following standards:
ISO 9001/2000 - quality management
ISO 14001 - environmental regulations
Israeli Standard 18001 - safety
The principal products produced and/or marketed by the Company, its
subsidiaries and associated companies are as follows:
o Grades of Paper and Board
Printing and writing paper, publication papers in reels, coated paper,
carbonless paper, cut-size paper for copy laser and inkjet, copy-book paper,
paper for continuous forms, paper for envelopes and direct mailing and various
grades of packaging paper and board.
o Packaging Products
Folding cartons, corrugated containers, consumer packages, solid board
containers and pallets.
o Household Products
Bathroom tissue, kitchen towels, facial tissue, napkins, disposable
tablecloths, sanitary towels, panty shields, tampons, disposable baby diapers,
training pants, baby wipes, disposable adult diapers, incontinence pads, cups
and plates.
o Industrial, Hospital and Food Service Products
Toilet paper, towel rolls, C-fold towels, napkins, place mats,
coasters, bed sheets, wadding, paper toilet seat covers, disposable bed-pans and
urinals, sterilizing paper, bathroom tissue and paper towel dispensers,
dispensers for liquid hand soaps and room deodorizing dispensers for washrooms
and cleaners, detergents and cleaning complimentary products.
o Other Products
Aluminum food wraps, cling-film wraps, garbage bags, air purifiers for
lavatories, oven baking and cooking trays, office supplies, recycled ground and
palletized plastics used by the plastic products industry, compost for soil
conditioning and fertilizers for agriculture and landscape planting.
Sales and Marketing
The Group's packaging and wrapping paper products are sold mostly to
four main customers in Israel, which operate in the corrugated board sector with
whom the Group has a long business relations.
The Group's office supplies products are sold to thousands of customers
in the Business to Business sector and to institutions such as governmental
offices and banks. About 25% of the sales are made through tenders.
10
The Group's paper grades products are sold to publishers, big and
medium size printers, converters, and wholesalers some of which are part of the
Group, as well as other direct customers.
The Group's household products are marketed mainly through retail
marketing chains, stores and the institutional market.
The Group's packaging products are sold to a wide range of customers in
different sectors (e.g., industry, agriculture, food and beverage industry),
including direct marketing to ultimate customers through subcontractors and
agents.
The Group's waste disposal services are provided mostly to
municipalities through tenders and directly to other customers. The Group also
operates landfills and transfer stations for the handling of solid waste.
The Group's main marketing strategy has the following objectives:
(a) Maintaining its existing dominant share in the Israeli market
of paper grades and household products produced by the Group
and imported by it, through short delivery time and prompt
service, while constantly improving the quality of its
products.
(b) Meeting the growing and changing requirements of the market by
adding new products and improving the quality of existing
grades of paper in order to meet the technological changes
required by new printing equipment and the needs of the
customers.
(c) Exploring new business opportunities in Israel and abroad and
increasing the range of its products and the production
capacity.
The following table sets forth the consolidated sales in NIS millions(**) by
categories of the consolidated segments of operations:
** AIPM made the transition to reporting in nominal New Israeli Shekels
(NIS) in 2004, pursuant to the directives of Standard 12 of the
Financial Accounting Standards Board in Israel. In the past AIPM's
reports were in NIS, adjusted to changes in the exchange rate of the US
dollar against the NIS.
The comparison figures for the years 2003 - 2002 are the dollar
figures, as reported in the past, multiplied by the exchange rate of
the US dollar as at December 31, 2003, the day of the transition to
NIS-based reporting pursuant to Standard 12 ($1 = NIS 4.379).
Packaging Paper
Manufacturing Marketing Office
and recycling (1) Supplies (2) Total
------------------------- ------------------------- -------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
----- ----- ----- ----- ----- ----- ----- ----- -----
367.4 332.1 314.6 115.5 133.0 141.1 482.9 465.1 455.8
===== ===== ===== ===== ===== ===== ===== ===== =====
The above mentioned segments include the following activities:
1. Packaging paper manufacturing and recycling - manufacturing and
marketing of packaging paper, including collecting and recycling of
paper waste. The manufacturing of packaging paper relies mainly on
paper waste as raw materials.
2. Marketing office supplies - Marketing of office supplies and paper,
mainly to institutions.
11
Raw Materials
The raw materials required for paper and board production are different
wood pulps, secondary fibers (i.e., waste paper) and various chemicals and
fillers. Pulp is imported primarily from major suppliers in Scandinavia, the
United States, Portugal, Austria, Germany, Brazil and South Africa on a regular
basis. The bulk of the pulp tonnage purchased is secured by revolving long-term
agreements renewed on a yearly basis. Most of the pulp for the printing and
writing paper manufactured by Mondi Hadera is purchased by Mondi Business Paper
(the Austrian parent company), which purchases pulp for its subsidiaries around
the world. This ensures fluent supply and better prices.
The pulp for the household products is being imported by H-K with the
assistance of K-C.
About 65% of the fibers required in paper production of the Group
(including printing and writing paper and household products) come from waste
paper, which in some paper grades, is used in lieu of relatively more expensive
pulp. The production of packaging and wrapping paper is based mostly on recycled
fibers. Therefore, the main raw material used for the production of packaging
and wrapping paper is paper waste most of which is collected from various
sources by Amnir, a wholly owned subsidiary of the Company. Approximately
200,000 tons per year of waste paper are collected and handled by Amnir, most of
which are used by the Group for the production of paper and some of which is
sold to tissue paper manufacturers. Apart from the waste paper collected by
Amnir there is a use of residue which is created during the production of
packages and purchased from the manufacturers of corrugated board.
The main raw material required for the manufacture of corrugated board
is board paper. Carmel purchases paper from two main suppliers one of them is a
company within the Group.
Since 1996, the Company has been using precipitated calcium carbonate
(PCC), a special pigment used for filling and coating paper in order to improve
quality. The PCC is manufactured in a plant constructed and operated by
Specialty Minerals Israel Ltd. (SMI), which is a wholly owned subsidiary of
Minerals Technologies Inc., a U.S. company. In 2004 an agreement was signed
between Mondi Hadera and Omya International AG for the supply of PCC for a
period of ten years commencing in April 2006. Omya will construct and operate a
PCC plant in Israel. The PCC purchased from Omya will replace the PCC purchased
from SMI and is expected to be cost saving.
The cost of paper production is affected by fluctuating raw material
prices and the cost of water, energy and fuel oil.
Competition
Most of the Group's products that are sold on the local market are
exposed to competition with local and imported products. The imported products
arrive in Israel exempt from import tariffs, especially from the EEC, EFTA and
the USA. The tariffs on imports of fine paper from other countries are in the
range of 0% -12%.
The main competitors of the Group in the different fields of operation
are Israeli companies which sell mainly imported products, except for sales of
baby diapers and hygienic products in which the Group's main competitor is
Proctor & Gamble.
In the market for office supplies that are sold directly to
institutions and businesses there are numerous local suppliers, that compete
with the Company.
The Group collection and paper recycling operation is exposed to local
competition by local companies which operate all over the country.
The competition has influence over the selling prices that the Group
can charge. The Group competes with the imported products by emphasizing the
advantages of having a local supplier by ensuring the customers uninterrupted
supply and service on short notice and excellent quality of products.
12
C. Organizational Structure
As of May 31, 2005, Clal Industries and Investment Ltd. (Clal)
beneficially owned 32.90% of the ordinary shares of the Company and Discount
Investment Corporation Ltd. (DIC) beneficially owned 18.59% of the ordinary
shares of the Company. Clal and DIC agreed to coordinate and pool their voting
power in the Company. To our knowledge, IDB Development Corporation Ltd. owns
67.26% of DIC and 61.93% of Clal. See "Item 7 - Major Shareholders and Related
Party Transactions."
Significant subsidiaries and associated companies
Name of the Company Ownership and Voting Country of
Incorporation
Subsidiaries
Amnir Recycling Industries Ltd. 100.00% Israel
Graffiti Office Supplies & Paper Marketing Ltd. 100.00% Israel
Attar Marketing Office Supplies Ltd. 100.00% Israel
American Israeli Paper Mills Paper Industry (1995) Ltd. 100.00% Israel
Datashred 2003 AG 75.00% Switzerland
Associated Companies
Hogla-Kimberly Ltd. 49.90% Israel
Ovisan Sihhi Bez Sanai Ve Ticaret A.S. 49.90% Turkey
Mondi Business Paper Hadera Ltd. 49.90% Israel
Barthelemi Holdings Ltd. 33.91% Israel
T.M.M. Integrated Recycling Industries Ltd. (direct and indirect) 41.60% Israel
Carmel Containers Systems Ltd. 26.25% Israel
C.D. Packaging Systems Limited (direct and indirect) 63.20%* Israel
Cycle-Tec Recycling Technology Ltd. 30.18% Israel
D. Property, Plants and Equipment
The Group's principal executive offices and manufacturing and warehouse
facilities are located on approximately 69 acres of land in Hadera, Israel,
which is 31 miles south of Haifa, a major seaport, and 28 miles north of Tel
Aviv. The Company owns 51 acres, and 18 acres are leased from the Israel Land
Administration, an agency of the State of Israel, under several leases. The
lease periods terminate during future years from 2008 until 2053. Some of this
land is rented to associated companies, which operate in Hadera.
The Group's facilities in Hadera are housed in two-story plants and
several adjoining buildings. Approximately 1,200,000 square feet are utilized
for manufacturing, storage and sales and administrative
----------
* The holding in voting shares is 63.05%
13
offices. An additional plant owned by H-K is located in a 10-acre plot in Afula,
a city in northern Israel. H-K is leasing from the Israel Land Administration in
Nahariya, in northern Israel, approximately 6 acres, which are rented to an
associated company. In September 2002, the Company signed an agreement with the
Tel Aviv Municipality for the extension of the lease period of a real estate
lease for a plant in Tel Aviv, that was shut down at the end of 2002, until the
year 2059, in return for the payment of $6.2 million by the Company. The Company
is investigating several options for using the land.
The Group also owns a warehouse containing 50,000 square feet situated
on three acres in the Tel Aviv area rented to third party, and a two-acre parcel
in the industrial zone of Bnei Brak, near Tel-Aviv, which is used for waste
paper collection.
H-K's headquarters and logistic center, which are leased under a long
term lease agreement, are located in a new modern site in Zrifin, near Tel-Aviv,
covering an area of 430,550 square feet, with 188,370 square feet of buildings.
Associated companies rent plant and office facilities in Migdal Haemek
and Caesarea and additional warehouses and waste paper collection sites
throughout Israel.
The machinery, equipment and assets of the Company are free of any
mortgage, lien, pledge or other charge or security interest.
The Group owns six paper machines that are used in the manufacture of
various grades of paper and board. Most of the paper production facilities of
the Company and its subsidiaries are located in Hadera where it operates five
machines with a combined production capacity of over 320,000 tons per year. The
Group owns another machine in Nahariya which produces tissue paper with
production capacity of 20,000 tons per year.
The Group also operates converting lines for personal care and
household paper products in Hadera and Nahariya.
The Group maintains facilities for collecting, sorting and baling waste
paper and board in various locations in Israel and a plant for the recycling of
urban waste in Afula. It also has a plant in Afula for the production of
disposable baby diapers, incontinence absorbent products and feminine hygiene
products, a plant in Migdal Haemek for the production of paperboard consumer
packages and a plant in Hadera for recycling plastic waste. The Group also
operatesa second plant for handling and recycling urban waste in Petah Tikva,
near Tel-Aviv, and several landfills.
The Company established in 2000 a new co-generation power plant, based
on high-pressure steam available from steam drying employed in paper production,
for a total investment of about $14 million. The operation of the power plant,
situated in Hadera, and the Group now enjoys an independent power generation
capacity of 18MW, with generation costs considerably lower than the cost of
electricity purchased from the Israel Electricity Company. As part of this
project, the infrastructure of the main electricity supply system was renovated
and improved, utilizing modern technological innovations.
The Company is promoting a project for establishing a combined cycle
co-generation plant based on natural gas at Hadera. In addition, the Company is
preparing for the conversion of its energy-generation systems to natural gas,
once the transportation infrastructure of natural gas to Hadera is completed.
This conversation is expected to enable savings in production costs, while
further improving environmental compliance. The capacity of the plant is
expected to enable the Company to sell electricity to external users, including
the Israel Electric Company.
In October 2004 a wholly owned subsidiary of the Company, American
Israeli Paper Mills Paper Industry (1995) Ltd., was granted by the Minister of
National Infrastructure a basic permit to generate electricity by means of power
and heat systems (co-generation). In addition, in December 2004 the project was
announced as "a National Infrastructure Project".
14
Environmental Regulation Matters
The business license of the main production site of the Group in Hadera
includes conditions regarding sewage treatment, effluent quality, air quality
and the handling of waste and chemicals. In addition, the site has to operate
according to the conditions of the Israeli water commission regarding effluent
disposal.
Certain of the Group's manufacturing operations are subject to
environmental and pollution control laws in Israel. In order to comply with
these laws, the Group planned and acquired, during 2001, a new modern facility
for the treatment of effluent using an anaerobic treatment process. This process
was installed in the Group's site in Hadera as a pre-treatment phase in the
existing system based on aerobic treatment, in order to improve the treated
effluent quality in compliance with environmental regulations.
In 2003 the Group recorded a significant improvement in sewage waste
quality, following the conclusion of the running-in and the optimization of its
anaerobic process facility and a significant reduction in sewage quantity.
During the years 2000-2004 the Group invested approximately $6 million
in projects intended to enable it to comply with the strict environmental
regulations applicable to it out of which $1 million was invested during 2004.
In addition, at the beginning of 2005 the Group had installed and bagan
operating a sand filter as tertiary treatment for its effluent in the site in
Hadera. The investment in this project was approximately $400,000.
The Company is promoting a project for establishing a combined cycle
co-generation plant based on natural gas at Hadera. This project is expected to
contribute and improve the environmental compliance since the Company will use
natural gas instead of fuel oil.
The Group's achievements in the environmental protection during the
last few years were acknowledged at the end of 2002, when the paper mills at the
Hadera site won the Shield for Environmental Excellence in Industry Award
granted by the Israeli Ministry of the Environment. In 2004 all plants at the
main Hadera site passed successfully various environmental inspections.
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Critical Accounting Policies and Estimates
The Company's discussion and analysis of the financial condition and
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in Israel (for information as to the reconciliation between U.S. and Israeli
GAAP, see Item 18). The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
The Company identified the most critical accounting principles upon
which its financial status depends. The Company determined the critical
principles by considering accounting policies that involve subjective decisions
or assessments.
The Company states its accounting policies in the notes to the
consolidated financial statements and at relevant sections in this discussion
and analysis.
15
This discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related notes included elsewhere
in this report.
The Company identified the following to be the most critical accounting
policies:
Inventories
The inventory is valued at the lower of cost or market, where cost is
determined on the moving average basis. The Company writes down its inventory
for estimated obsolescence or unmarketable inventory based on analysis of
inventory aging, assumptions about future demand and market conditions. If
actual demand and/or market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Allowance for doubtful accounts
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company provides an allowance for doubtful accounts as a percentage of all
specific debts doubtful of collection. The allowances are based on the
likelihood of recoverability of accounts receivable considering the aging of the
balances, the Company's historical write-off experience, net of recoveries,
change in credit worthiness of the customers, and taking into account current
collection trends that are expected to continue. These estimated allowances are
periodically reviewed, analyzing the customers' payment history. Actual customer
collections could differ from the Company's estimates.
Contingencies and risks involving the business
The Company is subject, from time to time, to various claims arising in
the ordinary course of operations. In determining whether liabilities should be
recorded for pending litigation claims, the Company assesses, based on advice of
its outside legal counsel, the allegations made and the likelihood that it will
successfully defend itself.
When the Company believes that it is probable that it will not prevail
in a particular matter, it then estimates the amount of the liability. The
evaluation of the probability of success of such claims and the determination of
whether there is a necessity to include provisions in respect thereof require
judgment by the Company's legal counsel and management.
Deferred income taxes
Deferred taxes are determined utilizing the asset and liability method,
based on the differences between the amounts presented in the financial
statements and those taken into account for tax purposes, in accordance with the
related tax laws. Valuation allowances are included in respect of deferred tax
assets when it is more likely than not that such assets will not be realized.
The Company has considered future taxable income and tax planning strategies in
assessing the need for the valuation allowance. Management evaluates the
realizability of the deferred tax assets on a current basis. If it were
determined that the Company would be able to realize the deferred tax assets in
excess of its net recorded amount, an adjustment to deferred tax assets would
increase income.
Impairment in value of Long-Lived Assets (including fixed assets and investments
in associated companies)
In February 2003, Accounting Standard No. 15 of the Israeli Accounting
Standard Board (hereafter - IASB) - "Impairment of Assets", became effective.
According to this standard the company performs a periodic review to evaluate
the need for a provision for impairment regarding its non-monetary assets -
mainly fixed assets as well as investments in associated companies.
16
Accordingly, at each balance sheet date, the company assesses whether
any events have occurred or changes in circumstances have taken place, which
might indicate that there has been an impairment of one or more of the above
assets. When such indicators of impairment are present, the Company evaluates
whether the carrying value of the asset in the Company's accounts can be
recovered from the cash flows anticipated from that asset.
The recoverable value of an asset is determined according to the higher
of the net selling price of the asset or its value in use to the Company. The
value in use is determined according to the present value of anticipated cash
flows from the continued use of the asset, including those expected at the time
of its future retirement and disposal. When it is not possible to assess whether
an impairment provision is required for a particular asset on its own, the need
for such a provision is assessed in relation to the recoverable value of the
cash generating unit to which that asset belongs.
Through December 31, 2002, the Company applied the provisions for
assessing and recording impairment of assets, prescribed by the U.S. standard,
FAS 121.
Discontinuance of Adjusting Financial Statements for Inflation
In October 2001, the IASB issued Israel Accounting Standard No. 12 -
"Discontinuance of Adjusting Financial Statements for Inflation" (hereinafter -
Standard 12), which provided for the discontinuance of adjusting financial
statements for the effects of inflation, as of January 1, 2003. In December
2002, Accounting Standard No. 17 was issued that postponed the date from which
Accounting Standard No. 12 is to be applied until January 1, 2004.
The Company's financial statements were drawn up in NIS adjusted for
the changes in the dollar (as allowed by section 29(b) of Opinion 36 of the
Israeli Institute) until December 31, 2003. Based on Standard 12 and the
provisions in paragraph 4 to Israeli Accounting Standard No. 13, with effect
from January 1, 2004, the Company is no longer able to measure its operations in
dollars, and its operations are measured in NIS. The inflation-adjusted NIS
amounts as of December 31, 2003, are the base for the nominal-historical
financial reporting following January 1, 2004.
See also note 1b to the financial statements.
As for information regarding the effects of new Israeli accounting
standards - see note 1q to the financial statements.
17
A. Operating Results
The following is a summary of the period-to-period changes in the
principal items included in the Consolidated Statements of Income:
Amount and Percentage Increase (Decrease)
New Israeli Shekels (in thousands)(1)
--------------------------------------------------
Year ended 12/31/04 Year ended 12/31/03
v. v.
year ended 12/31/03 year ended 12/31/02
------------------------ ------------------
Changes % Changes %
NIS NIS
----- ------ ----- ----
Net sales 17,762 3.8 9,317 2.0
Cost of sales 13,719 3.8 (1,586) (0.4)
------ --- ------ -----
Gross profit 4,043 3.9 10,903 11.9
Selling, administrative and general expenses (3,303) (5.9) 774 1.4
------- ---- --- ---
Income from ordinary operations 7,346 15.8 10,129 27.8
Financial expenses - net 2,871 (18.0) (13,001) 435.3
Other income (1,609) (100.0) 4,551
------- -----
Income before taxes on income 8,608 26.7 1,679 5.5
Taxes on income 4,554 (59.1) 2,086 21.3
----- ----- ----- ----
Income from operation of the Company and the
consolidated subsidiaries 13,167 53.7 3,765 18.2
Share in profits of associated companies (10,477) (29.5) 18,822 112.5
------- ----- ------ -----
Net income 2,685 4.5 22,587 60.3
======= ===== ====== =====
The statements of income for the years ended December 31, 2004, 2003
and 2002 are presented in New Israeli Shekels as explained in Note 1 to the
Consolidated Financial Statements (See footnote).
The number of New Israeli Shekels which were exchangeable for 1 U.S.
dollar increased (decreased) over the prior year by 7.3% , (-7.6%) and (-1.6%)
in 2002, 2003 and 2004, respectively.See Note 1 to the financial statements
attached and Item 18 for anticipated effect of adoption of accounting
pronouncements that have been issued but are not yet required to be adopted.
2004 Compared to 2003
I. Overview of Results of Operations
1. Consolidated Data
Sales amounted to NIS 482.9 million during 2004, as compared with NIS 465.1
million in 2003.
----------
(1) AIPM made the transition to reporting in nominal New Israeli Shekels
(NIS) in 2004, pursuant to the directives of Standard 12 of the
Financial Accounting Standards Board in Israel. In the past AIPM's
reports were in NIS, adjusted to changes in the exchange rate of the US
dollar against the NIS.
The comparison figures for the years 2003 and 2002 are the dollar
figures, as reported in the past, multiplied by the exchange rate of
the US dollar as at December 31, 2003, the day of the transition to
NIS-based reporting pursuant to Standard 12 ($1 = NIS 4.379).
18
Operating profit in 2004 amounted to NIS 53.9 million, as compared with NIS 46.6
million in 2003.
Profit after taxes and before AIPM's share in the earnings of associated
companies for 2004, amounted to NIS 37.7 million, as compared with NIS 24.5
million in 2003.
2. Net income
Net income amounted to NIS 62.7 million during 2004, as compared with
NIS 60.0 million in 2003.
Net income during 2004 includes non-recurring earnings on account of a
NIS 14.4 million tax benefit, originating from the influence of the decrease of
the corporate tax rate on the reserve for deferred taxes at AIPM and at its
associated companies (from 36% to 30% by 2007), along with a tax benefit on
account of the exercise of options by employees.
Net income in 2003 included NIS 2.7 million in non-recurring capital
gains and in a tax benefit on account of the exercise of options by employees.
Earnings per share in 2004 amounted to NIS 1,544 per NIS 1 par value
($3.58 per share), as compared with NIS 1,494 per NIS 1 par value ($3.41 per
share) in 2003. The return on shareholders' equity amounted to 10.2% in 2004, as
compared with 9.2% in 2003.
II. The Business Environment
A turnaround took place in the Israeli economy since the beginning of
2004, as the economy rebounded, following a severe recession that lasted several
years. The recovery was expressed by positive growth rates (approx. 4% in 2004,
up from 1.3% in 2003), higher demand and a more optimistic outlook in the
markets.
Israel has also experienced a certain calm in the security situation
lately, which may positively affect the economy, although this calm is not yet
reflected in the results in the financial statements presented herein.
AIPM is exposed to competition in all its areas of operation, both from
locally-produced goods and from imports. The level of competition is constantly
escalating.
Despite this competition, the Group is successfully preserving the
profitability of its Israeli operations, while recording continued growth in the
volume of operations.
AIPM is preparing for the conversion of its energy-generation system to
natural gas, once the transportation infrastructure of natural gas to Hadera is
completed. This conversion is expected to enable savings in production costs,
while further improving environmental compliance.
The exchange rate of the NIS compared to the USD was revaluated by 1.6%
during 2004, as compared with a 7.6% in 2003.
The inflation rate during 2004 amounted to 1.2%, as compared with a
negative inflation rate of -1.9% in 2003.
III. Analysis of Operations and Profitability
19
The analysis set forth below is based on the consolidated financial data
of the Company.
1. Sales
Consolidated sales amounted to NIS 482.9 million during 2004, as compared with
NIS 465.1 million in 2003. The growth in sales is attributed to a quantitative
increase in packaging paper and in the sale of paper waste to external entities,
coupled with an improvement in the prices of fluting and paper waste and a
change in the sales mix. On the other hand, the decrease in Graffiti sales
served to offset part of this growth.
2. Cost of Sales
Cost of sales amounted to NIS 375.9 million during 2004, as compared with NIS
362.2 million in 2003.
The gross margin - as a percentage of sales - reached 22.1% during 2004 and is
similar to 2003.
AIPM managed to maintain a gross margin similar to 2003, despite the rise in raw
material prices (paper waste by 13%), energy prices (4%), and water (5%). This
was accomplished through growth in sales, higher sales prices and the continued
efficiency process in all sectors of operation.
Labor Wages
Wages and salaries included in the cost of sales and in the selling, general and
administrative expenses, amounted to NIS 142.4 million in 2004, as compared with
NIS 137.0 million in 2003.
However, since the figures in 2003 were reported in accordance with the U.S.
dollar and due to the influence of changes in the exchange rate of the U.S.
dollar on the reporting of 2003 with the transition to reporting according to
Standard 12, the adjusted cost of wages in 2003, as presented above, was NIS 3.7
million lower than the nominal cost at the time that amounted to NIS 140.7
million.
Most of the growth compared to 2003 originated from an increase in wages by an
average of 3% that was mostly offset by a reduction in personnel and by
differences in other payments - primarily bonuses.
3. Selling, General and Administrative Expenses
Selling, general and administrative expenses (including wages) amounted to NIS
53.0 million - or 11.0% of sales -in 2004, as compared with NIS 56.3 million -
or 12.1% of sales - in 2003.
4. Operating Profit
Operating profit amounted to NIS 53.9 million - or 11.2% of sales - in 2004, as
compared with NIS 46.6 million - or 10.0% of sales - in 2003.
5. Financial Expenses
Financial expenses amounted to NIS 13.1 million during 2004, as compared with
NIS 16.0 million in 2003.
20
AIPM's linkage bases includes a surplus of dollar-linked monetary assets on the
one hand, and a surplus of NIS-denominated monetary liabilities, on the other
hand.
The financial expenses in 2003 were influenced by the sharp revaluation of the
New Israeli Shekel against the dollar (7.6%), which caused a significant
increase in the financial expenses during 2003 when financial reporting was
adjusted to the dollar.
In 2004, with the transition to reporting in nominal shekels in accordance with
Standard 12, AIPM's financial expenses grew slightly, as a result of the effects
of the small revaluation this year (1.6%) on AIPM's surplus dollar assets.
The average increase of NIS 60 million in net financial liabilities - compared
to 2003 - resulted in an increase in financial expenses during 2004. This growth
was partially offset by the decrease in the average interest rate on short-term
credit (5% in 2004 as compared with 7.9% in 2003).
6. Taxes on Income
Taxes on income amounted to NIS 3.2 million in 2004, as compared with
NIS 7.7 million in 2003.
Taxes on income from current operations amounted to NIS 13.2 million in
2004, as compared with NIS 8.8 million in 2003.
The principal factors behind the growth in tax expenses in 2004 as
compared with in 2003 include the growth in earnings before taxes in 2004, as
opposed to the tax benefit that was recorded in 2003 on account of the sharp
revaluation (erosion of the reserve), due to reporting adjusted to the changes
in the exchange rate of the dollar.
In June 2004 a law was passed in Israel, effective retroactively from
January 1, 2004, that serves to lower the corporate tax rate (36% prior to the
amendment) to 35% in 2004 and gradually down to 30% by 2007.
The effect of this change on AIPM's deferred taxes during 2004 (in the
consolidated report) amounted to NIS 5.8 million (primarily due to future tax
liabilities which were deferred in respect of timing differences in
depreciation, which were calculated at an accelerated pace in the tax reports).
Moreover, a tax benefit of NIS 4.2 million was recorded in 2004, on
account of the exercise of options by employees.
In view of the above, the tax expenses during 2004, as reported in the
financial statements, amounted to NIS 3.2 million.
7. Profit After Taxes and Prior to AIPM's Share in the Earnings of
Associated Companies
Profit after taxes and before AIPM's share in the earnings of associated
companies for 2004, amounted to NIS 37.7 million, as compared with NIS 24.5
million in 2003.
8. AIPM's Share in Earnings of Associated Companies
The companies whose earnings are reported under this item (according to AIPM's
holdings therein)
21
include primarily: Mondi Hadera, Hogla-Kimberly, Carmel and TMM.
AIPM's share in the earnings of associated companies amounted to NIS
25.1 million in 2004 (including NIS 4.4 million as our share in a non-recurring
benefit recorded in respect of the change in the corporate tax rate on the
deferred earnings of the companies), as compared with NIS 35.5 million in 2003.
The following principal changes were recorded in AIPM's share in the
earnings of associated companies (2004 - not including the aforementioned tax
benefit), compared to 2003:
- AIPM's share in the net income of Mondi Hadera (49.9%) decreased by NIS
3.0 million. Most of the change in the earnings is associated with a
decrease in operating profit between the years, that originated
primarily from lower margins in exports to Europe, coupled with
increased financial expenses in 2004 as a result of the repayment of
shareholder loans over the past two years that led to an increase in
Mondi Hadera's debt balance.
- AIPM's share in the net earnings of Hogla-Kimberly Israel (49.9%)
increased by approximately NIS 1.2 million, primarily due to the
ongoing improvement in operating profit at Hogla-Kimberly Israel, as
compared with 2003. This improvement was achieved primarily as a result
of better prices and quantitative growth, coupled with the continuing
efficiency measures, both in logistics and in production, and
particularly as a result of the expanded production of Huggies(R)
diapers in Afula. The said increase was offset by lower financial
revenues in 2004 as compared with 2003, due to the transition to
reporting according to Standard 12 and the effects of revaluation
differentials on the NIS compared to the USD, on Hogla's linkage
balance sheet.
- AIPM's share in the net loss of Ovisan (Hogla's subsidiary in Turkey)
(49.9%) amounted to NIS 15.4 million in 2004. Ovisan made considerable
efforts to increase its volume of operations in the Turkish market
during 2004, while tapping into Unilever's nationwide distribution
network, which includes a wide logistic network that covers all of
Turkey in a wide national spread, as a necessary condition for the
preparations for the continued development of Ovisan and the creation
of a platform for introducing the Kimberly-Clark Group's international
brands. In this capacity, a significant quantitative increase was
recorded in 2004 in the Ovisan sales - both to the domestic market and
to exports (up about 40% quantitatively) - accompanied by a significant
increase in selling and advertising expenses. The Ovisan loss during
2004 was caused as a result of the said change in the Ovisan
distribution and sales network, coupled with escalating competition in
the Turkish market due to the arrival of additional competitors into
the sector, which resulted in lower prices and a need to adjust the
value of inventories to the market prices on the balance sheet date.
The difficulties that were created in the assimilation of the new
reporting system, which accompanied the change in the distribution
system, resulted in delays in receiving the data and in difficulties in
providing an immediate response to changing market conditions in
reducing the losses, as mentioned above.
- AIPM's share in the net profits of the Carmel Group (26.25%) increased
by NIS 3.6 million, due to the continuing improvement in the operating
profit. The improvement is attributed to the comprehensive efficiency
measures being initiated by Carmel, coupled with the growth in the
volume of operations.
- AIPM's share in the TMM earnings (41.6%) increased by NIS 1.3 million.
The improvement originates from a significant decrease in TMM's
elevated financial expenses during 2004, compared to 2003. Among other
factors, this is attributed to a decrease in the interest rate over the
two years, coupled with financial revenues from local municipalities
22
(with which an agreement was reached) due to considerable arrears in
their payments. TMM managed to preserve its operating margin during
2004, despite the considerable increase in transportation costs, due to
the significant increase in diesel prices (up by an average of 40%
compared to 2003) which was not compensated by selling prices since
most of the company's agreements are linked to the consumer price index
which rose during 2004 by only 1.2% .
2003 compared to 2002
I. Overview of Results of Operations
1. Consolidated Data
Sales in 2003 totaled NIS 465.1 million, as compared with NIS 455.8
million in 2002.
The operating profit in 2003 amounted to NIS 46.6 million, as compared
with NIS 36.5 million in 2002.
The financial expenses in 2003 amounted to NIS 16.0 million, as
compared with NIS 3.0 million in 2002. The increased financial expenses are
primarily attributed to the impact of the revaluation on the net monetary
balances (see analysis below - Chapter III, Section 5).
2. Net Income and Earnings Per Share
Net profit in 2003 amounted to NIS 60.0 million, as compared with NIS
37.5 million in 2002.
Net profit in 2003 includes NIS 1.0 million in net capital gains,
resulting from the sale of apartments that were owned by the Company and that
served Company employees in the past, coupled with a NIS 1.6 million tax
benefit, on account of the exercise of employee option warrants. The net profit
in 2002 included approximately NIS 0.4 million in non-recurring income, net,
from the realization of assets and from taxes on account of preceding years.
The Earnings Per Share in 2003 amounted to NIS 1,494 per NIS 1 par
value ($3.41 per share), as compared with NIS 947 per NIS 1 par value ($2.16 per
share) in 2002.
The return on shareholders' equity amounted to 9.2% in 2003, as
compared with 5.9% in 2002.
II. The Business Environment
The severe recession that plague the Israeli economy over several
years, as part of the global economic crisis, has been accompanied by security
events and terrorist attacks and has resulted in negative growth of the Israeli
economy during the said period, along with a considerable rise in unemployment,
lower domestic demand (due to the lower purchasing power of the public and due
to the significant decrease in incoming tourism), coupled with a significant
escalation in competition in all sectors.
The said global economic crisis - especially in Europe - has also
affected the paper industry and resulted in a supply surplus and consequently in
continuing the importing of low-priced paper into Israel. These imports have led
to increased competition, especially in fine paper, accompanied by a decrease in
selling prices. As a result of the rise in pulp prices during the same period,
the margin between selling prices and pulp prices has decreased as well.
Pulp prices rose by an average of approximately 10% in 2003, as
compared with 2002
23
Despite the difficult business environment, the Group has managed to
maintain its operations at full capacity throughout 2003, while expanding its
operations in overseas markets.
Signs of a recovery in the Israeli economy began appearing toward the
end of 2003, as reflected by low, albeit positive growth (although no growth was
recorded in 2003 in per capita terms), coupled with a certain positive change in
the business atmosphere in the economy.
The exchange rate of the NIS compared to the U.S. dollar was revaluated
by 7.6% in 2003, as compared with a devaluation of 7.3% in 2002.
Inflation was negative in 2003, at -1.9%, as compared with an inflation
rate of 6.5% in 2002.
The negative inflation enabled the Bank of Israel to significantly
lower the interest rates, by approximately 3.7% in 2003. This has led to a
lowering of the Prime rate at the commercial banks in 2003, from 10.4% to 6.7%.
III. Analysis of Operations and Profitability
The analysis set forth below is based on the consolidated data.
1. Sales
The consolidated sales totaled NIS 465.1 million in 2003, as compared
with NIS 455.8 million in 2002.
The 2002 consolidated sales included a sum of NIS 7.9 million of sales
derived from the Shafir operation that was discontinued as of September 2002.
The NIS 17.2 million increase in sales - net of Shafir's sales in 2002
- originated primarily from a quantitative increase of approximately 6% in
packaging paper.
2. Cost of Sales
The cost of sales amounted to NIS 362.2 million in 2003 -77.9% of sales
- as compared with NIS 363.8 million -79.8% of sales - in 2002.
The gross margin as a percentage of sales reached 22.1% in 2003, as
compared with 20.2% in 2002.
The improved gross margin in 2003 compared to 2002, was achieved due to
the Company's ongoing improvements and increased efficiency. The said efficiency
was expressed by the increased output of the machines, by less work hours per
ton and a decrease in the consumption of energy per ton produced, coupled with
the continued reduction of various manufacturing costs.
The improved gross margin was achieved despite a sharp increase in
energy prices, following an average increase of approximately 21% in fuel oil
prices compared to 2002 (energy expenses grew by NIS 4.8 million, also on
account of the transition to low-sulfur fuel oil, due to the demands of the
Ministry of the Environment). Furthermore a 23% increase was recorded in water
prices.
Labor Wages
The labor wages recorded in the cost of sales, in the selling expenses
and in the general and administrative expenses, totaled NIS 137.0 million in
2003, as compared with NIS 125.5 million in 2002.
24
The increase in labor expenses originated primarily from an increase in
wages in dollar terms, due to the change in the average exchange rate between
the two periods, coupled with the updating of wages, to prevent a decrease in
real wages as a result of the rise in the CPI in 2002 (as mentioned above, the
CPI rose by 6.5% in 2002).
The said increase in wages was partially offset by the decrease in
personnel (as a result of efficiency measures and the shutting down of Shafir).
3. Selling, General and Administrative Expenses
The selling, general and administrative expenses (including wages)
amounted to NIS 56.3 million in 2003 (12.1% of sales), as compared with NIS 55.5
million (12.2% of sales) in 2002.
The increase in selling, general and administrative expenses originated
primarily from an increase in NIS-denominated expenses (including wages), in
dollar terms (due to the low dollar exchange rate, as compared with 2002).
4. Operating Profit
The operating profit amounted to NIS 46.6 million - 10.0% of sales - in
2003, as compared with NIS 36.5 million - 8% of sales - in 2002.
5. Financial Expenses
The financial expenses totaled NIS 16.0 million in 2003, as compared
with NIS 3.0 million in 2002.
The financial statements of 2003 were reported in NIS adjusted to the
changes in the exchange rate of the dollar.
The Company possesses a surplus of NIS-denominated financial
liabilities over financial assets (consisting primarily of notes and short-term
bank credit, denominated in NIS). Consequently, whereas a devaluation serves to
lower the financial expenses, a revaluation leads to an increase in the
financial expenses.
Elevated financial expenses were recorded by the Company in 2003,
originating primarily from the dollar revaluation, whereas in 2002, the
devaluation led to lower financial expenses (a difference of 15% between the
current year and in 2002).
It should nevertheless be stated that the cash-flow-related financial
expenses in 2003 (interest expenses net of revenues) amounted to NIS 8.8
million, similar to the amount paid in 2002.
6. Taxes on Income
The expenditure for taxes on income totaled NIS 7.7 million in 2003, as
compared with NIS 9.8 million in 2002.
The principal factor behind the decrease in tax expenses in 2003, as
compared with 2002, is the difference between the real-term revaluation in 2003
and the real term devaluation in 2002. This devaluation served to decrease the
protection on shareholders' equity (measured for tax purposes according to the
changes in the Consumer Price Index) and increased the expenditure on taxes in
2002. A high real-term revaluation was recorded in 2003, that contributed to
lowering the tax expenditure. (The report for 2003 was adjusted to the change in
the exchange rate of the dollar).
7. Profit After Taxes and Before the Company's Share in the
Earnings of Associated Companies
25
The profit after taxes and before the Company's share in the earnings
of associated companies amounted to NIS 24.5 million in 2003, as compared with
NIS 20.7 million in 2002.
26
8. Company's Share in Earnings of Associated Companies
The companies whose earnings are reported under this item (according to
AIPM's holdings therein), include primarily: Mondi Hadera, Hogla-Kimberly,
Carmel and TMM.
The Company's share in the earnings of associated companies amounted to
NIS 35.5 million in 2003, as compared with NIS 16.7 million in 2002.
The following principal changes were recorded in the Company's share in
the earnings of associated companies, compared to the preceding year:
- The Company's share in the net profit of Mondi Hadera grew by NIS 1.2
million as a result of the continuing improvement in operating
profitability, that was attained primarily due to efficiency measures
and the reorganization of operations and marketing at Mondi Hadera. The
improved profitability was impaired by a certain decrease in operating
profit in the second half of 2003, as compared with the preceding
quarters of 2003 (due to the lower margins and the competition against
imports), coupled with the increase in financial expenses, primarily on
account of the repayment of some of the loans that were received from
the shareholders when Mondi Hadera was founded.
- The Company's share in the net earnings of Hogla-Kimberly grew by NIS
19.0 million, as a result of the improved operating profit at
Hogla-Kimberly as compared with 2002. This is primarily attributed to
the improved efficiency in logistics following the relocation to the
central warehouse in Tzrifin and the gradual transition toward the
manufacturing of HUGGIES(R) diapers in Afula. Efficiency measures were
also initiated at Ovisan (Hogla's subsidiary in Turkey) and were
expressed by a significant improvement in the operating profit. The net
profit also grew compared with 2002 on account of financial revenues
that were recorded at Hogla-Kimberly and at Ovisan in 2003, due to the
effects of the revaluation (in the NIS and in the Turkish lira, as
compared with the U.S. dollar).
- The Company's share in the net profit of the Carmel Group grew by NIS
2.5 million due to the transition from an operating loss in the
preceding quarters, to an operating profit starting with the third
quarter of 2003. This improvement is attributed to the comprehensive
efficiency measures that are being initiated by Carmel.
- The Company's share in the net profit of TMM decreased by NIS 2.3
million, as a result of higher financial expenses in 2003, as compared
with 2002. This is attributed to an increase in bank credit (as a
result of an increase in customer debts primarily local municipalities
coupled by strategic investments in the development of TMM that were
financed using bank credit) and to the real-term interest in CPI terms,
that was higher in 2003 than it was in 2002.
B. Liquidity and capital resources
1. Cash Flows
The cash flows from operating activities amounted to NIS 47.1 million
in 2004, as compared with NIS 52.7 million in 2003. (The NIS 52.7 million in
cash flows in 2003 includes a NIS 16.4 million dividend received from an
associated company. Without the said dividend, the cash flows from operating
activities would have amounted to NIS 36.3 million in 2003). The improvement in
the cash flows from operating activities during 2004 (excluding the said
dividend) originated primarily from a smaller increase in the operating working
capital during 2004 compared to 2003, despite the growth in operating volumes in
2004.
27
2. Financial Liabilities
The Company anticipates that its existing credit lines are sufficient
for financing its working capital needs. The Company uses its cash flow from
operating activities to finance its investments and for repayment of loans and
dividend distributions to its shareholders.
Based on the Company's balance sheet, the Company believes that it is
unlikely that there will be any difficulties to obtain credit, whether short
term debts or long-term debts, to finance anticipated investments.
At December 21, 2003, the Company issued notes - through tender by
private placement - in the amount of NIS 200 million, to institutional
investors. These notes carry an interest rate of 5.65% per annum (a margin of
1.45% above government notes with a comparable average maturity at the time).
The principal will be repaid in seven equal annual installments between the
years 2007-2013 (average maturity of 6 years), with both the principal and the
interest being linked to the CPI. The notes are not convertible into the
Company's ordinary shares and shall not be registered for trade on a public
exchange.
The long-term liabilities (including current maturities) amounted to
NIS 267.9 million as at December 31, 2004 as compared with NIS 275.0 million as
at December 31, 2003.
The Company uses loans from local financial institutions, mostly banks,
to finance its activities. As of December 31, 2004, these loans consisted of the
following:
1. Short-term credit from banks - see Note 10d to the financial
statements attached.
2. Notes - see Note 4a to the financial statements attached.
3. Other liabilities - see Note 4b to the financial statements
attached.
For information regarding financial instruments used for hedging
purposes and market risks - see Item 11, "Quantitative and Qualitative
Disclosure about Market Risk".
The Group may incur additional tax liabilities in the event of
inter-company dividend distributions, derived from "approved enterprises"
profits. The said dividend distribution from investee companies is in the amount
of up to approximately NIS 85 million (of which the Company's share of the
additional tax is NIS 15 million, if this dividend is distributed). No account
was taken of the additional tax, since AIPM has the ability and the intention
that such earnings are to be reinvested and that no dividend would be declared
which would involve additional tax liability to the Group in the foreseeable
future.
C. Research and development, patents and licenses, etc.
There are no significant investments in research and development
activities.
D. Trend information
For trend information see "The Business Environment and the Influence
of External Factors" above.
E. Off Balance sheet Arrangements
The Company does not have any material off balance sheet managements,
as defined in Item 5E of the instructions to Form 20-F.
28
F. Contractual Obligations
Less Than More than
In NIS In Millions Total 1 Year 1-3 Years 3-5 Years 5 Years
-------------------------------------------------------------------------------------------
Long Term Debt Obligations 306.6 19.2 112.1 112.8 62.5
The company's material obligations are its notes and loans. See note 4
to the financial statements.
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
NAME DIRECTOR SINCE AGE POSITION
----- -------------- --- --------
Directors:
---------
Ronit Blum 2005 53 Director
Nochi Dankner 2003 51 Director
Michael Dorsman 1999 40 Director (until - March 6, 2005)
Avi Fischer 2004 49 Director
Aviezer (Gezi) Kaplan 2001 57 Director (until December 20, 2004)
Miri Lent-Sharir 2000 49 Director (until January 25, 2005)
Oren Lieder 2003 57 Director
Zvi Livnat 2003 52 Director
Amir Makov 2005 71 Director
Isaac Manor 2003 64 Director
Amos Mar-Haim 1984 67 Director
Leon Recanati 1988 57 Director (until July 13, 2004)
Adi Rozenfeld 2004 51 Director
Meir Shannie 2001 60 Director (until February 23, 2004)
Avi Yehezkel 2003 47 Director
Yaacov Yerushalmi 1998 63 Chairman of the Board since January 1999, CEO of
the Company from June 1990 until April 2003.
The business experience of each of the directors is as follows:
Ms. Ronit Blum is Director of Association of Friends, Tel Aviv Sourasky
Medical Center, Formerly, a lieutenant colonel in the Israel Defense Forces.
Mr. Nochi Dankner is Chairman and Chief Executive Officer of IDB
Holdings Corporation Ltd., Chairman of IDB Development Ltd., Discount
Investments Ltd. and of Clal Industries and Investments Ltd. He serves or served
as Chairman and Director in public and private companies of Ganden Group, IDB
Group and Bank Hapoalim.
29
Mr. Michael Dorsman is a businessman, Chairman of the Board and CEO of
D.B.P.L. Public Investments Ltd. and Papaya Investments Ltd.
Mr. Avi Fischer is Director and Co-CEO of Clal Industries and
Investments Ltd. and Deputy Chairman of IDB Development Ltd, Deputy CEO of IDB
Holdings Corporation Ltd., director of Discount Investment Ltd. and several
public and private companies of Ganden Group and IDB Group. Senior partner of
Fischer, Behar, Chen & Co. Law Office.
Mr. Oren Lieder is Executive Vice President and CFO of Discount
Investments Ltd. He serves as a director of various companies, including
publicly-traded companies. Formerly served as CFO of Bezeq, the Israeli Telecom
Company Ltd.
Mr. Zvi Livnat is Co-CEO of Clal Industries and Investments Ltd. ,
Deputy CEO of Commerce of Taavura Holding Group Ltd., Deputy CEO of IDB Holdings
Corporation, Deputy Chairman of IDB Development Ltd., director in Discount
Investments Ltd., and other public and private companies.
Mr. Amir Makov is the Chairman of The Israel Institute of Petroleum &
Energy and a director in the following companies: Bank Leumi Le-Israel, ICL
Fertilizers (Dead Sea Works, Rotem Amfert Negev), ICL Industry Products (Dead
Sea Bromine Company, Dead Sea Periclase), Granite Hacarmel Investments Ltd. and
an external director in Wolfman Industries and Ludan Engineering Co. Ltd. Mr.
Makov served as an external director of the Company between 1996-2001.
Mr. Isaac Manor is a director of various publicly-traded and
privately-held companies within the IDB Group, IDB Holdings Ltd., IDB
Development Ltd., Discount Investment Ltd. and Clal Industries and Investments
Ltd ,Israel Union Bank Ltd. and others and Co-CEO and Chairman of companies in
the David Lubinsky Group Ltd.
Mr. Amos Mar-Haim is a member of the Israel Accounting Standards Board
and a director of various companies and formerly Vice Chairman of the Israeli
Corporation Ltd.
Mr. Adi Rozenfeld is a businessman, consultant to companies and a
representative of Activa Holdings BV in Israel. He is also the Honorary Consul
of Slovenia in Israel and a director of various companies.
Mr. Avi Yehezkel is an external director at Bank Yahav. He served as a
Knesset member between 1992-2003, during these years, alternately, he served as
Deputy Minister of transportation, Chairman of the Economics Committee, Chairman
of the Defense Budget Committee, Chairman of the Capital Market Sub-Committee,
Chairman of the Banking Sub-Committee and member of the Finance Committee.
Mr. Yaacov Yerushalmi is Chairman of the Board of the Company since
January 1999 and Chief Executive Officer of the Company from June 1990 until
April 2003.
30
Senior Management (as of May 31, 2005)
Name Age Position and Business Experience for past five years
---- --- ----------------------------------------------------
Avi Brener 52 Chief Executive Officer since January 1, 2005
Israel Eldar 60 Corporate Controller and responsible for risks and business interruption
management. A director of subsidiaries and affiliated companies of the
Company.
Ofra Gorni 52 Business Development Manager and a director of subsidiaries and
affiliated companies of the Company.
Lea Katz 55 Legal counsel and Corporate Secretary .
Gabi Kenan 61 Senior Manager
Pinhas Rimon 65 General manager of Packaging Paper and Recycling Division. A director of
subsidiaries and affiliated companies of the Company.
Gideon Liberman 55 General Manager of Development and Infrastructure Division
Senior Management in Subsidiaries and Affiliated Companies (as of May 31, 2005)
Name Age Position in the Company
---- --- -----------------------
Arik Schor 49 General Manager, Hogla-Kimberly Ltd.
Avner Solel 51 General Manager, Mondi Business Paper Hadera Ltd.
Moshe Riani 46 General Manager, Graffiti Office Supplies & Paper Marketing Ltd.
Rafi Alon 58 General Manager, T.M.M. Integrated Recycling Industries Ltd.
Doron Kempler 55 General Manager, Carmel Container Systems Ltd.
31
B. Compensation
The aggregate amount of remuneration paid to all directors and the
above senior officers of the Company as a group for services provided by them to
the Company during 2004 was approximately NIS 10,175,000 (approximately
$2,362,000). The aggregate amount set aside for pension, retirement or similar
benefits for directors and officers as a group for services provided by them to
the Company during 2004 was approximately NIS 850,000 (approximately $197,000).
Out of the above mentioned remuneration, the remuneration paid by the
Company in 2004 to Mr. Yerushalmi, the Company's Chairman of the Board, for
services provided by him to the Company during 2004, was NIS 2,727,686
(approximately $633,000).
On May 7, 2001, the Company's Board of Directors adopted an incentive
plan, which was subsequently approved by the Company's shareholders, to
remunerate the Company's Chairman of the Board of Directors. According to the
plan, such remuneration will be equal to the increase in the value of 50,000
ordinary shares of the Company in the period from May 7, 2001 (share price - NIS
194.37 adjusted according to the plan) to May 7, 2008. The remuneration will be
spread over the period commencing two years from the resolution of the Board of
Directors, until the seventh anniversary of such resolution. As of May 31, 2005
the Chairman of the Board of Directors exercised one quarter of the plan in the
sum of NIS 930,000 (approximately $215,000). A liability was included in the
financial statements in respect of the above plan, under current liabilities.
Remuneration of Directors
The remuneration of the directors (including the external directors)
for 2004 was approved at the 2004 general meeting of shareholders. Pursuant to
regulations under the Israeli Companies Law, each external director of the
Company must receive the same annual compensation, which must be between NIS
28,361 and NIS 46,081, plus an additional fee for each meeting attended which
must be between NIS 998 and NIS 1,772. The Board approved in 2000 that the
remuneration of each director, including the external directors, be fixed at NIS
39,000 plus an additional NIS 1,500 for each meeting attended. The same amounts
were approved by the Board in 2001. In 2002, the Board of Directors resolved
that the remuneration of each director will be NIS 35,000 plus NIS 1,350 for
each meeting attended (a decrease of 10% compared to 2001), subject to the
approval of the Company's shareholders. In 2003 and 2004 the Board of Directors
resolved that the remuneration of each director will be the same as in the years
2000 and 2001, namely, NIS 39,000 plus an additional NIS 1,500 for each meeting
attended. The remuneration was also approved by the General Meeting of
Shareholders.
C. Board practices
The directors of the Company, except for the external directors, retire
from office at the Annual General Meeting of Shareholders and are eligible for
re-appointment at such Annual General Meeting.
Notwithstanding the aforesaid, if no directors were appointed at any
Annual General Meeting, the directors appointed at the previous Annual General
Meeting shall continue in office. Directors, except for the external directors,
may be removed from office earlier by a resolution at an Annual General Meeting
of Shareholders.
The Articles of Association of the Company provide that any director
may, by written notice, appoint any person who is approved by the directors to
be an alternate director and to act in his place and to vote at any meeting at
which he is not personally present. The alternate director is entitled to notice
of Board meetings and he will be remunerated out of the remuneration of the
director appointing him. The alternate director shall vacate his office if and
when the director appointing him vacates his office as director, or removes him
from office by written notice.
32
There are no services contracts which give the current directors of the
Company any benefits upon termination of appointment, except for Mr. Yaacov
Yerushalmi, whose terms of employment were submitted for approval at the Annual
General Meeting of Shareholders according to Israeli law.
External Directors
Under the Israeli Companies Law, which became effective on February 1,
2000, the Company (as a public company) is required to have at least two
external directors as members of its Board of Directors. An external director
may not have any financial or other substantial connection with the Company and
must be appointed at the Annual General Meeting of Shareholders. The external
directors are elected for a three-year term of office that may be extended for
another three years. Currently the external directors are Ms. Blum and Mr.
Makov.
Audit Committee
Under the Israeli Companies Law, members of the Audit Committee are to
be elected from members of the Board of the Company by the Board. The Audit
Committee will be comprised of at least three directors, including all of the
external directors, but excluding: (i) the chairman of the board of directors;
(ii) any director employed by the Company or who provides services to the
Company on a regular basis; or (iii) a controlling shareholder of the Company or
his relative.
The role of the Audit Committee under the Israeli law is: (i) to
examine flaws in the business management of the Company in consultation with its
auditors and to suggest appropriate courses of action and (ii) to decide whether
to approve actions or transactions which under the Israeli Companies Law require
the approval of the Audit Committee (transaction with a related party, etc.) The
Company does not have a Nominating Committee nor a Compensation Committee.
The Company's Audit Committee members are: Amos Mar-Haim, Chairman,
Ronit Blum, and Amir Makov.
D. Employees
As of April 30, 2005, the Group had 3,197 employees in Israel. The
Company and its subsidiaries had 717 employees in Israel of whom 141 were
engaged in the office supplies activities, 222 in recycling activities, 138 in
packaging paper activities, 153 in infrastructure activities and 63 were
management and clerical personnel at the Company's headquarters in Hadera. The
associated companies had 2,480 employees in Israel of whom 938 were engaged in
the household paper activities, 296 in the printing and writing paper
activities, 662 in the recycling activities and 584 in the corrugated board
containers activities.
Some of the employees are subject to the terms of employment of
collective bargaining agreements. The parties to such collective bargaining
agreement are the Company and the employees, through the union.
E. Share ownership
In January 1998, the Company's Board of Directors approved a stock
option plan, pursuant to which options for ordinary shares were allocated to
senior officers of the Company and its subsidiaries, including 32,000 options to
the CEO, in three annual installments. The plan was approved at the Company's
Annual General Meeting of Shareholders in February 1998 and expired in 2003
In April 2001, the Board of Directors of the Company adopted a new
stock option plan under which options to purchase a total of 194,300 shares may
be granted to senior officers of the Company and certain other companies in the
Group. All of the options were granted in July 2001. Each option is exercisable
to purchase one ordinary share of NIS 0.01 par value of the Company. The options
vest in
33
four yearly installments. The vesting period of the first installment is two
years, commencing on the date of grant, and the next three installments vest on
the third, fourth and fifth anniversary of the grant date. Each installment is
exercisable for two years from the vesting date of such installment. For further
information regarding the 2001 plan, see Note 6 of the Notes to the Consolidated
Financial Statements.
In 2004, 55,525 options were exercised under the 2001 plan and 24,295
shares were issued following the exercise of options.
In August 2001, the Company's Board of Directors approved a stock
option plan for employees of the Company and its subsidiaries. Under this plan,
up to 125,000 options may be granted without consideration. Each option is
exercisable to purchase one ordinary share of NIS 0.01 par value of the Company.
In November 2001, 81,455 options were granted under the 2001 employee plan. For
further information regarding the 2001 employee plan, see Note 6 of the Notes to
the Consolidated Financial Statements.
In 2004 8,615 options were exercised under the 2001 employee plan and
4,084 shares were issued following the exercise of options.
34
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major shareholders
The following table sets forth, as of May 23, 2005, the number of
Ordinary Shares of the Company beneficially owned by (i) all those persons who,
to the Company's knowledge, were the beneficial owners of more than 5% of such
outstanding shares, and (ii) all officers and directors of the Company as a
group:
Name and Address: Amount Beneficially Owned Percent of Class
Principal Shareholders: Directly or Indirectly* Outstanding
----------------------- ----------------------- -----------
Clal Industries Ltd. ("Clal") 1,315,709(1) 32.90 (1)
3 Azrieli Center, the Triangle Tower, Tel Aviv, Israel
Discount Investment Corporation Ltd. ("DIC") 743,525(1) 18.59 (1)
3 Azrieli Center, the Triangle Tower, Tel Aviv, Israel
Bank Leumi Le Israel Ltd. 248,142 6.20
P.O.B 2, Tel Aviv, Israel (through trust and provident funds)
Bank Hapoalim Ltd. 206,967 5.18
62 Yehuda Halevi St. Tel Aviv, Israel (through trust and
provident funds)
All officers and directors as a group ** **
----------
* Beneficial ownership is based on shared voting and dispositive power
over the securities listed in the table.
** The officers and directors of the Company own, in the aggregate, less
than 1% of the Company's outstanding ordinary shares, except for Nochi
Dankner, Isaac Manor and Zvi Livnat whose ownership is set forth in
footnote (1) below.
(1) IDB Holding Corporation Ltd. ("IDBH") holds 64.3%of the equity of and
voting power in IDB Development Corporation Ltd. ("IDBD"), which, in
turn, holds 67.26% of the equity of and voting power in DIC and 61.93%
of the equity of and voting power in Clal. IDBH, IDBD, Clal and DIC are
public companies traded on the Tel Aviv Stock Exchange.
Since May 19, 2003 approximately 51.7% of the outstanding share capital
of IDBH, is held by a group comprised of: (i) Ganden Investments I.D.B. Ltd.
("Ganden"), a private Israeli company controlled by Nochi Dankner and his
sister, Shelly Bergman, which holds 31.02% of the equity of and voting power in
IDBH; (ii) Manor Investments-IDB Ltd. ("Manor"), a private Israeli company
controlled by Ruth Manor which holds 10.34% of the equity of and voting power in
IDBH; and (iii) Avraham Livnat Investments (2002) Ltd. ("Livnat"), a private
Israeli company controlled by Avraham Livnat which holds 10.34% of the equity of
and voting power in IDBH. Ganden, Manor and Livnat, owning in the aggregate
approximately 51.7% of the equity of and voting power in IDBH, entered into a
Shareholders Agreement relating, among other things, to their joint control of
IDBH, the term of which is until May 19, 2023.
In addition: (a) Ganden Holdings Ltd., the parent company of Ganden,
holds approximately 6.44% of the equity and voting power in IDBH; (b) Manor
Holdings B.A. Ltd., the parent company of Manor, holds approximately 0.03% of
the equity and voting power in IDBH; (c) Avraham Livnat Ltd., the parent company
of Livnat, holds approximately 0.04% of the equity and voting power in IDBH; and
(d) Shelly Bergman owns, through a private company wholly owned by her,
approximately 7.23% of the equity and voting power of IDBH.
Nochi Dankner is Chairman and CEO of IDBH and chairman of IDBD, Clal
and DIC., Isaac Manor (the husband of Ruth Manor), and Zvi Livnat (the son of
Avraham Livnat) are directors of each of IDBH, IDBD, Clal and DIC.
35
In 1980 DIC and Clal agreed for a period of ten years (subject to
renewal for additional ten year periods) to coordinate and pool their voting
power in the Company in order to appoint an equal number of each party's
nominees to the Board of Directors of the Company, and in order to elect their
designees to the Board's Committees. They also agreed to vote en bloc in General
Meetings of the Company on the subject of dividend distributions. This agreement
has been extended to the year 2010.
The Company estimates that as of April 30, 2005, 9.15% of its
outstanding ordinary shares were held in the United States by 1,015 record
holders.
All ordinary shares of the Company have equal voting rights.
B. Related Party Transactions
The information is included in the Company's attached Consolidated
Financial Statements: For loans to associated companies see Note 2 to the
attached financial statements. For a capital note to an associated company, see
Note 4b to the attached financial statements. For transactions and balances with
related parties see Note 13 to the attached financial statements.
For further information see also Note 9f and 9g to the financial
statements attached.
C. Interests of Experts and Counsel
Not applicable to annual reports.
ITEM 8 - FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See the financial statements included in Item 18.
B. Significant Changes
None.
ITEM 9 - THE OFFER AND LISTING
A. Offer and Listing Details
The Company's ordinary shares are listed on the American Stock
Exchange. The trading symbol for the ordinary shares is AIP. The ordinary shares
are also listed on the Tel Aviv Stock Exchange.
36
The following table sets forth the high and low sale prices of the
Company's ordinary shares on the American Stock Exchange and the Tel Aviv Stock
Exchange for the periods indicated:
Last full five fiscal years
American Stock Exchange Tel Aviv Stock Exchange
-------------------- --------------------------------------------
High Low High Low High Low
----- ----- ------ ------ ----- -----
$ NIS $(1)
-------------------- -------------------- ------------------
Calendar Year
2004 60.73 48.75 267.10 217.60 60.33 48.72
---- ----- ----- ------ ------ ----- -----
2003 54.66 29.22 239.00 143.60 54.58 30.01
---- ----- ----- ------ ------ ----- -----
2002 40.50 25.18 178.00 116.10 40.10 24.90
---- ----- ----- ------ ------ ----- -----
2001 64.25 30.00 267.50 130.30 64.80 29.82
---- ----- ----- ------ ------ ----- -----
2000 83.5 55.50 347.00 224.90 86.10 54.96
---- ----- ----- ------ ------ ----- -----
Quarters during last two full fiscal years and first quarter of 2004:
American Stock Exchange Tel Aviv Stock Exchange
--------------------- -----------------------------------------------
2005 Quarter Ended High Low High Low High Low
----- ----- ------ ------ ----- -----
$ NIS $(1)
--------------------- --------------------- ------------------
March 31 57.98 48.25 246.90 214.80 56.96 49.42
----- ----- ------ ------ ----- -----
2004 Quarter Ended High Low High Low High Low
----- ----- ------ ------ ----- -----
$ NIS $(1)
--------------------- --------------------- ------------------
March 31 60.73 53.01 267.10 234.90 60.33 52.10
----- ----- ------ ------ ----- -----
June 30 57.25 51.30 257.30 235.70 56.65 51.26
----- ----- ------ ------ ----- -----
September 30 56.40 48.75 255.20 224.70 56.95 49.49
----- ----- ------ ------ ----- -----
December 31 59.00 49.20 256.90 217.60 59.21 48.72
----- ----- ------ ------ ----- -----
----------
(1) Share prices have been translated from New Israeli Shekels (NIS) to
U.S. Dollars at the representative rate of exchange, as reported by the
Bank of Israel, on the dates when such high or low prices in NIS were
recorded.
37
American Stock Exchange Tel Aviv Stock Exchange
--------------------- -------------------------------------------
2003 Quarter Ended High Low High Low High Low
----- ----- ------ ------ ----- -----
$ NIS $(1)
--------------------- -------------------- -----------------
March 31 35.50 29.22 165.20 143.60 35.25 30.01
----- ----- ------ ------ ----- -----
June 30 46.12 35.65 200.00 163.30 46.38 35.66
----- ----- ------ ------ ----- -----
September 30 47.20 41.10 205.70 178.60 46.19 40.31
----- ----- ------ ------ ----- -----
December 31 54.66 45.00 239.00 197.50 54.58 44.56
----- ----- ------ ------ ----- -----
2002 Quarters Ended High Low High Low High Low
----- ----- ------ ------ ----- -----
$ NIS $(1)
--------------------- -------------------- -----------------
March 31 40.50 32.00 178.00 149.30 40.10 32.00
----- ----- ------ ------ ----- -----
June 30 32.10 26.30 149.20 125.20 31.30 25.60
----- ----- ------ ------ ----- -----
September 30 28.60 25.18 133.60 116.10 28.60 24.90
----- ----- ------ ------ ----- -----
December 31 33.30 26.50 155.20 125.30 33.50 26.30
----- ----- ------ ------ ----- -----
Last full six months prior to filing of this report:
American Stock Exchange Tel Aviv Stock Exchange
------------------- --------------------------------------------
High Low High Low High Low
----- ----- ------ ------ ----- -----
$ NIS $(1)
------------------- --------------------- -----------------
May 2005 51.50 46.50 227.60 204.20 52.21 46.24
----- ----- ------ ------ ----- -----
April 2005 52.00 49.63 225.80 214.90 51.46 49.15
----- ----- ------ ------ ----- -----
March 2005 57.25 48.25 246.70 214.80 56.96 49.42
----- ----- ------ ------ ----- -----
February 2005 57.98 53.75 246.90 234.90 56.42 53.83
----- ----- ------ ------ ----- -----
January 2005 56.50 52.50 245.00 229.50 56.14 52.16
----- ----- ------ ------ ----- -----
December 2004 59.00 54.83 256.90 238.30 59.21 54.92
----------
(1) Share prices have been translated from New Israeli Shekels (NIS) to
U.S. Dollars at the representative rate of exchange, as reported by the
Bank of Israel, on the dates when such high or low prices in NIS were
recorded.
38
ITEM 10 - ADDITIONAL INFORMATION
A. Share Capital
Not applicable to Annual Reports.
B. Memorandum and Articles of Association
The Company was registered under Israeli law on February 10, 1951 and
its registration number with the Israeli registrar of companies is 52-001838-3.
On June 20, 2001, the Company's shareholders approved a new version of
the Articles of Association ("Articles").
Objects of the Company
As indicated in Article 5 of the Company's Articles, the Company may,
at any time, engage in any branch or kind of business in which it is, expressly
or by implication, authorized to engage in accordance with the Articles. The
Company may also cease to engage in such businesses, whether or not it has
commenced to engage in such branch or kind of business.
Director's Personal Interest
The Israeli Companies Law requires that a director and an officer of a
company disclose to the company any personal interest that he may have and all
related material information, in connection with any existing or proposed
transaction by the company. The disclosure is required to be made promptly and
in any event no later than the date of meeting of the board of directors in
which the transaction is first discussed.
If the transaction is an extraordinary transaction, the procedure of
approval is as described below. Under Israeli law, an extraordinary transaction
is a transaction other than in the ordinary course of business, otherwise than
on market terms or that is likely to have a material impact on the company's
profitability, assets or liabilities.
Subject to the restrictions of the Israeli Companies Law, a director is
entitled to participate in the deliberations and vote with regard to the
approval of transactions in which he has a personal interest. A director is not
entitled to participate and vote with regard to the approval of an extraordinary
transaction in which he has a personal interest, the approval of indemnity,
exemption or insurance of the directors or the approval of the directors'
compensation. If a majority of the directors have a personal interest in a
certain decision, they may participate and vote but the issue must be approved
also by the audit committee and by the shareholders. If the controlling
shareholder has a personal interest in an extraordinary transaction, the issue
must be approved also by the audit committee and the shareholders.
Any power of the Company which has not been conferred by law or by the
Articles to any other body, may be exercised by the Board. The management of the
Company is guided by the Board.
The Board shall formulate the policies of the Company and shall
supervise the performance of the office and actions of the General Manager,
including inter alia examination of the financial position of the Company and
determination of the credit framework which the Company may receive. Without
derogating from any power vested in the Board in accordance with the Articles,
the Board may, from time to time, at its discretion, decide upon the issuance of
a series of debentures, including capital notes or undertakings, including
debentures, capital notes or undertakings which can be converted into shares,
and also the terms thereof, and mortgage of the property of the Company, in
whole or in part, at present or in
39
future, by floating or fixed charge. Debentures, capital notes, undertakings or
other securities, as aforesaid, may be issued either at a discount or at a
premium or in any other manner, whether with deferred rights or special rights
and/or preferred rights and/or other rights, all the aforesaid as the Board may,
at its discretion, determine.
Except for special cases as detailed in the Articles and subject to the
provisions of the Israeli Companies Law, the Board may delegate its powers to
the General Manager, to an officer of the Company or to any other person or to
the Board committees. Delegation of the powers of the Board may be with regard
to a specific matter or for a particular period, at the discretion of the Board.
There are no limitation requirements regarding age affecting directors'
ability to serve as directors of the Company. The directors need not be
shareholders of the Company in order to qualify as directors.
The Shares -Rights and Restrictions
All of the Company's shares are ordinary shares. Every ordinary share
in the capital of the Company is of equal rights, for all intents and purposes,
to every other ordinary share, including the right to dividends, to bonus shares
and to participation in the surplus assets of the Company upon liquidation,
proportionately to the par value of each share, without taking into
consideration any premium paid in respect thereof, all the aforesaid subject to
the provisions of the Articles.
Each of the ordinary shares entitles the holder thereof to participate
at and to one vote at Annual General Meetings of the Company. As described in
Item 6.C, all directors, except external directors, stand for election each year
at the Annual General Meeting.
Subject to the provisions of the Israeli Companies Law, the Board may
resolve upon the distribution of a dividend. When deciding on the distribution
of a dividend, the Board may decide that the dividend shall be paid, in whole or
in part, in cash or by way of the distribution of assets in specie, including
securities or bonus shares, or in any other manner at the discretion of the
Board.
Dividends on the Company's ordinary shares may be paid only out of
retained earnings, as defined in the Israeli Companies Law, as of the end of the
most recent fiscal year or profits accrued over a period of two years, whichever
is higher.
The Company may, by resolution adopted at an Annual General Meeting by
an ordinary majority, decrease the capital of the Company and of any reserve
fund from redemption of capital. For the execution of any resolution as
aforesaid, the Board may, at its discretion, resolve any issues, which may arise
in connection therewith.
In case of winding up of the Company, the liquidator may determine the
proper value of the assets available for distribution and determine how the
distribution among the shareholders will be carried out.
The liability of the shareholders is limited to the payment of par
value of their ordinary shares.
Under the Israeli Companies Law, each and every shareholder has a duty
to act in good faith in exercising his rights and fulfilling his obligations
toward the Company and other shareholders and to refrain from abusing his power
in the Company, such as in voting at the General Meeting of shareholders on the
following matters: any amendment to the Articles; an increase of authorized
share capital; a merger; or an approval of certain actions and transactions
which require shareholder approval.
In addition, each and every shareholder has the general duty to refrain
from depriving other shareholders of their rights.
40
Furthermore, any controlling shareholder, any shareholder who knows
that it possesses the power to determine the outcome of a shareholder vote and
any shareholder that, pursuant to the provisions of the Articles, has the power
to appoint or to prevent the appointment of an officer in the Company or any
other power toward he Company is under a duty to act in fairness toward the
Company. The Israeli Companies Law does not describe the substance of this duty
of fairness. These various shareholder duties may restrict the ability of a
shareholder to act in what the shareholder perceives to be its own best
interests.
Modification of Rights of Shares
If the share capital is divided into different classes, the Company may
by resolution adopted at a General Meeting by a special majority (except if the
terms of the issuance of the shares of such class otherwise provide) annul,
convert, expand, supplement, restrict, amend or otherwise modify the rights of a
class of shares of the Company, provided that the consent, in writing, of all
the shareholders of such class thereto shall be received or that the resolution
shall have been approved by a General Meeting of the shareholders of such class
by special majority, or in the event that it was otherwise provided in the terms
of the issuance of a particular class of the shares of the Company, as may have
been provided in the terms of issuance of such class, provided that the quorum
at the class meeting shall be the presence, in person or by proxy, at the
opening of the meeting of at least two shareholders who own at least twenty five
percent (25%) of the number of the issued shares of such class.
The rights conferred upon the shareholders or owners of a class of
shares, whether issued with ordinary rights or with preference rights or with
other special rights, shall not be deemed to have been converted, restricted,
prejudiced or altered in any other manner by the creation or issuance of
additional shares of any class, whether of the same degree or in a degree
different or preferable to them, nor shall they be deemed to have been
converted, restricted, prejudiced or altered in any other manner by a change of
the rights linked to any other class of shares, all the aforesaid unless
otherwise expressly provided in the terms of the issuance of such shares.
Shareholders Meeting
The Company shall hold an Annual General Meeting each year not later
than fifteen months after the previous Annual Meeting, at such time and place as
may be determined by the Board. Any other General Meeting is referred to as a
"Special Meeting".
A notice of a General Meeting shall be published in at least two widely
distributed daily newspapers published in Hebrew. The notice shall be published
at least fourteen days prior to the convocation of the meeting. In addition the
Company provides a notice of the meeting and related proxy statement in English
to the holders of its Ordinary Shares listed on the records of the Company's
registrar and stock transfer agent in the United States.
Apart from the notices as to the General Meeting as above, according to
its articles and the Israeli Companies Law the Company is not required to give
any notice as to the General Meeting, either to the registered shareholders or
to shareholders who are not registered, subject to provisions of the Companies
Law and/or any other applicable law. The notice as to a General Meeting is
required to detail the place, the day and the hour at which the meeting will be
held and to include the agenda as well as a summary of the proposed resolutions
and any other details required by law.
The board of directors of the Company shall convene a Special Meeting
as may be decided by the Board, and shall also convene a special meeting at the
demand of any two directors or one quarter of the directors in office or one or
more shareholders who hold at least five percent of the issued capital and one
percent of the voting rights, or one or more shareholders who hold at least five
percent of the voting rights.
41
If the Board receives a demand for the convocation of a Special Meeting
as aforesaid, the Board shall within twenty one days of receipt of the demand
convene the meeting for a date fixed in the notice as to the Special Meeting,
provided that the date for convocation shall not be later than thirty five days
from the date of publication of the notice, all the aforesaid subject to the
provisions of the Companies Law.
In the resolution of the Board to convene a meeting, the Board may, at
its discretion and subject to the provisions of the law, fix the manner in which
the items on the agenda will be determined and notice given to the shareholders
entitled to participate at the meeting.
Each shareholder holding at least 1% of the voting rights is entitled
to request the Board to include in the agenda any issue, provided that this
issue is suitable to be discussed in a General Meeting.
No business shall be transacted at any General Meeting unless a quorum
is present at the time the meeting proceeds to business. A quorum shall be
constituted when two shareholders, holding collectively at least twenty five
percent of the voting rights, are present in person or by proxy within half an
hour from the time appointed for commencement of the meeting, unless otherwise
determined in the Articles.
If a quorum is not present within half an hour, the meeting shall stand
adjourned for seven days, to the same day of the week at the same time and
place, without need for notification to the shareholders, or to such other day,
time and place as the Board may by notice to the shareholders appoint.
If a quorum is not present as aforesaid at the adjourned meeting, the
meeting shall be canceled.
Voting and Adopting Resolutions at General Meetings
A shareholder who wishes to vote at a General Meeting shall prove to
the Company his ownership of his shares. The Board may issue directives and
procedures relating to the proof of ownership of shares of the Company.
A shareholder is entitled to vote at a General Meeting or class
meeting, in person or by proxy. A voting proxy need not be a shareholder of the
Company.
The above shall also apply to any person entitled to shares, provided
that at least forty eight hours before the time for the meeting or the adjourned
meeting, as the case may be, at which he proposes to vote, he shall satisfy the
Board of his right to vote such shares unless the Company shall have previously
recognized his right to vote the shares at such meeting.
The instrument appointing a proxy (hereinafter "Proxy Appointment")
shall be in writing signed by the principal, or if the principal is a
corporation the proxy appointment shall be in writing and signed by authorized
signatories of the corporation. The Board is entitled to demand that prior to
the holding of the meeting, there shall be produced to the Company a
confirmation in writing of the authority of signatories to bind the corporation
to the satisfaction of the Board. The Board may also issue provisions and
procedures relating to such matters.
The Proxy Appointment or an office copy to the satisfaction of the
Board shall be deposited at the registered office or at such other place or
places, in or outside of Israel, as may from time to time be determined by the
Board, either generally or in respect of a specific meeting, at least forty
eight hours prior to the commencement of the meeting or the adjourned meeting,
as the case may be, at which the proxy proposes to vote on the strength of such
Proxy Appointment.
A voting proxy is entitled to participate in the proceedings at the
General Meeting and to be elected as chairman of the meeting in the same manner
as the appointing shareholder, unless the Proxy Appointment otherwise provides.
The Proxy Appointment shall be in form usual in Israel or any other form which
may be approved by the Board.
42
Each ordinary share entitles the holder thereof to participate at a
General Meeting of the Company and to one vote at a poll.
Right of Non-Israeli Shareholders to Vote
There is no limitation on the right of non-resident or foreign owners
of any class of the Company's securities to hold or to vote according to the
rights vested in such securities.
Change of Control
Under the Articles, the approval of merger as provided in the Israeli
Companies Law, is subject to a simple majority at the General Meeting or class
meeting, as the case may be, all the aforesaid subject to the applicable
provisions of any law. It is also subject to the approval of the boards of the
merging companies.
For purposes of shareholders' approval, unless a court rules otherwise,
the merger will not be deemed approved if a majority of the shares held by
shareholders, other than the shareholders who are also shareholders in the other
merging company whose shares are held by the other merging company, or by any
person who holds 25% or more of the shares or the right to appoint 25% or more
of the directors in the other merging company, vote against the merger. Upon the
request of a creditor of either party to the proposed merger, a court may delay
or prevent the merger if it concludes that there exists a reasonable concern
that as a result of the merger, the surviving company will be unable to satisfy
the obligations of any of the parties to the merger. In addition, a merger may
not be completed unless at least 70 days have passed from the time that a
proposal of the merger has been filed with the Israeli Registrar of Companies.
The Israeli Companies Law also provides that an acquisition of shares
of a public company must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a 25% shareholder of the company and
there is no existing 25% or more shareholder in the company. If there is no
existing 45% or greater shareholder in the company, the Companies Law provides
that an acquisition of shares of a public company must be made by means of a
tender offer if as a result of the acquisition the purchaser would become a 45%
shareholder of the company.
If following any acquisition of shares, the acquirer will hold 90% or
more of the company's shares, the acquisition may not be made other than through
a tender offer to acquire all of the shares of such class. If more than 95% of
the outstanding shares are tendered in the tender offer, all the shares that the
acquirer offered to purchase will be sold to it. However, the remaining minority
shareholders may seek to alter the consideration by court order.
Under the Israeli Securities Act 1968, any major shareholder who is the
beneficial owner of more then 5% of the Company's equity capital or voting
securities is required to report this fact and any change in his holding to the
Israeli Securities Authority.
C. Material Contracts
o On August 30, 2004, the Company signed a term sheet for the purchase of
natural gas from the partners in the Thetis Sea Group. Pursuant to the
term sheet, the Company will purchase natural gas from the Thetis Sea
Partnership over a period that will end on the earliest of the
following dates:
1. 15 years.
2. The date of completion of the delivery of an overall quantity
of natural gas as determined in the agreement (minimum 0.4 BCM
and maximum 3 BCM assuming that the Company will
43
establish a new co-generation plant).
Accordingly, the financial volume of the term sheet ranges from $35
million to $260 million over the term of the agreement. This period may
be reduced, under certain conditions as set forth in the term sheet It
was further stipulated that the purchase of the natural gas was
contingent upon the completion of the laying of a natural gas pipeline
to Hadera, by a date to be agreed upon between the parties.
The term sheet is subject to the signing of a binding agreement, which
the Company is currently negotiating.
o In October 2004 a wholly owned subsidiary of the Company, American
Israeli Paper Mills Paper Industry (1995) Ltd., was granted by the
Minister of National Infrastructure a basic permit to generate
electricity by means of power and heat systems (co-generation). In
addition, in December 2004 the project was announced as "a National
Infrastructure Project".
The basic permit enables the Company to establish a power station
generating between 200 to 400 megawatt, in a combined cycle
co-generation, based on natural gas at Hadera.
The basic permit is subject to several conditions that have not yet
been fulfilled, including compliance with the production license,
compliance with the requirements of the electricity law and compliance
with specific milestones which are detailed in the permit.
o In 2004 the Company granted an undertaking of indemnification to
officers and directors of the Company, pursuant to which the Company is
undertaking to indemnify them according to the conditions specified in
a Letter of Indemnification provided, that the amount of
indemnification will not exceed a cumulative amount that is the
equivalent of 25% of the Company's equity according to the last
(consolidated) financial statements that will be published before the
date of the de facto grant of indemnification.
D. Exchange Controls
Foreign Exchange Regulations
There are no Israeli governmental laws, decrees or regulations that
restrict or that affect the export or import of capital, including but not
limited to, foreign exchange controls on remittance of dividends on the ordinary
shares or on the conduct of the Group's operations, except as otherwise set
forth in the paragraph below regarding taxation.
E. Taxation
The following information is regarding the Israeli laws only.
Investors are advised to consult their tax advisors with respect to the
tax consequences of their purchases, ownership and sales of Ordinary Shares,
including the consequences under applicable state and local law and federal
estate and gift tax law, and the application of foreign laws or the effect of
nonresident status on United States taxation. This tax summary does not address
all of the tax consequences to the investors of purchasing, owning or disposing
of the Ordinary Shares.
Income Taxes on Dividends Distributed by the Company to Non-Israeli Residents
Subject to the provisions of applicable tax treaties, dividend
distributions from regular profits by the Company to a non-resident shareholder
are subject to withholding tax of 25%. The portion of dividends paid out of
profits earned under an Approved Enterprise tax status of the Company is subject
to
44
withholding tax at the rate of 15% (in excess of the tax paid by the company
when the dividend is paid of these profits - 25% tax).
The same rates generally apply under the Israeli-U.S. Tax Treaty.
However, when a U.S. tax resident corporation is the recipient of the dividend,
the rate on a dividend out of regular (non-Approved Enterprise) profits may be
reduced to 12.5% under the treaty, where the following conditions are met:
(a) the recipient corporation owns at least 10% of the outstanding voting
rights of the Company for all of the period preceding the dividend
during the Company's current and prior taxable year; and
(b) generally not more than 25% of the gross income of the paying
corporation for its prior tax year consists of certain interest and
dividend income.
Otherwise, the usual rates apply.
United States individual citizens and residents and U.S. corporations
generally will be required to include in their gross income the full amount of
dividends received from the Company with respect to the Ordinary Shares owned by
them, including the amount withheld as Israeli income tax. Subject to the
limitations and conditions provided in the Internal Revenue Code of 1986, as
amended (the "Code"), such persons may be eligible to claim a credit for such
withheld amounts against their United States federal income tax liability. As an
alternative, the persons enumerated above (provided such persons, in the case of
individual taxpayers, itemize their deductions) may elect to deduct such
withheld tax from their gross income in determining taxable income (subject to
applicable limitations on the deductions claimed by individuals). However, such
a credit or deduction may be limited for U.S. alternative minimum tax purposes,
depending on the taxpayer's specific circumstances.
Dividend payments on the Ordinary Shares will not be eligible for a
dividends received deduction generally allowed to United States corporations
under the Code.
Income Taxes and Capital Gains Applicable in Israel and to Non-Israeli
Shareholders
The basic tax rate in 2004 applicable to corporations was 35% . Through
December 31, 2003, the corporate tax rate was 36%. Pursuant to an amendment to
the Israeli Income Tax Ordinance that was enacted in July 2004, the corporate
tax rate is to be gradually reduced from 36% to 30%, in the following manner:
the tax rate for 2004 will be 35%, in 2005 - 34%, in 2006 - 32%, and in 2007 and
thereafter - 30%. The maximum tax rate for individuals is 49%. These rates are
subject to the provisions of any applicable bilateral double taxation treaty.
Israeli law generally imposes a capital gains tax on the sale of securities and
any other capital assets.
Effective January 1, 2003, the capital gains tax rate imposed, on both
individuals and corporations upon sale of capital assets and non-traded
securities, acquired after that date has been reduced to 25%; capital gains
accrued from assets acquired before that date are subject to a blended tax rate
based on the relative Periods of time before and after that date that the asset
was held.
Effective January 1, 2003, capital gains from the sale of ordinary
shares on the Tel Aviv Stock Exchange (or listed on a designated foreign stock
market or traded in a foreign stock exchange), accrued by individuals (and
certain corporations) whose income in this regard is not classified as business
income, derived from January 1, 2003 and thereafter, will in general be liable
to capital gains tax of up to 15%. To the extent that the holder of the ordinary
shares claims a deduction of financing expenses, the gain will be subject to tax
at a rate of 25%.
In addition, if the ordinary shares are traded on the Tel Aviv Stock
Exchange (or listed on a designated foreign stock market), gains on the sale of
45
ordinary shares held by non-Israeli tax resident investors will generally be
exempt from Israeli capital gains tax.
Notwithstanding the foregoing, dealers (both individuals and
corporation) in securities in Israel are taxed at regular tax rates applicable
to business income.
The U.S. Israeli Tax Treaty exempts U.S. residents who hold an interest
of less than 10% an Israeli company, and who held an interest of less than 10%
during the 12 months prior to a sale of their shares, from Israeli capital gains
tax in connection with such sale. Certain other tax treaties to which Israel is
a party also grant exemptions from Israeli capital gains taxes.
Tax Reform -subject to the approval of the Israeli Knesset
In May 2005 the Israeli government approved a Reform in the Israeli
taxation law, which among other decreases the corporate tax gradually from 35%
in 2004 (see above) to 25% in 2010, this law has to be approved also by the
Israeli Knesset in order to be valid.
F. Dividends and Paying Agents
Not applicable to Annual Reports.
G. Statement by Expert Not applicable to Annual Reports.
H. Documents on display
A copy of each document (or a translation thereof to the extent not in
English) concerning the Company that is referred to in this Annual Report on
Form 20-F, is available for public view at our principal executive offices at
American Israeli Paper Mills Ltd., 1 Meizer Street Industrial Zone, Hadera
38100, Israel. Copies of this Annual Report and the exhibits hereto may be
inspected and copied at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549 and at the SEC's regional office at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials may be
obtained from the Public Reference Room of the SEC at 450 Fifth Street, NW,
Washington, D.C. 20549 at prescribed rates. The public may obtain information on
the operation of the SEC's Public Reference Room by calling the SEC in the
United States at 1-800-SEC-0330.
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Due to its operations, the Company is exposed to market risks,
consisting primarily of changes in interest rates - on both short and long-term
loans, changes in exchange rates and changes in raw material and energy prices.
These changes affect the Company's results of operations.
The Company's Board of Directors determines the policy according to
which financial instruments are employed and defines the objectives to be
attained, taking into account the Group's linkage balance sheet and the impact
of various changes in currencies and in the Consumer Price Index on the
Company's balance sheets and on its financial statements.
AIPM conducts calculations of the its exposure every month and examines
the compliance with the policy determined by the Board of Directors.
Furthermore, limited use is made of derivative financial instruments,
which the Company employs for hedging the cash flows, originating from the
existing assets and liabilities.
46
Such transactions are conducted primarily through currency options and
forward transactions opposite Israeli banking institutions. The Company
therefore believes that the inherent credit risk of these transactions is
slight.
As of December 31, 2004 AIPM owns CPI-linked long-term loans (notes) in
the total sum of about NIS 235 million. The interest on such loans is not higher
than the market interest rate. In the event that the inflation rate shall rise
significantly, a loss may be recorded in AIPM's financial statements, due to the
surplus of CPI-linked liabilities.
In order to hedge this exposure, AIPM has entered into forward
transactions, as at December 31, 2004 for hedging NIS 200 million against a rise
in the CPI until December 2005. These transactions serve to replace hedging
transactions in the same amount that terminated in January 2005.
Credit Risks
The Company's and its subsidiaries' cash and cash equivalents and the
short-term deposits as of December 31, 2004 are deposited mainly with major
Israeli banks. The Company and its subsidiaries consider the credit risks in
respect of these balances to be remote.
Most of these companies' sales are made in Israel, to a large number of
customers. The exposure to credit risks relating to trade receivables is limited
due to the relatively large number of customers. The Group performs ongoing
credit evaluations of its customers to determine the required amount of
allowance for doubtful accounts. The Company believes that an appropriate
allowance for doubtful debts is included in the financial statements.
Fair Value of Financial Instruments
The fair value of the financial instruments included in working capital
of the Group is usually identical or close to their carrying value. The fair
value of loans and other liabilities also approximates the carrying value, since
they bear interest at rates close to the prevailing market rates, except as
described below.
The Company does not disclose the fair value of long-term loans and
capital notes included under investments in associated companies as of December
31, 2004, aggregating NIS 69,123,000 (see note 2b) and of a capital note to an
associated company in the amount of NIS 32,770,000 (see note 4b), since their
value cannot be reliably determined so long as they have no repayment dates.
Quantitative Information Regarding Market Risk
The following are the balance-sheet components by linkage bases at
December 31, 2004:
47
In NIS Millions Unlinked CPI-linked In foreign Non- Total
currency, or monetary
linked items
thereto
(primarily
US$)
----- ---- ---- ----- -------
Assets
------
Cash and cash equivalents 3.3 4.5 7.8
Short-term investments 16.9 45.6 62.5
Other Accounts Receivable 192.0 1.8 43.6 7.7 245.1
Inventories 83.2 83.2
Investments in associated companies 49.3 11.2 8.6 362.7 431.8
Deferred taxes on income 6.5 6.5
Fixed assets, net 324.4 324.4
Deferred expenses, net of accrued amortization 1.1 1.1
----- ---- ---- ----- -------
Total Assets 261.5 58.6 56.7 785.6 1,162.4
----- ---- ---- ----- -------
Liabilities
-----------
Credit from Banks 110.5 2.2 112.7
Accounts Payable 142.8 1.0 10.1 153.9
Deferred taxes on income 52.6 52.6
Notes 235.1 235.1
Other liabilities 32.8 32.8
Shareholders' equity 575.3 575.3
----- ----- ---- ----- -------
Total liabilities and equity 286.1 236.1 12.3 627.9 1,162.4
----- ----- ---- ----- -------
Surplus financial assets (liabilities) as at
December 31, 2004 (24.6) (177.5) 44.4 (157.7) -
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable to Annual Reports
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
periodic filings with the SEC is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including the Company's Chief Executive Officer (CEO - the Company's senior
executive officer) and Chief Financial Officer (CFO - the Company's senior
financial officer), as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can
48
provide only reasonable assurance of achieving the desired control objectives.
Furthermore, management necessarily was required to use its judgment in
evaluating the cost to benefit relationship of possible disclosure controls and
procedures. Within 90 days prior to the date of this report, the Company
performed an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. The evaluation was performed with
the participation of senior management of each business segment and key
corporate functions, and under the supervision of the CEO and CFO. Based on the
evaluation, the Company's management, including the CEO and CFO, concluded that
the Company's disclosure controls and procedures were effective. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls after the date the Company
completed the evaluation.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Amos Mar-Haim a memberof the Registrant's Audit Committee, is Audit
Committee Financial Experts under the applicable rules and regulations of the
SEC. Amos Mar-Haim is "independent", as that term is defined in the American
Stock Exchange listing standards.
ITEM 16B. CODE OF ETHICS
The Company has adopted a code of ethics which is applicable to all
directors, officers and employees of the Company, including its principal
executive, financial and accounting officers and persons performing similar
functions (the "Code of Ethics"). The Code of Ethics covers areas of
professional and business conduct, and is intended to promote honest and ethical
behavior, including fair dealing and the ethical handling of conflicts of
interest; support full, fair, accurate, timely and understandable disclosure in
reports and documents the Company files with, or submits to, the SEC and other
governmental authorities, and in its other public communications; deter
wrongdoing; encourage compliance with applicable laws and governmental rules and
regulations; and ensure the protection of the Company's legitimate business
interests. The Company encourages all of itsofficers and employees promptly to
report any violations of the Code of Ethics, and has provided mechanisms by
which they may do so. The Company will provide a copy of the Code of Ethics to
any person, without charge, upon written request addressed to the Corporate
Secretary of the Company at the Company's corporate headquarters in Hadera,
Israel.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee maintains a policy of approving and recommending
only those services to be performed by the Company's external auditors which are
permitted under the Sarbanes-Oxley Act and the applicable rules of the SEC
relating to auditor's independence, and which are otherwise consistent with and
will encourage, and are remunerated at levels that accord with, the basic
principles of auditor independence. The practice of the Audit Committee is to
receive from the Company's management, a list of all services, including audit,
audit-related, tax and other services, proposed to be provided during the
current fiscal year to the Company and its subsidiaries by Kesselman &
Kesselman, an affiliate of PricewaterhouseCoopers. After reviewing and
considering the services proposed to be provided during the current fiscal year
and, where appropriate in order better to understand their nature, discussing
them with management, the Audit Committee pre-approves such of the proposed
services, with a specific pre-approved budget, as it considers appropriate in
accordance with the above principles. Additional services from Kesselman &
Kesselman and any increase in budgeted amounts will similarly be pre-approved
during the year by the Audit Committee on a case-by-case basis.
49
All audit-related and non-audit-related services performed by Kesselman
& Kesselman during 2004 were reported to, and the services proposed to be
provided by them during 2005 pre-approved by the Audit Committee, in accordance
with the procedures outlined above.
The total fees paid by the Company to Kesselman & Kesselman for all
services, described above, including audit services, for the years ended
December 31, 2004 and 2003 were $120,000 and $125,000, respectively.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Neither the Company nor any affiliated purchaser purchased any of the
Company's equity securities during 2004.
50
PART III
ITEM 18 - FINANCIAL STATEMENTS
The Company prepares its financial statements in accordance with
Israeli GAAP. Israeli GAAP and U.S. GAAP vary in certain significant respects,
as described below:
a. The functional currency of the Company
Through December 31, 1993, the financial statements of the Company,
presented in NIS values adjusted for the changes in the general purchasing power
of the Israeli currency based on the changes in the exchange rate of the dollar
were also used for the purposes of reporting in conformity with U.S. GAAP
applicable to entities operating in hyper-inflationary economic environments, as
prescribed by Statement No. 52 of the Financial Accounting Standards Board of
the United States (FASB). Since the inflation rate in Israel has decreased
considerably, the Company decided that, commencing in 1994, it would implement
the rules relating to economies no longer considered hyper-inflationary, for
reporting purposes, in accordance with U.S. GAAP.
Under those rules:
1) The functional currency of the Company (the currency in which most
income is derived and most expenses are incurred) is the New Israeli
Shekel (NIS);
2) The opening balances for 1994 are the balances presented in the
Company's balance sheet at December 31, 1993;
3) Transactions performed from January 1, 1994 are presented on the
basis of their original amounts in Israeli currency.
The term "Re-measured NIS" signifies the currency used for FASB 52
purposes, as described above.
As to the effect of application of these rules - see (i) below.
As to the discontinuance of the adjustment of the financial statements
to the exchange rate of the dollar as from January 2004, see not 1b to
the financial statements.
b. Deferred income taxes
Under Israeli GAAP, no deferred taxes are provided for in respect of
certain long-lived (more than 20 years) assets, such as buildings and land.
Under U.S. GAAP, in accordance with the provisions of FAS 109, income taxes are
to be provided for any assets that have a different basis for financial
reporting and income tax purposes.
In addition, for U.S. GAAP purposes deferred taxes are to be provided
for with respect to un-remitted earnings of investee companies. Under Israeli
GAAP due to the Company's policy to hold its investments in investee companies,
and not to realize them, these temporary differences are considered differences
permanent in duration for which deferred taxes are not provided for.
Through 1999, as long as the main investments of the Company were
subsidiaries which were controlled by the Company, the Company did not provide
for deferred taxes also for U.S. GAAP
51
reporting purposes, since those differences were deemed to be not taxable due to
the tax free inter-company dividend distribution law in Israel and tax planning
on its behalf, accordingly.
As from 2000, due to changes in certain of the Company's investments
from subsidiaries to associated companies, deferred taxes were provided for any
portion that arose from investee companies sources other than pre-1993
undistributed earnings (taking into account the Company's tax strategy).
As to the effect of application of this treatment, see (i) below.
c. Employee stock option plans
Under Israeli GAAP, no compensation expenses are recorded in respect of
employee stock options.
Under U.S. GAAP, the Company accounts for employee stock based
compensation using the intrinsic value-based model of accounting prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. In accordance with FAS 123 -
"Accounting for Stock-Based Compensation" ("FAS 123"), the Company discloses pro
forma data assuming the Company had accounted for employee stock option grants
using the fair value-based method defined in FAS 123.
All of the Company's awards are considered to be variable awards; thus
the difference between the price of the shares at each balance sheet date and
the exercise price of such options is charged to income over the vesting period
and is adjusted in subsequent periods up to the measurement date (exercise or
expiration date). The amount of the difference is correspondingly presented as
capital surplus.
As to new accounting pronouncement relating to share-based compensation
see (l.) bellow.
Pro-forma disclosure
Had compensation cost for the employee stock options plans, been
determined based on the fair value at the grant date, consistent with the method
of FAS 123, the Company's net income and earnings per share would have been
changed to the pro - forma amounts indicated below:
Year ended December 31
---------------------------------------------
2004 2003 2002
--------- --------- ---------
NIS in thousands, except for per share data
Net income, as reported under U.S. GAAP 58,720 38,469 54,624
Add (deduct):
stock based employee compensation expense (income), included in
reported net income, net of related tax effect 8,458 8,132 (1,066)
Deduct:
stock based employee compensation expense determined under fair
value method for all awards, net of related tax effects (3,523) (4,055) (4,801)
--------- --------- ---------
Pro forma net income -under U.S. GAAP 63,655 42,546 48,757
--------- --------- ---------
Earnings per share - under U.S. GAAP:
Basic - as reported 14.76 9.77 13.94
Basic - pro forma 16.00 10.80 12.44
Diluted - as reported 14.52 9.69 13.89
Diluted - pro forma 15.74 10.72 12.40
52
The quoted price of the Company's ordinary shares on December 31, 2004 was NIS
238.3 ($55.0).
A summary of the status of the Company's plans as of December 31, 2004,
2003 and 2002, and changes during the years ended on those dates, is presented
below:
2004 2003 2002
------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Price Price Price
------- ------- ------
Number NIS Number NIS Number NIS
-------- ------- -------- ------- ------- ------
Options outstanding at
beginning of year 216,243 159.15 333,916 147.27 333,916 184.52
Changes during the year:
Exercised (64,140) 153.82 (116,175) 116.37
Expired (1,498) 98.62
-------- ------- -------- ------- ------- ------
Options outstanding at
end of year 152,103 132.74 216,243 159.15 333,916 147.27
======== ======= ======== ======= ======= ======
Options exercisable at
year-end *54,953 99.98 70,518 179.53 58,161 99.67
======== ======= ======== ======= ======= ======
* Represents the number of options fully vested as of December 31, 2004.
Based upon the Company's share market value as of December 31, 2004,
this reflects potentially 31,897 shares regarding the options
exercisable at year-end.
The fair value of the options granted was computed by the Black-Scholes
formula using the following assumptions: dividend yield of 0%; expected
volatility of 30.5%; risk-free interest rate (linked to the Israeli CPI) of 4.5%
and expected average life 5-5.5 years.
The following table summarizes information about options outstanding at December
31, 2004.
Options outstanding
------------------------------------------------------------------
Number Number of options
Range of outstanding at Average exercisable at
Exercise December 31, remaining December 31,
Prices 2004 contractual life 2004
------ ---- ---------------- ----
NIS Years
68.77 30,372 1.5 30,372
113.23 14,878 1.8 14,878
125.18 48,575 2.5
177.37 9,703 0.5 9,703
177.37 48,575 3.5
152,103 2.4 54,953
======= === ======
53
d. Earnings per share ("EPS")
Israeli GAAP relating to computation of EPS is described in note 1P to
the financial statements attached.
The EPS computation according to U.S. GAAP presented below is in
accordance with FAS 128.
As applicable to the Company, the main difference between the two
methods of EPS computation is that shares to be issued upon exercise of employee
stock options (under SAR plans) are taken into account in the computation of
basic EPS in Israel, whereas in the United States, in computing basic EPS, only
the weighted average number of company shares actually outstanding in the
reported period is taken into account, and shares to be issued upon exercise of
options are included in the computation of diluted EPS. Another difference is
the U.S. requirement for separate presentation - in the income statements - of
basic and diluted EPS as long as they are not identical, while, in Israel, such
separate presentation is only required if the difference between basic and
diluted EPS is in excess of 5%.
As to the effect of application of U.S. GAAP, see (i) below.
Following are data relating to the weighted average number of shares
for the purpose of computing basic and diluted earnings per share under U.S.
GAAP:
2004 2003 2002
--------- --------- ---------
Weighted average number of shares used in the
computation of basic earnings per share 3,978,339 3,938,035 3,918,710
Net additional shares from the assumed exercise of
employee stock options 65,375 31,673 14,570
--------- --------- ---------
Weighted average number of shares used in the
computation of diluted earnings per share 4,043,714 3,969,708 3,933,280
========= ========= =========
e. Investment in marketable equity securities accounted for by
the equity method (associated company) - Carmel Container
Systems (Carmel)
Under Israeli GAAP, an investment in an associated company is tested
for impairment under the provisions of Israeli Standard No. 15 of the Israeli
Accountant Standard Board - "Impairment of Assets" (see note 1h to the financial
statements). Based on the provisions of this Standard, and as explained in note
2e to the financial statements, the Company determined that the recoverable
value of the investment in Carmel exceeds its carrying value (based, among
other, on its Discounted Cash Flows), and accordingly, the investment was not
written down.
Under U.S. GAAP (APB 18 - "The Equity Method of Accounting for
Investments in Common Stock") and SEC Staff Accounting Bulletin (SAB) No. 59
("Accounting for Noncurrent Marketable Equity Securities"), a decline in value
of investment in an associated company which is other than temporary was
recognized as a realized loss in 2003, establishing a new carrying value for the
investment. Factors considered in determining that a decline is other than
temporary included, among other, the length of time and the extent to which the
market value has been less than the carrying value of the investment. The
relevant market value for determining the impairment loss is the market value at
December 31, 2003.
Therefore, although according to the Israeli GAAP the recoverable value
of this investment exceeds
54
its carrying value (see above) under U.S. GAAP and SEC rules described above,
the decline in the market value of Carmel shares was the significant factor in
determining other than temporary decline. Accordingly, for U.S.GAAP reporting,
since the decline in the market value of Carmel was long and extensive, the
Company reduced the carrying value of this investment to its market value as of
December 31, 2003 and recorded an impairment loss amounting NIS 16,986,000 (see
also share in profits of associated companies under U.S. GAAP in Item 3 above).
Under US GAAP- Since there is no goodwill or non amortizable assets,
the impairment is attributed only to Carmel's fixed assets; therefore the
Company amortizes the impairment at the rates applicable to Carmel's fixed
assets. The amortization of the impairment, as above, resulted in an increase in
the share in profits of the associated company amounting to NIS 1,699 thousands
in 2004.
f. Statements of income presentation
Under Israeli GAAP, the Company included, in the statements of income
for the years ended December 31, 2002 and 2003, under "other income (expenses)",
in 2002 - loss from closure of facilities and disposal of assets and closing
inventories and in 2003 - gain from sale of apartments.
Under U.S. GAAP, the loss from inventories should be classified as part
of cost of sales and loss from closure of facilities, disposal of assets and
sale of apartments should be classified as part of operating income.
These adjustments were included in the reconciliation to the U.S. GAAP
(see operating income under U.S. GAAP in Item 3 above).
g. Accounting for guarantees
The Group's applies for U.S. GAAP purposes the provisions of FASB
interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others " ("FIN
45").
FIN 45 applies to guarantees either granted or amended after December 31, 2002.
Applying FIN 45 has not had a material effect on the Company.
h. Supplemental disclosure on employee rights upon retirement
The Company and its subsidiaries expects to contribute in 2005 NIS
8,400 thousands to the provident funds and to the insurance companies in respect
of its severance pay obligations.
i. The effect of applying U.S. GAAP on the consolidated financial
statements is as follows:
1) Consolidated statement of income figures:
55
Year ended December 31
-----------------------------------
2004 2003 2002
------- ------- -------
NIS in thousands
(except per share data)
Net income, as reported according to Israeli GAAP 62,732 60,047 37,460
Effect of treatment of the following items in accordance with U.S. GAAP:
Functional currency* 4,827 8,243 33,254
Deferred income taxes - net (2,080) (4,703) (17,156)
Year ended December 31
-----------------------------------
2004 2003 2002
------- ------- -------
NIS in thousands
(except per share data)
Other then temporary impairment of an investment in an associated company (16,986)
Amortization of other then temporary impairment of an investment in
an associated company 1,699
Applying APB 25 in respect of employee stock options:
Gross amount (12,660) (12,705) 1,667
Deferred taxes 4,202 4,573 (601)
------- ------- -------
Net income under U.S. GAAP 58,720 38,469 54,624
======= ======= =======
Earnings per share:
Under Israeli GAAP - net income per NIS 1 of par value of shares
Primary** 1,544 1,494 947
======= ======= =======
Under U.S. GAAP - per share:
Basic 14.76 9.77 13.94
======= ======= =======
Diluted 14.52 9.69 13.89
======= ======= =======
* In 2002 including exchange rate differences from the end of the year,
to December 31, 2003.
** Each NIS 1 par value is composed of 100 ordinary shares of NIS 0.01 par
value.
2) Shareholders' equity:
December 31
-----------------------
2004 2003
-------- --------
In thousands
Shareholders' equity according to Israeli GAAP 575,313 614,230
Effect of treatment of the following items in accordance with US GAAP:
Functional currency (47,798) (57,224)
Other then temporary impairment of an investment in an
associated company, net of amortization (15,287) (16,986)
Deferred income taxes 8,254 10,334
-------- --------
Shareholders' equity under US GAAP 520,482 550,354
======== ========
56
3) Consolidated balance sheet figures:
D e c e m b e r 3 1
-------------------------------------------------------------
2004 2003
------------------------- -------------------------
NIS Re-measured NIS NIS Re-measured NIS
------- ------- ------- -------
In thousands
-------------------------------------------------------------
As Reported Under As Reported Under
Israeli GAAP Under U.S. GAAP Israeli GAAP Under U.S. GAAP
------- ------- ------- -------
Assets
Inventories 83,220 71,344 90,654 75,308
======= ======= ======= =======
Investment in associated companies 431,752 418,787 383,879 366,376
======= ======= ======= =======
Fixed assets - net 324,406 285,851 325,641 283,831
======= ======= ======= =======
Liabilities and shareholders' equity
Deferred taxes - net 40,693 33,132 50,789 41,024
======= ======= ======= =======
Shareholders' equity 575,313 520,482 614,230 550,354
======= ======= ======= =======
j. Statement of cash flows
The Company presents its cash flow information, under Israeli GAAP net
of the effects of inflation.
The information to be included under US GAAP for the years ended
December 31, 2002, 2003 and 2004 is presented below:
2004 2003 2002
-------- -------- --------
NIS
------------------------------------------------
In thousands
------------------------------------------------
Net cash provided by operating activities 29,593 53,895 81,587
Net cash used in investing activities (42,043) (32,261) (43,682)
Net cash provided by (used in) financing activities (138,946) 125,517 (47,901)
Effect of inflation and exchange difference on
cash and cash equivalent 503 5,649 12,056
-------- -------- --------
Increase (decrease) in cash and cash
equivalents (150,893) 152,800 2,060
Balance of cash and cash equivalents
at beginning of year 158,706 5,906 3,846
-------- -------- --------
Balance of cash and cash equivalents
at end of year 7,813 158,706 5,906
======== ======== ========
57
k. Reporting comprehensive Income
In addition to net income, comprehensive income includes translation of
foreign currency financial statements of an investee company, as
follows:
Year Ended December 31
--------------------------
2004 2003
------- -------
Re-measured NIS
in thousands
--------------------------
Net income under U.S. GAAP 58,720 38,469
Differences from translation of foreign currency
financial statements of an investee company (1,288) (2,506)
------- -------
Comprehensive income 57,432 35,963
======= =======
As of December 31, 2004 the accumulated other comprehensive income
aggregates to (1,370) re-measured NIS, in thousands.
Recently issued accounting pronouncements:
1) FAS 123 (revised 2004)Share-based Payment
In December 2004, the Financial Accounting Standards Board ("FASB")
issued the revised Statement of Financial Accounting Standards ("FAS") No. 123,
Share-Based Payment (FAS 123R), which addresses the accounting for share-based
payment transactions in which the Company obtains employee services in exchange
for (a) equity instruments of the Company or (b) liabilities that are based on
the fair value of the Company's equity instruments or that may be settled by the
issuance of such equity instruments. This Statement eliminates the ability to
account for employee share-based payment transactions using APB 25, and requires
instead that such transactions be accounted for using the grant-date fair value
based method. This Statement will be effective as of the beginning of the first
annual reporting period that begins after June 15, 2005. Early adoption of FAS
123R is encouraged. The company decided to adopt this statement on January 1,
2006. This Statement applies to all awards granted or modified after the
Statement's effective date. In addition, compensation cost for the unvested
portion of previously granted awards that remain outstanding on the Statement's
effective date shall be recognized on or after the effective date, as the
related services are rendered, based on the awards' grant-date fair value as
previously calculated for the pro-forma disclosure under FAS 123 (see also c.
above).
The Company expects that upon the adoption of FAS 123R, the Company
will apply the modified prospective application transition method, as permitted
by the Statement. Under such transition method, upon the adoption of FAS 123R,
the Company's financial statements for periods prior to the effective date of
the Statement will not be restated.
The company expects that this statement may have material effect on
it's financial position and results of operations. The impact of this statement
on the Company's financial statements or its results of operations in 2006 and
beyond will depend upon various factors, among them the Company's future
compensation strategy.
58
FAS 151 Inventory Costs - an amendment of ARB 43, Chapter 4
In November 2004, the FASB issued FAS No. 151, "Inventory Costs - an amendment
of ARB 43, Chapter 4" (FAS 151). This Statement amends the guidance in ARB No.
43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
This Statement requires that those items be recognized as current-period
charges. In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. This Statement will be effective for inventory
costs incurred during fiscal years beginning after June 15, 2005 (January 1,
2006 for the Company). Earlier application of FAS 151 is permitted. The
provisions of this Statement shall be applied prospectively. The Company does
not expect this Statement to have a material effect on the Company's financial
statements or its results of operations.
FAS 153 Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29
In December 2004, the FASB issued FAS No. 153, Exchanges of Nonmonetary Assets -
An Amendment of APB Opinion No. 29 (FAS 153). FAS 153 amends APB Opinion No. 29,
Accounting for Nonmonetary Transactions (Opinion 29). The amendments made by FAS
153 are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the exception for nonmonetary exchanges of similar
productive assets and replace it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The provisions in FAS
153 are effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005 (July 1, 2005 for the Company). Early application
of the FAS 153 is permitted. The provisions of this Statement shall be applied
prospectively. The Company does not expect the adoption of FAS 153 to have a
material effect on the Company's financial statements or its results of
operations.
EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments"
In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
which provides new guidance for assessing impairment losses on debt and equity
investments. Additionally, EITF Issue No. 03-1 includes new disclosure
requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of EITF Issue No.
03-1; however, the disclosure requirements remain effective. The Company will
evaluate the effect, if any, of EITF Issue No. 03-1 when final guidance is
released
EITF Issue 02-14, Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock
In July 2004, the FASB issued EITF Issue No. 02-14, "Whether an
Investor Should Apply the Equity Method of Accounting to Investments Other Than
Common Stock." EITF Issue No. 02-14 addresses whether the equity method of
accounting applies when an investor does not have an investment in voting common
stock of an investee but exercises significant influence through other means.
EITF Issue No. 02-14 states that an investor should only apply the equity method
of accounting when it has investments in either common stock or in-substance
common stock of the investee, provided that the investor has the ability to
exercise significant influence over the operating and financial policies of the
investee. The provisions in EITF Issue No. 02-14 are effective for reporting
periods beginning after September 15, 2004
59
(October 1, 2004 for the Company). The adoption of EITF 02-14 by the Company did
not have any effect on the Company's financial statements or its results of
operations.
Schedule - Valuation and Qualifying Accounts
Three Years Ended December 31, 2004
(NIS in thousands)
Column A Column B Column C Column D Column E
Balance at beginning Additions Balance at
of period (reductions) Deductions end of period
charged to
expenses
----------------------- ---------------- --------------- -------------------
Allowance for doubtful accounts:
Year ended December 31, 2004 13,696 3,102 (650) 16,148
======================= ================ =============== ===================
Year ended December 31, 2003 12,752 944 -- 13,696
======================= ================ =============== ===================
Year ended December 31, 2002 11,538 1,230 (16) 12,752
======================= ================ =============== ===================
60
ITEM 19 - EXHIBITS
(a) The following financial statements and supporting documents are filed with
this report:
(i) Consolidated Audited Financial Statements of the Company for
the year ended December 31, 2004 (including reports of other
independent auditors).
(ii) Financial statements of Mondi Business Paper Hadera Ltd. for
the year ended December 31, 2004.
(iii) Financial statements of Hogla-Kimberly Ltd. for the year ended
December 31, 2004.
(iv) Report of independent accountants on Schedule on Valuation and
Qualifying Accounts and Schedule.
(v) Report of Independent auditors on reconciliation to U.S. GAAP.
(b) Exhibits:
1.1* Memorandum of Association
1.2** Articles of Association
3.1*** Voting Agreement dated February 5, 1980 by and among Clal Industries
Ltd., PEC Israel Economic Corporation and Discount Bank Investment
Corporation Ltd.
31.1 Certification of Chief Executive Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant to ss. 302 of the Sarbanes-Oxley
Act.
31.2 Certification of Chief Financial Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant to ss. 302 of the Sarbanes-Oxley
Act.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.ss.1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.ss.1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act.
* Previously filed as an exhibit to the Company's Annual Report on Form
20-F for the year ended December 31, 1987, file No. 1-4212, and
incorporated by reference herein.
** Previously filed as an exhibit to the Company's Annual Report on Form
20-F for the year ended December 31, 2000, file No. 1-4212, filed with
the SEC in June 2001 and incorporated by reference herein.
*** Incorporated by reference to the exhibit number 3.1 in the Company's
form 20-F for the year ended December 31, 1987.
61
SIGNATURES
Pursuant to the requirement of Section 12 of the Securities Exchange
Act of] 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN ISRAELI PAPER MILLS LIMITED
By: /s/ Lea Katz
--------------------------------
Name: Lea Katz
Title: Corporate Secretary
Dated: June 28, 2005
62
EXHIBIT INDEX
1.1* Memorandum of Association
1.2** Articles of Association
3.1*** Voting Agreement dated February 5, 1980 by and among Clal Industries
Ltd., PEC Israel Economic Corporation and Discount Bank Investment
Corporation Ltd. 8.1 List of subsidiaries
31.1 Certification of Chief Executive Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant to ss. 302 of the Sarbanes-Oxley
Act.
31.2 Certification of Chief Financial Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant to ss. 302 of the Sarbanes-Oxley
Act.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.ss.1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.ss.1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act.
* Previously filed as an exhibit to the Company's Annual Report on Form
20-F for the year ended December 31, 1987, file No. 1-4212, and
incorporated by reference herein.
** Previously filed as an exhibit to the Company's Annual Report on Form
20-F for the year ended December 31, 2000, file No. 1-4212, filed with
the SEC in June 2001 and incorporated by reference herein.
*** Incorporated by reference to the exhibit number 3.1 in the Company's
form 20-F for the year ended
92
EXHIBIT 19(a)(i)
----------------
BAR-LEV, MERRARI, GEVA & CO. C.P.A (ISR.)
--------------------------------------------------------------------------------
ADUITORS' REPORT
To the Shareholders of
EFFEH LANDFILL LTD.
We have audited the balance sheets of EFFEH Landfill Ltd. (hereafter - the
Company) as of December 31, 2004 and 2003 and the related statements of
operations, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2004 and 2003, and the results of operations and the cash flows for each of the
two years in the period ended December 31, 2004, in conformity with generally
accepted accounting principles in Israel. Furthermore, in our opinion, the
financial statements referred to above are prepared in accordance with the
Securities Regulation (Preparation of Annual Financial Statements), 1993.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have no significant affect the
determination of the results of operations for the years ended December 31, 2004
and 2003.
The above opinion is a mere translation of the Hebrew version of the opinion as
given in the aforementioned date.
/s/ BAR-LEV, MERRARI, GEVA & CO.
BAR-LEV, MERRARI, GEVA & CO.
Certified Public Accountants (Israel)
Tel Aviv, February 9, 2005
[GRAPHIC OMITTED]
|X| Kost Forer Gabbay & Kasierer |X| Phone: 972-4-8654000
2 Pal-yam Fax: 972-4-8654022
Haifa 33095, Israel
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
CARMEL CONTAINER SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of Carmel
Container Systems Ltd. ("the Company") and its subsidiaries as of December 31,
2003 and 2004, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of a subsidiary whose assets
constitute approximately 10% and 9% of total consolidated assets as of December
31, 2003 and 2004 respectively, and whose revenues constitute approximately 9%,
10% and 8% of total consolidated revenues for the years ended December 31, 2002,
2003 and 2004 respectively. The financial statements of this subsidiary were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to amounts included for this subsidiary is based
on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and standards generally
accepted in the Israel, including those prescribed by the Israeli Auditors'
Regulations (Auditor's Mode of Performance), 1973. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2003 and 2004, and the consolidated results of
their operations, changes in shareholder's equity and cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in Israel, which differ in certain respects from
those generally accepted in the United States (see Note 21 to the consolidated
financial statements).
As described in Note 2b, the financial statements as of the dates and for
the reported periods subsequent to December 31, 2003, are presented in reported
amounts, in conformity with Accounting Standards of the Israel Accounting
Standards Board. The financial statements as of the dates and for the reported
periods until the aforementioned date are presented in values that were adjusted
until that date according to the changes in the general purchasing power of the
Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.
/s/ KOST FORER GABBAY & KASIERER
Haifa, Israel, KOST FORER GABBAY & KASIERER
February 24, 2005 A Member of Ernst & Young Global
[GRAPHIC OMITTED]
|X| Kost Forer Gabbay & Kasierer |X| Phone: 972-4-8654000
2 Pal-yam Fax: 972-4-8654022
Haifa 33095, Israel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
BARTHELEMI HOLDINGS LTD.
We have audited the accompanying balance sheets of Barthelemi Holdings
Ltd. ("the Company") as of December 31, 2004 and 2003 and the consolidated
balance sheets as of such dates and the related statements of operations,
changes in shareholders' equity and cash flows - of the Company and consolidated
- for each of the three years in the period ended December 31, 2004 (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose
assets included in consolidation constitute approximately 4% of total
consolidated assets as of December 31, 2004 and 2003, and whose revenues
included in consolidation constitute approximately 6%, 7% and 11% of total
consolidated revenues for the years ended December 31, 2004, 2003 and 2002,
respectively. Furthermore, we did not audit the financial statements of an
affiliate, the investment in which, at equity, amounted to NIS 19,673 thousand
and NIS 19,829 thousand as of December 31, 2004 and 2003, respectively, and the
Company's equity in its losses amounted to NIS 156 thousand and NIS 14 thousand
for the years ended December 31, 2004 and 2003, respectively. The financial
statements of those companies were audited by other auditors, whose reports have
been furnished to us, and our opinion, insofar as it relates to amounts included
for those companies, is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position - of the Company and consolidated - as of
December 31, 2004 and 2003, and the results of operations, changes in
shareholders' equity and cash flows - of the Company and consolidated - for each
of the three years in the period ended December 31, 2004, in conformity with
generally accepted accounting principles in Israel which differ in certain
respects from those generally accepted in the United States, as described in
Note 23 to the consolidated financial statements.
/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 8, 2005 A Member of Ernst & Young Global
[LOGO OMITTED]
To the shareholders of
M.M.M United Landfill Industries (1998) Ltd
We have audited the financial statements of M.M.M United Landfill Industries
(1998) Ltd. (hereafter - the Company): balance sheets as of December 31, 2004
and 2003 and the related statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2004. These financial statements are the responsibility of the Company's board
of directors and management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2004 and 2003 and the results of operations, the changes in
shareholders' equity and the cash flows of the Company for each of the three
years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have no significant affected the
determination of the results of operations for the three years in the period
ended December 31, 2004.
We draw attention to the said in note 1D regarding the end of the program period
(TMA 16A Dudaim Site) in December 31, 2005. The company is currently in
procedures to extend the aforementioned program.
The above opinion is a mere translation of the Hebrew version of the opinion as
given in the aforementioned date.
/s/ Mualem Glezer Inbar Junio & Co.
Mualem Glezer Inbar Junio & Co.
Certified Public Accountants (Israel) Ramat-Gan, February 14, 2005
[OBJECT OMITTED]
[GRAPHIC OMITTED]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
TMM INTEGRATED RECYCLING INDUSTRIES LTD.
We have audited the balance sheets of TMM Integrated Recycling Industries
Ltd. ("the Company") as of December 31, 2004 and 2003 and the consolidated
balance sheets as of such dates and the related statements of operations,
changes in shareholders' equity, and cash flows - of the Company and
consolidated - for each of the three years in the period ended December 31, 2004
(not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose
assets included in consolidation constitute approximately 4% of total
consolidated assets as of December 31, 2004 and 2003, and whose revenues
included in consolidation constitute approximately 6%, 7% and 11% of total
consolidated revenues for the years ended December 31, 2004, 2003 and 2002,
respectively. Furthermore, we did not audit the financial statements of an
affiliate, the investment in which, at equity, amounted to NIS 19,673 thousand
and NIS 19,829 thousand as of December 31, 2004 and 2003, respectively, and the
Company's equity in its losses amounted to NIS 156 thousand and NIS 14 thousand
for the years ended December 31, 2004 and 2003, respectively. The financial
statements of those companies were audited by other auditors, whose reports have
been furnished to us, and our opinion, insofar as it relates to amounts included
for those companies, is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position - of the Company and consolidated - as of
December 31, 2004 and 2003, and the results of operations and cash flows - of
the Company and consolidated - for each of the three years in the period ended
December 31, 2004, in conformity with generally accepted accounting principles
in Israel. Furthermore, in our opinion, the financial statements referred to
above are prepared in accordance with the Securities Regulations (Preparation of
Annual Financial Statements), 1993.
/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 8, 2005 A Member of Ernst & Young Global
AMERICAN ISRAELI PAPER MILLS LIMITED
2004 CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN ISRAELI PAPER MILLS LIMITED
2004 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT AUDITORS 2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 3-4
Statements of income 5
Statements of changes in shareholders' equity 6
Statements of cash flows 7-8
Notes to financial statements 9-40
SCHEDULE - DETAILS OF SUBSIDIARIES AND
ASSOCIATED COMPANIES 41
---------------
-------------------------------
---------------
PricewaterhouseCoopers Kesselman & Kesselman
Certified Public Accountants
Trade Tower, 25 Hamered Street
Tel Aviv 68125 Israel
P.O Box 452 Tel Aviv 61003
Telephone +972-3-7954555
Facsimile +972-3-7954556
AUDITORS' REPORT
To the shareholders of
AMERICAN ISRAELI PAPER MILLS LIMITED
We have audited the consolidated balance sheets of American Israeli Paper Mills
Limited (hereafter - the Company) and its subsidiaries as of December 31, 2004
and 2003 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Company's board of directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain associated companies, the
Company's interest in which as reflected in the balance sheets as of December
31, 2004 and 2003 is NIS 353.1 million and NIS 299.3 million, respectively, and
the Company's share in excess of profits over losses of which is a net amount of
NIS 25.0 million, NIS 28.2 million and NIS 10.2 million for the years ended
December 31, 2004, 2003 and 2002, respectively. The financial statements of
those companies were audited by other auditors whose reports have been furnished
to us, and our opinion, insofar as it relates to amounts included for those
companies, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in Israel and in the standards of the Public Company Accounting Oversight Board
(United States), including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Company's board of directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company and its subsidiaries as of
December 31, 2004 and 2003 and the consolidated results of operations, changes
in shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted ("GAAP") in Israel. Furthermore, in our opinion, the financial
statements referred to above have been prepared in accordance with the Israeli
Securities (Preparation of Annual Financial Statements) Regulations, 1993.
As explained in note 1b the financial statements, as of dates and for reporting
periods subsequent to December 31, 2003, are presented in New Israeli Shekels,
in conformity with accounting standards issued by the Israel Accounting
Standards Board. The financial statements as of dates and for reporting periods
ended prior to, or on the above date, are presented in values that have been
adjusted for the changes in the exchange rate of the U.S. dollar, through that
date, in accordance with pronouncements of the Institute of Certified Public
Accountants in Israel.
Tel-Aviv, Israel /s/ Kesselman & Kesselman
March 10, 2005
2
AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED BALANCE SHEETS
December 31
-----------------------------------
Note 2004 2003
---- ---------------- -----------------
NIS in thousands (see note 1b.)
-----------------------------------
A s s e t s
CURRENT ASSETS: 8
Cash and cash equivalents 1o 7,813 158,706
Short-term investments 10a;1f 62,464 20,000
Accounts receivable: 10b
Trade 143,275 140,996
Other 101,840 128,246
Inventories 10c 83,220 90,654
--------- ---------
T o t a l current assets 398,612 538,602
--------- ---------
INVESTMENT AND LONG TERM
RECEIVABLES:
Investments in associated companies 2;8 431,752 383,879
Deferred income taxes 7f 6,511 3,885
--------- ---------
438,263 387,764
--------- ---------
FIXED ASSETS: 3
Cost 974,462 953,656
L e s s - accumulated depreciation 650,056 628,015
--------- ---------
324,406 325,641
--------- ---------
DEFERRED CHARGES,
net of accumulated amortization 1i 1,106 1,267
--------- ---------
T o t a l assets 1,162,387 1,253,274
========= =========
) Chairman of the
-------------------------------------------
Yaki Yerushalmi ) Board of Directors
)
-------------------------------------------
Avi brener ) Chief Executive Officer
)
-------------------------------------------
Israel Eldar ) Controller
Date of approval of the financial statements: March 10, 2005.
The accompanying notes are an integral part of the financial statements.
3
December 31
-------------------------------
Note 2004 2003
---- -------------- ---------------
NIS in thousands (see note 1b.)
---------------------------------------
Liabilities and shareholders' equity
CURRENT LIABILITIES: 8
Credit from banks 10d 112,684 144,989
Current maturities of long-term notes 4a 6,648 6,590
Accounts payable and accruals:
Trade 87,556 84,602
Other 10e 66,355 73,010
--------- ---------
T o t a l current liabilities 273,243 309,191
--------- ---------
LONG-TERM LIABILITIES:
Deferred income taxes 7f 52,562 61,801
Loans and other liabilities
(net of current maturities): 4;8
Notes 228,499 233,039
Other liabilities 32,770 35,013
--------- ---------
T o t a l long-term liabilities 313,831 329,853
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES 9
T o t a l liabilities 587,074 639,044
--------- ---------
SHAREHOLDERS' EQUITY: 6
Share capital (ordinary shares of NIS 0.01 par value: 125,257 125,257
authorized - 20,000,000 shares; issued and paid:
December 31, 2004 and 2005 - 3,996,674 and
3,968,295 shares, respectively)
Capital surplus 90,060 90,060
Currency adjustments in respect of financial statements
of associated companies (2,807) (1,122)
Retained earnings 362,803 400,035
575,313 614,230
--------- ---------
T o t a l liabilities and shareholders' equity 1,162,387 1,253,274
========= =========
The accompanying notes are an integral part of the financial statements.
4
AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF INCOME
Note 2004 2003 2002
------ ------- ------- ------
NIS in thousands (see note 1b.)
SALES - net 10f;14 482,854 465,092 455,775
COST OF SALES 10g 375,904 362,185 363,771
------- ------- ------
GROSS PROFIT 106,950 102,907 92,004
------- ------- ------
SELLING, MARKETING, ADMINISTRATIVE
AND GENERAL EXPENSES: 10h
Selling and marketing 30,595 31,324 29,167
Administrative and general 22,425 24,999 26,382
------- ------- ------
53,020 56,323 55,549
------- ------- ------
INCOME FROM ORDINARY OPERATIONS 53,930 46,584 36,455
FINANCIAL EXPENSES - net 10i 13,118 15,989 2,988
OTHER INCOME (EXPENSES) 10j 1,609 (2,942)
------- ------- ------
INCOME BEFORE TAXES ON INCOME 40,812 32,204 30,525
TAXES ON INCOME 7 3,152 7,706 9,792
------- ------- ------
INCOME FROM OPERATIONS OF THE
COMPANY AND ITS SUBSIDIARIES 37,660 24,498 20,733
SHARE IN PROFITS OF ASSOCIATED
COMPANIES - net 2 25,072 35,549 16,727
------- ------- ------
NET INCOME FOR THE YEAR 62,732 60,047 37,460
======= ======= ======
NIS
--------------------------------------
NET INCOME PER NIS 1 OF PAR VALUE
OF SHARES 1p;11 1,544 1,494 947
======= ======= ======
The accompanying notes are an integral part of the financial statements.
5
AMERICAN ISRAELI PAPER MILLS LIMITED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Currency
adjustments
in respect
of financial
statements of
Share Capital associated Retained
Capital surplus companies earnings Total
------- ------- --------- -------- -----
NIS in thousands (see note 1b.)
BALANCE AT JANUARY 1, 2002 125,256 90,060 (3,175) 422,332 634,473
CHANGES IN 2002:
Net income 37,460 37,460
Dividend paid (20,676) (20,676)
Currency adjustments in respect of financial
statements of associated companies (307) (307)
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 2002 125,256 90,060 (3,482) 439,116 650,950
CHANGES IN 2003:
Net income 60,047 60,047
Dividend paid (99,128) (99,128)
Exercise of employee options into shares 1 1
Currency adjustments in respect of financial
statements of associated companies 2,360 2,360
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 2003 125,257 90,060 (1,122) 400,035 614,230
======= ====== ====== ======= =======
CHANGES IN 2004:
Net income 62,732 62,732
Dividend paid (99,964) (99,964)
Exercise of employee options into shares * *
Currency adjustments in respect of financial
statements of associated companies (1,685) (1,685)
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 2004 125,257 90,060 (2,807) 362,803 575,313
======= ====== ====== ======= =======
*Represents an amount less than NIS 1,000.
The accompanying notes are an integral part of the financial statements.
6
(Continued) - 1
AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
2004 2003 2002
------- ------- -------
NIS in thousands (see note 1b.)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the year 62,732 60,047 37,460
Adjustments to reconcile net income to
net cash provided by operating activities (*) (15,637) (7,396) 39,718
------- ------- -------
Net cash provided by operating activities 47,095 52,651 77,178
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (30,952) (29,247) (46,807)
Short-term investments (42,000) (20,000)
Associated companies:
Granting of loans (779) (8,241) (3,302)
Collection of loans 13,688 21,895
Proceeds from sale of fixed assets 1,001 3,332 9,729
------- ------- -------
Net cash used in investing activities (59,042) (32,261) (40,380)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes issuance, net of issuance expenses of NIS 800,000 198,909
Consideration in respect of the exercise of options by employees 1
Repayment of long-term loans from banks and others (383) (762) (1,038)
Redemption of notes (6,666) (6,770) (5,960)
Dividend paid (99,964) (99,128) (20,676)
Short-term credit from banks - net (31,933) 40,606 (7,219)
------- ------- -------
Net cash provided by (used in) financing activities (138,946) 132,856 (34,893)
------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (150,893) 153,246 1,905
BALANCE OF CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 158,706 5,460 3,555
------- ------- -------
BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF YEAR 7,813 158,706 5,460
======= ======= =======
The accompanying notes are an integral part of the financial statements.
7
(Concluded) - 2
AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
2004 2003 2002
------- ------- -------
NIS in thousands (see note 1b.)
(*) Adjustments to reconcile net income to net cash provided by operating
activities: Income and expenses not involving cash flows:
Share in profits of associated companies - net (25,072) (35,549) (16,727)
Dividend received from associated company 16,391 21,852
Depreciation and amortization 28,633 28,247 26,809
Deferred income taxes - net (10,096) 3,471 3,703
Capital losses (gains) on:
Sale of fixed assets 508 (2,054) (137)
Termination of activities and disposal of assets - net 1,345
Gains on short-term deposits and investments not yet realized (464)
Linkage and exchange differences on principal of
long-term loans from banks - net (26) 79 (17)
Linkage differences on (erosion of) principal of Notes 2,184 3,110 (524)
Erosion of (linkage differences on) principal of
long-term loans to associated companies (721) (1,101) 153
Appreciation (erosion) of a long-term capital note granted to
an associated company 2,477 (2,202)
------- ------- -------
5,054 15,071 34,255
------- ------- -------
Changes in operating asset and liability items:
Increase in trade receivables (2,279) (9,260) (15,064)
Decrease (increase) in other receivables
(not include deferred income taxes) (12,037) (8,935) 3,394
Decrease (increase) in inventories 7,434 (159) 22,060
Increase (decrease) in trade payables 2,954 (14,653) 11,180
Increase (decrease) in other payables and accruals (6,655) 10,540 (16,107)
------- ------- -------
(10,583) (22,467) 5,463
------- ------- -------
(15,637) (7,396) 39,718
======= ======= =======
Supplementary cash flow information - cash paid during the year for:
Taxes on income 3,242 11,553 26,711
======= ======= =======
Interest 20,697 11,335 9,839
======= ======= =======
Information on activities not involving cash flows:
In 2004, equipment, which the company did not find suitable for its use, was
retired. The retirement was made against the cancellation of the loan made
available by the supplier in respect of said equipment. The retirement amounted
to NIS 1,079,000.
The accompanying notes are an integral part of the financial statements.
8
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, which, except for the changes required
by the transition to nominal financial reporting in 2004 - see b(1) and
b(4) below, were applied on a consistent basis, are as follows:
a. General:
1) Activities of the Group
American Israeli Paper Mills Limited (hereafter - the Company)
and its subsidiaries and associated companies (hereafter - the
Group) are engaged in the production and sale of paper and paper
products, including paper recycling activities and handling solid
waste. Certain companies are engaged in the marketing of office
supplies and in the sale of products produced by others (some of
which are not paper or paper products). Most of the Group's sales
are made to the local market (Israel). As to information by
operating segments, see note 14.
2) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets
and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
years. Actual results could differ from those estimates.
3) Definitions:
Subsidiaries - companies over which the Company has control and
over 50% of the ownership, the financial statements of which have
been consolidated with the financial statements of the Company.
Associated companies - investee companies, which are not
subsidiaries, over whose financial and operational policy the
Company exerts material influence, the investment in which is
presented by the equity method. Material influence is deemed to
exist when the percentage of holding in said company is 20% or
more, unless there are circumstances that contradict this
assumption.
Interested parties - as defined in the Israeli Securities
(Preparation of Annual Financial Statements) Regulations, 1993.
9
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
b. Basis of presentation of the financial statements
The Company draws up and presents its financial statements in Israeli
currency (hereafter - shekels or NIS).
Commencing in 2004, the adjustment of financial statements in Israel
for the changes in the exchange rate of the US dollar was
discontinued, and transitory provisions for financial reporting on a
nominal basis began being applied, as explained below; notwithstanding
the above, the comparative figures included in these financial
statements are based on the amounts adjusted for the changes in the
exchange rate of the US dollar, as previously reported; in the case of
the Company, these figures represented adjustment to inflation by way
of adjustment of the amounts for the changes in the exchange rate of
the US dollar (hereafter - the dollar), see (2) below.
1) Transition to nominal financial reporting in 2004
With effect from January 1, 2004, the company has adopted the
provisions of Israel Accounting Standard No. 12 -"Discontinuance
of Adjusting Financial Statements for Inflation" - of the Israel
Accounting Standards Board (hereafter -the IASB) and, pursuant
thereto, the company has discontinued, from the aforesaid date,
the adjustment of its financial statements for the changes in the
exchange rate of the dollar against the shekel.
The amounts adjusted for the changes in the exchange rate of the
dollar against the shekel (see (2) below), presented in the
financial statements as of December 31, 2003 (hereafter - "the
transition date"), were used as the opening balances for the
nominal financial reporting in the following periods. Additions
made after the transition date have been included in the
financial statements at their nominal values.
Accordingly, the amounts reported in 2004 are composed as
follows: amounts originating from the period that preceded the
transition date are composed of their adjusted to December 2003
shekel amount, with the addition of amounts in nominal values
that were added after the transition date, and net of amounts
that were deducted after the transition date (the retirement of
such sums is effected at their adjusted values as of transition
date, their nominal values, or a combination of the two,
according to the circumstances). All the amounts originating from
the period after the transition date are included in the
financial statements at their nominal values.
10
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
2) Comparative figures - amounts adjusted to end of 2003
Through December 31, 2003, the Company prepared its financial
statements on the basis of historical cost adjusted for the
changes in the exchange rate of the dollar, as permitted under
Opinion 36 of the Institute of Certified Public Accountants in
Israel (hereafter - the Israeli Institute) for companies whose
shares are traded on the stock exchange of a foreign country. The
Company's shares are traded in the United States on the AMEX.
The comparative figures included in these financial statements
are based on the amounts included for the prior reporting
periods, as adjusted for the changes in the exchange rate of the
dollar, stated at the exchange rate at December 31, 2003 (the
exchange rate in effect at the transition date).
The components of the income statements were, for the most part,
adjusted as follows: the components relating to transactions
carried out during the reported period - sales, purchases, labor
costs, etc. - were adjusted on the basis of the date in which the
transaction was carried out, while those relating to non-monetary
balance sheet items (mainly - changes in inventories and
depreciation) were adjusted on the same basis as the related
balance sheet item. The financing component represents financial
income and expenses in real terms and the erosion of balances of
monetary items during the year.
The investment in some of the associated companies (whose
operations constitute an integral part of the Company's
operations) and the company's share in their operating results
are recorded on the basis of the adjusted financial statements
(in accordance with the provisions of Standard No. 12, as
described above) of these companies. As to associated companies
whose financial statements were adjusted until December 31, 2003
on the basis of the changes in the CPI, see (4) below.
3) The amounts of non-monetary assets do not necessarily represent
realization value or current economic value, but only the
reported amounts of such assets, as described in (1) above. In
these financial statements, the term "cost" signifies cost in
reported amounts.
4) Associated companies whose financial statements are adjusted on
the basis of the changes in the Israeli CPI
For purposes of inclusion on the equity basis, until December 31,
2003, the amounts included in the financial statements of the
above associated companies operating independently were treated
as follows:
Balance sheet items at the end of the year and the results of
operations for the year reflect the amounts presented in the
financial statements of such companies. Balance sheet items at
the beginning of the year and changes in shareholders' equity
items during the year were adjusted on the basis of the changes
in the exchange rate of the dollar at the beginning of the year
or at the date of each change, respectively, through the end of
the year. Any differences resulting from the treatment described
above were carried to the adjusted shareholders' equity under a
separate item ("currency adjustments in respect of financial
statements of associated companies").
11
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
As from January 1, 2004, no additional differences have been
included in respect of said companies, in view of their
transition to reporting under Standard 12, as also applied by the
Company. The change in this equity item in 2004 is related to a
subsidiary of an associated company, which has a currency other
than NIS.
c. Principles of consolidation:
1) The consolidated financial statements include the accounts
of the Company and its subsidiaries. A list of the main
subsidiaries is presented in a schedule to the financial
statements.
2) Intercompany transactions and balances, as well as
intercompany profits on sales which have not yet been
realized outside the Group, have been eliminated.
d. Inventories
Raw materials and supplies, finished goods, purchased products
and maintenance and sundry stores are valued at the lower of cost
or market (net of processing costs and after deduction of a
provision for obsolescence, where appropriate); cost is
determined on the moving average basis.
e. Investments in associated companies:
1) The investments in these companies are accounted for by the
equity method.
2) Profits on intercompany sales, not yet realized outside the
Group, have been eliminated according to the percentage of
the Company's holding in such companies.
3) With effect from the interim financial statements for the
3-month period ended March 31, 2003, the Company reviews
whether any events have occurred or changes in circumstances
have taken place, which might indicate that there has been
an impairment of its investments in associated companies -
see h. below.
4) The excess of cost of the investment in associated companies
over the equity in net assets at time of acquisition
("excess of cost of investment") or the excess of equity in
net assets of associated companies at time of acquisition
over the cost of their acquisition ("negative excess of cost
of investment") represent the amounts attributed to specific
assets upon acquisition, at fair value. The excess of cost
of investment and the negative excess of cost of investment
are presented at their net amount and are amortized over the
remaining useful life of the assets. The average rate of
amortization is 10%.
f. Marketable securities
These securities are stated at market prices.
The changes in value of the above securities are carried to
financial income or expense.
12
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
g. Fixed assets:
1) Fixed assets are stated at cost, net of related investment
grants.
2) Fixed assets of own manufacture are stated at cost, based on
the direct costs with the addition of an appropriate portion
of related production costs.
3) Borrowing costs in respect of credit applied to finance the
construction of the fixed assets - during the period until
construction is completed - are charged to cost of such
assets.
4) The assets are depreciated by the straight-line method on
basis of their estimated useful life, as follows:
Years
-----------------------
Buildings 10-50 (mainly 33)
Machinery and equipment 7-20 (mainly 10 and 20)
Vehicles 5-7 (mainly 7)
Office furniture and equipment
(including computers) 3-17 (mainly 4)
h. Impairment of Assets
In February 2003, Accounting Standard No. 15 of the Israeli
Accounting Standard Board (hereafter - IASB) - "Impairment of
Assets", became effective. This standard requires a periodic
review to evaluate the need for a provision for the impairment of
the company's and its subsidiary's non-monetary assets - mainly
fixed assets as well as investments in associated companies.
Accordingly, commencing with the interim financial statements for
the 3-month period ended March 31, 2003, the Company assesses -
at each balance sheet date - whether any events have occurred or
changes in circumstances have taken place, which might indicate
that there has been an impairment of one or more of the above
assets. When such indicators of impairment are present, the
Company evaluates whether the carrying value of the asset is
recoverable from the cash flows expected from that asset.
The recoverable value of an asset is determined according to the
higher of the net selling price of the asset or its value in use
to the Company. The value in use is determined according to the
present value of anticipated cash flows from the continued use of
the asset, including those expected at the time of its future
retirement and disposal. When it is not possible to assess
whether an impairment provision is required for a particular
asset on its own, the need for such a provision is assessed in
relation to the recoverable value of the cash generating unit to
which that asset belongs.
The adoption of this Standard has not had any effect on the
Company and its subsidiaries.
13
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
i. Deferred charges
The item represents notes issuance costs, which are amortized
over the period of the notes (see note 4a).
j. Deferred income taxes:
1) Deferred taxes are computed in respect of differences
between the amounts presented in these statements and those
taken into account for tax purposes. As to the main factors
in respect of which deferred taxes have been included - see
note 7f. Deferred tax balances are computed at the tax rate
expected to be in effect at time of release to income from
the deferred tax accounts. The amount of deferred taxes
presented in the income statements reflects changes in the
above balances during the reporting years.
2) Taxes which would apply in the event of disposal of
investments in subsidiaries and associated companies have
not been taken into account in computing the deferred taxes,
as the Company intends to hold these investments, not to
realize them.
3) The Group may incur an additional tax liability in the event
of intercompany dividend distribution derived from "approved
enterprises" profits - see note 7a. No account was taken of
this additional tax, since it is the Group's policy not to
cause distribution of dividend which would involve an
additional tax liability to the Group in the foreseeable
future.
k. Revenue recognition
Revenue from sale of products to the local market, net of
discounts granted, is recognized upon shipment to the customer
(which represents the point at which the title transfers).
Revenue from sale of products for export, net of discounts, is
recognized as the products are delivered to the customer in the
target country.
l. Shipping and handling fees costs
Shipping and handling costs are classified as component of
selling and marketing expenses.
m. Allowance for doubtful accounts
The allowance is determined mainly in respect of specific debts
doubtful of collection (see note 12b).
n. Derivative financial instruments
Gains or losses from derivatives that are hedging existing assets
or liabilities are recognized in income and cash flows statements
commensurate with the results from those assets or liabilities.
14
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
o. Cash equivalents
The Group considers all highly liquid investments, which include
short-term bank deposits that are not restricted as to withdrawal
or use, the period to maturity of which did not exceed three
months at time of deposit, to be cash equivalents.
p. Net income per NIS 1 of par value of shares
Net income per NIS 1 of par value of shares is computed in
accordance with Opinion 55 of the Israeli Institute; as to the
data used in the per share computation - see note 11.
q. Recently issued pronouncement
In July 2004, the IASB issued Israel Accounting Standard No. 19 -
"Taxes on Income", which is based on International Accounting
Standard No. 12, that prescribes the accounting treatment
(recognition criteria, measurement, presentation and disclosure)
required for taxes on income. This accounting standard is to be
applied to financial statements covering periods commencing on,
or after, January 1, 2005.
For the most part, the provisions of this standard are the same
as the accounting principles that are customarily applied at
present (see j. above). The adoption of the standard is not
expected to have a material effect on the company's financial
statements in the forthcoming periods.
NOTE 2 - INVESTMENTS IN ASSOCIATED COMPANIES:
a. The Company has a number of investments in associated companies,
which are held either directly or through associated companies.
The financial statements of significant associated companies
(Mondy Business Paper Hadera Ltd. - formerly Neusiedler Hadera
Paper Ltd, NHP - and Hogla-Kimberly Ltd.) are attached to these
financial statements.
15
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):
b. Composed as follows:
December 31
----------------------
2004 2003
------- -------
NIS in thousands
Cost:
Shares 54,241 54,241
Excess of cost of investment - net 2,086 2,086
L e s s - accumulated amortization (2,624) (3,068)
Gain on issuance of shares of an associated
company to a third party 40,241 40,241
Currency adjustments (2,807) (1,122)
Share in profits accumulated since acquisition - net 271,492 246,864
------- -------
362,629 339,242
Long-term loans and capital notes * 69,123 44,637
------- -------
431,752 383,879
======= =======
* Classified by linkage terms, the total amounts of the loans
and capital notes are as follows:
Weighted average December 31
interest rate ----------------------
at December 31, 2004 2003
2004 ------ ------
% NIS in thousands
Linked to the dollar 8,616 21,897
Linked to the Israeli CPI 0%-6% 11,220 10,553
Loan and unlinked capital note 0%-5% 49,287 12,187
------ ------
69,123 44,637
====== ======
As of December 31, 2004, the repayment dates of the balance of
the loans and capital notes have not yet been determined.
16
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):
c. The changes in the investments during 2004 are as follows:
NIS in
thousands
-------
Balance at beginning of year 383,879
-------
Changes during the year:
Share in profits of associated companies - net 25,072
Currency adjustments (1,685)
Classifying long term balance 36,674
Decrease in balance of long-term loans and capital notes - net (12,188)
-------
Balance at end of year 431,752
=======
d. Mondy Business Paper Hadera Ltd. (hereafter - Mondy Hadera;
formerly - Neusiedler Hadera Paper Ltd- NHP):
Mondy Hadera is held to the extent of 49.9% by the Company and
also by Neusiedler AG (hereafter - Neusiedler), under an
agreement dated November 21, 1999. According to said agreement,
Mondy Hadera purchased the Group's activities in the field of
printing and writing paper, and issued to Neusiedler 50.1% of its
shares. As part of the said agreement, Neusiedler was granted an
option to sell to the Company its holdings in Mondy Hadera, at a
price which is 20% lower than the value (as defined in the
agreement). The understanding between the parties is that the
option would only be exercised under continued extraordinary
circumstances that preclude the operation of Mondy Hadera in
Israel. The Company believes that the likelihood of such
circumstances is very remote.
e. Investment in Carmel Container Systems Limited (hereafter -
Carmel)
The investment in shares includes, as of December 31, 2004 and
2003, amounts to NIS 32,300,000 and NIS 29,475,000, respectively,
which represents a holding of 26.25%. Carmel's shares are traded
in the United States on the "AMEX" Stock Exchange. The market
value of the Company's holding in these shares as of December 31,
2004 and 2003 is NIS 15,741,000 and NIS 9,656,000, respectively.
In November 2004, Carmel's board of directors decided to take
measures to withdraw Carmel's shares from trade on the "AMEX"
Stock Exchange in the United States and also to deregister with
the SEC. Accordingly, trade in Carmel's shares on the "AMEX" was
suspended from November 30, 2004 and the process of deregistering
with the SEC is currently being attended to.
17
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):
The Company's management believes that the low market value of
these shares is not representative of the economic value, as the
trade in Carmel's shares is very weak as described above. At the
beginning of 2003, the Company used the services of an outside
appraiser in determining the value in use to the Company.
The Company's management believes, based on the abovementioned
and current developments in 2004, that the investment should not
be written down.
The financial statements of Carmel are drawn up in accordance
with the provisions of Accounting Standard No. 12 of the IASB.
Until December 31, 2003, the financial statements have been drawn
up on the basis of cost, adjusted for the changes in the general
purchasing power of Israeli currency measured on the basis of the
Israeli CPI. For purposes of inclusion in the consolidated
financial statements up to said date, Carmel's financial
statements were adjusted on the basis of the changes in the
exchange rate of the dollar.
f. Investment in T.M.M Integrated Recycling Industries Ltd.
(hereafter - T.M.M.)
As of December 31, 2004, the Company's share in T.M.M. (directly
and through another associated company) is 41.6%.
The excess of equity in net assets of T.M.M. shares, over the
cost of investment therein - amounting to NIS 1,581,000 is
amortized over a period of ten years.
As of December 31, 2004 and 2003, the direct investment in the
shares of T.M.M is NIS 15,726,000 and NIS 15,759,000,
respectively. The market value of these shares as of December 31,
2004 and 2003 is NIS 11,338,000 and NIS 13,713,000, respectively.
The Company's management examined the value of its investment in
T.M.M. for impairment which is not temporary in nature. At the
beginning of 2003, the Company used the services of an outside
appraiser in determining the value in use to the Company.
The Company's management believes, based on the abovementioned
and current business developments within T.M.M during 2004, that
the investment should not be written down.
18
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - FIXED ASSETS:
a. Composition of assets, grouped by major classifications, and
changes therein during 2004, are as follows:
Cost
-----------------------------------------------------
Balance at Additions Retirements Balance at
beginning during during end of
of year the year the year year
------- ------ ------ -------
NIS in thousands
Land and buildings on the land 185,675 3,552 189,227
Machinery and equipment 653,206 25,008 4,461 673,753
Vehicles 31,860 3,772 5,678 29,954
Office furniture and equipment
(including computers) 65,569 2,800 7 68,362
Payments on account of
machinery and equipment 17,346 (4,180) 13,166
------- ------ ------ -------
953,656 30,952 10,146 974,462
======= ====== ====== =======
Accumulated depreciation Depreciated balance
---------------------------------------------------- ----------------------
Balance at Additions Retirements Balance at December 31
beginning during during end of ----------------------
of year the year the year year 2004 2003
------- ------ ----- ------- ------- -------
NIS in thousands NIS in thousands
Land and buildings on the land 104,237 3,348 107,585 81,642 81,438
Machinery and equipment 449,526 19,469 1,168 467,827 205,926 203,680
Vehicles 22,357 2,786 5,259 19,884 10,070 9,503
Office furniture and equipment
(including computers) 51,895 2,869 4 54,760 13,602 13,674
Payments on account of
machinery and equipment 13,166 17,346
------- ------ ----- ------- ------- -------
628,015 28,472 6,431 650,056 324,406 325,641
======= ====== ===== ======= ======= =======
19
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - FIXED ASSETS (continued):
b. The item is net of investment grants in respect of investments in
"approved enterprises" (see notes 7a and 9a).
c. The Group's real estate is partly owned and partly leased - to
the extent of NIS 44.5 million, in respect of which lease fees of
approximately NIS 25.8 million have been capitalized. The
leasehold rights are for 49-year periods ending in the years 2008
to 2059, with options to extend for an additional 49 years.
d. As of December 31, 2004 and 2003, the cost of fixed assets
includes borrowing costs of NIS 1,007,000 capitalized to the cost
of machinery and equipment.
e. Depreciation expenses amounted to NIS 28,472,000, NIS 28,165,000
and NIS 26,726,000, for the years ended December 31, 2004, 2003
and 2002, respectively.
f. As to pledges on assets - see note 9a.
20
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - NOTES AND OTHER LONG-TERM LIABILITIES (continued):
a. Notes
The item represents two series of notes issued to institutional
investors as follows:
December 31
---------------------------------------------
2004 2003
------------------- -------------------
NIS in thousands
---------------------------------------------
Series II Series I Series II Series I
------- ------ ------- ------
Balance 201,807 33,340 200,000 39,629
L e s s - current maturities 6,648 6,590
------- ------ ------- ------
201,807 26,692 200,000 33,039
======= ====== ======= ======
(1) Series I - May 1992
The balance of the notes as of December 31, 2004 is
redeemable in five installments, due in June of each of the
years 2005-2009, each installment amounting to 6.66% of the
original par value of the notes, which is NIS 99,819,000, in
December 2004 terms; the unpaid balance of the notes bears
annual interest of 3.8%, payable each June. The notes -
principal and interest - are linked to the Israeli CPI of
February 1992.
(2) Series II - December 2003
As of December 31, 2004, the unpaid balance of the notes is
payable in 7 annual installments at December of each of the
years 2007-2013; The unpaid balance of the notes bears
annual interest of 5.65%, payable in annual installments at
December of each year. The notes - principal and interest -
are linked to the Israeli CPI of November 2003.
b. Other liabilities:
December 31
--------------------
2004 2003
------ ------
NIS in thousands
Capital note to an associated company * 32,770 32,770
Other liability 2,243
------ ------
32,770 35,013
====== ======
* The capital note is unlinked and interest free. No repayment date
has been fixed, but the associated company does not intend to
demand the repayment of the capital note before January 1, 2006.
21
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - EMPLOYEE RIGHTS UPON RETIREMENT:
a. Israeli labor laws and agreements require the company and its
subsidiaries to pay severance pay to employees dismissed or
leaving their employ under certain circumstances, computed on the
basis of the number of years of service and, generally, the
latest pay rate (one month's pay for each year of service) or a
pension upon retirement.
To cover the liability for employee rights upon retirement,
pursuant to labor agreements in force and based on salary
components which, in management's opinion, create entitlement to
severance pay, deposits are made by the Company and its
subsidiaries with various provident funds (including pension
funds) or insurance policies for the benefit of employees.
The severance pay and pension liability and the amounts funded as
above are not reflected in the financial statements, as the
pension and severance pay risks have been irrevocably transferred
to the pension funds and the insurance companies, as allowed by
the Severance Pay Law.
b. The expenses relating to employee rights upon retirement, which
reflect the amounts that were deposited during the reported years
with provident funds, pension funds and various insurance
policies, are NIS 8,368,000, NIS 8,515,000 and NIS 5,786,000 in
2004, 2003, and 2002, respectively.
NOTE 6 - SHAREHOLDERS' EQUITY:
a. Share capital
Composed of ordinary registered shares of NIS 0.01 par value, as
follows:
December 31
---------------------------
2004 2003
--------- ---------
Authorized Issued and paid
---------- ---------------------------
Number of shares 20,000,000 3,996,674 3,968,295
========== ========= =========
Amount in NIS 200,000 39,967 39,683
========== ========= =========
The shares are traded on stock exchanges in Tel-Aviv and in the
U.S. The quoted prices per share, as of December 31, 2004 are NIS
238.30 and $ 55.00 (NIS 236.94), respectively.
b. Employee stock option plans:
1) The 1998 plan for senior officers in the Group
On January 11, 1998, the board of directors approved a stock
option plan for senior officers in the Group ("the 1998 plan
for senior officers").
22
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - SHAREHOLDERS' EQUITY (continued):
In 1998-2000, 155,498 options were granted under the 1998
plan for senior officers.
The number of shares resulted from exercise of the options
and the actual exercise price were fixed as follows: Upon
the receipt of an exercise request from an option holder, a
computation was made of the difference between the quoted
price of the Company's shares at the beginning of that
trading day and the exercise price; that difference was then
multiplied by the number of exercisable options (hereafter -
the benefit). The number of shares that the Company actually
issued to the option holder was the number of shares the
market value of which was equal to the amount of the benefit
computed as above. In consideration for the shares, the
option holder paid their par value only.
In 2000-2003, 154,000 options were exercised under the 1998
plan for senior officers. 92,832 shares of NIS 0.01 were
issued following the exercise. The unexercised balance of
1,498 options granted expired in 2003.
The ordinary shares issued upon exercise of the options
conferred upon their holders the same rights as all other
ordinary shares, upon issuance.
2) The 2001 plan for senior officers in the Group
On April 2, 2001, the Company's board of directors approved
a stock option plan for senior officers in the Group
(hereafter - the 2001 plan for senior officers). Under this
plan, 194,300 options were allotted on July 5, 2001 without
consideration. Each option is exercisable in purchase of one
ordinary share of NIS 0.01 par value of the Company. The
options will be exercisable in four equal annual batches.
The blocking period of the first batch is two years,
commencing on the date of grant; the blocking period of the
second batch is three years from the date of grant, and so
forth. Each batch is exercisable within two years from the
end of the blocking period.
The exercise price of the options granted as above was set
at NIS 217.00, linked to the CPI, on the basis of the CPI as
of April 2, 2001. The exercise price for each batch is
determined as the lesser of the aforementioned exercise
price or the average price of the Company's shares as quoted
on the Tel-Aviv Stock Exchange (hereafter - the Stock
Exchange) during thirty trading days preceding to the
effective date of each batch, less 10%. As stipulated by the
2001 plan for senior officers, the exercise price is to be
adjusted, following dividend distributions. Accordingly, the
exercise price as of December 31, 2004 is NIS 177.37 for the
first batch, NIS 68.77 for the second batch, NIS 125.18 for
the third batch and NIS 177.37 for the fourth batch.
The quoted price of the Company's shares on the Tel Aviv
Stock Exchange close to the time of the board of directors'
resolution to grant the options, was NIS 204.00. Prior to
the granting of the options, the price was NIS 185.8.
23
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - SHAREHOLDERS' EQUITY (continued):
b. Employee stock option plans (continued):
The fair value of each option - computed on the basis of the
Black-Scholes option-pricing model - as prescribed by the
regulations of the Tel-Aviv Stock Exchange - was approximately
NIS 56.69 on the date of grant.
Notwithstanding the above, the number of shares resulting from
exercise of the options and the actual exercise price will be
determined as follows: when an exercise request is received from
an option holder, a computation will be made of the difference
between the quoted price of the Company's shares at the beginning
of that trading day and the exercise price; that difference is to
be multiplied by the number of exercisable options, as of the
date of the exercise (hereafter - the benefit). The number of
shares that the Company will actually issue to the option holder
will be the number of shares the market value of which is equal
to the amount of the benefit computed as above. In consideration
for the shares, the option holder will pay their par value only.
The ordinary shares issued upon exercise of the options will
confer upon their holders the same rights as all other ordinary
shares, upon issuance.
In 2004 and 2003, 55,525 and 1,550 options, respectively, were
exercised under the 2001 plan for senior officers, and 24,295 and
227 shares of NIS 0.01, respectively, were issued following the
exercise of options, as above. The unexercised balance of the
options granted is 137,225.
This plan is designed to be governed by the terms stipulated by
Section 102 of the Israeli Income Tax Ordinance. Inter alia,
these terms provide that the company will be allowed to claim, as
an expense for tax purposes, the amounts credited to the
employees as a benefit in respect of shares or options granted
under the plan.
The amount allowed as an expense for tax purposes, at the time
the employee utilizes such benefit, is limited to the amount of
the benefit that is liable to tax as labor income, in the hands
of the employee; all being subject to the restrictions specified
in Section 102 of the Income Tax Ordinance.
3) The 2001 employee plan
On August 29, 2001, the Company's board of directors
approved a stock option plan for employees in the Group,
according to a specification (hereafter - the 2001 employee
plan). Under this plan, up to 125,000 options will be
allotted without consideration. Each option is exercisable
in purchase of one ordinary share of NIS 0.01 par value of
the Company. The blocking period of the options is two years
from the date of grant. Each option is exercisable within
three years from the end of the blocking period.
On November 4, 2001, 81,455 options were granted under the
2001 employee plan.
24
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - SHAREHOLDERS' EQUITY (continued):
The exercise price of all the options granted as above was
set at NIS 160.99, linked to the CPI, on the basis of the
CPI as of August 29, 2001. This price represents the average
price of the Company's shares as quoted on the Tel-Aviv
Stock Exchange during thirty trading days prior to the date
of the board of directors' approval, less 10%. As stipulated
by the 2001 employee plan, the exercise price has been
adjusted, following a dividend distribution and it is NIS
113.57 as of December 31, 2004.
The quoted price of the Company's shares on the Tel Aviv
Stock Exchange close to the time of the board of directors'
resolution to grant the options, was NIS 171.20. Prior to
the granting of the options, the price was NIS 138.80.
The fair value of each option - computed on the basis of the
Black-Scholes option-pricing model - as prescribed by the
regulations of the Tel-Aviv Stock Exchange - was
approximately NIS 64.11 on the date of grant.
Notwithstanding the above, the number of shares resulting
from exercise of the options and the actual exercise price
will be fixed as follows: when an exercise request is
received from an option holder, a computation will be made
of the difference between the quoted price of the Company's
shares at the beginning of that trading day and the exercise
price; that difference is to be multiplied by the number of
exercisable options, as of the date of the exercise
(hereafter - the benefit). The number of shares the that
Company will actually issue to the option holder will be the
number of shares the market value of which is equal to the
amount of the benefit computed as above. In consideration
for the shares, the option holder will pay their par value
only.
The ordinary shares issued upon exercise of the options will
confer upon their holders the same rights as all other
ordinary shares, upon issuance.
In 2004 and 2003, 8,615 and 57,962 options, respectively,
were exercised under the 2001 employee plan. 4,084 and
20,665 shares of NIS 0.01, respectively, were issued
following the exercise of options, as above. The unexercised
balance of the options granted is 14,878.
This plan is designed to be governed by the terms stipulated
by Section 102 of the Israeli Income Tax Ordinance. Inter
alia, these terms provide that the company will be allowed
to claim, as an expense for tax purposes, the amounts
credited to the employees as a benefit in respect of shares
or options granted under the plan.
The amount allowed as an expense for tax purposes, at the
time the employee utilizes such benefit, is limited to the
amount of the benefit that is liable to tax as labor income,
in the hands of the employee; all being subject to the
restrictions specified in Section 102 of the Income Tax
Ordinance.
25
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME:
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (hereafter - the law)
Under the law, by virtue of the "approved enterprise" status
granted to certain of their production facilities, certain
subsidiaries were entitled to various tax benefits (mainly
reduced tax rates) until 2003.
During the period of benefits - mainly 7 years commencing in the
first year in which the companies earn taxable income from the
approved enterprises, provided the maximum period to which it is
restricted by law has not elapsed - reduced tax rates or
exemption from tax apply, as follows:
1) Corporate tax rate of 25%, instead of the regular tax rate
(see d. below).
2) Tax exemption on income from certain approved enterprises in
respect of which the companies have elected the "alternative
benefits" (involving waiver of government guaranteed loans);
the length of the exemption period is 4 years, after which
the income from these enterprises is taxable at the rate of
25% for 3 years.
The part of the taxable income which is entitled to the tax
benefits is determined on the basis of the ratio of the
turnover attributed to the "approved enterprise" to the
total turnover of these companies, taking into account the
ratio of the "approved enterprise" assets to total assets of
these companies. The turnover that is attributed to the
"approved enterprise" is generally computed on the basis of
the ratio of the increase in turnover to the "basic"
turnover stipulated in the instrument of approval.
The period of benefits in respect of the "approved
enterprises" of these companies expired at the end of 2003.
The entitlement to the above benefits is conditional upon
the companies' fulfilling the conditions stipulated by the
law, regulations published thereunder and the instruments of
approval for the specific investments in "approved
enterprises". In the event of failure to comply with these
conditions, the benefits may be cancelled and the companies
may be required to refund the amount of the benefits, in
whole or in part, with the addition of linkage differences
to the CPI and interest.
b. Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985 (hereafter - the
inflationary adjustments law)
Under the inflationary adjustments law, results for tax purposes
are measured in real terms, having regard to the changes in the
Israeli CPI. The Israeli companies in the Group are taxed under
this law.
26
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
c. The Law for the Encouragement of Industry (Taxation), 1969
The Company and certain subsidiaries are "industrial companies"
as defined by this law. These companies claimed depreciation at
accelerated rates on equipment used in industrial activity as
stipulated by regulations published under the inflationary
adjustments law.
The Company also files consolidated tax returns with certain
subsidiaries as permitted under this law.
d. Tax rates applicable to income not derived from "approved
enterprises"
The income of the Company and its Israeli subsidiaries (other
than income from "approved enterprises", see a. below) is taxed
at the regular rate. Through to December 31, 2003, the corporate
tax was 36%. In July 2004, an amendment to the Income Tax
Ordinance was enacted. One of the provisions of this amendment is
that the corporate tax rate is to be gradually reduced from 36%
to 30%, in the following manner: the rate for 2004 will be 35%,
in 2005 - 34%, in 2006 - 32%, and in 2007 and thereafter - 30%.
The effect of the change in the tax rates in the coming years on
the deferred tax balances on the effective date of the amendment
to the law, is included under "taxes on income" in the statements
of income (loss) - see g (1) below.
e. Carryforward tax losses
Carryforward tax losses are NIS 20,399,000 and NIS 14,002,000 as
of December 31, 2004 and 2003, respectively. Under the
inflationary adjustments law, carryforward losses are linked to
the Israeli CPI, and may be utilized indefinitely.
27
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
f. Deferred income taxes
The composition of the deferred taxes, and the changes therein
during 2004 and 2003, are as follows:
Among Among Among As a
non-current current non-current non-current
assets (1) assets (2) liability (3) Total
------ ------ ------ -------
NIS in thousands
Balance at January 1, 2003 (10,948) 58,266 47,318
Changes in 2003:
Reclassification 3,885 (3,885)
Amounts carried to income (64) 3,535 3,471
------ ------ ------ -------
Balance at December 31, 2003 (7,127) (3,885) 61,801 50,789
Changes in 2004:
Amounts carried to income 1,769 (2,626) (9,239) (10,096)
------ ------ ------ -------
Balance at December 31, 2004 (5,358) (6,511) 52,562 40,693
====== ====== ====== =======
(1) In respect of inventories, provisions for doubtful
accounts, vacation and recreation pay, and
carry-forward tax losses.
(2) In respect of carryforward tax losses.
(3) Mainly in respect of depreciable fixed assets.
The deferred taxes are computed at the rate of 30%-34%.
g. Taxes on income included in the income statements:
1) As follows:
2004 2003 2002
------ ----- -----
NIS in thousands
For the reported year:
Current 13,248 4,235 4,702
Deferred, see f. above:
In respect of changes to tax rates,
see d. above (5,824)
In respect of the reporting period (4,272) 3,471 3,703
------ ----- -----
3,152 7,706 8,405
For previous years - Current 1,387
------ ----- -----
3,152 7,706 9,792
====== ===== =====
28
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
2) Following is a reconciliation of the "theoretical" tax
expense, assuming all income is taxed at the regular
rate, as stated in d. above, and the actual tax
expense:
2004 2003 2002
----------------- ----------------- -----------------
NIS in NIS in NIS in
% thousands % thousands % thousands
----- ------ ----- ------ ----- ------
Income before taxes on income, as reported
in the statements of income 100.0 40,812 100.0 32,204 100.0 30,525
===== ====== ===== ====== ===== ======
Theoretical tax on the above amount 35.0 14,284 36.0 11,593 36.0 10,989
Tax benefits arising from reduced tax rate
for approved enterprises (1.5) (487) (1.0) (305)
----- ------ ----- ------ ----- ------
35.0 14,284 34.5 11,106 35.0 10,684
Decrease in taxes resulting from computation
of deferred taxes at a rate which is
different from the theoretical rate (4.3) (1,762)
Tax benefit resulting from
changes in tax rates, see d. above (14.3) (5,824)
Tax deduction in respect of options
exercised by employees according to
section 102 of the Israeli
Income Tax Ordinance (10.3) (4,221) (5.0) (1,607) (6.2) (1,883)
Other - net 1.6 675 (5.6) (1,793) (1.3) (396)
----- ------ ----- ------ ----- ------
Taxes on income for the reported year 7.7 3,152 23.9 7,706 27.5 8,405
===== ====== ===== ====== ===== ======
h. Tax assessments
The Company and most of its subsidiaries have received final tax
assessments through the year ended December 31, 2000.
29
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - LINKAGE TERMS OF MONETARY BALANCES:
a. As follows:
December 31, 2004
----------------------------------------
In, or linked
to, foreign
currency Linked to the
(mainly dollar) Israeli CPI Unlinked
------ ------ -------
NIS in thousands
Assets:
Current assets:
Cash and cash equivalents 4,531 3,282
Short-term investments 45,539 16,925
Receivables 43,600 1,799 192,071
Investments in associated companies - long-term
loans and capital notes 8,616 11,220 49,287
------ ------- -------
56,747 58,558 261,565
====== ======= =======
Liabilities:
Current liabilities:
Short-term credit from banks 2,238 110,446
Accounts payables and accruals 10,100 1,013 142,798
Long-term liabilities (including current maturities):
Loans from banks
Notes 235,147
Other liabilities 32,770
------ ------- -------
12,338 236,160 286,014
====== ======= =======
December 31, 2003
----------------------------------------
In, or linked
to, foreign
currency Linked to the
(mainly dollar) Israeli CPI Unlinked
------ ------ -------
NIS in thousands
Assets:
Current assets:
Cash and cash equivalents 8,561 150,145
Short-term investments 20,000
Receivables 48,457 215 210,560
Investments in associated companies - long-term
loans and capital notes 21,897 10,553 12,187
------ ------- -------
78,915 10,768 392,892
====== ======= =======
Liabilities:
Current liabilities:
Short-term credit from banks 144,617
Accounts payables and accruals 11,579 146,033
Long-term liabilities (including current maturities):
Loans from banks 372
Notes 239,629
Other liabilities 2,243 32,770
------ ------- -------
13,822 240,001 323,420
====== ======= =======
As to exposures relating to fluctuations in foreign currency exchange rates and
the use of derivatives for hedging purposes - see note 12a.
30
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - LINKAGE TERMS OF MONETARY BALANCES (continued):
b. Data regarding the exchange rate and the Israeli CPI:
Exchange rate of
one dollar CPI*
---------- ----
NIS Points
At end of year:
2004 4.308 180.7
2003 4.379 178.6
2002 4.737 182.0
Change in the year:
2004 (1.6%) 1.2%
2003 (7.6%) (1.9%)
2002 7.3% 6.5%
* Based on the index for the month ending on each
balance sheet date, on the basis of 1993 average =
100.
NOTE 9 - COMMITMENTS, CONTINGENT LIABILITIES AND LIABILITIES SECURED BY PLEDGES:
a. In respect of investment grants
Under the Law for the Encouragement of Capital Investments, 1959,
certain subsidiaries and an associated company have received
investment grants from the State of Israel. In the event of
failure to comply with the terms attached to the receipt of the
grants, the companies may be required to refund the amount of the
grants, in whole or in part, with linkage differences and
interest from the date of receipt.
The abovementioned subsidiaries have registered floating charges
on all their assets in favor of the State of Israel as security
for compliance with the terms of the investment grants received.
In respect of the grant received by the associated company, the
Company has provided a guarantee, with another associated
company, for the repayment of the grant. As of December 31, 2004,
the guarantee amounts to NIS 181,000.
b. In 1996, an associated company received a grant amounting to NIS
2,067,000 from the Fund for Preparation for Exposure of the
Ministry of Industry and Trade. With respect to this grant, the
Company has provided a bank guarantee of NIS 2,036,000 in favor
of the State of Israel.
c. The Company has provided guarantees of NIS 2,154,000 in favor of
an associated company, in connection with the latter's
participation in a tender. If the associated company does not win
the tender, the guarantee will become null and void.
d. A subsidiary has provided a guarantee of NIS 1,291,000 to a bank
in respect of a loan extended to an associated company.
e. A subsidiary provided guarantees to various entities, in
connection with tenders, in the aggregate amount of approximately
NIS 1,700,000.
31
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - COMMITMENTS, CONTINGENT LIABILITIES AND LIABILITIES SECURED BY PLEDGES
(continued):
f. On May 7, 2001, the Company's board of directors resolved to
carry out a plan, which was approved by the shareholders'
meeting, to remunerate the Company's chairman of the board of
directors. According to the plan, a remuneration will be granted,
equal to the increase in the value of 50,000 shares of the
Company in the period from May 7, 2001 (share price - NIS 194.37,
linked to the terms of the plan) to May 7, 2008. The remuneration
will be spread over the period commencing two years from the
resolution of the board of directors, until the end of seven
years from said resolution. In 2004, one quarter of the
remuneration was exercised. As of December 31, 2004, another
quarter is exercisable. A liability was included in the financial
statements in respect of the above plan, under current
liabilities.
g. In accordance with the Companies Law, 1999, in 2004, the Company
issued new letters of indemnity to its officers, pursuant to
which the Company undertakes to indemnify the officers for any
liability or expense, for which indemnification may be paid under
the law, that may be incurred by the officers in connection with
actions performed by them as part of their duties as officers in
the Company, which are directly or indirectly related to the
events specified in the addendum to the letters of indemnity,
provided that the total amount of indemnification payable to the
officers, shall not exceed 25% of the Company's shareholders'
equity as per its latest financial statements published prior to
the actual indemnification. The liability of officers in
connection with the performance of their duties, as above, is
partly covered by an insurance policy.
32
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL
STATEMENT INFORMATION:
Balance sheets:
Weighted average December 31
interest rate -----------------------
at December 31, 2004 2003
2004 ------- -------
---------------- NIS in thousands
a. Short-term investments:
Short term deposit - linked to the CPI 4.0% 45,539
Short-term deposit - unlinked 20,000
Marketable securities 16,925
------- -------
62,464 20,000
======= =======
b. Receivables:
1) Trade:
Open accounts 128,699 128,021
Checks collectible 14,576 12,975
------- -------
143,275 140,996
======= =======
The item is:
Net of allowance for doubtful accounts 16,148 13,696
======= =======
Includes associated companies 26,089 26,594
======= =======
2) Other:
Employees and employee institutions 4,072 3,060
Associated companies 78,616 89,691
Prepaid expenses 2,287 2,883
Advances to suppliers 4,200 9,365
Deferred income taxes, see note 7f 5,358 7,127
Income tax authority 1,733 12,005
Interest receivable 1,579 257
Sundry 3,995 3,858
------- -------
101,840 128,246
======= =======
c. Inventories:
For industrial activities:
Finished goods 11,684 14,819
Raw materials and supplies 8,725 10,426
------- -------
20,409 25,245
For commercial activities - purchased products 16,972 18,817
------- -------
37,381 44,062
Maintenance and sundry stores 45,839 46,592
------- -------
83,220 90,654
======= =======
d. Credit from banks:
Short-term credit - unlinked 4.5% 110,446 144,617
Short-term credit - Swiss franc 3.2% 2,238
Current maturities of long-term
Loans 372
------- -------
112,684 144,989
======= =======
33
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
e. Accounts payable and accruals - other:
December 31
------------------
2004 2003
------ ------
NIS in thousands
Payroll and related expenses 34,904 37,324
Institutions in respect of employees 10,551 12,944
Customs and value added tax authorities 3,850 728
Associated company 511 521
Accrued interest 1,544 2,127
Accrued expenses 7,903 7,825
Sundry 7,092 11,541
------ ------
66,355 73,010
====== ======
Statements of income:
2004 2003 2002
------- ------- -------
NIS in thousands
f. Sales - net (1):
Industrial activities (2) 363,489 326,825 310,628
Commercial activities 119,365 138,267 145,147
------- ------- -------
482,854 465,092 455,775
======= ======= =======
(1) Including sales to associated companies 121,987 115,505 104,864
======= ======= =======
(2) Including sales to export 42,232 44,175 40,645
======= ======= =======
g. Cost of sales:
Industrial activities:
Materials consumed 83,533 72,292 61,649
Payroll and related expenses 91,468 85,419 78,903
Depreciation 24,537 22,739 21,182
Other manufacturing costs 82,991 80,709 77,765
Decrease (increase) in inventory of
finished goods 3,135 (1,651) 12,585
------- ------- -------
285,664 259,508 252,084
Commercial activities - cost of products sold 90,240 102,677 111,687
------- ------- -------
375,904 362,185 363,771
======= ======= =======
Including purchases from associated
Companies 22,793 26,374 29,423
34
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
2004 2003 2002
------ ------ ------
NIS in thousands
h. Selling, marketing, administrative and
general expenses:
Selling and marketing:
Payroll and related expenses 14,311 15,225 14,692
Packaging, transport and shipping 6,458 5,719 5,689
Commissions 2,467 2,733 1,605
Depreciation 1,159 1,595 1,659
Other 6,200 6,052 5,522
------ ------ ------
30,595 31,324 29,167
====== ====== ======
Administrative and general:
Payroll and related expenses 36,649 36,360 31,927
Office supplies, rent and maintenance 1,521 1,938 1,750
Professional fees 1,029 *1,663 1,010
Depreciation 2,776 2,814 3,884
Doubtful accounts and bad debts 3,102 944 1,791
Other 1,735 *4,681 10,148
------ ------ ------
46,812 48,400 50,510
L e s s - rent and participation from
associated companies 24,387 23,401 24,128
------ ------ ------
22,425 24,999 26,382
====== ====== ======
* Reclassified
i. Financial income (expenses) - net*: Expenses:
In respect of long-term loans - net 26 1,607
In respect of notes - including amortization
of deferred charges 15,188 5,031 1,291
Erosion of operating monetary balances,
net of related hedges 2,289
In respect of short-term balances - net
(2002 -net of borrowing costs capitalized to
the cost of fixed assets) 6,547 16,917 1,506
------ ------ ------
21,761 23,555 5,086
------ ------ ------
Income:
In respect of long-term loans - net 2,098
In respect of increase in value of operating
monetary balances, net of related hedges 1,901 **7,429
In respect of short-term balances - net 6,742 ** 137
------ ------ ------
8,643 7,566 2,098
------ ------ ------
(13,118) (15,989) (2,988)
====== ====== ======
* Including financial income (expenses) in respect
of loans to associated companies 721 (1,376) 2,207
====== ====== ======
** Reclassified
35
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
2003 2002
----- ------
NIS in thousands
j. Other income (expenses):
From the sale of apartments (1) 1,609
From termination of an activity and
disposal of assets(2) (2,942)
----- ------
1,609 (2,942)
===== ======
1) In 2003, the Company sold apartments that it previously held
for the use of its employees.
2) In 2002, the Company terminated operations at some of its
sites, as follows:
a) At the Molett site in Nahariya, the operation of the
old household paper machine was terminated, following
the introduction of a new tissue machine by
Hogla-Kimberly Ltd., an associated company.
Subsequently, the old paper machine was sold to a third
party (overseas).
b) In order to comply with the requirements of the
Ministry of Environment, the operation of the old paper
machines at the Shafir site in Tel-Aviv were
terminated. The termination included dismissal of
employees, sale of maintenance stores, sale of the
machines to a third party (overseas) and other related
costs (including closing inventories).
c) The Company sold real estate that it owned in Ashdod.
The effects of the restructuring resulting from the
termination of the operations are as follows:
2002
----------------
NIS in thousands
----------------
Severance pay expenses (2,334)
Other expenses, net of sale proceeds (4,475)
Gain on sale of real estate in Ashdod 3,867
----------------
(2,942)
================
NOTE 11 - NET INCOME PER NIS 1 OF PAR VALUE OF SHARES:
a. The weighted average par value of shares used in
computation of per share data is as follows:
NIS
---
Year ended December 31:
2004 40,640
==== ======
2003 40,197
==== ======
2002 39,557
==== ======
36
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
b. In the reported years, plans for granting stock options
to employees in the Group were taken into account in
computing per share data, having regard to the quoted
price of the Company's share at the end of each year.
NOTE 12 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
a. Derivative financial instruments
The Company has limited involvement with derivative financial
instruments. The Company uses these instruments as hedges. The
Company utilizes derivatives, mainly forward exchange contracts
and currency options, to protect its cash flows in respect of
existing assets and liabilities denominated in currencies other
than the functional currency of the Company or that are linked to
the CPI. As the counter-parties to these derivatives are Israeli
banks, the Company considers the inherent credit risks remote.
In January 2004, the Company entered into a forward transaction
for a period of one year, in order to hedge an amount of NIS 200
million against increases in the Israeli CPI.
At the end of 2004, the Company entered into a forward
transaction for a period of one year, in order to hedge an amount
of NIS 200 million against increases in the CPI, following the
termination of the aforementioned transaction in January 2005.
b. Credit risks
The Company and its subsidiaries' cash and cash equivalents and
the short-term deposit as of December 31, 2004 are deposited
mainly with major Israeli banks. The Company and its subsidiaries
considers the credit risks in respect of these balances to be
remote.
Most of these companies sales are made in Israel, to a large
number of customers. The exposure to credit risks relating to
trade receivables is limited due to the relatively large number
of customers. The Group performs ongoing credit evaluations of
its customers to determine the required amount of allowance for
doubtful accounts. An appropriate allowance for doubtful accounts
is included in the financial statements.
c. Fair value of financial instruments
The fair value of the financial instruments included in working
capital of the Group is usually identical or close to their
carrying value. The fair value of loans and other liabilities
also approximates the carrying value, since they bear interest at
rates close to the prevailing market rates, except as described
below.
The Company does not disclose the fair value of long-term loans
and capital notes included under investments in associated
companies as of December 31, 2004, aggregating NIS 69,123,000
(see note 2b) and of a capital note to an associated company in
the amount of NIS 32,770,000 (see note 4b.), since their value
cannot be reliably determined so long as they have no repayment
dates.
37
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 - INTERESTED PARTIES - TRANSACTIONS AND BALANCES:
a. Transactions:
1) Income (expenses):
2004 2003 2002
------ ------ ------
NIS in thousands
Sales 45,278 38,715 36,030
====== ====== ======
Costs and expenses (9,247) (7,009) (6,038)
====== ====== ======
The amounts presented above represent transactions that the
Company carried out in the ordinary course of business with
interested parties (companies which are held by the Company's
principal shareholder), at terms and prices similar to those
applicable to non-affiliated customers and suppliers.
2) Benefits to interested parties:
2004 2003 2002
------ ------ -----
Payroll to interested parties employed
By the Company - NIS in thousands *3,300 *3,364 2,000
====== ====== =====
Number of people to whom
the benefits relate 2 2 1
====== ====== =====
Remuneration of directors who are not
employed by the Company -
NIS in thousands 528 444 324
====== ====== =====
Number of people to whom
the benefits relate 13 13 9
====== ====== =====
* In 2004 and 2003, the amounts include the salary of the
CEO who was appointed in April 2003 and ended his
office in April 2004, in addition to the salary of the
Chairman of the Board of Directors (who served earlier
as the CEO). The amount for 2004 includes a quarter of
the remuneration to the Chairman of the Board of
Directors, see note 9f.
3) In 2003, an interested party employed by the Company
exercised 15,999 options granted to him under the 1998 plan
for senior employees. 8,529 shares of NIS 0.01 par value
have been issued at par against the exercise of said
options.
4) As to the plan for the remuneration of the Company's
Chairman of the Board of Directors - see note 9f.
38
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
b. Balances with interested parties:
December 31
------------------
2004 2003
------ ------
NIS in thousands
Accounts receivable - commercial activity* 13,378 10,440
====== ======
Accounts payables and accruals 3,563 2,430
====== ======
* There were no significant changes in the balance during the year.
NOTE 14 - SEGMENT INFORMATION:
a. Activities of the Company and its subsidiaries:
1) Manufacturing and marketing of packaging paper, including
collection and recycling of paper waste. The manufacturing
of paper relies mainly on paper waste as raw material.
2) Marketing of office supplies and paper, mainly to
institutions.
Most of the Group's sales are to the local market (Israel) and
most of its assets are located in Israel.
39
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SEGMENT INFORMATION (continued):
b. Business segment data:
Paper and recycling Marketing of office supplies
------------------------------- --------------------------------
2004 2003 2002 2004 2003 2002
------= ------- ------- ------- ------- -------
NIS in thousands
Sales - net(1) 367,391 332,124 314,636 115,463 132,968 141,139
== ======= ======= ======= ======= ======= =======
Income (loss) from ordinary operations 58,496 46,282 37,488 (4,566) 302 (1,033)
======= ======= ======= ======= ======= =======
Financial expenses, net
Other income (expenses)
Income before taxes on income
Segment assets (at end of year) 494,194 497,811 482,833 56,707 59,480 65,234
Unallocated assets (at end of year) (2)
Consolidated total assets (at end of year)
Segment liabilities (at end of year) 66,564 58,906 66,325 20,992 25,696 32,930
Unallocated liabilities (at end of year)
Consolidated total liabilities (at end of year)
Depreciation and amortization 26,671 25,523 24,422 1,962 2,724 2,387
======= ======= ======= ======= ======= =======
T o t a l
-----------------------------------
2004 2003 2002
--------- --------- ---------
NIS in thousands
Sales - net(1) 482,854 465,092 455,775
========= ========= =========
Income (loss) from ordinary operations 53,930 46,584 36,455
Financial expenses, net 13,118 15,989 2,988
Other income (expenses) 1,609 (2,942)
--------- --------- ---------
Income before taxes on income 40,812 32,204 30,525
Segment assets (at end of year) 550,901 557,291 548,067
Unallocated assets (at end of year) (2) 611,486 695,983 504,056
--------- --------- ---------
Consolidated total assets (at end of year) 1,162,387 1,253,274 1,052,123
========= ========= =========
Segment liabilities (at end of year) 87,566 84,602 99,255
Unallocated liabilities (at end of year) 499,518 554,442 301,918
--------- --------- ---------
Consolidated total liabilities (at end of year) 587,074 639,044 401,173
========= ========= =========
Depreciation and amortization 28,633 28,247 26,809
========= ========= =========
(1) Represents sales to external customers.
(2) Including investments in associated companies.
---------------
-------------------------------
---------------
40
Schedule
AMERICAN ISRAELI PAPER MILLS LIMITED
Details of Subsidiaries and Associated Companies
At December 31, 2004
Percentage of direct and
indirect holding in shares
conferring equity and
voting rights
--------------------------
%
Main subsidiaries:
Amnir Recycling Industries Limited 100.00
Graffiti Office Supplies and Paper Marketing Ltd. 100.00
Attar Marketing Office Supplies Ltd. 100.00
American Israeli Paper Mills Paper Industry (1995) Ltd. 100.00
Main associated companies:
Hogla-Kimberly Ltd. 49.90
Subsidiaries of Hogla-Kimberly Ltd.:
Hogla-Kimberly Marketing Limited 49.90
Molett Marketing Limited 49.90
Shikma For Personal Comfort Ltd. 49.90
Ovisan Sihhi Bez Sanai Ve Ticavet A.S. 49.90
Hogla-Kimberly Holdings A.S. 49.90
H-K Overseas (Holland) B.V. 49.90
Mondy Business Paper Hadera Ltd. 49.90
Subsidiaries of Mondy Business Paper Hadera Ltd.:
Grafinir Paper Marketing Ltd. 49.90
Yavnir (1999) Ltd. 49.90
Mondy Business Paper Hadera Marketing Ltd. 49.90
Mitrani Paper Marketing 2000 (1998) Ltd. 49.90
Carmel Container Systems Limited 26.25
C.D. Packaging Systems Limited* 63.20
Barthelemi Holdings Ltd. 33.91
T.M.M. Integrated Recycling Industries Ltd.** 41.60
* C.D. Packaging Systems Limited is partly held through Carmel Container
Systems Limited (an associated company); the holding in voting shares of
C.D. Packaging Systems Limited is 63.05%.
** T.M.M Integrated Recycling Industries Ltd. is partly held directly and
partly through Barthelemi Holdings Ltd.
41
[GRAPHIC OMITTED]
Enclosed please find the financial reports of the following associated
companies:
- Mondi Business Paper Hadera Ltd.
- Hogla-Kimberly Ltd.
The financial report of the following associated companies are not included:
- Carmel Containers Systems Ltd., according to section 44(c) of the
Securities (Periodic and Immediate Reports) Regulations.
- TMM Integrated Recycling Industries Ltd., a reporting corporation.
EXHIBIT 19(a)(ii)
-----------------
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
TABLE OF CONTENTS
Page
----
Independent Auditors' Report 1
Financial Statements:
Balance Sheets 2
Statements of Operations 3
Statements of Changes in Shareholders' Equity 4
Statements of Cash Flows 5-6
Notes to the Financial Statements 7-32
Independent Auditors' Report
to the Shareholders of
Mondi Business Paper Hadera Ltd.
(formerly, Neusiedler Hadera Paper Ltd.)
We have audited the accompanying balance sheet of Mondi Business Paper Hadera
Ltd. ("the Company") as of December 31, 2004, and the consolidated balance sheet
as of that date, and the related statements of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for the year then ended. These financial statements are the responsibility of
the Company's Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of the Company and on a consolidated basis as of December
31, 2003 and for each of the two years in the period then ended were audited by
other auditors whose report, dated March 10, 2004, expressed an unqualified
opinion on those financial statements.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States) and with generally accepted auditing
standards in Israel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by the Board of Directors and management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position - of the Company and on
a consolidated basis - as of December 31, 2004 and the results of operations,
changes in shareholders' equity and cash flows - of the Company and on a
consolidated basis - for the year then ended, in accordance with generally
accepted accounting principles in Israel. In addition, in our opinion, the
financial statements referred to above are prepared in accordance with the
Israeli Securities Regulations (Preparation of Annual Financial Statements),
1993.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
the financial position and results of operations as of the dates and for the
years presented.
As explained in Note 2A, the financial statements as of dates and for reporting
period commencing January 1, 2004, are presented at reported amounts, in
accordance with accounting standards of the Israeli Accounting Standards Board.
The financial statements as of dates prior to January 1, 2004 and for reporting
periods ended through December 31, 2003, have been prepared on the basis of
historical cost adjusted for changes in the exchange rate of the U.S. dollar in
relation to the NIS, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, February 23, 2005
-1-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
BALANCE SHEETS
(NIS in thousands)
Consolidated Company
------------------------- ------------------------
December 31, December 31,
------------------------- ------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------- ------- ------- -------
Reported Adjusted Reported Adjusted
Note Amounts (1) Amounts (2) Amounts (1) Amounts (2)
--- ------- ------- ------- -------
Current Assets
Cash and cash equivalents 3 10,804 31,678 9,616 20,034
Trade receivables 4 157,815 147,748 - -
American Israeli Paper Mills
Group, net - - 178,289 (*)138,841
Other receivables 5 7,580 11,296 8,700 13,458
Inventories 6 90,391 89,231 60,301 62,650
------- ------- ------- -------
266,590 279,953 256,906 234,983
------- ------- ------- -------
Long-Term Investments
Investments in Subsidiaries 7 - - 1,933 (*) 4,340
------- ------- ------- -------
Fixed Assets 8
Cost 149,083 132,692 144,312 127,617
Less - accumulated depreciation 33,345 25,381 30,308 22,701
------- ------- ------- -------
115,738 107,311 114,004 104,916
------- ------- ------- -------
Other Assets - Goodwill 7B 3,800 4,423 - -
------- ------- ------- -------
386,128 391,687 372,843 344,239
======= ======= ======= =======
Current Liabilities
Current maturities of long-term
bank loans 11 15,125 15,108 15,125 15,108
Trade payables 9 104,661 104,097 63,902 53,397
American Israeli Paper Mills
Group, net 65,033 (*) 48,786 - -
Subsidiaries - - 99,159 52,671
Other payables and accrued expenses 10 23,132 (*) 16,864 16,480 16,231
------- ------- ------- -------
207,951 184,855 194,666 137,407
------- ------- ------- -------
Long-Term Liabilities
Long-term bank loans 11 36,248 51,725 36,248 51,725
Capital notes to shareholders 12 17,233 43,790 17,233 43,790
Deferred taxes 21 25,422 29,247 25,422 29,247
Accrued severance pay, net 13 87 145 87 145
------- ------- ------- -------
78,990 124,907 78,990 124,907
------- ------- ------- -------
Commitments and Contingent Liabilities 14
Shareholders' Equity
Share capital 15 1 1 1 1
Premium 43,352 43,352 43,352 43,352
Retained earnings 55,834 38,572 55,834 38,572
------- ------- ------- -------
99,187 81,925 99,187 81,925
------- ------- ------- -------
386,128 391,687 372,843 344,239
======= ======= ======= =======
(*) Reclassified.
(1) See Note 2A.
(2) Adjusted for changes in the exchange rate of the U.S. dollar as of
December 31, 2003.
----------------------- --------------- ----------------
E. Amar A. Solel Y. Yerushalmi
Chief Financial Officer General Manager Vice Chairman of
the Board of Directors
Approval date of the financial statements: February 23, 2005.
The accompanying notes are an integral part of the financial statements.
-2-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
STATEMENTS OF OPERATIONS
(NIS in thousands, except per share data)
Consolidated Company
---------------------------------------- ----------------------------------------
Year ended December 31, Year ended December 31,
---------------------------------------- ----------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ----------- ----------- ------- ----------- ----------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Note Amounts (1) Amounts (2) Amounts (2) Amounts (1) Amounts (2) Amounts (2)
-- ------- ----------- ----------- ------- ----------- ----------
Net sales 16 686,094 (*) 640,020 (*) 574,227 482,698 462,654 421,413
Cost of sales 17 605,738 556,890 (*) 491,712 416,504 391,492 (*)360,879
------- ----------- ----------- ------- ----------- ----------
Gross profit 80,356 83,130 82,515 66,194 71,162 60,534
Selling expenses 18 46,135 42,892 (*) 40,731 34,606 32,330 (*) 24,997
General and
administrative expenses 19 7,803 (*) 8,425 (*) 10,212 6,442 (*) 5,945 (*) 4,274
------- ----------- ----------- ------- ----------- ----------
Operating profit 26,418 31,813 31,572 25,146 32,887 31,263
Financing expenses, net 20 (8,438) (*) (2,561) (*) (3,852) (7,643) (2,713) (4,387)
Other income (expenses), net 100 (*) (215) (*) (109) 47 (*) (120) (*) (61)
------- ----------- ----------- ------- ----------- ----------
Income before income taxes 18,080 29,037 27,611 17,550 30,054 26,815
Income taxes 21 818 10,518 11,534 359 10,275 9,800
------- ----------- ----------- ------- ----------- ----------
Income after income taxes 17,262 18,519 16,077 17,191 19,779 17,015
Equity in net earnings
(losses) of Subsidiaries - - - 71 (1,260) (938)
------- ----------- ----------- ------- ----------- ----------
Net income for the year 17,262 18,519 16,077 17,262 18,519 16,077
======= =========== =========== ======= =========== ==========
Earnings per share (in NIS) 17,262 18,519 16,077 17,262 18,519 16,077
======= =========== =========== ======= =========== ==========
Number of shares used
In computation 1,000 1,000 1,000 1,000 1,000 1,000
======= =========== =========== ======= =========== ==========
(*) Reclassified.
(1) See Note 2A.
(2) Adjusted for changes in the exchange rate of the U.S. dollar as of
December 31, 2003.
The accompanying notes are an integral part of the financial statements.
-3-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NIS in thousands)
Share Retained
capital Premium earnings Total
------- ------- -------- -----
Balance - January 1, 2002
(Adjusted Amounts (2)) 1 43,352 3,976 47,329
Changes during 2002:
Net income for the year - - 16,077 16,077
------- ------- -------- ------
Balance - December 31, 2002
(Adjusted Amounts (2)) 1 43,352 20,053 63,406
Changes during 2003:
Net income for the year - - 18,519 18,519
------- ------- -------- ------
Balance - December 31, 2003
(Adjusted Amounts (2)) 1 43,352 38,572 81,925
Changes during 2004:
Net income for the year - - 17,262 17,262
------- ------- -------- ------
Balance - December 31, 2004
(Reported Amounts (1)) 1 43,352 55,834 99,187
======= ======= ======== ======
(1) See Note 2A.
(2) Adjusted for changes in the exchange rate of the U.S. dollar as of
December 31, 2003.
The accompanying notes are an integral part of the financial statements.
-4-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
STATEMENTS OF CASH FLOWS
(NIS in thousands)
Consolidated Company
--------------------------------------- ---------------------------------------
Year ended December 31, Year ended December 31,
--------------------------------------- ---------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ------- ------ ------- ------- ------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts (1) Amounts (2) Amounts (2) Amounts (1) Amounts (2) Amounts (2)
------- ------- ------ ------- ------- ------
Cash flows - operating activities
Net income for the year 17,262 18,519 16,077 17,262 18,519 16,077
Adjustments to reconcile net
income to net cash provided
by operating activities
(Appendix A) 20,295 37,698 31,659 30,855 29,887 26,772
------- ------- ------ ------- ------- ------
Net cash provided by
operating activities 37,557 56,217 47,736 48,117 48,406 42,849
------- ------- ------ ------- ------- ------
Cash flows - investing activities
Acquisition of fixed assets (16,235) (9,339) (16,305) (16,235) (9,339) (16,086)
Proceeds from sale of fixed assets 197 635 800 93 244 357
------- ------- ------ ------- ------- ------
Net cash used in investing
activities (16,038) (8,704) (15,505) (16,142) (9,095) (15,729)
------- ------- ------ ------- ------- ------
Cash flows - financing activities
Short-term bank credit, net - (18) (4,147) - - -
Repayment of long-term loans (15,265) (21,116) (7,266) (15,265) (21,116) (7,266)
Repayment of long-term capital
notes to shareholders (27,128) (43,790) - (27,128) (43,790) -
------- ------- ------ ------- ------- ------
Net cash used in
financing activities (42,393) (64,924) (11,413) (42,393) (64,906) (7,266)
------- ------- ------ ------- ------- ------
Increase (decrease) in
cash and cash equivalents (20,874) (17,411) 20,818 (10,418) (25,595) 19,854
Cash and cash equivalents -
beginning of year 31,678 49,089 28,271 20,034 45,629 25,775
------- ------- ------ ------- ------- ------
Cash and cash equivalents -
end of year 10,804 31,678 49,089 9,616 20,034 45,629
======= ======= ====== ======= ======= ======
(1) See Note 2A.
(2) Adjusted for changes in the exchange rate of the U.S. dollar as of
December 31, 2003.
The accompanying notes are an integral part of the financial statements.
-5-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
APPENDICES TO STATEMENTS OF CASH FLOWS
(NIS in thousands)
Consolidated Company
--------------------------------- ----------------------------------
Year ended December 31, Year ended December 31,
--------------------------------- ----------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------ --------- ------ ------ ------ ------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts (1) Amounts (2) Amounts (2) Amounts (1) Amounts (2) Amounts (2)
------ --------- ------ ------ ------ ------
A. Adjustments to reconcile net
income to net cash provided by
operating activities
Income and expenses items
not involving cash flows:
Equity in net losses (earnings) of
subsidiaries - - - (71) 1,260 938
Depreciation and amortization 9,118 8,626 8,077 7,885 7,252 6,484
Deferred taxes, net 823 10,438 11,483 359 10,275 9,893
Increase (decrease) in liability for
severance pay, net (58) 14 5 (58) 49 19
Capital loss (gain)
from sale of fixed assets (100) 215 84 (47) 118 37
Effect of exchange rate and linkage
differences of long-term bank
loans and long-term loan to
subsidiary (195) 1,460 (134) (195) 1,307 (120)
Effect of exchange rate
differences of long-term
capital notes to shareholders 571 - - 571 - -
Changes in assets and liabilities:
Decrease (increase)
in trade receivables (10,067) 7,247 (696) - 2,811 (2,455)
Decrease (increase)
in other receivables (932) 752 9,025 574 (328) 7,983
Decrease (increase)
in inventories (1,160) (9,533) 13,010 2,349 1,945 5,744
Increase (decrease) in trade
payables (220) 27,447 6,043 9,721 8,626 1,716
Increase (decrease) in
American Israeli Paper Mills
Group, net 16,247 (*)(1,612) (*)(19,014) (39,448) (*)(63,995) (*)(41,447)
Increase in Subsidiaries - - - 48,966 61,486 33,473
Increase (decrease) in other
Payables and accrued expenses 6,268 (*)(7,356) (*) 3,776 249 (*) (919) (*) 4,507
------ --------- ------ ------ ------ ------
20,295 37,698 31,659 30,855 29,887 26,772
====== ========= ====== ====== ====== ======
B. Non-cash activities Acquisition of fixed
assets on credit 784 - - 784 - -
====== ========= ====== ====== ====== ======
(*) Reclassified.
(1) See Note 2A.
(2) Adjusted for changes in the exchange rate of the U.S. dollar as of
December 31, 2003.
The accompanying notes are an integral part of the financial statements.
-6-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL
A. Description of Business
Mondi Business Paper Hadera Ltd. ("the Company") was incorporated and
commenced operations on January 1, 2000. The Company and its
Subsidiaries are engaged in the production and marketing of paper,
mainly in Israel.
Within the framework of a comprehensive decision of Neusiedler AG
("NAG" or the "Parent Company"), wholly-owned by the Mondi Group, the
Company and one of its Subsidiaries changed their names in November
2004 to Mondi Business Paper Hadera Ltd. and Mondi Business Paper
Hadera Marketing Ltd. in replacement of Neusiedler Hadera Paper Ltd.
and Neusiedler Hadera Paper Marketing (1999) Ltd., respectively.
In the framework of a change in the organizational structure of the
Group, effective January 1, 2003, all marketing and selling activities
of the Group, which until such date were performed by four
Subsidiaries, were centralized to one Subsidiary with three logistic
sites.
The Company is presently owned by NAG (50.1%) and American-Israeli
Paper Mills Ltd. ("AIPM") (49.9%).
B. Definitions:
The Company - Mondi Business Paper Hadera Ltd.
The Group - the Company and its Subsidiaries, a list of which is
provided in Note 7C.
Subsidiaries - companies in which the Company exercises over 50%
ownership and control, directly or indirectly, and
whose financial statements are fully consolidated
with those of the Company.
Related Parties - as defined by Opinion No. 29 of the Institute of
Certified Public Accountants in Israel.
Interested Parties - as defined in the Israeli Securities Regulations
(Presentation of Financial Statements), 1993.
Controlling Shareholder - as defined in the Israeli Securities Regulations
(Presentation of Transactions between a Corporation
and its Controlling Shareholder in the Financial
Statements), 1996.
NIS - New Israeli Shekel.
CPI - the Israeli consumer price index.
Dollar - the U.S. dollar.
Euro - the United European currency.
Adjusted Amount - see Note 2A(1) below.
Reported Amount - see Note 2A(1) below.
-7-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL (cont.)
C. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following are the principal accounting policies applied in the
preparation of the financial statements in a manner consistent with
previous years with the exception of the cessation of financial
statement adjustment as described in paragraph A below.
A. Cessation of Financial Statement Adjustment and Change to
Reporting in Reported Amounts - Standard No. 12
(1) Definitions
Adjusted Amount - historical nominal amount adjusted for
changes in the exchange rate of the U.S. dollar as of
December 31, 2003, in accordance with Opinion No. 36 of the
Institute of Certified Public Accountants in Israel.
Reported Amount - Adjusted Amount plus amounts in nominal
terms added subsequent to December 31, 2003, and less
amounts subtracted after that date.
(2) General
In January 2004, Israeli Accounting Standard No. 12
"Cessation of Financial Statements Adjustment" came into
effect. Following the initial implementation of Standard No.
12, commencing January 1, 2004, the Group ceased the
presentation of its financial statements based on nominal
historical cost adjusted for the changes in the exchange
rate of the U.S. dollar in relation to the NIS. Effective
with the interim financial statements as of March 31, 2004
and for the reporting periods thereafter, including the year
ended December 31, 2004, the Group's financial statements
are prepared and presented in Reported Amounts.
Comparative figures included in these financial statements
relating to December 31, 2003 and for each of the two years
then ended, are presented in Adjusted Amounts.
The amounts at which non-monetary items are presented in
these financial statements do not necessarily represent
their realization value or economic value, but solely their
Reported Amount.
The Company's condensed financial statements in nominal
values, on the basis of which the Company's financial
statements in Reported amounts and Adjusted Amounts were
prepared, are presented in Note 24.
-8-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
A. Cessation of Financial Statement Adjustment and Change to Reporting in
Reported Amounts - Standard No. 12 (cont.)
(3) Principles of Adjustment applicable for financial statements
relating to reporting periods ended through December, 31 2003
a. Balance Sheet Items
Non-monetary items (items whose balances reflect historical
value at acquisition or upon establishment) have been
adjusted in accordance with the changes in the exchange rate
of the U.S. dollar from the date of
acquisition/establishment through December 31, 2003.
Monetary items (items whose balance sheet amount reflects
their current value or realization value at the balance
sheet date) are presented in the December 31, 2003 balance
sheet at their nominal value as of that date.
Investments in Subsidiaries were presented based on the
dollar adjusted financial statements of these companies.
b. Statement of Operations Items
Income and expenses reflecting transactions, other than
financial income and expenses, were adjusted for changes in
the exchange rate of the U.S. dollar from the date of the
transaction through December 31, 2003.
Income and expenses deriving from non-monetary items (mainly
depreciation, amortization, deferred taxes and changes in
inventory) were presented in a manner corresponding to the
adjustment of the related balance sheet items.
Financing income (expenses), net reflect income and expenses
in real terms and include exchange rate differences derived
from monetary items.
The Company's share in the results of Subsidiaries is
determined based on the dollar adjusted financial statements
of these companies.
-9-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
A. Cessation of Financial Statement Adjustment and Change to Reporting in
Reported Amounts - Standard No. 12 (cont.)
(4) Principles of Adjustment applicable for financial statements
relating to reporting periods ended through December, 31 2004
a. Balance Sheet Items
Non-monetary items (items whose balances reflect historical value
at acquisition or upon establishment) are presented at their
Adjusted Amounts plus additions and dispositions occurring during
the reporting period. Additions made subsequent to December 31,
2003 and dispositions of items added subsequent to such date, are
presented at their historical nominal value. Dispositions of
items added on or prior to December 31, 2003 are presented at
their Adjusted Amount.
Monetary items (items whose balance sheet amount reflects their
current value or realization value at the balance sheet date) are
presented at their nominal value as of the balance sheet date.
Investments in Subsidiaries are presented based on the financial
statements of these companies prepared according to the guidance
of Standard No. 12.
b. Statement of Operations Items
Income and expenses reflecting transactions, and financial income
and expenses, are presented at their nominal value.
Income and expenses deriving from non-monetary items (mainly
depreciation, amortization and changes in inventory) were
presented in a manner corresponding to the presentation of the
related non-monetary balance sheet item, as illustrated above.
The Company's share in the results of Subsidiaries is determined
based on the financial statements of these companies prepared
according to the guidance of Standard No. 12.
-10-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
B. Principles of Consolidation
The consolidated financial statements include consolidation of the
financial statements of all Subsidiaries. Material inter-company
balances and transactions of and between Subsidiaries have been fully
eliminated.
The data included in the consolidated financial statements is based on
audited financial statements of the Subsidiaries included therein.
For amortization policy of an allocated goodwill associated with the
acquisition of a Subsidiary, see H below.
C. Cash and Cash Equivalents
Cash and cash equivalents include bank deposits, available for
immediate withdrawal, as well as unrestricted short-term deposits with
maturities of less than three months from the date of deposit.
D. Allowance for Doubtful Accounts
The allowance for doubtful accounts is computed on the specific
identification basis for accounts whose collectibility, on
management's estimation, is uncertain.
E. Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined for raw materials, auxiliary materials and finished
products on the basis of weighted moving average cost per unit.
F. Investments in Subsidiaries
Investments in Subsidiaries are presented using the equity method
based on their audited financial statements. For amortization of an
excess cost of an investment in a Subsidiary over its net book value
at the acquisition date, see H below.
G. Fixed Assets
Fixed assets are presented at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line
method at rates considered adequate to depreciate the assets over
their estimated useful lives. Amortization of leasehold improvements
is computed over the shorter of the term of the lease, including any
option period, where the Company intends to exercise such option, or
their useful life.
The annual depreciation and amortization rates are: %
Leasehold improvements 10
Machinery and equipment 5-20 (mainly 5%)
Motor vehicles 15-20
Office furniture and equipment 7-33
-11-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
G. Fixed Assets (cont.)
Impairment of Long-Lived Assets
Management reviews long-lived assets on a periodic basis, as well as
when such a review is required based upon relevant circumstances, to
determine whether events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. According to
the Israeli Accounting Standards Board's Standard No. 15, "Impairment
of Assets", an asset's recoverable value is the higher of the asset's
net selling price and the asset's value in use, the latter being equal
to the asset's discounted expected cash flows. If applicable, an
impairment loss is recorded at the amount in which the carrying amount
of the asset exceeds its recoverable value.
H. Other Assets - Goodwill
The unallocated excess cost of an investment in a Subsidiary over its
net book value at the acquisition date reflects goodwill. The goodwill
is amortized over the expected estimated economic life of the goodwill
(10 years) by the straight-line method. Impairment examinations and
recognition are performed and determined based on the accounting
policy outlined in G above.
In March 2004, the Israeli Accounting Standards Board issued Standard
No. 20 "The amortization Period of Goodwill". Standard No. 20 calls
for the amortization of goodwill over its useful life, based on a
systematic method that should reflect the estimated expected period in
which the goodwill is to contribute economic benefits. The
amortization period shall not exceed 20 years from the date on which
the goodwill was initially recognized. Standard No. 20 is in effect
for reporting periods commencing January 1, 2004, and its provisions
are to be applied on a prospective basis. The implementation of
Standard No. 20 did not, and is not expected to, affect the Group's
financial position and results of operations.
I. Supplier Discounts
Ongoing discounts granted by suppliers, as well as year end discounts,
in respect of which no commitments to meet given targets are required
by the Group, are included in the financial statements upon the
execution of purchases that grant the Group said discounts. Supplier
discounts contingent upon the Group's fulfillment of certain targets,
such as meeting a minimal annual volume (in quantities or amount), or
an increase in purchases over previous periods, are included in the
financial statements in proportion to Group's purchases from suppliers
during the reported period, which advance the Group towards the stated
targets, only if it is expected that those targets will be reached and
the discounts can reasonably be estimated. The estimate of meeting the
targets is based, inter-alia, on historical experience, Group's
relationships established with the suppliers and the estimated volume
of purchases during the remaining reported period.
-12-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
J. Deferred Income Taxes
The Group records deferred taxes in respect of temporary differences
between the carrying values of assets and liabilities in the financial
statements and their values for tax purposes, including depreciation
differences on leased property and fixed assets. The Group records
deferred-tax assets in respect of temporary difference as well as in
respect of carry-forward tax losses so long as it is probable that
those assets will be realized in the foreseeable future. The deferred
taxes are computed by the tax rates expected to be in effect at
realization, as they are known at the balance sheet date.
The computation of deferred taxes has not taken into account taxes
that would have been applicable in case of future realization of
investments in Subsidiaries, since the Group does not contemplate such
realization in the foreseeable future.
K. Revenue Recognition
Revenues are recognized upon shipment, when title has been transferred
and collectibility is reasonably assured. Revenues are presented net
of discounts granted. The accrual for estimated discounts granted is
computed according to the provisions stipulated in the agreements, and
is recorded when revenues are recognized.
L. Forward Transactions
The gain or loss of currency forward transactions designated to hedge
long-term loans from banks against currency fluctuations, are included
in operations as incurred.
M. Earnings Per Share
Earnings per share are computed based on the weighted average number
of paid up capital shares during the year.
-13-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
N. Exchange Rates and Linkage Basis
(1) Balances in foreign currency or linked thereto are included in
the financial statements based on the representative exchange
rates, as published by the Bank of Israel, that were prevailing
at the balance sheet date.
(2) Following are the changes in the representative exchange rate of
the U.S. dollar and the Euro vis-a-vis the NIS and in the Israeli
CPI:
Representative
exchange rate CPI
of the Dollar "in respect of"
As of: (NIS per $1) (in points)
------------ -----------
December 31, 2004 4.308 180.74
December 31, 2003 4.379 178.58
December 31, 2002 4.737 182.02
Increase (decrease)
during the year ended: % %
- -
December 31, 2004 (1.6) 1.2
December 31, 2003 (7.6) (1.9)
December 31, 2002 7.3 6.5
(3) Exchange-rate differences are charged to operations as
incurred.
O. Reclassification
Certain amounts in prior years' financial statements have been
reclassified in order to conform to the 2004 presentation.
P. Recent Accounting Standards - Income Taxes
In July 2004, the Israeli Accounting Standards Board published
Accounting Standard No. 19 "Income Taxes" (the "Standard"). The
Standard established the guideline for recognizing, measuring,
presenting and disclosing taxes on income taxes in the financial
statements. The Standard is effective for financial statements
relating to reporting periods commencing on, or after, January 1,
2005. The initial adoption of the Standard shall be accounted for by
the cumulative effect of change in accounting method, for the
beginning of the period in which the Standard is initially adopted.
The Company estimates that the implementation of the new Standard is
not expected to have an effect on the Group's financial position,
results of operations and cash flows.
NOTE 3 - CASH AND CASH EQUIVALENTS
Consolidated Company
------------------------ ----------------------
December 31,
----------------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------ ------ ----- ------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------ ------ ----- ------
NIS in thousands NIS in thousands
In NIS 10,215 7,186 9,616 7,138
In foreign currencies (primarily the
U.S. dollar) 589 24,492 - 12,896
------ ------ ----- ------
10,804 31,678 9,616 20,034
====== ====== ===== ======
-14-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - TRADE RECEIVABLES
Consolidated
----------------------------
December 31,
----------------------------
2 0 0 4 2 0 0 3
------- -------
Reported Adjusted
Amounts Amounts
------- -------
Composition: NIS in thousands
Domestic
Open accounts 107,693 96,469
Checks receivable 29,943 35,952
------- -------
137,636 132,421
------- -------
Foreign
Open accounts 749 -
Related parties 21,872 18,957
------- -------
22,621 18,957
------- -------
Less - allowance for doubtful accounts 2,442 3,630
------- -------
157,815 147,748
======= =======
NOTE 5 - OTHER RECEIVABLES
Consolidated Company
----------------------- ----------------------
December 31,
---------------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
----- ------ ----- ------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
----- ------ ----- ------
Composition: NIS in thousands NIS in thousands
Deferred taxes (Note 21D) 3,952 8,600 2,928 7,112
Prepaid expenses 842 990 620 329
Advances to suppliers 1,133 736 737 569
Value added taxe - - 3,636 4,922
Income tax advances, net 240 201 - -
Others 1,413 769 779 526
----- ------ ----- ------
7,580 11,296 8,700 13,458
===== ====== ===== ======
-15-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - INVENTORIES
Consolidated Company
------------------------ -----------------------
December 31,
----------------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------ ------ ------ ------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------ ------ ------ ------
NIS in thousands NIS in thousands
Raw and auxiliary materials 30,098 31,389 30,098 31,389
Finished products (1) 60,293 57,842 30,203 31,261
------ ------ ------ ------
90,391 89,231 60,301 62,650
====== ====== ====== ======
(1) Includes products in transit 1,723 - - -
====== ====== ====== ======
The inventories are net of provision
for obsolescence 1,302 1,347 1,200 971
====== ====== ====== ======
NOTE 7 - INVESTMENTS IN SUBSIDIARIES
Company
-----------------------
December 31,
-----------------------
2 0 0 4 2 0 0 3
------ ------
Reported Adjusted
Amounts Amounts
------ ------
A. Composition NIS in thousands
Cost of shares 4,338 4,338
Accumulated losses since acquisition, net (2,405) (2,476)
------ ------
1,933 1,862
Long-term loan (*) - 2,478
------ ------
1,933 4,340
====== ======
(*) The non-interest bearing loan, denominated in NIS and linked to
the Israeli Consumer Price Index, was considered part of the
Company's investments in the Subsidiary. The loan was repaid at
the end of 2004.
Consolidated
----------------------
December 31,
----------------------
2 0 0 4 2 0 0 3
----- -----
Reported Adjusted
Amounts Amounts
----- -----
B. Goodwill: NIS in thousands
Cost 6,232 6,232
Less - accumulated amortization 2,432 1,809
----- -----
3,800 4,423
===== =====
-16-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - INVESTMENTS IN SUBSIDIARIES (cont.)
C. Consolidated Subsidiaries
The consolidated financial statements as of December 31, 2004, include
the financial statements of the following Subsidiaries:
Ownership and control
As of December 31,
---------------------
2 0 0 4
---------------------
%
---------------------
Mondi Business Paper Hadera Marketing Ltd. (see Note 1A) 100.00
Grafinir Paper Marketing Ltd. 100.00
Yavnir (1999) Ltd. 100.00
Miterani Paper Marketing 2000 (1998) Ltd. 100.00
NOTE 8 - FIXED ASSETS
Office
Machinery furniture
Leasehold and Motor and
improvements equipment vehicles equipment Total
----- ----------- ----- ----- -------
Consolidated NIS in thousands
Cost:
Balance - January 1, 2004
(Adjusted Amounts) 3,724 (*) 124,390 1,785 2,793 132,692
Changes during 2004:
Additions - 16,155 811 53 17,019
Dispositions - (317) (311) - (628)
----- ----------- ----- ----- -------
Balance - December 31, 2004
(Reported Amounts) (1) 3,724 140,228 2,285 2,846 149,083
----- ----------- ----- ----- -------
Accumulated depreciation:
Balance - January 1, 2004
(Adjusted Amounts) 1,427 21,703 1,215 1,036 25,381
Changes during 2004:
Additions 389 7,329 367 410 8,495
Dispositions - (277) (254) - (531)
----- ----------- ----- ----- -------
Balance - December 31, 2004
(Reported Amounts) 1,816 28,755 1,328 1,446 33,345
----- ----------- ----- ----- -------
Net book value:
December 31, 2004
(Reported Amounts) 1,908 111,473 957 1,400 115,738
===== =========== ===== ===== =======
December 31, 2003
(Adjusted Amounts) 2,297 102,687 570 1,757 107,311
===== =========== ===== ===== =======
(*) Reclassified.
-17-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - FIXED ASSETS (cont.)
Office
Machinery furniture
Leasehold and Motor and
improvements equipment vehicles equipment Total
------------ --------- -------- --------- ------
Company NIS in thousands
Cost:
Balance - January 1, 2004
(Adjusted Amounts) 2,651 (*)123,066 71 1,829 127,617
Changes during 2004:
Additions - 16,155 811 53 17,019
Dispositions - (317) (7) - (324)
------------ --------- -------- --------- -------
Balance - December 31, 2004
(Reported Amounts) (1) 2,651 138,904 875 1,882 144,312
------------ --------- -------- --------- -------
Accumulated depreciation:
Balance - January 1, 2004
(Adjusted Amounts) 1,040 21,033 38 590 22,701
Changes during 2004:
Additions 265 7,172 121 327 7,885
Dispositions - (277) (1) - (278)
------------ --------- -------- --------- -------
Balance - December 31, 2004
(Reported Amounts) 1,305 27,928 158 917 30,308
------------ --------- -------- --------- -------
Net book value:
December 31, 2004
(Reported Amounts) 1,346 110,976 717 965 114,004
-=========== ========= ======== ========= =======
December 31, 2003
(Adjusted Amounts) 1,611 102,033 33 1,239 104,916
-=========== ========= ======== ========= =======
(*) Reclassified.
(1) Total cost as of December 31, 2004 includes payments on account of fixed
asset in the amount of NIS 5,326 thousand.
-18-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - TRADE PAYABLES
Consolidated Company
------------------------ -----------------------
December 31,
-----------------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------- ------- ------ ------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------- ------- ------ ------
NIS in thousands NIS in thousands
In Israeli currency 22,484 19,981 20,561 16,163
In foreign currency or linked thereto 82,177 84,116 43,341 37,234
------- ------- ------ ------
104,661 104,097 63,902 53,397
======= ======= ====== ======
NOTE 10 - OTHER PAYABLES AND ACCRUED EXPENSES
Consolidated Company
----------------------- -----------------------
December 31,
----------------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------ --------- ------ ---------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------ --------- ------ ---------
NIS in thousands NIS in thousands
Accrued payroll
and related expenses 11,703 (*)11,900 11,703 (*)11,900
Value Added Tax 3,366 368 - -
Advances from customers 862 258 - -
NAG - Parent Company 2,252 552 - 552
Interest payable 2,900 2,882 2,900 2,882
Forward transaction 1,322 - 1,322 -
Other 727 (*) 904 555 (*) 897
------ --------- ------ ---------
23,132 (*)16,864 16,480 (*)16,231
====== ========= ====== =========
(*) Reclassified.
-19-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - LONG-TERM BANK LOANS
Consolidated
and Company
Interest ---------------------
rate December 31,
-------- ---------------------
% (*) 2 0 0 4 2 0 0 3
------ ------
Reported Adjusted
Amounts Amounts
------ ------
A.Composition NIS in thousands
In U.S. dollar (**) 3.06 31,946 44,755
In Israeli CPI 6.55 19,427 22,078
------ ------
51,373 66,833
Less - current maturities 15,125 15,108
------ ------
36,248 51,725
====== ======
(*) Annual average interest rate as of December 31, 2004.
(**) As of December 31, 2004, NIS 25,484 thousand bear interest based on Libor
plus + 0.5%-0.6%.
Consolidated
and Company
-----------
December 31,
------------
2 0 0 4
-------
Reported
Amounts
-------
B. Maturities NIS in thousands
Second year - 2006 15,327
Third year - 2007 11,235
Fourth year - 2008 3,688
Fifth year - 2009 5,998
Sixth year - 2010 and thereafter -
-------
36,248
=======
C. According to the loan agreements with the banks, the Company is to
achieve, inter alia, financial ratio at the end of each audited fiscal
year of total shareholders equity including capital notes to
shareholders to total assets to be no less than 30%. In case the
Company fails to fulfill these covenants, the banks are entitled to
demand early repayment of the loans, in whole or in part. As of
December 31, 2004, the Company was in full compliance with the
covenants stipulated in the bank agreements and this financial ratio
amounted to 30.15%.
D. As to a "negative pledge agreement" signed by the Company, see Note
14B.
E. In 2004 and 2003, the Company and its Subsidiaries entered into an
agreement for a bank credit facility, pursuant to which the Company
and its subsidiaries may, from time to time, borrow an aggregate
principal amount of up to adjusted NIS 87,580 thousand. Under the
-20-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
terms of the agreement, the credit facility has no time limit. As of
the balance sheet date, the Group has not utilized any of the credit
facility.
NOTE 12 - CAPITAL NOTES TO SHAREHOLDERS
The capital notes to shareholders are linked to the dollar and bear no
interest. According to the terms of the capital notes, the Company has
the ultimate discretion upon the dates of repayment of the capital
notes. As of December 31, 2004, the Company has not yet determined the
future repayment dates.
During 2004, the Company repaid the shareholders an aggregate of NIS
27,128 thousand ($ 6,000 thousand) in respect of capital notes.
NOTE 13 - ACCRUED SEVERANCE PAY, NET
Israeli law and labor agreements determine the obligations of the
Group to make severance payments to dismissed employees and to
employees leaving employment under certain other circumstances. The
liability for severance pay benefits, as determined by Israeli Law, is
based upon length of service and the employee's most recent monthly
salary. The liability of the Group for severance pay to its permanent
employees is covered by current deposits to pension and severance
funds. Accumulated amounts so funded are not under the control or
administration of the Group, and accordingly, neither those amounts
nor the corresponding accruals are reflected in the financial
statements. The amounts presented in the balance sheet as of December
31, 2004 reflects the severance pay liability in respect of temporary
employees.
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
A. Commitments
(1) The Group is obligated to pay license fees to a shareholder - see
Note 22B.
(2) The Company and its Subsidiaries lease certain of their
facilities under operating leases for varying periods with
renewal options primarily from AIPM. Future minimum lease rentals
as of December 31, 2004 are as follows:
Consolidated Company
------------ -------
Reported amounts
----------------
NIS in thousands
----------------
2005 4,599 3,446
2006 4,599 3,446
2007 4,599 3,446
2008 4,453 3,446
------ ------
18,250 13,784
====== ======
B. Liens
To secure long-term bank loans and short-term bank credit (the balance
of which as of December, 31 2004 is NIS 51,373 thousand), the Company
entered into a "negative pledge" agreement under which the Company is
committed not to pledge any of its assets, excluding fixed pledges
relating to assets financed by others, prior to the consent of the
banks.
-21-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
C. Guarantees
The Company from time to time and in the framework of its ongoing
operations provides guarantees, the amount of which as of December, 31
2004 was NIS 4,058 thousand.
NOTE 15 - SHARE CAPITAL
A. As of December 31, 2004 and 2003, share capital is composed of
ordinary shares of NIS 1.00 par value each. Authorized - 38,000
shares; issued and paid up - 1,000 shares.
B. Holders of ordinary shares are entitled to participate equally in the
payment of cash dividends and bonus share (stock dividend)
distributions and, in the event of the liquidation of the Company, in
the distribution of assets after satisfaction of liabilities to
creditors. See also Note 1A.
NOTE 16 - NET SALES
Consolidated Company
-------------------------------------- -------------------------------------
Year ended December 31, Year ended December 31,
------- ----------- ----------- ------- ------- -------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ----------- ----------- ------- ------- -------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- ----------- ----------- ------- ------- -------
NIS in thousands NIS in thousands
Industrial operations 471,190 (*) 453,807 (*) 422,885 482,698 462,654 421,413
Commercial operations 214,904 186,213 (*) 151,342 - - -
------- ----------- ----------- ------- ------- -------
686,094 (*) 640,020 (*) 574,227 482,698 462,654 421,413
======= =========== =========== ======= ======= =======
(*) Reclassified.
-22-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 17 - COST OF SALES
Consolidated Company
---------------------------------------- ------------------------------------
Year ended December 31, Year ended December 31,
---------------------------------------- ------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- --------- ---------- ------- --------- ----------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- --------- ---------- ------- --------- ----------
NIS in thousands NIS in thousands
Purchases (**) 188,013 177,176 122,125 - - -
Materials consumed 297,006 271,334 251,070 297,006 271,334 251,070
Salaries and related expenses 32,576 30,482 (*) 27,358 32,576 30,482 (*) 27,358
Subcontracting 5,066 (*) 4,388 (*) 2,951 5,06 (*) 4,388 (*) 2,951
Energy costs 45,991 43,166 36,539 45,991 43,166 36,539
Depreciation 7,896 7,243 6,464 7,897 7,243 6,464
Other manufacturing costs
and expenses (including rent) 31,124 (*)30,370 (*) 26,230 30,335 (*)29,584 (*) 24,788
------- --------- ---------- ------- --------- ----------
607,672 564,159 472,737 418,871 386,197 349,170
Change in finished goods and
goods in process (1,934) (7,269) 18,975 (2,367) 5,295 11,709
------- --------- ---------- ------- --------- ----------
605,738 556,890 (*)491,712 416,504 391,492 (*)360,879
======= ========= ========== ======= ========= ==========
(*) Reclassified.
(**) The purchases of the Group are related principally to commercial
operations.
NOTE 18 - SELLING EXPENSES
Consolidated Company
---------------------------------------- ------------------------------------
Year ended December 31, Year ended December 31,
---------------------------------------- ------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- --------- ---------- ------- --------- ----------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- --------- ---------- ------- --------- ----------
NIS in thousands NIS in thousands
Salaries and related expenses 17,169 16,913 (*)16,440 17,169 16,913 (*) 10,284
Packaging and shipping to customers 16,235 (*)14,368 (*)14,460 15,464 (*)13,756 (*) 13,058
Maintenance and rent 7,973 (*) 7,641 (*) 7,195 313 (*) 429 (*) 1,204
Transportation expenses 1,256 1,178 1,427 1,137 399 315
Advertising - 180 153 - 180 116
Commissions and license fees
to a shareholder 2,912 1,865 176 - - -
Depreciation 552 670 880 523 (*) 653 20
Other 38 (*) 77 (*) - - (*) - (*) -
------- --------- ---------- ------ --------- -----------
46,135 42,892 (*)40,731 34,606 32,330 (*) 24,997
======= ========= ========== ====== ========= ===========
(*) Reclassified.
-23-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 19 - GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated Company
---------------------------------- ------------------------------------
Year ended December 31, Year ended December 31,
---------------------------------- ------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
----- --------- --------- ----- --------- ---------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
----- --------- --------- ----- --------- ---------
NIS in thousands NIS in thousands
Salaries and related expenses 3,811 3,821 3,310 3,811 3,821 2,090
Office maintenance 187 (*) 232 (*) 696 - (*) - (*) -
Professional and
management fees 2,217 1,594 2,227 1,555 1,152 1,549
Depreciation 47 (*) 28 (*) 110 40 (*) 31 (*) -
Amortization of goodwill 623 (*) 623 (*) 623 - - -
Bad and doubtful debts (311) 679 1,475 - - -
Other 1,229 (*) 1,448 (*) 1,771 1,036 (*) 941 (*) 635
----- --------- --------- ----- --------- ---------
7,803 (*) 8,425 (*)10,212 6,442 (*) 5,945 (*) 4,274
===== ========= ========= ===== ========= =========
(*) Reclassified.
NOTE 20 - FINANCING EXPENSES, NET
Consolidated Company
---------------------------------- ----------------------------------
Year ended December 31, Year ended December 31,
---------------------------------- ----------------------------------
2 0 0 4 (*)2 0 0 3 (*)2 0 0 2 2 0 0 4 (*)2 0 0 3 (*)2 0 0 2
----- ----- ------ ----- ------ -----
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
----- ----- ------ ----- ------ -----
NIS in thousands NIS in thousands
Interest on long-term bank loans 2,573 3,254 4,208 2,573 3,254 4,208
===== ===== ====== ===== ====== =====
Erosion of monetary assets and
liabilities, net 2,070 (783) (1,210) 1,293 (2,112) (664)
===== ===== ====== ===== ====== =====
Forward transaction 1,322 - - 1,322 - -
===== ===== ====== ===== ====== =====
(*) Reclassified.
-24-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 21 - INCOME TAXES
A. The Company and its Subsidiaries are taxed according to the provisions
of The Income Tax Ordinance and the Income Tax Law (Inflationary
Adjustments), 1985. The Company is an industrial company in conformity
with the Law for the Encouragement of Industry (Taxes), 1969. The
major benefits the Company is entitled to under this law is
accelerated depreciation rates.
Consolidated Company
------------------------------------ -------------------------------------
Year ended December 31, Year ended December 31,
------------------------------------ -------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ------- ------- ------- ------- -------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- ------- ------- ------- ------- -------
B. Composition NIS in thousands NIS in thousands
Current taxes 81 80 51 - - -
Taxes in respect of prior years (86) - - - - (93)
Deferred taxes (E. below) 823 10,438 11,483 359 10,275 9,893
--- ------ ------ --- ------ -----
818 10,518 11,534 359 10,275 9,800
=== ====== ====== === ====== =====
C. Reconciliation of the Statutory Tax Rate to the Effective Tax Rate
Consolidated Company
-------------------------------------- --------------------------------------
Year ended December 31, Year ended December 31,
-------------------------------------- --------------------------------------
2 0 0 4 (*)2 0 0 3 (*)2 0 0 2 2 0 0 4 (*)2 0 0 3 (*)2 0 0 2
------ ------ ------ ------ ------ ------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------ ------ ------ ------ ------ ------
NIS in thousands NIS in thousands
Income before income taxes 18,080 29,037 27,611 17,550 30,054 26,815
====== ====== ====== ====== ====== ======
Tax computed by
statutory tax rate
(35%-36% - see E. below) 6,328 10,453 9,940 6,143 10,819 9,653
Tax increments (savings)
due to:
Non-deductible expenses 211 226 239 - 33 -
Non-taxable income (40) - (94) (21) (15) (94)
Reduction in corporate tax rates -
(E. below) (4,397) - - (4,479) - -
Differences arising from
basis of measurement (**) (1,198) (161) 1,449 (1,284) (562) 334
Prior years income taxes (86) - - - - (93)
------ ------ ------ ------ ------ ------
818 10,518 11,534 359 10,275 9,800
====== ====== ====== ====== ====== ======
(*) Reclassified.
(**) For 2004 - Reported Amounts (NIS) for financial reporting purposes
vis-a-vis the consumer price index for tax purposes; For 2003 and 2002 -
U.S. dollar for financial reporting purposes vis-a-vis the Consumer Price
Index for tax purposes.
-25-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 21 - INCOME TAXES (cont.)
D. Deferred Taxes
Consolidated Company
--------------------------------------- ---------------------------------------
Year ended December 31, Year ended December 31,
--------------------------------------- ---------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ------- ------- ------- ------- -------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- ------- ------- ------- ------- -------
NIS in thousands NIS in thousands
Balance as of beginning of year (20,647) (10,209) 1,274 (22,135) (11,860) (1,967)
Changes during the year (5,220) (10,438) (11,483) (4,838) (10,275) (9,893)
Adjustment due to
change in income tax rates 4,397 - - 4,479 - -
------- ------- ------- ------- ------- -------
Balance as of end of year (21,470) (20,647) (10,209) (22,494) (22,135) (11,860)
======= ======= ======= ======= ======= =======
Consolidated Company
----------------------- -----------------------
December 31,
-------------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------- ------- ------- -------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------- ------- ------- -------
NIS in thousands NIS in thousands
Deferred taxes are presented in the
balance sheets as follows:
Long-term liabilities:
Depreciable fixed assets (25,448) (29,299) (25,448) (29,299)
Accrued severance pay, net 26 52 26 52
------- ------- ------- -------
(25,422) (29,247) (25,422) (29,247)
------- ------- ------- -------
Other receivables and prepayments (Note 5):
Inventories - 544 - 364
Allowance for doubtful accounts 831 1,308 - -
Vacation and recreation pay 1,564 1,518 1,564 1,518
Carry forward tax losses 1,557 5,230 1,364 5,230
------- ------- ------- -------
3,952 8,600 2,928 7,112
------- ------- ------- -------
(21,470) (20,647) (22,494) (22,135)
======= ======= ======= =======
For 2004 - Deferred taxes were computed at rates between 30%-34%, primarily
- 30%.
For 2003 - Deferred taxes were computed at 36%.
E. Reduction of Corporate Tax Rates
In June 2004, the Israeli Knesset passed Amendment No. 140 to the Income
Tax Ordinance, according to which the corporate income-tax rate would be
gradually reduced from 36% to 30% by 2007 (2004-35%, 2005-34%, 2006-32%,
2007-30%).
-26-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 21 - INCOME TAXES (cont.)
F. Carryforward tax losses of the Group and the Company are NIS 4,362 thousand
and NIS 4,010 thousand as of December 31, 2004, respectively.
G. The Company and its Subsidiaries have tax assessments that are considered
final through the 2000 tax year.
NOTE 22 - RELATED PARTIES AND INTERESTED PARTIES
A. Balances with Related Parties and Subsidiaries
Consolidated Company
--------------------- ----------------------
December 31,
---------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------ --------- ------- ----------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------ --------- ------- ----------
NIS in thousands NIS in thousands
Trade receivables - AIPM - - 178,289 (*)138,841
====== ========= ======= ==========
Trade receivables - related parties 21,872 18,957 - -
====== ========= ======= ==========
Long-term loan to Subsidiary - - - 2,478
====== ========= ======= ==========
Trade payables - AIPM 65,033 (*)48,786 - -
====== ========= ======= ==========
Trade payables - related parties 9,009 (*) 9,536 103,671 (*) 54,094
====== ========= ======= ==========
Other payables and accrued expenses - AIPM 2,478 (*) 2,298 2,478 (*) 2,298
====== ========= ======= ==========
Other payables and accrued expenses - related
parties 2,252 (*) 552 - (*) 552
====== ========= ======= ==========
Capital notes to shareholders 17,233 43,790 17,233 43,790
====== ========= ======= ==========
(*) Reclassified.
-27-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 22 - RELATED PARTIES AND INTERESTED PARTIES (cont.)
B. Transactions with Related Parties and Subsidiaries
Consolidated Company
----------------------------------- ---------------------------------
Year ended December 31, Year ended December 31,
------- ---------- ---------- ------ ---------- ---------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ---------- ---------- ------ ---------- ---------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- ---------- ---------- ------ ---------- ---------
NIS in thousands NIS in thousands
Sales to related parties 165,596 171,131 155,599 - - -
======= ========== ========== ======= ========== =========
Sales to Subsidiaries - - - 482,698 462,654 421,413
======= ========== ========== ======= ========== =========
Cost of sales 106,546 (*) 88,613 (*) 75,716 78,400 (*) 73,024 (*)66,035
======= ========== ========== ======= ========== =========
Selling expenses, net
(Participation in selling
expenses, net) 9,875 (*) 6,428 (*) - 1,796 (*) (1,909) (*)(3,643)
======= ========== ========== ======= ========== =========
General and administrative expenses 1,837 (*) 1,410 (*) 1,756 1,480 (*) 1,086 (*) 1,432
======= ========== ========== ======= ========== =========
Financing expenses (income), net 1,939 13,759 (3,722) 2,268 858 (298)
======= ========== ========== ======= ========== =========
(*) Reclassified.
(**) The transactions as above are in the ordinary course of business at market
prices and customary credit terms.
C. (1) The Company leases its premises from AIPM and render services
(including electricity, water, maintenance and professional services)
under agreements, which are renewed every year.
(2) The Group is obligated to pay commissions and license fees to NAG.
NOTE 23 - DISCLOSURE AND PRESENTATION OF FINANCIAL INSTRUMENTS
A. Credit Risk
The revenues of the Group's are derive from a large number of
customers mainly in Israel and in Europe. Management regularly
monitors the balance of trade receivables and the financial statements
include an allowance for doubtful accounts based on management's
estimation. Taking the aforementioned into consideration, the exposure
to credit risk from trade receivables is immaterial.
Cash and cash equivalents (including amounts in foreign currency) are
deposited with major commercial banks in Israel.
-28-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 23 - DISCLOSURE AND PRESENTATION OF FINANCIAL INSTRUMENTS (cont.)
B. Fair Value of Financial Instruments
The financial instruments of the Group consist primarily of
non-derivative assets and liabilities. Non-derivative assets include
cash and cash equivalents, receivables, other current assets and
long-term loans given. Non-derivative liabilities include trade
payables, other current liabilities, long-term loans from banks and
capital notes to shareholders. Due to the nature of these financial
instruments, their fair value, generally, is identical or close to the
value at which they are presented in the financial statements, unless
stated otherwise.
The fair value of the long-term loans approximates their carrying
value, since they bear interest at rates close to the prevailing
market rates.
The terms of the Capital Notes to shareholders do not include
determined payment dates. Therefore, fair value based on present
values cannot be established and accordingly is not disclosed in the
financial statements.
The Group maintains enters from time to time, into off-balance sheet
financial instruments for hedging against currency and interest-rate
risks.
-29-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 24 - COMPANY'S FINANCIAL STATEMENTS IN NOMINAL VALUES
A. Balance Sheets
Company
-----------------------
December 31,
-----------------------
2 0 0 4 2 0 0 3
------- -----------
NIS in thousands
Current Assets
Cash and cash equivalents 9,616 20,034
American Israeli Paper Mills Group, net 178,289 (*) 138,841
Other receivables 5,772 6,328
Inventories 60,301 63,651
------- -----------
253,978 228,854
------- -----------
Long-Term Investments
Investments in Subsidiaries
648 (*) 2,854
======= ===========
Fixed Assets, net 111,066 101,815
------- -----------
365,692 333,523
======= ===========
Current Liabilities
Current maturities of long-term bank loans 15,125 15,108
Trade payables 63,902 53,397
Subsidiaries 99,159 52,671
Other payables and accrued expenses 16,480 (*) 16,231
------- -----------
194,666 137,407
------- -----------
Long term liabilities
Long term-bank loans 36,248 51,725
Capital notes to shareholders 17,233 43,790
Accrued severance pay, net 87 145
------- -----------
53,568 95,660
------- -----------
Shareholders' Equity 117,458 100,456
------- -----------
365,692 333,523
======= ===========
-30-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 24 - COMPANY'S FINANCIAL STATEMENTS IN NOMINAL VALUES (cont.)
B. Statement of Operations
Year ended December 31,
------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2
------- --------- ----------
NIS in thousands
Net sales 482,698 480,764 452,986
Cost of sales 417,831 406,930 (*)380,830
------- --------- ----------
Gross profit 64,867 73,834 72,156
Selling expenses 34,598 33,455 (*) 26,929
General and administrative expenses 6,444 (*) 9,080 (*) 4,629
------- --------- ----------
Operating profit 23,825 31,299 40,598
Financing (expenses) income, net (7,143) 3,152 (11,957)
Other income (expenses), net 48 (*) (93) (*) (10)
------- --------- ----------
Income before income taxes 16,730 34,358 28,631
Income taxes - - -
------- --------- ----------
Income after income taxes 16,730 34,358 28,631
Equity in net earnings (losses) of Subsidiaries 272 (34) (385)
------- --------- ----------
Net income for the year 17,002 34,324 28,246
(*) Reclassified.
-31-
MONDI BUSINESS PAPER HADERA LTD.
(FORMERLY, NEUSIEDLER HADERA PAPER LTD.)
NOTES TO FINANCIAL STATEMENTS
NOTE 24 - COMPANY'S FINANCIAL STATEMENTS IN NOMINAL VALUES (cont.)
C. Statements of Changes in Shareholders' Equity
Share Retained
Capital Premium earnings Total
------- ------ ------ -------
NIS in thousands
Balance - January 1, 2002 1 41,125 (3,240) 37,886
------- ------ ------ -------
Changes during 2002:
Net income for the year - - 28,246 28,246
------- ------ ------ -------
Balance - December 31, 2002 1 41,125 25,006 66,132
------- ------ ------ -------
Changes during 2003:
Net income for the year - - 34,324 34,324
------- ------ ------ -------
Balance - December 31, 2003 1 41,125 59,330 100,456
------- ------ ------ -------
Changes during 2004:
Net income for the year - - 17,002 17,002
------- ------ ------ -------
Balance - December 31, 2004 1 41,125 76,332 117,458
======= ====== ====== =======
-32-
EXHIBIT 19(a)(iii)
------------------
HOGLA-KIMBERLY LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
HOGLA-KIMBERLY LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
TABLE OF CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm 1
Financial Statements:
Balance Sheets 2
Statements of Operations 3
Statements of Changes in Shareholders' Equity 4
Statements of Cash Flows 5-6
Notes to the Financial Statements 7-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Hogla-Kimberly Ltd.
We have audited the accompanying balance sheets of Hogla-Kimberly Ltd. ("the
Company") as of December 31, 2004 and 2003, and the consolidated balance sheets
as of those dates, and the related statements of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States) and with generally accepted auditing
standards in Israel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by the Board of Directors and management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position - of the Company and
on a consolidated basis - as of December 31, 2004 and 2003, and the results of
operations, changes in shareholders' equity and cash flows - of the Company and
on a consolidated basis - for each of the three years in the period ended
December 31, 2004, in accordance with generally accepted accounting principles
in Israel. In addition, in our opinion, the financial statements referred to
above are prepared in accordance with the Israeli Securities Regulations
(Preparation of Annual Financial Statements), 1993.
As explained in Note 2A, the financial statements as of dates and for reporting
period commencing January 1, 2004, are presented at reported amounts, in
accordance with accounting standards of the Israeli Accounting Standards Board.
The financial statements as of dates prior to January 1, 2004 and for reporting
periods ended through December 31, 2003, have been prepared on the basis of
historical cost adjusted for changes in the exchange rate of the U.S. dollar in
relation to the NIS, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, March 7, 2005
-1-
HOGLA-KIMBERLY LTD.
BALANCE SHEETS
(NIS in thousands)
Consolidated Company
---------------------- -----------------------
December 31, December 31,
---------------------- -----------------------
Note 2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
---- ------- ------- ------- -------
Reported Adjusted Reported Adjusted
Amounts (1) Amounts (3) Amounts (1) Amounts (3)
------- ------- ------- -------
Current Assets
Cash and cash equivalents 3 117,364 37,340 109,717 31,645
Current maturities of long-term bank deposits 7 - 7,882 - 7,882
Trade receivables 4 214,389 229,979 113,448 74,668
Other receivables 5 35,725 14,222 13,855 7,879
Inventories 6 142,551 92,664 71,185 58,539
------- ------- ------- -------
510,029 382,087 308,205 180,613
------- ------- ------- -------
Long-Term Investments
Long-term bank deposits 7 68,928 70,064 - -
Capital note of shareholder 8 32,770 32,770 32,770 32,770
Investments in Subsidiaries 9 - - 176,400 196,037
------- ------- ------- -------
101,698 102,834 209,170 228,807
------- ------- ------- -------
Fixed Assets 10
Cost 507,175 479,744 406,271 380,774
Less - accumulated depreciation 222,256 210,176 174,306 164,163
------- ------- ------- -------
284,919 269,568 231,965 216,611
------- ------- ------- -------
Other Assets
Goodwill 9B 25,878 29,073 - -
Deferred taxes 22 15,108 - - -
------- ------- ------- -------
40,986 29,073 - -
------- ------- ------- -------
937,632 783,562 749,340 626,031
======= ======= ======= =======
Current Liabilities
Short-term bank credit - 1,087 - 1,087
Current maturities of
long-term bank loans 13 68,747 15,147 - -
Trade payables 11 219,902 139,555 265,546 174,580
Other payables and accrued expenses 12 38,720 37,632 12,249 10,645
------- ------- ------- -------
327,369 193,421 277,795 186,312
------- ------- ------- -------
Long-Term Liabilities
Long-term bank loans 13 81,851 96,338 - -
Deferred taxes 22 37,388 29,428 35,013 26,738
------- ------- ------- -------
119,239 125,766 35,013 26,738
------- ------- ------- -------
Commitments and Contingent Liabilities 15
Minority Interest 54,492 51,394 - -
------- ------- ------- -------
Shareholders' Equity
Share capital 16 29,038 28,788 29,038 28,788
Capital reserves 180,414 156,799 180,414 156,799
Translation adjustments relating to
foreign held autonomous Subsidiary (2) (3,377) - (3,377) -
Retained earnings 230,457 227,394 230,457 227,394
------- ------- ------- -------
436,532 412,981 436,532 412,981
------- ------- ------- -------
937,632 783,562 749,340 626,031
======= ======= ======= =======
(1) See Note 2A(1).
(2) See Note 2B.
(3) Adjusted for changes in the exchange rate of the U.S dollar as of December
31, 2003.
-------- ------------- -------- ----------
T. Davis Y. Yerushalmi O. Argov A. Brenner
Chairman of the Vice-Chairman of the Chief Financial Chief Executive
Board of Directors Board of Directors Officer Officer
Approval date of the financial statements: March 7, 2005.
The accompanying notes are an integral part of the financial statements.
-2-
HOGLA-KIMBERLY LTD.
STATEMENTS OF OPERATIONS
(NIS in thousands)
Consolidated Company
---------------------------------------- ----------------------------------------
Year ended December 31, Year ended December 31,
---------------------------------------- ----------------------------------------
Note 2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
---- --------- --------- --------- --------- --------- ---------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts (1) Amounts (2) Amounts (2) Amounts (1) Amounts (2) Amounts (2)
--------- --------- --------- --------- --------- ---------
Net sales 17 995,569 868,671 766,549 479,320 377,117 285,442
Cost of sales 18 719,982 621,014 554,763 393,903 322,558 233,096
--------- --------- --------- --------- --------- ---------
Gross profit 275,587 247,657 211,786 85,417 54,559 52,346
Selling expenses 19 193,701 130,670 123,955 15,286 7,538 5,373
General and
administrative expenses 20 41,029 39,046 29,941 4,985 4,381 5,368
--------- --------- --------- --------- --------- ---------
Operating profit 40,857 77,941 57,890 65,146 42,640 41,605
Financing income
(expenses), net 21 (1,490) 5,517 (13,425) (4,536) (12,268) (4,622)
Other income, net 903 496 78 205 238 714
--------- --------- --------- --------- --------- ---------
Income before income taxes 40,270 83,954 44,543 60,815 30,610 37,697
Income taxes 22 10,244 20,566 19,232 17,627 11,775 16,076
--------- --------- --------- --------- --------- ---------
Income after income
taxes 30,026 63,388 25,311 43,188 18,835 21,621
Equity in net earnings (losses)
of Subsidiaries - - - (16,260) 37,418 1,091
Minority interest in
earnings of Subsidiary (3,098) (7,135) (2,599) - - -
--------- --------- --------- --------- --------- ---------
Net income for the year 26,928 56,253 22,712 26,928 56,253 22,712
========= ========= ========= ========= ========= =========
Earnings per share (in NIS) (*) 3.16 6.61 2.67 3.16 6.61 2.67
========= ========= ========= ========= ========= =========
Number of shares used in
computation (*) 8,513,473 8,513,473 8,513,473 8,513,473 8,513,473 8,513,473
========= ========= ========= ========= ========= =========
(1) See Note 2A(1).
(2) Adjusted for changes in the exchange rate of the U.S dollar as of December
31, 2003.
(*) Retroactively adjusted for the effect of bonus share distribution.
The accompanying notes are an integral part of the financial statements.
HOGLA-KIMBERLY LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NIS in thousands)
Translation Dividend
adjustments declared
relating to after
foreign held balance
Share Capital autonomous Retained sheet
capital reserves Subsidiary earnings date Total
------ ------- ------ ------- -------- -------
Balance - January 1, 2002
(Adjusted Amounts (3)) 28,788 156,799 - 181,272 - 366,859
Changes during 2002:
Dividend declared
after balance-sheet date (32,843) 32,843 -
Net income for the year 22,712 22,712
------ ------- -------- ------- -------- -------
Balance - December 31, 2002 28,788 156,799 32,843 389,571
(Adjusted Amounts (3)) - 171,141
Changes during 2003:
Dividend paid (32,843) (32,843)
Net income for the year 56,253 56,253
------ ------- -------- ------- -------- -------
Balance - December 31, 2003
(Adjusted Amounts (3)) 28,788 156,799 - 227,394 - 412,981
Changes during 2004:
Distribution of bonus shares 250 23,615 (23,865) -
Translation adjustments
relating to foreign held
autonomous Subsidiary (2) (3,377) (3,377)
Net income for the year 26,928 26,928
------ ------- -------- ------- -------- -------
Balance - December 31, 2004
(Reported Amounts (1)) 29,038 180,414 (3,377) 230,457 - 436,532
------ ------- -------- ------- -------- -------
(1) See Note 2A(1).
(2) See Note 2B.
(3) Adjusted for changes in the exchange rate of the U.S dollar as of December
31, 2003.
The accompanying notes are an integral part of the financial statements.
-3-
HOGLA-KIMBERLY LTD.
STATEMENTS OF CASH FLOWS
(NIS in thousands)
Consolidated Company
--------------------------------- ----------------------------------
Year ended December 31, Year ended December 31,
--------------------------------- ----------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ------- ------- ------- ------- -------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts (1) Amounts (3) Amounts (3) Amounts (1) Amounts (3) Amounts (3)
------- ------- ------- ------- ------- -------
Cash flows - operating activities
Net income 26,928 56,253 22,712 26,928 56,253 22,712
Adjustments to reconcile net
income to net cash provided by
operating activities
(Appendix A) 30,683 4,190 14,324 60,934 7,188 80,535
-------- ------- ------- -------- ------- -------
Net cash provided by
operating activities 57,611 60,443 37,036 87,862 63,441 103,247
-------- ------- ------- -------- ------- -------
Cash flows - investing activities
Withdrawal of short-term bank deposit - - 57,069 - - -
Withdrawal of long-term bank deposits 8,138 9,195 8,759 8,138 9,195 8,759
Acquisition of fixed assets (25,191) (26,953) (76,523) (17,490) (20,351) (66,375)
Proceeds from sale of fixed assets 1,827 1,092 456 649 284 161
-------- ------- ------- -------- ------- -------
Net cash used in investing activities (15,226) (16,666) (10,239) (8,703) (10,872) (57,455)
-------- ------- ------- -------- ------- -------
Cash flows - financing activities
Dividend paid - (32,843) (43,790) - (32,843) (43,790)
Long-term loans received 57,672 28,949 11,386 - - -
Repayment of long-term loans (15,162) (24,960) - - - -
Short-term bank credit (1,087) 1,087 - (1,087) 1,087 -
-------- ------- ------- -------- ------- -------
Net cash provided by
(used in) financing activities 41,423 (27,767) (32,404) (1,087) (31,756) (43,790)
-------- ------- ------- -------- ------- -------
Translation adjustments of cash
and cash equivalents of foreign
held autonomous Subsidiary (2) (3,784) - - - - -
-------- ------- ------- -------- ------- -------
Increase (decrease) in cash and
cash equivalents 80,024 16,010 (5,607) 78,072 20,813 2,002
Cash and cash equivalents -
beginning of year 37,340 21,330 26,937 31,645 10,832 8,830
-------- ------- ------- -------- ------- -------
Cash and cash equivalents -
end of year 117,364 37,340 21,330 109,717 31,645 10,832
======== ======= ======= ======== ======= =======
(1) See Note 2A(1).
(2) See Note 2B.
(3) Adjusted for changes in the exchange rate of the U.S dollar as of December
31, 2003.
The accompanying notes are an integral part of the financial statements.
-4-
HOGLA-KIMBERLY LTD.
APPENDICES TO STATEMENTS OF CASH FLOWS
(NIS in thousands)
Consolidated Company
---------------------------------- ----------------------------------
Year ended December 31, Year ended December 31,
---------------------------------- ----------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------ ----- ------ ------ ----- ------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts (1) Amounts (2) Amounts (2) Amounts (1) Amounts (2) Amounts (2)
------ ----- ------ ------ ----- ------
A. Adjustments to reconcile
net income to net cash provided
by operating activities
Income and expenses items
not involving cash flows:
Minority interest in
earnings of
Subsidiary 3,098 7,135 2,599 - - -
Equity in net losses
(earnings) of
Subsidiaries - - - 16,260 (37,418) (1,091)
Depreciation and
amortization 23,468 25,213 22,086 14,702 14,789 12,093
Deferred taxes, net (5,011) 8,251 1,072 8,512 10,417 1,046
Loss (gain) from sale of fixed
assets (1,162) (482) 81 (205) (208) (29)
Effect of exchange rate
differences, net (1,901) (2,266) 2,202 (258) (2,476) 2,202
Changes in assets and liabilities:
Decrease (increase) in trade
receivables 15,763 (47,933) (14,411) 1,799 (4,930) (455)
Decrease (increase) in other
receivables (20,938) (2,115) 4,860 (6,211) (1,431 (1,395)
Increase in inventories (46,919) (6,237) (16,362) (12,646) (16,247) (10,406)
Increase in trade payables 49,624 27,544 18,343 8,392 13,628 15,495
Net change in balances with
related parties 13,591 (10,050) 7,731 28,985 42,067 71,830
Increase (decrease) in other
payables and accrued expenses 1,070 5,130 (13,877) 1,604 (11,003) (8,755)
------ ------ ------ ----- ------ ------
30,683 4,190 14,324 60,934 7,188 80,535
------ ------ ------ ----- ------ ------
B. Non-cash activities
Acquisition of fixed assets on credit 18,470 8,661 13,707 11,619 8,460 13,707
(1) See Note 2A(1).
(2) Adjusted for changes in the exchange rate of the U.S dollar as of December
31, 2003.
The accompanying notes are an integral part of the financial statements.
-5-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
A. Description
Hogla Kimberly Ltd. ("the Company") and its Subsidiaries are engaged
principally in the production and marketing of paper and hygienic products.
The Company's results of operations are affected by transactions with
shareholders and affiliated companies (see Note 23).
The Company is presently owned by Kimberly Clark Corp. ("KC" or the "Parent
Company") (50.1%) and American-Israeli Paper Mills Ltd. ("AIPM") (49.9%).
B. Definitions:
The Company - Hogla-Kimberly Ltd.
The Group - the Company and its Subsidiaries, a list of which is
provided in Note 9D.
Subsidiaries - companies in which the Company exercises over 50%
ownership and control, directly or indirectly, and
whose financial statements are fully consolidated
with those of the Company.
Related Parties - as defined by Opinion No. 29 of the Institute of
Certified Public Accountants in Israel.
-6-
Interested Parties - as defined by the Israeli Securities Regulations
(Presentation of Financial Statements), 1993.
Controlling Shareholder as defined by the Israeli Securities Regulations
(Presentation of Transactions between a Corporation
and its Controlling Shareholder in the Financial
Statements), 1996.
NIS - New Israeli Shekel.
CPI - the Israeli consumer price index.
Dollar - the U.S. dollar.
Adjusted Amount - see Note 2A(1) below.
Reported Amount - see Note 2A(1) below.
C. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
D. The financial statements of the Company are prepared in accordance with
the Israeli Securities Regulations (Preparation of Annual Financial
Statements), 1993.
-7-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following are the principal accounting policies applied in the
preparation of the financial statements in a manner consistent with
previous years with the exception of the cessation of financial
statement adjustment as described in paragraph A below and Translation
of Foreign Operations as described in paragraph B below.
A. Cessation of Financial Statements Adjustment and Change to
Reporting in Reported Amounts - Standard No. 12
(1) Definitions
Adjusted Amount - historical nominal amount adjusted
for changes in the exchange rate of the U.S. dollar
as of December 31, 2003, in accordance with Opinion
No. 36 of the Institute of Certified Public
Accountants in Israel.
Reported Amount - Adjusted Amount plus amounts in
nominal terms added subsequent to December 31, 2003,
and less amounts subtracted after that date.
(2) General
In January 2004, Israeli Accounting Standard No. 12
"Cessation of Financial Statements Adjustment" came
into effect. Following the initial implementation of
Standard No. 12, commencing January 1, 2004, the
Group ceased the presentation of its financial
statements based on nominal historical cost adjusted
for the changes in the exchange rate of the U.S.
Dollar in relation to the NIS. Effective with the
interim financial statements as of March 31, 2004 and
for the reporting periods thereafter, including the
year ended December 31, 2004, the Group's financial
statements are prepared and presented in Reported
Amounts.
Comparative figures included in these financial
statements relating to December 31, 2003 and for each
of the two years then ended, are presented in
Adjusted Amounts.
The amounts at which non-monetary items are presented
in these financial statements do not necessarily
represent their realization value or economic value,
but solely their Reported Amount.
The Company's condensed financial information in
nominal values, on the basis of which the Company's
financial statements in Reported Amounts and Adjusted
Amounts were prepared, are presented in Note 25.
(3) Basis of presentation
a. Balance Sheet Items
Non-monetary items (items whose balances
reflect historical value at acquisition or
upon establishment) are presented at their
Adjusted Amounts plus additions and
dispositions occurring during the reporting
period. Additions made subsequent to
December 31, 2003 and dispositions of items
added subsequent to such date, are presented
at their historical nominal value.
Dispositions of items added on or prior to
December 31, 2003 are presented at their
Adjusted Amount.
-8-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
A. Cessation of Financial Statements Adjustment and Change to
Reporting in Reported Amounts - Standard No. 12 (cont.)
(3) Basis of presentation (cont.)
a. Balance Sheet Items (cont.)
Monetary items (items whose balance sheet
amount reflects their current value or
realization value at the balance sheet date)
are presented at their nominal value as of
the balance sheet date.
Investments in Subsidiaries and minority
interest are presented based on the
financial statements of these companies
prepared according to the guidance of
Standard No. 12.
b. Statement of Operations Items
Income and expenses reflecting transactions,
and financial income and expenses, are
presented at their nominal value.
Income and expenses deriving from
non-monetary items (mainly depreciation and
amortization) were presented in a manner
corresponding to the presentation of the
related non-monetary balance sheet item, as
illustrated above.
The Company's share and minority interest in
the results of Subsidiaries are determined
based on the financial statements of these
companies prepared according to the guidance
of Standard No. 12.
(4) Principles of Adjustment through December 31, 2003
a. Balance Sheet Items
Non-monetary items (items whose balances
reflect historical value at acquisition or
upon establishment) have been adjusted in
accordance with the changes in the exchange
rate of the U.S. dollar from the date of
acquisition/establishment through December
31, 2003.
Investments in Subsidiaries and minority
interest were determined based on the dollar
adjusted financial statements of these
companies.
-9-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
Monetary items (items whose balance sheet
amounts represent current or realization
value at the balance sheet date) are
presented in the December 31, 2003 balance
sheet at their nominal value as of that
date.
b. Statement of Operations Items
Income and expenses reflecting transactions,
other than financial income and expenses,
were adjusted for changes in the exchange
rate of the U.S. dollar from the date of the
transaction to the balance sheet date.
Income and expenses arising from
non-monetary items (mainly depreciation,
amortization, deferred taxes and changes in
inventory) were adjusted in a manner
corresponding to the adjustment of the
related balance sheet items.
(4) Principles of Adjustment through December 31, 2003
(cont.)
b. Statement of Operations Items (cont.)
Financing income (expenses), net reflect
income and expenses in real terms and
include exchange rate differences derived
from monetary items.
The Company's share and the minority
interest in the results of Subsidiaries were
determined based on the dollar adjusted
financial statements of these companies.
c. Adjustment and Translation of Foreign
Subsidiaries Financial Statements
The financial statements of Subsidiaries
operating abroad, which act as an integral
operation of the Group, were prepared in
U.S. dollars and translated into NIS based
on the exchange rate of the U.S. dollar on
the balance sheet date.
B. Translation of Foreign Operations' Financial Statements -
Standard No. 13
(a) In January 2004, Israeli Accounting Standard
No. 13 "Effect of Changes in Foreign
Exchange Rates" came into effect. This
Standard addresses the translation of
transactions denominated in foreign
currency, as well as the translation of
financial statements of a foreign entity,
for inclusion in the financial statements of
the reporting company. Standard No. 13
supersedes Clarifications No. 8 and 9 to
Opinion No. 36 of the Institute of Certified
Public Accountants in Israel, which were
nullified on the date on which Accounting
Standard No. 12 came into effect, as
described in A above.
-10-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
(b) A Foreign Entity Classified as a Foreign
Held Autonomous Subsidiary
o Following the implementation of
Standard No. 13, commencing January
2004 goodwill derived from an
investment made in another entity
is to be treated as one of that
entity's assets. Accordingly, the
goodwill associated with the
Group's investment in Ovisan (a
Subsidiary located in Turkey) is
translated to NIS at the closing
rate, rather than at the exchange
rate at the date in which said
investment was made, as was
previously required under the
applicable accounting literature in
effect through December 31, 2003.
o Monetary and non-monetary assets
and liabilities of the foreign
entity are translated at the
closing rate.
o Statement of operations items and
cash flow items of the foreign
entity are translated, in general,
by the average exchange rate for
the reporting period, rather than
by the closing rate as was
previously required under the
applicable accounting literature
prior to the date in which Standard
No. 13 came into effect (January 1,
2004).
o All differences resulting from the
translation of the foreign entity's
financial statements by the method
described above, are included in a
separate component of shareholders'
equity as "Translation adjustments
relating to foreign held autonomous
Subsidiary".
-11-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
C. Principles of Consolidation
The consolidated financial statements include consolidation of
the financial statements of all Subsidiaries. Material
inter-company balances and transactions of and between
Subsidiaries and the Company have been fully eliminated.
The data included in the consolidated financial statements is
based on audited financial statements of the Subsidiaries
included therein.
The excess cost of an investment in a Subsidiary in Turkey
over the net book value upon acquisition of that Subsidiary is
allocated to fixed assets and is amortized at the rate
applicable to those assets, or upon their realization. The
unallocated excess cost reflects goodwill, which is presented
in the consolidated balance sheet as "other assets" and
amortized by the straight-line method over 15 years due to the
unique economic conditions relating to that Subsidiary and the
expected economic benefit period from its acquisition. See
also I below.
D. Cash and Cash Equivalents
Cash and cash equivalents include bank deposits, available for
immediate withdrawal, as well as unrestricted short-term
deposits with maturities of less than three months from the
date of deposit.
E. Allowance for Doubtful Accounts
The allowance for doubtful accounts is generally computed as
percentage from the relevant balances, on the basis of
historical experience, with the addition of a specific
provision in respect of accounts, which on management estimate
are doubtful of collection.
F. Inventories
Inventories are presented at the lower of cost or market
value, with cost determined as follows:
Finished products - Based on actual production cost.
Raw, auxiliary
materials and - Based on moving-average basis.
other
G. Investments in Subsidiaries
Investments in Subsidiaries are presented using the equity
method based on their audited financial statements. In
relation to excess cost of investment in Subsidiary in Turkey,
see C above.
H. Fixed Assets
Fixed assets are presented at cost less accumulated
depreciation and amortization. Depreciation is calculated
using the straight-line method at rates considered adequate to
depreciate the assets over their estimated useful lives.
Amortization of leasehold improvements is computed over the
shorter of the term of the lease, including any option period,
-12-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
where the Company intends to exercise such option, or their
useful life.
The annual depreciation and amortization rates are: %
Buildings 2-4
Leasehold improvements 10-25
Machinery and equipment 5-20
Motor vehicles 15-20
Office furniture and equipment 10-33
Impairment of Long-Lived Assets
Management reviews long-lived assets on a periodic basis, as
well as when such a review is required based upon relevant
circumstances, to determine whether events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. According to Standard No.15 of the
Israeli Accounting Standards Board, "Impairment of Assets", an
asset's recoverable value is the higher of the asset's net
selling price and the asset's value in use, the latter being
equal to the asset's discounted expected cash flows. If
applicable, an impairment loss is recorded at the amount in
which the carrying amount of the asset exceeds its recoverable
value.
I. Other Assets - Goodwill
Goodwill derived from the acquisition of Subsidiary in Turkey
is amortized based on the straight line method over 15 years
(see also C above). Impairment examinations and recognition
are performed and determined based on the accounting policy
outlined in H above. In March 2004, the Israeli Accounting
Standard Board issued Standard No. 20 "The Amortization Period
of Goodwill". Standard No. 20 calls for the amortization of
goodwill over its useful life, based on a systematic method
that should reflect the estimated expected period in which the
goodwill is to contribute economic benefits. The amortization
period shall not exceed 20 years from the date on which the
goodwill was initially recognized. Standard No. 20 is in
effect for reporting periods commencing January 1, 2004, and
its provisions are to be applied on a prospective basis. The
implementation of Standard No. 20 did not, and is not expected
to, affect the Group's financial position and results of
operations.
J. Supplier Discounts
Ongoing discounts granted by suppliers, as well as year end
discounts, in respect of which no commitments to meet given
targets are required by the Group, are included in the
financial statements upon the execution of purchases that
grant the Group said discounts. Supplier discounts contingent
upon the Group's fulfillment of certain targets, such as
meeting a minimal annual volume (in quantities or amount), or
an increase in purchases over previous periods, are included
in the financial statements in proportion to the Group's
purchases from suppliers during the reported period, which
advance the Group towards the stated targets, only if it is
expected that those targets will be reached and the discounts
can reasonably be estimated. The estimate of meeting the
targets is based, inter-alia, on historical experience,
Group's relationships established with the suppliers and the
estimated volume of purchases during the remaining reported
period.
-13-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
K. Deferred Income Taxes
The Group records deferred taxes in respect of temporary
differences between the carrying values of assets and
liabilities in the financial statements and their values for
tax purposes, including depreciation differences on leased
property and fixed assets. The Group records deferred-tax
assets in respect of temporary differences as well as in
respect of carry-forward tax losses so long as it is probable
that those assets will be realized in the foreseeable future.
The deferred taxes are computed by the tax rates expected to
be in effect at realization, as they are known at the approval
date of the financial statements.
The computation of deferred taxes has not taken into account
taxes that would have been applicable in case of future
realization of investments in Subsidiaries, since the Group
does not contemplate such realization in the foreseeable
future. Moreover, the computation also excludes deferred taxes
in respect of dividend distributions within the Group for
cases in which such dividend distributions are expected to be
tax-exempt.
L. Dividends
Dividends proposed or declared subsequent to the balance-sheet
date, but prior to the financial statements approval date, are
presented as a separate component of shareholders' equity.
M. Revenue Recognition
Revenues are recognized upon shipment, when title has been
transferred and collectibility is reasonably assured.
Revenues are presented net of sales incentives, primarily:
bonuses granted to chains as a percentage of their purchases
(target bonus); volume discounts; and coupons distributed to
customers entitling price discounts.
An accrual for estimated returns and sales incentives,
computed primarily on the basis of historical experience, is
recorded at the time revenues are recognized and deducted from
revenues.
N. Earnings Per Share
Earnings per share are computed based on the number of paid up
capital shares during the year.
O. Exchange Rates and Linkage Basis
(1) Balances in foreign currency or linked thereto are
included in the financial statements based on the
representative exchange rates, as published by the
Bank of Israel, that were prevailing at the balance
sheet date.
-14-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
O. Exchange Rates and Linkage Basis (cont.)
(2) Following are the changes in the representative
exchange rate of the U.S. dollar vis-a-vis the NIS
and the Turkish Lira, and in the CPI:
Representative
exchange Turkish Lira exchange CPI
rate of the rate with the U.S. "in respect
Dollar dollar of"
As of: (NIS per $1) (TL'000 per $1) (in points)
------------ --------------- -----------
December 31, 2004 4.308 1,352 180.74
December 31, 2003 4.379 1,393 178.58
December 31, 2002 4.737 1,640 182.02
Increase (decrease)
during the year ended: % % %
------------ --------------- -----------
December 31, 2004 (1.6) (2.9) 1.2
December 31, 2003 (7.6) (15.0) (1.9)
December 31, 2002 7.3 13.3 6.5
(3) Exchange-rate differences are charged to operations
as incurred.
P. Reclassification
Certain amounts in prior years' financial statements have been
reclassified in order to conform to the 2004 presentation.
Q. Recent Accounting Standards - Income Taxes
In July 2004, the Israeli Accounting Standard Board published
Accounting Standard No. 19 "Income Taxes" (the "Standard").
The Standard established the guidelines for recognizing,
measuring, presenting and disclosing income taxes in the
financial statements. The Standard is effective for financial
statements relating to reporting periods commencing on, or
after, January 1, 2005. The initial adoption of the Standard
shall be accounted for by the cumulative effect of a change in
accounting method, for the beginning of the period in which
the Standard is initially adopted. The implementation of
Standard No. 19 is not expected to affect the Group's
financial position and results of operations.
NOTE 3 - CASH AND CASH EQUIVALENTS
Consolidated Company
-------------------- -------------------
December 31,
-----------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------- ------ ------- ------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------- ------ ------- ------
NIS in thousands NIS in thousands
In NIS 875 527 589 520
In foreign currencies
(primarily the U.S. dollar) 116,489 36,813 109,128 31,125
------- ------ ------- ------
117,364 37,340 109,717 31,645
======= ====== ======= ======
-15-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 4 - TRADE RECEIVABLES
Consolidated Company
-------------------- -------------------
December 31,
-----------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------- ------- ------- ------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------- ------- ------- ------
NIS in thousands NIS in thousands
Domestic - Open accounts 159,693 154,617 - -
Checks receivable 33,013 34,421 - -
Related parties 598 348 91,023 60,820
------- ------- ------- ------
193,304 189,386 91,023 60,820
Foreign - Open accounts 25,971 47,697 3,900 5,699
Related parties 775 206 18,567 8,191
------- ------- ------- ------
220,050 237,289 113,490 74,710
Less - allowance for doubtful accounts 5,661 7,310 42 42
------- ------- ------- ------
214,389 229,979 113,448 74,668
======= ======= ======= ======
The Company's products are marketed principally by its Subsidiaries.
NOTE 5 - OTHER RECEIVABLES
Consolidated Company
------------------- ------------------
December 31,
----------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------ ------ ------ -------
Reported Adjusted Reported Adjusted
Amount Amounts Amounts Amounts
------ ------ ------ -------
NIS in thousands NIS in thousands
Deferred taxes (Note 22D) 4,611 5,518 1,532 1,769
Prepaid expenses 2,175 2,908 1,429 1,570
Advances to suppliers 615 3,074 411 2,128
Value added taxes 15,970 236 - (*) 924
Income tax advances, net 10,973 1,467 10,134 878
Loans to employees 600 477 232 262
Other 781 542 117 (*) 348
------ ------ ------ -------
35,725 14,222 13,855 7,879
====== ====== ====== =======
(*) Reclassified.
NOTE 6 - INVENTORIES
Consolidated Company
------------------- ------------------
December 31,
----------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------ ------ ------ -------
Reported Adjusted Reported Adjusted
Amount Amounts Amounts Amounts
------ ------ ------ -------
NIS in thousands NIS in thousands
Raw and auxiliary materials 67,765 48,482 37,710 34,293
Finished goods 56,872 29,087 18,729 10,969
Spare parts and other 17,914 15,095 14,746 13,277
------- ------ ------ --------
142,551 92,664 71,185 58,539
======= ====== ====== ========
-16-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 7 - LONG-TERM BANK DEPOSITS
Consolidated Company
Interest ------------------- -----------------------
rate December 31,
-------- ------------------------------------------------
% (*) 2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------ ------ ------- -----
NIS in thousands NIS in thousands
A. Composition
Linked to the U.S.
dollar 1.75 68,928 77,946 - 7,882
Less - current
maturities - 7,882 - 7,882
------ ------ ------- -----
68,928 70,064 - -
(*) Annual interest rate as of December 31, 2004.
B. The deposit is held as collateral for long-term loan received by
Subsidiary (see Note 15C).
C. The deposit is subject to re-deposit every two years.
NOTE 8 - CAPITAL NOTE OF SHAREHOLDER
The capital note of AIPM, denominated in NIS, is not linked and does
not bear interest. Repayment date will be mutually agreed upon. The
erosion or increase in value of the capital note was charged to capital
reserves until March 31, 2000 (the date on which AIPM ceased to be the
controlling shareholder).
NOTE 9 - INVESTMENTS IN SUBSIDIARIES
Company
--------------------
December 31,
--------------------
2 0 0 4 2 0 0 3
------- -------
Reported Adjusted
Amounts Amounts
------- -------
A. Composition NIS in thousands
Cost of shares 972 972
Equity in post-acquisition earnings, net 174,600 190,860
Translation adjustments relating to
foreign held autonomous Subsidiary (3,377) -
Capital notes (*) 4,205 4,205
------- -------
176,400 196,037
======= =======
(*) The non-interest bearing capital notes, denominated
in U.S. dollar, are considered part of the Company's
investments in the Subsidiaries. Repayment dates
have not yet been determined.
-17-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 9 - INVESTMENTS IN SUBSIDIARIES (cont.)
Consolidated
-------------------
December 31,
-------------------
2 0 0 4 2 0 0 3
------ ------
Reported Adjusted
Amounts Amounts
------ ------
B. Goodwill (see Note 2C above) NIS in thousands
Cost 40,859 41,532
Less - accumulated amortization 14,981 12,459
------ ------
25,878 29,073
====== ======
C. Investment in Ovisan
As of December 31, 2004, the Group's investment in the
Turkish Subsidiary amounted to NIS 28,001 thousand
(including goodwill in the net amount of NIS 25,878
thousand).
D. Consolidated Subsidiaries
The consolidated financial statements as of December 31,
2004, include the financial statements of the following
Subsidiaries:
Ownership and
control as of
December 31,
2004
-------------
%
-------------
Rakefet Marketing and Trade Services Ltd. ("Rakefet") (*) 79.7
Subsidiaries of Rakefet:
Hogla-Kimberly Marketing Ltd. (**) 99.5
("Marketing")
Shikma Ltd. ("Shikma") (**) 99.0
Mollet Marketing Ltd. ("Mollet") 100.0
H-K Overseas (Holland) B.V. 100.0
Subsidiaries of H-K Overseas (Holland) B.V.:
Ovisan Sihhi Bez Sanai ve Ticaret Anonim 100.0
Sirketi ("Ovisan")
Hogla-Kimberly Holding Anonim Sirketi 100.0
(*) The remaining ownership and control of Rakefet are
held by AIPM group (10.1%) and by KC (10.2%).
(**) The remaining ownership and control of Marketing and
Shikma are held by the Company.
-18-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 10 - FIXED ASSETS
Office
Machinery furniture
Leasehold and Motor and
CONSOLIDATED Buildings (1) improvements equipment vehicles equipment Total (2)
------ ----- ------- ------ ----- -------
Cost: NIS in thousands
Balance - January 1, 2004
(Adjusted Amounts) 54,869 9,268 384,618 19,048 11,941 479,744
Changes during 2004:
Additions 1,184 111 33,679 334 840 36,148
Dispositions - - (4,477) (5,111) (395) (9,983)
Foreign currency
translation adjustments 305 - 829 71 61 1,266
------ ----- ------- ------ ----- -------
Balance - December 31, 2004
(Reported Amounts) 56,358 9,379 414,649 14,342 12,447 507,175
------ ----- ------- ------ ----- -------
Accumulated depreciation:
Balance - January 1, 2004
(Adjusted Amounts) 15,385 5,097 166,491 14,983 8,220 210,176
Changes during 2004:
Additions 614 841 15,911 1,968 1,302 20,636
Dispositions - - (3,946) (4,985) (387) (9,318)
Foreign currency
translation adjustments 112 - 519 63 68 762
------ ----- ------- ------ ----- -------
Balance - December 31, 2004
(Reported Amounts) 16,111 5,938 178,975 12,029 9,203 222,256
------ ----- ------- ------ ----- -------
Net book value:
December 31, 2004
(Reported Amounts) 40,247 3,441 235,674 2,313 3,244 284,919
====== ===== ======= ====== ===== =======
December 31, 2003
(Adjusted Amounts) 39,484 4,171 218,127 4,065 3,721 269,568
====== ===== ======= ====== ===== =======
COMPANY
Cost:
Balance - January 1, 2004
(Adjusted Amounts) 25,209 6,112 343,089 3,159 3,205 380,774
Changes during 2004:
Additions 116 111 29,816 334 123 30,500
Dispositions - - (4,125) (878) - (5,003)
------ ----- ------- ------ ----- -------
Balance - December 31, 2004
(Reported Amounts) 25,325 6,223 368,780 2,615 3,328 406,271
------ ----- ------- ------ ----- -------
Accumulated depreciation:
Balance - January 1, 2004
(Adjusted Amounts) 11,812 3,733 142,932 3,076 2,610 164,163
Changes during 2004:
Additions - 589 13,876 18 219 14,702
Dispositions - - (3,681) (878) - (4,559)
------ ----- ------- ------ ----- -------
Balance - December 31, 2004
(Reported Amounts) 11,812 4,322 153,127 2,216 2,829 174,306
------ ----- ------- ------ ----- -------
Net book value:
December 31, 2004
(Reported Amounts) 13,513 1,901 215,653 399 499 231,965
====== ===== ======= ====== ===== =======
December 31, 2003
(Adjusted Amounts) 13,397 2,379 200,157 83 595 216,611
====== ===== ======= ====== ===== =======
(1) Buildings include industrial buildings on lands leased by the Company
from AIPM (until 2005).
(2) The majority of the Group's fixed assets are located in Israel.
-19-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 11 - TRADE PAYABLES
Consolidated Company
--------------------- ---------------------
December 31,
----------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------- ------- ------- -------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------- ------- ------- -------
NIS in thousands NIS in thousands
In Israeli currency
Open accounts 112,932 78,509 57,371 34,206
Related parties 23,124 13,682 184,476 114,455
In foreign currency
Open accounts 67,915 37,294 19,041 20,804
Related parties 15,931 10,070 4,658 5,115
------- ------- ------- -------
219,902 139,555 265,546 174,580
======= ======= ======= =======
NOTE 12 - OTHER PAYABLES AND ACCRUED EXPENSES
Consolidated Company
--------------------- ---------------------
December 31,
----------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------- ------- ------- -------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------- ------- ------- -------
NIS in thousands NIS in thousands
Accrued income taxes,
net of advances 10,464 8,663 - -
Accrued payroll and related expenses 22,195 20,531 10,796 10,474
Value Added Tax 2,695 4,779 1,269 -
Advances from customers 726 1,085 - 32
Other 2,640 2,574 184 139
------ ------ ------ ------
38,720 37,632 12,249 10,645
====== ====== ====== ======
NOTE 13 - LONG-TERM BANK LOANS
Interest Consolidated
rate December 31,
-------- ------ ------
% (*) 2 0 0 4 2 0 0 3
------ ------
Reported Adjusted
Amounts Amounts
------ ------
A. Composition NIS in thousands
In U.S. dollar Libor +1.22-1.63 150,598 108,858
In Euro - 2,627
Less - current maturities 68,747 15,147
------ ------
81,851 96,338
====== ======
(*) Annual interest rate as of December 31, 2004.
B. Maturities (NIS in thousands)
2005 - current maturities 68,747
2006 12,923
Thereafter - see C below 68,928
-------
150,598
=======
C. Subject to renewal every two years - see Note 7C.
D. Liens - see Note 15C.
-20-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 14 - SEVERANCE PAY
Obligations of the Group for severance pay to its employees are covered
by current payments to pension and severance funds. Accumulated amounts
in the pension and severance funds are not under the control or
administration of the Group, and accordingly, neither those amounts nor
the corresponding accruals are reflected in the financial statements.
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
A. Commitments
(1) The Group is obligated to pay royalties to a
shareholder - see Note 23B.
(2) The Company and its Subsidiaries lease certain of
their facilities under operating leases for varying
periods with renewal options. Future minimum lease
rentals as of December 31, 2004 are as follows:
Consolidated Company
------------ -------
NIS in thousands
2005 13,966 5,763
2006 7,178 -
2007 7,178 -
2008 7,178 -
2009 and thereafter 25,122 -
60,622 5,763
B. Guarantees
(1) The Company is contingently liable in respect of a
guarantee securing bank loans provided to a
Subsidiary, the balance of which as of December 31,
2004 amounted to NIS 81,670 thousand.
(2) As part of their normal course of business, the
Subsidiaries provided third parties with bank
guarantees for contract performance, the balance of
which as of December 31, 2004 amounted to NIS 295
thousand.
C. Liens
As a collateral for long-term loans given to Subsidiary, the
Group recorded a lien on its bank deposits, in the amount of
NIS 68,928 thousand as of December 31, 2004.
D. Legal proceedings
(1) The Company received on December 7, 2003 a claim and
a petition that was filed in Tel-Aviv district court
for the approval of a class action against the
Company. According to the petition the Company has
reduced the number of units of diapers in a package
and thus misled the public according to the Israeli
Consumer Protection Act. The plaintiffs estimate the
scope of the class action to be NIS 18 million. The
Company rejects the claim and intends to defend
itself against the action. Based on the opinion of
the Company's legal counsel for this matter,
management is unable, at this stage, to estimate the
possible outcome of the lawsuit. However, based on
the legal counsels, management estimates that the
Company has valid arguments to oppose the lawsuit and
reasonable basis for denying it from being recognized
as a class action. Therefore, no provision was
recorded in the financial statements relating to this
matter.
-21-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
D. Legal proceedings (cont.)
(2) In February 2004, a former customer filed a lawsuit
against the Company. This lawsuit is a part of
multi-suppliers lawsuit, filed by the customer and
asking for one billion NIS from the Company and each
other supplier for alleged damages. The customer
asked for discharge from legal fee and the request
was denied. Due to the preliminary stage of the
proceedings, management is unable to estimate the
possible outcome of the lawsuit. However, based on
the Company's legal counsels, management estimates
that the Company has valid arguments to oppose the
lawsuit. Therefore, no provision was recorded in the
financial statements relating to this matter.
NOTE 16 - SHARE CAPITAL
A. Composition of Share Capital in Nominal NIS
As of December 31, As of December 31,
-------------------------- --------------------------
2004 2003
-------------------------- --------------------------
Issued and Issued and
Authorized fully paid up Authorized fully paid up
---------- --------- ---------- ---------
Ordinary Shares of
Nis 1.00 par value 11,000,000 8,513,473 11,000,000 8,263,473
---------- --------- ---------- ---------
B. In connection with the Company's approved enterprise program,
in September 2004, the Company's Board of Directors decided to
issue to the Company's shareholders 250,000 bonus shares with
a premium of NIS 94.46 for each share.
C. Holders of ordinary shares are entitled to participate equally
in the payment of cash dividends and bonus share (stock
dividend) distributions and, in the event of the liquidation
of the Company, in the distribution of assets after
satisfaction of liabilities to creditors. Each ordinary share
is entitled to one vote on all matters to be voted on by
shareholders.
NOTE 17 - NET SALES
Consolidated
--------------------------------------
Year ended December 31,
--------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2
------- ------- -------
% % %
------- ------- -------
A. Sales to major customers (as percentage from total net
sales)
Customer A 9.9 8.9 11.1
Customer B 11.0 10.1 11.8
NIS in thousands
--------------------------------------
Reported Adjusted Adjusted
Amounts Amounts Amounts
------- ------- -------
B. Sales from commercial operations 238,989 376,974 311,360
C. Foreign sales (principally Turkey) 108,102 106,935 80,184
======= ======= ======
-22-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 18 - COST OF SALES
Consolidated Company
----------------------------------- --------------------------------
Year ended December 31, Year ended December 31,
------- ------- ------- ------- ------- -------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ------- ------- ------- ------- -------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- ------- ------- ------- ------- -------
NIS in thousands NIS in thousands
Purchases (*) 558,155 446,008 425,365 239,402 178,339 122,861
Salaries and related expenses 85,167 67,516 55,999 62,870 56,812 46,389
Manufacturing expenses 87,201 79,810 55,834 84,717 73,281 51,229
Depreciation 17,244 18,221 14,207 14,674 15,309 11,423
------- ------- ------- ------- ------- -------
747,767 611,555 551,405 401,663 323,741 231,902
Change in finished
goods inventory (27,785) 9,459 3,358 (7,760) (1,183) 1,194
------- ------- ------- ------- ------- -------
719,982 621,014 554,763 393,903 322,558 233,096
======= ======= ======= ======= ======= =======
(*) The purchases of the Company are related to manufacturing operations.
Consolidated purchases in excess of Company purchases relate
principally to commercial operations.
NOTE 19 - SELLING EXPENSES
Consolidated Company
------------------------------------- ----------------------------------
Year ended December 31, Year ended December 31,
------------------------------------- ----------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ------- ------- ------- ------- -------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- ------- ------- ------- ------- -------
NIS in thousands NIS in thousands
Salaries and related expenses 57,003 46,887 39,656 - - 16
Maintenance and
transportation expenses 42,283 26,596 24,332 7,206 5,810 3,868
Advertising and sales promotion 60,114 30,371 38,591 6,373 86 46
Commissions to distributors 5,130 4,571 2,007 - - 453
Royalties to a shareholder 20,468 15,642 12,220 1,679 1,500 673
Depreciation 3,687 3,778 4,188 28 142 317
Other 5,016 2,825 2,961 - - -
------- ------- ------- ------- ------- -------
193,701 130,670 123,955 15,286 7,538 5,373
======= ======= ======= ======= ======= =======
-23-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 20 - GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated Company
---------------------------------- -------------------------------
Year ended December 31, Year ended December 31,
---------------------------------- -------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------ ------ ------ ----- ----- -----
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------ ------ ------ ----- ----- -----
NIS in thousands NIS in thousands
Salaries and related expenses 15,837 18,283 13,481 2,387 2,567 2,423
Administrative and computer
services 10,150 6,287 6,210 1,640 1,190 1,188
Services provided by
Shareholder 1,188 1,161 1,161 238 215 736
Office maintenance 4,632 5,376 2,990 230 207 228
Depreciation 522 718 588 - 2 4
Goodwill amortization 2,832 2,768 2,768 - - -
Provision for doubtful accounts 2,144 1,562 215 - - -
Other 3,724 2,891 2,528 490 200 789
------ ------ ------ ----- ----- -----
41,029 39,046 29,941 4,985 4,381 5,368
====== ====== ====== ===== ===== =====
NOTE 21 - FINANCING INCOME (EXPENSES), NET
Consolidated Company
------------------------------------ -----------------------------------
Year ended December 31, Year ended December 31,
------------------------------------ -----------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
-------- -------- -------- -------- -------- --------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
-------- -------- -------- -------- -------- --------
NIS in thousands NIS in thousands
Interest on long-term bank loans (2,673) (2,111) (2,794) - - -
====== ====== ====== ======== ======== =======
Exchange rate differences
derived from capital note - 2,476 (2,202) - 2,476 (2,202)
====== ====== ====== ======== ======== =======
Interest from long-term and
short-term bank deposits 1,464 1,357 1,804 463 486 31
====== ====== ====== ======== ======== =======
The majority of the remaining balances of the consolidated financial income
(expenses) for each of the periods presented are comprised of exchange rate
differences.
-24-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 22 - INCOME TAXES
Consolidated Company
-------------------------------------- --------------------------------------
Year ended December 31, Year ended December 31,
-------------------------------------- --------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ------- ------- ------- ------- -------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- ------- ------- ------- ------- -------
A. Composition NIS in thousands NIS in thousands
Current taxes 18,045 10,878 18,904 9,952 - 15,774
Taxes in
respect of prior
years (1,003) 1,437 (744) (837) 1,358 (744)
Deferred taxes - D. below (6,798) 8,251 1,072 8,512 10,417 1,046
------- ------- ------- ------- ------- -------
10,244 20,566 19,232 17,627 11,775 16,076
======= ======= ======= ======= ======= =======
B. The Company and its Israeli Subsidiaries are subject to the Income Tax
Ordinance and the Income Tax Law (Inflationary Adjustments), 1985.
Non-Israeli Subsidiaries are subject to income tax provisions of their
home country. The Company is an industrial company in conformity with
the Law for the Encouragement of Industry (Taxes), 1969. The principal
benefit that the Company is entitled to under this law is accelerated
depreciation rates and reduced tax rates.
During 2002, the Company's program for the establishment of a new
facility for manufacturing paper was granted Approved Enterprise status
in accordance with the Law for the Encouragement of Capital
Investments, 1959, under "alternative benefits" track. The approval
program is for total investments of approximately NIS 80 million.
According to the terms of the program, income derived from the Approved
Enterprise will be tax-exempt for a period of 10 years commencing in
the year in which the program was substantially completed. Distribution
of dividends from tax exempt profits of the Approved Enterprise will be
subject to income tax at a rate equal to the income tax rate of the
Approved Enterprise had the Company not elected the alternative
benefits track. The Company completed the investments relating to the
new facility and commenced its operations during 2003.
-25-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 22 - INCOME TAXES (cont.)
C. Reconciliation of the statutory tax rate to the effective tax rate:
Consolidated Company
---------------------------------- ----------------------------------
Year ended December 31, Year ended December 31,
---------------------------------- ----------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------ ------ ------ ------ ------ ------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------ ------ ------ ------ ------ ------
NIS in thousands NIS in thousands
Income before
income taxes 40,270 83,954 44,543 60,815 30,610 37,697
------ ------ ------ ------ ------ ------
Tax computed by
statutory tax rate
(35%-36% - see E. below) 14,095 30,223 16,035 21,285 11,020 13,570
Tax increments
(savings) due to:
Reduced tax rate (161) (1,185) (1,397) (2,433) (918) (1,397)
Non-deductible expenses 1,454 1,874 1,840 6 434 248
Non-taxable income (455) (65) (2,198) (87) - -
Unrecorded deferred
taxes in connection
with tax loss carry
forward - - 1,074 - - -
Utilization of prior
years unrecorded
deferred taxes in
connection with tax loss
carry forward - (3,471) - - - -
Unrecorded deferred
taxes in connection
with submitting
consolidated tax
returns - - - - 2,053 -
Reduction in corporate tax
rates (E. below) (1,594) - - (1,573) - -
Differences arising from
basis of measurement (*) (2,821) (7,629) 3,883 537 (1,753) 3,737
Income taxes for prior years (1,003) 1,437 (744) (837) 1,358 (744)
Other differences, net 729 (618) 739 729 (419) 662
------ ------ ------ ------ ------ ------
10,244 20,566 19,232 17,627 11,775 16,076
====== ====== ====== ====== ====== ======
(*) For 2004 - In Israel, Reported Amounts (NIS) for financial reporting
purposes vis-a-vis the consumer price index for tax purposes; In Turkey
- U.S. dollar for financial reporting purposes vis-a-vis the Turkish
Lira for tax purposes.
For 2003 and 2002 - U.S. dollar for financial reporting purposes
vis-a-vis the Consumer Price Index in Israel and the Turkish Lira for
tax purposes.
-26-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 22 - INCOME TAXES (cont.)
D. Deferred Taxes
Consolidated Company
--------------------------------- ---------------------------------
Year ended December 31, Year ended December 31,
--------------------------------- ---------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------ ------ ------ ------ ------ ------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------ ------ ------ ------ ------ ------
NIS in thousands NIS in thousands
Balance as of
beginning of year 23,910 15,659 14,587 24,969 14,552 13,506
Changes during the year (3,417) 8,251 1,072 10,085 10,417 1,046
Adjustment due to
change in income
tax
rates (1,594) - - (1,573) - -
Foreign currency
translation adjustments (1,230) - - - - -
------ ------ ------ ------ ------ ------
Balance as of end
of year 17,669 23,910 15,659 33,481 24,969 14,552
Consolidated Company
-------------------- --------------------
December 31,
------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------ ------ ------ ------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------ ------ ------ ------
NIS in thousands NIS in thousands
Deferred taxes are presented in the
balance sheets as follows:
Long-term liabilities (in respect of
depreciable assets) 37,388 29,428 35,013 26,738
Other receivables (in respect of
temporary differences) - Note 5 (4,611) (5,518) (1,532) (1,769)
Other Assets (15,108) - - -
------ ------ ------ ------
17,669 23,910 33,481 24,969
====== ====== ====== ======
For 2004 - Deferred taxes were computed at rates between 30%-34%,
primarily - 30%. For 2003 - Deferred taxes were computed at rates
between 32%-36%, primarily - 30%.
E. Reduction of Corporate Tax Rates
In June 2004, the Israeli Knesset passed Amendment No. 140 to the
Income Tax Ordinance, according to which the corporate income-tax rate
would be gradually reduced from 36% to 30% by 2007 (2004-35%, 2005-34%,
2006-32%, 2007-30%).
F. The Company and one of its subsidiaries are "Industrial Companies" as
defined in the Israeli Law for the Encouragement of Industry
(Taxes)-1969. Based on this Law, the Company and that subsidiary file
consolidated tax returns.
G. The Company and its Israeli Subsidiaries possess final tax assessments
through 2001.
-27-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 23 - RELATED PARTIES AND INTERESTED PARTIES
A. Balances with Related Parties
Consolidated Company
------------------ ------------------
December 31,
------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 4 2 0 0 3
------ ------ ------ ------
Reported Adjusted Reported Adjusted
Amounts Amounts Amounts Amounts
------ ------ ------ ------
NIS in thousands NIS in thousands
Trade receivables (*) 1,373 554 18,731 8,354
====== ====== ====== ======
Capital note - shareholder 32,770 32,770 32,770 32,770
====== ====== ====== ======
Capital notes - Subsidiaries - - 4,205 4,205
====== ====== ====== ======
Trade payables (*) 39,055 23,752 31,251 24,097
====== ====== ====== ======
(*) Company - excludes Subsidiaries in Israel. See also Notes 4 and 11.
B. Transactions with Related Parties and Subsidiaries
Consolidated Company
--------------------------------- --------------------------------
Year ended December 31, Year ended December 31,
--------------------------------- --------------------------------
2 0 0 4 2 0 0 3 2 0 0 2 2 0 0 4 2 0 0 3 2 0 0 2
------- ------- ------- ------ ------ ------
Reported Adjusted Adjusted Reported Adjusted Adjusted
Amounts Amounts Amounts Amounts Amounts Amounts
------- ------- ------- ------ ------ ------
NIS in thousands NIS in thousands
Sales to related parties 12,565 6,103 17,646 9,903 4,169 15,247
======= ======= ======= ======= ======= =======
Sales to Subsidiaries - - - 454,289 358,767 266,614
======= ======= ======= ======= ======= =======
Cost of sales 162,096 169,469 224,682 58,254 61,703 63,723
======= ======= ======= ======= ======= =======
Royalties 20,468 15,642 12,220 1,679 1,500 673
======= ======= ======= ======= ======= =======
Other selling expenses (*) - - 2,413 - - 451
======= ======= ======= ======= ======= =======
General and
administrative
expenses (*) 8,969 8,201 7,380 1,878 1,428 2,167
======= ======= ======= ======= ======= =======
Financing income, net (*) - 3,314 2,076 2,784 2,526 1,381
======= ======= ======= ======= ======= =======
(*) Company - excludes Subsidiaries in Israel.
-28-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 24 - DISCLOSURE AND PRESENTATION OF FINANCIAL INSTRUMENTS
A. Credit Risk
The revenues of the Group's principal Subsidiaries are derived
from two major customers and a large number of smaller
customers. Management regularly monitors the balance of trade
receivables and the financial statements include an allowance
for doubtful accounts based on management's estimation. Taking
the aforementioned into consideration, the exposure to credit
risk from trade receivables is immaterial.
Cash and cash equivalents and long-term deposits (including
amounts in foreign currency) are deposited with major banks in
Israel and abroad. Therefore, it is not expected that such
banks will fail to meet their obligations.
B. Fair Value of Financial Instruments
The financial instruments of the Group consist primarily of
non-derivative assets and liabilities. Non-derivative assets
include cash and cash equivalents, deposits, receivables and
other current assets. Non-derivative liabilities include trade
payables and other current liabilities. Due to the nature of
these financial instruments, their fair value, generally, is
identical or close to the value at which they are presented in
the financial statements, unless stated otherwise.
Due to the fact that as of December 31, 2004, the terms of the
capital note of shareholder do not include determined payment
dates, fair value based on present values cannot be
established. Accordingly, the fair value of the capital note
is not disclosed in the financial statements.
-29-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 25 - COMPANY'S FINANCIAL INFORMATION IN NOMINAL VALUES FOR TAX PURPOSES
A. Balance Sheets
Company
----------------------
December 31,
----------------------
2 0 0 4 2 0 0 3
------- -------
NIS in thousands
Current Assets
Cash and cash equivalents 109,717 31,645
Current maturities of long-term bank deposits - 7,882
Trade receivables 113,448 74,668
Other receivables 12,360 6,139
Inventories 71,185 58,539
------- -------
306,710 178,873
Long-Term Investments
Capital note of shareholder 32,770 32,770
Investments in Subsidiaries 169,303 189,340
------- -------
202,073 222,110
Fixed Assets, net 220,520 203,572
------- -------
729,303 604,555
Current Liabilities
Short-term bank credit - 1,087
Trade payables 265,546 174,580
Other payables and accrued expenses 12,249 10,645
------- -------
277,795 186,312
------- -------
Shareholders' Equity 451,508 418,243
------- -------
729,303 604,555
======= =======
-30-
NOTE 25 - COMPANY'S FINANCIAL INFORMATION IN NOMINAL VALUES FOR TAX
PURPOSES (cont.)
B. Statement of Operations
Year ended December 31,
-------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2
------- ------- -------
NIS in thousands
Net sales 479,320 387,019 308,566
Cost of sales 392,376 334,764 245,936
------- ------- -------
Gross profit 86,944 52,255 62,630
Selling expenses 15,283 7,827 6,038
General and administrative expenses 4,985 4,327 5,762
------- ------- -------
Operating profit 66,676 40,101 50,830
Financing income (expenses), net (4,541) (5,995) 3,676
Other income, net 282 255 254
------- ------- -------
Income before income taxes 62,417 34,361 54,760
Income taxes 9,115 1,428 16,344
------- ------- -------
Income after income taxes 53,302 32,933 38,416
Equity in net earnings
of Subsidiaries 16,660 29,682 8,881
------- ------- -------
Net income for the year 36,642 62,615 47,297
======= ======= =======
-31-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 25 - COMPANY'S FINANCIAL INFORMATION IN NOMINAL VALUES FOR TAX
PURPOSES (cont.)
C. Statements of Changes in Shareholders' Equity
Translation
adjustments Dividend
relating to declared
foreign held after
Share Capital autonomous Retained balance
capital reserves Subsidiary earnings sheet date Total
----- ------- ------ ------- ----------- -------
NIS in thousands
Balance - January 1, 2002 8,263 132,127 - 206,977 - 347,367
Changes during 2002:
Dividend declared after
balance-sheet date (35,528) 35,528
Exchange rate differences of
prior year declared dividend (2,537) (2,537)
Net income for the year 47,297 47,297
----- ------- ------ ------- ------- -------
Balance - December 31, 2002 8,263 132,127 - 216,209 35,528 392,127
Changes during 2003:
Dividend paid (35,528) (35,528)
Exchange rate differences of
prior year declared dividend (971) (971)
Net income for the year 62,615 62,615
----- ------- ------ ------- ------- -------
Balance - December 31, 2003 8,263 132,127 - 277,853 - 418,243
Changes during 2004:
Dividend paid
Distribution of bonus 250 23,615 (23,865) -
shares
Translation adjustments
relating to foreign held
autonomous Subsidiary (3,377) (3,377)
Net income for the year 36,642 36,642
----- ------- ------ ------- ------- -------
Balance - December 31, 2004 8,513 155,742 (3,377) 290,630 - 451,508
===== ======= ====== ======= =======
-32-
EXHIBIT 19(a)(iv)
-----------------
[GRAPHIC OMITTED]
Kesselman & Kesselman
Certified Public Accountants
Trade Tower, 25 Hamered Street
Tel Aviv 68125 Israel
P.O Box 452 Tel Aviv 61003
Telephone +972-3-7954555
Facsimile +972-3-7954556
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of
American Israeli Paper Mills Limited.
Our audits of the consolidated financial statements referred to in our report
dated March 10, 2005, appearing in the 2004 annual report to the shareholders of
American Israeli Paper Mills Limited also included an audit of Financial
Statement Schedule - Valuation and Qualifying Accounts - listed in Item 18 on
this Form 20-F. In our opinion, the Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with
related consolidated financial statements.
/s/ Kesselman & Kesselman
Tel-Aviv, Israel Kesselman & Kesselman
March 10, 2005 Certified Public Accountants (Isr.)
EXHIBIT 19(a)(v)
-----------------
[GRAPHIC OMITTED]
|X| Kost Forer Gabbay & Kasierer |X| Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
OF ISRAELI GAAP TO U.S. GAAP
T.M.M. Integrated Recycling Industries Ltd.
Tel Aviv
--------
In connection with our audits of the balance sheets of T.M.M. Integrated
Recycling Industries Ltd. ("the Company") as of December 31, 2004 and 2003, and
the related statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2004 (not
presented separately herein), we have also audited the information in the
Reconciliation of Israeli GAAP to U.S. GAAP ("the Reconciliation"). The
Reconciliation is the responsibility of the Company's management. Our
responsibility is to express an opinion on the Reconciliation based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
Reconciliation is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
Reconciliation. An audit also includes assessing the accounting principles used
and significant estimates made by the management, as well as evaluating the
overall Reconciliation presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the information set forth in the Reconciliation presents fairly,
in all material respects, in relation to the financial statements of the Company
taken as a whole, the financial position and the operating results of the
Company in conformity with accounting principles generally accepted in the
United States.
/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 8, 2005 A Member of Ernst & Young Global
T.M.M. INTEGRATED RECYCLING INDUSTRIES LTD.
RECONCILIATION OF ISRAELI GAAP TO U.S. GAAP
(In thousands of NIS)
A. Shareholders' equity as of December 31, 2004 as reported in the
financial statements of the Company prepared in accordance with
accounting principles generally accepted in Israel 84,061
Adjustments to conform with accounting principles generally
accepted in the United States:
Inflation adjustments (1,250)
Capitalized start-up costs, net of tax effect (1,168)
Amortization of goodwill 6,239
------
3,821
------
Adjusted Shareholders' Equity in accordance with accounting
principles generally accepted in the United States 87,882
======
B. Net income for the year ended December 31, 2004 as reported
in the financial statements of the Company prepared in
accordance with accounting principles generally accepted
in Israel 603
Adjustments to conform with accounting principles generally accepted in
the United States:
Inflation adjustments 791
Reversal of capitalized start-up costs, net of tax effect (323)
Amortization of goodwill 2,080
------
2,548
------
Adjusted net income for the year ended December 31, 2004
in accordance with accounting principles generally
accepted in the United States 3,151
======
C. Changes in shareholders' equity for the year ended
December 31, 2004 in accordance with accounting
principles generally accepted in the United States
Balance as of January 1, 2004 84,731
Net income 3,151
Balance as of December 31, 2004 87,882
======
T.M.M. INTEGRATED RECYCLING INDUSTRIES LTD.
RECONCILIATION OF ISRAELI GAAP TO U.S. GAAP
(In thousands of NIS)
A. Shareholders' equity as of December 31, 2003 as reported in the
financial statements of the Company prepared in accordance with
accounting principles generally accepted
in Israel 83,458
Adjustments to conform with accounting principles generally
accepted in the United States:
Inflation adjustments (2,041)
Capitalized start-up costs, net of tax effect (845)
Amortization of goodwill 4,159
------
1,273
------
Adjusted Shareholders' Equity in accordance with accounting
principles generally accepted in the United States 84,731
======
B. Net loss for the year ended December 31, 2003 as reported
in the financial statements of the Company prepared in
accordance with accounting principles generally accepted
in Israel (3,098)
Adjustments to conform with accounting principles generally accepted in
the United States:
Inflation adjustments 2,629
Reversal of capitalized start-up costs, net of tax effect (116)
Amortization of goodwill 2,080
------
4,593
------
Adjusted net income for the year ended December 31, 2003
in accordance with accounting principles generally
accepted in the United States 1,495
======
C. Changes in shareholders' equity for the year ended
December 31, 2003 in accordance with accounting
principles generally accepted in the United States
Balance as of January 1, 2003 83,236
Net income 1,495
------
Balance as of December 31, 2003 84,731
======
T.M.M. INTEGRATED RECYCLING INDUSTRIES LTD.
RECONCILIATION OF ISRAELI GAAP TO U.S. GAAP
(In thousands of NIS)
A. Shareholders' equity as of December 31, 2002 as Reported in the
financial statements of the Company prepared in accordance with
accounting principles generally accepted
in Israel 88,211
Adjustments to conform with accounting principles generally
accepted in the United States:
Inflation adjustments (6,325)
Capitalized start-up costs, net of tax effect (729)
Amortization of goodwill 2,079
------
(4,975)
------
Adjusted Shareholders' Equity in accordance with accounting
principles generally accepted in the United States 83,236
======
B. Net income for the year ended December 31, 2002
as Reported in the financial statements of the Company
prepared in accordance with accounting principles
generally accepted in Israel 2,916
Adjustments to conform with accounting principles generally accepted in
the United States:
Inflation adjustments 3,532
Reversal of capitalized start-up costs, net of tax effect (143)
Amortization of goodwill 2,079
------
5,468
------
Adjusted net income for the year ended December 31, 2002
in accordance with accounting principles generally accepted
in the United States 8,384
======
C. Changes in shareholders' equity for the year ended
December 31, 2002 in accordance with accounting principles
generally accepted in the United States
Balance as of January 1, 2002 74,852
Net income 8,384
------
Balance as of December 31, 2002 83,236
======
[GRAPHIC OMITTED]
Kesselman & Kesselman
Certified Public Accountants
Trade Tower, 25 Hamered Street
Tel Aviv 68125 Israel
P.O Box 452 Tel Aviv 61003
Telephone +972-3-7954555
Facsimile +972-3-7954556
Report of Independent Registered Public Accounting Firm on Reconciliation
of Israeli GAAP to U.S. GAAP
To the Shareholders of
American Israeli Paper Mills Ltd.
In connection with our audits of the consolidated balance sheets of American
Israeli Paper Mills Ltd. ("the Company") as of December 31, 2004 and 2003, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31, 2004
(the "Financial Statements"), which are incorporated in this Form 20-F, we have
also audited the information included in the Reconciliation of Israeli GAAP to
U.S. GAAP listed under Item 18 herein. Those financial statements and the
Reconciliation are the responsibility of the Company's Board of directors and
management. Our responsibility is to express an opinion on the financial
statements and the Reconciliation based on our audit.
We did not audit the U.S.GAAP financial data of certain associated companies in
which the Company's share in excess of profits over losses of which is a net
amount of remeasured NIS 30.8 million in 2004 and re-measured NIS 24.7 million
in 2003. The financial data of those companies were audited by other independent
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to amounts included for those companies, is based solely on the reports
of the other independent auditors.
We conducted our audit in accordance with auditing standards generally accepted
in Israel, and the standards of the Public Company Accounting Oversight Board
(United States), which include examining, on a test basis, evidence supporting
the amounts and disclosures in the attached report, in order to obtain
reasonable assurance that there is no material misstatement, and to provide us
with a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other independent
auditors, the information set forth under Item 18 present fairly, in all
material respects, in relation to the Financial Statements taken as a whole the
financial position and the operating results of the Company in conformity with
accounting principles generally accepted in the United States.
/s/ Kesselman & Kesselman
Tel-Aviv, Israel Kesselman & Kesselman
March 10, 2005 Certified Public Accountants (Isr.)
Date: March 7, 2005
Our ref: 783910
To: Rakefet Marketing and Trade Services Ltd.
Ramla
Gentlemen,
Re: US GAAP Adjustments Report as of December 31, 2004
Pursuant to your request and as the independent accountants of Rakefet Marketing
and Trade Services Ltd. ("the Company"), we have audited the Company's US GAAP
Adjustments Report as of December 31, 2004 and for the year then ended ("the
Report"). The Report, which is enclosed herewith, marked by our Firm's
identification seal, is your responsibility.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States) and with generally accepted auditing
standards in Israel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the Report is
free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Report, assessing the accounting principles used and significant estimates
made by the Board of Directors and management, as well as evaluating the overall
Report presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the Report referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2004, and the
results of operations and changes in shareholders' equity for the year then
ended., in accordance with generally accepted accounting principles in the
United States of America.
Sincerely,
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Rakefet Marketing and Trade Services Ltd.
US GAAP Adjustments Report
As of December 31, 2004
As of the date of this letter, the audit of the Company's books has
been completed, and the financial statements of the Company are to be
prepared in accordance with generally accepted accounting principles
("GAAP") applicable in Israel. The following describes the effects on
the Company's financial statements had the Company would have prepared
its financial statements in accordance with GAAP applicable in the
United States of America.
A. Basis of Measurement - Adjusted NIS vis-a-vis Nominal NIS
According to Israeli GAAP, the financial statements of the Company
through December 31, 2003 were presented based on nominal
historical cost adjusted for the changes in the exchange rate of
the U.S. Dollar in relation to the NIS based on the principles
presented in Note 2A(4) to the Mother-Company's (Hogla-Kimberly
Ltd.) financial statements as of December 31, 2004, while
according to US GAAP, the financial statements are to be presented
in nominal historical terms. Accordingly, the effect of the
difference in the basis of measurement on the Company's financial
position and results of operations is excluded for the U.S. GAAP
presentation. As presented in Note 2A to the Mother-Company's
financial statements as of December 31, 2004, commencing January
1, 2004, the Company ceased the presentation of its financial
statements based on adjusted NIS, and effective with the interim
financial statements as of March 31, 2004 and for the reporting
periods thereafter, including the year ended December 31, 2004,
the Company's financial statements are prepared and presented in
Reported Amounts, as defined in Note 2A(1) to the Mother-Company's
financial statements as of December 31, 2004.
B. Selected Balance Sheet Items
As of December 31, 2004
------------------------------------------
As As per
reported Adjustment US GAAP
-------- ---------- -------
NIS in thousands
------------------------------------------
Shareholders' equity 267,695 1,797 269,492
======= ===== =======
Rakefet Marketing and Trade Services Ltd.
US GAAP Adjustments Report
As of December 31, 2004
-----------------------
C. Selected Statements of Operation Items
Company
-----------------------
Year ended December 31,
-----------------------
2 0 0 4
-----------------------
NIS in thousands
-----------------------
Net income under Israeli GAAP 15,259
Effect of material differences between
Israeli GAAP and US GAAP:
Change in basis of measurement
from adjusted NIS to nominal NIS 27
Deferred taxes (61)
-------
Net income under US GAAP 15,225
=======
D. Changes in Shareholders' Equity in Accordance with US GAAP
NIS in thousands
-----------------------
Shareholders' equity under US GAAP as of January 1, 2004 254,267
Net income for the year under US GAAP 15,225
-------
Shareholders' equity under US GAAP as of December 31, 2004 269,492
=======
March 7, 2005
______________
signature
February 23, 2005
Our ref: 783921
To: Mondi Business Paper Hadera Ltd.
Hadera
------
Gentlemen,
Re: US GAAP Adjustments Report as of December 31, 2004
--------------------------------------------------
Pursuant to your request and as the independent accountants of Mondi Business
Paper Hadera Ltd. ("the Company"), we have audited the Company's US GAAP
Adjustments Report as of December 31, 2004 and for the year then ended ("the
Report"). The Report, which is enclosed herewith, marked by our Firm's
identification seal, is your responsibility.
The balance presented in the Report under the "Shareholders' equity under US
GAAP as of January 1, 2004" line item was audited by other auditors, who issued
their unqualified accountants report in relation thereto in March 18, 2004.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States) and with generally accepted auditing
standards in Israel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the Report is
free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Report, assessing the accounting principles used and significant estimates
made by the Board of Directors and management, as well as evaluating the overall
Report presentation. We believe that our audit provide a reasonable basis for
our opinion.
In our opinion, the Report referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2004, and the
results of operations and changes in shareholders' equity for the year then
ended, in accordance with generally accepted accounting principles in the United
States of America.
Sincerely,
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Mondi Business Paper Hadera Ltd.
US GAAP Adjustments Report
As of December 31, 2004
-----------------------
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles ("GAAP")
applicable in Israel. The following describes the effects on the
Company's consolidated financial statements had the Company prepared
its financial statements in accordance with GAAP applicable in the
United States of America.
A. Recent accounting pronouncements by the FASB
(1) SFAS No. 151 - Inventory Costs, an Amendment of ARB No. 43,
Chapter 4 - In November 2004 the FASB issued SFAS No. 151,
"Inventory Costs, an Amendment of ARB No. 43, Chapter 4". SFAS No.
151 amends the guidance in ARB 43, Chapter 4, "Inventory Pricing",
which provides guidance on the allocation of certain costs to
inventory. SFAS 151 clarifies that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current-period charges. In
addition, SFAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this
statement are effective for inventory costs incurred during fiscal
years beginning after June 2005. The provisions of this statement
shall be applied prospectively. The Company is currently assessing
the impact of the adoption of this Standard on the Company's
financial position and results of operations under U.S. GAAP.
(2) SFAS 153, Exchange of Non-Monetary Assets - In December 2004, the
FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets an
amendment of APB No. 29". This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. The Statement specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This
Statement is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after the date this Statement is
issued. Retroactive application is not permitted. The Company is
assessing the impact of the adoption of this Standard, and
currently estimates that its adoption in not expected to have a
material effect on the Company's financial position and results of
operations.
B. Goodwill
According to Israeli GAAP, goodwill is to be amortized over the
expected estimated economic life of the asset acquired, while
according to US GAAP (SFAS 142), commencing January 2002 goodwill
is no longer amortized but rather is reviewed annually (or more
frequently if impairment indicators arise) for impairment.
Following are the corresponding balance-sheet items presented
according to US GAAP with regard to the goodwill associated with
the acquisition of Miterani (see Note 7B to the Company's
financial statements as of December 31, 2004) and the other GAAP
differences outlined in D. Below.
Mondi Business Paper Hadera Ltd.
US GAAP Adjustments Report
As of December 31, 2004
-----------------------
C. Basis of Measurement - Adjusted NIS vis-a-vis Nominal NIS
According to Israeli GAAP, the financial statements of the Group
through December 31, 2003 were presented based on nominal
historical cost adjusted for the changes in the exchange rate of
the U.S. Dollar in relation to the NIS based on the principles
presented in Note 2A(4) to the Company's financial statements as
of December 31, 2004, while according to US GAAP, the financial
statements are to be presented in nominal historical terms.
Accordingly, the effect of the difference in the basis of
measurement on the Group's financial position and results of
operations is excluded for the U.S. GAAP presentation. As
presented in Note 2A to the Company's financial statements as of
December 31, 2004, commencing January 1, 2004, the Group ceased
the presentation of its financial statements based adjusted NIS,
and effective with the interim financial statements as of March
31, 2004 and for the reporting periods thereafter, including the
year ended December 31, 2004, the Group's financial statements are
prepared and presented in Reported Amounts, as defined in Note
2A(1) to the Company's financial statements as of December 31,
2004.
D. Selected Balance Sheet Items
As of December 31, 2004
-----------------------------------------
As As per
reported Adjustment US GAAP
-------- ---------- -------
NIS in thousands
-----------------------------------------
Other assets - Goodwill 3,800 1,678 5,478
====== ====== ======
Shareholders' equity 99,187 (2,313) 96,874
====== ====== ======
Mondi Business Paper Hadera Ltd.
US GAAP Adjustments Report
As of December 31, 2004
-----------------------
E. Selected Statements of Operation Items
Consolidated and Company
------------------------
Year ended December 31,
-----------------------
2 0 0 4
-----------------------
NIS in thousands
-----------------------
Net income under Israeli GAAP 17,262
Effect of material differences between
Israeli GAAP and US GAAP:
Change in basis of measurement
from adjusted NIS to nominal NIS (1,104)
Amortization of goodwill 623
Deferred taxes 440
------
Net income under US GAAP 17,221
======
F. Changes in Shareholders' Equity in Accordance with US GAAP
NIS in thousands
-----------------------
Shareholders' equity under US GAAP as of January 1, 2004 79,653
Net income for the year under US GAAP 17,221
------
Shareholders' equity under US GAAP as of December 31, 2004 96,874
======
/s/ Avi Magid
----------------
Avi Magid
Chief Financial Officer
March 7, 2005
Our ref: 783908
To: Hogla-Kimberly Ltd.
Ramla
-----
Gentlemen,
Re: US GAAP Adjustments Report as of December 31, 2004
Pursuant to your request and as the independent accountants of Hogla-Kimberly
Ltd. ("the Company"), we have audited the Company's US GAAP Adjustments Report
as of December 31, 2004 and for the year then ended ("the Report"). The Report,
which is enclosed herewith, marked by our Firm's identification seal, is your
responsibility.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States) and with generally accepted auditing
standards in Israel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the Report is
free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Report, assessing the accounting principles used and significant estimates
made by the Board of Directors and management, as well as evaluating the overall
Report presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the Report referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2004, and the
results of operations and changes in shareholders' equity for the year then
ended, in accordance with generally accepted accounting principles in the United
States of America.
Sincerely,
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Hogla-Kimberly Ltd.
US GAAP Adjustments Report
As of December 31, 2004
-----------------------
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles ("GAAP")
applicable in Israel. The following describes the effects on the
Company's consolidated financial statements had the Company prepared
its financial statements in accordance with GAAP applicable in the
United States of America.
A. Recent accounting pronouncements by the FASB
(1) SFAS No. 151 - Inventory Costs, an Amendment of ARB No. 43,
Chapter 4 - In November 2004 the FASB issued SFAS No. 151,
"Inventory Costs, an Amendment of ARB No. 43, Chapter 4". SFAS No.
151 amends the guidance in ARB 43, Chapter 4, "Inventory Pricing",
which provides guidance on the allocation of certain costs to
inventory. SFAS 151 clarifies that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current-period charges. In
addition, SFAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this
statement are effective for inventory costs incurred during fiscal
years beginning after June 2005. The provisions of this statement
shall be applied prospectively. The Company is currently assessing
the impact of the adoption of this Standard on the Company's
financial position and results of operations under U.S. GAAP.
(2) SFAS 153, Exchange of Non-Monetary Assets - In December 2004, the
FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets an
amendment of APB No. 29". This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. The Statement specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This
Statement is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after the date this Statement is
issued. Retroactive application is not permitted. The Company is
assessing the impact of the adoption of this Standard, and
currently estimates that its adoption in not expected to have a
material effect on the Company's financial position and results of
operations.
B. Goodwill
According to Israeli GAAP, goodwill is to be amortized over the
expected estimated economic life of the asset acquired, while
according to US GAAP (SFAS 142), commencing January 2002 goodwill
is no longer amortized but rather is reviewed annually (or more
frequently if impairment indicators arise) for impairment.
Following are the corresponding balance-sheet items presented
according to US GAAP with regard to the goodwill associated with
the acquisition of Ovisan (see Note 9B to the Company's financial
statements as of December 31, 2004) and the other GAAP differences
outlined in D. Below.
Hogla-Kimberly Ltd.
US GAAP Adjustments Report
As of December 31, 2004
-----------------------
C. Basis of Measurement - Adjusted NIS vis-a-vis Nominal NIS
According to Israeli GAAP, the financial statements of the Group
through December 31, 2003 were presented based on nominal
historical cost adjusted for the changes in the exchange rate of
the U.S. Dollar in relation to the NIS based on the principles
presented in Note 2A(4) to the Company's financial statements as
of December 31, 2004, while according to US GAAP, the financial
statements are to be presented in nominal historical terms.
Accordingly, the effect of the difference in the basis of
measurement on the Group's financial position and results of
operations is excluded for the U.S. GAAP presentation. As
presented in Note 2A to the Company's financial statements as of
December 31, 2004, commencing January 1, 2004, the Group ceased
the presentation of its financial statements based adjusted NIS,
and effective with the interim financial statements as of March
31, 2004 and for the reporting periods thereafter, including the
year ended December 31, 2004, the Group's financial statements are
prepared and presented in Reported Amounts, as defined in Note
2A(1) to the Company's financial statements as of December 31,
2004.
D. Selected Balance Sheet Items
As of December 31, 2004
-----------------------------------------
As As per
reported Adjustment US GAAP
-------- ---------- -------
NIS in thousands
-----------------------------------------
Other assets - Goodwill 25,878 8,731 34,609
======= ===== =======
Shareholders' equity 436,532 (419) 436,113
======= ===== =======
Hogla-Kimberly Ltd.
US GAAP Adjustments Report
As of December 31, 2004
-----------------------
E. Selected Statements of Operation Items
Consolidated and Company
------------------------
Year ended December 31,
------------------------
2 0 0 4
------------------------
NIS in thousands
------------------------
Net income under Israeli GAAP 26,928
Effect of material differences between
Israeli GAAP and US GAAP:
Change in basis of measurement
from adjusted NIS to nominal NIS 1,254
Amortization of goodwill 2,832
Deferred taxes (2,298)
-------
Net income under US GAAP 28,716
=======
F. Changes in Shareholders' Equity in Accordance with US GAAP
NIS in thousands
------------------------
Shareholders' equity under US GAAP as of January 1, 2004 409,978
Translation adjustments (2,581)
Net income for the year under US GAAP 28,716
-------
Shareholders' equity under US GAAP as of December 31, 2004 436,113
=======
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