20-F
As filed with the Securities and Exchange Commission on June 23, 2008



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

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended on December 31, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to

o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-04212

AMERICAN ISRAELI PAPER MILLS LTD.
(Exact name of registrant as specified in its charter)

N/A Israel
(Translation of registrant's (Jurisdiction of incorporation
name into English) or organization)

P.O. Box 142, Hadera 38101, Israel
(Address of principal executive offices)

Lea Katz. Adv., Corporate Secretary, TL: 972-4-6349408, FAX: 972-4-6339740. Industrial Zone, Hadera, Israel


(Name, Telephone, E-Mail and/or Facsimile and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
 
Ordinary Shares par value NIS .01 per share American Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 5,060,774 Ordinary Shares, par value NIS .01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes     x No

If this report is an annual or transition report, indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes     x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes x No o



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Cheek one)

Large accelerated filer o     Accelerated filer x    Non- accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

  U.S. GAAP o
  International Financing Reporting Standards as issued by the International Accounting Standards Board o
  Other x

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 x Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes     x No



TABLE OF CONTENTS

CERTAIN DEFINED TERMS
FORWARD-LOOKING STATEMENTS

PART I

PAGE
 
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY 12 
ITEM 4A. UNRESOLVED STAFF COMMENTS 22 
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 22 
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 38 
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 43 
ITEM 8. FINANCIAL INFORMATION 44 
ITEM 9. THE OFFER AND LISTING 45 
ITEM 10. ADDITIONAL INFORMATION 47 
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 54 
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 57 
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 58 
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 58 
ITEM 15. CONTROLS AND PROCEDURES 58 
ITEM 16. [RESERVED] 59 
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 59 
ITEM 16B. CODE OF ETHICS 59 
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 59 
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 60 
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 60 
PART III
ITEM 17. FINANCIAL STATEMENTS 61 
ITEM 18. FINANCIAL STATEMENTS 69 
ITEM 19. EXHIBITS 70 

3



CERTAIN DEFINED TERMS

        In this annual report, unless otherwise provided, references to “American Israeli Paper Mills,” “AIPM,” “Company,” “we,” “us.” and “our” refer to American Israel Paper Mills Ltd. and its subsidiaries and references to the “Group” refers to American Israel Paper Mills Ltd., its subsidiaries and associated companies. The terms “Euro,” “EUR” or “€” refer to the common currency of twelve member states of the European Union, “NIS” refers to New Israeli Shekel, and “dollar,” “USD” or “$” refers to U.S. dollars.

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 “Exchange 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.

4



PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

        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 it relates to the Company, as described in Item 17.

        The following selected financial data is derived from the audited consolidated financial statements of the Company, which have been audited by Brightman Almagor & Co., an independent public accounting firm and a member firm of Deloitte Touche Tohmastu. Brightman Almagor & Co replaced Kesselman & Kesselman & Co. who served as the Company’s external auditors since 1954 until 2006. Our audited consolidated balance sheets as of December 31, 2006 and 2007, and the related audited consolidated statements of income and of cash flows for each of the three years ended December 31, 2005, 2006 and 2007, together with the notes thereto, appear elsewhere in this annual report.

        You should read the following selected consolidated financial data in conjunction with the section of this annual report entitled “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the notes thereto included elsewhere in this annual report.

        The financial data is presented in New Israeli Shekel (NIS) as follows: AIPM made a transition to reporting in nominal NIS in 2004, pursuant to the directives of Standard 12 of the Financial Accounting Standards Board in Israel. Prior to 2004, 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 year 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.

5



Five Fiscal Year Financial Summary

According to Israeli GAAP

Year Ended December 31
Income Statement Data:
2007
2006
2005
2004
2003
(In Thousands of NIS Except Per Share Amounts)
 
Sales      583,650    530,109    482,461    482,854    465,092  
Income from ordinary operations    75,369    50,501    43,338    54,438    46,584  
Share in profits (losses) of associated  
companies, net    (2,884 )  **(26,202 )  16,414    25,072    35,549  
Net income    31,442    113,330    145,715    162,732    160,047  
Selected Balance Sheet Data:   
Total assets    1,319,067    1,173,287    1,155,758    1,162,387    1,253,274  
Fixed assets    445,566    400,823    379,934    345,239    340,543  
Long-term debt    219,031    256,290    260,581    261,269    268,052  
Shareholders' equity    678,087    430,842    523,384    575,313    614,230  
Per Share Data:   
Shares outstanding at end of year    5,060,774    4,032,723    4,002,205    3,996,674    3,968,295  
Amount in NIS    50,608    40,327    40,022    39,967    39,683  
Net income per NIS 1 par value:  
         Primary    7.61    3.31    11.43    15.77    15.26  
         Fully diluted    7.60    3.28    11.35    15.44    14.99  
Dividend declared per share    -    224.85    2*24.99    225.12    225.12  


* Consists of two dividends that were declared in 2005 (see footnote 2 below)
** Amount does not include the cumulative affect of a change in accounting policy of associated company of NIS (461).

1 The net income includes gains for the years 2005, 2004 and 2003 (in the sum of 8,000 thousands, NIS 14,440 thousands and NIS 2,700 thousands respectively, which relate to certain tax benefits – for a further discussion of these items, see discussion in Item 5 – Operating Financial Review and Prospects, in this annual report on Form 20-F.

2 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.
  Dividend for 2005 in the sum of NIS 12.50 per share ($2.71 per share) was declared in August 2005 and paid in September 2005.
  Additional dividend for 2005 in the sum of NIS 12.49 per share ($2.71 per share) was declared in December 2005 and paid in January 2006.
  Dividend for 2006 in the sum of NIS 24.85 per share ($ 5.64 per share) was declared in June 2006 and paid in July 2006.

6



According to U.S. GAAP

Year ended December 31
Income Statement And Balance Sheet Data:
2007
2006
2005
2004
2003
(In Thousands of re-measured NIS Except Per Share Amounts)
 
Sales      583,650    530,109    482,461    482,854    481,491  
Income from ordinary operations    75,484    76,917    63,258    63,974    53,688  
Share in profits (losses) of associated  
companies, net    (1,739 )  (19,686 )  8,193    29,213    20,972  
Net income    32,750    23,909    141,861    158,720    138,469  
Total assets    1,274,855    1,123,964    1,097,543    1,107,725    1,189,215  
 Fixed assets    411,551    362,539    340,914    300,746    291,060  
Long-term debt    219,656    257,075    260,581    261,269    268,052  
Shareholders' equity    622,425    374,768    461,406    520,482    550,354  
Per Share Data:   
Shares outstanding at end of year    5,060,774    4,032,723    4,002,205    3,996,674    3,968,295  
Share outstanding to compute:  
Basic net income per share    4,132,728    4,025,181    3,999,910    3,978,339    3,938,035  
Diluted net income per share    4,139,533    4,055,628    4,051,610    4,043,714    3,969,708  
Amount in NIS    50,608    40,327    40,022    39,967    39,683  
Net income per share. (re-measured NIS)  
         Basic    7.93    5.94    10.47    14.76    9.77  
         Diluted    7.91    5.89    10.33    14.52    9.69  
Dividend declared per share    -    224.85    2**24.99    225.12    225.55  

For further information about the effect of the application of U.S. GAAP, see Item 17.


** Consists of two dividends declared in 2005 (see footnote 2 below)

1 The net income includes losses in the years 2005 and 2003, in the sum of NIS 10,000 thousands and NIS 16,986 thousands respectively, (representing other than temporary impairment of investment in associated companies (see Item 17-e)).

  Net income in the years 2005, 2004 and 2003, includes gains of NIS 8,000 thousands, NIS 14,440 thousands and NIS 2,700 thousands respectively, originated from certain tax benefits for a further discussion of these items, see Item 5 – Operating and Financial Review and Prospects.

2 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.
  Dividend for 2005 in the sum of NIS 12.50 per share ($2.71 per share) was declared in August 2005 and paid in September 2005.
  An additional dividend for 2005 in the sum of NIS 12.49 per share ($2.71 per share) was declared in December 2005 and paid in January 2006.
  Dividend for 2006 in the sum of NIS 24.85 per share ($ 5.64 per share) was declared in June 2006 and paid in July 2006.

7



Exchange Rates

        The exchange rate between the NIS and U.S. dollar published by the Bank of Israel was NIS 3.233 to the dollar on May 31, 2008. The high and low exchange rates between the NIS and the U.S. dollar during the six months from December 2007 through May 2008, as published by the Bank of Israel, were as follows:

Month
High
Low
1 U.S. dollar = 1 U.S. dollar =
 
December 2007 4.008 NIS 3.841 NIS
January 2008 3.861 NIS 3.625 NIS
February 2008 3.655 NIS 3.578 NIS
March 2008 3.656 NIS 3.377 NIS
April 2008 3.640 NIS 3.425 NIS
May 2008 3.461 NIS 3.233 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
January 1, 2003 - December 31, 2003 4.512 NIS/$1
January 1, 2004 - December 31, 2004 4.483 NIS/$1
January 1, 2005 - December 31, 2005 4.878 NIS/$1
January 1, 2006 - December 31, 2006 4.456 NIS/$1
January 1, 2007 - December 31, 2007 4.085 NIS/$1

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 confined by legal constraints (such as government policy on various subjects, different requirements made by the authorities supervising environmental regulations and governmental decisions to raise minimum wages). These restrictions may affect the results of operations of the Group.


* The Group – The Company and its subsidiaries and associated companies

8



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 occasionally enter into hedging transactions to cover the exposure due to the liabilities. A high inflation rate may also affect payroll expenses, which, at the long run, tends to be adjusted to the changes in the CPI.

Exposure to Exchange Rate Fluctuation

        The Company, its consolidated 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. Changes in the foreign exchange rates of the different currencies compared to the New Israeli Shekel may cause erosion in profitability and cash flow.

        In September 2007 the company entered into dollar/Euro hedging transactions for periods of up to four months, in the amount of NIS 13.4 million, terminated at the end of 2007. In December 2007, the company entered into buy and sale transactions of Euro – NIS options for up to one year period for 20 million Euro.

Interest Risks

        The company is exposed to changes in interest rates, primarily in respect of bonds it has issued in the amount of NIS 196 million, as of December 31, 2007.

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 the section titled – “Competition” in Item 4B below.

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 the collection of paper waste and seek wider range of collection sources. The lack of enforcement of the Israeli recycling laws, which require waste recycling, makes it difficult to find alternative resources at a competitive cost, but the enactment of the Clean Environment Act in January 2007, which charges a landfill levy on waste may, if effectively enforced, significantly improve the ability to collect paper waste.

        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 tariffs or entrance 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.

Account Receivable 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.

9



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 Hogla-Kimberly Ltd (“H-K”) operates through its subsidiary, Kimberly –Clark Turkey (“KCTR”). These risks result from economic instability and high inflation rates and exchange rate fluctuations, which have characterized the Turkish economy during the past years, and may be repeated and adversely affect KCTR’s activities.

Risks Associated with credit from banks

The Company forms part of the I.D.B. Group and is influenced by the Israel Banking Supervisor’s “Correct Banking Management Regulations”, which includes amongst other things, limits to the volume of loans an Israeli bank can issue to a single borrower; a single “borrowing group” (as this term is defined in the said regulations), and to the six largest borrowers and “borrowing groups” at a bank corporation. I.D.B. Development, its controlling shareholders and some of the companies held thereby, are considered to be a single “borrowing group”. Under certain circumstances, this can influence the AIPM Group’s ability to borrow additional sums from Israeli banks and to carry out certain business transactions in partnership with entities that drew on the aforesaid credit.
For further information, see “Item 11 – Quantitative and Qualitative Disclosure about Market Risk”.

Risk related to our paper and recycling business

We are dependent on the transporter of natural gas to our plant in Hadera.

        In October 2007, we converted our energy-generation systems, currently based on heavy fuel oil, to natural gas (see Item 4 Section D below). The termination by the natural gas transporter of its agreement with us to transport the natural gas that we use at our facility in Hadera could have a material adverse effect on our operations.

We are dependent on a single source supplier of natural gas.

        In our paper and recycling operations, we are dependent on our current supplier of natural gas Yam Tethys, which as of the date of this annual report is the sole supplier of natural gas in Israel, for the supply of natural gas to our facility in Hadera. If our agreement with Yam Tethys is terminated, we would be required to contract with natural gas suppliers outside of Israel, or to convert back to fuel oil, which, as of the date of this annual report, is significantly more expensive than natural gas. If we are required to contract with alternative natural gas suppliers outside of Israel, such a transition would involve a substantial expense.

Unforeseen or recurring operational problems and maintenance outages at any of our paper and recycling facilities may cause significant lost production.

        Our paper and recycling operations are concentrated in a small number of facilities in a limited number of locations. Our manufacturing process could be affected by operational problems that could impair our production capability. Each of our facilities contains complex and sophisticated machines that are used in our manufacturing process. Disruptions or shutdowns at any of our facilities could be caused by many factors, many of which are outside our control. If our facilities are shut down, they may experience prolonged startup periods, regardless of the reason for the shutdown. Any prolonged disruption in operations of any of our facilities could cause significant lost production, which would have a material adverse effect on our business, financial condition and operating results.

Our profitability may be affected by new environmental and safety laws and regulations and compliance expenditures.

        Certain aspects of our manufacturing operations are subject to a wide range of general and industry-specific environmental, and safety laws and regulations, which impose a substantial financial burden on our resources. Such financial expense is likely to increase as the public’s environmental awareness increases and laws and regulations impose additional obligations on us.

        In addition, as our operations involve the use of hazardous and poisonous materials, we may be exposed to litigation in connection with third-party damages, including tort liability and natural resource damages, relating to past or present releases of hazardous substances on or from our properties. We may be involved in administrative or judicial proceedings and inquiries in the future relating to such environmental matters which could have a material adverse effect on our business, financial condition and operating results.

10



Under Israeli law, we are considered a “monopoly” and therefore subject to certain restrictions that may negatively impact our ability to grow our business in Israel.

        We have been declared a monopoly under the Israeli Restrictive Trade Practices Law, 1988, in the market for the manufacture and marketing of packaging paper. Under Israeli law, a monopoly is prohibited from taking certain actions, and the Commissioner of the Israeli Antitrust Authority has the right to intervene in matters that may adversely affect the public, including imposing business restrictions on a company declared a monopoly, including supervision of prices charged. The Israeli antitrust authority may further declare that we have abused our position in the market. Any such declaration in any suit in which it is claimed that we engage in anti-competitive conduct would serve as prima facie evidence that we are a monopoly or that we have engaged in anti-competitive behavior. Furthermore, we may be ordered to take or refrain from taking certain actions, such as set maximum prices, in order to protect against unfair competition. Despite all the above-mentioned, the Israeli antitrust authority had not intervened and/or imposed any restrictions upon us with regard to our declaration as a monopoly. Restraints on our operations as a result of being considered a “monopoly” in Israel could adversely affect our financial outcomes in the manufacture and marketing of packaging paper activity.

Risk related to our office supplies business

We are dependent on continued success in securing large tenders.

        The office supplies activity is conducted through securing large-scale tenders for defined and fixed periods of time. We cannot assure that in the future we and/or our subsidiaries will continue to be successful at securing these tenders. If we and/or our subsidiaries are unsuccessful in continually securing certain large-scale tenders, this may negatively impact our sales volume which, in turn, may adversely affect our profitability in the office supplies sector of our business.

We are dependent on the ability of a wholly-owned subsidiary to maintain its current status as an exclusive distributor of certain international brands of office supplies.

        Graffiti Office Supplies & Paper Marketing Ltd., or Graffiti, our wholly owned subsidiary, through Atar Marketing Office Supplies Ltd., or Atar, also our wholly owned subsidiary, is the exclusive distributor of a number of international brands in the office supplies industry. If we were to lose exclusivity regarding one or more of these brands, this could adversely affect our profitability in this field. However, due to the fact that Graffiti is an exclusive agent for a number of providers, according to the assessment of Graffiti the effect of the aforementioned cancelation of exclusivity would not be material.

Risks relating to our location in Israel

Political, economic, and security conditions in Israel affect our operations and may limit our ability to produce and sell our products or provide our services

        We are incorporated under the laws of the State of Israel, where we also maintain our headquarters and our principal manufacturing facilities. Specifically, we could be materially and adversely affected by:

  any major hostilities involving Israel;

  a full or partial mobilization of the reserve forces of the Israeli army;

  the interruption or curtailment of trade between Israel and its present trading partners; or

  a significant downturn in the economic or financial condition of Israel.

        Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Most recently, in the summer of 2006, for approximately one month, battles took place between the Israeli military and Lebanese guerilla units. Further, the establishment of a Hamas government in Gaza has created additional unrest and uncertainty in the region. There is no indication as to how long the current hostilities will last or whether there will be any further escalation. Any continuation of or further escalation in these hostilities or any future armed conflict, political instability or violence in the region may have a negative effect on our business condition, harm our results of operations and adversely affect our share price. Furthermore, there are a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel or Israeli companies, and we are precluded from marketing our products to these countries. Restrictive laws or policies directed toward Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.

        Generally, all nonexempt male adult citizens and permanent residents of Israel, including some of our officers and employees, are obligated to perform military reserve duty annually, and are subject to being called to active duty at any time under emergency circumstances. While we have operated effectively under these requirements since our incorporation, we cannot predict the full impact of such conditions on U.S. in the future, particularly if emergency circumstances occur. If many of our employees are called for active duty, our business may be adversely affected.

        Furthermore, an economic slowdown in Israel or globally and/or a deterioration of the political and security situation in Israel and outside Israel could have an adverse effect on the financial situation of the Company and the Group’s companies. In addition, these circumstances could reduce the demand for the Company’s products, and as a result hurt sales, financial results and profitability.

11



Risks relating to our ordinary shares

Our shares are listed for trade on more than one stock exchange, and this may result in price variations.

        Our ordinary shares are listed for trading AMEX and on TASE. This may result in price variations. Our ordinary shares are traded on these markets in different currencies, U.S. dollars on AMEX and New Israeli Shekels on TASE. These markets have different opening times and close on different days. Different trading times and differences in exchange rates, among other factors, may result in our shares being traded at a price differential on these two markets. In addition, market influences in one market may influence the price at which our shares are traded on the other.

Any shareholder with a cause of action against us as a result of buying, selling or holding our ordinary shares may have difficulty asserting a claim under U.S. securities laws or enforcing a U.S. judgment against us or our officers, directors or Israeli auditors.

        We are organized under the laws of the State of Israel, and we maintain most of our operations in Israel. Most of our officers and directors as well as our Israeli auditors reside outside of the United States and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, if you wish to enforce a judgment obtained in the United States against us, or our officers, directors and auditors, you will probably have to file a claim in an Israeli court. Additionally, you might not be able to bring civil actions under U.S. securities laws if you file a lawsuit in Israel. We have been advised by our Israeli counsel that Israeli courts generally enforce a final executory judgment of a U.S. court for liquidated amounts in civil matters after a hearing in Israel. If a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency. However, payment in the local currency of the country where the foreign judgment was given shall be acceptable, subject to applicable foreign currency restrictions.

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

        American Israeli Paper Mills Ltd. 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, and also the Company’s registered offices, are located at 1 Meizer St., Industrial Zone, P.O. Box 142, Hadera, Israel. The Company’s telephone number is (972-4) 634-9349, and its facsimile number is (972-4) 633-9740.

        Over the last few years, the Group has participated in several 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. On June 1, 2007 Carmel preformed a self-acquisition of its own shares, and as a result, the Group’s holding in Carmel increased. As of December 31, 2007, the Group held 36.2% of the shares of Carmel. Another major shareholder in Carmel is the Kraft Group LLC, an American shareholder holding49.6% of Carmel’s shares. Carmel shares were traded on the AMEX before it was delisted and deregistrated in 2005.

    2.        In 1996, Kimberly-Clark Ltd. (“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”, which was renamed to Kimberly-Clark Turkey (“KCTR”), 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 (the “Agreement”) with Neusiedler AG, which later changed its name to Mondi Business Paper (“MBP”), pursuant to which MBP 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 Neusiedler Hadera Paper (NHP), a subsidiary that was established for this purpose, of which MBP acquired 50.1%. NHP was renamed in 2004 to Mondi Business Hadera Paper, and was again renamed in February 2008 and is now called Mondi Hadera Paper (“Mondi Hadera”).

        In accordance with the Agreement, MBP was granted the option, unlimited by time and realizable at any time, by which MBP is allowed to sell its holdings in Mondi Hadera to the Company at a price 20% lower than Mondi Hadera’s value. According to the Agreement, Mondi Hadera’s value will be set according to a valuation that will not be less than the sum stated in the Agreement. According to oral understandings between senior officers of the Company and MBP that was resulted in proximity to the agreement between the parties, MBP agreed to actualize the option only in exceptional circumstances, such as those that paralyze production in Israel for long periods of time. Since the long period that passed from the date of those oral understandings, and due to changes in MBP’s management, recently accrued, the Company has taken a conservative accounting approach to the Agreement by reflecting the financial value of the option in the note regarding the transition to IFRS, which will occur in fiscal year 2008. See also Note 16(E)(7) to the financial statements of the Company for December 31, 2007.

12



    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 business, acquired 20% of Cycle-Tec Recycling Technologies Ltd. (“Cycle-Tec”) in 1997 and an additional 10% in 1998. Cycle-Tec is a research and development company developing a process for manufacturing high-strength, low-cost composite materials based on recycled post-consumer plastic and paper treated with special chemical additives. As of May 31, 2008, Amnir owned 30.18% of Cycle-Tec.

    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. The agreement did not apply to Amnir’s operations in collecting and recycling paper and plastic. (As of February 13, 2007, the Company is no longer a shareholder in Amnir Environment – see Item 6 below.)

    6.        In March 2000, AIPM and CGEA entered into an agreement with Tamam Integrated Recycling Industries Ltd. (“TMM”) and its controlling shareholders. Through a jointly held company, called Barthelemi Holdings Ltd (“Barthelemi”), AIPM and CGEA acquired from TMM’s controlling shareholders 62.5% of the share capital of TMM, an Israeli company in the solid waste management field. Simultaneously, 100% of Amnir Environment’s shares were transferred to TMM in return for an allocation of 35.3% of the shares of TMM to the shareholders of Amnir Environment. Following the transaction, AIPM and CGEA together owned 75.74% of the shares of TMM. In August and September 2000, TMM acquired approximately 3% of its own share capital. In December 2001 and in August 2003 AIPM and CGEA acquired additional shares of TMM’s through the jointly held company Barthelemi, resulting in an increase in the ownership of shares of TMM by AIPM and CGEA to 88%. As of December 31, 2006, AIPM held directly and indirectly 43.08% of TMM’s shares and CGEA held 44.92%. On January 4, 2007, an agreement was signed between the Company and CGEA, according to which the Company sold to CGEA its holdings in Barthelemi and the remainder of its holdings in TMM. The $27 million transaction was completed on February 13, 2007. Since then, the Company has no longer been a shareholder in TMM.

    7.        In June 2005, C.D. Packaging Systems Ld. (“C.D.”, a company held jointly by AIPM and Carmel) acquired the business activity of Frenkel and Sons Ltd., in exchange for an allocation of shares in C.D. Both companies were engaged in the field of folding boxes. C.D. was renamed to Frenkel-CD Ltd. in the merger, which was effective as of January 1, 2006. As of May 31, 2008, the Group held 37.93% of C.D.‘s shares (directly and indirectly through Carmel, which holds 27.85% of C.D.‘s shares). In addition, Frenkel and Sons Ltd. held 44.3% of C.D.‘s shares.

        Other important events in the development of the Company include:

        During the first half of 2008, critical agreements were signed for acquiring the equipment required for a new production system for packaging paper produced from paper and board waste. The new production system at the Company’s Hadera site, which will have an output capacity of approximately 230 thousand tons per annum, will cost an estimated NIS 690 million (approximately $170 million). The principal equipment for the production system was acquired from the leading companies in the world in the manufacture and sale of paper machines, with the central equipment purchased from the Italian company Voith, while additional complementary items were ordered from Finnish company METSO. For further details, see Item 10.C Material Contracts.

On January 1, 2007, an agreement was signed with Arledan Investments Ltd., according to which the Company sold its leasing rights over a plot of land of approximately three acres in “Ramat Hahayal”, for a sale price of approximately NIS 57 million. The property is rented until January 2013. For further details, see Item 10.C Material Contracts.

        In November 2007, the Company allocated via private placement 1,012,585 ordinary shares NIS 0.01 par value each which on the allocation date comprised 20% of the Company’s issued share capital in exchange for a total investment of NIS 213 million. About 60% of these shares (607,551 shares) were allotted to shareholders in the Company, Clal Industries Ltd. and Discount Investments Corporation Ltd. (hereinafter in this paragraph: the “Special Offerees”), in accordance with their pro-rata holdings in the Company, and 40% of these shares (405,034 shares) were offered by way of a tender to institutional and/or private investors (whose number did not exceed 35) (hereinafter in this paragarph: the “Ordinary Offerees”). The share price for Ordinary Offerees, determined by auction, was NIS 210. Accordingly, the share price for Special Offerees, considering the number of shares offered to Special Offerees, was set at NIS 211.05 (the auction share price plus 0.5%). The Company paid the distributors a rate of 1.2% of the total consideration received from institutional and/or private investors, that is, a sum of NIS 1,020,686. The consideration received in respect of the allotment of these shares, shall be used for the partial financing of the acquisition of the new machine for the manufacture of packaging paper, as set forth in Item 4.D Property, Plants and Equipment.

        On May 11, 2008, the Board of Directors approved the change of the name of the Company from American Israeli Paper Mills Ltd. to Hadera Paper Ltd. or to a similar name approved by the Israeli Registrar of Companies and to amend the Company’s articles of association accordingly. The change shall be effective subordinate to the approval by shareholders at the Annual General Meeting that will be held in June 2008, and after approval of the Israeli Registrar of Companies.

13



        On May 26, 2008, the Company publicly filed with the Israeli Securities Authority and the Tel Aviv Stock Exchange (“TASE”) a shelf prospectus pursuant to which the Company may issue from time to time: (1) Up to 1,000,000 ordinary shares of the Company, par value NIS 0.01 each; (2) Up to five series of debentures (series 3 to 7) each of a total principal amount of up to NIS 1,000,000,000, payable in a number of payments, as described in the shelf prospectus; (3) Up to five series of convertible debentures (series 8 to 12) each of a total principal amount of up to NIS 1,000,000,000, payable in a number of payments, as described in the shelf prospectus; (4) Up to four series of warrants (series A to D), each series including no more than 10,000,000 warrants, each warrant is exercisable into one ordinary share of the Company, par value NIS 0.01 each, subject to adjustments, in return for cash payment, as described in the shelf prospectus; and (5) Up to four series of warrants (series E to H), each series including no more than 1,000,000 warrants, each warrant is exercisable to debentures with principal amount of NIS 100 from Series 2, 3 to 7 and 8 to 12 of the Company, subject to adjustments, in return for cash payment, as described in the shelf prospectus. The offering of the ordinary shares, debentures and warrants in accordance with the shelf prospectus shall be made in accordance with Article 23A(F) to the Israeli Securities Law of 1968, pursuant to shelf offering reports, in which all the details specific to that offering shall be disclosed. The securities covered by the shelf prospectus have not been registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Capital Expenditures and Divestitures

2007

The Company’s investments in fixed assets totaled about NIS 82.0 million (about $ 21.3 million) in 2007. These investments included:

Investments of approximately NIS 1.8 million ($ 0.5 million) in environmental expenditures.
An investment of approximately NIS 12.5 million ($ 3.3 million) in a conversion to gas system.
Investments of approximately NIS 19.4 million ($ 5.0 million) in conversion and improvement of steam tanks.
Investments of approximately NIS 2.8 million ($ 0.7 million) in real estate in Naharia as a reserve for the Company's future development.
  Investments of approximately NIS 5.6 million (about $1.4 million) in new packaging paper production system (“Machine 8”).
Investments totaling NIS 39.9 million ($ 10.4 million) in buildings, equipment, transportation and information technology.

2006

The Company’s investments in fixed assets totaled about NIS 53.1 million (about $ 12.5 million) in 2006. These investments included:

Investments of approximately NIS 3.0 million ($ 0.7 million) in environmental expenditures.
An investment of approximately NIS 2.5 million ($ 0.6 million) in a conversion to gas system.
Investments of approximately NIS 13.9 million ($ 3.3 million) in conversion and improvement of steam tanks.
Investments of approximately NIS 1.7 million ($ 0.4 million) in real estate in Hadera as a reserve for the Company's future development.
Investments totaling NIS 32.0 million ($ 7.5 million) in buildings, equipment, transportation and information technology.

2005

The Company’s investments in fixed assets totaled about NIS 71.1 million (about $15.4 million) in 2005. These investments included:

Investments of approximately NIS 4.6 million ($1.0 million) in environmental expenditures.
An investment of approximately NIS 1.8 million ($0.4 million) in a conversion to gas system
Investments of approximately NIS 36.8 million ($8 million) in real estate in Hadera an Naharia.
Investments totaling NIS 27.9 million ($6 million) in buildings, equipment, transportation and information technology.

14



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, kitchen products, corrugated board containers and packaging for consumer goods.

        In 1995, the Company formed a wholly-owned subsidiary, AIPM Paper Industry Ltd. to engage in production and sale of packaging paper.

        In order to serve its paper production activities, the Company, through a wholly-owned subsidiary, supplies various services, including engineering services, maintenance, steam and energy, water supply, and sewage treatment, to a variety of paper machines located at the Company’s main production site in Hadera in return for cost sharing (the cost of the above-mentioned services are divided among the Group companies, according to the actual use and consumption of their paper machines located in Hadera). In December 2007, the Company applied to the Israeli Income Tax Authority requesting approval to spin-off operations of this subsidiary to a new company named Hadera Paper – Development and Infrastructure Ltd. The objectives of this spin-off are to improve efficiency and to allow the Company in the future to consider forming strategic partnerships with AIPM Paper Industry operations. To date, Income Tax Authority approval of the spin-off has not yet been received, and the spin-off has not yet been completed.

        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 manufactured and/or marketed by the Group are as follows:

  Grades of Paper and Board

        Printing and writing paper, publication papers in reels, coated paper, recycled 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.

  Packaging Products

        Folding cartons, corrugated containers, consumer packages solid board containers and pallets.

  Household Products

        Bathroom tissue, toilet paper, kitchen towels, facial tissue, napkins, disposable tablecloths, sanitary towels, panty shields, tampons, disposable baby diapers, training pants, baby wipes, disposable adult diapers, and incontinence pads.

  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 complementary products, cups and plates, and examination gloves.

  Other Products

        Aluminum food wraps, cling-film wraps, garbage bags, oven baking and cooking trays, office supplies, recycled ground and palletized plastics used by the plastic products industry.

Sales and Marketing

        The Group’s packaging products are sold mostly to five main customers in Israel (one of them is an associated company) which operate in the corrugated board sector with whom the Group has long-standing business relationships.

        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, health maintenance organizations and banks. About 21% of the sales are made through tenders.

        The Group’s paper grade 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 customers.

15



        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., to the agriculture, and food and beverage industries), including direct marketing to ultimate customers through subcontractors and agents.

        The Group’s main marketing strategy has the following objectives:

  (a) Maintaining its existing dominant share in the Israeli market for paper grade and household products produced by the Group and imported by it, through short delivery times 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 its production capacity.

        In March 2007, KCTR signed an agreement in principle with Unilever, according to which Unilever shall distribute and sell KCTR’s products in Turkey, excluding distribution and sales to food chains, which will be done directly by KCTR. The agreement was signed to help KCTR increase its market penetration and volume of sales following the approval of a strategic plan by KCTR to expand its activities in Turkey in the coming decade. The complete strategic plan is designed to expand the activities of KCTR from the current yearly sales volume of $50 million to a volume of $300 million in the year 2015.

        The following table sets forth the consolidated sales in NIS millions by categories of the consolidated segments of operations:

Packaging Paper
Manufacturing
and Recycling 1

Marketing Office
Supplies 2

Total
2007
2006
2005
2007
2006
2005
2007
2006
2005
 
 464.7  408.0    368.9    119.0    122.1    113.6    583.7    530.1    482.5  










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.

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, Chile and Spain. The bulk of the pulp tonnage purchased by the Company is secured by revolving long-term agreements renewed on a yearly basis. All of the pulp for the printing and writing paper manufactured by Mondi Hadera is purchased by Mondi Paper (the Austrian parent company), which purchases pulp for its subsidiaries around the world. This ensures fluent supply and better prices.

        The pulp for household products is imported by H-K with the assistance of K-C.

        About 65% of the fibers required in paper production by the Group (including printing and writing paper and household products for the operation of its associated companies) come from waste paper, which in some paper grades is used in lieu of relatively more expensive pulp. The production of packaging and brown wrapping paper is based mostly on recycled fibers. Therefore, the main raw material used for the production of packaging and brown wrapping paper is paper waste, most of which is collected from various sources by Amnir, a wholly owned subsidiary of the Company. Approximately 210,000 tons per year of waste paper are collected and handled by Amnir, most of which are used by the Group for the production of fluting and tissue paper, and some of which is sold to other tissue paper manufacturers. Apart from the waste paper collected by Amnir, American Israeli Paper Mills Industries (1995) Ltd, Company’s subsidiary, purchase residue which is created during the production of packages and purchased from the manufacturers of corrugated board.

        The relative absence of supporting enforcement of Israel’s Recycling Act, which mandates waste recycling, detracts from the Company’s ability to expand waste collection. On January 16, 2007, however, the Clean Environment Act (9th amendment) – 2007 was enacted, imposing a landfill levy on waste. Pursuant to the provisions of this act, a landfill charge will be levied against waste, at the rate of NIS 10 per ton in 2007, rising up to NIS 50 per ton from 2011 and thereafter. The enforcement of this act may lead to improved capacity in paper waste collection.

16



        Also, Amnir is preparing to increase paper waste collection over the coming years following approval by the Company’s Board of Directors of an investment in a new machine for packaging paper, at a cost of approximately $170 million (see also Item 4.D. Property, Plants and Equipment). The construction of the new packaging machine will require twice the volume of paper waste collection to serve as raw material in the production of packaging paper over the coming years. Amnir is gearing up to increase collection volumes in anticipation of the installation of the new packaging paper machine.

        The main raw material required for the manufacture of corrugated board is board paper. Carmel purchases paper from two main suppliers which are also shareholders of Carmel.

        Since 1996, Mondi Hadera, an associated company, has been using precipitated calcium carbonate (“PCC”), a special pigment used for filling and coating paper, in order to improve paper quality. In 2005, an agreement was signed between Mondi Hadera and the Swedish company Omya International AG (“Omya”) for the supply of PCC. The original agreement was signed for a period of 10 years and, in 2007, the parties signed an agreement extending it for another four years. The supplier is contesting the aforesaid extension period. Omya constructed and operates a PCC plant in Israel. In September 2005, the Agreement was converted to an Israeli fully-owned subsidiary of Omya. The PCC purchased from Omya replaced a former PCC purchase from another PCC supplier, and led to a significant PCC cost saving.

        The cost of paper production is affected by fluctuating raw material prices and the cost of water and energy (during 2007, the cost of paper production was affected also by prices of fuel oil. However, since October 2007, the Company converted its energy-generation systems, which had been based on fuel oil, to natural gas). The associated companies are exposed to fluctuations in raw material prices, as well as the prices of products purchased for import that arrive in Israel with no tariffs and no entrance barriers. Unusual increases in the cost of raw materials or in the quantity of imported finished products could impair profitability.

Competition

        Most of the Group’s products that are sold in the Israeli market are exposed to competition with local and imported products. The imported products arrive in Israel exempt from import tariffs, especially from the European Economic Community (“EEC”), the European Free Trade Association (“EFTA”) and the U.S. Tariffs on imports of fine paper from other countries range up to 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 main competitor of H-K is Proctor & Gamble Co.)

        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 sector of office supplies with direct delivery to organizations and businesses includes two dominant competitors, Office Depot and Kravitz, which together with Grafiti primarily dominate the tender and strategic business customer segment. In addition, there a large number of small competitors, which mostly operate within a limited geographical area. In late 2006 and early 2007, several tenders of the Accountant General of the Ministry of Finance were issued for office supplies and consumables office supplies. The tenders were secured by Office Depot, whose market share in this sector is therefore expected to grow to about 11%. Graffiti and Kravitz will each possess an estimated 10% market share after implementation of the new General Accountant tenders.

        The Group’s collection and paper recycling operation competes with local companies which operate in every region of Israel.

        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.

        Competition in packaging paper is against imports. Imports into Israel include all paper types produced in Israel at different paper qualities. To the best of the Company’s knowledge, the primary overseas competitors include Varel – Germany, Emin Leidlier– France, Saica – Spain, Hamburger – Austria, SCA – Italy, Otor – France and Nine Dragons – China.

        Regarding Mondi Hadera, entry barriers to manufacturing writing and print papers are high due to heavy investments required in paper machinery. On the other hand, Mondi Hadera is exposed to competition from paper importers who do not face entrance barriers to the Israeli market. As there are no restrictions, obstacles or customs duties imposed on paper imported into Israel, Mondi Hadera must constantly maintain other advantages it has as a local manufacturer, such as availability, flexibility, service and quality, in order to deal with paper importers. Mondi Hadera’s main competitors are the following paper importers: Niris Ltd., Ronaimer Ltd., Allenper Trade Ltd., Mei Hanahal Ltd. and BVR Ahvat Havered Ltd.

17



        Hogla-Kimberly operates in a very competitive environment with the local market as well as against imported products. Nevertheless, the operations of Hogla-Kimberly in the manufacture of paper products and diapers is characterized by few competitors, especially in view of the elevated entrance barriers that exist therein, include inter alia, significant investments in production facilities, investments in distribution infrastructure and frequent investments in technological improvements. It should further be noted that although there exists no limit on the import of paper products and diapers, other than tariffs on imports from the Far East, due to the bulky nature of some of the products, local production enjoys a significant economic advantage.

        Regarding feminine hygiene products and disposable diapers, Hogla-Kimberly’s main competitor is Procter and Gamble (P&G). Regarding household paper products, Hogla-Kimberly’s main competitors include Sano – Bruno’s Plants Ltd. (hereinafter: “Sano”), Shaniv Paper Industries Ltd. (hereinafter: “Shaniv”) and Kalir Chemicals – Production and Marketing Ltd. (hereinafter: “Kalir”). It should be noted that as part of the competition in the household paper products market to the Ultra-Orthodox activity, one of the company’s competitors (Shaniv), shuts down its production on Saturdays (the “sabbath”). This fact may constitute a certain advantage for this competitor in that particular market. In the activity of paper products to the institutional market, Hogla-Kimberly’s main competitors include Kalir and Sano. In the home cleaning aids activity there are many competitors and a large market share is held by private labels.

        The Company’s operations depend – to a great degree – on energy consumption, and are therefore strongly impacted by fuel prices. Profit margins may be eroded if fuel and electricity prices surge.

        In December 1989, the Company was declared a monopoly in the manufacture and marketing of packaging paper by the Israel Antitrust Authority- there are no special provisions for the packaging paper.

        Regarding seasonality, H-K’s products are generally sold year-round, with some increase in sales during the Jewish holiday seasons (Rosh Hashanah and Passover).

C. Organizational Structure

        As of May 20, 2008, Clal Industries and Investment Ltd. beneficially owned 37.98% of the ordinary shares of the Company and Discount Investment Corporation Ltd. beneficially owned 21.45% of the ordinary shares of the Company. Clal and DIC agreed in 1980 to coordinate and pool their voting power in the Company. To the best of our knowledge, IDB Development Corporation Ltd. owns 73.88% of DIC and 60.52% of Clal. See “Item 7. Major Shareholders and Related Party Transactions”.

18



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
 
Associated Companies
Hogla-Kimberly Ltd. 49.90% Israel
 
Kimberly -Clark Tuketim Mallari Sanayi Ve Ticaret A.S.
("KCTR") (held through H-K) 49.90% Turkey
 
Mondi Paper Hadera Ltd. 49.90% Israel
 
Barthelemi Holdings Ltd.** 35.98% Israel
 
T.M.M. Integrated Recycling Industries Ltd. (direct and indirect)** 43.08% Israel
 
Carmel Containers Systems Ltd. 36.21% Israel
 
Frenkel- CD Ltd. (direct and indirect through Carmel) 37.93* Israel
 
Cycle-Tec Recycling Technology Ltd. 30.18% Israel


* The holding in voting shares is 35.11%

** As of February 2007, the Company no longer has any holding in these entities.

D. Property, Plants and Equipment

        The Group’s principal executive offices and manufacturing and warehouse facilities are located on approximately 87.5 acres of land in Hadera, Israel, which is 31 miles south of Haifa. Hadera is a major seaport located 28 miles north of Tel Aviv. The Company owns 68.5 acres of the land on which it operates, of which 19.27 acres were purchased in 2005 for the amount of $4.4 million. An additional 17 acres are leased from the Israel Land Administration, an agency of the State of Israel, under several leases. The lease periods terminate from 2012 until 2056. 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 offices. In addition, AIPM leases from the Israel Land Administration approximately 6.25 acres in Nahariya, in northern Israel, under a lease agreement until 2018, which are rented to an associated company. Recently, the Company acquired the contractual rights via a development agreement in another area of approximately 0.9 acres in Nahariya, which will also be rented to the associated company. In September 2002, the Company signed an agreement with the Tel Aviv Municipality for the extension of the lease period until 2059 of a real estate lease for a plant in Tel Aviv that had been shut down at the end of 2002, in return for the payment of $6.2 million by the Company. The Company is investigating several options for using the land. According to the lease agreement, the Company is obliged to utilize its building permits until September 2009.

19



        The Group also owns a two-acre parcel in the industrial zone of Bnei Brak, which is near Tel-Aviv and used for waste paper collection.

        The Group owned a warehouse containing 50,000 square feet of space situated on approximately 3.1 acres of land in the Tel Aviv area, leased from the Israel Land Authority and rented to third party under a long term lease agreement. On December 31, 2006, the Company sold its lease rights to this land to Erledan Investments Accountant Ltd. in consideration of NIS 57 million. For further information, see Note 10 (i) to the financial statements of the Company.

        H-K’s headquarters and logistics center, which are leased under a long-term lease agreement, are located in a new, modern site in Zrifin, near Tel-Aviv. The headquarters and logistics center, covers an area of 430,550 square feet, with 188,370 square feet of buildings. An additional production plant owned by H-K is located in a 10-acre plot in Afula, a city in northern Israel.

        Associated companies rent plants and office facilities in 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 five 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 the Company operates four of the five machines with a combined production capacity of over 320,000 tons per year. The fifth machine is located in Nahariya, which produces tissue paper with a production capacity of 20,000 tons per year.

        In November 2006 and October 2007, the Company’s Board of Directors approved an investment of approximately $170 million to construct a new packaging paper machine in Hadera for the manufacture of packaging paper from cardboard and paper waste. The machine will have an output capacity of 230,000 tons per annum. Subsequent to the construction of the new machine, planned for 2009, and along with the parallel decommissioning of one of two packaging paper machines currently operating, the Company’s annual production capacity for packaging paper will increase from 160,000 tons at the present time, to approximately 330,000 tons per year. The new packing paper machine is intended to address growing demand in the local market for packaging paper at prices and of a quality that are competitive with prices and quality of imported packaging paper. As at the date of this annual report, the Company has signed the principal agreements necessary for the purchase of the main equipment for the new paper machine, and the Company is in the process of negotiating agreements with additional suppliers and contractors required for the new paper machine. The Company intends to finance the construction of the new machine partially with proceeds received from the private placement in November 2007, as described in Item 4 Section A. In addition, the company is analyzing various other alternatives for raising the additional funds required to complete the acquisition of the new machine, including by way of a public offering of the Company’s securities. The Company has yet to decide how it will finance the project, and is currently analyzing various alternatives.

        The Group also operates converting lines for the production 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. 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.

        In 2000, the Company established a new co-generation power plant in Hadera, based on high-pressure steam available from steam drying employed in paper production, for a total investment of about $14 million. With the operation of the power plant, the Group now enjoys an independent power generation capacity of 18 megawatt, with generation costs considerably lower than the cost of electricity previously 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. In October 2007, a malfunction was discovered during routine maintenance testing of the steam turbine in the new power plant,. Due to this malfunction, from October 2007 up to the beginning of June 2008 , only up to 7 megawatt was generated by an alternative turbine, that was temporarily being used by the Company, due to this malfunction. The malfunction had been repaired at the beginning of June 2008. The Company estimates this malfunction will not have a material impact on the Company, since the Company estimates, based on a letter received by the Company from its insurance company in March 2008, that the insurance company will cover the major portion of the loss associated with the malfunction.

20



        During October 2007 the Company converted its energy-generation system that had been using heavy fuel oil to natural gas, and completed the transition of the energy system at its Hadera facility from fuel oil to natural gas. The use of natural gas is expected to significantly lower the cost of energy to the Company, while concurrently significantly reducing the amount of emissions released into the atmosphere. The Company has invested a total of NIS 30 million in infrastructure installation and conversion of existing equipment for the use of natural gas instead of fuel oil. The Company estimates that the transition to the use of natural gas, based on the current natural gas and fuel oil prices, will yield annual savings which would, in turn, improve net profit by NIS 25 million per full year of operation. In 2007, the Group reduced its energy costs by NIS 12 million, primarily due to the transition from the use of fuel oil to the use of natural gas during the fourth quarter of 2007. Pursuant to the Company’s agreement with Yam Tethys, as described in Item 10 Material Contracts Section 10.C below, natural gas will be supplied by the Yam Tethys partnership through mid-2011. As part of the process of the Company’s transition to the use of natural gas instead of fuel oil, the Company has had to adapt its work environment accordingly, including by implementing changes according to its hazardous materials permit as well as its policies regarding work procedures.

        In addition, the Company is examining and promoting a project for establishing a combined cycle co-generation plant based on natural gas in Hadera, to be supplied by East Mediterranean Gas Company (“EMG”) pursuant to the principles agreement signed by the parties on May 2007, as described in Item 10 Material Contracts. The new plant is expected to enable the Company to sell electricity to external users, including the Israel Electric Company (IEC) and/or private customers. The project for the new power plant is in the final stages of configuration and feasibility studies.

        As part of the progress of examining and promoting the project, the Israeli Minister of National Infrastructure granted the Company 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” by the Israeli Minister of National Infrastructure.

        The permit authorizes the Company to build a power station with a total output of 230 megawatts, with integrated cycle co-generation, operating on natural gas, at the AIPM site in the Hadera Industrial Zone. This authorization is contingent upon several conditions that have yet to be met, including, among other things, meeting the production license requirements, meeting the requirements of the Electricity Economy Law, and achieving certain milestones outlined in the authorization.

        In October 2006, the National Infrastructure Committee approved the change in designation of 40,000 m(2) of land, adjacent to the Company’s premises in Hadera, to be used as a power station and for other uses. The approval was empowered by the Israeli government on February 6, 2007.

        Environmental Regulation Matters

        The business license for 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 Company is required to operate the site in accordance with the conditions specified by the Israeli water commission regarding effluent disposal. To the best knowledge of the Company, the Company operates the site in compliance with such requirements, and in the event of non-compliance, the Company acts in conjunction with such governmental authorities to rectify any violations.

        In November 2006, the Environmental Protection Ministry announced that, even though the Company plant at Hadera has made considerable investments in sewage treatment and environmental protection issues, an investigation may be launched against it to review deviations from certain emission standards. The Company expects that the investigation will not have a material impact on its operations.

        Certain of the Group’s manufacturing operations are subject to environmental and pollution control laws in Israel. In order to comply with these laws, during 2001, the Group planned and acquired a new, modern facility for the treatment of effluents using an anaerobic treatment process. This process was installed on the Group’s site in Hadera as a pre-treatment phase in the existing system which is based on aerobic treatment, in order to improve the quality of the treated effluents so that they are in compliance with environmental regulations.

        During the years 2000-2007 the Group invested approximately $15.9 million in Hadera site on projects intended to enable the Company to comply with the strict environmental regulations applicable to it, approximately $4.4 million of which was invested in 2007, including a $3.6 million investment in the conversion of the energy system to consume natural gas instead of fuel oil as described below, $250 thousand for noise reduction projects at the Hadera facility, as well as an investment in reuse of treated waste water at the facility and improved reliability of the water and sewage treatment system.

        In October 2007, the Company converted its energy-generation system that had been using heavy fuel oil to natural gas, and completed the transition of the energy system at its Hadera facility from fuel oil to natural gas. The Company invested approximately $8 million in converting its energy-generation systems, currently based on heavy fuel oil, to natural gas. This process was completed with the completion of the installation of the natural gas pipeline to Hadera. This project is expected to significantly reduce the cost of energy to the Company, which, in turn, would improve net profits by approximately $6.5 million per full year of operation, as well as improve the Company’s compliance with environmental requirements by using natural gas instead of fuel oil. In 2007 the Group reduced its cost of energy by approximately NIS 12 million, or $3 million, primarily due to the transition from the use of fuel oil to the use of natural gas for steam generation during the fourth quarter of 2007.

21



        Furthermore, over the past two years the Company has been implementing a gradual plan to further reduce noise at the Company’s facility in Hadera. In 2007, the Company invested a total of NIS 1 million in implementation of this plan.

        The Company estimates that its total environmental expenses in 2008, arising in the normal course of business, will amount to NIS 3.6 million. This amount includes investments in environmental compliance that have been approved by the Company’s Board of Directors, as well as on-going Company activities related to environmental protection. According to Company estimates, these expenses are not expected to decline in coming years.

        In 2007 all plants at the main Hadera site successfully passed various environmental inspections.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

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 17). 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.

        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 critical accounting policies:

Inventories

        Commencing January 1, 2007, the Company has been implementing the provisions of Accounting Standard No. 26, "Inventories".

        Inventories are measured at the lower of cost or net realizable value. The cost of inventories includes acquisition costs, fixed and varied overhead costs, as well as others costs incurred in bringing the inventory to the current location and condition.

        The net realization value represents the selling price estimate during the ordinary course of business, net of the estimate of completion costs and the estimate of costs required to perform the sale.

        Until December 31, 2006, inventory was presented at the lower of cost or market value.

        In accordance with the Standard, when inventories are purchased under credit terms whereby the arrangement involves a financing element, the inventories should be presented at cost reflecting the purchase price under ordinary credit terms. The difference between the actual purchase amount and the cost reflecting the purchase price under ordinary credit terms, is recognized as an interest expense during the credit period.

        The cost of inventory is determined on a moving average basis.

        The spare parts that are in continuous use, are not associated with the specific fixed assets. Some of these spare parts are even sold to the Group’s affiliated companies, as needed, and are part of the inventory. Based on the experience accumulated by the Company, these spare parts are held for no longer than 12 months. In light of the above, the spare parts that are in continuous use are presented in inventory clause, and recognized in the profit and loss report when used.

        The first-time application of the standard did not have any effect on the Company’s financial statements.

22



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 current collection trends that are expected to continue. These estimated allowances are periodically reviewed, and customers’ payment histories analyzed. 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

        The Company and the companies in the Group allocate taxes in respect of temporary differences between the value of assets and liabilities in the financial statements and their tax base and in respect of losses for tax purposes, whose realization is predictable. Deferred taxes are computed at the tax rates expected to be in effect at the time of realization thereof, as they are known at the balance sheet date.

        The current taxes, as well as the changes in the deferred tax balances, are included in the tax expenses or income in the reporting period.

        Taxes that 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 it is the Company’s policy to hold these investments, not to realize them.

        The Group may incur an additional tax liability in the event of an 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 dividends, which would involve an additional tax liability to the Group in the foreseeable future.

        In April 2005, the IASB issued Clarification No. 7 – “Accounting Treatment of the Tax Benefits, in Respect of Capital Instruments Granted to Employees, For Which No Compensation was Recognized”. The provisions of this clarification apply to such tax benefits, which have not been allowed as a deduction through December 31, 2004. The clarification stipulates that, commencing on January 1, 2005, the tax benefit derived by the Company from the exercise of options granted to employees is to be carried to shareholders’ equity, in the period in which the benefit to the employees is allowed as a deduction for tax purposes. Formerly, the aforesaid tax saving was credited to the statement of income, as part of the taxes on income item.

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 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 non-monetary assets, mainly fixed assets and investments in associated companies. 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. See Note 2g to the Financial Statements.

        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.

23



        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.

Discontinuance of Adjusting Financial Statements for Inflation

        The Company draws up and presents its financial statements in Israeli currency (hereafter - shekels or NIS), in accordance with the provisions of Israel Accounting Standard No. 12 – “Discontinuance of Adjusting Financial Statements for Inflation” – of the IASB, which establishes principles for transition to nominal reporting, commencing January 1, 2004 (hereafter - the transition date). Accordingly, amounts that relate to non-monetary assets (including depreciation and amortization thereon), investments in associated companies (see also below) “permanent” investments, and equity items, which originate from the period that preceded the transition date, are based on the data adjusted for the changes in the exchange rate of the dollar (based on the exchange rate of the dollar at December 31, 2003), as previously reported. All the amounts originating from the period after the transition date are included in the financial statements at their nominal values.

        The financial statements of group companies which are drawn up in foreign currency, are translated into shekels or are remeasured in shekels for the purpose of inclusion in these financial statements, as explained in e. below.

        The sums of non-monetary assets do not necessarily reflect the realization value or an updated economic value, but rather only the reported sums of the said assets, as stated in (1), above. The term ‘cost’ in these financial statements shall mean the cost in reported sums.

Offset of financial instruments

        Financial assets and financial liabilities are presented on the balance sheet at their net amount, only when the Company has a legally enforceable right to effect such set off, and subject to the existence of intent to settle the asset and the liability on a net basis, or to realize the asset and settle the liability simultaneously.

Deferred charges

        Until December 31, 2005, the deferred charges in respect of issue of debentures were displayed in Other Assets at their cost, deduction of accumulated amortization. The above expenses that were attributed to the debenture issuance were amortized at the straight line method on the basis of the weighted average of the debentures in turnover, till their redemption date.

        The balance of deferred issuance costs, which at December 31, 2005 amounted to NIS 946 thousands, has been reclassified and presented as a deduction from the amount of the liabilities to which such expenses relate. Through December 31, 2005, deferred issuance costs were included under other assets and amortized according to the straight-line method.

Revenue Recognition

        Commencing January 1, 2006, the company applies Israel Accounting Standard No. 25 of the IASB – “Revenue”, which prescribes recognition, measurement, presentation and disclosure criteria for revenues originating from the sale of goods purchased or manufactured by the company.

        Revenue is measured, as detailed below, at the fair value of the consideration received or the consideration that the company is entitled to receive, taking into account trade discounts and/or bulk discounts granted by the entity:

        Revenue from sale of goods is recognized when all the following conditions have been satisfied: (a) the significant risks and rewards of ownership of the goods have been transferred to the buyer; (b) the company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to the company; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

        The Company implements Clarification No. 8 of the Israeli Institute of Accounting Standard regarding the reporting of revenues on a gross basis or a net basis. Accordingly, the Company’s revenues as an agency or intermediary, without bearing the risks and returns that derive from the transaction, are presented on a net basis.

24



        Interest income is accrued on a cumulative basis, taking into consideration the principal to be repaid and by using the effective interest rate.

        Dividend income in respect of investments is recognized on the date in which the entitlement for said income was created for the shareholders.

        Upon the application of the standard, an associated company separates the financing component embedded in revenue from sales made on credit for periods exceeding the customary credit period in its industry (mainly 90 days), that does not bear interest at the appropriate rate; the financing component is determined according to the amount by which the nominal amount of consideration for the transaction exceeds the present value of future cash payments in respect thereof, based on the customary market interest rate applicable to credit extended under similar terms. Revenue from the financing component is recognized over the credit period. Through December 31, 2005, the company did not separate the financing component in respect of sales made on credit, as above, and included within revenue from the sale on the date of recognition of such revenue.

        In accordance with the transitional provisions of the standard, on January 1, 2006 the affiliated company recognized an expense of NIS 1.1 million as a result of presentation in present value, resulting from the adjustment of trade receivables in respect of such credit transactions to their present value on the effective date of the standard, the share of the company at the adjustment effect as above was approximately NIS 0.5 million which is presented in these financial statements under “Cumulative effect, at beginning of year, of an accounting change in an associated company”.

Share – Based Payment

        Commencing January 1, 2006, the company applies Israel Accounting Standard No. 24 of the IASB, “Share-Based Payment”, which prescribes the recognition and measurement principles, as well as the disclosure requirements, relating to share-based payment transactions.

        Since the company has not granted any equity-settled awards, nor made modifications to existing grants, subsequent to March 15, 2005, the measurement criteria of the standard do not apply to past grants made by the company, and its application has not had any effect on the financial statements of the Company.

Net Income per Share

        In January 2006, Accounting Standard No. 21 of the IASB, “Earnings per Share” became effective. The computation of basic net income per share is generally based on earnings available for distribution to holders of ordinary shares, divided by the weighted average number of ordinary shares outstanding during the period.

        In computing diluted net income per share, the weighted average number of shares to be issued, assuming that all dilutive potential shares are converted into shares, is to be added to the average number of ordinary shares used in the computation of the basic income (loss) per share. Potential shares are taken into account, as above, only when their effect is dilutive (reducing net income per share from continuing activities).

        Comparative net income per share figures included in these financial statements reflect a retrospective application of the new standard’s computation directives.

As to the data used in the computation of net income per share, as above – see Note 11 to the Financial Statements.

Effects of Prior Year Misstatements

        In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Financial Statements – Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, or SAB 108. SAB 108 requires companies to quantify the impact of all correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006. We initially applied the provisions of SAB 108 using the cumulative effect transition method in our annual financial statements for the year ending December 31, 2006 in connection with our accounting treatment for various misstatements the cumulative effect of which on our retained earnings as at December 31, 2005 totaled NIS 2,665 thousand net of tax.

25



General

1.     On March 7, 2006, T.M.M (an associated company) announced that the Israeli Securities Authority had addressed T.M.M with regard to an investigation the authority is conducting. At this stage, T.M.M is unable to estimate the impact of the investigation on the Company. On January 4, 2007, the Company sold all its holdings in T.M.M. (See Item 4A – History and Development of the Company above). Regarding T.M.M., true to publishing date of this report, the Company does not have any new information.

2.     On April 15, 2007, at a General Meeting the shareholders approved the appointment of Brightman Almagor & Co as the Company’s external auditors for the year 2007. Brightman Almagor & Co replaced Kesselman & Kesselman & Co who served as the Company’s external auditors since 1954.

3.     In January 2008, the Board of Directors of the Company approved a program for the allotment, for no consideration, of non marketable options to the CEO of the company, to employees and officers of the company and investees. In the context of the program, an allotment of 287,750 options was approved, of which 40,250 options were to the CEO of the company, 135,500 to management of the subsidiaries and 74,750 to management of the affiliates.

        On May 11, 2008, the board of directors of the company approved the allotment to a trustee of the balance of the options that had not been allotted through that date, in the amount of 32,250 options as a pool for the future grant to officers and employees of investees, subject to the approval of the board of directors.

        The date of grant of the options was set for the months of January- March 2008, subject to restrictions of Section 102 (capital route) of the Income Tax Ordinance. As of the date of approval of the financial statements, 250,500 options had been allotted. Each option is exercisable into one ordinary share of the company with NIS 0.01 par value against the payment of an exercise increment in the amount of NIS 223.965 (subject to adjustments). The options will vest in installments as follows: 25% of the total options will be exercisable from January 14, 2009; 25% of the total options will be exercisable from January 14, 2010; 25% of the total options will be exercisable from January 14, 2011; and 25% of the total options will be exercisable from January 14, 2012. The vested options are exercisable through January 14, 2012, 2013, 2014 for the first and second, third and fourth portions, respectively.

        The cost of the benefit embedded in the allotted options as above, on the basis of the fair value as of the date they are granted, was approximated to be the amount of approximately NIS 13.5 million. This amount will be charged to the statement of operations over the vesting period. The debt for the grant to officers of the affiliates will be paid in cash.

        The fair value of the options granted as aforementioned was estimated by applying the Black and Scholes model. In this context, the effect of the terms of vesting will not taken into account by the company, other than the market condition of fair value of the capital instruments granted.

The parameters which were used for implementation of the model are as follows:

Share price (NIS) 217.10-245.20
Exercise price (NIS) 223.965 
Anticipated volatility (*) 27.04%
Length of life of the options (years) 3-5 
Non risk interest rate 5.25%

(*) The anticipated volatility is determined on the basis of historical fluctuations of the share price of the company. The average length of life of the option was determined in accordance with management’s forecast as to the holding period by the employees of options granted to them, in consideration of their functions in the company and past experience of the company with employees leaving.

26



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 12/31/07
v.
year ended 12/31/06

Year ended 12/31/06
v.
year ended 12/31/05

Changes
%
Changes
%
NIS
NIS
 
Net sales      53,541    10.1    47,648    9.9  
Cost of sales    22,129    5.3    35,546    9.3  




Gross profit    31,412    28.2    12,102    12.2  
Selling, administrative and general expenses    6,544    10.7    4,939    8.8  




Income from ordinary operations    24,868    49.2    7,163    16.5  
Financial expenses (income) - net    11,553    (37.1 )  (18,621 )  149.1  
Other income    (39,483 )  (105.8 )  32,861    739.4  




Income before taxes on income    (3,062 )  (5.4 )  21,403    60.6  
Taxes on income    (2,605 )  15.6    (10,711 )  178.8  




Income from operation of the Company and the  
consolidated subsidiaries    (5,667 )  (14.2 )  10,692    36.5  
Share in profits (losses) of associated companies    23,779    (89.2 )  (42,616 )  (259.6 )
Cumulative effect, at beginning of year of an  
accounting change in an associated company    -    -    (461 )  -  




Net income    18,112    135.9    (32,385 )  (70.8 )





* The statements of income for the years ended December 31, 2007, 2006 and 2005 are presented in New Israeli Shekels as explained in note 1 to the Financial Statements.

        The number of New Israeli Shekels which were exchangeable for 1 U.S. dollar increased (decreased) over the prior year by 6.8%, (-8.2%) and (-9.0%) in 2005, 2006 and 2007, respectively. See Note 1 to the Financial Statements attached and Item 17 Financial Statements for the anticipated effect of adopting of accounting pronouncements that have been issued but are not yet adopted.

2007 Compared to 2006

I. Overview of Results of Operations

1. Consolidated Data

        Consolidated sales in 2007 amounted to NIS 583.6 million, as compared with NIS 530.1 million in 2006, representing growth of approximately 10%.

        The consolidated operating profit amounted to NIS 75.4 million in 2007, as compared with NIS 50.5 million in 2006, representing growth of approximately 49.3%.

        Profit after taxes and before AIPM’s share in earnings of associated companies for 2007, amounted to NIS 34.3 million, as compared with NIS 40.0 million in 2006.

2. Net Profit and Earnings Per Share

        Net profit in 2007 amounted to NIS 31.4 million, as compared with NIS 13.3 million in 2006.


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 U.S. dollar against the NIS.

27



        Net profit this year was affected by the growth in the Company’s share in the losses of the operations in Turkey (KCTR), amounting to NIS 11.8 million (see Section C7 in this Item 5, below).

        In 2007, the net profit included earnings from the realization of surplus cost at an associated company in the amount of NIS 2.5 million, a loss from the amortization of a tax asset at an associated company in the sum of NIS 13.4 million and a capital loss from the sale of cardboard machines (machine 6) and hub machines in the sum of NIS 2.4 million.

        Net profit in 2006 included a net capital gain from the sale of real estate at Atidim in the sum of NIS 28.5 million, and non-recurring expenses (net of taxes) of NIS 18 million, primarily on account of a provision for impairment at an associated company (in the third quarter of the year) and the impact of the devaluation and modified tax rates in Turkey (in the second quarter of the year- approximately NIS 8 million included in the loss of the operations in Turkey).

        Basic earnings per share amounted to NIS 7.61 per share in 2007 ($ 1.98 per share), as compared with NIS 3.31 per share in 2006 ($0.81 per share) .

        The diluted earnings per share amounted to NIS 7.60 per share in 2007 ($ 1.98 per share), as compared with NIS 3.28 per share in 2006 ($0.77 per share).

II. The Business Environment

        2007 was characterized by continued growth in the Israeli economy of 4.7% , while the high demand in consumer spending persisted. Moreover, 2007 was characterized by the continued revaluation of the NIS against the U.S. dollar, which amounted to 9%, in addition to a revaluation of 8.2% in 2006.

        The positive global trends in the paper industry, primarily in Europe, due to the decline in the gap between paper supply and demand, have affected the group companies active in Israel. Moreover, the growth trend in developing markets, primarily in Asia, as reflected by relatively high growth rates, is creating high demand for pulp and paper waste, as well as for paper products.

        These demands are causing a continuing rise in input prices – primarily fibers and chemicals – in parallel to a rise in global paper prices since the end of the previous year – both in fine paper and in packaging paper.

        These trends enable the Group companies to realize price hikes in most paper and paper products areas, thereby compensating for the high input prices, while improving profitability.

        The above information pertaining to trends in the paper market constitutes forward-looking information as defined in the securities law, based on the company’s estimates at the date of this report. These estimates may not materialize – in whole or in part – or may materialize in a different manner, inter alia on account of factors that lie outside the control of the company, such as changes in global raw material prices, changes in supply and demand of global paper products.

        Energy prices (primarily fuel oil) that were at their lowest point in two years during the first quarter this year, have reversed their trend in the second quarter of 2007 and have started climbing back toward the high prices that prevailed in 2006. The trend of rising fuel prices that began in the second quarter of the year, accelerated in the second half of the year and amounted to 40%, as compared with the level of prices at the beginning of the year. Due to the gradual transition to the use of natural gas in the course of the fourth quarter of the year, the Group saved NIS 12 million in energy operation costs. These savings are mostly attributed to the transition to natural gas and to the fuel oil price level during 2007.

Electricity prices rose by an average of 13% at the end of 2007.

The inflation rate in 2007 amounted to 3.4%, as compared with an inflation rate of 0% in 2006.

III. Analysis of Operations and Profitability

The analysis set forth below is based on the consolidated data.

28



1. Sales

        The consolidated sales amounted to NIS 583.6 million in 2007, as compared with NIS 530.1 million in 2006 and NIS 482.5 million in 2005.

        The increase in the turnover in 2007 originated primarily from the growth in sales of packaging paper and recycling as a result of the possibility of realizing price hikes in accordance with prevailing global conditions in the paper market.

        Sales of the packaging paper and recycling activity amounted to NIS 464.7 million in 2007, as compared with NIS 408.0 million in the corresponding period last year.

        The growth in the sales turnover of the packaging paper and recycling activity originated primarily from the raising of the selling prices.

        Sales of the marketing of office supplies marketing activity amounted to NIS 119.0 million in the reported period, as compared with NIS 122.1 million last year. Most of the decrease in sales is attributed to the impact of not winning the Accountant General tender in early 2007, a fact that was somewhat compensated for by an increase in sales to other customers, at better margins.

        The change in the turnover in 2006 in relation to 2005 originated primarily from a certain increase in sales of packaging paper and recycling and a marginal decrease in sales of the office supplies sector in light of a change in the customer mix toward a more profitable one.

2. Cost of Sales

        The cost of sales amounted to NIS 440.9 million in 2007, representing 75.5% of sales, as compared with NIS 418.7 million, or 79.0% of sales in 2006 and as compared with NIS 383.2 million, or 79.4% of sales in 2005.

        The gross profit as a percentage of sales grew in 2007 to reach 24.5%, as compared with 21.0% in 2006 and 20.6% in 2005.

        The increase in the gross profit originated primarily from the improved selling prices and the quantitative growth in the local market, coupled with the savings in energy costs, primarily on account of the transition to natural gas in the last quarter. On the other hand, an increase was recorded in other manufacturing costs as a result of the increase of the volume of operations, including growth in collection by Amnir and the rise in diesel prices.

        Labor Wages

        The labor wages in the cost of sales, in selling expenses and in General and Administrative expenses, amounted to approximately NIS 174.8 million in 2007, as compared with NIS 160.6 million in 2006 and NIS 149.7 million in 2005.

        The change in payroll costs in relation to the corresponding period last year reflects a 5% increase in personnel – especially at Amnir, as part of preparations for increasing paper waste collection in anticipation of the future operation of the new packaging paper machine – along with a nominal increase of 3.5% in the wages. The wage expenses (in General and Administrative) also included non-recurring expenditures, primarily on account of the employment agreement with the Company’s CEO. See Note 9D to the financial statements.

3. Selling, General and Administrative Expenses

        The selling, general and administrative expenses (including wages) amounted to NIS 67.4 million in 2007 (11.6% of sales), as compared with NIS 60.9 million (11.5% of sales), in 2006 and NIS 55.9 million in 2005 (11.6% of sales).

        The increase in selling, general and administrative expenses originated primarily from growth in labor expenses, including non-recurring influences, as stated above in the Labor Wages section.

4. Operating Profit

        The operating profit amounted to NIS 75.4 million in 2007, representing 49% growth in relation to 2006, 13.0% of sales, as compared with NIS 50.5 million, or 9.5% of sales in 2006 and as compared with NIS 43.3 million, or 9.0% of sales in 2005.

        The increase in operating profit in 2007, by 49% in relation to 2006, originated from the increase in sales of packaging paper and recycling, primarily on account of the improvement in selling prices and the efficiency measures, that were partially offset by rising energy prices, coupled with the improvement in the operating profit of the marketing of office supplies activity as a result of efficiency measures and the reorganization that the company initiated in the past several years.

29



        In the marketing of office supplies activity, the trend of maintaining the operating profit of NIS 0.4 million in 2007, was attributed to the reorganization in the sector, accompanied by far-reaching efficiency measures and steps to increase sales, following the transition to an operating profit in 2006 as compared with a loss in 2005 (NIS 0.2 million in 2006, as compared with NIS -0.9 million in 2005).

5. Financial Expenses

        Financial expenses amounted to NIS 19.6 million in 2007, as compared with NIS 31.1 million in 2006.

        The total average of the Company’s net, interest-bearing liabilities grew by an average of approximately NIS 10 million between the years 2007 and 2006. The increase is primarily attributed to investments in fixed assets, net of positive cash flows from operating activities.

        Despite the said increase in the obligo, the financial expenses in 2007 were cut back in relation to the preceding year by NIS 11.5 million.

        The said decrease in financial expenses originated from the decrease in the average interest rate on short-term credit (by approximately 1.2%), the lower expenses on account of CPI-linked notes, despite the sharp rise in the inflation rate in relation to 2006, on account of the lowering of the cost of hedging the CPI-linked notes against a rise in the CPI that fell from 1.8% in 2006, to 1.3% in 2007 and resulted in a approximately NIS 1.1 million decrease in note-related costs.

        As a result of currency hedging transactions made by the company on the dollar/euro ratio, the company recorded financial revenues of NIS 4.6 million in the last quarter of the year. (These revenues, on account of hedging the expected cash flows for the new packaging paper Machine were allocated to the statement of income pursuant to accounting principles since the agreement with the machine’s supplier VOITH was only signed in late December 2007).

        Due to the decrease in the dollar exposure this year in relation to the preceding year, the financial expenses decreased this year by NIS 4.7 million in relation to last year on account of currency rate differential revenues on account of the assets in foreign currency.

6. Taxes on Income

        Expenses for taxes on income from current operations totaled NIS 18.4 million in 2007, as compared with NIS 5.5 million in 2006 and NIS 10.2 million in 2005.

        The principal factors responsible for the increase in tax expenses from operating activities in 2007 as compared with 2006, included the increase in operating profit before taxes this year, despite the impact of the lower tax rate on current and deferred taxes this year, in relation to last year. In addition, the tax expenses this year grew by NIS 2 million as a result of the sharp rise in the CPI this year by 3.4% in relation to last year.

        Moreover, the tax expenses in 2007 included an additional tax expense of NIS 0.9 million in 2007 from taxes on previous years as a result of the completion of tax assessments for the years 2002-2005. An additional tax expense of NIS 11.2 million was recorded in 2006, primarily on account of betterment tax on the sale of real estate. A tax benefit of NIS 4.2 million was recorded in 2005 on account of the impact of the tax reforms that were passed by the Knesset in July 2005 (gradually lowering the corporate tax rate to 25% by 2010) on the company’s deferred taxes.

        Total tax expenses amounted to NIS 19.3 million in 2007, as compared with NIS 5.5 million in 2006 and NIS 6.0 million in 2005.

7. 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 (losses) of associated companies amounted to NIS (2.9) million in 2007, as compared with losses of NIS (26.7) million in 2006 and earnings of NIS 16.4 million in 2005.

        The following principal changes were recorded in the Company’s share in the earnings of associated companies, in relation to 2006:

30



  The Company’s share in the net profit of Mondi Hadera (49.9%) increased by NIS 12.9 million this year. Most of the change in profit originated from the company’s highly improved profitability, the transition from an operating loss of NIS 2.1 million last year to an operating profit of NIS 33.6 million this year – primarily as a result of the improved trading conditions that allowed for higher selling prices that led to an improved gross margin, coupled with a decrease in certain raw material costs as a result of the lower dollar exchange rate, primarily in the course of the second half of the year, coupled with a significant improvement in the efficiency of the company’s operational array. This said improvement was rendered possible as a result of the said recovery in the European paper industry, coupled with the quantitative increase in sales to the local market. This improvement began in the second quarter of the year, accelerated in the second quarter and preserved the same trend in the second half of the year. The sharp improvement in profit was somewhat offset as a result of the rise in the net financial expenses, which originated primarily from working capital requirements due to the rise in the volumes of operation and the impact of changes in the exchange rate.

  The Company’s share in the net profit of Hogla-Kimberly Israel (49.9%) increased by NIS 5.4 million in 2007, as compared with 2006. The operating profit of Hogla grew from NIS 127.0 million to NIS 135.4 million this year. The improved operating profit originated from a quantitative increase in sales, improved selling prices and the continuing trend of raising the proportion of some of the premium products out of the products basket. This improvement was partially offset by the continuing rise in raw material prices. The net profit was also affected by the increase in financial expenses of NIS -1.7 million, as compared with financial revenues of NIS 1 million last year, as a result of the financing needs of the operations in Turkey. The net profit of Hogla-Kimberly Israel last year was influenced by non-recurring tax expenses of NIS 4.5 million (our share was approximately NIS 2.2 million).

  Company’s share in the losses of KCTR (formerly: “Ovisan”) (49.9%) grew by approximately NIS 11.8 million in 2007, as compared with 2006. The operating loss decreased by approximately NIS 9.4 million in 2007 in relation to last year, due to the continuing growth in the penetration rate of brands and their strengthened position in the market. The launch process of premium KC products in the Turkish market (Kotex® and Huggies®), that began in the second quarter last year and was accompanied by fierce competition over shelf space, primarily against P&G coupled with the erosion of selling prices – to the lowest levels in the world – for same-quality disposable diapers. In the course of 2007, a non-recurring loss of approximately NIS 6 million ($1.5 million) was included on account of the termination of trade agreements with distributors due to the transition to distribution by Unilever, of which our share was approximately NIS 3 million. Moreover, the tax asset that was recorded in previous years in Turkey, in the sum of approximately approximately NIS 26 million ($6.4 million) was reduced, of which our share is NIS approximately 13.3 million. Last year, the loss included a non-recurring expenditure of approximately NIS 16 million, of which our share was approximately NIS 8 million, primarily as a result of the devaluation of the Turkish lira and the amortization of a tax asset in the sum of approximately NIS 6.7 million, of which our share was approximately NIS 3.3 million.

  The Company’s share in the net profit of Carmel (36.21%) increased by NIS 2.1 million in 2007 as compared with 2006. The factors that affected the growth in the company’s share in the net profit of Carmel, originated inter alia from the improvement in the operating profitability at Carmel – primarily in the second half of the year. This improvement originated primarily from higher prices and was partially offset by the sharp rise in raw material prices. In the course of the second quarter, the company’s holding rate in Carmel rose from 26.25% to 36.21% due to Carmel’s self purchase of some of the minority shareholders’ holdings. As a result of the acquisition, a negative surplus cost of NIS 4.9 million was created at the company, of which a sum of NIS 2.4 million was allocated to the statement of income this year and served to increase the company’s share in the Carmel profits in 2007. In 2006, Carmel’s net profit included capital gains from the sale of a real-estate asset in Netanya in the amount of NIS 3.9 million, of which the Company’s share was approximately NIS 1 million.

        In 2006, the Company’s share in the earnings of associated companies included the Company’s share in the losses of TMM, in the amount of NIS 14.8 million. As mentioned above, the Company sold its holdings in TMM in early 2007 and this item is therefore not included in the Company’s share in the earnings of associated companies this year.

        The Company’s share in the earnings of associated companies from current operations in Israel (excluding Turkey and TMM) grew by NIS 20.7 million this year and amounted to NIS 60.9 million.

2006 Compared to 2005

I. Overview of Results of Operations

1. Consolidated Data

        Consolidated sales in 2006 amounted to NIS 530.1 million, as compared with NIS 482.5 million in 2005, representing growth of approximately 10%.

31



        The consolidated operating profit amounted to NIS 50.5 million in 2006, as compared with NIS 43.3 million in 2005, representing growth of approximately 17%.

        Profit after taxes and before AIPM’s share in earnings of associated companies for 2006, amounted to NIS 40.0 million, as compared with NIS 29.3 million in 2005.

    2.        Net Profit and Earnings Per Share

        Net profit in 2006 amounted to NIS 13.3 million, as compared with NIS 45.7 million in 2005.

        Net profit this year was affected by the growth in the Company’s share in the losses of the operations in Turkey (KCTR), amounting to NIS 41.9 million (see Section C7 in this Item 5, below).

        Net profit in 2006 included a net capital gain from the sale of real estate at Atidim in the sum of NIS 28.5 million, and non-recurring expenses (net of taxes) of NIS 18 million, primarily on account of a provision for impairment at an associated company (in the third quarter of the year) and the impact of the devaluation and modified tax rates in Turkey (in the second quarter of the year- approximately NIS 8 million included in the loss of the operations in Turkey).

        Basic earnings per share amounted to NIS 3.31 per share in 2006 ($0.81 per share), as compared with NIS 11.43 per share in 2005 ($2.48 per share) .

        The diluted earnings per share amounted to NIS 3.28 per share in 2006 ($0.77 per share), as compared with NIS 11.35 per share in 2005 ($2.46 per share).

II. The Business Environment

        In 2006, the accelerated growth in the Israeli economy continued (5%), along with growing demand in the public sector and growth in private consumption.

        Although the Second Lebanon War in the summer of 2006 led to a slowdown in economic activity during the war. The economy, however, rapidly recovered and for the rest of 2006 returned to the accelerated growth rate that existed before the war.

        The Company’s results continued to be effected by high energy prices – primarily fuel oil, whose prices rose by an aggregate 70% in 2005 and 2006 as compared to 2004 (38% in 2005 and 22% in 2006), while diesel prices rose by an average of 29% during the same period.

        The impact of rising energy prices on the aggregate operating profit of the Company amounted to approximately NIS 22 million in 2006.

        At the same time, the prices of the main raw materials utilized by the Group in their various activities also continued to rise during 2006.

        The impact of rising raw material prices on the aggregate operating profit of the Company amounted to approximately NIS 46 million in 2006.

        The recovery that began in Europe’s paper industry, which closed the gap between paper supply and demand, was slow during 2006 and did not yet fully translate into a decrease in competing imports into Israel. As a result it was difficult to raise selling prices –primarily those of fine paper, as warranted by the said rise in input prices.

General

        During 2006 the Group dealt with the increased input prices by implementing a range of activities. These activities included raising prices vis-à-vis the competition to the extent possible and intensifying the efficiency measures implemented with respect to all its expense components. The efficiency measures implemented by the Group in 2006 led to cost savings in the amount of approximately NIS 27 million.

        As part of the said operations, the Company initiated measures to achieve synergies between the Group’s companies, so as to allow for efficiency and cost-cutting, including energy and raw material costs. Among other measures, this was reflected in a fuel purchase agreement that allowed for significant savings, while capitalizing on the Group’s economies of scale. The said measures also included the anticipated savings from the completion of the conversion to the use of natural gas at the Hadera plant, as described below.

32



        At the same time, the Group continues to implement a number of cross organization plans including the following: the talent management program for the development of the Group’s managers and the creation of a managerial reserve; the WOW Program, for enhancing the customers’ perceived added value of the Company’s products and improving the loyalty premium and the price based on a differentiation of products and service; and Kimberly Clark’s global center lining program, aimed at improving production-line efficiency (applying a methodology that creates a common basis for all factors influencing operation of the machines, such as engineering, maintenance, technology and operations, while continuously measuring the variance of the selected parameters, creating a process of constant improvement in both quality and costs). These programs began to show results in 2006 .

        The Group also continued its efforts to improve selling prices, on the one hand, while extending the efficiency measures on the other hand, in order to compensate for the said rise in input prices.

        It is impossible to estimate the influence of the above operations on the Group’s profitability, at this stage.

        As part of the Company’s efforts to cut production costs and achieve further improvements in environmental quality, the Company is continuing to promote the project for the establishment of a co-generation plant in Hadera, using natural gas.

        The Company took the initial steps to convert its energy generation facilities from the use of fuel oil to natural gas. This process was completed with the completion of the natural gas pipeline to Hadera , pduring the third quarter of 2007.

        In connection therewith, the Company signed an agreement in London on July 29, 2005, with the Tethys Sea Group, for the purchase of natural gas to supply the Company’s requirements in the coming years, for the operation of the existing energy co-generation plant at the Hadera plant that has been converted for the use of natural gas, instead of the current use of fuel oil. The overall financial volume of the transaction totals about $35 million over the term of the agreement from the initial supply of gas and until the earlier of (1) the point at which the Company will have purchased an aggregate of 0.43 BCM of natural gas, or (2) , July 1, 2011.

        The conversion from fuel oil to gas was to enable significant savings in fuel costs, estimated at approximately $8.5 million per annum, due to the significant differences between the current prices of fuel oil and gas, and will enhance the Group’s competitiveness and profitability.

        The exchange rate between the NIS and the U.S. dollar was revalued by a further 8.2% in 2006, as compared to a 6.8% devaluation in 2005.

The inflation rate in 2006 amounted to 0%, as compared with an inflation rate of 2.4% in 2005.

III. Analysis of Operations and Profitability

The analysis set forth below is based on the consolidated data.

1. Sales

        Consolidated sales amounted to NIS 530.1 million in 2006, as compared with NIS 482.5 million in 2005 and NIS 482.9 million in 2004.

        The growth in sales in 2006 included increases in sales in both the packaging paper and recycling sector, as well as the office supplies sector.

        The change in sales in 2005 in comparison to 2004, originated primarily from a certain growth in the sales of packaging paper and recycling, along with an immaterial decrease in the office supplies sector, following the implementation of a reorganization in this sector.

2. Cost of Sales

        Cost of sales amounted to NIS 418.7 million in 2006, representing 79.0% of sales, as compared with NIS 383.2 million, or 79.4% of sales in 2005 and as compared with NIS 375.9 million, or 77.9% of sales in 2004.

        The gross margin grew to 21.0% of sales in 2006, as compared with 20.6% in 2005 and 22.1% in 2004.

        The principal factors that affected the material changes in gross profitability in 2006, as compared with 2005 consisted of a certain increase in raw material prices and an unusual rise in energy prices (fuel oil by 22%).

        The rising prices in packaging paper and recycling and the quantitative increase in sales – primarily in office supplies sector – together with the continuing efficiency, resulted in an improvement in the consolidated gross margin in 2006.

        The gross margin eroded in 2005 as compared to 2004 as a result of the unusual increase in energy prices (approximately 38%), raw material prices and other inputs. These price hikes were not fully compensated for by an increase in selling prices, due to prevailing market conditions.

33



        Labor Wages

        The labor wages in the cost of sales, in selling, general and administrative expenses , amounted to approximately NIS 162.2 million in 2006, as compared with NIS 149.7 million in 2005 and NIS 137.0 million in 2004.

        The increase in wages in 2006 originated mostly from an increase in personnel – primarily at Amnir as part of the preparations for an expansion in collection volumes, in anticipation of the establishment of the new paper manufacturing array.

3. Selling, General and Administrative Expenses

        The selling, general and administrative expenses (including wages) amounted to NIS 60.9 million in 2006 (11.5% of sales), as compared with NIS 55.9 million (11.6% of sales) in 2005 and NIS 52.5 million in 2004 (10.8% of sales).

        The increase in selling, general and administrative expenses originated partially from a certain increase in labor expenses, coupled with non-recurring expenses (approximately NIS 2 million), included in the expenses this year.

4. Operating Profit

        The operating profit amounted to NIS 50.5 million in 2006, representing growth of 17% as compared with 2005, and comprised 9.5% , 9.0% and 11.3% of sales in 2006, 2005 and 2004 respectively.

        The increase in operating profit in 2006, in a rate of 17% as compared with 2005 originated from the increase in sales of packaging paper and recycling, primarily on account of the improvement in selling prices and the efficiency measures, that were partially offset by rising energy prices, coupled with the improvement in the operating profit of the office supplies sector as a result of efficiency measures and the reorganization that the Company initiated in the past several years.

        In the office supplies sector, the transition to operating profit in 2006, as compared with an operating loss in 2005, was attributed to the reorganization in the sector, accompanied by far-reaching efficiency measures and steps to increase sales, following the decrease of the operating loss in 2005 as compared with 2004 (NIS -0.9 million in 2005, as compared with NIS -4.6 million in 2004).

5. Financial Expenses

        Financial expenses amounted to NIS 31.1 million in 2006, as compared with NIS 12.5 million in 2005 and NIS 13.1 million in 2004.

        The total average of the Company’s net, interest-bearing liabilities grew by an average of approximately NIS 160 million in 2006, compared to 2006 and 2005. The increase resulted primarily from investments in fixed assets and dividends distributed in 2006, net of dividends received from associated companies and the positive cash flows from operating activities.

        Moreover, the costs of hedging the Series 2 notes against a rise in the CPI has risen to 1.8% per annum in 2006, as compared with 1.3% per annum in 2005 and resulted in an increase in costs related to the notes.

        During 2006 hedging transaction was made at a cost equal to 1.8%, and a 0.1% decrease in the CPI led during 2006 to additional financing costs of NIS 4 million being incurred on account of the CPI-linked notes.

        In addition to the above, the sharp revaluation in 2006 of the New Israeli Shekel against the U.S. dollar served to increase the financial expenses on account of the surplus of dollar-denominated assets over dollar-denominated liabilities held by the Company, as compared with the devaluation recorded in 2005 (revaluation of 8.2% in 2006, as compared with a devaluation of 6.8% in 2005), also resulted in an increase in financial expenses in 2006.

6. Taxes on Income

        Expenses for taxes on income from current operations totaled approximately NIS 5.5 million in 2006, as compared with NIS 10.2 million in 2005 and NIS 13.2 million in 2004.

        The principal factors responsible for the decrease in tax expenses from current operations in 2006 as compared with 2005, are both the decrease in the profit from current operations before taxes this year, and the impact of the lower tax rate on current and deferred taxes this year, in relation to last year.

34



        Moreover, the tax expenses in 2006 included an additional tax expense of NIS 11.2 million, primarily on account of the betterment tax realized on the sale of real estate. A tax benefit of NIS 4.2 million was recorded in 2005 on account of the impact of the tax reforms that were passed by the Knesset in July 2005 (gradually lowering the corporate tax rate to 25% by 2010) on the Company’s deferred taxes.

        In 2004, the financial statements included a tax benefit of NIS 10 million, on account of the impact of the change in the corporate tax rate and a benefit on account of the exercise of options by employees.

        Total tax expenses amounted to NIS 16.7 million in 2006, as compared with NIS 6.0 million in 2005 and NIS 3.2 million in 2004.

7. Company’s Share in Earnings (Losses) of Associated Companies

        The companies whose earnings are reported under this item (according to AIPM’s holdings therein), primarily include: Mondi Hadera, Hogla-Kimberly, Carmel and TMM.

        The Company’s share in the earnings (losses) of associated companies amounted to NIS (26.7) million in 2006, as compared with NIS 16.4 million in 2005 and NIS 25.1 million in 2004.

        The following principal changes were recorded as the Company’s share in the earnings of the associated companies:

The Company’s share in the losses of Mondi Hadera (49.9%) in 2006, grew by NIS 2 million in relation to last year. Last year, Mondi recorded a tax benefit of NIS 4 million (our share consists of NIS 2 million on account of the change in the corporate tax rate; without this benefit, no change would have been recorded in the Company’s share as compared with last year). Mondi’s quantitative sales increased in 2006 as a result of greater output capacity due to the improvements to the paper machine in 2005. The sharp rise in pulp prices in the course of the year (16%), rising energy prices (22%) and the continuing imports from Europe at low prices, served to erode the gross margin and harmed the operating profitability. The revaluation of the dollar and the lowering of interest rates served to lower the financial expenses and offset the erosion in the operating profit.

The Company’s share in the net earnings of Hogla-Kimberly Israel (49.9%) increased by NIS 9.8 million in 2006, as compared with 2005. The operating profit of Hogla-Kimberly Israel grew from NIS 94 million to NIS 128 million. This increase is primarily attributed to the improvement in selling prices. In the course of the year, Hogla-Kimberly continued to improve selling prices and to expand the market share of premium products, where the profit margins are higher. In 2006, Hogla-Kimberly also continued its far-reaching efficiency measures, that further contributed to its profitability. This profitability was partially offset by the continuing increase in input prices in 2006 (primarily raw materials and energy).

The Company’s share in the losses of KCTR, a wholly-owned consolidated subsidiary of Hogla-Kimberly (49.9%) grew by NIS 41.9 million in 2006, as compared with 2005. Over the past two years KCTR has been establishing the organizational infrastructure in Turkey, developing its sales and distribution network, and is continuing to upgrade the diaper production plant producing Huggies® premium disposable diapers. In 2006, KCTR began launching Kimberly Clark’s international brands – Huggies® and Kotex®– on the Turkish market. The launch of the brands involves significant investments in advertising, sales promotion and listing fees for the organized retail chains. These investments led to continued growth and an increase of 30% in quantitative sales to the local market. However, the rising prices of raw materials on account of the sharp devaluation in local currency in 2006, the escalating competition against local manufacturers and the investments in launching the international brands – all led to a significant increase in the operating loss. Furthermore, KCTR recorded an extraordinary expenditure of approximately NIS 16 million (the Company’s 49.9% share –approximately NIS 8 million) on account of the effect of the reduction in the corporate tax rate from 30% to 20% on the tax asset created in the past several years at KCTR and due to the sharp 20% devaluation of the exchange rate of the Turkish lira relative to the U.S. dollar.

The Company’s share in the net earnings of the Carmel Group (26.25%) increased by NIS 2.0 million in 2006, as compared with 2005. The change in profit is attributed to the higher operating profit that increased from NIS 8.1 million to NIS 11.7 million. The improvement in the operating profit originated primarily from an increase in quantities, the rise in selling prices and the continuing efficiency measures. This improvement was partially eroded in the course of the year as a result of the continuing rise in energy and raw material prices. At the same time, financial expenses have decreased as a result of the revaluation of the dollar in 2006.

The Company’s share in the losses of TMM (43.08%) increased by NIS 10.1 million in 2006, as compared with 2005. The factors that led to this increase in losses included primarily non-recurring expenses that were incurred during the year. These expenses included a loss on account of the cumulative impact at the beginning of the year, on account of the implementation of Standard 25, in the sum of NIS 1.1 million, a provision for impairment on account of a long-term loan granted to a third party in the amount of NIS 1.6 million, the cancellation of a tax asset created on account of carryover losses in the amount of NIS 2.2 million and the impairment of two transfer stations by NIS 12.5 million. The Company’s total share in these expenses amounted to approximately NIS 7.5 million (incorporated above).

As mentioned above, the Company sold its direct and indirect holdings in TMM in early 2007.

35



B. Liquidity and capital resources

1. Cash Flows

        The cash flows from operating activities in 2007 amounted to NIS 69.5 million, as compared with NIS 53.1 million in 2006. The change in the cash flows from operating activities in 2007 is primarily attributed to the increase in current operations and in profit.

        The cash flows from operating activities in 2005 amounted to NIS 88.6 million.

        The dividend that was declared in December 2005, in the amount of NIS 50 million, was paid in January 2006. Additional dividend of NIS 100 million was paid in July 2006.

2. Financial Liabilities

        The Company believes that its existing credit lines and cash flow from operations 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 debt or long-term debt, to finance anticipated investments.

        On 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) of the Companies amounted to NIS 261.7 million as at December 31, 2007 as compared with NIS 297.9 million as at December 31, 2006.

        The Company uses loans from local financial institutions, mostly banks, to finance its activities. As of December 31, 2007, these loans consisted of the following:

  1. Short-term credit from banks – AIPM has a bank credit facility of some NIS 360 Million. Of this, as of December 31, 2007, some NIS 143 Million were utilized. The Company does not have any credit limitations (i.e. – financial covenants) other than this. see Note 10c to the Financial Statements attached.

  2. Notes – see Note 4a to the Financial Statements attached.

  3. Long Term Loans – See Note 4b to the Financial Statements

  4. Other liabilities – see Note 4c 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 distributions from investee companies is in the amount of up to approximately NIS 97 million (of which the Company’s share of the additional tax is NIS 16 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.

36



3. Material commitments for Capital Expenditures

  The Company converted during October 2007 its energy-generation plant in Hadera to using natural gas, instead of fuel oil.

  In this capacity, the Company signed an agreement in London on July 29, 2005, with the Thetis Sea Group, for the purchase of natural gas. The gas that will be purchased is intended to fulfill the Company’s requirements in the coming years, for the operation of the existing energy generation plants using cogeneration at the Hadera plant, when it will be converted for the use of natural gas, instead of the current use of fuel oil. The overall financial scope of the transaction totals $ 35 million over the term of the agreement from the initial supply of gas and until the earlier of (1) the point at which the Company will have purchased an aggregate of 0.43 BCM of natural gas, or (2) , July 1, 2011.

  In this capacity the Company also contracted with Alstom Power Boiler Service gmbh, a manufacturer of equipment in the energy industry, in an agreement worth approximately € 1.74 million, for the purchase of the systems needed for the conversion and assistance with their installation at the plant in Hadera. Up to December 31, 2007 the remainder of the agreement was worth approximately € 0.6 million.

  In the beginning of 2008, the Company has engaged in a contract with the main equipment suppliers for the new manufacturing facility of packaging papers, for the total sum of €48.4 million. Some of the equipment will be supplied during 2008 and the rest will be supplied in the beginning of 2009.

  In the last quarter of 2007, the Company signed an agreement with a gas company for the transmission of gas for a period of 6 years with a two-year extension option. The total financial value of the transaction is NIS 13.8 million.

C. Research and development, patents and licenses, etc.

        There were no significant investments in research and development activities during the last three years.

D. Trend information

        For trend information see The Business Environment section included in Item 5 above.

E. Off Balance sheet Arrangements

        The Company does not have any material off balance sheet arrangements, as defined in Item 5E of Form 20-F.

F. Contractual Obligations

In NIS in million
Total
Less than 1
year

1-3 years
4-5 years
 
Long term debt obligations*      232.3    47.9    118.6    65.8  
Purchase obligations**    132.0    37.5    94.5    -  

* Including interest
** From natural gas agreement

37



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A Directors and Senior Management

        The following table sets forth certain information with respect to the directors and executive officers of the Company:

Name
Age
Position/Principal Occupation
 
Senior Management in Company and in    
Subsidiaries (as of June 10, 2008)
Avi Brener 55 Chief Executive Officer
Israel Eldar 63 Controller and responsible for risks and business interruption management.
Shaul Gliksberg 46 Chief Financial Officer and Business Development Manager
Lea Katz 57 Legal counsel and Corporate Secretary.
Gabi Kenan 64 Senior Manager for projects
Gur Ben David 56 General manager of Packaging Paper and Recycling Division.
Pinhas Rimon 68 Senior manager
Gideon Liberman 58 General Manager of Development and Infrastructure Division, Chief Operating Officer
Amir Moshe 42 General Manager, Graffiti Office Supplies & Paper Marketing Ltd.
Uzi Carmi 52 General Manager, Amnir Recycling Industries Ltd.
Simcha Kenigsbuch 50 Chief Information Officer
 
Senior Management in Affiliated Companies
(as of June 10, 2008)
Arik Schor 52 General Manager, Hogla-Kimberly Ltd.
Avner Solel 54 General Manager, Mondi Business Paper Hadera Ltd.
Doron Kempler 58 General Manager, Carmel Container Systems Ltd.
 
Directors of the Company
Zvi Livnat(1) 55 Chairman of the Board
Ari Bronshtein(2) 39 Director
Nochi Dankner(3) 53 Director (Until August 8, 2007)
Roni Milo(4) 58 Director
Avi Fischer(5) 52 Director
Isaac Manor(6) 67 Director
Amos Mar-Haim(7) 70 Director
Adi Rozenfeld(8) 53 Director
Avi Yehezkel(9) 49 Director
Amir Makov(10) 74 External Director
Ronit Blum(11) 56 External Director (Until May 22, 2008)

(1) Mr. Livnat has been a member of our Board of Directors since 2003 and was appointed Chairman of our Board since April 2, 2006.
(2) Mr. Bronsthein has been a member of our Board of Directors since 2006.
(3) Mr. Dankner has been a member of our Board of Directors since 2003 and resigned on August 8, 2007.
(4) Mr. Milo has been a member of our Board of Directors since August 8, 2007.
(5) Mr. Fischer has been a member of our Board of Directors since 2004.
(6) Mr. Manor has been a member of our Board of Directors since 2003.
(7) Mr. Mar-Haim has been a member of our Board of Directors since 1984.
(8) Mr. Rozenfeld has been a member of our Board of Directors since 2004.
(9) Mr. Yehezkel has been a member of our Board of Directors since 2003.
(10) Mr. Makov has been a member of our Board of Directors since 2005.
(11) Ms. Blum has been a member of our Board of Directors since 2005. On May 22, 2008 the Company received a resignation letter from Ms. Blum, an external director. Ms. Blum pointed out that due to other offices she holds, there is a potential for an affiliation between her and the controlling shareholder of the Company (the IDB Group). The Israeli Companies Law of 1999 prohibits certain affiliations between an external director and the controlling shareholder of the company in which the said external director serves. Because of the possible affiliation, Ms. Blum decided to resign. On June 3, 2008, the Company’s Board of Directors resolved to call for a Special General Meeting to elect Mrs. Atalya Arad as an external director of the Company.

38



        The business experience of each of the directors is as follows:

        Mr. Zvi Livnat. Mr. Livnat has been Chairman of the Board of Directors of the Company since April 2006. In addition he serves as Co-CEO of Clal Industries and Investments Ltd., Executive Vice President and director of IDB Holding Corporation Ltd., Deputy Chairman of IDB Development Corporation Ltd., and a director of Discount Investments Corporation Ltd. Mr. Livnat also serves in prominent positions in other public and private companies. Mr. Livnat is a graduate of HND Business Studies &Transport (CIT) – Dorset Institute of Higher Education, Bournemouth, United Kingdom.

        Mr. Ari Bronshtein. Mr. Bronshtein is Vice President of Discount Investments Corporation Ltd. He also serves as director at various companies. He formerly served as Deputy CEO of Economics and Business Development of Bezeq, the Israeli Telecom Company Ltd. Mr. Bronshtein is a graduate of Tel Aviv University where he studied Management and Economics. He also received a master’s degree in Management Science of Accounting and Finance from Tel-Aviv University.

        Mr. Roni Milo. Mr. Milo served as Chairman of Azorim from 2003-2006, as well as Chairman of the Israeli Cinema Council during the same period. He also serves as a director of Bank Yahav. Mr. Milo is a lecturer of social science at Bar Ilan University. Mr. Milo is a graduate of Tel-Aviv University, where he received L.L.B..

        Mr. Avi Fischer. Mr. Fischer is Director and Co-CEO of Clal Industries and Investments Ltd., Deputy Chairman of IDB Development Ltd., Deputy CEO of IDB Holdings Corporation Ltd., and Chairman and director of several public and private companies in the Ganden Group and the IDB Group. He is a senior partner in Fischer, Behar, Chen & Co. Law Office. Mr. Fischer is a graduate of Tel-Aviv University, where he received L.L.B..

        Mr. Isaac Manor. Mr. Manor is a director of IDB Holdings Corporation Ltd., IDB Development Ltd., Discount Investments Corporation Ltd., Clal Industries and Investments Ltd. and is a director of various publicly-traded and privately-held companies within the IDB Group, the Israel Union Bank Ltd. and others. . He also serves as Chairman and as a director of companies in the David Lubinsky Group Ltd. Mr. Manor is a master in Business Management from the Hebrew University of Jerusalem.

        Mr. Amos Mar-Haim. Mr. Mar-Haim is a member of the Israel Accounting Standards Board and a director of various companies. He is the Deputy Chairman of Phoenix Investments & Finances Ltd., Chairman of Migdal Underwriting & Promotion of Investments Ltd. and is a member of the Active Committee of the Public Companies Union. Mr. Mar-Haim received a B.A. in Economics and M.A. in Business Management with specialization in Finance from the Hebrew University of Jerusalem.

        Mr. Adi Rozenfeld. Mr. Rozenfeld is a businessman, an Honorary Consul of Slovenia in Israel and a director of Clal Industries and Investments Ltd., Discount Investments Corporation Ltd. and Property & Building Corp. He is also Chairman of the Association of Friends, Haifa University. Mr. Rozenfeld is a graduate of Haifa University,where he studied General History.

        Mr. Avi Yehezkel. Mr. Yehezkel is an external director at Bank Yahav. He served as a Knesset member from 1992-2003, during which he also 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 as a member of the Finance Committee. Mr. Yehezkel is a graduate of Tel-Aviv University where he studied Economics, and has an M.A. in Law from Bar- Ilan University.

        Mr. Amir Makov. Mr. Makov is Chairman of The Israel Institute of Petroleum & Energy, and a director in the following companies: ICL Fertilizers (Dead Sea Works, Rotem Amfert Negev), ICL Industry Products (Dead Sea Bromine Company), and Pigmentan Ltd.. He is also an external director in Wolfman Industries and in Leumi Card Ltd. Mr. Makov served as an external director of the Company from 1996-2001. Mr. Makov is a graduate of the Technion where he received a B.Sc in Chemical Engineering and has M.A. in Law from the Hebrew University of Jerusalem.

6.B Compensation

        The aggregate amount of remuneration paid to all directors and senior officers of the Company, and its subsidiaries (24 officers and directors) as a group for services provided by them during 2007 was approximately NIS 15,732,701 (approximately $4,090,666). The aggregate amount set aside for pension, retirement or similar benefits for all directors and senior officers of the Company and its subsidiaries as a group for services provided by them during 2007 was approximately NIS 1,882,204 (approximately $489,393).

39



        The aggregate remuneration above includes payments to the Company’s five most-highly compensated officers, as follows1:

Name
Position
NIS (in thousands)
 
No. 1 CEO(a) 2,643 
 
No. 2 Senior Manger 1,612 
 
No. 3 Deputy CEO 1,406 
 
No. 4 Senior Manger 1,268 
 
No. 5 Senior Manger 1,195 

(a) On May 13, 2007, the Board of Directors approved the Employment Agreement and remuneration of Mr. Avi Brener, the CEO of the Company. The main elements of the Agreement are: monthly salary linked to the Israeli Consumer Price Index and a yearly bonus in the amount of between 6-9 salaries, subject to the discretion of the Board. In addition, upon termination of employment, Mr. Brener will receive, in addition to provisions for severance payments, a retirement grant payment in an aggregate amount equal to one-month's salary for each year in which he was employed by the Group (from August 1988).

        In addition, the senior officers of the Company and of certain other companies in the Group were granted options pursuant to a stock option plan adopted in January 2008. For details regarding the stock option plan granted to senior officers, see Item 6.E. Share ownership, below, and Note 6b of the Notes to the Consolidated Financial Statements.

Remuneration of Directors

        The remuneration of the directors (including the external directors) for 2007 was approved at the 2007 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 29,010 and NIS 47,135, plus an additional fee for each meeting attended which must be between NIS 1,021 and NIS 1,813. The Board determined that for 2007 the remuneration of each director, including the external directors, would be fixed at NIS 40,000 plus an additional NIS 1,550 for each meeting attended.

        On June 3, 2008, the Board of Directors resolved to adjust the annual compensation and the compensation for participation in Board of Directors and committee meetings granted to all the directors in the Company, including external directors and directors who are, or their family members are, controlling shareholders of the Company, for the year 2008 up to a sum equal to the "Fixed Amount", according to the second and third supplements to the Israeli Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director) 2000, as amended in March 2008, effective commencing from, and is subject to, the election of Mrs. Atalya Arad as an external director in the Company at the forthcoming Special General Meeting.

6.C Board Practices

        The directors of the Company, except for the external directors (see below), retire from office at the Annual General Meeting of Shareholders and are eligible for re-appointment at such Annual General Meeting.

        Notwithstanding the foregoing, if no directors were appointed at any Annual General Meeting, the directors appointed at the previous Annual General Meeting would 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 Board of 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.

        There are no contracts which give the current directors of the Company any benefits upon termination of office.


1 The chart details remuneration paid by the Company to five most-highly compensated officers of the Company, as reported by the Company in accordance with Israeli law in its Annual Report for 2007 filed with the Israel Securities Agency in March 2008.

40



In reliance upon Section 110 of the AMEX Company Guide, as a foreign private issuer, the Company has elected not to follow the requirement that a majority of the members of our Board of Directors be independent, pursuant to Sections 121 and 802 of the AMEX Company Guide. In addition, the Company is considered a "controlled company" under the AMEX Company Guide as over 50% of the voting power in the Company is held by Clal and DIC as a group. According to Section 801(a) of the AMEX Company Guide, a controlled company is not required to comply with board independence requirements under Section 802. Accordingly, the Company's Board of Directors is currently composed of nine members, of whom four are independent directors, namely, Amir Markov, Avi Yehezkel, Roni Milo and Amos Mar-Haim, and five are non-independent directors, namely Zvi Livnat, Ari Bronshtein, Avi Fischer, Isaac Manor and Adi Rozenfeld. Due to the resignation of Ms. Ronit Blum, an external director and an independent member of the Company's Board of Directors, the Company's Board of Directors has resolved to convene a special general meeting of the Company's shareholders, to be held on July 10, 2008, to elect Ms. Atalya Arad as an external director of the Company in place of Ms. Blum. If elected, the Company will have ten members on the Board of Directors, of which five would be independent, including Ms. Arad, and five non-independent directors. For further information regarding the resignation of Ronit Blum 6.A. Directors and Senior Management.

External Directors

        Under the Israeli Companies Law, 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. Due to the resignation of Ms. Ronit Blum, Mr. Makov is currently the only external director of the Company. For details of Ms. Blum's resignation, and for the period of time each director served in his or her respective position, see Item 6.A. Directors and Senior Management. The Company's Board of Directors has resolved to convene a special general meeting of the Company's shareholders, to be held on July 10, 2008, to elect Ms. Atalya Arad as an external director of the Company in place of Ms. Blum.

        None of the Group's directors are entitled to benefits upon termination of their employment.

Audit Committee

        Under the Israeli Companies Law, members of the Audit Committee are elected from members of the Board of Directors of the Company by the Board of Directors. The Audit Committee must 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. In addition, according to the rules of the AMEX the audit committee must have at least three members, each of whom satisfies the independence standards of Section 803A of the AMEX Company Guide and Rule 10A-3 under the Securities Exchange Act of 1933, must not have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years and is able to read and understand fundamental financial statements. Additionally, the Audit Committee must have at least one member who is financially sophisticated. The Audit Committee operates under a charter adopted by the board of directors.

        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 to rectify such flaws and (ii) to decide whether to approve actions or transactions which under the Israeli Companies Law require the approval of the Audit Committee (such as transactions with a related party).

        The Company's Audit Committee members are currently: Amos Mar-Haim, Chairman, and Amir Makov. Both of whom are "independent" directors, as that term is defined in the American Stock Exchange listing standards. If elected to the Board of Directors, Ms. Atalya Arad will replace Ms. Blum as the third member of the Company's Audit Committee.

        The Company's Audit Committee also serves as a Balance Sheet Committee to supervise the completeness of the financial statements and the work of the CPAs and to offer recommendations regarding the approval of the financial statements and the discussion thereof prior to said approval.

Nominating Committee

        In reliance upon Section 801(a) of the AMEX Company Guide, as a controlled company in which over 50% of the voting power is held by Clal and DIC as a group, the Company has elected not to follow the requirement that a listed company have a nominating committee of the board of directors that is responsible for recommending nominations to the company's board of directors, pursuant to Section 804 of the AMEX Company Guide.

41



Compensation Committee

        Section 805 of the AMEX Company Guide requires that compensation of the chief executive officer and other officers of a listed company be determined, or recommended to the board for determination, either by a compensation committee comprised of independent directors or by a majority of the independent directors on its board. According to Section 801(a) of the AMEX Company Guide, a controlled company is not required to comply with Section 805. In reliance upon Section 801(a), as a controlled company, the Company has elected not to follow the requirements of Section 805. The Company has a Compensation Committee, but it is comprised of two independent directors, namely, Amos Mar-Haim and Amir Makov, and one non-independent director, namely, Zvi Livnat.

6.D Employees

        As of April 30, 2008, the Group had 3,050 employees in Israel, of which the Company and its subsidiaries had 816 employees in Israel. Of the Company employees in Israel, 142 were engaged in the office supplies activities, 654 in the packaging paper and recycling division, and 20 were management and clerical personnel at the Company's headquarters in Hadera. The associated companies had 2,234 employees in Israel, of whom 1,080 were engaged in the household paper activities (in addition, KCTR had 287 employees in Turkey engaged in household paper activities, 317 in the printing and writing paper activities and 837 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 agreements are the Company and the employees, through the union. The Company believes that the relationship between the Company and the union are good.

6.E Share Ownership

        In 2001 the Board of Directors of the Company approved two option plans.

        In April 2001, the Board of Directors adopted a 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 by July 2001. Each option is exercisable to purchase one ordinary share of NIS 0.01 par value of the Company. The options vest in 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 2007, 35,425 options were exercised under the 2001 plan and 14,466 shares were issued following the exercise of options. As of the reporting date of this 20-F, the full amount of options allotted under said plan were exercised or have expired.

        In August 2001, the Board of Directors approved a stock option plan for employees of the Company and its subsidiaries that expired on November 3, 2006. 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. The vesting period of the options is two years from the data of grant. Each option is exercisable within three years from the end of the vesting period. For further information regarding the 2001 employee plan, see Note 6 of the Notes to the Consolidated Financial Statements. As of the reporting date, the full amount of options allotted under said plan were exercised or have expired.

        On January 14, 2008, following the approval of the Audit Committee, the Board of Directors approved a bonus plan for senior employees in the Company and/or in subsidiaries and/or in associated companies, under which up to 285,750 options (, each exercisable into one ordinary share of the Company, will be allotted to senior employees and officers in the Group, including the CEO of the Company. On the date of approval of the bonus plan, the number of shares to be allotted accounted for 5.65% of the issued share capital of the Company. The offerees in the said bonus plan are not interested parties in the Company, except for the CEO who is an interested party by virtue of his position. Pursuant to the conditions of the said options, the offerees who will exercise the option will not be allocated all of the shares derived therefrom, but only a quantity of shares that reflects the sum of the financial benefit that is inherent to the option at the exercise date only. The options vest in four yearly installments. The vesting period of the first installment is one year, commencing on the date of grant, and the next three installments vest on the fourth, fifth and sixth anniversary of the grant date. The first installment is exercisable for four years from the vesting date. Each installment of the next three installments is exercisable for two years from the vesting date of such installment. For further information regarding the 2008 plan, see Note 6 of the Notes to the Consolidated Financial Statements.

        Of the 287,750 options under the bonus plan, 40,250 options were allotted to the CEO of the Company, 135,500 were to management of the subsidiaries and 74,750 were to management of the affiliates. The date of grant of the options was set for the months of January-March 2008, subject to the restrictions of Section 102 (Capital Route) of the Israeli Income Tax Ordinance. As of December 31, 2007, 250,500 options had been allotted. On May 11, 2008, the Board of Directors approved the allotment to a trustee of the balance of the options that had not been allotted through that date, in the amount of 32,250 options, as a pool for a future grant to officers and employees, subject to the approval of the Board.

42



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A Major shareholders

        The following table sets forth, as of June 10, 2008, 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
Directly or Indirectly*

Percent of Class
Outstanding

 
Clal Industries Ltd. ("Clal")            
3 Azrieli Center, the Triangle Tower, Tel Aviv,  
Israel    1,921,861 (1)  37.98 (1)
   
Discount Investments Corporation Ltd. ("DIC")
3 Azrieli Center, the Triangle Tower, Tel Aviv, Israel
    1,085,761 (1)  21.45 (1)
   
All officers and directors as a group    **    **  

* Beneficial ownership is calculated in accordance with Rule 13d-3 under the Securities Exchange Act of 1934.

** The officers and directors of the Company own, in the aggregate, less than 1% of the Company’s outstanding ordinary shares, except for, Isaac Manor and Zvi Livnat whose ownership is set forth in footnote (1) below.

(1) IDB Holding Corporation Ltd. (“IDBH”) holds 75.78% of the equity of and 76.04% of the voting power in IDB Development Corporation Ltd. (“IDBD”), which, in turn, holds 73.88% of the equity of and voting power in DIC and 60.52% of the equity of and voting power in Clal. IDBH, IDBD, Clal and DIC are public companies traded on the Tel Aviv Stock Exchange.

  IDBH is controlled as follows: (i) Ganden Holdings Ltd. (“Ganden”), which is a private Israeli company controlled by Nochi Dankner and his sister, Shelly Bergman, holds approximately 54.72% of the outstanding shares of IDBH (of which, approximately 17% of the outstanding shares of IDBH are held directly and approximately 37.73% of the outstanding shares of IDBH are held through Ganden Investments I.D.B. Ltd, a private Israeli company, which is an indirect wholly owned subsidiary of Ganden); (ii) Shelly Bergman, through a wholly-owned company, holds approximately 4.23% of the outstanding shares of IDBH and approximately 0.68% of the equity and 0.69% of the voting power in IDBD,; (iii) Avraham Livnat Ltd. (“Livnat”), which is a private company controlled by Avraham Livnat holds, directly and through a wholly-owned subsidiary (Avraham Livnat Investments (2002) Ltd.), approximately 13.26% of the outstanding shares of IDBH); (iv) Manor Holdings BA Ltd. (“Manor”), a private company controlled by Isaac and Ruth Manor holds, directly and through a majority-owned subsidiary (Manor Investments-IDB Ltd.), approximately 13.24% of the outstanding shares of IDBH. Subsidiaries of Ganden, Livnat and Manor have entered into a shareholders agreement with respect to shares of IDBH constituting 31.02%, 10.34% and 10.34%, respectively, of the outstanding shares of IDBH for the purpose of maintaining and exercising control of IDBH as a group. The holdings of said entities in IDBH in excess of said 51.7% of the issued share capital and voting rights of IDBH (as well as the holdings of Ganden, Manor and Livnat and Shelly Bergman in IDBH) are not subject to the shareholders agreement. The term of the shareholders agreement expires in May 2023. Certain of the foregoing shares of IDBH have been pledged in favor of certain financial institutions as collateral for loans taken to finance part of the purchase price of such shares. Upon certain events of default, these financial institutions may foreclose on the loans and assume ownership of or sell the shares.

  Isaac Manor (the husband of Ruth Manor), and Zvi Livnat (the son of Avraham Livnat) are directors of each of IDBH, IDBD, and DIC. Isaac Manor is also a director of Clal.

43



  Avi Fischer holds, directly and through a private company controlled by Avi Fischer and his wife, directly and indirectly, 9.02% of the equity and the voting power of Ganden.

        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 as a bloc in General Meetings of the Company on the subject of dividend distributions. This agreement has been extended up to the year 2010.

        Since May 23, 2005, beneficial ownership percentages for Clal and DIC increased by 5.14% and 2.9%, respectively, as compared to the percentages as indicated in the chart above.

        The Company estimates that as of May 30, 2008, 8.46 % of its outstanding ordinary shares were held in the United States by 827 record holders.

        All ordinary shares of the Company have equal voting rights. The Company’s major shareholders who beneficially own 5% or more of the Company’s ordinary shares outstanding do not have voting rights different from other holders of ordinary shares.

7.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 4c 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 9b, 9c and 9d to the financial statements attached.

7.C Interests of Experts and Counsel

        Not applicable.

ITEM 8. FINANCIAL INFORMATION

8.A Consolidated Statements and Other Financial Information

        See the financial statements included in Item 17.

Export Sales

        In 2007, the Company had NIS 48.7 million of export sales, which represents approximately 8.3% of the NIS 583.6 million total sales volume of the Company.

        Legal Proceedings

        From time to time, we and our subsidiaries and affiliated companies may be involved in lawsuits, claims, investigations or other legal or arbitral proceedings that arise in the ordinary course of our business. These proceedings may include general commercial disputes and claims regarding intellectual property.

        In December 2003, a petition was filed against H-K, an affiliated company (of which the Company owns 49.9% of the outstanding shares), for approval of a class action lawsuit. According to the petition, H-K had reduced the number of units of diapers in a package of its “Huggies® Freedom” brand and thus misled the public according to the Israeli Consumer Protection Act. The plaintiff estimated the damages in the class action lawsuit to be NIS 18 million. On October 9, 2007, the court dismissed the action and the petition for the approval of a class action, and ordered the plaintiffs to pay legal fees and expenses to H-K in the amount of NIS 30,000.

        In September 2006, a petition was filed against H-K, an affiliated company (of which the Company owns 49.9% of the outstanding shares), for approval of a class action lawsuit. According to the petition, H-K had reduced the number of units of diapers in a package of its “Titulim®” brand and thus misled the public according to the Israeli Consumer Protection Act. The plaintiff estimated the damages inthe class action lawsuit to be NIS 47 million. On June 18, 2007, the court approved the plaintiff’s abandonment of the petition for approval of a class action lawsuitwith no order that legal expenses be paid.

        In December 2006, a petition was filed against H-K for the approval of a class action lawsuit. According to the petition, H-K has reduced the quantity of paper in its “Kleenex® Premium” brand toilet paper several years earlier, and thus misled the public according to the Israeli Consumer Protection Act. The plaintiff estimated the damages in the class action lawsuit to be approximately NIS 43 million. On June 26, 2007, the court approved plaintiff’s abandonment of the petition for the approval of a class action lawsuit, and ordered payment of the legal expenses of H-K in the amount of NIS 10,000.

44



        In January 2007, a petition was filed against H-K for the approval of a class action lawsuit. According to the petition, H-K reduced the quantity of wipes in its “Titulim® Premium” brand baby wipes several years earlier, and thus misled the public according to the Israeli Consumer Protection Act. The plaintiff estimated the scope of the damages in the class action lawsuit to be approximately NIS 28 million. H-K rejects these claims in their entirety and intends to defend itself vigorously against the lawsuit. On July 4, 2007, the court approved the plaintiff’s abandonment of the petition for approval of a class action lawsuitwith no order that legal expenses be paid.

        In November 2006, the Environmental Protection Ministry announced an investigation of the Company in connection with alleged deviations from certain air emission standards at its production plant in Hadera. The Company anticipates that the investigation will not materially impact its operations.

        On March 7, 2006, TMM, an affiliated company, announced that the Israeli Securities Authority contacted TMM with regard to an investigation the authority is conducting. At this stage, TMM is unable to predict the outcome of this investigation or estimate the impact it may have on the company. On February 04, 2007, the Company sold all its holdings in TMM. See “Item 4. Information on the Company – A. History and Development of the Company” for information on the sale by the Company of its holdings in TMM.

Dividend Policy

        During 2007, the Company did not have a defined policy for distributing dividends.

8.B Significant Changes

        The following significant changes occurred since December 31, 2007, the date of the most recent annual financial statements included in this document:

        In January 2008, the Board of Directors of the Company approved a program for the allotment, for no consideration, of non marketable options to the CEO of the company, to employees and officers of the company and investees. For further details, see Item 5 (General) above.

ITEM 9. THE OFFER AND LISTING

9.A Listing Details

        The following table sets forth the high and low market prices of the Company’s ordinary shares on the American Stock Exchange (“AMEX”) and TASE for the five most recent full fiscal years:

American Stock Exchange
Tel Aviv Stock Exchange
High
Low
High
Low
High
Low
$
NIS
$*
 
Calendar Year
2007       67.50    41.00    259.40    185.00    65.60    43.65  
2006     52.12    38.50    237.00    168.50    53.01    38.42  
2005     57.98    37.50    246.90    176.90    56.42    38.24  
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  

* Share prices have been converted 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.

45



        The following table sets forth the high and low market prices of the Company’s ordinary shares on AMEX and TASE for each fiscal quarter for the two most recent fiscal years and the first quarter of 2008:

American Stock Exchange
Tel Aviv Stock Exchange
2008 Quarter Ended
High
Low
High
Low
High
Low
$
NIS
$*
 
March 31      69.05    56.5    261.30    192.10    67.67    56.83  
June 30 (through June- 15)     80.53    74.5    270.20    245.60    83.58    71.69  

2007 Quarter Ended
High
Low
High
Low
High
Low
$
NIS
$*
 
March 31      49.84    41.90    207.50    185.00    49.61    43.65  
June 30    67.50    47.21    259.40    198.70    65.60    47.82  
September 30    60.88    47.00    250.60    203.10    60.87    47.28  
December 31    66.00    50.00    259.30    200.30    66.92    51.01  

2006 Quarter Ended
High
Low
High
Low
High
Low
$
NIS
$*
 
March 31      49.23    42.00    227.00    197.50    49.60    42.26  
June 30    52.12    41.52    237.00    194.00    53.01    43.17  
September 30    46.67    38.50    228.80    168.50    51.78    38.42  
December 31    48.55    41.00    206.00    177.10    47.63    41.24  

        The following table sets forth the high and low market prices of the Company’s ordinary shares on AMEX and TASE for each month of the most recent six months:

American Stock Exchange
Tel Aviv Stock Exchange
High
Low
High
Low
High
Low
$
NIS
$*
 
May 2008      80.80    61.00    266.60    212.10    81.55    62.09  
April 2008    67.50    60.00    235.10    216.00    67.79    60.95  
March 2008    65.00    56.50    234.70    192.10    64.57    56.83  
February 2008    68.00    64.00    244.00    223.50    67.19    62.24  
January 2008    69.05    61.25    261.30    227.90    67.67    61.50  
December 2007    66.00    59.10    259.30    240.00    66.92    62.66  

* 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.

9.B Plan of Distribution

        Not applicable.

9.C Markets

        The Company’s ordinary shares have been listed on AMEX since 1959. The ordinary shares have also been listed on TASE since 1961. The trading symbol for the ordinary shares on AMEX is “AIP”.

9.D Selling Shareholders

Not applicable.

9.E Dilution

Not applicable.

46



9.F Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

10.A Share Capital

        Not applicable.

10.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.

        The Company’s Memorandum of Association (the “Memorandum of Association”) and Articles of Association (the “Articles”) are attached as Exhibits 1.1 and 1.2, respectively, of this annual report.

Objects and purposes of the company

        As indicated in Article 5 of the Articles, the Company may, at any time, engage in any kind of business in which it is, expressly or by implication, authorized to engage in accordance with the objects of the Company as specified in the Memorandum of Association. According to the Company’s Memorandum of Association, the Company’s objectives are paper manufacturing and any other legal objective.

Director’s personal interest

        The Israeli Companies Law requires that a director and an officer in 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 the meeting of the board of directors in which the transaction is first discussed. The Companies Law defines a “personal interest” as a personal interest of a person in an action or transaction by the company, including a personal interest of a relative and of a corporation in which he or his relative are interested parties, excluding a personal interest stemming solely from ownership of shares in the company.

        If the transaction is an extraordinary transaction, the approval procedures are as described below. Under the Israeli Companies Law, an extraordinary transaction is a transaction that is not in the ordinary course of business, a transaction not on market terms or a transaction 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 transaction must be approved by the audit committee, board of directors and by shareholders at a general shareholders meeting byt the affirmative vote of the holders of a majority of the voting power represented at the meeting in person or by proxy, provided that either (i) such a majority includes at least one third of the total votes of shareholders who are not controlling shareholders or on their behalf, present at the meeting in person or by proxy (votes abstaining shall not be taken into account in counting the above-referenced shareholder votes); or (ii) the total number of shares of the shareholders mentioned in clause (i) above that are voted against does not exceed one percent (1%) of the total voting rights in the Company.

        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 of Directors. The management of the Company is guided by the Board of Directors.

Powers and function of directors

        According to the Companies Law, the Board of Directors shall formulate the policies of the Company and shall supervise the performance of the office and actions of the General Manager (CEO), including, inter alia, examination of the financial position of the Company and determination of the credit framework of the Company. According to the Company’s Articles, as authorized by the Companies Law, and without derogating from any power vested in the Board of Directors in accordance with the Articles, the Board of Directors 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 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 at the Board of Directors’ discretion.

47



        According to the Companies Law, compensation to directors is subject to approval of the audit committee, the Board of Directors and the General Meeting of Shareholders. There are no provisions in the Company’s Articles regarding an age limit for the retirement of directors.

Pursuant to regulation promulgated under the Companies Law, the remuneration of directors does not require the approval of the general meeting according to the Companies law if it does not exceed the maximum amount permissible by applicable law. Nevertheless, if a shareholder (one or more) who holds at least 1% of the share capital or the voting rights in the Company objects, not later than 14 days from the filing of a report by the Company with the Israeli Authority then, a resolution of the audit committee and the Board of Directors regarding the remuneration of the directors would require approval of the General Meeting by a simple majority and the resolution regarding the remuneration of the directors who are deemed to be controlling shareholders of the Company would require the approval of the General Meeting by a simple majority provided that the majority of the votes cast approving such resolution includes (a) at least 1/3 of the votes of shareholders (or any one on their behalf) voting at the General Meeting who do not have a personal interest in the approval of the transaction (the votes of abstaining shareholders will not be taken into account as part of the majority votes); or (b) the votes of the shareholders mentioned in section (a) above, who object to such resolution constituted no more than 1% of all voting rights in the Company.

        Except for special cases as detailed in the Articles and subject to the provisions of the Israeli Companies Law, the Board of Directors may delegate its powers to the CEO, to an officer of the Company or to any other person or to committees of the Board. Delegation of the powers of the Board of Directors may be with regard to a specific matter or for a particular period, at the discretion of the Board of Directors.

        As described in Item 6.C “Board Practices”, all directors, except external directors, stand for election annually at the General Meeting. 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 has equal rights to that of 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 is 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.

        Subject to the provisions of the Israeli Companies Law, the Board of Directors may decide whether or not to distribute a dividend. When deciding on the distribution of a dividend, the Board of Directors 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 of Directors.

        Dividends on the Company’s ordinary shares may only be paid 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 or any reserve fund from redemption of capital.

        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 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.

        In addition, each shareholder has the general duty to refrain from depriving other shareholders of their rights.

        Furthermore, any controlling shareholder who knows that he 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 regarding the 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.

48



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 of 60% of the votes of shareholders (in present or by proxies) voting at the General Meeting (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 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 Israel in Hebrew. The notice shall be published at least twenty-one days prior to the meeting date. 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 described above, the Company is not required by the Articles and the Israeli Companies Law to give any additional notice as to the General Meeting, either to the registered shareholders or to shareholders who are not registered. 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, to include the agenda as well as a summary of the proposed resolutions, and to include any other details required by law.

        The Board of Directors of the Company may determine to convene a Special Meeting, 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.

        If the Board of Directors receives a demand for the convocation of a Special Meeting as aforesaid, the Board of Directors 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 of Directors 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 the manner in which notice will be given to the shareholders entitled to participate at the meeting.

        Each shareholder holding at least ten percent (10%) of the issued capital and one percent (1%) of the voting rights, or each shareholder holding at least ten percent (10%) of the voting rights, is entitled to request that the Board 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 begins consideration of business. A quorum shall be constituted when two shareholders, holding collectively at least twenty five percent (25%) of the voting rights, are present in person or by proxy within half an hour from the time provided in the meeting notice, unless otherwise determined in the Articles.

        If a quorum is not present within half an hour, the meeting shall be 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 determine.

        If a quorum is not present at the adjourned meeting, the meeting shall be canceled.

49



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 in the manner required by the Companies Law. The Board of Directors 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 or by proxy card. A voting proxy need not be a shareholder of the Company.

        Any person entitled to shares of the Company may vote at a General Meeting in the same manner as if he were the registered holder of such shares, provided that at least forty eight hours before the time of the meeting or of the adjourned meeting, as the case may be, at which he proposes to vote, he shall satisfy the Board of Directors 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 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 of Directors 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 of Directors. The Board of Directors may also establish 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 of Directors, either generally or in respect to 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 basis 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 a form customary in Israel or any other form which may be approved by the Board.

        According to an amendment to the Israeli Companies Law, a shareholder is also entitled, in certain issues, to vote by a proxy card.

        Each ordinary share entitles the holder thereof to participate at a General Meeting of the Company and to one vote on each item that comes before the General Meeting.

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 a merger as provided in the Israeli Companies Law is subject to a simple majority at a General Meeting or class meeting, as the case may be, all subject to the applicable provisions of law. Such a merger is also subject to the approval of the boards of the merging companies.

        For purposes of shareholders’ approval, unless a court rules otherwise, in the vote by the shareholder meeting of a merging company whose shares are held by the other merging company, the merger will not be deemed approved if a majority of the shares held by shareholders voting at the general meeting, other than the shareholders who are also shareholders in the other merging company or 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 merger obligations. . In addition, a merger may not be completed unless at least 30 days have passed from the date that the merger was approved at the general meetings of any of the merging companies and at least 50 days have passed from the date that a proposal of merger was 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 at the time. If there is no existing shareholder of the Company who holds more than 45% of the voting rights 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 shareholder of more than 45% of the voting rights in 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.

50



        Under the Israeli Securities Act 1968, any major shareholder who is the beneficial owner of more than 5% of the Company’s equity capital or voting securities is required to report this fact, and any change in his holdings, to the Israeli Securities Authority.

Transfer Agent and Registrar

        We have appointed American Stock Transfer & Trust Co. as the transfer agent and registrar for our ordinary shares.

Listing

        Our ordinary shares are listed on both the AMEX and on the TASE under the symbol “AIP”.

10.C Material Contracts

        For a description of material contracts other than those described below, see “Item 7 Major Shareholders and Related Party Transactions–Related Party Transactions.”

        On January 1, 2007, an agreement was signed with Arledan Investments Ltd., according to which the Company sold its leasing rights over a plot of land stretching over approximately three acres in “Ramat Hahayal”, for a sale price of approximately NIS 57 million. The property is rented until January 2013. As a result of the sale, it recognized, capital profits of approximately NIS 21 million in the fourth quarter of 2006.

        In February 2007, AIPM finalized the sale of all its direct and indirect holdings in TMM, as well as its holdings in Barthelemi, to CGEA (in an agreement signed January 4, 2007). The sale price was approximately $27 million. Following the sale, AIPM ceased to be a shareholder in TMM. For further details, see Item 4.A History and Development of the Company.

        In March 2007, KCTR signed an agreement in principle with Unilever, according to which Unilever shall distribute and sell KCTR’s products in Turkey, excluding distribution and sales to food chains, which will be done directly by KCTR. The agreement was signed to help KCTR increase its market penetration and volume of sales following the approval of a strategic plan by KCTR to expand its activities in Turkey in the coming decade. The complete strategic plan is designed to expand the activities of KCTR from the current yearly sales volume of $50 million to a volume of $300 million in the year 2015.

        In May 2007, the Company entered into an agreement with East Mediterranean Gas Company (“EMG”) for the purchase of natural gas from Egypt. The agreement describes principles for use in concluding a detailed agreement for the purchase of natural gas. It is expected that this will generate significant fuel cost savings and lead to further improvement in air quality. In July 2005, AIPM signed an agreement for the purchase of natural gas with Thetys Sea Group to meet the Company’s requirements for natural gas at the Hadera production facility until the middle of 2011. The agreement with EMG provides for the continued availability of natural gas for an additional 15 years. In addition, the agreement allows AIPM, within a limited period of time, to increase the quantities of natural gas purchased to serve the needs of the new power plant which is being planned. The estimated annual purchase of natural gas from EMG will range from $10 million to $50 million, depending on the quantities purchased and the prevailing prices. Bank and corporate guarantees, of an order of one year purchase, will be provided by AIPM, when signing the detailed agreement. According to the May 2007 agreement, the parties must sign a detailed agreement by the end of 2007. As of the report date of this annual report, the parties are in negotiations to formulate the final version of the said detailed agreement.

        On July 29, 2005 the Company signed an agreement in London, with the Thetys Sea Group (Noble Energy Mediterranean Ltd., Delek Drilling Limited Partnership, Avner Oil Exploration Limited Partnership and Delek Investment and Assets Ltd.), for the purchase of natural gas. The gas that will be purchased is intended to fulfill the Company’s requirements in the coming years, for the operation of the existing energy co-generation plant at Hadera that was converted for the use of natural gas, instead of fuel oil. The overall financial volume of the transaction totals $35 million over the term of the agreement from the initial supply of gas and until the earlier of (1) the point at which the Company will have purchased an aggregate of 0.43 BCM of natural gas, or (2) , July 1, 2011.

        On July 11, 2007, the Company entered into an agreement with Israel Natural Gas Routes Ltd. (“Gas Routes”) for transportation of natural gas to its facility in Hadera for a six-year term, with an optional extension for another two-years. Consideration, pursuant to the agreement includes payment of a non-recurring connection fee upon connection based on the actual cost of connection to the Company’s facility, as well as monthly payments based on two components: (a) a fixed amount for the gas volume ordered by the Company; and (b) an additional amount based on the actual gas volume delivered to the facility. As of the report date of this annual report, the Company is dependent on Gas Routes, since in the agreement the Company undertook to pay a set annual payment of NIS 2 million even if it does not actually make use of Gas Routes’ transportation services.

51



        During the first half of 2008, critical agreements were signed for acquiring the equipment required for a new production system for packaging paper produced from paper and board waste. –The new production system at the Company’s Hadera site, which will have an output capacity of approximately 230 thousand tons per annum, will cost an estimated NIS 690 million (approximately $170 million). The principal equipment for the production system was acquired from the leading companies in the world in the manufacture and sale of paper machines, with the central equipment purchased from the Italian company Voith, while additional complementary items were ordered from Finnish company METSO. According to the signed agreements, the Company will pay a total sum of € 48.4 million for the equipment detailed above. Some of the equipment will be supplied in the coming months, whereas the rest of the equipment will be supplied by the beginning of 2009. Pursuant to the signed agreements, the Company is expected to sign agreements with additional suppliers and contractors for the acquisition of additional equipment necessary for the production system.

10.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 ordinary shares or on the conduct of the Group’s operations, except as otherwise set forth in the paragraph below regarding taxation.

10.E Taxation

The following information is regarding Israeli law 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.

        On July 24, 2002, the Israeli Knesset enacted income tax reform legislation, commonly referred to as the “2003 Tax Reform”. The 2003 Tax Reform has introduced fundamental and comprehensive changes into Israeli tax laws. Most of the legislative changes took effect on January 1, 2003. The 2003 Tax Reform has introduced a transition from a primarily territorial-based tax system to a personal-based system of taxation with respect to Israeli residents. The Tax 2003 Reform has also resulted in significant amendment of the international taxation provisions, and new provisions concerning the taxation of capital markets, including the abolishment of currently “exempt investment routes” (e.g., capital gains generated by Israeli individuals from the sale of securities traded on the TASE).

        After the 2003 Tax Reform, the Israeli Parliament approved on July 25, 2005 additional income tax reform legislation (the “2006 Tax Reform”), pursuant to the recommendations of a committee appointed by the Israeli Minister of Finance, which incorporated additional fundamental changes in Israeli tax law. The 2006 Tax Reform includes, inter alia, a gradual reduction of income tax rates for both individuals and corporations over the years through 2010, and outlines a path towards uniformity in the taxation of interest, dividend and capital gains derived from securities. Most of the amendments to the tax law are effective as of January 1, 2006, subject to certain exceptions. Transition rules apply in certain circumstances.

        Various issues related to the effective date of the 2003 Tax Reform and the 2006 Tax Reform remain unclear in view of ambiguous legislative language and the lack of authoritative interpretations at this time. The analysis below is therefore based on our current understanding of the new legislation.

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 (non-Approved Enterprise) by the Company to a non-resident shareholder are generally subject to a withholding tax of 20%. If the shareholder is considered a “principal shareholder” at any time during the 12-month period preceding such distribution, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate on the shareholder (non-Approved Enterprise income) will be 25%. The withholding tax by the Company on such dividend would remain 20% In the event that tax exempt Approved Enterprise profits are distributed as a dividend, the Company is subject to the corporate tax from which it was exempt (25%) and to withholding tax at source in respect of the distributed dividend (usually 15%).

        Generally, under the Tax Treaty Between the Government of the United States of America and the Government of the State of Israel with Respect to Taxes on Income (“U.S. Treaty”), the maximum rate of withholding tax on dividends paid to a shareholder who is a resident of the United States (as defined in the U.S. Treaty) will be 25%. 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:

          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

          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.

52



        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 on dividends distributed by the Company to Israeli residents

        The distribution of dividend income to Israeli residents will generally be subject to income tax at a rate of 20% for individuals and will be exempt from income tax for corporations. In the event that tax exempt Approved Enterprise profits are distributed as a dividend, the Company is subject to the corporate tax from which it was exempt (25%) and to withholding tax at source in respect of the distributed dividend (usually 15%). In addition, if an Individual Israeli shareholder is considered a “principal shareholder” at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the Company, the tax rate on the dividend (not source from Approved Enterprise income) will be 25%. The withholding tax by the Company on such dividend would remain 20%.

Tax on capital gains of shareholders – General

        Israeli law imposes a capital gains tax on the sale of capital assets by an Israeli resident and on the sale of capital assets located in Israel or the sale of direct or indirect rights to assets located in Israel. The Israeli Tax Ordinance distinguishes between “Real Gain” and “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed on the basis of the increase in the Israeli CPI between the date of purchase and the date of sale. The Real Gain, accrued at the sale of an asset purchased on or after January 1, 2003, is generally taxed at a 20% rate for individuals (except for “principal shareholder” which then the tax rate is 25%) and 25% for corporations. Inflationary Surplus, that accrued after December 31, 1993, is exempt from tax.

        In July 2005, the Israeli Parliament approved tax reform which, among other things, decreases the corporate tax gradually from 31% in 2006 to 25% in 2010.

        Pursuant to the 2006 Tax Reform, the current applicable corporate tax rate in 2007 is to be gradually reduced from 29% to 25%, in the following manner: the tax rate for 2007 was – 29% , in 2008 – 27%, in 2009 – 26%, in 2010 and afterwards – 25%. The maximum tax rate for individuals is 48% in 2007 and shall also be gradually reduced to 44% in 2010 and afterwards. 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.

        An individual shareholder will generally be subject to tax at a 20% rate on realized real capital gain accrued from January 1, 2003 and thereafter. To the extent that the shareholder claims a deduction of financing expenses, the gain will be subject to tax at a rate of 25% (until otherwise stipulated in bylaws that may be published in the future).

        If such shareholder is considered a “principal shareholder” at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the Company, the tax rate will be 25%.

Israeli corporation’s shareholders will generally be subject to tax at a 25% rate on realized real capital gain accrued from January 1, 2003 and thereafter.

        The tax basis of shares acquired prior to January 1, 2003 will be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a taxpayer may elect the actual adjusted cost of the shares as the tax basis provided he can provide sufficient proof of such adjusted cost.

        It should be noted that different taxation rules may apply to shareholders who purchased their shares prior to the listing on the TASE. They should consult with their tax advisors for the precise treatment upon sale.

Corporations which are subject to the Inflationary Adjustments Law

        The shareholder will be subject to tax at the corporate tax rate on realized real capital gain.

53



Capital gains – non-Israeli residents (Individuals and Corporations)

        Non-Israeli residents are generally exempt from capital gains tax on any gains derived from the sale of shares publicly traded on the TASE provided, however, that such capital gains are not derived from his permanent establishment in Israel and that such shareholders did not acquire their shares prior to an initial public offering. In addition, non-Israeli companies will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli company, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli company, whether directly or indirectly.

        It should be noted that different taxation rules may apply to shareholders who purchased their shares prior to the listing on the TASE. They should consult with their tax advisors for the precise treatment upon sale.

        Notwithstanding the foregoing with respect to both Israeli and non-Israeli residents, dealers (both individuals and corporation) in securities in Israel are generally taxed at regular tax rates applicable to business income.

        The U.S. Israeli Tax Treaty exempts U.S. residents who hold directly or indirectly an interest of less than 10% of the Israeli company, and who held an interest of less than 10% during all 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.

Uncertainty in income taxes

As of January 1, 2007, the Company adopted FASB Interpretation No. 48, ‘Accounting for Uncertainty in Income Taxes–an Interpretation of FASB Statement No. 109’ (“FIN 48”). FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax positions; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim-period guidance, among other provisions. As a result of the implementation of the standard there isn’t any influence on the financial statements of the Group.

10.F Dividends and Paying Agents

        Not applicable.

10.G Statement by Expert

        Not applicable.

10.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. We are subject to the information requirements of the Exchange Act. In accordance with these requirements, we file reports and other information with the Securities and Exchange Commission (the “SEC”).

        Copies of this annual report and the exhibits hereto may be inspected and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. 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 in interest rates affect the Company’s financial results.

        The Company’s Board of Directors determines the policy to address these risks, 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 changes in various currencies and in the Consumer Price Index on the Company’s cash flows and on its financial statements.

        AIPM conducts calculations of its exposure every month and examines the compliance with the policy determined by the Board of Directors.

54



        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.

        Such hedging transactions are conducted primarily through currency options and forward transactions with Israeli banking institutions. The Company believes that the inherent credit risk of these transactions is slight.

        As of December 31, 2007 AIPM owned CPI-linked long-term loans (notes) in the total amount of approximately NIS 195.5 million. The interest on such loans is not higher than the market interest rate. In the event that the inflation rate rises 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 entered into forward transactions, in early 2008 for hedging NIS 190 million against a rise in the CPI until December 2008. These transactions replaced hedging transactions of NIS 220 million that terminated in December 2006 and January 2007.

        Through our normal operations, we are exposed principally to the market risks associated with changes in the Consumer Price Index, which our notes are linked to. We manage our exposure to these market risks through our regular financing activities and, when deemed appropriate, we hedge these risks through the use of derivative financial instruments. We use the term hedge to mean a strategy designed to manage risks of volatility movements on certain liabilities. The gains or losses on derivative instruments are expected to offset the losses or gains on these liabilities. We use derivative financial instruments as risk hedging tools and not for trading or speculative purposes. Our risk management objective is to minimize the effect of volatility on our financial results exposed to these risks and appropriately hedging them with forward contracts.

Maturity
In NIS thousands
2008
2009-10
2011-12
More than 5
years

Total book
value

Total fair
value

 
Series 1debentures      7,049    7,049    -    -    14,098    14,336  
Series 2 debentures    30,342    60,684    60,684    30,342    182,052    191,537  

Credit Risks

        The Company’s and its subsidiaries’ cash and cash equivalents and the short-term deposits as of December 31, 2007 are deposited mainly with major Israeli banks. The Company and its subsidiaries consider the credit risks in respect of these balances to be immaterial.

        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.

55



Sensitivity Analysis Tables for Sensitive Instruments, According to Changes in Market Elements

        All other Company’s market risk sensitive instruments are instruments entered into for purposes other than trading proposes.

Sensitivity to Interest Rates
Sensitive Instruments
Profit (loss) from changes
Fair value
As at
Dec-31-07

Profit (loss) from changes
Interest
rise 10%

Interest
rise 5%

Interest
decrease
10%

Interest
decrease
5%

In NIS thousands
 
Series 1 Debentures      54    27    14,336    (54 )  (27 )
Series 2 Debentures    2,370    1,191    191,537    (2,417 )  (1,203 )
Other liabilities    121    60    31,510    (122 )  (61 )
Long-term loans and capital  
notes - granted    (186 )  (93 )  (48,644 )  188    94  

The fair value of the loans is based on a calculation of the present value of the cash flows, according to the generally-accepted interest rate on loans with similar characteristics (4% in 2007).

Regarding the terms of the debentures and other liability – See Note 4 to the Financial Statements

Regarding the terms of the long-term loans and capital notes granted – See Note 2 to the Financial Statements

Sensitivity of € linked instruments to changes in the(euro)exchange rate
Sensitive Instruments
Profit (loss) from changes
Fair value
As at Dec-31-07

Profit (loss) from changes
Revaluation
of € 10%

Revaluation of
€ 5%

Devaluation
of € 10%

Devaluation of
€ 5%

In NIS thousands
 
NIS-€ forward transaction      6,038    4,028    994    (8,439 )  (3,741 )

        See Note 12a to the financial statements.

Sensitivity to the U.S. Dollar Exchange Rate
Sensitive Instruments
Profit (loss) from changes
Fair value
As at Dec-31-07

Profit (loss) from changes
Revaluation
of $ 10%

Revaluation of
$ 5%

Devaluation of
of $ 10%

Devaluation of
$ 5%

In NIS thousands
 
Other Accounts Receivable      1,272    636    12,720    (1,272 )  (636 )
Capital note    242    121    2,421    (242 )  (121 )
Accounts Payable    (1,036 )  (518 )  (10,363 )  1,036    518  

Other accounts receivable reflect primarily short-term customer debts.

Capital note – See Note 2b to the financial statements.

Accounts payable reflect primarily short-term liabilities to suppliers.

56



Quantitative Information Regarding Market Risk

        The following are the balance-sheet components by linkage bases at December 31, 2007:

In NIS Millions
Unlinked
CPI-linked
In
foreign
currency, or
linked
thereto
(primarily
U.S.$)

Non-Monetary
Items

Total
 
      Assets                        
      Cash and cash equivalents     2.5         165.2         167.7  
      Other Accounts Receivable     259.0    0.4    12.7    11.8    283.9  
      Inventories                    69.6    69.6  
      Investments in Associated Companies     52.2         2.4    291.6    346.2  
      Deferred taxes on income                    6.1    6.1  
      Fixed assets, net                    445.6    445.6  
      Deferred expenses, net of accrued amortization   





      Total Assets     313.7    0.4    180.3    824.7    1,319.1  





      Liabilities   
      Credit from Banks     143.0                   143.0  
      Other Accounts Payable     185.3         10.4         195.7  
      Deferred taxes on income                    40.5    40.5  
      Long-Term Loans     33.5                   33.5  
      Notes (bonds)          195.5              195.5  
      Other liabilities - including current maturities     32.8                   32.8  
      Equity, funds and reserves                    678.1    678.1  





      Total liabilities and equity     394.6    195.5    10.4    718.6    1,319.1  





      Surplus financial assets   
(liabilities) as at December 31, 2007       (80.9 )   (195.1 )   169.9     106.1        

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

57



PART II

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

(a) Disclosure Controls and Procedures

        Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (f)) have concluded that, as of the end of the period covered by this Form 20-F, our disclosure controls and procedures were effective to ensure that material information required to be disclosed in the reports that we file and furnish under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Management’s Report on Internal Control over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:

  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;

  provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

  provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements. Also, projection of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

        Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        As permitted, we have excluded from our evaluation the affiliated companies: Mondi Hadera Paper Ltd., Frenkel C.D. Ltd., Carmel Container Systems Ltd., Cycle-Tec Recycling Technology Ltd., and Hogla-Kimberly Ltd. (“H-K”) (which together, not including H-K, are referred to as the “excluded companies”), which are included in our 2007 Consolidated Financial Statements. In the aggregate, the Company’s investments in the excluded companies represented 10.8% of consolidated total assets and, in the aggregate, the Company’s share in net income of the excluded companies represented 42% of consolidated net income (loss) for the year ended December 31, 2007. H-K has a significant influence on the 2007 Consolidated Financial Statements; however, H-K had its evaluation performed separately, as part of the 2007 evaluation by Kimberly-Clark Ltd., H-K’s parent company.

        Our management’s assessment of the effectiveness of the Company’s internal control over financial reporting concluded that, as of December 31, 2007, the Company’s internal control over financial reporting was effective. Our independent registered public accounting firm, Brightman Almagor, an affiliate of Deloitte Touche Tohmastu, has audited the consolidated financial statements in this annual report on Form 20-F, and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting as of December 31, 2007.

(c) There were no changes in our internal controls over financial reporting that occurred during the year end December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

58



ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

        Amos Mar-Haim, a member of the Company’s Audit Committee, meets the criteria of an Audit Committee Financial Expert under the applicable rules and regulations of the SEC and his designation as the Audit Committee’s Financial Expert has been ratified by the Board of Directors. Amos Mar-Haim is “independent”, as that term is defined in the AMEX’s 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 officer, principal financial officer, and principal accounting officer or controller 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 actual or apparent 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 its officers 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 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 Brightman Almagor & Co., a member firm of Deloitte Touche Tohmastu (on April 15, 2007, at a General Meeting the shareholders approved the appointment of Brightman Almagor & Co. as the Company’s external auditors for the year 2007. Brightman Almagor & Co replaced Kesselman & Kesselman & Co. who served as the Company’s external auditors since 1954 until 2006.). 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 approves prior to the accountant being engaged such of the proposed services, with a specific pre-approved budget, as it considers appropriate in accordance with the above principles. Additional services from Brightman Almagor and any increase in budgeted amounts will similarly be approved during the year by the Audit Committee prior to the accountant being engaged on a case-by-case basis.

        All audit-related and non-audit-related services performed by Brightman Almagor during 2007 were proposed to and approved by the Audit Committee prior to the accountant being engaged, in accordance with the procedures outlined above.

        The following table provides information regarding fees we paid to Brightman Almagor for all services, including audit services, for the years ended December 31, 2007 and 2006, respectively.

U.S. $ in thousands
2007
2006
 
Audit fees            
Audit of financial statements    150    150  
Auditing IFRS reconciliation    22    -  
Audit-related Fees   
ICFR audit    120    -  
Tax Fees     -    -  
All Other Fees     -    -  
Differentials    20    -  


Total    312    150  

“Audit Fees” are the aggregate fees billed for the audit of our annual financial statements. This category also includes services that the independent accountant generally provides, such as statutory audits, consents and assistance with and review of documents filed with the SEC.

“Audit-Related Fees” are the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit and are not reported under Audit Fees. These fees include mainly accounting consultations regarding the accounting treatment of matters that occur in the regular course of business, implications of new accounting pronouncements and other accounting issues that occur from time to time.

59



“Tax Fees” are the aggregate fees billed for professional services rendered for tax compliance, tax advice, other than in connection with the audit of the financial statements. Tax compliance involves preparation of original and amended tax returns, tax planning and tax advice.

“All Other Fees” are the aggregate fees billed for products and services provided other than those included in “Audit Fees,” Audit-Related Fees,” or “Tax Fees.”

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 2007.

60



PART III

ITEM 17. FINANCIAL STATEMENTS

        See Item 19 below for Consolidated Financial Statements filed as a part of this Annual Report.

        The Company prepares its financial statements in accordance with Israeli GAAP. The effect of the material differences between Israeli GAAP and U.S. GAAP, as it relates to the Company, are 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 for reporting purposes, commencing in 1994, it would implement the rules relating to economies no longer considered hyper-inflationary 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 under Israeli GAAP, to the exchange rate of the dollar as from January 2004, see note 1b to the financial statements.

b. Deferred income taxes

        Under Israeli GAAP, no deferred taxes have been provided through December 31, 2004 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. Following the adoption of Israeli Standard No. 19 in 2005, except for land that originated from business combinations consummated prior to January 1, 2005, these differences no longer exist.

        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 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.

        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.

61



c. Stock based compensation

        Under Israeli GAAP, until December 31, 2005 no compensation expenses were recorded in respect of employee stock options. Commencing January 1, 2006, the Company applied Israel Accounting Standard No. 24 of the IASB, “Share-Based Payment” (hereafter - Standard 24), which prescribes the recognition and measurement principles, as well as the disclosure requirements, relating to share-based payment transactions.

        However, since the Company has not granted any equity-settled awards, nor made modifications to existing grants, subsequent to March 15, 2005, the transition date as prescribed in the Israeli standard, the measurement criteria of the standard do not apply to past grants made by the company, and its application has not had any effect on the measurements of the stock based compensation expenses.

        Under Israeli GAAP, prior to the adoption of Standard 24, there were no compensation expenses recorded in respect of share based payments. However, upon exercise, the tax benefit is credited to shareholders equity. The U.S. GAAP adjustment of NIS (3,397) in 2007, NIS (2,414) in 2006 and NIS (401) in 2005 to shareholders’ equity is required to reverse the credit to equity upon exercise.

        For U.S. GAAP purposes, prior to January 1, 2006 the Company accounted for employee stock based compensation under the intrinsic value model in accordance with 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 disclosed pro forma data assuming the Company had accounted for employee stock option grants using the fair value-based method defined in FAS 123.

        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. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of FAS 123R.

        FAS 123R 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 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.

        Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro-forma disclosure purposes under FAS 123, taking into account the forecasted forfeiture rate.

        The Company adopted FAS 123R, as of January 1, 2006, using the modified prospective application transition method, as permitted by FAS 123R. Under such transition method, the Company’s financial statements for periods prior to the effective date of FAS 123R (January 1, 2006) have not been restated. The adoption of FAS 123R resulted in a net gain representing the cumulative effect of a change in accounting principle in an amount of approximately NIS 0.2 million net of tax, which reflects the net cumulative impact of estimating future forfeiture in the determination of period expense, rather that recording forfeitures when they occur as was previously required.

        The fair value of stock options granted with service conditions, was determined using the Black Scholes option pricing model, which is consistent with the Company’s valuation techniques previously utilized for options in footnote disclosures required under FAS 123 and FAS 148. Such value is recognized as an expense over the service period, net of estimated forfeitures, using the accelerated method of amortization under FAS 123R.

        The estimation of stock awards that will ultimately vest requires significant judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period those estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

        At December 31, 2006 all options are fully vested.

62



        The following table illustrates the effect on net income and EPS assuming the Company had applied the fair value recognition provisions of FAS 123 to its stock based employee compensation for the years presented prior to the adoption of FAS 123R:

Year ended December 31
2005
NIS in thousands, except for per share data
 
Net income, as reported under U.S. GAAP      41,861  
Add (deduct):  
    stock based employee compensation expense (reversal), included in reported  
    net income, net of related tax effect    (1,838 )
Deduct:  
    stock based employee compensation expense -determined under fair value method  
    for all awards, net of related tax effect    (939 )

   
Pro forma net income -under U.S. GAAP    39,084  

   
Earnings per share - under U.S. GAAP:  
    Basic - as reported    10.47  
    Basic - pro forma    9.77  
    Diluted - as reported    10.33  
    Diluted - pro forma    9.65  

        A summary of the status of the Company’s option plans as of December 31, 2007, 2006 and 2005 ,respectively, and changes during the years ended on those dates, is presented below:

2007
2006
2005
Weighted
average
exercise
Price

Weighted
average
exercise
Price

Weighted
average
exercise
Price

Number
NIS
Number
NIS
Number
NIS
 
Options outstanding at                            
    beginning of year    35,425    122.21    127,571    114.03    152,103    132.74  
Changes during the year:  
   
    Exercised    (35,425 )  119.76    (55,090 )  94.01    (16,282 )  143.38  
    Forfeited    -     -    (37,056 )  102.06  (8,250 )  178.25






Options outstanding at  
end of year    *-    -    35,425  122.21  127,571   114.03






Options exercisable at  
    year-end    -    -    35,425    127.35    78,996    87.61  







* The options plan expired during July 2007.

d. Earnings per share (“EPS”)

        Israeli GAAP relating to computation of EPS was changed as of January 1, 2006 with retroactive effect. As to the provisions of the new standard see note 1v 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, after the implementation of the new Israeli standard No. 21, there are no material GAAP differences with regard to the computation of the basic EPS, however there is a difference in the computation of the diluted EPS as follows:

The computation of the diluted EPS under U.S. GAAP requires that the unamortized compensation expenses related to employee stock options will be included in the total amount of the assumed proceeds used in applying the treasury stock method, while under Israeli GAAP this amounts is not taken into account.

        As to the effect of application of U.S. GAAP, see (i) below.

63



        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:

2007
2006
2005
 
Weighted average number of shares used in the                
computation of basic earnings per share    4,132,728    4,025,181    3,999,910  
Net additional shares from the assumed exercise of  
employee stock options    6,805    30,447    51,700  



Weighted average number of shares used in the  
computation of diluted earnings per share    4,139,533    4,055,628    4,051,610  




e. Investment in marketable equity securities accounted for by the equity method (associated companies) –Carmel Container Systems (Carmel) and T.M.M. Integrated Recycling Industries Ltd (TMM)

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 1i to the financial statements). Based on the provisions of this Standard, and as explained in note 2f to the financial statements, the Company determined that the recoverable value of the investment in Carmel exceeds its carrying value (based, among other things, 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”), SEC Staff Accounting Bulletin (SAB) No. 59 (“Accounting for Non current Marketable Equity Securities”) and EITF 03-1 (The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments), 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 things, 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 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 that the decline was other than a 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 to NIS 16,986,000.

        Under U.S. GAAP, since there was no goodwill and non amortizable assets, the impairment was 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 the years 2007, 2006 and 2005.

        Carmel was held to the extent of 26.25% by the Company. During the second quarter of 2007 Carmel acquired its own shares which were held by part of its minority shareholders. As a result of this acquisition the share of holding in Carmel increased from 26.25% to 36.21%. The increase in the share of holding yielded to the Company negative excess of cost in the amount of NIS 4,923 thousands which according to standard 20 (adjusted) was related to non financial assets, which will be realized according to the rate of realization of these assets.

        Under Israeli GAAP during the period the Company included in the profits from affiliated companies, a profit amount of NIS 2,439 thousands from the realization of these assets.

        Under U.S. GAAP (FAS 141 – “Business Combination”) since there is no realization attributed to inventory the Company included in the profit from affiliated companies, a profit amount of NIS 733 thousands from the realization of fixed assets.

64



TMM –

        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). Until December 31, 2005 based on the provisions of this Standard, a the Company determined that the recoverable value of the investment in TMM based on an outside appraiser exceeded its carrying value (based, among other things, on its Discounted Cash Flows), and accordingly, the investment was not written down.

        As a result of the implementation of Accounting Standard No. 15, T.M.M recorded a loss of NIS 12.5 million from the impairment of fixed assets in the third quarter of 2006, based on the estimate of an external assessor. The Company’s share of this loss (43.08%) amounted to NIS 5.4 million. This sum appeared as part of the Company’s share in the earnings (losses) of associated companies for that year.

        At the beginning of 2007 the Company sold its holdings in TMM for a sum approximately equal to its book value, after taking into account the impairment, which was done during 2006.

        Under U.S. GAAP (APB 18 – “The Equity Method of Accounting for Investments in Common Stock”), SEC Staff Accounting Bulletin (SAB) No. 59 (“Accounting for Non-current Marketable Equity Securities”) and EITF 03-1 (The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments), a decline in value of investment in an associated company which is other than temporary was recognized as a realized loss in 2005, establishing a new carrying value for the investment. Factors considered in determining that a decline is other than temporary included, mainly, 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, 2005.

        Therefore, although according to the Israeli GAAP the recoverable value of this investment exceeded its carrying value (see above) under U.S. GAAP and SEC rules described above, the decline in the market value of TMM shares was the significant factor in determining that the decline was other than a temporary decline. Accordingly, for U.S.GAAP reporting, since the decline in the market value of TMM was long and extensive, the Company reduced the carrying value of this investment to its market value as of December 31, 2005 and recorded an impairment loss amounting NIS 10,000,000.

        The losses of TMM and Barthelemi for the year 2006 under U.S. GAAP including impairment in value of fixed assets and goodwill, amounted to NIS 21.6 million. The Company’s share in this impairment was approximately NIS 8.7 million. Due to the impairment recorded in the Company’s books in 2005 the Company’s share in the operating results of those investment for 2006 was determined, based on their actual results, net of the impairment, to have been already reflected in 2005. As a result under U.S. GAAP the book value of TMM was as of 31, December 2006 similar to the value under Israeli GAAP, as mentioned above.

        On January 4, 2007, the Company entered into an agreement with Veolia Israel CGEA Ltd. (“CGEA”), whereby it agreed to sell to CGEA its holdings in Barthelemi, along with its remaining holdings in T.M.M. Pursuant to the agreement, CGEA has acquired all of the Company’s holdings in Barthelemi. CGEA also acquired all of the Company’s holdings in T.M.M, as part of a complete tender offer, and, beginning in February 2007, the Company was no longer a shareholder in T.M.M.

        The sale of the Company’s holdings in T.M.M was made for consideration approximately equal to its book value, after taking into account, the impairment as mention above.

f. Reclassification of deferred charges

        Under Israeli GAAP, in accordance with a new Israeli Standard No 22, commencing January 1, 2006 see also note 1j to the financial statements:
        The balance of deferred debt issuance costs, which at December 31, 2005 amounted to NIS 946 thousands, is reclassified and presented as a deduction from the amount of the liabilities to which such expenses relate. Under U.S. GAAP deferred charges should be classified as other assets, see h.3. below. The reclassifications have not impacted net income as both costs are amortized to the income statement over the term of the debt.

g. Leasehold rights from the Israel Land Administration Authority (“ILAA”)

        Under Israeli GAAP, land lease rights from the ILAA are accounted for as fixed assets, and not depreciated.

         Under U.S. GAAP, in accordance with SFAS 13 “Accounting for Leases”, leases involving real estate can be accounted for as capital lease only when (a) the lease transfers ownership of the property to the lessee by the end of the lease term or (b) the lease contains a bargain purchase option. Since none of the above-mentioned terms is met, leasehold rights are accounted for as an operating lease. The leasehold rights are amortized over the period of the initial option and if applicable the renewal option period (see j below).

65



h. Put option for investee

        As part of an agreement dated November 21, 1999 with Mondi Business Paper (hereafter MBP, formerly Neusiedler AG), Mondi Hadera purchased the operations of the Group in the area of writing and typing paper and issued 50.1% of its shares to MBP.

        As part of this agreement, MBP was granted an option to sell its holdings in Mondi Hadera to the company, at a price 20% lower than its value (as defined in the agreement) or $ 20 million less 20%, whichever is higher. According to oral understandings between persons in the company and persons in MBP, which were formulated in proximity to signing the agreement, MBP will exercise the option only in extremely extraordinary circumstances, such as those which obstruct manufacturing activities in Israel over a long period.

        In view of the extended period which has passed since the date of such understandings and due to changes in the management of MBP, occurring recently, the company has chosen to take a conservative approach, and, accordingly, to reflect the economic value of the option in the context of the transition to reporting according to international standards.

        Under Israeli GAAP, it was not required to give a value to the PUT option.

        Under U.S. GAAP, the value of the option was computed and recognized as a liability, measured according to fair value, with changes in fair value being recorded to operations in accordance with U.S. GAAP.

        As of December 31, 2007, a liability with respect to the option for sale of the shares of the subsidiary in the amount of approximately NIS 3,901 thousands was presented.

i. The effect of applying U.S. GAAP on the consolidated financial statements is as follows:

  1) Consolidated statement of income figures:

Year ended December 31
2007
2006
2005
NIS in thousands
(except per share data)

 
Net income, as reported according to Israeli GAAP      31,442    13,330    45,715  
Effect of treatment of the following items in accordance with U.S. GAAP:  
   Functional currency , see a above    5,826    6,970    6,490  
   Deferred income taxes - net, see a above    (1,032 )  (2,757 )  (3,961 )
   Reconciliation resulting from the Company's share in the adjustments of the  
associated companies.    (554 )  5,278    80  
   Other then temporary impairment of an investment in associated companies, see  
e above              (10,000 )
   Amortization of other then temporary impairment of an investment in  
an associated company, see e above    1,699    1,699    1,699  
   Amortization of leasehold rights from the ILAA, see g above    (730 )  (596 )    
   Reconciliation resulting from Put option for investee    (3,901 )          
   Applying FAS 123R in respect of employee stock options, see c above:  
      Gross amount         (373 )     
      Deferred taxes         116       
   Applying APB 25 in respect of employee stock options, see c above:  
      Gross amount              3,093  
      Deferred taxes              (1,255 )
   Cumulative effect at beginning of period, net of tax of NIS 127 *, see c above         242       



   
Net income under U.S. GAAP    32,750    23,909    41,861  



   
Earnings per share, see d above:  
      Basic    7.93    5.94    10.47  



      Diluted    7.91    5.89    10.33  




*As a result of the adoption of FAS 123R, see c above.

66



  2) Shareholders’ equity:

December 31
2007
2006
In thousands
 
Shareholders' equity according to Israeli GAAP      678,087    430,842  
Effect of treatment of the following items in accordance with U.S. GAAP:  
    Functional currency    (35,646 )  (41,472 )
Amortization of leasehold rights    (1,326 )  (596 )
    Investments in associated companies    7,326    7,880  
    Other then temporary impairment of an investment in -  
associated companies, net of amortization    (20,191 )  (21,890 )
Elimination of exercise of employee options into shares    (3,397 )  (2,414 )
Cumulative effect, at beginning of 2006 of SAB 108, net of tax    (2,665 )  (2,665 )
Put Option    (3,901 )  -  
 Deferred income taxes    4,138    5,083  


Shareholders' equity under U.S. GAAP    622,425    374,768  



  3) Consolidated balance sheet figures:

D  e  c  e  m  b  e  r   3  1
2007
2006
NIS
Re-measured NIS
NIS
Re-measured NIS
In thousands
As Reported Under
Israeli GAAP

Under U.S. GAAP
As Reported Under
Israeli GAAP

Under U.S. GAAP
 
   Assets                    
   
Inventories    69,607    69,103    62,109    60,131  




   
Investment in associated companies    346,186    334,261    375,510    362,199  




   
Fixed assets - net    445,566    411,551    400,823    362,539  




   
Deferred charges    -    625    -    785  




   
Liabilities and shareholders' equity   
   
Accounts payable and accruals - Other    87,235    91,136    -    -  




   
Deferred taxes - net    25,316    30,748    27,267    29,786  




   
   Notes    195,525    196,150    226,364    227,149  




   
Shareholders' equity**    678,087    622,425    430,842    374,768  





** 2006 retained earnings are net of an adjustment of NIS (2,665) thousands, net of tax related to the adoption of SAB 108 (see k below).

67



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 U.S. GAAP for the years ended December 31, 2005, 2006 and 2007, respectively, is presented below:

2007
2006
2005
N I S
I n   t h o u s a n d s
 
Net cash provided by operating activities      69,538    64,521    94,143  
Net cash used in investing activities    (24,692 )  (50,410 )  (19,868 )
Net cash used in financing activities    109,278    (8,808 )  (73,770 )



 Increase (decrease) in cash and cash  
    Equivalents    154,124    5,303    505  
 Balance of cash and cash equivalents  
    at beginning of year    13,621    8,318    7,813  



 Balance of cash and cash equivalents  
    at end of year    167,745    13,621    8,318  




        Under Israeli GAAP, cash flows relating to investments in, and proceeds from the sale of, marketable securities classified as a “current investment” are presented as investing activities in the statements of cash flows, while under U.S. GAAP, these securities are classified as operating activities.

k. Adoption of SAB 108 –Accounting for the Effects of Prior year Misstatements when Quantifying Misstatements in current year financial statements

        In September 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 addresses the diversity in practice of quantifying financial statement misstatements resulting in the potential build up of improper amounts on the balance sheet. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for companies with fiscal years ending after November 15, 2006 and SAB 108 allows a one-time transitional cumulative effect adjustment to beginning retained earnings, in the first year of adoption, for errors that were not previously deemed material, but are material under the guidance in SAB 108.

        Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. The Company has adopted SAB No. 108. The adoption of SAB No. 108 had an effect of NIS 2,665 thousand , net of tax, on the consolidated retained earnings due to the GAAP differences related to the leases from the Israeli Land Administration Authority, see note g above.

l. Recently issued accounting pronouncements in the Untied States:

1. SFAS No. 157 –Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company does not expect the adoption will have material impact on its consolidated financial statements.

68



2. SFAS No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The provisions of SFAS No. 159 are effective for the Company beginning January 1, 2008. The Company does not expect the adoption of SFAS No. 159 will have an impact on its consolidated financial statements.

3. SFAS No. 141 (revised 2007) – Business Combinations

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on its consolidated results of operations and financial condition.

4. SFAS No. 160 – Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51". SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 will have significant impact on its consolidated financial statement

Schedule – Valuation and Qualifying Accounts

Three Years Ended December 31, 2007

(NIS in thousands)

Column A Column B Column C Column D Column E
 
Balance at beginning
of period

(reductions)
Additions
charged to
expenses

Deductions
Balance at
end of period

 
Allowance for doubtful accounts:                    
Year ended December 31, 2007    16,791    738    (358 )  17,171  




Year ended December 31, 2006    16,914    (123 )  -    16,791  




Year ended December 31, 2005    16,148    840    (74 )  16,914  





ITEM 18. FINANCIAL STATEMENTS

Not applicable.

69



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, 2007 (including Reports of Independent Registered Public Accounting Firms).

  (ii) Financial statements of Mondi Paper Hadera Ltd. for the year ended December 31, 2007.

  (iii) Financial statements of Hogla-Kimberly Ltd. for the year ended December 31, 2007.

  (iv) Report of independent Registered Public Accounting Firms on Schedule on Valuation and Qualifying Accounts and Schedule.

  (v) Report of Independent Registered Public Accounting Firms on reconciliation to U.S. GAAP.

(b) For additional documents filed with this report see Exhibit Index.

70



SIGNATURES

        The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

AMERICAN ISRAELI PAPER MILLS LIMITED


By: /s/ Shaul Gliksberg
——————————————
Shaul Gliksberg
Chief Financial Office

Dated: June 22, 2008

71



EXHIBIT INDEX

Exhibit
Number


Description


1.1 Memorandum of Association of AIPM (incorporated by reference to the Company's Annual Report on Form 20-F for the year ended December 31, 1987).

1.2 Articles of Association of AIPM (incorporated by reference to exhibit 1 to the Company's Annual Report on Form 20-F for the year ended December 31, 2005, filed with the SEC on June 30, 2006).

3.1 Voting Agreement dated February 5, 1980 by and among Clal Industries Ltd., PEC Israel Economic Corporation and Discount Bank Investment Corporation Ltd. (incorporated by reference to exhibit 3.1 to the Company's Annual Report on Form 20-F for the year ended December 31, 1987).

8.1 Table of subsidiaries of AIPM.*

12.1 Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant toss.302 of the Sarbanes-Oxley Act.*

12.2 Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant toss.302 of the Sarbanes-Oxley Act.*

13.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act.*

13.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act.*

* Field herein.

72



AMERICAN ISRAELI PAPER MILLS LIMITED
2007 CONSOLIDATED FINANCIAL STATEMENTS



AMERICAN ISRAELI PAPER MILLS LIMITED
2007 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

Page
 
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2-F-3
CONSOLIDATED FINANCIAL STATEMENTS:
    Balance sheets F-4-F-5
    Statements of income F-6
    Statements of changes in shareholders' equity F-7
    Statements of cash flows F-8-F-10
    Notes to financial statements F-11-F-58
SCHEDULE - DETAILS OF SUBSIDIARIES AND ASSOCIATED COMPANIES F-59



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
American Israeli Paper Mills Ltd.

We have audited the accompanying consolidated balance sheets of American Israeli Paper Mills Ltd. (“the Company”) and its subsidiaries as of December 31, 2007 and the related statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2007. 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.

The financial statements of the company for the years ended December 31,2006 and 2005 have been audited by other independent auditors who expressed their unqualified opinion as of March 7, 2007.

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, 2007 is NIS 66.5 million, and the Company’s share in excess of profits over losses of which is a net amount of NIS 2.9 million, for the year ended December 31, 2007. The financial statements of those companies were audited by other Independent registered Public Accounting Firms 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 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. 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other independent auditors, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2007 and the consolidated results of their operations and their consolidated cash flows for year ended December 31, 2007, 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.

In addition we have audited the Company’s US GAAP reconciliation report presented at item 17 of this form 20-F as of December 31, 2007 and for the year then ended (“the Report”). The Report is the responsibility of the Company’s management.

In our opinion, the Report present fairly, in all material respects, the information set forth there in, in accordance with generally accepted accounting principles in the United States of America

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 22, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
June 22, 2008

F - 2



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
American Israeli Paper Mills Ltd.  

We have audited the internal control over financial reporting of American Israeli Paper Mills Ltd. and subsidiaries (the “Company”) as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and its subsidiaries as of December 31, 2007 and the related statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for year ended December 31, 2007 and our report dated June 22, 2008 expressed an unqualified opinion thereon.

/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
June 22, 2008

F - 3



AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED BALANCE SHEETS

December 31
Note
2007
2006
NIS in thousands (see note 1b.)
 
Assets                  
CURRENT ASSETS:    8           
    Cash and cash equivalents   1u   167,745    13,621  
   
    Accounts receivable:   10a           
       Trade        178,771    168,050  
       Other        105,109    146,684  
    Inventories   10b   69,607    62,109  


           Total current assets        521,232    390,464  


INVESTMENTS AND LONG-TERM   
    RECEIVABLES:   
    Investments in associated companies   2;8   346,186    375,510  
    Deferred income taxes   7f   6,083    6,490  


                                                                     352,269    382,000  


FIXED ASSETS:     3
    Cost        1,164,847    1,109,239  
    Less - accumulated depreciation        719,281    708,416  


                                                                      445,566    400,823  


DEFERRED CHARGES,   
    net of accumulated amortization   1i           


           Total assets        1,319,067    1,173,287  



  )  Chairman of the
/s/ Zvi Livnat  
Zvi Livnat )  Board of Directors
 
  )
/s/ Avi Brener  
Avi Brener )  Chief Executive Officer
 
  )
/s/ Shaul Gliksberg  
Shaul Gliksberg )  Chief Financial and Business
  Development Officer

Date of approval of the financial statements: 22 June 2008

The accompanying notes are an integral part of the financial statements

F - 4



December 31
Note
2007
2006
NIS in thousands (see note 1b.)
 
Liabilities and shareholders' equity                
CURRENT LIABILITIES:     8            
    Credit from banks and others    10c    143,015    203,003  
    Current maturities of long-term notes and long term loans    4a;b    42,775    41,567  
    Accounts payable and accruals:    10d            
       Trade         108,409    96,273  
       Other         87,235    103,699  


           Total current liabilities         381,434    444,542  


LONG-TERM LIABILITIES:   
    Deferred income taxes    7f    40,515    41,613  
    Loans and other liabilities  
       (net of current maturities):    4;8            
       Loans from banks    4b    28,127    33,515  
       Notes    4a    158,134    190,005  
       Other liabilities    4c    32,770    32,770  


           Total long-term liabilities         259,546    297,903  


COMMITMENTS AND CONTINGENT LIABILITIES     9            


           Total liabilities         640,980    742,445  


SHAREHOLDERS' EQUITY:     6            
    Share capital (ordinary shares of NIS 0.01 par value:  
       authorized - 20,000,000 shares; issued and paid:  
       December 31, 2007 and 2006 - 5,060,774 and  
       4,032,723 shares, respectively)         125,267    125,257  
    Capital surplus         301,695    90,060  
    Capital surplus resulting from tax benefit on exercise  
    of employee options         3,397    2,414  
    Differences from translation of foreign currency  
         financial statements of associated companies         (5,166 )  (8,341 )
    Retained earnings         252,894    221,452  


           Total shareholders equity         678,087    430,842  


           Total liabilities and shareholders' equity         1,319,067    1,173,287  



The accompanying notes are an integral part of the financial statements.

F - 5



AMERICAN ISRAELI PAPER MILLS LTD.
CONSOLIDATED STATEMENTS OF INCOME

Note
2007
2006
2005
NIS in thousands (see note 1b.)
 
SALES      10e;14    583,650    530,109    482,461  
COST OF SALES     10f    440,854    418,725    383,179  



GROSS PROFIT          142,796    111,384    99,282  



SELLING, MARKETING, ADMINISTRATIVE   
    AND GENERAL EXPENSES:     10g                 
    Selling and marketing         31,367    31,366    30,482  
    Administrative and general         36,060    29,517    25,462  



          67,427    60,883    55,944  



INCOME FROM ORDINARY OPERATIONS          75,369    50,501    43,338  
FINANCIAL EXPENSES - net     10h    19,558    31,111    12,490  
OTHER INCOME (EXPENSES) - net     10i    (2,178 )  37,305    4,444  



INCOME BEFORE TAXES ON INCOME          53,633    56,695    35,292  
TAXES ON INCOME     7    19,307    16,702    5,991  



INCOME FROM OPERATIONS OF THE   
    COMPANY AND ITS SUBSIDIARIES          34,326    39,993    29,301  
SHARE IN PROFITS (LOSSES) OF ASSOCIATED   
    COMPANIES - net     2    (2,884 )  (26,202 )  16,414  
   
 INCOME BEFORE CUMULATIVE EFFECT,   
    AT BEGINNING OF YEAR, OF AN ACCOUNTING                       



    CHANGE IN ASSOCIATED COMPANIES          31,442    13,791    45,715  
   
CUMULATIVE EFFECT, AT BEGINNING OF   
    YEAR, OF AN ACCOUNTING CHANGE IN AN ASSOCIATED COMPANY     1m    -    (461 )  -  



NET INCOME FOR THE YEAR          31,442    13,330    45,715  



   
(See note 1b)NIS
   
    EARNINGS PER SHARE:     1v;11                 
    Primary:   
    Before cumulative effect of a change in accounting policy         7.61    3.42    11.43  
    Cumulative effect, at beginning of year, of a change in accounting  
    policy of an associated company         -    (0.11 )  -  



    Net income per share         7.61    3.31    11.43  



Fully diluted:   
    Before cumulative effect of a change in accounting policy         7.60    3.39    11.35  
    Cumulative effect, at beginning of year, of a change in accounting  
    policy of an associated company         -    (0.11 )  -  



    Net income per share         7.60    3.28    11.35  



Number of shares used to compute the primary earnings per share         4,132,728    4,025,181    3,999,867  



Number of shares used to compute the fully diluted earnings per share         4,139,533    4,058,610    4,028,107  




The accompanying notes are an integral part of the financial statements.

F - 6



AMERICAN ISRAELI PAPER MILLS LIMITED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Share capital
Capital
surpluses

Capital surplus
resulting from
tax benefit on
exercise
of employee options

Differences from
currency translation
resulting from
financial
statements of
associated companies

Retained
earnings

Total
N I S   i n   t h o u s a n d s (see note 1b.)
 
BALANCE AT JANUARY 1, 2005      125,257    90,060    -    (2,807 )  362,803    575,313  
CHANGES IN 2005:   
    Net income    -    -    -    -    45,715    45,715  
    Dividend paid***    -    -    -    -    (100,039 )  (100,039 )
    Exercise of employee options into shares    *    -    401    -    -    401  
    Differences from currency translation resulting from  
       financial statements of associated companies    -    -    -    1,994    -    1,994  






BALANCE AT DECEMBER 31, 2005     125,257    90,060    401    (813 )  308,479  523,384  
CHANGES IN 2006:   
    Net income    -    -    -    -    13,330    13,330  
    Dividend paid    -    -    -    -    (100,357 )  (100,357 )
    Exercise of employee options into shares    *    -    2,013    -    -    2,013  
    Differences from currency translation resulting from  
       financial statements of associated companies    -    -    -    (7,528 )  -    (7,528 )






BALANCE AT DECEMBER 31, 2006     125,257    90,060    2,414    (8,341 )  221,452    430,842  
CHANGES IN 2007:   
    Net income    -    -    -    -    31,442    31,442  
    Costs Shares issuance (deduction of costs issuance in
        the amount of NIS 1,581 thousands)**
    10    211,635    -    -    -    211,645  
    Exercise of employee options into shares    *    -    983    -    -    983  
    Differences from currency translation resulting from  
       financial statements of associated companies    -    -    -    3,175    -    3,175  






BALANCE AT DECEMBER 31, 2007     125,267    301,695    3,397    (5,166 )  252,894    678,087  







The accompanying notes are an integral part of the financial statements.

* Represents an amount less than NIS 1,000.
** See note 6a.
*** Includes a dividend, declared in December 2005 and paid in January 2006, amounting to approximately NIS 50 million.

F - 7



AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS

2007
2006
2005
NIS in thousands (see note 1b)
 
CASH FLOWS FROM OPERATING ACTIVITIES:                
    Net income for the year    31,142    13,330    45,715  
    Adjustments to reconcile net income to  
       net cash provided by operating activities (A)    38,096    39,775    42,845  



    Net cash provided by operating activities    69,538    53,105    88,560  



CASH FLOWS FROM INVESTING ACTIVITIES:   
    Purchase of fixed assets    (85,959 )  (53,107 )  (71,080 )
    Deposit and Marketable securities    -    11,582    51,003  
    Associated companies:  
       Granting of loans    (318 )  -    (2,744 )
       Collection of loans    2,893    2,112        
    Proceeds from sale of investment of associated company    27,277    -    -  
    Proceeds from sale of subsidiary consolidated in the past (B)    -    -    2,004  
    Proceeds from sale of fixed assets    31,415    419    6,532  



    Net cash used in investing activities    (24,692 )  (38,994 )  (14,285 )



CASH FLOWS FROM FINANCING ACTIVITIES:   
    Proceeds gain from private shares allocating    211,645    -    -  
    Receipt of long-term loans from banks    -    40,000    1,746  
    Repayment of long-term loans from banks    (5,212 )  (1,277 )  (277 )
    Redemption of notes    (37,167 )  (6,913 )  (6,680 )
    Dividend paid    -    (150,450 )  (49,946 )
    Short-term credit from banks - net    (59,988 )  109,832    (18,613 )



    Net cash used in financing activities    109,278    (8,808 )  (73,770 )



INCREASE IN CASH AND   
    CASH EQUIVALENTS     154,124    5,303    505  
BALANCE OF CASH AND CASH EQUIVALENTS AT   
    BEGINNING OF YEAR     13,621    8,318    7,813  



BALANCE OF CASH AND CASH EQUIVALENTS AT   
    END OF YEAR     167,745    13,621    8,318  




The accompanying notes are an integral part of the financial statements.

F - 8



AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS

2007
2006
2005
NIS in thousands (see note 1b.)
 
(A)    Adjustments to reconcile net income to net cash provided                
            by operating activities:   
            Income and expenses not involving cash flows:  
               Share in losses (profits) of associated companies - net    2,884    26,663    (16,414 )
               Capital loss from sale of investment of an associated company    28    -    -  
               Dividend received from associated company    -    19,616    21,761  
               Depreciation and amortization    34,865    31,957    31,604  
               Deferred income taxes - net    (1,951 )  (5,755 )  (7,671 )
               Capital losses (gains) on:  
                 Sale of fixed assets - net    1,403    (28,823 )  (3,570 )
                 Sale of subsidiary consolidated in the past (B)    -    -    (874 )
               Losses (gains) on short-term deposits and securities    -    (166 )  45  
               Linkage and exchange differences (erosion) on principal of  
                 long-term loans from banks - net    -    -    (111 )
               Linkage differences (erosion) on principal of notes    6,326    (415 )  6,171  
               Linkage differences (erosion) on principal of long-term loans  
                 granted to associated companies    (265 )  178    (975 )



     43,290    43,255    29,966  



               Changes in operating asset and liability items:  
               Increase in trade receivables    (10,721 )  (17,641 )  (7,162 )
               Decrease (increase) in other receivables  
                  (excluding deferred income taxes)    1,168    (1,661 )  (1,587 )
               Decrease (increase) in inventories    (7,498 )  1,890    (1,612 )
               Increase in trade payables    16,101    5,761    3,018  
               Increase (decrease) in other payables and accruals    (4,244 )  8,171    20,222  



     (5,194 )  (3,480 )  12,879  



     38,096    39,775    42,845  



Supplementary disclosure of cash flow information -   
Payments in cash during the year:   
    Income taxes paid    23,415    23,877    1,559  



    Interest paid    26,428    23,714    15,828  




The accompanying notes are an integral part of the financial statements.

F - 9



AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS

2005
NIS in thousands
(see note 1b)

 
(B)   Proceeds from sale of subsidiary consolidated in the past -        
   
           Assets and liabilities of the subsidiary consolidated in the  
               past at the date of its sale:    509  
           Working capital (excluding cash and cash equivalents)    1,979  
           Fixed assets    (1,358 )
           Long-term liabilities    874  
           Capital gain from the sale    2,004  

(C)  Information on activities not involving cash flows:

  1) Dividend declared by the Company in December 2005, in the amount of approximately NIS 50 million, was paid in January 2006.

  2) Dividend declared by an associated company in December 2005 that the Company’s share in this dividend amounts to NIS 2,650,000 was paid during 2006.

  3) In December 2006 a land was sold in consideration of approximately NIS 40 million, net of tax, betterment levy and other accompanying selling cost. This amount was transferred to a trustee at the date of the transaction execution and received during January 2007 see note 10i.

  4) For December 31, 2007 the acquisition of fixed assets on credit amounts to NIS 6,634 thousands and for December 31, 2006 amounts to NIS 10,599 thousands.

The accompanying notes are an integral part of the financial statements.

F - 10



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

  The consolidated financial statements are drawn up in conformity with accounting principles generally accepted in Israel and in accordance with the Israeli Securities (Preparation of Annual Financial Statements) Regulations, 1993. The Company’s financial statements are presented separately from these consolidated financial statements.

  The significant accounting policies, which, except for the changes in the accounting policy resulting from the first-time application, in 2007, of new accounting standards of the Israel Accounting Standards Board (hereafter - the IASB) were applied on a consistent basis, as follows:

  As to the adoption of International Financial Reporting Standards (IFRS), which is to be carried out in reporting periods commencing on January 1, 2008 and thereafter, see note 16 below.

  a. General:

  1) Activities of the Group

  American Israeli Paper Mills Limited and its subsidiaries (hereafter – the Company) are engaged in the production and sale of paper packaging, in paper recycling activities and in the marketing of office supplies. The Company also has holdings in associated companies that are engaged in the production and sale of paper and paper products including the handling of solid waste (the Company and its investee companies – hereafter –the Group). Most of the Group’s sales are made on the local (Israeli) market. For segment information, 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.

  Related parties – as defined by opinion No. 29 of the Institute of Certified Public Accountants in Israel.

F - 11



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  Controlling shareholders – Until December 31, 2006, transactions between the Company and a controlling shareholder therein were treated in accordance with the provisions of Securities Regulations (Presentation of Transactions between a Company and a Controlling Shareholder Therein in the Financial Statements), 1996 (hereinafter – “the Regulations”).

  As of January 1, 2007, the Company has been implementing Accounting Standard No. 23: “The Accounting Treatment of Transactions between an Entity and the Controlling Shareholder Therein”.

  b. Basis of presentation of the financial statements

  1) The Company draws up and presents its financial statements in Israeli currency (hereafter - shekels or NIS). in accordance with the provisions of Israel Accounting Standard No. 12 – “Discontinuance of Adjusting Financial Statements for Inflation” – of the IASB, which establishes principles for transition to nominal reporting, commencing January 1, 2004 (hereafter - the transition date). Accordingly, amounts that relate to non-monetary assets (including depreciation and amortization thereon), investments in associated companies (see also e below) “permanent” investments, and equity items, which originate from the period that preceded the transition date, are based on the data adjusted for the changes in the exchange rate of the dollar (based on the exchange rate of the dollar at December 31, 2003), as previously reported. All the amounts originating from the period after the transition date are included in the financial statements at their nominal values.

The financial statements of group companies which are drawn up in foreign currency, are translated into shekels or are remeasured in shekels for the purpose of inclusion in these financial statements, as explained in e. below.

  2) The sums of non-monetary assets do not necessarily reflect the realization value or an updated economic value, but rather only the reported sums of the said assets, as stated in (1), above. The term ‘cost’ in these financial statements shall mean the cost in reported sums.

  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 profits on intercompany sales that have not yet been realized outside the Group, have been eliminated.

  d. Inventories

  Commencing January 1, 2007, the Company has been implementing the provisions of Accounting Standard No. 26, “Inventories”.

  Inventories are measured at the lower of cost or net realizable value. The cost of inventories includes acquisition costs, fixed and varied overhead costs, as well as others costs incurred in bringing the inventory to the current location and condition.

The net realization value represents the selling price estimate during the ordinary course of business, net of the estimate of completion costs and the estimate of costs required to perform the sale.

  Until December 31, 2006, inventory was presented at the lower of cost or market value.

F - 12



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  In accordance with the Standard, when inventories are purchased under credit terms whereby the arrangement involves a financing element, the inventories should be presented at cost reflecting the purchase price under ordinary credit terms. The difference between the actual purchase amount and the cost reflecting the purchase price under ordinary credit terms, is recognized as an interest expense during the credit period.

  The cost of inventory is determined on a moving average basis.

  The spare parts of machinery and equipment, which are not intended for current use, are presented under “fixed assets”.

  The first-time application of the standard did not have any effect on the Company’s financial statements.

  e. Investments in associated companies:

  1) The investments in these companies are accounted for by the equity method. According to this method, the Company records, in its statement of income, its share in the profits and losses of these companies that were created after acquisition, and, in its statement of changes in shareholders’ equity, its share in changes in capital surpluses (mostly translation differences relating to their investments in subsidiaries that present their financial statements in foreign currency) that were created after acquisition.

  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) The Company reviews 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 its investments in associated companies – see i. 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%.

  5) In accordance with the provisions of Standard No. 20 (As Amended), which is applied by the group companies since January 1, 2006, as of that date, amortization of goodwill at associated company, which until then was included under “share in profits (losses) of associated companies”, was discontinued. The amounts of amortization of goodwill, included under “share in profits (losses) of associated companies”, as above, for the year ended December 31, 2005 are NIS 4 million.

  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.

F - 13



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  g. Real estate for investment

  Commencing January 1, 2007, when the standard became effective, the Company has been implementing Accounting Standard No. 16, “Real Estate For Investment”.

  Real estate for investment is defined as real estate (land or a building or part of a building or both), which is held (by the owners or under a financing lease), for the purpose of producing rental income or realizing a capital appreciation or both, and not for the purpose of:

  The use of manufacture or supply of goods or services or for administrative purposes, or

  Sale during the ordinary course of business

  The Company does not own any buildings that fall under the definition of Real Estate for Investment. The Company has several leasing rights in real estate which, in accordance with IFRS, are classified as operating leases. Upon initial adoption of IFRS, the Company does not intend to classify these leasehold rights as real estate held for investment. The Company has consequently decided not to classify these leasehold rights as real estate held for investment according to Standard 16, but rather to continue to present them at cost, as part of fixed assets, pursuant to generally accepted accounting principles in Israel. The initial adoption of the provisions of the Standard did not consequently have a material impact on the Company’s financial statements.

  h. Fixed assets:

  Commencing January 1, 2007, The Company has been implementing Accounting Standard No. 27 –“Fixed Assets” and Accounting Standard No. 28 “Amendment of Transition Provisions in Accounting Standard No. 27, Fixed Assets”.

  A fixed asset is a tangible item, which is held for use in the manufacture or supply of goods or services, or leased to others, which is predicted to be used for more than one period. The Company presents its fixed assets items according to the cost model.

  Under the cost method – a fixed asset item is presented at the balance sheet at cost (net of any investment grants), less any accumulated depreciation and any accumulated impairment losses. The cost includes the cost of the asset’s acquisition as well as costs that can be directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The cost of qualifying assets also includes credit costs which have to be discounted as stated in note k. below.

  The depreciation is carried out systematically by the straight line method over the expected useful life of the item’s components from the date in which the asset is prepared for its intended use.

  The useful life that was used in the calculation of the asset’s depreciation is as follows:

Years
 
Buildings 10 to 50 (primarily 33)
Machinery and equipment 7 to 20 (Primarily 10 and 20)
Vehicles 5 to 7 (primarily 7)
Office furniture & equipment (including computers) 3 to 17 (primarily 4)

F - 14



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  In accordance with the implementation of the transitional provisions of Accounting Standard No. 28 “Amendment of Transition Provisions in Accounting Standard No. 27, Fixed Assets”, as of January 1, 2007, the Company has been adopting the cost model.

  i. Impairment of assets

  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 non-monetary assets, mainly fixed assets and investments in associated companies. 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.

In accordance with the transitional provisions of Standard 22, commencing January 1, 2006, in addition to the aforesaid, the financial statements include the following changes:

  The balance of deferred issuance costs, which at December 31, 2005 amounted to NIS 946 thousands, has been reclassified and presented as a deduction from the amount of the liabilities to which such expenses relate. Through December 31, 2005, deferred issuance costs were included under other assets and amortized according to the straight-line method.

  The change in the amortization method of deferred issuance costs, as above, do not have a material effect on the operating results in the reported years.

  j. Deferred charges

  Until December 31, 2005, the deferred charges in respect of issue of debentures were displayed in Other Assets at their cost, deduction of accumulated amortization. The above expenses that were attributed to the debenture issuance were amortized at the straight line method on the basis of the weighted average of the debentures in turnover, till their redemption date.

  The balance of deferred issuance costs, which at December 31, 2005 amounted to NIS 946 thousands, has been reclassified and presented as a deduction from the amount of the liabilities to which such expenses relate. Through December 31, 2005, deferred issuance costs were included under other assets and amortized according to the straight-line method.

  k. Credit costs

  The Company has been discounting credit costs in accordance with Standard No. 3 –“Discounting of Credit Costs” of the Israeli Institute of Accounting Standards.

  Pursuant to Standard No. 3, specific and non-specific financing costs are to be capitalized to qualifying assets (assets under preparation or establishment, which still do not serve their purpose and the preparation of which for their intended use or sale require considerable time, all in accordance with the rule established in Standard No. 3). Non-specific financing costs are capitalized to such qualifying assets, or portion thereof, which was not financed with specific credit, by means of a rate which is the weighted-average cost of the financing sources which were not specifically capitalized.

F - 15



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  l. Deferred income taxes:

  The Company and the companies in the Group allocate taxes in respect of temporary differences between the value of assets and liabilities in the financial statements and their tax base and in respect of losses for tax purposes, whose realization is predictable. Deferred taxes are computed at the tax rates expected to be in effect at the time of realization thereof, as they are known at the balance sheet date.

  The current taxes, as well as the changes in the deferred tax balances, are included in the tax expenses or income in the reporting period.

  Taxes that 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 it is the Company’s policy to hold these investments, not to realize them.

  The Group may incur an additional tax liability in the event of an 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 dividends, which would involve an additional tax liability to the Group in the foreseeable future.

  In April 2005, the IASB issued Clarification No. 7 – “Accounting Treatment of the Tax Benefits, in Respect of Capital Instruments Granted to Employees, For Which No Compensation was Recognized”. The provisions of this clarification apply to such tax benefits, which have not been allowed as a deduction through December 31, 2004. The clarification stipulates that, commencing on January 1, 2005, the tax benefit derived by the Company from the exercise of options granted to employees is to be carried to shareholders’ equity, in the period in which the benefit to the employees is allowed as a deduction for tax purposes. Formerly, the aforesaid tax saving was credited to the statement of income, as part of the taxes on income item.

  m. Revenue recognition

  Commencing January 1, 2006, the company applies Israel Accounting Standard No. 25 of the IASB – “Revenue”, which prescribes recognition, measurement, presentation and disclosure criteria for revenues originating from the sale of goods purchased or manufactured by the company.

  Revenue is measured, as detailed below, at the fair value of the consideration received or the consideration that the company is entitled to receive, taking into account trade discounts and/or bulk discounts granted by the entity:

  Revenue from sale of goods is recognized when all the following conditions have been satisfied: (a) the significant risks and rewards of ownership of the goods have been transferred to the buyer; (b) the company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to the company; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

F - 16



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  The Company implements Clarification No. 8 of the Israeli Institute of Accounting Standard regarding the reporting of revenues on a gross basis or a net basis. Accordingly, the Company’s revenues as an agency or intermediary from sales of electricity, water, steam and logistic services to the group company, without bearing the risks and returns that derive from the transaction, are presented on a net basis.

  Interest income is accrued on a cumulative basis, taking into consideration the principal to be repaid and by using the effective interest rate.

  Dividend income in respect of investments is recognized on the date in which the entitlement for said income was created for the shareholders.

  Upon the application of the standard, an associated company separates the financing component embedded in revenue from sales made on credit for periods exceeding the customary credit period in its industry (mainly 90 days), that does not bear interest at the appropriate rate; the financing component is determined according to the amount by which the nominal amount of consideration for the transaction exceeds the present value of future cash payments in respect thereof, based on the customary market interest rate applicable to credit extended under similar terms. Revenue from the financing component is recognized over the credit period. Through December 31, 2005, the company did not separate the financing component in respect of sales made on credit, as above, and included within revenue from the sale on the date of recognition of such revenue.

  In accordance with the transitional provisions of the standard, on January 1, 2006 the company recognized an expense of NIS 1.1 million as a result of presentation in present value, resulting from the adjustment of trade receivables in respect of such credit transactions to their present value on the effective date of the standard, the share of the company at the adjustment effect as above was approximately NIS 0.5 million which is presented in these financial statements under “Cumulative effect, at beginning of year, of an accounting change in an associated company”.

  n. Shipping and handling costs

  Shipping and handling costs are classified as a component of selling and marketing expenses.

  o. Allowance for doubtful accounts

  The allowance is determined mainly in respect of specific debts doubtful of collection (see note 12b).

  p. Derivate financial instruments

  Gains and losses from forward transactions on existing assets or liabilities are included in the Income Statements and Statements of Cash Flows when created.

F - 17



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  q. Fair Value of Financial Instruments

  The fair value of financial instruments traded in active markets is based on the quoted prices as of the balance sheet date. The fair value of financial instruments that are not traded in an active market will be determined on the market prices of similar financial instruments and in the absence thereof, based on accepted valuation methods.

The Company uses several valuation techniques, which are accompanied by assumptions based on the existing economic conditions at each balance sheet date.

  The applied valuation methods include the current value of cash flows, economic models for the valuation of options and additional acceptable valuation methods.

  r. Offset of Financial instruments

  Financial assets and financial liabilities are presented on the balance sheet at their net amount, only when the Company has a legally enforceable right to effect such set off, and subject to the existence of intent to settle the asset and the liability on a net basis, or to realize the asset and settle the liability simultaneously.

  s. Share-based payment

  Commencing January 1, 2006, the company applies Israel Accounting Standard No. 24 of the IASB, “Share-Based Payment” (hereafter - Standard 24), which prescribes the recognition and measurement principles, as well as the disclosure requirements, relating to share-based payment transactions.

  Since the company has not granted any equity-settled awards, nor made modifications to existing grants, subsequent to March 15, 2005, the measurement criteria of the standard do not apply to past grants made by the company, and its application has not had any effect on the financial statements of the Company.

  t. Transactions between the Company and Controlling Shareholders Therein

  1. Until December 31, 2006, transactions between the Company and a controlling shareholder therein were treated in accordance with the provisions of Securities Regulations (Presentation of Transactions between a Company and a Controlling Shareholder Therein in the Financial Statements), 1996 (hereinafter – “the Regulations”).

  As of January 1, 2007, the Company has been implementing Accounting Standard No. 23: “The Accounting Treatment of Transactions between an Entity and the Controlling Shareholder Therein”.

  This standard stated that the basis of valuation in transactions between an entity and the controlling shareholder therein is the fair value. Transactions such as loans of controlling shareholders or distribution pf dividend to controlling shareholders are not be recorded in shareholders’ equity and should to be included in the operating results of the controlled entity. The differences between the proceeds determined in the transactions between an entity and a controlling shareholder therein and the fair value of these transactions, shall be carried to shareholders’ equity. Current taxes and deferred taxes that relate to items carried to shareholders’ equity in respect of transactions with controlling shareholders, shall also be carried directly to shareholders’ equity. The provisions of the standard do not apply to transactions of business combinations under the same controlling interest.

The implementation of the standard did not have any effect on the financial statements of the Company.

F - 18



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  2. Until December 31, 2006, loans provided/received to/from a controlling shareholder, not under market conditions, were presented in the financial statements at their fair value only if the difference between the proceeds of the loan and its fair value exceeded 5 percent.

  As of January 1, 2007, loans provided/received are presented on the date of the initial recognition of the fair value, while the difference between the amount of the loan and its fair value is carried to shareholders’ equity.

  The standard applies to transactions between an entity and a controlling shareholder therein, which were carried out after January 1, 2007, as well as to loans provided or received from a controlling shareholder prior to January 1, 2007, starting from this date.

  Pursuant to the standard, the balance of loans that were granted by the Company to an associated company, as at January 1, 2007, is measured at fair value.

The implementation of the standard did not have material effect on the financial statements of the Company.

  u. Cash equivalents

  The Company 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.

  v. Net income per share

  The computation of basic net income per share is generally based on earnings available for distribution to holders of ordinary shares, divided by the weighted average number of ordinary shares outstanding during the period.

  In computing diluted net incomeper share, the weighted average number of shares to be issued, assuming that all dilutive potential shares are converted into shares, is to be added to the average number of ordinary shares used in the computation of the basic income (loss) per share. Potential shares are taken into account, as above, only when their effect is dilutive (reducing net income per share from continuing activities).

  Comparative net income per share figures for the year 2005 included in these financial statements reflect a retrospective application of the new standard’s computation directives.

  As to the data used in the computation of net income per share, as above – see note 11

  w. Israel Accounting Standard No. 29 – “Adoption of International Reporting FinancialStandards (IFRS)"

  In July 2006, the Israel Accounting Standards Board issued Israel Accounting Standard No. 29 – “Adoption of International Reporting Financial Standards (IFRS)”(hereafter – “the standard” or “Standard 29”).

F - 19



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  The standard stipulates that companies, which are subject to the Securities Law, and are required to report pursuant to regulations issued thereunder, except for offshore corporations, shall draw up their financial statements under International Financial Reporting Standards (IFRS) and the clarifications thereto, which are issued by the IASB (The International Accounting Standards Board).

  An entity implementing the IFRS as of January 1, 2008, which elected to report comparative data for one year only (2007), shall be required to prepare an opening balance sheet as of January 1, 2007 (hereafter – “opening balance sheet”) in accordance with IFRS provisions.

  The transition to reporting under IFRS shall be conducted in accordance with the provisions of IFRS 1, “First-Time Adoption of International Financial Reporting Standards”. IFRS 1 prescribes rules on how an entity should make the transition from financial reporting based on previous local accounting rules, to financial reporting based on international accounting standards. IFRS 1 supersedes all the transitional provisions established by other IFRS (including transitional provisions established in previous local accounting standards) and states that all IFRS should be adopted retroactively in the opening balance sheet. At the same time, IFRS 1 provides reliefs concerning mandatory retroactive implementation with regard to certain defined topics. In addition, IFRS 1 specifies several exceptions to the principle of retrospective application of certain aspects of other IFRS.

  The Company’s management has elected to adopt IFRS starting from January 1, 2008, see Note 16 regarding reconciliations to be carried out during the transition to reporting under IFRS and the reliefs which the Company has chosen pursuant to the provisions of IFRS1.

F - 20



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2 – INVESTMENTS IN ASSOCIATED COMPANIES:

  a. The Company has a number of investments in associated companies, which are held either directly or through investee companies. The financial statements of significant associated companies (Mondi Business Paper Hadera Ltd. – formerly Neusiedler Hadera Paper Ltd, NHP – Hogla-Kimberly Ltd and Carmel container system Ltd.) are attached to these financial statements.

  b. Composed as follows:

December 31
2007
2006
NIS in thousands
 
Shares:            
    Cost    7,325    54,241  
    Excess of cost of investment - net    6,929    2,086  
    L e s s - accumulated amortization    (6,929 )  (2,086 )
Gain on issuance of shares of an associated  
    company to a third party    40,241    40,241  
Differences from translation of foreign currency  
    financial statements    (5,166 )  (8,341 )
Share in profits (after deduction of losses) accumulated since  
    acquisition    249,132    219,328  


     291,532    305,469  
Long-term loans and capital notes *    54,654    70,041  


     346,186    375,510  



  * Classified by linkage terms and rate of interest, the total amounts of the loans and capital notes are as follows:

Weighted average
interest rate
at December 31,
2006

December 31
2007
2006
%
NIS in thousands
 
Capital notes in dollars           2,698    6,337  
Unlinked loans and capital notes    4.8 %  51,956    63,704  


          54,654    70,041  



  As of December 31, 2007, the repayment dates of the balance of the loans and capital notes have not yet been determined.

F - 21



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 2007 are as follows:

NIS in
thousands

 
 Balance at the beginning of the year      375,510  

Changes during the year:  
    Share in losses of associated companies - net    (2,884 )
    Dividend from associated companies    (14,692 )
    Adjustments resulting from translation of foreign currency  
        financial statements    3,175  
    Share in capital surplus from capital note to associated company    464  
    Increase in balance of long-term loans and capital notes - net    (15,387 )

Balance at end of year    376,186  


  d. Mondi Business Paper Hadera Ltd. (hereafter - Mondi Hadera; formerly – Neusiedler Hadera Paper Ltd. – NHP):

  Mondi Hadera is held to the extent of 49.9% by the Company and also by Mondi Business Paper LTD (hereafter – MBP), under an agreement dated November 21, 1999. According to the said agreement, Mondi Hadera purchased the Group’s activities in the field of printing and writing paper, and issued to MBP 50.1% of its shares. As part of the said agreement, Neusiedler was granted an option to sell to the Company its holdings in Mondi Hadera, at a price that is 20% lower than the value (as defined in the agreement) or $ 20 million less 20%, whichever is higher. According to oral understandings between persons in the company and persons in MBP, which were formulated in proximity to signing the agreement, MBP will exercise the option only in extremely extraordinary circumstances, such as those which obstruct manufacturing activities in Israel over a long period In view of the extended period which has passed since the date of such understandings and due to changes in the management of MBP, occurring recently, the company has chosen to take a conservative approach, and, accordingly, to reflect the economic value of the option in the context of the transition to reporting according to international standards, see note 16 e7.

  e. Hogla-Kimberly Ltd. (hereafter – Hogla-Kimberly)

  Hogla-Kimberly is held to the extent of 49.9% by the Company and to the extent of 50.1% by Kimberly Clark Corporation (hereafter- KC).

  f. Investment in Carmel Container Systems Limited (hereafter – Carmel)

  Carmel Container Systems was held to the extent of 26.25% by the Company. During the second quarter an affiliated company (Carmel Container Systems Limited hereafter – Carmel) acquired its own shares which were held by part of its minority shareholders. As a result of this acquisition the share of holding in Carmel increased from 26.25% to 36.21%. The increase in the share of holding yielded to the company negative excess of cost in the amount of NIS 4,923 thousands which according to standard 20 (adjusted) was related to non financial assets, which will be realized according to the rate of realization of these assets.

  During the period the Company included in the profits from affiliated companies, profit amount of NIS 2,439 thousands form the realization of these assets.

F - 22



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2 – INVESTMENTS IN ASSOCIATED COMPANIES (continued):

  g. Investment in T.M.M Integrated Recycling Industries Ltd.

  On January 4, 2007, the Company entered into an agreement with Veolia Israel CGEA Ltd. (hereinafter: “CGEA”), whereby it will sell to CGEA its holdings in Barthelemi, along with its remaining holdings in T.M.M.Pursuant to the agreement, CGEA has acquired all of the Company’s holdings in Barthelemi.CGEA also acquired all of the Company’s holdings in T.M.M, as part of a complete tender offer and starting February 2007, the Company is no longer a shareholder in T.M.M.

  The sale of the holdings in T.M.M was made in consideration of a sum approximately similar to the book value, after taking into account, the impairment as mention above.

F - 23



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3 – FIXED ASSETS:

  a. Composition of assets and the accumulated depreciation thereon, grouped by major classifications, and changes therein during 2007, are as follows:

Cost
Accumulated depreciation
Balance at
beginning
of year

Additions
during
the year

Retirements
during
the year

Balance at
end of
year

Balance at
beginning
of year

Additions
during
the year

Retirements
during
the year

Balance at
end of
year

Depreciated balance
December 31
2007
2006
NIS in thousands
NIS in thousands
NIS in thousands
 
Land and buildings thereon      228,747    21,434    99    250,082    113,944    3,673    154    117,463    132,619    114,803  
Machinery and equipment    702,206    80,592    20,027    762,771    512,044    25,658    8,505    529,197    233,574    190,162  
Vehicles    35,339    5,228    5,322    35,245    23,049    3,409    5,147    21,311    13,934    12,290  
Office furniture
    and equipment
  
   (including computers)    70,913    2,377    807    72,483    59,379    2,125    10,194    51,310    21,173    11,534  
Payments on account of  
   machinery and
   equipment, net
    49,329    (27,547 )  -    21,782    -    -    -    -    21,782    49,329  
Spare parts - not current, net    22,705    -    221    22,484    -    -    -    -    22,484    22,705  










     1,109,239    82,084    26,476    1,164,847    708,416    34,865    24,000    719,281    445,566    400,823  











F - 24



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).

  c. The Company’s real estate is partly owned and partly leased – to the extent of NIS 37.5 million, in respect of which lease fees of approximately NIS 25.8 million have been capitalized. The leasehold rights are for 49-57 year periods ending in the years 2008 to 2059, with options to extend for an additional 49 years.

  d. As of December 31, 2007 and 2006, 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 34,865,000, NIS 31,957,000 and NIS 31,604,000 , for the years ended December 31, 2007, 2006 and 2005, respectively.

NOTE 4 – NOTES AND OTHER LONG-TERM LIABILITIES:

  a. Notes

  The item represents two series of notes issued to institutional investors as follows:

December 31
2007
2006
NIS in thousands
Series II
Series I
Series II
Series I
 
Balance      182,052    14,098    206,627    20,522  
Less - current maturities    30,342    7,049    29,518    6,841  




     151,710    7,049    177,109    13,681  





  1) Series I – May 1992

  The balance of the notes as of December 31, 2007 is redeemable in two installments, due in June of each of the years 2008-2009, each installment amounting to 6.66% of the original par value of the notes, which is NIS 105,055,000, in December 2007 terms; the unpaid balance of the notes bears annual interest of 3.8%, payable annually each June. The notes – principal and interest – are linked to the Israeli known CPI (base CPI of February 1992).

  2) Series II – December 2003

  The balance of the notes as of December 31, 2007 is redeemable in 6 equal, annual installments due in December of each of the years 2008-2013; the unpaid balance of the notes bears annual interest of 5.65%, payable annually each December. The notes –principal and interest – are linked to the Israeli known CPI (based CPI of November 2003).

F - 25



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 – NOTES AND OTHER LONG-TERM LIABILITIES:

  3) As of December 31 2007 the balance of the notes represents in deduction of issuance costs amounts to NIS 625 thousands. As to the change from January 2006 in the presentation of deferred issuance costs – see note 1j above.

  b. Long-Term Loans

  The section refers to two long-term loans that were received from banks, as detailed below:

2007
2006
NIS Thousands
NIS Thousands
 
Loan 1      11,591    14,319  
Loan 2    21,920    24,404  
Less - current maturities    5,384    5,208  


     28,127    33,515  



  1) Loan 1

  In July 2006, the Company assumed a loan of NIS 15 million.The outstanding balance as at December 31, 2007, is scheduled for repayment in 17 quarterly installments through to January 2012, each in the sum of NIS 0.7 million.The outstanding balance of the loan carries a variable rate of interest, linked to the Prime lending rate.

  2) Loan 2

  In July 2006, the Company assumed a loan of NIS 25 million.The outstanding balance as at December 31, 2007, is scheduled for repayment in 27 quarterly installments through to July 2014, each in the sum of NIS 1.0 million including principal and interest component on the outstanding balance of principal.The outstanding balance of the loan carries a variable rate of interest, linked to the Prime lending rate.

  c. Other liability

  The capital note from an associated company 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, 2009.

F - 26



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 employment under certain circumstances, computed on the basis of the number of years 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 that, 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 the 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 9,398,000, NIS 8,849,000 and NIS 8,710,000 in 2007, 2006, and 2005, respectively.

NOTE 6 – SHAREHOLDERS’ EQUITY:

  a. Share capital

  Composed of ordinary registered shares of NIS 0.01 par value, as follows:

December 31
2007
2006
Authorized
Issued and paid
 
Number of shares      20,000,000    5,060,774    4,032,723  



Amount in NIS    200,000    50,608    40,327  




  The shares are traded on stock exchanges in Tel-Aviv and in the U.S. (“AMEX”). The quoted prices per share, as of December 31, 2007 are NIS 249.2 and $ 65.50 (NIS 251.91), respectively.

  As part of the Company’s arrangement for the financing of the acquisition of the new machine for the manufacture of packaging paper in November 2007, the Company performed a private allotment of 1,012,585 ordinary shares of NIS 0.01 par value of the Company, which, as of the date of allotment, accounted for 20% of the issued share capital of the Company against an investment in the total sum of $213 million (hereinafter in this section: “the raised amount”). About 60% of the shares (607,551 shares) were allotted to the shareholders in the Company, Clal Industries and Investments and Discount Investments (hereinafter: “the special offerees”), in accordance with the pro-rata holdings in the Company, and 40% of the shares (405,034 shares) were offered by way of a tender to institutional entities and private entities. The price per share for institutional entities and private entities as determined in the tender was NIS 210. Accordingly, the price per share for Clal Industries and Investments and Discount Investments considering the amount of shares offered to Clal Industries and Investments and Discount Investments, was set at NIS 211.05 (the price per share in the tender plus a rate of 0.5%). The Company paid the distributors a rate of 1.2% of the total consideration received from institutional entities and private entities, that is, a sum of NIS 1,020,686.

F - 27



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 – SHAREHOLDERS’ EQUITY (continued):

  The share capital was increased as a result from this issuance in amounts of NIS 10 thousands and the capital surplus that divided from the issuance in deduction of cost issuance as mentioned above amounts of NIS 211,635 thousands.

  b. Employee stock option plans:

  1) 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 can be exercised to purchase one ordinary share of NIS 0.01 par value of the Company. The options are 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 known CPI on 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 the thirty trading days preceding to the effective date of each batch, less 10%. The 2001 plan for senior officers expired during July 2007.

  In 2007, 2006 and 2005, 35,425, 44,998 and 13,877 options, respectively, were exercised under the 2001 plan for senior officers, and 15,466, 24,303 and 4,307 shares of NIS 0.01, respectively, were issued following the exercise of the options, as above. 8,250 options expired in 2005 (from the first batch) and 10,225 options expired in 2006 (from the second batch). In 2006 12,225 option were cancelled from the third batch and 12,225 were cancelled from the forth batch.

  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 is 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.

  Since, in accordance with Israeli accounting principles, the Company does not recognize the expense in its accounts (with respect to the salary benefit embodied in these grants), then under Clarification No. 7 of the IASB (See note 1j), the Company credited the tax saving derived from the exercise of benefits by employees in the years 2005, 2006 and 2007 to capital surplus.

F - 28



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 – SHAREHOLDERS’ EQUITY (continued):

  2) 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 can be exercised to purchase 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.

  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 known CPI on August 29, 2001. This price represents the average price of the Company’s shares as quoted on the Tel-Aviv Stock Exchange during the thirty trading days prior to the date of the board of directors’ approval, less 10%. The 2001 employee Plan was expired during November 2006.

  In 2006 and 2005 10,091 and 2,405 options, respectively, were exercised under the 2001 employee plan, and 6,215 and 1,224 shares of NIS 0.01, respectively, were issued following the exercise of options, as above. The last of the options that were granted and were not exercised, expired during 2006.

  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 is 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.

  Since, in accordance with Israeli accounting principles, the Company does not recognize the expense in its accounts (with respect to the salary benefit embodied in these grants), then under Clarification No. 7 of the IASB (See note 1j), the Company credited the tax saving derived from the exercise of benefits by employees in the years 2006 and 2005 to capital surplus.

  3) The 2008 plan for senior officers in the Group

  With regard to the 2008 plan for senior officers in the group see note 15 – events subsequent balance sheet date.

F - 29



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 instead of the tax exemption); 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. As of the Financial Statements date, the company is not entitled to tax benefits under the law for the Encouragement of Capital Investments.

  The entitlement to the above benefits is conditional upon the companies’ fulfilling the conditions stipulated by the law, regulations published there under 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 CPI linkage differences 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 Company and its subsidiaries are taxed under this law.

  On February 26, 2008, the Knesset ratified the third reading of the Income Tax Law (Inflation Adjustments) (Amendment 20) (Limitation of Term of Validity) – 2008 (hereinafter: “The Amendment”), pursuant to which the application of the inflationary adjustment law will terminate in tax year 2007 and as of tax year 2008, the law will no longer apply, other than transition regulations whose intention it is to prevent distortions in tax calculations.

F - 30



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 – TAXES ON INCOME (continued):

  According to the amendment, in tax year 2008 and thereafter, the adjustment of revenues for tax purposes will no longer be considered a real-term basis for measurement.

Moreover, the linkage to the CPI of the depreciated sums of fixed assets and carryover losses for tax purposes will be discontinued, in a manner whereby these sums will be adjusted until the CPI at the end of 2007 and their linkage to the CPI will end as of that date.

  c. The Law for the Encouragement of Industry (Taxation), 1969

  The Company and certain consolidated 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 consolidated 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. above) is taxed at the regular rate. Through to December 31, 2003, the corporate tax was 36%. In July 2004, an amendment No. 140, to the Income Tax Ordinance was published fixing, among others that corporate tax rate is gradually reduced from 36% to 30%. In August 2005, an additional amendment (No. 147) to the Income Tax Ordinance was published which makes a further revision to the corporate tax rates prescribed by Amendment No. 140. As a result of the aforementioned amendments, the tax rates for 2004 and thereafter are as follows: 2004 – 35%, 2005 – 34%, 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26% and 2010 and thereafter – 25%.

  As a result of the said changes in the tax rates, the Company adjusted – in each of the years 2004 and 2005 – at the time the aforementioned amendments were made, its deferred tax balances, in accordance with the tax rates expected to be in effect in the coming years; the effect of the change has been carried to income in these years.

  Capital gains (except for the real capital gain from the sale of marketable securities – to which the regular tax rates will apply) are taxed at a reduced tax rate of 25% on capital gains that arose after January 1, 2003, and at the regular corporate tax rate on income that arose until that date.

  e. Carryforward tax losses

  Carryforward tax losses in subsidiary companies are NIS 24,334,000 and NIS 24,036,000 as of December 31, 2007 and 2006, respectively.

  The Company examines on each balance sheet date the possibility of recording deferred taxes in respect of carryforward tax losses based on an assessment of all evidence, both positive and negative, regarding the likelihood of their being taxable income in the foreseeable future. Under the inflationary adjustments law, carryforward losses are linked to the Israeli CPI, and may be utilized indefinitely.

F - 31



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 at balance sheet dates, and the changes therein during the years 2007 and 2006, are as follows:

In respect of balance sheet items
Provisions for employee rights
Depreciable
fixed
assets

Inventories
Severance
pay

Vacation
and
recreation
pay

Doubtful
accounts

In respect of
carryforward tax
losses
(see above)

Total
N I S   i n   t h o u s a n d s
 
Balance at January 1, 2006      45,783    2,551    526    (4,079 )  (5,962 )  (5,797 )  33,022  
Changes in 2006 -  
    amounts carried to income    (4,170 )  (1,404 )  26    36    450    (693 )  (5,755 )







Balance at December 31, 2006    41,613    1,147    552    (4,043 )  (5,512 )  (6,490 )  27,267  
Changes in 2007 -  
    amounts carried to income    (1,098 )  (875 )  (721 )  (42 )  378    407    (1,951 )







Balance at December 31, 2007    40,515    272    (169 )  (4,085 )  (5,134 )  (6,083 )  25,316  








  The deferred taxes are computed at the rate of 25%-27%.

  Deferred taxes are presented in the balance sheets as follows:

December 31
2007
2006
NIS in thousands
 
Among current assets      (9,116 )  (7,856 )
Among long-term asset balances    (6,083 )  (6,490 )
Among long-term liabilities    40,515    41,613  


Balance - liability - net    25,316    27,267  



F - 32



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 – TAXES ON INCOME (continued):

  g. Taxes on income included in the income statements:

  1) As follows:

2007
2006
2005
NIS in thousands
 
For the reported year:                
   Current    20,408    22,457    13,662  
   Previous years    850            
   Deferred, see f. above:  
      In respect of changes to tax rates,  
          see d. above    -    -    (4,166 )
      In respect of the reporting period    (1,951 )  (5,755 )  (3,505 )



     19,307    16,702    5,991  




  Current taxes in 2007 were computed at an average tax rate of 29%, 2006 – 31% and 2005- 34%, see (2) below.

  2) Following is a reconciliation of the “theoretical” tax expense, assuming all income is taxed at the regular rate applicable to companies in Israel, as stated in d. above, and the actual tax expense:

2007
2006
2005
%
NIS in
thousands

%
NIS in
thousands

%
NIS in
thousands

 
Income before taxes on income, as reported                            
   in the statements of income    100    53,633    100.0    56,695    100.0    35,292  






Theoretical tax on the above amount    29.0    15,554    31.0    17,575    34.0    11,999  
   
Decrease in taxes resulting from computation  
   of deferred taxes at a rate which is  
   different from the theoretical rate    (1.6 )  (859 )  (2.1 )  (1,196 )  (0.9 )  (324 )
Decrease in taxes resulting from adjustment to  
    deferred tax balances due to changes  
    in tax rates, see d. above    -    -    -    -    (11.8 )  (4,166 )
Differences at equity and non financial assets
definition for the purpose of tax
    4.5    2,400    -    -    -    -  
   Previous years tax    1.6    850    -    -    -    -  
   Nondeductible expenses    0.3    170    -    -    -    -  
Other - net    2.2    1,192    0.6    323    (4.3 )  (1,518 )






Taxes on income for the reported year    36.0    19,307    29.5    16,702    17.0    5,991  







  h. Tax assessments

  The Company and most of its subsidiaries have received final tax assessments through the year ended December 31, 2005.

F - 33



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued):

NOTE 8 – LINKAGE TERMS OF MONETARY BALANCES:

  a. As follows:

December 31, 2007
December 31, 2006
In, or linked
to, foreign
currency
(mainly dollar)

Linked to the
Israeli CPI

Unlinked
In, or linked
to, foreign
currency
(mainly dollar)

Linked to the
Israeli CPI

Unlinked
NIS in thousands
NIS in thousands
 
Assets:                            
    Current assets:  
       Cash and cash equivalents    165,189    -    2,556    8,573    -    5,048  
       Receivables    12,720    439    258,882    59,849    244    243,049  
    Investments in associated companies - long-term  
       loans and capital notes    2,421    -    52,233    6,337    -    63,704  






     180,330    439    313,671    74,759    244    311,801  






Liabilities:  
    Current liabilities:  
       Short-term credit from banks    -    -    143,015    -    -    203,003  
       Accounts payables and accruals    10,363    -    185,281    8,422    -    191,551  
    Long-term liabilities (including current maturities):  
      Long -term loans    -    -    33,511    -    -    38,723  
       Notes    -    195,525    -    -    226,364        
       Other liability    -    -    32,770    -    -    32,770  






     10,363    195,525    394,577    8,422    226,364    466,047  







As to exposures relating to fluctuations in foreign currency exchange rates and the use of derivatives for hedging purposes – see note 12a.

F - 34



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:            
    2007     3.846    191.2  
    2006     4.225    184.9  
    2005     4.603    185.0  
   
Change in the year:   
    2007     (9.0 )%  3.4 %
    2006     (8.2 )%  -  
    2005     6.8 %  2.4 %

  * 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:

  a. Subsidiaries provided guarantees to various entities, in connection with tenders, in the aggregate amount of approximately NIS 2,902,000.

  b. 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 former chairman of the board of directors. According to the plan, 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 or until the time of termination of duty in certain conditions, the earlier. Up to December 31 2006, all of the remuneration was exercised.

  c. In accordance with the Companies Law, 1999, the Company issued new letters of indemnity to its officers in 2004, 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.

F - 35



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 – COMMITMENTS, CONTINGENT LIABILITIES: (continued)

  d. On May 13, 2007, the Company’s Audit Committee and Board of Directors approved an employment contract with the Company’s General Manager. The employment contract is not time-limited and consists of the following principal terms of employment: Monthly wages of NIS 95,000, linked to the Consumer Price Index (CPI) starting in 2007, an annual bonus equal to 6-9 monthly paychecks, to be determined at the discretion of the Company’s Board of Directors. Retirement conditions – In addition to the liberation of the funds accrued in the Managers’ Insurance, upon leaving his position, the general manager will receive a retirement bonus equal to his last monthly paycheck – prior to leaving his position – multiplied by the number of years during which he was employed by the Company (starting August 1998), including advanced notice of 6 months in the event of termination or resignation and additional auxiliary conditions. It has to be noted that the amounts transferred to managerial insurance policies in respect of severance pay ,will include current completion on basis of last monthly salary for each year of work in the Group.

  It should be noted that in proximity to the appointment of the General Manager, who entered his position in January 2005, a brief memorandum was drafted regarding the said employment, with terms similar to those mentioned above. This memorandum was not approved by the Company’s Board of Directors and the Company’s management, based on the opinion of legal counsel, is doubtful whether it is legally binding. The impact of the agreement will be expressed in the second quarter results and will amount to NIS 1.3 million (net, after taxes) on account of the retirement terms.

  e. The Company converted during October 2007 its energy-generation plant in Hadera to using natural gas, instead of fuel oil.

  In this capacity, the Company signed an agreement in London on July 29, 2005, with the Thetis Sea Group, for the purchase of natural gas. The gas that will be purchased is intended to fulfill the Company’s requirements in the coming years, for the operation of the existing energy generation plants using cogeneration at the Hadera plant, when it will be converted for the use of natural gas, instead of the current use of fuel oil. The overall financial scope of the transaction totals $ 35 million over the term of the agreement (5 years from the initial supply of gas, but no later than July 1, 2011).

  In this capacity the Company also contracted with Alstom Power Boiler Service gmbh, a manufacturer of equipment in the energy industry, in an agreement worth approximately € 1.74 million, for the purchase of the systems needed for the conversion and assistance with their installation at the plant in Hadera. Up to December 31, 2007 the remainder of the agreement was worth approximately € 0.6 million.

  f. In the beginning of 2008, the Company has engaged in a contract with the main equipment suppliers for the new manufacturing facility of packaging papers, for the total sum of €48.4 million. Some of the equipment will be supplied during 2008 and the rest will be supplied in the beginning of 2009.

  g. In the last quarter of 2007, the Company signed an agreement with a gas company for the transmission of gas for a period of 6 years with a two-year extension option. The total financial value of the transaction is NIS 13.8 million.

  h. In November 2006, the Environmental Protection Ministry announced that, even though the company plant at Hadera has made considerable investments in sewage treatment and environmental protection issues, an investigation may be launched against it to review deviations from certain emission standards into the air. Based on the opinion of its legal advisors, the Company anticipates that the investigation will not materially impact its operations.

F - 36



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 – COMMITMENTS, CONTINGENT LIABILITIES AND LIABILITIES: (continued)

  i. On October 21, 2007, the tax authorities issued a demand for payment of a betterment levy in the amount of NIS 8 million in respect of change of land use, which is designed for the construction of a new production line for the manufacture of packaging papers.

The Company contested the amount of the levy through counter-assessment in the sum of NIS 400,000. In addition, it should be noted that as a result, these financial statements do not include a provision for said demand. When the levy is recognized in the financial statements, it will be included in the cost of the land and therefore will not have any effect on the operating results of the Company.

F - 37



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 – SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

  Balance sheets:

  a. Receivables:

December 31
2007
2006
NIS in thousands
 
1) Trade:            
      Open accounts    164,032    152,944  
      Checks collectible    14,739    15,106  


     178,771    168,050  


      The item is:  
          Net of allowance for doubtful accounts    17,171    16,791  


          Includes associated companies    37,255    36,967  


2) Other:  
      Employees and employee institutions    2,218    2,451  
      Associated companies - current debt    80,054    72,467  
      Prepaid expenses    2,719    3,732  
      Advances to suppliers    2,303    2,617  
      Deferred income taxes, see note 7f    9,116    7,856  
      Proceeds from sale of land in trustee's control (see note 10i)    -    51,936  
      Accounts Receivable    4,953    -  
      Sundry    3,746    5,625  


     105,109    146,684  



  b. Inventories:

For industrial activities:            
   Finished goods    19,824    16,998  
   Raw materials and supplies    7,630    7,884  


     27,454    24,882  
For commercial activities - purchased products    19,280    14,348  


     46,734    39,230  
Maintenance and spare parts *    22,873    22,879  


     69,607    62,109  



* Including inventories for the use of associated companies.

  c. Credit from banks:

Weighted average
Interest rate
on December 31,
2007

December 31
2007
2006
NIS in thousands
 
Unlinked      5.3 %  143,015    203,003  

F - 38



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 – SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

  d. Accounts payable and accruals – other:

December 31
2007
2006
NIS in thousands
 
1)     Trade:            
          Open accounts    104,301    91,932  
          Checks payable    4,108    4,341  


     108,409    96,273  


   
2)     Other:  
          Payroll and related expenses    43,902    42,553  
          Institutions in respect of employees    22,057    15,775  
          Income tax authority    908    19,824  
          Customs and value added tax authorities    322    8,814  
          Accrued interest    1,679    2,104  
          Accrued expenses    17,697    14,100  
          Sundry    670    529  


     87,235    103,699  



  Statements of income:

2007
2006
2005
NIS in thousands
 
e. Sales - net (1):
 
Industrial operations (2)      462,634    404,030    364,539  
Commercial operations    121,016    126,079    117,922  



     583,650    530,109    482,461  



(1) Including sales to associated companies    159,627    149,173    115,262  



(2) Including sales to export    48,669    47,886    43,356  




  f. Cost of sales:

Industrial operations:                
    Materials consumed    93,260    85,617    80,740  
    Payroll and related expenses    115,773    104,880    96,370  
    Depreciation    30,906    27,886    27,396  
    Other manufacturing costs    114,400    106,387    94,517  
    Decrease (increase) in inventory of  
       finished goods    (2,826 )  (420 )  (4,894 )



     351,513    324,350    294,129  
Commercial operations - cost of products sold    89,341    94,375    89,050  



     440,854    418,725    383,179  



Including purchases from associated  
    companies    31,220    39,900    37,747  




F - 39



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 – SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

2007
2006
2005
NIS in thousands
 
g. Selling, marketing, administrative and general expenses:
 
Selling and marketing:                
    Payroll and related expenses    13,454    13,954    13,641  
    Packaging, transport and shipping    9,712    9,243    7,866  
    Commissions    1,869    2,121    2,699  
    Depreciation    1,403    1,331    1,145  
    Other    4,929    4,717    5,131  



     31,367    31,366    30,482  



   
Administrative and general:  
    Payroll and related expenses    45,527    43,407    39,727  
    Office supplies, rent and maintenance    1,214    1,593    1,241  
    Professional fees    1,789    1,167    991  
    Depreciation    3,159    3,128    2,903  
    Doubtful accounts and bad debts    738    (122 )  840  
    Other    9,997    7,022    4,201  



     62,424    56,195    49,903  
    L e s s - rent and participation from  
       associated companies    26,364    26,678    24,441  



     36,060    29,517    25,462  




  h. Financial expenses - net*:

Expenses:                
    In respect of long-term loans    1,907    1,196    -  
    In respect of notes - including amortization of deferred  
       charges and net of related hedges    15,642    17,013    16,516  
    In respect of exchange differences from operating monetary balance-net    2,227    4,771    -  
    In respect of short-term balances    10,430    11,590    3,559  



     30,206    34,570    20,075  



Income:   
    In respect of long-term loans    4,289    579    385  
    In respect of exchange differences from operating monetary balances    -    -    3,294  
In respect of short-term balances    6,359    2,880    3,906  



     10,648    3,459    7,585  



     (19,558 )  (31,111 )  (12,490 )



** Including financial income (expenses) in respect  
   of loans to associated companies    2,655    2,280    3,401  




F - 40



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 – SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

  i. Other income

2007
2006
2005
NIS in thousands
 
Proceeds from sale of land      -    *40,641    3,260  
Capital gain from sale of fixed assets    (2,150 )  317    310  
Gains (losses) from sale of the operation in Switzerland    -   (3,653 )  874  
Capital loss from sale of associated company    (28 )  -    -  



     (2,178 )  37,305    4,444  




  * On December 31, 2006, the Company sold a land estate. As a result of this sale, the Company recorded a capital gain in the amount of approximately NIS 28.5 million, net of tax, betterment levy, and expenses related to the sale. The proceeds of the sale, in the amount of NIS 43 million, were deposited on December 31, 2006 with a trustee in order to secure the liabilities of the Company. At the beginning of January 2007, the balance in the amount of approximately NIS 30 million was received, and in during the course of February this balance was transferred from the trustee to the Company.

NOTE 11 – NET INCOME PER SHARE

  Following are data relating to the net income and the number of shares (including adjustments to such data) used for the purpose of computing the basic and fully diluted net income per ordinary share. (The data for the year 2005 are after retroactive application of the provisions of Accounting Standard No. 21 of the IASB, see note 1v):

Net income
Year ended December 31

2007
2006
2005
NIS in thousands
 
Net income for the period, as reported in the                
    income statements, used in computation of  
    basic net income per share    31,442    13,330    45,715  



Total net income for the purpose of computing  
    diluted income per share    31,442    13,330    45,715  




Number of shares
Year ended December 31

2007
2006
2005
 
Weighted average number of shares used for                
    computing the basic income per share    4,132,728    4,025,181    3,999,867  
Adjustment in respect of incremental shares of warrants    6,805    33,429    28,240  



Weighted average number of shares used for  
    computing the diluted income per share    4,139,533    4,058,610    4,028,107  




F - 41



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 economic hedges. The Company utilizes derivatives, mainly forward exchange contracts, to protect its expected 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 December 2006 the Company entered into forward transactions for a period of one year, in order to hedge an amount of NIS 100 million against increases in the CPI, following the termination of the 2005 transaction that was finalized.

In January 2007, the Company entered into forward transactions for a period of one year, in order to hedge an amount of NIS 120 million against increases in the CPI, following the termination of the 2005 transaction that was finalized.

  In January 2008, the Company entered into forward transactions for a period of one year, in order to hedge an amount of NIS 90 million against increases in the CPI, following the termination of the aforementioned transaction.

In February 2008, the Company entered into additional forward transactions for a period of one year, in order to hedge an amount of NIS 50 million against increases in the CPI, following the termination of the aforementioned transaction.

  b. Credit risks

  The Company and its subsidiaries’ cash and cash equivalents as of December 31, 2007 and 2006 are deposited mainly with major 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. An appropriate allowance for doubtful accounts is included in the financial statements.

  c. Exchange rate risks

  Approximately half of the Company’s sales are nominated in US dollars, while a substantial part of its expenditures and its liabilities are in NIS, and as a result, the Company has an exposure to the changes in the rate of exchange of the NIS against the US dollar. This exposure includes an economic exposure (resulting from the excess of receipts over payments, in foreign currency or linked to it) and reporting exposure (relating to the excess of dollar linked assets over liabilities).

  The Company has trade receivables balances linked to the US dollar – see note 8(a).

F - 42



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 – FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):

  d. Fair value of financial instruments

  The following table specifies the carrying amount and fair value of financial instrument groups that are not presented in the financial statements at their value:

Carrying Amount
Fair Value
December 31, 2007
NIS in thousands

 
Financial Assets            
  Long term loans and capital note    51,956    50,590  


Financial Liabilities   
  Notes - series 1*    14,098    14,336  
  Notes - series 2*    182,052    191,537  
  Other liability*    32,770    31,510  


     228,920    237,383  



  * The above carrying amounts are based on the computation of the present value of cash flows at interest rates applicable to similar characterized loans (in 2007 – 4%).

NOTE 13 – INTERESTED PARTIES – TRANSACTIONS AND BALANCES:

  a. Transactions:

  1) Income (expenses):

2007
2006
2005
NIS in thousands
 
Sales      57,050    47,803    46,396  



Costs and expenses    (16,956 )  (20,175 )  (13,997 )



Financial expenses    2,128    2,191    1,731  




  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.

F - 43



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 – INTERESTED PARTIES – TRANSACTIONS AND BALANCES (continued):

  2) Benefits to interested parties:

2007
2006
2005
 
Payroll to interested parties employed                
    by the Company - NIS in thousands    *2,643    *8,094    *5,181



    Number of people to whom the benefits relate    1    2    2  



Remuneration of directors who are not  
    employed by the Company -  
    NIS in thousands    601    504    485  



Number of people to whom  
    the benefits relate    11    11    12  




  * In 2007 because of the payroll of CEO. In 2006 includes the payroll of CEO and of the former Chairman of the Board of Directors and, in addition a payment to the former chairman of the Board of directors as a result of exercise of a bonus according to a remuneration plan. In 2005 including the CEO and the former Chairman of the Board of Directors. 2005 includes a special bonus to the Chairman of the Board of Directors, in a sum of NIS 800,000.

  3) During 2007, an interested party employed by the Company (the CEO) held 1,975 options under the 2001 plan for senior employees in the group (see note 6b(1)). As of December 31, 2007 all the options were exercised.

  4) As to the plan for the remuneration of the Company’s former chairman of the Board of Directors – see note 9b.

  b. Balances with interested parties:

December 31
2007
2006
NIS in thousands
 
Accounts receivable - commercial operations*      20,710    18,825  


Accounts payables and accruals    1,589    4,930  


Notes    34,216    38,871  



  * 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 sales are on the local (Israeli) market and most of the assets are located in Israel.

F - 44



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
T o t a l
2007
2006
2005
2007
2006
2005
2007
2006
2005
N I S  i n  t h o u s a n d s
 
Sales - net(1)      464,653    408,045    368,884    118,997    122,064    113,577    583,650    530,109    482,461  









Income (loss) from ordinary operations    74,936    50,359    44,218    433    142    (880 )  75,369    50,501    43,338  
Financial expenses, net                                  19,558    31,111    12,490  
Other income                                  (2,178 )  37,305    4,444  



Income before taxes on income                                  53,633    56,695    35,292  
Taxes on income                                  19,307    16,702    5,991  



Income from operations of the Company and its subsidiaries                                  34,326    39,993    29,301  
Share in profits of associated companies - net                                  (2,884 )  (26,663 )  16,414  



Net income                                  31,442    13,330    45,715  



   
Segment assets (at end of year)    630,435    574,319    536,965    63,509    56,663    57,377    693,944    630,982    594,342  
Unallocated corporate assets (at end of year) (2)                                   625,123    542,305    561,416  



         Consolidated total assets (at end
           of year)
                                  1,319,067    1,173,287    1,155,758  



Segment liabilities (at end of year)    79,116    69,923    57,754    29,293    26,350    32,758    108,409    96,273    90,512  
Unallocated corporate liabilities (at end of year)                                  532,571    646,172    541,862  



         Consolidated total liabilities (at
            end of year)
                                  640,980    742,445    632,374  









Depreciation and amortization    33,267    30,137    29,795    1,596    1,820    1,809    34,863    31,957    31,604  









Investments in fixed assets    80,431    51,380    70,014    1,653    1,727    1,066    82,084    53,107    71,080  










(1) Represents sales to external customers.

(2) Including investments in associated companies.

F - 45



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued):

NOTE 15 – EVENTS SUBSEQUENT BALANCE SHEET DATE

  On January 14, 2008, the Company’s Board of Directors approved, pursuant to approval by the Audit Committee, adoption of a compensation plan for senior employees of the Company and/or its subsidiaries and/or associated companies, whereby up to 285,750 stock options, each of which is exercisable into one ordinary share of the company of NIS 0.01 par value, would be allocated to senior employees and officers of the Group, including the Company CEO, which at the time of approval of said allocation comprised 5.65% of the Company’s issued share capital. The offerees in the said plan are not interested parties in the company, except for the CEO who is an interested party by virtue of his position. Pursuant to the conditions of the said option warrants, the offerees who will exercise the option warrants will not be allocated all of the shares derived there from, but only a quantity of shares that reflects the sum of the financial benefit that is inherent to the option warrants at the exercise date only. As at the reported date, the said option warrants have yet to be allocated.

  The influence of the plan at the consolidated financial statements was estimated at NIS 13.5 million.

  The option warrants are not registered for trade. The company has obtained approval from the stock exchange and from AMEX to register for trade the ordinary shares that shall be allocated to the offerees upon exercise of the option warrants.

  On May 20, 2008 an associated Company, Hogla-Kimberly Ltd received from the Israeli tax authority compensation in the amount of about NIS 4.5 millions. The compensation is due to damages during the second Lebanon war that caused the associated Company to partially stop its manufacturing activity in its northern plant. The associated Company will record a pre tax income for the second quarter of 2008.

  The company’s share in the compensation above is NIS 2,250 thousand.

F - 46



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – DISCLOSURE REGARDING THE ADOPTION OF IFRS

  A. General

  Following the publication of Account Standard No. 29, “the Adoption of International Financial Reporting Standards (IFRS)” in July 2006, the Company plans to adopt IFRS starting from January 1, 2008.

  Pursuant to the provisions of IFRS1, which deals with the first-time adoption of IFRS, and considering the date in which the Company elected to adopt these standards for the first time, the financial statements which the Company must draw up in accordance with IFRS rules, are the consolidated financial statement as of December 31, 2008, and for the year ended on that date. The date of transition of the Company to reporting under IFRS, as it is defined in IFRS 1, is January 1, 2007 (hereinafter: “the transition date”), with an opening balance sheet as of January 1, 2007 (hereinafter: “Opening Balance”). The Company’s interim financial statements for 2008 will also be drawn up in accordance with IFRS, and shall include comparative figures for the year.

  Under the opening balance sheet, the Company performed the following reconciliations:

  Recognition of all assets and liabilities whose recognition is required by IFRS.
  De-recognition of assets and liabilities if IFRS do not permit such recognition.
  Classification of assets, liabilities and components of equity according to IFRS.
  Application of IFRS in the measurement of all recognized assets and liabilities.

  IFRS 1 states that all IFRS shall be adopted retroactively for the opening balance sheet. At the same time, IFRS 1 includes 14 reliefs, in respect of which the mandatory retroactive implementation does not apply. As to the reliefs implemented by the Company, see section f. below.

  Changes in the accounting policy which the Company implemented retroactively in the opening balance sheet under IFRS, compared to the accounting policy in accordance with Generally Accepted Accounting Principles in Israel, were recognized directly under Retained Earnings or another item of Shareholders’ Equity, as the case may be.

This note is formulated on the basis of International Financial Reporting Standards and the notes thereto as they stand today, that have been published and shall enter into force or that may be adopted earlier as at the Group’s first annual reporting date according to IFRS, December 31, 2008. Pursuant to the above, the Company’s management has made assumptions regarding the anticipated financial reporting regulations that are expected to be implemented when the first annual financial statements are prepared according to IFRS, for the year ended December 31, 2008.

The IFRS standards that will be in force or that may be adopted in the financial statements for the year ended December 31, 2008 are subject to changes and the publication of additional þclarifications. Consequently, the financial reporting standards that shall be applied to the represented periods, will be determined finally only upon preparation of the first financial statements according to IFRS, as at December 31, 2008.

  The Note above includes all the financial data required by the Accounting Standard No. 29 and accordingly to the publicity of the Israel Securities Authority FAQ 6.

  Listed below are the Company’s consolidated balance sheets as of January 1, 2007 and December 31, 2007, the consolidated statement of income for the year ended on December 31, 2007, and the Company’s shareholders’ equity prepared in accordance with International Accounting Standards. In addition, the table presents the material reconciliations required for the transition from reporting under Israeli GAAP to reporting under IFRS.

According to IFRS 1, the adoption of IFRS in the opening balance sheet as of the transition date will be done retrospectively.

F - 47



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  B. Reconciliation of balance sheets from Israeli GAAP to IFRS:

December 31, 2007
January 1, 2007
Israeli GAAP
Effect of
transition
to IFRS

IFRS
Israeli
GAAP

Effect of
transition
to IFRS

IFRS
Note
NIS in thousands
 
CURRENT ASSETS:                                  
  Cash and cash equivalents        167,745    -    167,745    13,621    -    13,621  
  Accounts receivables   E8    178,771    (218 )  178,553    168,050    (218 )  167,832  
  Other receivable   E1    105,109    (10,694 )  *94,415    146,684    (10,065 )  *136,619  
  Inventories        69,607    -    69,607    62,109    -    62,109  






  Total Current Assets         521,232    (10,912 )  510,320    390,464    (10,283 )  380,181  






   
Non-Current Assets   
  Property, plant and equipment   E2; F3    445,566    (34,726 )  *410,840    400,823    (34,880 )  *365,943  
  Investment in associated companies   E6; E9    346,186    217    *346,403    375,510    (1,962 )  *373,548  
  Deferred tax assets   E1    6,083    14,539    20,622    6,490    12,233    18,723  
  Lease receivables   E2    -    29,291    *29,291    -    30,089    *30,089  
  Other assets        -    1,578    *1,578    -    2,209    *2,209  
  Employee benefit assets   E3    -    1,179    *1,179    -    1,132    *1,132  






  Total Non-Current Assets         797,835    12,078    809,913    782,823    8,821    791,644  






  Total Assets         1,319,067    1,166    1,320,233    1,173,287    (1,462 )  1,171,825  







* Reclassified

F - 48



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  B. Reconciliation of balance sheets from Israeli GAAP to IFRS:

December 31, 2007
January 1, 2007
Israeli GAAP
Effect of
transition
to IFRS

IFRS
Israeli
GAAP

Effect of
transition
to IFRS

IFRS
Note
NIS in thousands
 
 CURRENT LIABILITIES:                                  
    
   Credit from banks and others        143,015    -    143,015    203,003    -    203,003  
   Current maturities to long-term  
     notes and long-term loans   E4    42,775    -    42,775    41,567    -    41,567  
   Trade payables        108,409         108,409    96,273    -    96,273  
   Other payables and accrued  
     expenses   E3; E7    87,235    (14,005 )  *73,230    103,699    (32,346 )  *71,353  
    Financial liabilities at fair value  
    through Profit and loss        -    3,901    *3,901    -    1,612    *1,612  
    Current tax liabilities   E10    -    908    *908    -    19,824    *19,824  






   
Total Current Liabilities        381,434    (9,196 )  372,238    444,542    (10,910 )  433,632  






   
 NON-CURRENT LIABILITIES:  
   Loans from banks and others        28,127    -    28,127    33,515    -    33,515  
   Notes   E4    158,134    -    158,134    190,005    -    190,005  
   Deferred taxes        40,515    -    40,515    41,613    -    41,613  
   Employee benefit liabilities   E3    -    20,038    *20,038    -    19,217    *19,217  
   Other non-current liabilities   E9    32,770    (1,560 )  *31,210    32,770    (1,560 )  *31,210  






Total Non-Current Liabilities        259,546    18,478    278,024    297,903    17,657    315,560  






   
SHAREHOLDERS EQUITY    F2    678,087    (8,116 )  *669,971    430,842    (8,209 )  *422,633  






   
Total liabilities and shareholders   
   equity         1,319,067    1,166    1,320,323    1,173,287    (1,462 )  1,171,825  







* Reclassified.

F - 49



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  C. Reconciliation of profit and loss from Israeli GAAP to IFRS:

December 31, 2007
Israeli
GAAP

Effect of transition
to IFRS

IFRS
Note
NIS in thousands (except per share data)
 
Revenue            583,650    -    583,650  
Cost of sales        440,854    527    441,381  



Gross profit         142,796    (527 )  142,269  
   
Operating Costs and Expenses   
Selling expenses        31,367    -    31,367  
General and administrative expenses        36,060    317    36,377  
Other expenses, net   E7    2,178    2,289    * 4,467  



Operating profit         73,191    (3,133 )  70,058  
   
Finance income   E5    10,648    -    10,648  
Finance expenses   E5; E9    30,206    1,560    31,766  



Finance income (expenses), net         (19,558 )  (1,560 )  (21,118 )



   
Profit (loss) after financial income (expenses), net           53,633    (4,693 )  48,940  
Share of profit (loss) of associated companies, net   E6; E9    (2,884 )  3,740    *856  



Profit (loss) before taxes on income         50,749    (953 )  49,796  
Taxes on income        19,307    (1,046 )  18,261  



Net income         31,442    93    31,535  



   
   Earnings Per Share (NIS)   
       Primary        7.61    (0.02 )  7.63  



   
       Full diluted        7.60    (0.02 )  7.62  



   
Number of shares used to compute the primary  
earnings per share        4,132,728    4,132,728    4,132,728  



Number of shares used to compute the fully diluted  
earnings per share        4,139,533    4,139,533    4,139,533  




*Reclassified.

F - 50



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – FINANCIAL INFORMATION IN ACCORDANCE WITH IFRS (continued)

  D. Equity reconciliation:

Share Capital
Premium on shares
Capital surplus
Share-based
payment (in
respect of
employee options)

Capital surplus
from translation
differences

Retained Earnings
Total
NIS thousands
NIS thousands
NIS thousands
NIS thousands
NIS thousands
NIS thousands
 
As at January 1, 2007                            
Israeli GAAP       125,257     90,060     2,414     (8,341 )   221,452     430,842  
   
Adjustments of investment in associated companies  
  by the equity method    -    -    -    -    *(402 )  *(402 )
Classification of adjustments deriving from  
  translations of financial statements of foreign  
  operations    -    -    -    8,341    (8,341 )  -  
Employee benefits net of tax effects    -    -    -    -    (4,172 )  (4,172 )
Amortization of pre-paid expenses in respect of  
  lease of land    -    -    -    -    (1,868 )  (1,868 )
Put option on affiliated Company    -    -    -    -    *(1,612 )  *(1,612 )
Effect of classifying a doubtful debt provision as  
  specific after being classified as general    -    -    -    -    (155 )  (155 )






   
Under IFRS rules       125,257     90,060     2,414     -     *204,902     422,633  







*Reclassified.

F - 51



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – FINANCIAL INFORMATION IN ACCORDANCE WITH IFRS (continued)

  D. Equity reconciliation (continued):

Share Capital
Premium on
shares

Capital surplus
Share-based
payment (in
respect of
options to
employees)

Capital
surplus from
hedging
reserves

Capital surplus
from translation
differences

Retained
Earnings

Total
NIS thousands
NIS thousands
NIS thousands
NIS thousands
NIS thousands
NIS thousands
NIS thousands
 
As at December 31, 2007                                
Israeli GAAP       125,267     301,695     3,397     -     (5,166 )   252,894     678,087  
Adjustments of investment in associated  
  companies by the equity method    -    -    -    -    -    *3,338    *3,338  
Classification of adjustments deriving from  
  translations of financial statements of  
  foreign operations    -    -    -    -    8,341    (8,341 )  -  
Cash flow hedges    -    -    -    *(635 )  635    -    -  
Benefits to employees net of tax effects    -    -    -    -    -    (4,326 )  (4,326 )
Amortization of pre-paid expenses in respect  
  of lease of land    -    -    -    -    -    (1,508 )  (1,508 )
Put option on affiliated Company    -    -    -    -    -    *(3,901 )  *(3,901 )
Financial expenses on capital note from  
  affiliated Company    -    -    -    -    -    *(1,560 )  *(1,560 )
Effect of classifying a doubtful debt  
provision as specific after being classified  
as general    -    -    -    -    -    (159 )  (159 )







Under IFRS rules       125,267     301,695     3,397     (635 )   3,810     *236,437     669,971  








*Reclassified.

F - 52



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – FINANCIAL INFORMATION IN ACCORDANCE WITH IFRS (continued)

  E. Additional information (1) (2) (3)

  (1) Deferred Taxes

  In accordance with generally accepted accounting principles in Israel, deferred tax assets or liabilities were classified as current or non-current assets or liabilities depending on the classification of the assets in respect of which they were created.

  Pursuant to IAS 12, deferred tax assets or liabilities are classified as non-current assets or liabilities, respectively.

  Consequently, amounts of NIS 7,856,000 and NIS 9,116,000 which were previously presented under accounts receivable were reclassified to deferred taxes under non-current taxes as of January 1, 2007 and December 31, 2007, respectively.

  (2) Land leased from the Israel Land Administration

  In accordance with generally accepted accounting principles in Israel, land leased from the Israel Land Administration, was classified as fixed assets and included in the amount of the capitalized leasing fees that were paid. The amount paid was not depreciated.

  Pursuant to IAS 17, “Lease”, land lease arrangements, whereunder at the end of the leasing period, the land is not transferred to the lessor, are classified as operating lease arrangements. As a result, the Company’s lands in Hadera and Nahariya, which were leased from the Israel Land Administration and the Company’s land in Tel-Aviv, which was leased from the Tel-Aviv Municipality, and which do not constitute real estate for investment that is measured at fair value, shall be presented in the Company’s balance sheet as pre-paid expenses in respect of lease, and amortized over the remaining period of the lease.

  Consequently, the pre-paid expense balance in respect of an operating lease increased by NIS 30,023 thousands and by NIS 29,263 thousands and the balance of fixed assets decreased by NIS 34,814 thousands and by NIS 34,701 thousands. The change was partly carried to retained earnings in the sums of NIS 1,868 thousands and NIS 1,508 thousands and partly against deferred taxes in the sums of NIS 2,923 thousands and NIS 3,927 thousands on January 1, 2007 and on December 31, 2007, respectively.

  (3) Employee benefits

  In accordance with generally accepted accounting principles in Israel, the company’s liability for severance pay is calculated based on the recent salary of the employee multiplied by the number of years of employment.

  Pursuant to IAS 19, the provision for severance pay is calculated according to an actuarial basis taking into account the anticipated duration of employment, the value of time, the expected salary increases until retirement and the possible retirement under conditions not entitling severance pay.

F - 53



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – FINANCIAL INFORMATION IN ACCORDANCE WITH IFRS (continued)

  E. Additional information (3) (continued)

  In addition, under Israeli GAAP, deposits made with regular policies or directors’insurance policies which are not in the employee’s name, but in the name of the employer, were also deducted from the company’s liability.

  Under IFRS, regular policies or directors’ insurance policies as aforesaid, which do not meet the definition of plan assets under IAS 19, will be presented in the balance sheet under a separate item and will not be deducted from the employer’s liability.

  Most of the Group’s employees are covered according to Section 14 of the Compensation Law. Employee deposits are not reflected in the company’s financial statements and accordingly, no provision is necessary in the books. However, the Company is required to pay employees differences from entitlement to severance pay and unutilized vacation pay. These liabilities are computed in accordance with the actuary’s assessment based on an estimate of their utilization and redemption.

  In addition, net liabilities in respect of benefits to employees after retirement, which relate to defined benefit plans, are measured based on actuarial estimates and discounted amounts.

  The impact of the aforesaid on the balance sheet is an increase in liabilities in respect of net benefits to employees, as of January 1, 2007 and December 31, 2007, in the amount of NIS 5,563,000 and NIS 5,762,000, respectively, and an increase in deferred taxes as of January 1, 2007 and December 31, 2007, in the amounts of NIS 1,391,000 and NIS 1,436,000, respectively.

  Moreover, assets with regard to employee benefits were classified from other current liabilities to non current assets. The amount of approximately NIS 1,179 thousands, NIS 1,132 thousands as of December 31, 2007 and January 1, 2007 , respectively .

  (4) CPI-linked assets and liabilities

  The Company has assets and liabilities that are linked to the Consumer Price Index (hereinafter – the CPI), which are not measured at fair value under the statement of income. The Company determines the effective interest rate in respect of these assets and liabilities as a real rate with the addition of linkage differences in line with actual changes in the CPI until the balance sheet date. This is also the approach used under generally accepted accounting principles in Israel.

  As of the balance sheet date, the Company has CPI-linked financial liabilities in the total sum of NIS 196,150,000.

F - 54



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – FINANCIAL INFORMATION IN ACCORDANCE WITH IFRS (continued)

  E. Additional information (4) (continued)

  There is another interpretation of IFRS, under which the effective interest rate in respect of these assets and liabilities should include the anticipated inflation up to the relevant repayment dates (instead of accumulation of real interest plus linkage differences in line with changes in the CPI until the balance sheet date).

  The vast majority of loans and long-term and medium-term financing arrangements in Israel are linked to the CPI. Therefore, the Israeli Institute for Accounting Standards has submitted a request to the International Financial Reporting Interpretation Committee (IFRIC) to clarify the applicable method in the measurement of the effective interest rate of such assets and liabilities under IFRS.

  The Committee’s response in this matter and the implications thereof cannot be reliably predicted. If the Committee’s response indicates that the method used in Israel (and which was implemented in these financial statements/ as described in this note) is not appropriate in accordance with IFRS, the Company will have to change the method of measurement of these assets and liabilities and it may have to do so by way of restating its financial statements. Under the present circumstances, the Company is unable to reliably measure the potential impact on its financial statements in such a case.

  (5) Financial Revenues and Expenses

  In accordance with generally accepted accounting principles in Israel, financing income and expenses are presented under the statement of income in one amount.

  Pursuant to IAS 1, financing income and expenses should be presented separately.

  Consequently, financing expenses in the sum of NIS 31,766,000 and financing expenses in the sum of NIS 10,648,000 were presented in the statement of income for the year ended December 31, 2007.

  (6) Investment in Associated Companies

  In the course of the second quarter, Carmel, an associated company, made a repurchase of its own shares, held by some of its minority shareholders.As a result of this repurchase, the Company’s holdings in Carmel rose from 26.25% to reach 36.21%.This increase in the holding rate led to a negative cost surplus of NIS 4,923,000 for the Company. According to Standard 20 (amended), this was allocated to non-monetary items and will be realized in accordance with the realization rate of these items.

  During 2007, the Company included a sum of NIS 2,439,000 in earnings from associated companies, as a result of the realization of these items.According to the directives of IAS 28 regarding the equity method of accounting, the balance of the negative cost surplus in the amount of NIS 4,923 thousand will be allocated to the Company’s share in earnings of associated companies during 2007, thereby increasing the Company’s earnings for the year ended on December 31, 2007 by a sum of NIS 2,484,000.The Investments in Associated Companies item in the balance sheet will also grow by the said sum.

F - 55



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – FINANCIAL INFORMATION IN ACCORDANCE WITH IFRS (continued)

  E. Additional information (continued)

  (7) Put option for investee

  As part of an agreement dated November 21, 1999 with Mondi Business Paper (hereafter MBP, formerly Neusiedler AG), Mondi Hadera purchased the operations of the Group in the area of writing and typing paper and issued 50.1% of its shares to MBP.

  As part of this agreement, MBP was granted an option to sell its holdings in Mondi Hadera to the company, at a price 20% lower than its value (as defined in the agreement) or $ 20 million less 20%, whichever is higher. According to oral understandings between persons in the company and persons in MBP, which were formulated in proximity to signing the agreement, MBP will exercise the option only in extremely extraordinary circumstances, such as those which obstruct manufacturing activities in Israel over a long period.

  In view of the extended period which has passed since the date of such understandings and due to changes in the management of MBP, occurring recently, the company has chosen to take a conservative approach, and, accordingly, to reflect the economic value of the option in the context of the transition to reporting according to international standards. Under accounting principles generally accepted in Israel, it was not required to give a value to the PUT option. According to the international standards, the value of the option was computed and recognized as a liability, measured according to fair value, with changes in fair value being recorded to operations in accordance with IAS 39.

  As of January 1, 2007, a liability with respect to the option for sale of the shares of the investee in the amount of approximately NIS 1,612 thousands was presented.

  As of December 31, 2007, a liability with respect to the option for sale of the shares of the subsidiary in the amount of approximately NIS 3,901 thousands was presented.

  (8) Provision for doubtful debts

  Under generally accepted accounting principles in Israel, the provision for doubtful debts is calculated both by means of a general provision on the basis of approximations and past experience, ascertained by the company in accordance with the structure and nature of the customers in the various companies, and also on the basis of a specific provision for customers where the likelihood of collection was low in reliance on indicators in the hand of the company and was made in a specific manner.

  According to international standards, the provision for doubtful debts is calculated solely on the basis of a specific provision.

  As a result, the amount of the provision for doubtful debts increased as of January 1, 2007 by the amount of NIS 218 thousands and deferred taxes decreased by NIS 63 thousands.

F - 56



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – FINANCIAL INFORMATION IN ACCORDANCE WITH IFRS (continued)

  E. Additional information (8) (continued)

  The amount of the provision for doubtful debts increased as of December 31, 2007 by the amount of NIS 218 thousands and deferred taxes decreased by NIS 59 thousands.

  (9) Capital note issued to an investee

  The company’s balance sheet includes a capital note that was issued to an investee. Due to the fact that no repayment date was set for the capital note, and in view of the fact that the company is not a controlling interest in the investee, the capital note was presented under Israeli standards at its nominal value, and financial expenses in respect of same were not recorded in the statement of operations.

  In accordance with the directives of the international standards, the capital note was classified as a financial liability under IAS 39. Therefore, the capital note will be measured at unamortized cost, while using the effective interest method.

  In accordance with understandings reached between the company and the investee, that the capital note will not be repayable prior to January 1, 2009, the amortized cost of the capital note in the financial statements of the company prepared according to the directives of the international standards will be considered as if it were repayable on such date.

  (10) Current Taxes

  In accordance with generally accepted accounting principles in Israel, current tax assets or liabilities were classified as other current assets or liabilities, respectively.

  According to International Standards (IAS 1) current tax assets or liabilities are classified as separate balance in the balance sheet.

Consequently, amounts of NIS 19,824 thousands and NIS 908 thousands which were previously presented under other current liabilities were reclassified to current tax liabilities as of January 1, 2007 and December 31, 2007, respectively.

  F. Reliefs with respect to the retroactive implementation of IFRS adopted by the Company

  IFRS 1 includes several reliefs, in respect of which the mandatory retroactive implementation does not apply. The following reliefs are those which the Company elected to adopt in its opening balance sheet under IFRS as of January 1, 2007 (hereinafter: “the opening balance sheet”):

  1. Share-Based Payment

  The provisions of IFRS 2, which deals with share-based payments, have not been retroactively implemented with respect to equity instruments granted before November 7, 2002 and which have vested prior to the transition date.

F - 57



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – FINANCIAL INFORMATION IN ACCORDANCE WITH IFRS (continued)

  F. Reliefs with respect to the retroactive implementation of IFRS adopted by the Company (continued)

  2. Translation Differences

  The Company chose not to retroactively implement the provisions of IAS 21 regarding translation differences accumulated as of January 1, 2007, with respect to overseas operations. Consequently, the opening balance sheet does not include cumulative translation differences in respect of overseas operations.

  3. Deemed Cost For Items Of Fixed Assets

  IFRS 1 allows to measure fixed assets, as of the transition date, or before it, based on revaluation that was carried out in accordance to prior accounting principles, as deemed cost, on the time of the revaluation, if the revaluation was comparable in general, to the cost or to the cost net of accumulated depreciation according to the IFRS standards, adjusted to changes such as changes in the CPI.

  Until December 31, 2003 the Company adjusted its financial statements to the changes in foreign rate of the U.S dollar, in accordance with opinion No. 36 of the institute of Certified Accountancy in Israel.

  For the purpose of adapting the IFRS standards, the Company chose to implement the above said relief allowed under IFRS 1, and to measure fixed assets items that were purchased or established up to December 31, 2003 according to the affective cost for that date, based on their adjusted value to the foreign exchange rate of the U.S dollar up to that date.

F - 58



AMERICAN ISRAELI PAPER MILLS LIMITED

Schedule

Details of Subsidiaries and Associated Companies
At December 31, 2007

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  
       Turketim Mallari Sanayi ve Ticaret A.S (KCTR)    49.90  
    Mondi Business Paper Hadera Ltd.    49.90  
    Subsidiary of Mondi Business Paper Hadera Ltd.:  
       Mondi Business Paper Hadera Marketing Ltd.    49.90  
    Carmel Container Systems Limited    36.21  
    Frenkel C.D. Limited**    27.85  

* Not including dormant companies.
** Frenkel C.D. Limited is partly held through Carmel Container Systems Limited (an associated company); the holding in voting shares of C.D. Packaging Systems Limited is 27.85%.

F - 59



  Enclosed please find the financial reports of the following associated companies:

  Mondi Business Paper Hadera Ltd.

  Hogla-Kimberly Ltd.

  Carmel Containers Systems Ltd.



MONDI BUSINESS PAPER HADERA LTD.

FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007



MONDI BUSINESS PAPER HADERA LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007

TABLE OF CONTENTS

Page
 
Report of Independent Registered Public Accounting Firm M-1 
 
Financial Statements:
 
  Balance Sheets M-2 
 
  Statements of Operations M-3 
 
  Statements of Changes in Shareholders' Equity M-4 
 
  Statements of Cash Flows M-5 - M-6
 
  Notes to the Financial Statements M-7 - M-30



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
Mondi Business Paper Hadera Ltd.

We have audited the accompanying balance sheets of Mondi Business Paper Hadera Ltd. (“the Company”) as of December 31, 2007 and 2006, 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 on a consolidated basis – for each of the three years in the period ended December 31, 2007. 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.

We conducted our audits in accordance with generally accepted auditing standards in Israel, including those prescribed under the Auditors’ Regulations (Auditor’s Mode of Performance), 1973 and 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 whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its 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 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, 2007 and 2006, and the results of operations, changes in shareholders’ equity and cash flows – of the Company and on consolidated basis – for each of the three years in the period ended December 31, 2007, in conformity 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 described in Note 2A, the financial statements are presented in reported amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.

/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu

Israel
May 26, 2008

M - 1



MONDI BUSINESS PAPER HADERA LTD.
BALANCE SHEETS
(NIS in thousands)

Consolidated
Company
As of December 31,
As of December 31,
Note
2  0  0  7
2  0  0  6
2  0  0  7
2   0  0  6
 
Current Assets                          
   Cash and cash equivalents        323    15    -    -  
   Trade receivables   3   190,935    173,174    -    -  
   Subsidiaries        -    -    134,316   (*)109,725  
   Other receivables   4   13,483    6,610    16,933    7,850  
   Inventories   5   143,366   (*)109,116    88,605   (*)71,927  




         348,107    288,915    239,854    189,502  




Long-Term Investments   
   Investments in Subsidiaries   6A   -    -    1,275    1,429  




   
Fixed Assets    7                     
   Cost        220,149   (*)214,170    216,592   (*)209,732  
   Less - accumulated depreciation        63,656    53,882    60,641    50,303  




         156,493    160,288    155,951    159,429  




Long -Term Assets   
   Long term Trade receivables        440    -    -    -  
   Goodwill   6B   3,177    3,177    -    -  




         3,617    3,177    -    -  




   
         508,217    452,380    397,080    350,360  




   
Current Liabilities   
   Short term bank credit        101,760    96,740    101,760    96,740  
   Current maturities of long-term  
      bank loans   10   14,387    15,243    14,387    15,243  
   Capital notes to shareholders   11   5,514    6,337    5,514    6,337  
   Trade payables   8   118,912    108,007    85,861    72,458  
   American Israeli Paper Mills  
      Group, net        71,109    62,807    -    -  
   Other payables and accrued expenses   9   21,239    20,884    14,262    17,220  




         332,921    310,018    221,784    207,998  




Long-Term Liabilities   
   Long-term bank loans   10   38,035    33,869    38,035    33,869  
   Capital notes to shareholders   11   -    6,338    -    6,338  
   Deferred taxes   20   29,934    14,047    29,934    14,047  
   Accrued severance pay, net   12   46    46    46    46  




         68,015    54,300    68,015    54,300  




Commitments and Contingent Liabilities    13                     
   
Shareholders' Equity   
   Share capital   14   1    1    1    1  
   Premium        43,352    43,352    43,352    43,352  
   Capital reserves        929    -    929    -  
   Retained earnings        62,999    44,709    62,999    44,709  




         107,281    88,062    107,281    88,062  




   
         508,217    452,380    397,080    350,360  





/s/ David Muhlgay
/s/ Avner Solel
/s/ Zvi Livnat
D. Muhlgay A. Solel Z. Livnat
Financial Director Managing Director Vice-Chairman of the Board of Directors

Approval date of the financial statements: May 26, 2008.
(*) Reclassified

The accompanying notes are an integral part of the financial statements.

M - 2



MONDI BUSINESS PAPER HADERA LTD.
STATEMENTS OF OPERATIONS
(NIS in thousands)

Consolidated
Company
Year ended December 31,
Year ended December 31,
Note
2  0  0  7
2  0  0  6
2  0  0   5
2  0  0  7
2  0  0  6
2  0  0  5
 
Net sales      15    770,032    711,545    663,338    580,202    534,214    462,177  
   
Cost of sales    16    688,000    659,845    609,752    517,376    501,080    420,558  






   
   Gross profit          82,032    51,700    53,586    62,826    33,134    41,619  
   
Selling expenses    17    37,889    44,506    45,268    21,609    27,852    35,924  
General and  
  administrative expenses    18    10,532    9,245    7,301    7,785    6,788    6,702  






   
   Operating profit (loss)          33,611    (2,051 )  1,017    33,432    (1,506 )  (1,007 )
   
 Financing expenses, net    19    (8,414 )  (6,854 )  (12,868 )  (8,280 )  (6,540 )  (11,533 )
   
 Other income, net         313    37    65    27    -    -  






   
   Income (loss) before income   
   taxes          25,510    (8,868 )  (11,786 )  25,179    (8,046 )  (12,540 )
   
tax benefits (Income  
  taxes)    20    (7,220 )  1,149    8,380    (6,735 )  1,493    8,470  






   
   Income (loss) after   
   income taxes (tax   
   benefits)          18,290    (7,719 )  (3,406 )  18,444    (6,553 )  (4,070 )
   
Equity in net earnings  
   (losses) of  
   Subsidiaries         -    -    -    (154 )  (1,166 )  664  






   
   Net income (loss) for   
   the year          18,290    (7,719 )  (3,406 )  18,290    (7,719 )  (3,406 )







The accompanying notes are an integral part of the financial statements.

M - 3



MONDI BUSINESS PAPER HADERA LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NIS in thousands)

Share
capital

Premium
Capital
reserves

Retained
earnings

Total
 
Balance - January 1, 2005      1    43,352    -    55,834    99,187  
   
Changes during 2005:   
   
   Loss for the year    -    -    -    (3,406 )  (3,406 )





   
Balance - December 31, 2005     1    43,352    -    52,428    95,781  
   
Changes during 2006:   
   
   Loss for the year    -    -    -    (7,719 )  (7,719 )





   
Balance - December 31, 2006     1    43,352    -    44,709    88,062  
   
Changes during 2007:   
   
   Recognition in capital reserves  
     due to presentation of  
     shareholders  
     capital notes at fair value (*)    -    -    929    -    929  
   
   Profit for the year    -    -    -    18,290    18,290  





   
Balance - December 31, 2007     1    43,352    929    62,999    107,281  






(*)     The company created the Capital reserves due to initial application of standard No. 23.

The accompanying notes are an integral part of the financial statements.

M - 4



MONDI BUSINESS PAPER HADERA LTD.
STATEMENTS OF CASH FLOWS
(NIS in thousands)

Consolidated
Company
Year ended December 31,
Year ended December 31,
2  0  0  7
2  0  0  6
2  0  0  5
2  0  0  7
2  0  0  6
2  0  0  5
 
Cash flows - operating activities                            
Net income (loss) for the year    18,290    (7,719 )  (3,406 )  18,290    (7,719 )  (3,406 )
Adjustments to reconcile net  
   income (loss) to net cash provided  
   by (used in) operating activities  
   (Appendix A)    (11,317 )  (2,667 )  (29,625 )  (11,291 )  (2,698 )  (28,359 )






Net cash provided by (used in)   
   operating activities     6,973    (10,386 )  (33,031 )  6,999    (10,417 )  (31,765 )






   
Cash flows - investing activities   
Acquisition of fixed assets    (8,458 )  (8,414 )  (51,323 )  (8,443 )  (8,414 )  (51,323 )
Proceeds from sale of fixed assets    376    189    248    27    189    184  






Net cash used in investing   
   activities     (8,082 )  (8,225 )  (51,075 )  (8,416 )  (8,225 )  (51,139 )






   
Cash flows - financing activities   
Short-term bank credit, net    5,020    10,853    87,004    5,020    10,869    86,990  
Repayment of long-term bank loans    (15,927 )  (16,002 )  (13,702 )  (15,927 )  (16,002 )  (13,702 )
Proceeds of long-term bank loans    18,000    28,000    -    18,000    28,000    -  
Repayment of long-term capital  
   notes to shareholders    (5,676 )  (4,225 )  -    (5,676 )  (4,225 )  -  






Net cash provided by (used in)   
   financing activities     1,417    18,626    73,302    1,417    18,642    73,288  






   
Increase (decrease) in   
   cash and cash equivalents     308    15    (10,804 )  -    -    (9,616 )
Cash and cash equivalents -   
   beginning of year     15    -    10,804    -    -    9,616  






Cash and cash equivalents -   
   end of year     323    15    -    -    -    -  







The accompanying notes are an integral part of the financial statements.

M - 5



MONDI BUSINESS PAPER HADERA LTD.
APPENDICES TO STATEMENTS OF CASH FLOWS
(NIS in thousands)

Consolidated
Company
Year ended December 31,
Year ended December 31,
2  0  0  7
2  0  0  6
2  0  0  5
2  0  0  7
2  0  0  6
2  0  0  5
 
A. Adjustments to reconcile net                            
income (loss) to net cash provided   
by (used in) operating activities   
   
Income and expenses items   
not involving cash flows:   
Equity in net losses (earnings) of  
   Subsidiaries    -    -    -    154    1,166    (664 )
Depreciation and amortization    10,701    10,907    10,722    10,432    10,513    9,617  
Deferred taxes, net    7,006    (1,330 )  (8,470 )  6,724    (1,501 )  (8,470 )
Decrease in liability for severance  
   pay, net    -    (5 )  (36 )  -    (5 )  (36 )
Capital gain  
   from sale of fixed assets    (313 )  (37 )  (65 )  (27 )  (37 )  -  
Effect of exchange rate and linkage  
   differences of long-term bank  
   loans and long-term loan to  
   Subsidiary    1,237    (935 )  (738 )  1,237    (935 )  (739 )
Effect of exchange rate  
   differences of long-term  
   capital notes to shareholders    (556 )  (1,512 )  1,179    (556 )  (1,512 )  1,179  
   
Changes in assets and liabilities:   
Increase in trade receivables    (17,761 )  (12,299 )  (3,060 )       -    -  
Decrease (increase)  
   in other receivables    2,008    (261 )  (345 )  80    2,611    (3,165 )
Decrease (increase)  
Increase in Subsidiaries    -    -    -    (24,591 ) (*)(26,854 ) (*)(3,741 )
   in inventories    (34,250 ) (*)4,816    (26,468 )  (16,678 ) (*)15,600    (30,153 )
Increase in long term trade  
   receivables    (440 )  -    -    -    -    -  
Increase (decrease) in trade  
   payables    12,394    4,354    (4,235 )  14,892    (3,578 )  8,907  
Increase (decrease) in  
   American Israeli Paper Mills  
   Group, net    8,302    (7,047 )  4,821    -    -    -  
Increase (decrease) in other  
   payables and accrued expenses    355    682    (2,930 )  (2,958 )  1,834    (1,094 )






     (11,317 )  (2,667 )  (29,625 )  (11,291 )  (2,698 )  (28,359 )






   
B. Non-cash activities   
Acquisition of fixed  
   assets on credit    (1,489 ) (*)3,596    3,342    (1,489 ) (*)3,596  3,342  







The accompanying notes are an integral part of the financial statements.

(*) Reclassified

M - 6



MONDI BUSINESS PAPER HADERA 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.

  The Company is presently owned by Neusiedler Holdings BV. (“NHBV” or the “Parent Company”) (50.1%) and American-Israeli Paper Mills Ltd. (“AIPM”) (49.9%).

  The financial statements are prepared in accordance with the Israeli Securities Regulations (Preparation of Annual Financial Statements), 1993.

  B. Definitions:

The Company - Mondi Business Paper Hadera Ltd.
 
The Group - the Company and its Subsidiaries, a list of which is presented in Note 6C.
 
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 - Until January 1, 2007 as defined by Opinion No. 29 of the Institute of Certified Public Accountants in Israel. As of January 1, 2007 as defined by standard No.23 published by the Israeli Accounting Standard board.
 
Interested Parties - Until January 1, 2007 as defined in the Israeli Securities Regulations (Presentation of Financial Statements), 1993. As of January 1, 2007 as defined in Standard No.23 published by the Israeli Accounting Standards board.
 
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.
 
Reported Amount - see Note 2A(1) below.

M - 7



MONDI BUSINESS PAPER HADERA 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 application of standard No.27 “Fixed assets”, standard No.28 ” Amendment of the transitional orders in accounting standard No. 27” , accounting standard No. 23 “Accounting for transactions between an entity and a controlling party” and accounting standard No. 30 “Intangible assets”.

  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 years ended December 31, 2004 and 2005, the Group’s financial statements are prepared and presented in Reported 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 23.

M - 8



MONDI BUSINESS PAPER HADERA 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 in reporting amounts

  a. Balance Sheet Items

  Non-monetary items (items whose balances reflect historical value at acquisition or upon establishment) are presented at their Adjusted Amounts as of December 31, 2003 plus additions and dispositions occurring subsequent to such date. 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 in accordance with 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 in accordance with the guidance of Standard No. 12.

M - 9



MONDI BUSINESS PAPER HADERA 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 unallocated excess cost due to investment in an investee deriving from the difference between the fair value of the investee’s identifiable assets (including intangible assets) over the fair value of its identifiable liabilities (after deferred taxes) at the acquisition date is goodwill, which has been depreciated by December 31, 2005 over about 4 years.

  See note I below for the accounting for goodwill as of January 1, 2006.

  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

  As of January 1, 2007 the Company applies Accounting Standard NO.26 “Inventories”. Inventories are stated at the lower of cost or net realizable value. Inventory cost includes purchase cost, direct labor cost, variable and fixed manufacturing overhead and any other costs incurred in bringing the inventories to their present location and condition.

  Net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. Any reduction of inventory to net realizable value as well as any other inventory loss is recorded in the current period.

  Subsequent elimination of a write-down that stems from an increase in net realizable value is allocated to operations during the period in which the elimination is taking place.

  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. For amortization of goodwill included in an investment in a Subsidiary, see I below.

M - 10



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  G. Fixed Assets

  As of January 1, 2007 the Company applies accounting standard No. 27 “Property plant and equipment” and accounting standard No. 28 “Amendment of the transitional orders in accounting standard No. 27 “Property plant and equipment”

  Cost method- fixed assets are presented at cost, including interest and other capitalizable costs (capitalizable costs include only incremental direct costs that are identifiable with, and related to, the property and equipment and are incurred prior to its initial operation), less accumulated depreciation and amortization.

  As of January 1, 2007 Any fixed asset with a meaningful cost in relation to the item’s total cost should be depreciated separately. Moreover, the depreciation method used will be reviewed at least once at yearend and, if any meaningful change had taken place in the estimated consumption of future economic benefits inherent in the asset, the method should be modified to reflect such changes. This change will be treated as a change in accounting estimate.

  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

  Scrap value, depreciation method and the assets useful lives are being reviewed by management in the end of every financial year. Changes are handled as a change of estimation and are applied from here on.

  Profit of loss due to the sale or abandon of an asset is determined by the difference between the proceeds from the sale to the net book value of the asset and is attributed to profit and loss statements.

  As a result of the application of this standards the Company reclassified major spare parts and standby equipment, that had been recorded as inventory, to property plant and equipment in the amount of NIS 2,715 thousand as of December 31,2007 (NIS 2,927 thousand as of December 31, 2006.

M - 11



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  H. Impairment of Long-Lived Assets

  At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

  Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired.

  Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

  If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

  Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

M - 12



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  I. Other Assets – Goodwill

  As of January 1, 2006 the Company applies Standard No. 20 (revised) “Accounting Treatment for Goodwill and Other Intangibles upon the Acquisition of an Investee” (in this paragraph- “the standard”).

  By December 31, 2005 the Company had systematically amortized its goodwill deriving from the Acquisition of investees using the straight line method over periods of 15 years.

  As of January 1, 2007 the Company applies Standard No. 30

In accordance with the standard, goodwill is the unallocated excess cost due to investment in an investee deriving from the difference between the fair value of the investee’s identifiable assets (including intangible assets) over the fair value of its identifiable liabilities (after deferred taxes) at the acquisition date. Goodwill is no longer amortized in a systematic manner, but is examined for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

  For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period.

  On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

  J. Deferred Income Taxes

  The Group records deferred income 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 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. The deferred income 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 income 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.

M - 13



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  L. Transaction between the company and a controlling party.

  As of January 1, 2007 the company is implementing accounting Standard NO.23 “Accounting for transactions between an entity and a controlling party”.

  The Standard stipulates that transactions between an entity and a controlling party will be measured based on fair value; transactions which in nature are owner investments or distributions to owners should be reported directly in equity and not be recognized in the controlled entity’s profit and loss; the differences between the consideration in transactions between an entity and a controlling party and their fair value will be recognized directly in equity. Current and deferred taxes pertaining to the items recognized in equity due to transactions with controlling parties will be recognized directly in equity as well.

  Loans-
As of January 1, 2007 loans granted from controlling party will be measured on fair value, the differences between the consideration in transactions between an entity and a controlling party and their fair value will be recognized directly in equity.

  The Standard is effective for transactions between an entity and a controlling party taking place subsequent to January 1, 2007 and for loans granted from or given to a controlling party prior to the Standard’s effective date, starting on the Standard’s effective date.

  As a result of initial application of the standard the company’s share holders equity increased in the sum of NIS 929 thousand , the current liabilities decreased in the sum of NIS 823 thousand and the results of operation decreased in the sum of NIS 556 thousand during the period.

M - 14



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  M. 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. Management’s 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.

  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 vis-a-vis the NIS and in the Israeli CPI:

As of:
Representative
exchange rate
of the Dollar
(NIS per $1)

CPI
"in respect of"
(in points)

 
December 31, 2007      3.846    191.15  
December 31, 2006    4.225    184.87  
December 31, 2005    4.603    185.05  

Increase (decrease)
during the year ended:

%
%
 
December 31, 2007      (9.1 )  3.4  
December 31, 2006    (8.2 )  -  
December 31, 2005    6.8    2.4  

  (3) Exchange-rate differences are charged to operations as incurred.

M - 15



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  O. Recent Accounting Standards

  Application of Standard No.29 “Adoption of International Financial Reporting Standards”

  In July 2006, the Israeli Accounting Standards Board published Accounting Standard No. 29 -“Adoption of International Financial Reporting Standards” – IFRS (“the Standard”). According to this Standard, the financial statements of an entity subject to the Israeli Securities Law and authoritative Regulations thereunder, other than foreign corporations as defined by this Law that prepares its financial statements in other than Israeli GAAP, will be prepared for the reporting periods commencing January 1, 2008, including interim periods, in accordance with the IFRS and related interpretations published by the International Accounting Standards Board.

  An entity adopting IFRS as of January 1, 2008 and electing to report comparative figures in accordance with the IFRS for only 2007, will be required to prepare opening balance-sheet amounts as of January 1, 2007 based on the IFRS.

  Reporting in accordance with the IFRS will be carried out based on the provisions of IFRS No. 1, “First-time Adoption of IFRS Standards”, which establishes guidance on implementing the transition from financial reporting based on domestic national accounting standards to reporting in accordance with the IFRS.

  IFRS No. 1 supersedes the transitional provisions established in other IFRSs (including those established in former domestic national accounting standards), stating that all IFRSs should be adopted retroactively for the opening balance-sheet amounts. Nevertheless, IFRS No. 1 grants allowances on certain issues by not applying the retroactive application in respect thereof. In addition, IFRS No. 1 contains certain exceptions with regard to the retroactive application of certain aspects stipulated in other IFRSs.

  Management decided to adopt IFRS standards starting January 1, 2008.

M - 16



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

NOTE 3 TRADE RECEIVABLES

Consolidated
AS of December 31,
2 0 0 7
2 0 0 6
 
Domestic            
   Open accounts    132,061    137,585  
   Checks receivable    34,882    26,575  


     166,943    164,160  


Foreign   
   Open accounts    26,984    4,680  
   Related parties    -    7,188  


     26,984    11,868  


     193,927    176,028  
   Less - allowance for doubtful accounts     (2,992 )  (2,854 )


     190,935    173,174  



NOTE 4 OTHER RECEIVABLES

Consolidated
Company
As of December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
 
Deferred taxes (Note 20D)      11,257    2,376    10,687    1,524  
Prepaid expenses    -    952    -    739  
Advances to suppliers    1,142    1,861    727    1,300  
Value Added Tax    -    -    5,358    3,913  
Income tax advances, net    -    138    -    10  
Others    1,084    1,283    161    364  




     13,483    6,610    16,933    7,850  





M - 17



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

NOTE 5 INVENTORIES

Consolidated
Company
As of December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
 
Raw and auxiliary materials      49,638   (*) 30,703  39,917   (*) 30,703
Finished products and goods in process    93,728    78,413    48,688    41,224  




     143,366    109,116    88,605    71,927  




   
       Includes products in transit    9,722    4,440    -    -  




   
The inventories are presented net of  
  impairment provision    1,310    540    815    518  





  The cost of inventories recognised as an expense includes NIS 770 thousand in respect of write-downs of inventory to net realisable value.

  (*) As a result of applying standard No.27, spare parts in the sum of NIS 2,927 thousand were defined as fixed assets.

NOTE 6 INVESTMENTS IN SUBSIDIARIES

  A. Composition

Company
As of December 31,
2 0 0 7
2 0 0 6
 
Cost of shares      4,338    4,338  
Accumulated losses since acquisition, net    (3,063 )  (2,909 )


     1,275    1,429  



  B. Goodwill

Consolidated
As of December 31,
2 0 0 7
2 0 0 6
 
Cost      6,232    6,232  
Less - accumulated amortization    3,055    3,055  


     3,177    3,177  



  C. Consolidated Subsidiaries

  The consolidated financial statements as of December 31, 2007, include the financial statements of the following Subsidiaries:

Ownership and control
As of December 31,
2 0 0 7

%
 
Mondi Business Paper Hadera Marketing Ltd.      100.00  
Grafinir Paper Marketing Ltd.    100.00  
Yavnir (1999) Ltd.    100.00  
Miterani Paper Marketing 2000 (1998) Ltd.    100.00  

  (*) Reclassified

M - 18



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

NOTE 7 FIXED ASSETS

Leasehold
improvements

Machinery
and
equipment

Motor
vehicles

Office
Furniture,
Computers
and
equipment

Total
 
Consolidated                        
   
Cost:   
Balance - January 1, 2007    3,724   (*) 203,964  3,107    3,375    214,170  
Changes during 2007:  
   Additions    71    6,118    780    -    6,969  
   Dispositions    -    (236 )  (754 )  -    (990 )





Balance - December 31, 2007    3,795    209,846    3,133    3,375    220,149  





   
Accumulated depreciation:   
Balance - January 1, 2007    2,593    47,285    1,712    2,292    53,882  
Changes during 2007:  
   Additions    394    9,509    436    362    10,701  
   Dispositions    -    (220 )  (707 )  -    (927 )





Balance - December 31, 2007    2,987    56,574    1,441    2,654    63,656  





   
Net book value:   
December 31, 2007    808    153,272    1,692    721    156,493  





   
December 31, 2006    1,131    156,679    1,395    1,083    160,288  





   
Company   
   
Cost:   
Balance - January 1, 2007    2,651   (*) 202,671  1,999    2,411    209,732  
Changes during 2007:  
   Additions    71    6,103    780    -    6,954  
   Dispositions    -    (94 )  -    -    (94 )





Balance - December 31, 2007    2,722    208,680    2,779    2,411    216,592  





   
Accumulated depreciation:   
Balance - January 1, 2007    1,835    46,268    584    1,616    50,303  
Changes during 2007:  
   Additions    272    9,422    435    303    10,432  
   Dispositions    -    (94 )  -    -    (94 )





Balance - December 31, 2007    2,107    55,596    1,019    1,919    60,641  





   
Net book value:   
December 31, 2007    615    153,084    1,760    492    155,951  





   
December 31, 2006    816    156,403    1,415    795    159,429  






(*) Reclassified

M - 19



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

NOTE 8 TRADE PAYABLES

Consolidated
Company
As of December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
 
In Israeli currency      30,490    29,006    26,864    24,351  
In foreign currency or linked thereto    88,422    79,001    58,997    48,107  




     118,912    108,007    85,861    72,458  





NOTE 9 OTHER PAYABLES AND ACCRUED EXPENSES

Consolidated
Company
As of December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
 
Accrued payroll and                    
   related expenses    15,774    12,719    10,454    12,719  
Value Added Tax    777    1,559    -    -  
Advances from customers    941    1,165    -    -  
NHBV - Accrual for license fee    34    910    -    -  
Interest payable    1,493    2,803    1,493    2,803  
Other    2,220    1,728    2,315    1,698  




     21,239    20,884    14,262    17,220  





NOTE 10 LONG-TERM BANK LOANS

  A. Composition

Interest
rate

Consolidated
and Company

As of December 31,
% (*)
2 0 0 7
2 0 0 6
 
In U.S. dollar      6.67    -    7,627  
In NIS indexed to the CPI    6.55    52,422    41,485  


          52,422    49,112  
Less - current maturities         14,387    15,243  


                                                                  38,035  33,869



  (*) Average interest rate as of December 31, 2007.

M - 20



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

NOTE 10 LONG-TERM BANK LOANS (Cont.)

  B. Maturities

Consolidated
and Company

As of December 31,
2 0 0 7
 
First year - 2008      14,387  
Second year - 2009    17,109  
Third year - 2010    11,240  
Fourth year - 2011    4,252  
Fifth year - 2012    5,434  

     52,422  


  C. According to the loan agreements with the banks, as amended in the second half of 2005, the Company has to achieve, inter alia, financial ratio at the end of each audited fiscal year of total shareholders equity (which includes capital notes to shareholders) to total assets to be no less than 22%. 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, 2007, the Company was in full compliance with the covenants stipulated in the bank agreements and this financial ratio amounted to 22.16%.

  D. As to a “negative pledge agreement” signed by the Company, see Note 13B.

  E. The Company and its Subsidiaries have been granted a total 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 290,000 thousand. As of the balance sheet date, the Group utilized NIS 183,000 thousand of the credit facility as long & short term borrowings and as bank guarantees granted to third parties.

NOTE 11 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, 2007 the total capital notes amount is NIS 5,514 thousand. Management intends to repay NIS 5,514 thousand of the capital note balance during 2008.

NOTE 12 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, 2007 reflects the severance pay liability in respect of temporary employees.

M - 21



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

NOTE 13 COMMITMENTS AND CONTINGENT LIABILITIES

  A. Commitments:

  (1) 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, 2007 are as follows:

Consolidated
Company
 
2008       4,628    3,280  
2009     4,628    3,280  


     9,256    6,560  



  B. Liens

  To secure long-term bank loans and short-term bank credits (the balance of which as of December, 31 2007 is NIS 154,182 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.

  C. Guarantees

  The Company from time to time and in the course of its ongoing operations provides guarantees.

NOTE 14 SHARE CAPITAL

  A. As of December 31, 2007 and 2006, 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).

M - 22



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

NOTE 15 NET SALES

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Industrial operations      580,202    534,214    460,383    580,202    534,214    462,177  
Commercial operations    189,830    177,331    202,955    -    -    -  






     770,032    711,545    663,338    580,202    534,214    462,177  







NOTE 16 COST OF SALES

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Purchases (*)      175,507    165,168    187,618    -    -    -  
Materials consumed    383,002    343,801    306,803    383,002    343,801    306,803  
Salaries and related expenses    40,756    38,082    36,391    40,756    38,082    36,391  
Subcontracting    5,260    6,464    5,898    5,260    6,464    5,898  
Energy costs    57,700    63,013    54,883    57,700    63,013    54,883  
Depreciation    10,432    10,510    9,607    10,432    10,116    9,607  
Other manufacturing costs  
  and expenses (including rent)    28,133    28,884    29,939    27,492    28,660    29,093  






     700,790    655,922    631,139    524,642    490,136    442,675  
Change in finished goods ,  
  goods in process, and  
    products in transit (**)    (12,790 )  3,923    (21,387 )  (7,266 )  10,944    (22,117 )






     688,000    659,845    609,752    517,376    501,080    420,558  







  (*) The purchases of the Group are related principally to commercial operations.

  (**) Change in raw and auxiliary materials are included in materials consumed.

M - 23



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

NOTE 17 SELLING EXPENSES

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Salaries and related expenses      19,340    19,190    17,205    12,288    10,793   (*)13,554  
Packaging and shipping to customers    9,423   (*)15,464 (*)18,079  5,179 (*) 13,415   (*) 17,162  
Maintenance and rent    8,438    8,494    8,237    3,721    3,421   (*)4,747  
Advertising    450    70    166    286    39   (*)131  
Commissions and license fees  
   to a shareholder    26    961    1,164    -    -    -  
Depreciation    212    327    417    135    184   (*)330  






     37,889    44,506    45,268    21,609    27,852    35,924  







(*) Reclassified.

NOTE 18 GENERAL AND ADMINISTRATIVE EXPENSES

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Salaries and related expenses      4,221    3,829    3,863    4,221    3,829    3,863  
Office maintenance    174    209    169    -    -    -  
Professional and  
   management fees    1,998    1,792    2,060    1,423    1,353    1,537  
Depreciation    57    70    74    57    70    74  
Amortization of goodwill         -    623    -    -    -  
Bad and doubtful debts    1,707    1,627    (840 )  -    -    -  
Other    2,375    1,718    1,352    2,084    1,536    1,228  






     10,532    9,245    7,301    7,785    6,788    6,702  







NOTE 19 FINANCING INCOME (EXPENSES), NET

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Interest on long-term bank loans      13,822    5,803    2,486    13,822    5,803    4,935  






Erosion of monetary assets and  
   liabilities, net    (5,408 )  (3,036 )  5,630    (5,542 )  (3,702 )  4,883  






Forward transaction    -    515    (1,497 )  -    515    (1,497 )







M - 24



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

NOTE 20 INCOME TAXES (TAXES BENEFITS)

  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 benefit the Company is entitled to under this law is accelerated depreciation rates.

  B. Composition

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Current taxes      (140 )  (79 )  (54 )  -    -    -  
Taxes in respect of prior years    (74 )  (102 )  (36 )  (11 )  (8 )  -  
Deferred taxes (D. below)    (7,006 )  1,330    8,470    (6,724 )  1,501    8,470  






     (7,220 )  1,149    8,380    (6,735 )  1,493    8,470  







  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 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Income (loss) before income taxes      25,510    (8,868 )  (11,786 )  25,179    (8,046 )  (12,540 )






   
Statutory tax rate    29 %  31 %  34 %  29 %  31 %  34 %
Tax computed by statutory tax  
  rate    7,398    (2,727 )  (4,007 )  7,302    (2,494 )  (4,264 )
   
Tax increments (savings)   
  due to:   
Non-deductible expenses    -    16    212    -    4    -  
Non-taxable income    -    (78 )  (22 )  -    -    -  
Reduction in corporate tax rates -  
  (E. below)    -    -    (3,888 )  -    -    (3,962 )
Differences arising from  
  basis of measurement    (252 )  1,538    (711 )  (576 )  989    (244 )
Prior years income taxes    74    102    36    9    8    -  






     7,220    (1,149 )  (8,380 )  6,735    (1,493 )  (8,470 )







M - 25



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

NOTE 20 INCOME TAXES (TAXES BENEFITS) (Cont.)

  D. Deferred Taxes

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Balance as of beginning                            
  of year    (11,671 )  (13,001 )  (21,471 )  (12,523 )  (14,024 )  (22,494 )
Changes during the year    (7,006 )  1,330    4,582    (6,724 )  1,501    4,508  
Adjustment due to  
  change in income  
    tax rates    -    -    3,888         -    3,962  






   
  Balance as of end of year    (18,677 )  (11,671 )  (13,001 )  (19,247 )  (12,523 )  (14,024 )







Consolidated
Company
As of December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
 
 Deferred taxes are presented in the                    
 balance sheets as follows:   
    
 Other receivables and prepayments (Note 4):  
    
    Allowance for doubtful accounts    570    852    -    -  
    Vacation and recreation pay    1,743    1,524    1,743    1,524  
    Carry forward tax losses    8,933    -    8,933    -  




     11,246    2,376    10,676    1,524  




   
 Long-term liabilities:  
    Depreciable fixed assets    (29,934 )  (25,401 )  (29,934 )  (25,401 )
    Accrued severance pay, net    11    11    11    11  
    Less- Carry forward tax losses    -    11,343    -    11,343  




     (29,923 )  (14,047 )  (29,923 )  (14,047 )




     (18,677 )  (11,671 )  (19,247 )  (12,523 )





For 2006-2007 – Deferred taxes were computed at rates between 29%-25%, primarily – 25%.

Deferred taxes are recognized in respect of all carry forward losses of the Group, see F.

M - 26



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

NOTE 20 INCOME TAXES (TAXES BENEFITS) (Cont.)

  E. Reduction of Corporate Tax Rates

  In July 2005, the Israeli Knesset passed the Law for Amending the Income Tax Ordinance (No. 147), 2005, according to which commencing in 2006 the corporate income-tax rate would be gradually reduced, for which a 31% tax rate was established, through 2010, in respect of which a 25% tax rate was established. The effect of this amendment on the Group’s deferred income tax provisions is reflected by an increase of NIS 3,888 thousand in income tax benefit for the year ended December 31, 2005.

  F. Carryforward tax losses of the Group and the Company are NIS 50,271 thousand as of December 31, 2006 and NIS 33,086 thousand as of December 31, 2007, respectively.

  G. The Company and its Subsidiaries have tax assessments that are final through the 2002 tax year.

NOTE 21 RELATED PARTIES AND INTERESTED PARTIES

  A. Balances with Related Parties and Subsidiaries

Consolidated
Company
As of December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
 
Trade receivables - related parties      -    7,188    134,316    109,725  




Trade payables - AIPM    71,109    62,807    -    -  




Trade payables - related parties    38,090    4,714    -    -  




Other payables and accrued expenses - AIPM    -    2,402    -    2,208  




Other payables and accrued expenses -  
related parties    34    910    -    -  




Capital notes to shareholders    6,443    12,675    6,443    12,675  





M - 27



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(Reported amounts)
(NIS in thousands)

NOTE 21 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  7
2  0  0  6
2  0  0  5
2  0  0  7
2  0  0  6
2  0  0  5
 
Sales to related parties      26,602    96,520    103,196    -    -    -  






   
Sales to Subsidiaries    -    -    -    580,202    534,214    462,177  






   
Cost of sales    106,226    106,679    106,076    91,361    9,148    77,930  






   
Selling expenses, net  
  (Participation in selling  
  expenses, net)    64    4,413    5,969    (12,353 )  (8,564 )  (450 )






   
General and  
  administrative expenses    1,998    1,234    1,750    1,423    935    1,447  






   
Financing expenses  
  (income), net    2,880    2,361    2,406    2,880    2,361    1,845  







  C. (1) The Company leases its premises from AIPM and receives services (including energy, water, maintenance and professional services) under agreements, which are renewed every year.

  (2) The Group is obligated to pay commissions to NAG.

NOTE 22 DISCLOSURE AND PRESENTATION OF FINANCIAL INSTRUMENTS

  A. Credit Risk

  The Group’s revenue derives 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.

  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 and other current assets. Non-derivative liabilities include short-term bank credit, 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 Group enters from time to time into off-balance sheet financial instruments for hedging against currency and interest-rate risks.

M - 28



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

NOTE 23 COMPANY’S FINANCIAL STATEMENTS IN NOMINAL VALUESFOR TAX PURPOSES

  A. Balance Sheets

Company
As of December 31,
2  0  0  7
2  0  0  6
 
Current Assets            
  American Israeli Paper Mills Group, net    306,025    243,559  
  Other receivables    9,535    16,334  
  Inventories    88,605   (*)71,927  


     404,165    331,820  


   
Long-Term Investments   
  Investments in Subsidiaries    (1 )  146  


   
Fixed Assets, net     153,548   (*)156,827  


   
Long -Term Assets   
  Deferred Taxes    -    -  


     557,712    488,793  


   
Current Liabilities   
  Short term bank credit    101,760    96,740  
  Current maturities of long-term bank loans    14,387    15,243  
  Capital notes to shareholders    5,514    6,337  
  Trade payables    85,861    72,458  
  Subsidiaries    171,709    133,834  
  Other payables and accrued expenses    14,262    17,220  


     393,493    341,832  


   
Long term liabilities   
  Long-term bank loans    38,035    33,869  
  Capital notes to shareholders    -    6,338  
  Accrued severance pay, net    46    46  


     38,081    40,253  


   
Shareholders' Equity     126,138    106,708  


     557,712    488,793  



(*) Reclassified

M - 29



MONDI BUSINESS PAPER HADERA LTD.
NOTES TO FINANCIAL STATEMENTS
(NIS in thousands)

NOTE 23 COMPANY’S FINANCIAL STATEMENTS IN NOMINAL VALUES FOR TAX PURPOSES (Cont.)

  B. Statement of Operations

Year ended December 31,
2  0  0  7
2  0  0  6
2  0  0  5
 
Net sales      580,202    534,214    462,177  
   
Cost of sales    517,192    500,916    420,394  



   
    Gross profit     63,010    33,298    41,783  
   
Selling expenses    21,597    27,766    35,904  
   
General and administrative expenses    7,707    6,851    6,698  



    Operating profit (loss)     33,706    (1,319 )  (819 )
   
Financing (expenses) income, net    (8,316 )  (6,539 )  (11,533 )
   
Other income, net    -    -    -  



    Income (loss) before income tax benefits     25,390    (7,858 )  (12,352 )
   
Income tax benefits (expenses)    (6,734 )  1,492    8,470  



    Income (loss) after income tax benefits     18,656    (6,366 )  (3,882 )
   
   Equity in net earnings (losses) of Subsidiaries    (155 )  (1,166 )  664  



    Net income (loss) for the year     18,501    (7,532 )  (3,218 )




  C. Statements of Changes in Shareholders’ Equity

Share
Capital

Premium
Capital
reserves

Retained
earnings

Total
 
Balance - January 1, 2005      1    41,125    -    76,332    117,458  
   
Changes during 2005:   
   Loss for the year    -    -    -    (3,218 )  (3,218 )





   
Balance - December 31, 2005     1    41,125    -    73,114    114,240  
   
Changes during 2006:   
   Loss for the year    -    -    -    (7,532 )  (7,532 )





   
Balance - December 31, 2006     1    41,125    -    65,582    106,708  
   
Changes during 2007:   
   Loss for the year    -    -    929    18,501    19,430  





   
Balance - December 31, 2007     1    41,125    929    84,083    126,138  






M - 30



HOGLA-KIMBERLY LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007



HOGLA-KIMBERLY LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007

TABLE OF CONTENTS

Page
 
Report of Independent Registered Public Accounting Firm H-1
 
Financial Statements:
 
   Balance Sheets H-2
 
   Statements of Operations H-3
 
   Statements of Changes in Shareholders' Equity H-4
 
   Statements of Cash Flows H-5 - H-7
 
   Notes to the Financial Statements H-8 - H-38



Brightman Almagor
Haifa Office
5 Ma'aleh Hashichrur Street
Haifa, 33284
P.O.B. 5648, Haifa 31055
Israel

Tel: +972 (4) 860 7373
Fax: +972 (4) 867 2528
Info-haifa@deloitte.co.il
www.deloitte.com

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, 2007 and 2006, 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 on a consolidated basis – for each of the three years in the period ended December 31, 2007. 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.

We conducted our audits in accordance with generally accepted auditing standards in Israel, including those prescribed under the Auditors’ Regulations (Auditor’s Mode of Performance), 1973 and 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 whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its 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 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, 2007 and 2006, and the results of operations, changes in shareholders’ equity and cash flows – of the Company and on consolidated basis – for each of the three years in the period ended December 31, 2007, in conformity 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 described in Note 2A, the financial statements are presented in reported amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.

/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu

Israel
May 26, 2008

H - 1



HOGLA-KIMBERLY LTD.
BALANCE SHEETS
(REPORTED AMOUNTS)

(NIS in thousands)

Consolidated
Company
December 31,
December 31,
Note
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
 
Current Assets                        
   Cash and cash equivalents    3    23,082    7,190    6,990    1,358  
   Trade receivables    4    274,232    263,126    65,744    108,281  
   Other receivables    5    39,098   (*)27,576    22,924    23,783  
   Inventories    6    184,424   (*)172,709    90,709   (*)88,714  




          520,836    470,601    186,367    222,136  




Long-Term Investments   
   Capital note of shareholder    7    32,770    32,770    32,770    32,770  
   VAT receivable         43,317   (*)26,170    -    -  
   Investments in Subsidiaries    8    -    -    217,840    166,276  




          76,087    58,940    250,610    199,046  




Property plant and equipment     9                      
   Cost         596,039   (*)552,539    467,089   (*)449,076  
   Less - accumulated depreciation         281,186    253,245    225,417    208,071  




          314,853    299,294    241,672    241,005  




Other Assets   
   Goodwill    8B    24,495    22,338    -    -  
   Deferred taxes    21D    5,261    30,788    -    -  




          29,756    53,126    -    -  




          941,532    881,961    678,649    662,187  




Current Liabilities   
   Short-term bank credit    12    155,302    152,856    59,260    43,800  
   Trade payables    10    265,827    204,936    136,347    121,121  
   Other payables and accrued expenses    11    71,525    58,040    35,775    32,780  




          492,654    415,832    231,382    197,701  




Long-Term Liabilities   
   Liability for employee rights upon early  
   retirement    13B    3,402    -    3,402    -  
   Deferred taxes    21D    40,333    35,364    38,722    33,721  




          43,735    35,364    42,124    33,721  




Commitments and Contingent Liabilities     14                      
   
Shareholders' Equity   
   Share capital    15    29,638    29,638    29,638    29,638  
   Capital reserves         235,608    230,153    235,608    230,153  
   Translation adjustments relating to  
       foreign held autonomous Subsidiary         (6,757 )  (14,393 )  (6,757 )  (14,393 )
   Accumulated other comprehensive income         (1,349 )  (76 )  (1,349 )  (76 )
   Retained earnings         148,003    185,443    148,003    185,443  




          405,143    430,765    405,143    430,765  




          941,532    881,961    678,649    662,187  





(*) Reclassified.

/s/ Tom Davis
——————————————
T. Davis
Chairman of the Board of Directors
/s/ O. Argov
——————————————
O. Argov
Chief Financial Officer
/s/ A. Schor
——————————————
A. Schor
Chief Executive Officer

Approval date of the financial statements: May 26, 2008.

        The accompanying notes are an integral part of the financial statements.

H - 2



HOGLA-KIMBERLY LTD.
STATEMENTS OF OPERATIONS
(REPORTED AMOUNTS)

(NIS in thousands)

Consolidated
Company
Year ended December 31,
Year ended December 31,
Note
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Net sales      16    1,375,674   (*)1,244,193   (*)1,134,968    685,868    617,544    540,002  
   
Cost of sales    17    968,374    883,908    820,715    554,427    496,986    452,694  






   
    Gross profit          407,300    360,285    314,253    131,441    120,558    87,308  
   
Selling and marketing  
   expenses    18    279,868   (*)258,508   (*)191,670    13,945    15,531    13,708  
   
General and  
   administrative expenses    19    65,710    57,906    56,283    11,483    6,110    5,040  






   
    Operating profit          61,722    43,871    66,300    106,013    98,917    68,560  
   
Financing income  
   (expenses), net    20    (29,097 )  (25,627 )  752    (4,896 )  2,811    34  
   
Other income, net         5    774    176    2    632    153  






   
    Income before income taxes          32,630    19,018    67,228    101,119    102,360    68,747  
   
Income taxes    21    (64,615 )  (35,903 )  (19,527 )  (29,336 )  (33,733 )  (18,895 )






   
    Income (loss) after income   
      taxes          (31,985 )  (16,885 )  47,701    71,783    68,627    49,852  
   
Equity in losses  
   of Subsidiaries         -    -    -    (103,768 )  (79,298 )  (6,576 )
   
Minority interest in  
   losses (earnings) of  
     Subsidiary         -    6,214    (4,425 )  -    -    -  






   
    Net income (loss) for   
      the year          (31,985 )  (10,671 )  43,276    (31,985 )  (10,671 )  43,276  







(*) Reclassified.

        The accompanying notes are an integral part of the financial statements.

H - 3



HOGLA-KIMBERLY LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(REPORTED AMOUNTS)

(NIS in thousands)

Share capital
Capital
reserves

Translation
adjustments
relating to
foreign held
autonomous
Subsidiary

Accumulate other
comprehensive
income

Retained
earnings

Total
 
Balance - January 1, 2005      29,038    180,414    (3,377 )  -    230,457    436,532  
   
Changes during 2005:   
   
   Translation adjustments  
     relating to foreign held  
     autonomous Subsidiary    -    -    3,995    -    -    3,995  
   Dividend paid    -    -    -    -    (43,619 )  (43,619 )
   Net income for the year    -    -    -    -    43,276    43,276  






   
Balance - December 31, 2005     29,038    180,414    618    -    230,114    440,184  






   
Changes during 2006:   
   
   Shares issued    600    49,739    -    -    -    50,339  
   Translation adjustments  
     relating to foreign held  
     autonomous Subsidiary    -    -    (15,011 )  -    -    (15,011 )
   Movement in capital reserve  
     of hedging transactions, net    -    -    -    (76 )  -    (76 )
   Dividend paid    -    -    -    -    (34,000 )  (34,000 )
   Loss for the year    -    -    -    -    (10,671 )  (10,671 )






   
Balance - December 31, 2006     29,638    230,153    (14,393 )  (76 )  185,443    430,765  






   
Changes during 2007:   
   
   Translation adjustments  
     relating to foreign held  
     autonomous Subsidiary    -    -    7,636    -    -    7,636  
   Movement in capital reserve  
     of hedging transactions, net    -    -    -    (1,273 )  -    (1,273 )
   Capitalization of retained  
     earnings from Approved  
     Enterprise earnings    -    5,455    -    -    (5,455 )  -  
   Loss for the year    -    -    -    -    (31,985 )  (31,985 )






   
Balance - December 31, 2007     29,638    235,608    (6,757 )  (1,349 )  148,003    405,143  







        The accompanying notes are an integral part of the financial statements.

H - 4



HOGLA-KIMBERLY LTD.
STATEMENTS OF CASH FLOWS
(REPORTED AMOUNTS)

(NIS in thousands)

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
Cash flows - operating activities                            
    Net income (Loss) for the year     (31,985 )  (10,671 )  43,276    (31,985 )  (10,671 )  43,276  
  Adjustments to reconcile net income to  
    net cash provided by operating  
    activities (Appendix A)    97,456   (*)(28,381 ) (*)(36,678 )  199,738   (*)95,517   (*)45,897  






   Net cash provided by (used in)   
     operating activities     65,471    (39,052 )  6,598    167,753    84,846    89,173  






   
Cash flows - investing activities   
Withdrawal of long-term bank deposit    -    -    73,648    -    -    -  
Capital notes and loans to Subsidiary    -    -    -    (149,551 )  (117,128 )  (112,314 )
Merger of subsidiaries (Appendix B)    -    -    -    -    58    -  
Acquisition of Property plant and equipment    (43,013 ) (*)(27,537 ) (*)(45,578 )  (28,037 ) (*)(2,124 ) (*)(17,279 )
Proceeds from sale of Property plant  
  and equipment    124    150    293    7    75    153  






   Net cash provided by (used in)   
     investing activities     (42,889 )  (27,387 )  28,363    (177,581 )  (119,119 )  (129,440 )






   
Cash flows - financing activities   
Dividend paid    -    (34,000 )  (43,619 )  -    (34,000 )  (43,619 )
Repayment of long-term loans    -    (23,432 )  (94,437 )  -    -    -  
Short-term bank credit    (7,368 )  96,156    21,475    15,460    43,800    -  






   Net cash provided by   
     (used in) financing activities     (7,368 )  38,724    (116,581 )  15,460    9,800    (43,619 )






   
Translation adjustments of cash   
  and cash equivalents of foreign   
  held autonomous Subsidiary     678    (646 )  (193 )  -    -    -  






   
Increase (decrease) in cash and   
   cash equivalents     15,892    (28,361 )  (81,813 )  5,632    (24,473 )  (83,886 )
Cash and cash equivalents -   
   beginning of year     7,190    35,551    117,364    1,358    25,831    109,717  






Cash and cash equivalents -   
   end of year     23,082    7,190    35,551    6,990    1,358    25,831  







(*) Reclassified.

        The accompanying notes are an integral part of the financial statements.

H - 5



HOGLA-KIMBERLY LTD.
APPENDICES TO STATEMENTS OF CASH FLOWS
(REPORTED AMOUNTS)

(NIS in thousands)

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
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    -    (6,214 )  4,425    -    -    -  
       Equity in losses of  
         Subsidiaries    -    -    -    123,668    79,390    6,576  
       Depreciation and  
         amortization    27,742    24,820    25,162    18,781    17,526    15,606  
       Deferred taxes, net    32,436    (12,408 )  (12,740 )  3,822    (1,560 )  1,029  
       Loss (Gain) from sale of  
         Property plant and  
         equipment    658    37    (293 )  664    16    (153 )
       Effect of exchange rate  
         differences, net    (1,110 )  5,332    20    -    -    -  
   
Changes in assets and liabilities:   
       Decrease (Increase) in trade  
         receivables    11,505   (*)(7,964 )  (41,401 )  610    478    1,733  
       Decrease (Increase) in other  
         receivables    (11,831 ) (*) 5,771   (*) (11,828 )  (17,813 )  (11,079 )  (380 )
       Increase in inventories    (7,004 ) (*)(36,399 ) (*) (1,413 )  (1,995 ) (*) (11,496 ) (*) (4,711 )
       Increase (Decrease) in trade  
         payables    50,770   (*)(13,486 )  6,167    31,937    14,137    9,936  
       Net change in balances  
         with related parties    (5,878 ) (*)9,875    (10,515 )  34,940    2,038    12,395  
        Increase in other long term  
         asset    (14,177 ) (*)(5,110 ) (*)(7,146 )  -    -    -  
       Increase in other payables and  
         accrued expenses    10,943    7,365    12,884    1,722    6,067    3,866  
       Long term liability for  
         employee rights upon early  
         retirement    3,402    -    -    3,402    -    -  






     97,456    (28,381 )  (36,678 )  199,738    95,517    45,897  







(*) Reclassified.

        The accompanying notes are an integral part of the financial statements.

H - 6



HOGLA-KIMBERLY LTD.
APPENDICES TO STATEMENTS OF CASH FLOWS
(REPORTED AMOUNTS)

(NIS in thousands)

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
 
B. Assets and liabilities of                            
  mergered subsidiaries:   
Working capital (other than cash  
and cash equivalents)    -    -    -    -    200,174    -  
Property plant and equipment    -    -    -    -    3,990    -  
Investments    -    -    -    -    (192,929 )  -  
Other assets    -    -    -    -    -    -  
Long-term liabilities    -    -    -    -    (771 )  -  
Short-term liabilities    -    -    -    -    (10,522 )  -  






     -    -    -    -    (58 )  -  






   
C. Non-cash activities   
Acquisition of property plant and  
  equipment on credit    8,455   (*)11,897    37,617    3,173    11,091    7,121  






   
Conversion of capital note issued by  
  subsidiary to capital    -    -    -    18,045    -    -  






   
Shares issue to share holders  
  considering there share in the  
  merged subsidiaries    -    50,339    -    -    50,339    -  







(*) Reclassified.

        The accompanying notes are an integral part of the financial statements.

H - 7



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

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 22).

  The Company is owned by Kimberly Clark Corp. ("KC" or the "Parent Company") (50.1%) and American-Israeli Paper Mills Ltd. ("AIPM") (49.9%).

  The financial statements of the Company are prepared in accordance with the Israeli Securities Regulations (Preparation of Annual Financial Statements), 1993.

  B. Definitions:

The Company Hogla-Kimberly Ltd.
 
The Group the Company and its Subsidiaries, a list of which is presented in Note 8D.
 
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 by the Israeli Securities Regulations (Preparation of Annual 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.
 
YTL the Turkish New Lira.
 
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.

H - 8



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

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 application of the provisions of Standard No. 23 – “Accounting for Transactions between an Entity and a controlling party”, Standard No. 26–“Inventory”, Standard No. 27– “Property plant and equipment” and Standard No. 28– “Amendment of the transitional orders in accounting standard No. 27 “Property plant and equipment”", Standard No. 30–“Intangible Assets “.

  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.

  Commencing January 1, 2004, the Group’s financial statements are prepared and presented in Reported 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 25.

H - 9



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  A. Cessation of Financial Statement Adjustment and Change toReporting in Reported Amounts – Standard No. 12 (Cont.)

  (3) Principles of Adjustment applicable for financial statements in reporting amounts

  a. Balance Sheet Items

  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.

  Non-monetary items (items whose balances reflect historical value at acquisition or upon establishment) are presented at their Adjusted Amounts as of December 31, 2003 plus additions and dispositions occurring subsequent to such date. 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.

  Investments in Subsidiaries are presented based on the financial statements of these companies prepared in accordance with 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 in accordance with the guidance of Standard No. 12.

H - 10



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  B. Translation of Foreign Operations’ Financial Statements

  Principles of Translation of financial Statements of Foreign Held Autonomous Subsidiary applicable for financial statements relating to reporting periods ended in December 31, 2007, 2006 and 2005

  Monetary and non-monetary assets and liabilities of the foreign entity are translated at the closing rate.

  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).

  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”.

  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.

  C. Principles of Consolidation

  The consolidated financial statements include consolidation of the financial statements of the Company and all its 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 Property plant and equipment and is amortized at the rate applicable to those assets, or upon their realization. The unallocated excess cost deriving from the difference between the fair value of the subsidiary identifiable assets (including intangible assets) over the fair value of the subsidiary identifiable liabilities (after deferred taxes), at the acquisition date, reflects goodwill, which is presented in the consolidated balance sheets defined as “other assets”.

  See note I below for the accounting for goodwill as of January 1, 2006.

H - 11



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  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 a specific provision in respect of accounts, which on management estimate are doubtful of collection.

  F. Inventories

  As of January 1, 2007 the Company applies accounting standard No. 26 “Inventory”.

  The standard establishes, among other things, that inventory should be stated at the lower between cost and net realizable value. Cost is determined by the first in, first out (FIFO) method or by average weighted cost used consistently for all types of inventory of similar nature and uses. In certain circumstances the standard requires cost determination by a specific identification of cost, which includes all purchase and production costs, as well as any other costs incurred in reaching the inventory’s present stage.

  Any reduction of inventory to net realizable value as well as any other inventory loss is recorded in the current period.

  Subsequent elimination of a write-down that stems from an increase in net realizable value is allocated to operations during the period in which the elimination is taking place.

  Until December 31, 2007 inventories were presented at the lower of cost or market value.

  Cost determined as follows:

Finished products - Based on actual production cost.
Raw, auxiliary    
   materials and other - Based on moving-average basis.

  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 - 12



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  H. Property plant and equipment

  As of January 1, 2007 the Company applies accounting standard No. 27 “Property plant and equipment” and accounting standard No. 28 “Amendment of the transitional orders in accounting standard No. 27 “Property plant and equipment”".

  Cost method – an item will be presented at net book value, less accumulated impairment losses.

  Revaluation method – an item whose fair value can be measured reliably will be presented at its estimated amount, which equals its fair value at the revaluation date, net of depreciation accumulated subsequently and less accumulated impairment losses. Revaluations should take place on a current basis in order to ensure that book value does not materially differ from the fair value that would have been determined on the balance-sheet date. The revaluation of a single item calls for the revaluation of the entire Company and if the asset’s book value rises following this revaluation, this increase should be allocated directly to shareholders’ equity (“revaluation reserve”). Nevertheless, this increase will be recognized as an operating item up to the amount offsetting the decrease from that asset’s revaluation recognized previously as income or loss. Should book value decline following revaluation, this decline will be recognized as an operating item yet allocated directly to shareholders’ equity (“revaluation reserve”) up to the amount leaving any credit balance in that reserve in respect of that asset.

  The Company has adopted the cost method.

  Until December 31, 2006, Property plant and equipment components with different useful lives were not depreciated separately in accordance to their useful lives.

  Any Property plant and equipment with a meaningful cost in relation to the item’s total cost should be depreciated separately. Moreover, the depreciation method used will be reviewed at least once at yearend and, if any meaningful change had taken place in the estimated consumption of future economic benefits inherent in the asset, the method should be modified to reflect such changes. This change will be treated as a change in an accounting estimate.

  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:

%
 
Buildings 2-4
Leasehold improvements 10-25
Machinery and equipment 5-10
Motor vehicles 15-20
Office furniture and equipment 6-33

H - 13



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  H. Property plant and equipment (Cont.)

  Scrap value, depreciation method and the assets useful lives are being reviewed by management in the end of every financial year. Changes are handled as a change of estimation and are applied from here on.

  Profit of loss due to the sale or abandon of an asset is determined by the difference between the proceeds from the sale to the net book value of the asset and is attributed to profit and loss statements.

  As a result of the application of this standards the Company reclassified major spare parts and standby equipment, that had been recorded as inventory, to property plant and equipment in the amount of NIS 5,307 thousand as of December 30,2007 (NIS 5,153 thousand as of December 31, 2006).

  Impairment of Long-Lived Assets excluding Goodwill

  At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired.

  Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

  If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

  Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

H - 14



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  I. Other Assets – Goodwill

  As of January 1, 2006 the Company applies Standard No. 20 (revised) “Accounting Treatment for Goodwill and Other Intangibles upon the Acquisition of an Investee” (in this paragraph- “the standard”).

  By December 31, 2005 the Company had systematically amortized its goodwill deriving from the Acquisition of investees using the straight line method over a period of 15 years.

  As of January 1, 2007 the Company applies Standard No. 30

  In accordance with the standard, goodwill is the unallocated excess cost due to investment in an investee deriving from the difference between the fair value of the investee’s identifiable assets (including intangible assets) over the fair value of its identifiable liabilities (after deferred taxes) at the acquisition date. Goodwill is no longer amortized in a systematic manner, but is examined for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

  For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period.

  On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

  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.

H - 15



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  K. Deferred Income Taxes

  The Group records deferred income 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 those that result from depreciation differences on leased property and Property plant and equipment. 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 income taxes are computed using the tax rates expected to be in effect at realization according to tax laws that have been substantively enacted by the balance sheet date.

  The computation of deferred income 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.

  The Company reclassified participation in advertising expenses paid to customers as reduction of revenue, instead of marketing expenses as was presented in previous accounting periods, in order to conform to the current format of presentation in the consolidated financial statements as of December 31, 2007.

H - 16



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  N. Freestanding derivative financial instruments

  The Company recognizes freestanding derivative financial instruments as either assets or liabilities in its balance sheets and measures those instruments at fair value. Accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a foreign exchange derivative instrument designated as a cash flow hedge, the effective portion of the derivative is initially reported as a component of shareholders’ equity as accumulated other comprehensive income subsequently recognized into earnings as the hedged item affects earnings. The ineffective portion of the derivative is recognized in earnings immediately. For derivative instruments that are not designated as cash flow hedges, changes in fair value are recognized in earnings according to changes in their fair value.

  The Company formally documents all relationships between hedging instruments and hedged items and the risk management objective and strategy for each hedge transaction. At inception of the hedge and quarterly thereafter, the Company performs a correlation assessment to determine whether changes in the fair values or cash flows of the derivatives are deemed highly effective in offsetting changes in the fair values or cash flows of the hedged items. If at any time subsequent to the inception of the hedge, the correlation assessment indicates that the derivative is no longer highly effective as a hedge, the Company discontinues hedge accounting and recognizes all subsequent derivative gains and losses in the results of operations.

  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.

  (2) Exchange-rate differences are charged to operations as incurred.

  (3) 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:

As of:
Representative
exchange
rate of the Dollar
(NIS per $1)

Turkish Lira exchange
rate vis-a-vis the
U.S. dollar
(TL'000 per $1)

CPI
"in respect
of"
(in points)

 
December 31, 2007      3.846    1,176    191.15  
December 31, 2006    4.225    1,412    184.87  
December 31, 2005    4.603    1,351    185.05  

Increase (decrease)
during the year ended:

%
%
%
 
December 31, 2007      (8.97 )  16.7    3.39  
December 31, 2006    (8.21 )  4.54    (0.09 )
December 31, 2005    6.85    -    2.38  

H - 17



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  P. Recent Accounting Standards

  Application of Standard No.29 “Adoption of International Financial Reporting Standards”

  In July 2006, the Israeli Accounting Standards Board published Accounting Standard No. 29 -“Adoption of International Financial Reporting Standards” – IFRS (“the Standard”). According to this Standard, the financial statements of an entity subject to the Israeli Securities Law and authoritative Regulations thereunder, other than foreign corporations as defined by this Law that prepares its financial statements in other than Israeli GAAP, will be prepared for the reporting periods commencing January 1, 2008, including interim periods, in accordance with the IFRS and related interpretations published by the International Accounting Standards Board.

  An entity adopting IFRS as of January 1, 2008 and electing to report comparative figures in accordance with the IFRS for only 2007, will be required to prepare opening balance-sheet amounts as of January 1, 2007 based on the IFRS.

  Reporting in accordance with the IFRS will be carried out based on the provisions of IFRS No. 1, “First-time Adoption of IFRS Standards”, which establishes guidance on implementing the transition from financial reporting based on domestic national accounting standards to reporting in accordance with the IFRS.

  IFRS No. 1 supersedes the transitional provisions established in other IFRSs (including those established in former domestic national accounting standards), stating that all IFRSs should be adopted retroactively for the opening balance-sheet amounts. Nevertheless, IFRS No. 1 grants allowances on certain issues by not applying the retroactive application in respect thereof. In addition, IFRS No. 1 contains certain exceptions with regard to the retroactive application of certain aspects stipulated in other IFRSs.

  Management decided to adopt IFRS standards starting January 1, 2008.

NOTE 3 CASH AND CASH EQUIVALENTS

Consolidated
Company
December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
NIS in thousands
NIS in thousands
 
In NIS      182    464    174    335  
In foreign currencies    22,900    6,726    6,816    1,023  




     23,082    7,190    6,990    1,358  





H - 18



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 4 TRADE RECEIVABLES

  A. Composition

Consolidated
Company
December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
NIS in thousands
NIS in thousands
 
Domestic     -     Open accounts      172,982    174,509    1,336    1,286  
    -   Checks receivable    33,994    34,312    21    4  
    -   Related parties (**)    897    428    60,031   (*)102,312  




             207,873    209,249    61,388    103,602  




   
Foreign   -   Open accounts    50,949   (*)64,825    1,437   (*)2,114  
    -   Related parties    21,781   (*)6,092    2,919   (*)2,565  




             72,730    70,917    4,356    4,679  




             280,603    280,166    65,744    108,281  
Less - allowance for doubtful          
  accounts            6,371    17,040    -    -  




               274,232    263,126    65,744    108,281  




 

  (*) Reclassified

  (**) Balances with Israeli related parties are linked to the CPI and bear 4% annual interest

  B. The Company’s products are marketed principally by its Subsidiaries.

  C. Commencing November 2007 Hogla Kimberly is covered by a credit insurance policy, which partially covers it’s most major customers. In accordance with the policy conditions, the company will be reimbursed starting from an annual loss of US dollars 150 thousands to a maximum of US dollars 7 million, subject to deductible conditions.

NOTE 5 OTHER RECEIVABLES

Consolidated
Company
December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
NIS in thousands
NIS in thousands
 
Deferred taxes (Note 21D)      5,770    6,641    2,522    1,343  
Prepaid expenses    5,262    1,753    1,546    1,419  
Advances to suppliers    196    5,583    -    -  
Value Added Taxes    -   (*)-    8,451    -  
Income tax advances, net    21,786    10,471    9,567    -  
Loans to employees    588    689    249    289  
Related party    -    -    -    19,851  
Other    5,496    2,439    589    881  




     39,098    27,576    22,924    23,783  





  (*) Reclassified

H - 19



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 6 INVENTORIES

  A. Composition

Consolidated
Company
December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
NIS in thousands
NIS in thousands
 
Raw and auxiliary materials      75,071    84,798    45,688    53,824  
   
Finished goods    89,886    70,043    27,309    18,622  
   
Spare parts and other    19,467   (*)17,868    17,712   (*)16,268  




     184,424    172,709    90,709    88,714  




  (*) Reclassified.

  B. The cost of inventories recognised as an expense:

Consolidated
Company
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
NIS in thousands
NIS in thousands
 
Change in inventory      9,383    19,693    2,939    13,078  





  C. See note 2F with regards to the initial application of accounting standard No.26 “Inventory”

NOTE 7 CAPITAL NOTE OF SHAREHOLDER

  The capital note of AIPM, denominated in NIS, is not linked and does not bear interest.

  As of the signing date of the financial statements, negotiations are in process between the shareholders, and the Company, regarding repayment of the capital note not before early 2009.

H - 20



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 8 INVESTMENTS IN SUBSIDIARIES

  A. Composition

Company
December 31,
2 0 0 7
2 0 0 6
NIS in thousands
 
Cost of shares      972    972  
Capital Injections (see also F below)    396,965   (*) 183,325  
Equity in post-acquisition earnings, net    (15,042 ) (*)88,726  
Merger of subsidiaries (see also E below)    (141,049 ) (*)(141,049 )
Dividend received from subsidiary    (19,900 )  -  
   
Translation adjustments relating to  
  foreign held autonomous Subsidiary    (6,757 ) (*)(8,631 )


     215,189    123,343  


   
Capital notes (see also F(1) below)    2,651   (*)48,695  
Translation adjustments on loans and capital notes    -    (5,762 )


     2,651    42,933  


     217,840    166,276  



  (*) Reclassified.

  B. Goodwill (see Note 2C and 2I above)

Consolidated
December 31,
2 0 0 7
2 0 0 6
NIS in thousands
 
Cost      44,927    44,927  
Translation adjustments    (1,514 )  (3,671 )


     43,413    41,256  
Less - accumulated amortization (*)    18,918    18,918  


     24,495    22,338  


  (*) As of January 1, 2006 goodwill is no linger amortized in a systematic manner see also Note 2I.

H - 21



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 8 INVESTMENTS IN SUBSIDIARIES (Cont.)

  C. Investment in Kimberli Clark Tuketim Mallari Sanayi Ve Ticaret A.S. (“KCTR”) (formerly: Ovisan)

  As of December 31, 2007 and 2006, the Group’s investment in KCTR (a Turkish Subsidiary) amounted to NIS 144,992 and 116,041 thousand respectively (including goodwill – see above). In the recent years KCTR incurred significant losses from operations.

  The company examined the investment in KCTR for impairment in accordance to its revocable amount.

Based on the said examination, company’s business forecast and estimates, no impairment is required.

  During years 2005 – 2007, the Company provided KCTR NIS 377,829 thousand for the continuation of its on going operations. In addition, the Company has committed to financially support KCTR in 2008. Such finance support may be granted to KCTR either by cash injections, long-term loans, or guaranties if required so by banks according to the financing needs of KCTR.

  D. Consolidated Subsidiaries

  The consolidated financial statements as of December 31, 2007, include the financial statements of the following Subsidiaries:

Ownership and
control as of
December 31,
2007

%
 
Hogla-Kimberly Marketing Ltd. ("Marketing")      100.0  
   
Kimberly Clark Tuketim Mallari Sanayi Ve Ticaret  
  A.S. ("KCTR")    100.0  
Mollet Marketing Ltd. ("Mollet")    100.0  
H-K Overseas (Holland) B.V.    100.0  
Hogla-Kimberly Holding Anonim Sirketi (*)    100.0  

  (*) The company is inactive.

  E. Merger of subsidiaries

  In July 2006, the Israeli Tax Authority approved the merger of Rakefet Marketing and trade services Ltd. (Rakefet) and Shikma Ltd. (Shikma) into the Company. According to the merger, the assets and liabilities of Shikma and Rakefet were merged into those of the Company on July 1, 2006. The Company is in the process of issuing shares to its shareholders, KC and AIPM, in respect of their holdings in Rakefet.

  F. Capital Injections

  1. In December, 2007 the capital notes to KCTR were converted to capital injections at the amount of NIS 44,609 thousands.

  2. In December 2007, Hogla Kimbely made a share premium contribution to it’s subsidiary, H-K Overseas (Holland) B.V, in the amount of NIS 18,045 thousands.

H - 22



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 9 PROPERTY PLANT AND EQUIPMENT

CONSOLIDATED
Buildings (1)
Leasehold
Improvements

Machinery
And
Equipment

Motor
Vehicles

Furniture
and
Equipment

Total (2)
NIS in thousands
 
Cost:                            
Balance - January 1, 2007    (*) 57,131   (*) 12,066   (*) 453,748 (*) 13,101   (*) 16,493    552,539  
Changes during 2007:  
Additions    1,158    1,406    34,007    1,424    1,580    39,575  
Dispositions    -    -    (2,438 )  -    -    (2,438 )
Foreign currency  
  translation adjustments    2,900    86    2,984    (15 )  408    6,363  






   
Balance - December 31, 2007     61,189    13,558    488,301    14,510    18,481    596,039  






   
Accumulated depreciation:   
Balance - January 1, 2007    (*) 20,005   (*) 6,193   (*) 202,421 (*) 12,065   (*) 12,561    253,245  
Changes during 2007:  
Additions    1,157    1,034    23,435    597    1,519    27,742  
Dispositions    -    -    (1,654 )  -    -    (1,654 )
Foreign currency  
  translation adjustments    474    20    1,187    (15 )  187    1,853  






   
Balance - December 31, 2007     21,636    7,247    225,389    12,647    14,267    281,186  






   
Net book value:   
December 31, 2007    39,553    6,311    262,912    1,863    4,214    314,853  






   
December 31, 2006   (*) 37,126   (*) 5,873   (*) 251,327 (*) 1,036   (*)3,932    299,294  






   
COMPANY   
Cost:   
Balance - January 1, 2007    (*) 26,750   (*) 8,641   (*) 406,969   (*) 2,305   (*) 4,411    449,076  
Changes during 2007:  
Additions    677    231    19,111    -    100    20,119  
Dispositions    -    -    (2,106 )  -    -    (2,106 )






Balance - December 31, 2007     27,427    8,872    423,974    2,305    4,511    467,089  






   
Accumulated depreciation:   
Balance - January 1, 2007    (*) 14,988   (*) 4,566   (*)182,919   (*) 1,918   (*) 3,680    208,071  
Changes during 2007:  
Additions    604    495    17,325    108    249    18,781  
Dispositions    -    -    (1,435 )  -    -    (1,435 )






Balance - December 31, 2007     15,592    5,061    198,809    2,026    3,929    225,417  






Net book value:   
December 31, 2007    11,835    3,811    225,165    279    582    241,672  






   
December 31, 2006   (*) 11,762   (*) 4,075   (*) 224,050 (*) 387   (*) 731    241,005  







(*) Reclassified
(1) Company – leasehold improvements of industrial buildings on lands leased by the Company from AIPM (until 2007). The lease agreements are renewed annually.
(2) The majority of the Group’s Property plant and equipment are located in Israel with the remaining located in Turkey.
(3) See note 2H with regards to the initial application of accounting standard No.27 “Property plant and equipment”

H - 23



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 10 TRADE PAYABLES

Consolidated
Company
December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
NIS in thousands
NIS in thousands
 
In Israeli currency:                    
    Open accounts    124,328    95,810    50,257    38,755  
    Related parties    26,119    22,199    23,765    36,221  
In foreign currency:  
    Open accounts    86,400    70,251    51,291    38,774  
    Related parties    28,980    16,676    11,034    7,371  




     265,827    204,936    136,347    121,121  





NOTE 11 OTHER PAYABLES AND ACCRUED EXPENSES

Consolidated
Company
December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
NIS in thousands
NIS in thousands
 
Accrued income taxes,                    
   net of advances    11,827    11,303    11,827    10,711  
Accrued payroll and related  
expenses    37,835    26,239    18,116    12,763  
Value Added Tax    577    7,051    -    6,565  
Advances from customers    413    318    -    -  
Deratives liabilities    2,394    228    2,394    228  
Liability for employee  
  rights upon early retirement    992    -    992    -  
Other    17,487    12,901    2,446    2,513  




     71,525    58,040    35,775    32,780  





NOTE 12 SHORT TERM BANK LOANS

Consolidated
Company
Interest
rate

December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
%
NIS in thousands
NIS in thousands
 
NIS nominated      4.7    59,260    43,800    59,260    43,800  
YTL nominated    19.4    96,042    109,056    -    -  




           155,302    152,856    59,260    43,800  





  On January 2008, KCTR repaid all remaining bank loans in the amount of US dollars 24.5 million (NIS 91.9 million) .The repayments were financed by the Company’s capital injection.

H - 24



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 13 LONG TERM EMLOYEES LIABILITIES

  A. 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 statement.

  B. Liability for employee rights upon early retirement

  The liability is for payments to employees and former employees who are on early retirement until the day of their legal retirement.

NOTE 14 COMMITMENTS AND CONTINGENT LIABILITIES

  A. Commitments

  (1) The Group is obligated to pay royalties to a shareholder – see also Note 22B.

  (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, 2007 are as follows:

Consolidated
Company
NIS in thousands
 
2008       21,568    9,243  
2009     14,373    2,921  
2010     12,955    2,353  
2011     10,146    1,230  
2012 and thereafter    85,160    330  


     144,202    16,077  



  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, 2007 amounted to NIS 96,042 thousand.

  (2) As part of their normal course of business, the Company and its Subsidiaries provided third parties with bank guarantees for contract performance, the balance of which as of December 31, 2007 amounted to NIS 4,257 thousand.

  (3) A Subsidiary provided letters of guarantees to the Customs Authority the balance of which as of December 31, 2007 amounted to NIS 2,581 thousands.

H - 25



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 14 COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

  C. Legal proceedings

  (1) The Company received in November, 2003 a claim and a petition that was filed in the Tel-Aviv district court for the approval of a class action suit against the Company. According to the petition the Company has reduced the number of units of diapers in a package of its “Huggies Freedom” brand, 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 defended itself against the action. In addition, a court hearing took place in which plaintiff’s and defendant’s witnesses were cross- examined, and plaintiff submitted its closing statement.

  On October 2007, the court dismissed the plaintiff’s petition for that class action suit against the Company.

  (2) In February 2004, a former customer filed a lawsuit against the Company. This lawsuit is a part from multi-suppliers lawsuit, filed by the customer claiming 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. The customer appealed and was denied again. Customer faild to pay legal fee, and therefore court erased his lawsuit. The customer appealed again. 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, and it is probable that its arguments will be accepted. Therefore, no provision was recorded in the financial statements relating to this lawsuit.

  (3) On August 23, 2006 a petition was filed against the Company in the Tel-Aviv district court for the approval of a class action suit against the Company. According to the petition the Company has reduced the number of diapers in the “Titulim Premium” brand Packages, and thus misled the public according to the Israeli Consumer Protection Act. The plaintiff estimates the scope of the class action to be NIS 47 million. The Company rejected the claim and defended itself against the action.

  On June 17, 2007, the court approved a withdrawal of the plaintiff’s from his petition for that class action suit against the Company.

  (4) On December 10, 2006 a petition was filed against the Company in the Tel-Aviv district court for the approval of a class action suit against the Company. According to the petition the Company has reduced the number of Tissue paper in the “Kleenex Premium” Packages brand, and thus misled the public according to the Israeli Consumer Protection Act. The plaintiff estimates the scope of the class action to be NIS 43 million. The Company rejects the request and acting to dismiss it.

  On June 27, 2007, the court approved a withdrawal of the plaintiff’s from his petition for that class action suit against the Company.

  (5) On January 02, 2007 a petition was filed against the Company in the Tel-Aviv district court for the approval of a class action suit against the Company. According to the petition the Company has reduced the number of Wet Wipes in the “Titulim premium wet wipes” Packages, and thus misled the public according to the Israeli Consumer Protection Act. The plaintiff estimates the scope of the class action to be NIS 28 million. The Company rejects the request and acting to dismiss it.

On July 4, 2007, the court approved a withdrawal of the plaintiff’s from his petition for that class action suit against the Company.

H - 26



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 14 COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

  C. Legal proceedings (Cont.)

  (6) In July 2005, Clubmarket Marketing Chains Ltd. (“Clubmarket”), a customer of the Company and one of the largest retail groups in Israel, applied for the regional court in Tel-Aviv (“Court”) for a staying of procedures by creditors. The court protection was granted until August 17, 2005. As a result, in the second quarter of 2005 a provision of NIS 10.6 million for doubtful accounts was recorded, which is included in the general and administrative expenses line item. In the third quarter of 2005, Shufersal, Israel’s biggest retail chain, won a bid supervised by the Court for the purchase of the stores, operations and inventories of Clubmarket. In December 2005, the Court approved a creditors settlement submitted by the trustees, according to which, amongst other matters, the Company is to receive about 51% of Clubmarket’s debt to the Company. The settlement is subject to various conditions, including reaching an understanding between the trustees and the Company about the exact amount Clubmarket is to pay the Company, and crystallizing certain material issues between the trustees and the Israeli Tax Authorities.

  On September 2007 a compromise was made between the trustees and the company, which was approved by the court, that the total approved debt of clubmarket to the company is NIS 23.9 million. Until December 31, 2007, NIS 9.3 million were received as part of the creditors settlement.

  Due to said uncertainties relating to the exact amounts to be paid, and based on the opinions of the Company’s legal advisors for this matter, management cannot estimate, at this stage, the exact payout of Clubmarket’s debt to the Company as a result of said settlement.

  There is not any remaining net balance of Clubmarket as of December 31, 2007, that is in excess of the doubtful accounts provision recorded in the financial statements.

  (7) On July 12, 2007 a lawsuit filled against KCTR, a Hogla Kimberly subsidiary, by a former distributer, claiming financial loss caused to him. The amount claimed is approximately YTL 880 thousands (NIS 2,690 thousands).KCTR filled a counter claim for it’s damage in the amount of approximately YTL 355 thousands ( NIS 1,086 thousands). Based on the Company’s legal counsels, management estimates that the Company has valid arguments to oppose the lawsuit, and it is probable that its arguments will be accepted. Therefore, no provision was recorded in the financial statements relating to this lawsuit.

NOTE 15 SHARE CAPITAL

  A. Composition of Share Capital in Nominal NIS as of December 31, 2007 and 2006:

Number of Shares (*)
Authorized
Issued and
fully paid up

 
Ordinary Shares of NIS 1.00 par value      11,000,000    8,263,473  



  (*) As of December 31, 2006 the Company has commenced a process of registering 600 shares by the registrar of companies. The shares were issued to the shareholders of the Company as part of the merger process (see also note 8E).

H - 27



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 15 SHARE CAPITAL (Cont.)

  B. In connection with the Company’s approved enterprise program, following the Company’s Board of Directors decision in September 2004, the Company’s issued its shareholders in 2004, 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.

  D. According to the decision of the Board of Directors which took place at March 1, 2007, the Company approved the capitalization of NIS 5.455 million of the Company’s retained earnings that were derived from Approved Enterprise activities of previous years, by transferring the said amount from retained earnings to capital reserve.

NOTE 16 NET SALES

Consolidated
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
 
A.     Foreign sales (principally in Turkey)      264,324    211,637    173,966  




%
%
%
 
B.     Sales to major customers                
     (as percentage from total net sales)  
    Customer A    15.4    10.7    11.0  
    Customer B    11.8    9.8    9.9  

NOTE 17 COST OF SALES

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
NIS in thousands
 
Purchases (*)      719,872    663,804    614,281    341,489    299,670    276,319  
Salaries and related expenses    111,356    95,158    88,175    91,148    73,843    67,792  
Manufacturing expenses    125,402    114,212    100,371    111,854    103,223    93,487  
Depreciation    24,501    21,717    18,757    18,673    17,402    15,568  






     981,131    894,891    821,584    563,164    494,138    453,166  
Change in finished  
   goods inventory    (12,757 )  (10,983 )  (869 )  (8,737 )  2,848    (472 )






     968,374    883,908    820,715    554,427    496,986    452,694  







(*) The purchases of the Company are related to manufacturing operations. Consolidated purchases in excess of Company purchases relate principally to commercial operations.

H - 28



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 18 SELLING EXPENSES

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
NIS in thousands
 
Salaries and related expenses      77,981    66,024    61,574    418    664    -  
Maintenance and  
  transportation expenses    50,857    45,687    40,153    9,821    10,321    8,925  
Advertising and sales promotion    78,634   (*) 69,474 (*)38,362  15    68    2,577  
Commissions to distributors    25,155    31,917    19,067    -    -    -  
Royalties    29,296    25,864    23,703    3,591    4,053    2,157  
Depreciation    2,285    2,534    3,022    100    106    38  
Other    15,660    17,008    5,789    -    319    11  






     279,868    258,508    191,670    13,945    15,531    13,708  







(*) Reclassified.

NOTE 19 GENERAL AND ADMINISTRATIVE EXPENSES

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
NIS in thousands
 
Salaries and related expenses      32,078    28,457    19,927    4,530    2,458    2,699  
Administrative and computer  
   services    10,862    10,234    9,189    2,570    2,354    1,417  
Services provided by  
   Shareholder    1,295    1,177    1,194    324    284    199  
Office maintenance    5,412    5,120    4,804    481    384    198  
Depreciation    956    611    560    8    10    -  
Goodwill amortization    -    -    3,030    -    -    -  
Provision for doubtful accounts    (1,962 )  1,865    10,327    -    173    -  
Other    17,069    10,442    7,252    3,570    447    527  






     65,710    57,906    56,283    11,483    6,110    5,040  






H - 29



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 20 FINANCING INCOME (EXPENSES), NET

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
NIS in thousands
 
Interest on long-term bank loans      -    -   (*)(6,443 )  -    -    -  
Interest on Short-term bank loans    (26,815 )  (28,323 )  -    (3,009 )  (1,681 )  -  
Exchange rate differences    (9 )  3,795   (*)2,990    1,943    3,722    2,097  
Finance Expenses from  
  derivative    (1,779 )  (676 )  -    (1,779 )  (676 )  -  
   
Interest from long-term and  
  short-term bank deposits    230    465   (*)3,659    140    426    1,324  
Interest expenses to tax authorities    (158 )  (1,006 ) (*)181    (392 )  (1,027 )  833  
Interest from (to) related parties    -    -    -    (1,779 )  2,167    (4,158 )
Other    (566 )  118    365    (20 )  (120 )  (62 )






     (29,097 )  (25,627 )  752    (4,896 )  2,811    34  







NOTE 21 INCOME TAXES

  A. Composition

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
NIS in thousands
 
Current taxes      33,082    35,607    32,267    26,450    29,469    17,866  
Taxes in respect of  
    prior years    (1,421 )  9,685    -    (1,455 )  7,131    -  
Deferred taxes - D.  
    below    32,954    (9,389 )  (12,740 )  4,341    (2,867 )  1,029  






     64,615    35,903    19,527    29,336    33,733    18,895  







  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.

H - 30



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 21 INCOME TAXES (Cont.)

  B. (Cont.)

  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 97 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.

  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 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
NIS in thousands
 
Income before income taxes      32,630    19,018    67,228    101,119    102,360    68,747  






 
Statutory tax rate (see E. below)    29 %  31 %  34 %  29 %  31 %  34 %
Tax computed by statutory tax rate-    9,463    5,896    22,858    29,324    31,732    23,374  
   
Tax increments (savings) due to:   
Income (Expenses) in reduced  
  tax rate    8,159    6,903    1,112    (939 )  (893 )  -  
Non-deductible expenses    1,326    2,048    4,352    1,296    1,781    40  
Non-taxable income    (505 )  (580 )  (1,144 )  -    -    -  
Unrecorded deferred taxes in  
  connection with tax loss carry  
  forward    20,216    -    450    -    -    -  
Change in deferred taxes due to  
  decrease in tax rate in Turkey    -    11,295    -    -    -    -  
 Deferred taxes prior years    27,255    6,685    -    1,150    -    -  
Reduction in corporate tax rates  
  (see E. below)    (762 )  (938 )  (5,361 )  (880 )  (1,639 )  (5,476 )
Differences arising from  
     basis of measurement (*)    331    (232 )  (1,664 )  791    666    813  
Income (Expenses) taxes for  
  prior years    (1,421 )  4,863    -    (1,455 )  2,306    -  
Other differences, net    553    (37 )  (1,076 )  49    (220 )  144  






     64,615    35,903    19,527    29,336    33,733    18,895  







  (*) Commencing year 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.

H - 31



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 21 INCOME TAXES (Cont.)

  D. Deferred Taxes

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
NIS in thousands
 
Balance as of                            
beginning of year    (2,065 )  3,800    17,669    32,378    34,510    33,481  
Changes during the year    29,367    (7,108 )  (7,473 )  4,702    (493 )  6,505  
Adjustment due to change  
  in income tax rates    (762 )  (938 )  (5,361 )  (880 )  (1,639 )  (5,476 )
Foreign currency  
  translation adjustments    2,762    2,181    (1,035 )  -    -    -  






Balance as of end of year    29,302    (2,065 )  3,800    36,200    32,378    34,510  







Consolidated
Company
December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
NIS in thousands
NIS in thousands
 
Deferred taxes are presented in the                    
balance sheets as follows:   
   
Long-term liabilities (in respect of depreciable  
  assets)    40,333    35,364    38,722    33,721  
Other receivables (in respect of temporary  
  differences) See Note 5    (5,770 )  (6,641 )  (2,522 )  (1,343 )
Other assets    (5,261 )  (30,788 )  -    -  




     29,302    (2,065 )  36,200    32,378  





  For 2007 – Deferred taxes were computed at rates between 20%-28%, primarily – 24.5%.

  For 2006 – Deferred taxes were computed at rates between 20%-29%, primarily – 20%.

  Deferred taxes at the amount of NIS 519 thousand due to revaluation of financial instruments treated as cash flow hedges were recognized directly to equity.

  As of December 31, 2007 carryforward tax losses deriving from the Turkish subsidiary sum up to NIS 247.3 millions. 

  The Company has examined the validity of the deferred tax assets deriving from its Turkish subsidiary. As a result of this examination, the deferred tax asset due to carry-forward tax losses in the Turkish subsidiary was fully amortized in the amounts of NIS 26,509 thousand for the year ended December 31, 2007.

H - 32



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 21 INCOME TAXES (Cont.)

  E. Reduction of Corporate Tax Rates

  1. In July 2005, the Israeli Knesset passed the Law for Amending the Income Tax Ordinance (No. 147), 2005, according to which commencing in 2006 the corporate income-tax rate would be gradually reduced, for which a 31% tax rate was established, through 2010, in respect of which a 25% tax rate was established. For the effect of the reduction in tax rates, see D. above.

  2. During the second quarter of 2006 the corporate tax in Turkey was reduced from 30% to 20%. The change in the corporate tax resulted in additional tax expenses in the amount of NIS 10.6 millions which reflected the impact on the deferred tax assets.

  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. Following a tax assessment of the company’s tax return, performed by the tax authorities in Israel with respect of tax-years 2003 and 2002 the company recorded additional provision for tax expenses, in the amount of NIS 4.2 millions for the year ended December 31, 2006.

  I. The Company and its subsidiary Shikma Ltd. possess final tax assessments through 2002. Hogla Kimberly Marketing Ltd., a subsidiary of the Company, posses’ final tax assessments through 2003.

Mollet Marketing Ltd., a subsidiary of the Company, posses’ final tax assessments through 2003.

NOTE 22 RELATED PARTIES AND INTERESTED PARTIES

  A. Balances with Related Parties

Consolidated
Company
December 31,
December 31,
2 0 0 7
2 0 0 6
2 0 0 7
2 0 0 6
NIS in thousands
NIS in thousands
 
Trade receivables (*)      22,678   (*)6,520    2,034   (*)849  




Capital note - shareholder    32,770    32,770    32,770    32,770  




Other receivables    -    -    -   (*)19,851  




Capital notes - Subsidiaries    -    -    2,651   (*)48,695  




Capital injection - Subsidiaries    -    -    396,965   (*)183,325  




Trade payables (*)    55,099   (*)38,875    33,760    38,422  





  (*) Company – excludes Subsidiaries. See also Notes 4 and 10.

H - 33



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
(REPORTED AMOUNTS)

NOTE 22 RELATED PARTIES AND INTERESTED PARTIES

  B. Transactions with Related Parties and Subsidiaries

Consolidated
Company
Year ended December 31,
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
NIS in thousands
 
Sales to related                            
  parties    82,217    27,552    28,355    7,969    1,743    -  






Sales to Subsidiaries    -    -    -    657,233    598,384    516,625  






Cost of sales    188,252    150,350    157,073    115,367    86,879    73,951  






Royalties to the  
  shareholders    28,069    24,632    22,922    3,593    4,053    2,157  






General and  
  administrative  
expenses (*)    10,944    9,966    9,381    2,893    1,863    1,615  







  (*) Company – excludes Subsidiaries.

NOTE 23 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 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, 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.

H - 34



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS

NOTE 23 DISCLOSURE AND PRESENTATION OF FINANCIAL INSTRUMENTS (Cont.)

  B. Fair Value of Financial Instruments (Cont.)

  As of December 31, 2007 the Company had entered into 42 hedge transaction in respect of anticipated purchases amounting to NIS 68.2 million, (in U.S. dollar and Euro currency).

  The hedge transactions are shown in the balance sheet at fair value. The fair value of future transactions is based on future exchange rates, as quoted the balance sheet date.

  As of December 31, 2007 the fair value of the cash flow hedging transaction is a net liability of NIS 2.4 million.

NOTE 24 SUBSEQUENT EVENTS

  A. On January 2008, Hogla Kimberly made an agreement with an Israeli bank for an prime linked interest loan in the amount of NIS 100 million which will be repaid during 4 year period. As part of the agreement the company agreed to the following covenants:

  1. It’s shareholder’s equity will not be less than NIS 250 million and not less than 25% of the total consolidated assets.

  2. Both the company’s shareholder’s Kimbely Clark and AIPM separately or together, will not hold less than 51% of the company’s share capital.

  B. On May 20, 2008 the Company received from the Israeli tax authority a compensation in the amount of about NIS 4.5 millions. The compensation is due to loss of earnings during a security situation that occurred in July 2006 in northern Israel and caused the Company to partially stop its manufacturing activity in its Naharia plant. The Company will record a pre tax income of 4.5 million NIS for the second quarter of 2008.

H - 35



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS

NOTE 25 COMPANY’S FINANCIAL INFORMATION IN NOMINAL VALUES FOR TAX PURPOSES

  A. Balance Sheets

Company
December 31,
2 0 0 7
2 0 0 6
NIS in thousands
 
Current Assets            
   Cash and cash equivalents    6,990    1,358  
   Trade receivables    65,744    108,281  
   Other receivables    20,991    22,511  
   Inventories    90,709   (*)88,714


     184,434    220,864  


Long-Term Investments   
   Capital note of shareholder    32,770    32,770  
   Investments in Subsidiaries    215,047    161,183  


     247,817    193,953  


   
Property plant and equipment, net     233,134   (*)231,483


     665,385    646,300  


Current Liabilities   
   Short-term bank credit    59,260    43,800  
   Trade payables    136,347    121,121  
   Other payables and accrued expenses    35,775    32,780  


     231,382    197,701  


   
Liability for employee rights upon early retirement    3,402    -  


   
Shareholders' Equity     430,601    448,599  


     665,385    646,300  



H - 36



HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS

NOTE 25 COMPANY’S FINANCIAL INFORMATION IN NOMINAL VALUES FOR TAX PURPOSES (Cont.)

  B. Statement of Operations

Company
Year ended December 31,
2 0 0 7
2 0 0 6
2 0 0 5
NIS in thousands
 
Net sales      685,868    617,544    540,002  
   
Cost of sales    553,450    495,856    451,703  



   
   Gross profit     132,418    121,688    88,299  
   
Selling expenses    13,947    15,532    13,861  
   
General and administrative expenses    11,480    6,107    5,040  



   
   Operating profit     106,991    100,049    69,398  
   
Financing income (expenses), net    (4,895 )  2,811    190  
   
Other income    2    632    153  



   
   Income before income taxes     102,098    103,492    69,741  
   
Income taxes    (24,995 )  (36,601 )  (17,866 )



   
   Income after income taxes     77,103    66,891    51,875  
   
Equity in losses of Subsidiaries    (101,638 )  (77,898 )  (9,466 )



   
   Net income (loss) for the year     (24,535 )  (11,007 )  42,409  




H - 37



HOGLA-KIMBERLY LTD. NOTES TO FINANCIAL STATEMENTS

NOTE 25 COMPANY’S FINANCIAL INFORMATION IN NOMINAL VALUES FOR TAX PURPOSES (Cont.)

  C. Statements of Changes in Shareholders’ Equity

Share
capital

Capital
reserves

Translation
adjustments
relating to
foreign held
autonomous
Subsidiary

Retained
earnings

Accumulate
other
comprehensive
income

Total
NIS in thousands
 
Balance - January 1, 2005      8,513    155,742    (3,377 )  290,785    -    451,663  
   
Changes during 2005:   
Dividend paid    -    -    -    (43,619 )  -    (43,619 )
Translation adjustments  
   relating to foreign held  
   autonomous Subsidiary    -    -    3,995    -    -    3,995  
Net income for the year    -    -    -    42,409    -    42,409  






   
Balance - December 31, 2005     8,513    155,742    618    289,575    -    454,448  






   
Changes during 2006:   
Dividend paid    -    -    -    (34,000 )  -    (34,000 )
Shares issued    600    49,097          -          49,697  
Translation adjustments  
   relating to foreign held  
   autonomous Subsidiary    -    -    (10,463 )  -    -    (10,463 )
 Movement in capital reserve  
  of hedging transactions, net    -    -    -    -    (76 )  (76 )
Loss for the year    -    -    -    (11,007 )  -    (11,007 )






   
Balance - December 31, 2006     9,113    204,839    (9,845 )  244,568    (76 )  448,599  






   
Changes during 2007:   
Translation adjustments  
   relating to foreign held  
   autonomous Subsidiary    -    -    7,810    -    -    7,810  
 Movement in capital reserve  
  of hedging transactions, net    -    -    -    -    (1,273 )  (1,273 )
 Capitalization of retained earnings  
 from Approved Enterprise earnings    -    5,455    -    (5,455 )  -    -  
Loss for the year    -    -    -    (24,535 )  -    (24,535 )






   
Balance - December 31, 2007     9,113    210,294    (2,035 )  214,578    (1,349 )  430,601  







H - 38



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

INDEX

Page
Report of Independent Auditors C-2
 
Balance Sheets C-3 - C-4
 
Statements of Operations C-5 - C-6
 
Statements of Changes in Shareholders' Equity C-7
 
Statements of Cash Flows C-8 - C-11
 
Notes to Consolidated Financial Statements C-12 - C-63
 
Appendix to Consolidated Financial Statements - List of Affiliated Companies C-64




n

Kost Forer Gabbay & Kasierer
2 Pal-Yam Ave.
Haifa 33095, Israel

n

Phone: 972-4-8654000
Fax:       972-4-8654022

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

CARMEL CONTAINER SYSTEMS LTD.

        We have audited the accompanying balance sheets of Carmel Container Systems Ltd. (“the Company”) as of December 31, 2007 and 2006, 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, 2007. 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 a certain affiliate, whose revenues constitute approximately 8% of total consolidated revenues for the year ended December 31, 2005. The financial statements of this affiliate were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for this affiliate, is based on the reports of the other auditors.

        We conducted our audits in accordance with generally accepted auditing standards in Israel, including those prescribed under the Auditors’ Regulations (Auditor’s Mode of Performance), 1973 and 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 whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its 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 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, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and consolidated as of December 31, 2007 and 2006, and the results of their operations, changes in shareholder’s equity and cash flows- of the company and consolidated -for each of the three years in the period ended December 31, 2007, 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.

        As described in Note 2, the financial statements referred to above are presented in reported amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.

Haifa, Israel
March 3, 2008 Except for Note 23, as which
the date is May 26, 2008
  /s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global

C - 2



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
BALANCE SHEETS


The Company
Consolidated
Convenience
translation
(Note 2a)

December 31,
December 31,
2006
2007
2006
2007
2007
Note
Reported NIS
U.S. $
(In thousands)
 
     ASSETS                            
   
 CURRENT ASSETS:  
   Cash and cash equivalents         353    1,747    1,820    2,522    656  
   Trade receivables, net    3    145,234 (*)  161,147    163,276 (*)  185,153    48,140  
   Other accounts receivable and prepaid  
   expenses    4    2,305    1,891    3,574    2,546    662  
   Inventories    5    66,101 (*)  48,169    71,925 (*)  55,149    14,339  





   
 Total current assets          213,993    212,954    240,595    245,370    63,797  





   
LONG TERM ASSETS AND INVESTMENTS  
 Other accounts receivable         311    141    311    141    37  
 Severance pay fund, net    14    312    -    133    -    -  
 Investment in affiliated company    6    44,142    35,594    8,368    8,378    2,178  





   
 Total          44,765    35,735    8,812    8,519    2,215  





   
 PROPERTY AND EQUIPMENT, NET    7    78,058 (*)  65,938    84,916 (*)  72,454    18,839  





   
  INTANGIBLE ASSETS (see Note 23)    8    1,997 (*)  2,127    1,997 (*)  2,127    553  





   
 Total assets          338,813    316,754    336,320    328,470    85,404  






(*) Reclassified-see note 2 g(1), v

The accompanying notes are an integral part of the consolidated financial statements.

C - 3



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
BALANCE SHEETS


The Company
Consolidated
Convenience
translation
(Note 2a)

December 31,
December 31,
2006
2007
2006
2007
2007
Note
Reported NIS
U.S. $
(In thousands)
 
  LIABILITIES AND SHAREHOLDERS' EQUITY                            
   
 CURRENT LIABILITIES:  
   Short-term credit from banks    9    7,645    16,903    7,645    16,903    4,395  
   Current maturities of long-term loans    12    24,211    25,602    24,211    25,602    6,657  
   Trade payables    10    87,729    81,045    93,544    87,423    22,731  
   Other accounts payable and accrued  
   expenses    11    26,243 (*)  17,463    17,395 (*)  22,161    5,762  





   
 Total current liabilities          145,828    141,013    142,795    152,089    39,545  





   
 LONG-TERM LIABILITIES:  
   Long-term loans from banks less current  
     maturities    12    48,170    49,376    48,170    49,376    12,838  
   Accrued severance pay, net    14    -    98    -    298    77  
   Deferred income taxes    18f    8,796    6,174    9,336    6,614    1,719  





   
 Total long-term liabilities          56,966    55,648    57,506    56,288    14,634  





   
 CONTINGENT LIABILITIES AND COMMITMENTS (Note 15)
   
 SHAREHOLDERS' EQUITY:  
   Share capital - Ordinary shares of NIS 1 par  
   value:  
   10,000,000 shares authorized at  
   December 31, 2006 and 2007; 2,520,000  
   shares issued and 2,400,187 shares  
   outstanding at December 31, 2006 and  
   1,739,937 shares outstanding at December  
   31, 2007    17    23,716    23,716    23,716    23,716    23,716  
   Additional paid-in capital         45,413    45,413    45,413    45,413    11,808  
   Cumulative other comprehensive loss         -    (392 )  -    (392 )  (102 )
   Retained earnings         71,148    78,921    71,148    78,921    20,520  





   
          140,277    147,658    140,277    147,658    38,392  
 Less - treasury shares         (4,258 )  (27,565 )  (4,258 )  (27,565 )  (7,167 )





   
          136,019    120,093    136,019    120,093    31,225  





   
 Total liabilities and shareholders' equity          338,813    316,754    336,320    328,470    85,404  






(*) Reclassified-see note 2 g(1), v

May 26, 2008 /s/ Robert Kraft /s/ Zvika Livnat /s/ Doron Kempler /s/ Jacob Konkol





Date of approval of the Robert Kraft Zvika Livnat Doron Kempler Jacob Konkol
financial statements Chairman of the Vice Chairman of General Manager Chief Financial Officer
  Board of Directors the Board of Directors

The accompanying notes are an integral part of the consolidated financial statements.

C - 4



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS


Consolidated
Convenience
translation
(Note 2a)

Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Note
Reported NIS
U.S. $
(In thousands, except per share data)
 
  Revenues           415,335    419,906    471,428    122,576  
 Cost of revenues    20a    368,173    368,804    416,951    108,412  




   
 Gross profit         47,162    51,102    54,477    14,164  




   
 Selling and marketing expenses    20b    21,344    23,360    24,185    6,288  
 General and administrative expenses    20c    17,676    16,449    16,621    4,322  




   
          39,020    39,809    40,806    10,610  




   
 Operating income         8,142    11,293    13,671    3,554  
 Financial expenses, net    20d    7,370    1,862    4,329    1,126  




   
          772    9,431    9,342    2,428  
 Other income, net    20e    272    5,307    337    88  




   
 Income before taxes on income  
 (tax benefit)         1,044    14,738    9,679    2,516  
 Taxes on income (tax benefit)    18    (1,389 )  2,755    1,916    498  




   
 Income after taxes on income (tax benefit)         2,433    11,983    7,763    2,018  
 Equity in earnings (losses) of an affiliated  
    company    6    -    (545 )  10    3  
 Minority interest in losses of a subsidiary         14    -    -    -  




   
 Net income         2,447    11,438    7,773    2,021  




   
 Basic and diluted net income per shares (in  
    NIS)         1.02    4.77    3.84   $ 1  




   
 Weighted average number of shares outstanding  
    during the year (in thousands)         2,400    2,400    2,022    2,022  





The accompanying notes are an integral part of the consolidated financial statements.

C - 5



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
COMPANY’S STATEMENTS OF OPERATIONS


The Company
Convenience
translation
(Note 2a)

Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Note
Reported NIS
U.S. $
(In thousands, except per share data)
 
  Revenues           327,056    357,690    406,222    105,622  
 Cost of revenues    20a    295,961    317,730    362,379    94,222  




   
 Gross profit         31,095    39,960    43,843    11,400  




   
 Selling and marketing expenses    20b    16,609    20,425    21,164    5,503  
 General and administrative expenses    20c    13,074    13,145    13,295    3,457  




   
          29,683    33,570    34,459    8,960  




   
 Operating income         1,412    6,390    9,384    2,440  
 Financial expenses, net    20d    7,823    2,657    4,722    1,229  




   
          (6,411 )  3,733    4,662    1,211  
 Other income, net    20e    2,384    2,240    2,145    558  




   
 Income (loss) before taxes on income  
 (tax benefit)         (4,027 )  5,973    6,807    1,769  
 Taxes on income (tax benefit)    18    (2,376 )  1,010    1,486    386  




   
 Income after taxes on income (tax benefit)         (1,651 )  4,963    5,321    1,383  
 Equity in earnings of an affiliated company    6    4,098    6,475    2,452    638  




   
 Net income         2,447    11,438    7,773    2,021  




   
 Basic and diluted net income per NIS  
   1 par value of shares (in NIS)         1.02    4.77    3.84   $ 1  




   
 Weighted average number of shares outstanding  
    during the year (in thousands)         2,400    2,400    2,022    2,022  





The accompanying notes are an integral part of the consolidated financial statements.

C - 6



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


Share
capital

Additional
paid-in
capital

Cumulative
other
comprehensive
loss

Retained
earnings

Less-
treasury
shares

Total
shareholders'
equity

Reported NIS (In thousands)
 
 Balance at January 1, 2005      23,716    45,413    -    57,263    (4,258 )  122,134  
   
   Net income    -    -    -    2,447    -    2,447  






   
 Balance at December 31, 2005    23,716    45,413    -    59,710    (4,258 )  124,581  
   
   Net income    -    -    -    11,438    -    11,438  






   
 Balance at December 31, 2006    23,716    45,413    -    71,148    (4,258 )  136,019  
   
 Unrealized loss on hedging  
    Derivative, net- (*)    -    -    (392 )  -    -    (392 )
   
 Repurchase of company shares  
   (Treasury shares)    -    -    -    -    (23,307 )  (23,307 )
   
   Net income    -    -    -    7,773    -    7,773  






   
 Balance at December 31, 2007    23,716    45,413    (392 )  78,921    (27,565 )  120,093  






   
Convenience translation into U.S. $ (Note 2a)
Share
capital

Additional
paid-in
capital

Cumulative
other
comprehensive
loss

Retained
earnings

Less-
treasury
shares

Total
shareholders'
equity

U.S. $ (In thousands)
 
 Balance at January 1, 2007    6,166    11,808    -    18,499    (1,107 )  35,366  
 Repurchase of company shares  
 (Treasury Shares)    -    -    -    -    (6,060 )  (6,060 )
   Net income        -    -    2,021    -    2,021  
 Unrealized loss on hedging  
    derivative    -    -    (102 )  -    -    (102 )






   
 Balance at December 31, 2007    6,166    11,808    (102 )  20,520    (7,167 )  31,225  







(*)See note 2(o).

The accompanying notes are an integral part of the consolidated financial statements.

C - 7



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS


Consolidated
Convenience
translation
(Note 2a)

Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
(In thousands)
 
Cash flows from operating activities:                    
   Net income    2,447    11,438    7,773    2,021  
   Adjustments required to reconcile net income to net cash  
     provided by operating activities:  
     Equity in earnings (losses) of an affiliated company    -    545    (10 )  (3 )
     Minority interest in losses (earnings) of subsidiary, net    (14 )  -    -    -  
     Depreciation    21,165 (*)  20,178 (*)  21,920    5,699  
     Deferred income taxes, net    (1,540 )  2,591    (2,077 )  (540 )
     Accrued severance pay, net    (59 )  (54 )  431    112  
     Erosion and Linkage differentials of long-term loans  
       from banks    306    (23 )  710    185  
     Capital gain on sale of property and equipment, net    (272 )  (5,293 )  (235 )  (61 )
     Increase in trade receivables    (3,782 )  (20,741 )  (24,259 )  (5,689 )
     Decrease (increase) in other accounts receivable and  
       prepaid expenses    279    (520 )  545    142  
     Decrease (increase) in inventories    (7,555 )  (22,603 )  16,776    4,362  
     Increase (decrease) in trade payables    (5,932 )  19,735    (2,105 )  (547 )
     Increase in other accounts payable and accrued expenses    92    2,735    6,611    1,099  




 Net cash provided by operating activities    5,135    7,988    26,080    6,781  




   
 Cash flows from investing activities:   
   Purchase of property and equipment    (15,937 )(*)  (15,135 )(*)  (9,045 )  (2,352 )
   Proceeds from sale of property and equipment    797    3,483    276    72  
   Advance in respect of sale of real estate    1,970    -    -    -  
   Refund of investment grants    (362 )  -    -    -  
   Transition from consolidated to equity(c)    -    (85 )  -    -  
   Lending long term loan    -    (500 )  -    -  
   Repayment of long term loan    -    36    153    40  




 Net cash used in investing activities    (13,532 )  (12,201 )  (8,616 )  (2,240 )




   
 Cash flows from financing activities:   
   Purchase of equipment with credit    -    (6,000 )  (4,600 )  (1,196 )
   Proceeds from long-term loans from banks and others    27,000    39,000    29,000    7,540  
   Principal payments of long-term loans from banks and others    (21,904 )  (23,408 )  (27,113 )  (7,050 )
   Short-term credit from bank, net    3,020    (3,648 )  9,258    2,407  
   Repurchase of the Company's shares    -    -    (23,307 )  (6,060 )
   Payment of dividend by affiliated company    -    (2,650 )  -    -  




 Net cash provided by (used in) financing activities    8,116    3,294    (16,762 )  (4,359 )




 Increase (decrease) in cash and cash equivalents    (281 )  (919 )  702    181  
 Cash and cash equivalents at the beginning of the year    3,020    2,739    1,820    475  




 Cash and cash equivalents at the end of the year    2,739    1,820    2,522    656  





(*) Reclassified-see note 2 g(1).

The accompanying notes are an integral part of the consolidated financial statements.

C - 8



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS


Convenience
translation
(Note 2a)

Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
(In thousands)
 
a. Non-cash transactions:                    
    Unpaid declared dividend    2,650    -    -    -  




    Differed tax on unrealized loss    -    -    (145 )  (38 )




    Unrealized loss    -    -    537    140  




    Purchase of property and equipment with credit    -    -    584    152  




   
b. Supplemental disclosure of cash flows activities:   
    Cash paid during the year for:  
      Interest    3,540    4,625    5,523    1,436  




      Income taxes    230    255    40    10  




   
c. Transition from consolidated to equity:   
   
Working capital, net (except cash and cash  
equivalents)    -    12,788    -    -  
Property and equipment, net    -    6,290    -    -  
Investment in affiliated company    -    (8,913 )  -    -  
Long-term liabilities    -    (1,337 )  -    -  
Minority interests    -    (8,913 )  -    -  




     -    (85 )  -    -  





The accompanying notes are an integral part of the consolidated financial statements.

C - 9



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
COMPANY'S STATEMENTS OF CASH FLOWS


The Company
Convenience
translation
(Note 2a)

Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
(In thousands)
 
 Cash flows from operating activities:                    
   Net income    2,447    11,438    7,773    2,021  
   Adjustments required to reconcile net income to net cash  
     provided by operating activities:  
     Equity in earnings of an affiliated company    (4,098 )  (6,475 )  (2,452 )  (638 )
     Depreciation    17,871 (*)  18,904 (*)  20,408    5,306  
     Deferred income taxes, net    (826 )  2,551    (2,477 )  (644 )
     Accrued severance pay, net    (42 )  (183 )  410    107  
     Erosion and Linkage differentials of long-term loans  
       from banks    306    (23 )  710    185  
     Capital gain on sale of property and equipment, net    (226 )  (94 )  (178 )  (46 )
     Increase in trade receivables    (3,899 )  (24,026 )(*)  (18,295 )  (4,758 )
     Decrease (increase) in other accounts receivable and  
       prepaid expenses    469    667    431    112  
     Decrease (increase) in inventories    (5,437 )  (21,932 )  17,932    4,663  
     Increase (decrease) in trade payables    (4,498 )  19,648    (2,084 )  (542 )
     Increase in other accounts payable and accrued expenses    5,298    8,222 (*)  (10,898 )  (2,834 )




 Net cash provided by operating activities    6,427    8,677    15,243    3,962  




   
 Cash flows from investing activities:   
   Purchase of property and equipment    (14,945 )(*)  (11,637 )(*)  (8,454 )  (2,199 )
   Proceeds from sale of property and equipment    621    195    218    57  
   Advance in respect of sale of real estate    -    -    -    -  
   Refund of investment grants    -    -    -    -  
   Lending long term loan    -    (500 )  -    -  
   Repayment of long term loan    -    36    153    40  




 Net cash used in investing activities    (14,324 )  (11,906 )  (8,087 )  (2,102 )




   
 Cash flows from financing activities:   
   Purchase of equipment with credit    -    (6,000 )  (4,600 )  (1,196 )
   Proceeds from long-term loans from banks and others    27,000    39,000    29,000    7,540  
   Principal payments of long-term loans from banks and others    (21,904 )  (23,408 )  (27,113 )  (7,050 )
   Short-term credit from bank, net    3,062    (3,648 )  9,258    2,407  
   Repurchase of the Company's shares    -    -    (23,307 )  (6,060 )
   Payment of dividend by affiliated company    -    (2,650 )  11,000    2,860  




 Net cash provided by (used in) financing activities    8,158    3,294    (5,762 )  (1,499 )




   
 Increase (decrease) in cash and cash equivalents    261    65    1,394    361  
 Cash and cash equivalents at the beginning of the year    27    288    353    92  




 Cash and cash equivalents at the end of the year    288    353    1,747    454  





(*) Reclassified-see note 2 g(1).

The accompanying notes are an integral part of the consolidated financial statements.

C - 10



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
COMPANY'S STATEMENTS OF CASH FLOWS (CONT.)


Convenience
translation
(Note 2a)

Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
(In thousands)
 
a. Non-cash transactions:                    
    Unpaid declared dividend    2,650    -    -  -




    Differed tax on unrealized gain    -    -    (145 )  (38 )




    Unrealized gain    -    -    537    140  




    Purchase of property and equipment with credit            584    152  




   
b. Supplemental disclosure of cash flows activities:   
    Cash paid during the year for:  
      Interest    3,540    4,625    5,523    1,436  




      Income taxes    230    255    40    10  





The accompanying notes are an integral part of the consolidated financial statements.

C - 11



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1: GENERAL

  a. Carmel Container Systems Ltd. (“Carmel Systems” or “the Company”), is an Israeli industrial company. The Company and its subsidiary (“the Group”) designs, manufactures and markets shipping containers, consumer packaging products and packaging wooden pallets and boxes (see Note 21). The Group’s sales are to a large number of customers mainly in Israel.

  The Company’s subsidiary is Tri-Wall Containers (Israel) Ltd. (“Tri-Wall”) which is 100% controlled. Until January 1, 2006 CD Packaging Systems Ltd. (“CD”) was subsidiary of the Company (See Note 1b).

  b. On January 1, 2006, an agreement between CD and its shareholders and Frenkel and Sons (Frenkel) and its shareholders, for the acquisition of Frankel’s operations was consummated. Frankel is engaged in the manufacturing and marketing of packaging and display stands from carton.

  Pursuant to the agreement, CD acquired from Frenkel its operations, including Frenkel’s assets and liabilities (except for Frenkel’s holdings in one of its subsidiaries which holds an industrial building in Caesarea and except for certain liabilities that were defined as protected) in exchange for 4,429,000 Ordinary A shares and 795 Ordinary B shares of CD that have been issued to Frenkel’s shareholders according to a mechanism prescribed in the agreement. As a result of the above, the Company’s effective holding percentage in CD declined from 50.1% to 27.85%. Due to loss of control in CD, the Company ceased consolidating this subsidiary commencing January 1, 2006.

  No gain or loss was recorded in connection with the above mentioned transaction.

  c. Definitions:

  In these financial statements:

Subsidiaries - Companies in which more than 50% of the voting equity is owned or controlled by the Company (as defined in Opinion No. 57 of the Institute of Certified Public Accountants in Israel) and their financial statements are consolidated with those of the Company.
 
Related parties - As defined in Opinion No. 29 of the Institute of Certified Public Accountants in Israel.
 
Affiliated
company
- Company in which the Company exercises material influence and that are not subsidiaries, and the Company's investment in which is recorded in the financial statement according to the equity method.

C - 12



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

  The consolidated financial statements presented herein are prepared in accordance with generally accepted accounting principles (“GAAP”) in Israel.

  The company prepared its financial statements in accordance with the Securities Regulations (Preparation of Annual Financial Statements,) 1993, for the first time, and therefore presents the Company statements, that were reclassified (See g(1) and v).

  The significant accounting policies applied in the preparation of the financial statements on a consistent basis, except as described in f, g and t below are as follows:

  a. Reporting basis of the financial statements:

  1. In the past, the Company prepared its financial statements based on the historical cost convention adjusted for the changes in the Israeli Consumer Price Index (“Israeli CPI”). The adjusted amounts, as included in the balance sheet as of December 31, 2003, served as a starting point for nominal financial reporting beginning January 1, 2004. Additions made after the transition date are included at nominal values.

  2. In accordance with Accounting Standard No. 12 with respect to the discontinuance of the adjustment of financial statements, the adjustment of financial statements for the effects of inflation was discontinued on December 31, 2003 and, as of that date, the Company began preparing its financial statements in reported amounts.

  3. The amounts for non-monetary assets do not necessarily represent realizable value or current economic value, but only the reported amounts for those assets.

  4. Cost in these financial statements represents cost in the reported amount.

  5. Convenience translation into US Dollars:

  The reported financial statements as of December 31, 2007 and for the year then ended, have been translated into US Dollars using the representative exchange rate of US Dollars as of such date (U.S.$ 1=NIS 3.846). The translation was made solely for the convenience of the readers. It should be noted that the reported New Israel Shekel figures do not necessarily represent the current costs of the various elements presented, and that the translated US Dollar figures should not be construed unless otherwise indicated in these statements.

  b. Consolidated financial statements:

  The consolidated financial statements include the accounts of companies over which the Company exercises control. Significant inter-company balances and transactions between the Group companies have been eliminated in the consolidated financial statements.

  c. Investments in affiliated company:

  1. The Company’s investment in affiliated company is presented by the equity method of accounting.

  2. The Company evaluates in each reporting period the necessity to record an impairment loss, in accordance with the provisions of Accounting Standard No. 15 (see h below).

C - 13



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  d. Cash equivalents:

  The Group considers all highly liquid investments, including unrestricted short-term bank deposits purchased with original maturities of three months or less, to be cash equivalents

  e. Allowance for doubtful accounts

  Such allowance is determined in respect of specific debts whose collection, in the opinion of the Group management, is doubtful.

  f. Inventories:

  1. As of January 1, 2007, the Company applies Accounting Standard No. 26, “Inventories”. Inventories are measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and costs necessary to make the sale. An evaluation of net realizable value is carried out in each subsequent period.

  Cost of inventory includes the inventory purchase costs and the costs required to bring the inventory to its current location and condition. Cost is determined as follows:

  Raw Materials and goods in transit – using the “first-in, first-out” method.

  Supplies and packaging material – on the basis of moving – average cost

  Work in progress and Finished products – on the basis of computed with allocable indirect manufacturing cost.

  The Company periodically evaluates the condition and age of inventories and provides for slow moving inventories accordingly. If in a particular period, production is not at normal capacity, the cost of inventories does not include fixed overhead costs in excess of those allocated based on normal capacity. Such unallocated overhead costs are recognized as an expense in the statement of income in the period in which they are incurred. Furthermore, cost of inventories does not include abnormal amounts of materials, labor and other costs resulting from inefficiency.

  2. When inventories are purchased under credit terms whereby the arrangement involves a financing element, the inventories are presented at cost reflecting the cash purchase price, and the financing element is recognized as a financial expense over the period of the financing.

  The initial adoption of the standard had no material effect on the interim financial statements.

  g. Fixed assets:

  1. As of January 1, 2007, the Company applies the provision of accounting standards No. 27 “Fixed assets” of the Israel Accounting Standards Board (“the Standards”).

  Fixed assets are stated at cost, including direct acquisition costs, less accumulated impairment losses, accumulated depreciation and investment grants, and excluding day-to-day servicing expenses. Cost includes spare parts and auxiliary equipment that can be used only in connection with the machinery and equipment. Borrowing costs related to financing the acquisition or the construction of fixed assets during the pre-operating period are included in the cost of the assets. Expenditures for improvements and upgrading are added to cost.

C - 14



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  g. Fixed assets (cont.):

  The cost of spare parts and auxiliary equipment which do not meet the definition of fixed assets is charged to operations as incurred. Base inventory of spare parts and auxiliary equipment, which has not been depreciated and meets the definition of fixed assets, is depreciated over its useful life and comparative data have been restated.

  Following our effects of the changes of the financial statements:

  1. Balance sheets:

Consolidated
December 31, 2006
As
previously
reported

The
change

As
presented
in these
financial
statements

Reported NIS in thousands
 
Inventories      71,425    500    71,925  



   
Fixed assets - cost    393,637    3,103    396,740  



   
Fixed assets - accumulated depreciation    306,224    5,600    311,824  



   
Intangible assets    -    1,997    1,997  




  Statements of operations:

Consolidated
Year ended December 31,
2006
2005
As
previously
reported

The
change

As
presented
in these
financial
statements

As
previously
reported

The
change

As
presented
in these
financial
statements

Reported NIS in thousands
 
Cost of revenues                            
   
Other manufacturing  
   costs    39,568    (2,800 )  36,768    41,342    (2,800 )  38,542  






   
Depreciation    16,645    2,800    19,445    17,262    2,800    20,062  






   
Total    368,804    -    368,804    368,173    -    368,173  







C - 15



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  g. Fixed assets (cont.):

  1. Balance sheets:

The Company
December 31, 2006
As
previously
reported

The
change

As
presented
in these
financial
statements

Reported NIS in thousands
 
Inventories      65,601    500    66,101  



   
Fixed assets - cost    354,899    3,103    358,002  



   
Fixed assets - accumulated depreciation    274,394    5,600    279,994  



   
Intangible assets    -    1,997    1,997  




  Statements of operations:

The Company
Year ended December 31,
2006
2005
As
previously
reported

The
change

As
presented
in these
financial
statements


As
previously
reported

The
change

As
presented
in these
financial
statements

Reported NIS in thousands (except per share data)
 
Cost of revenues                            
   
Other manufacturing costs    35,618    (2,800 )  32,818    33,712    (2,800 )  30,912  






   
Depreciation    15,432    2,800    18,232    14,172    2,800    16,972  






   
Total    317,730    -    317,730    295,962    -    295,962  







  g. Fixed assets (cont.):

  The Group recognizes the cost of replacing a part of a fixed asset as part of the fixed asset’s carrying amount when the cost has been incurred, the economic benefits associated with the part are expected to flow to the Group and the cost of the part can be measured reliably. Ongoing maintenance costs are recognized in the income statement as incurred.

  The depreciation of assets is discontinued at the earlier of the date on which the asset is classified as held for sale and the date on which the asset is derecognized. An asset is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognized.

C - 16



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  The cost of a fixed asset also includes an initial estimate of the costs of dismantling and removing the asset and restoring the site on which the asset is located, for which the Company has incurred an obligation when the asset is acquired or as a result of the use of the asset during a certain period not for the manufacture of inventories.

  As a result of the initial adoption of the provisions of the standard, the Company reclassified some of its auxiliary equipment to inventories in an amount of NIS 500 thousand.

  2. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The annual depreciation rates are as follows:

%
 
Buildings 8
Machinery and equipment 6 - 10 (mainly 8%)
Motor vehicles and forklifts 15
Office furniture and equipment 6 - 33
Leasehold improvements over the term of the lease

  h. Costs of software development:

  Costs of software development for internal use, including costs of developing and establishing a website infrastructure, are capitalized after completion of the planning stage, when the development is expected to be completed and the software will be used according to plan. Capitalization of costs is discontinued when the software is substantially completed and is ready for its designated use. The costs are amortized over the estimated useful life of the software. As of January 1, 2007, pursuant to Accounting Standard No. 30, the Company reclassified such costs from fixed assets to intangible assets.

C - 17



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  i. Impairments of fixed assets and investments:

  1. Impairment of fixed assets:

  The Group applies Accounting Standard No. 15, “Impairment of Assets”. The Standard applies to all of the assets included in the balance sheet other than inventories, assets arising from employee benefits, deferred tax assets and financial assets (with the exception of investments in affiliates). According to the Standard, whenever there is an indication that an asset may be impaired, the Company should determine if there has been an impairment of the asset by comparing the carrying amount of the asset to its recoverable amount. The recoverable amount is the higher of an asset’s net selling price or value in use, which is determined based on the present value of estimated future cash flows expected to be generated by the continuing use of an asset and by its disposal at the end of its useful life. If the carrying amount of an asset exceeds its recoverable amount, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. An impairment loss recognized should be reversed only if there have been changes in the estimates used to determine the asset’s recoverable amount since the impairment loss was recognized.

  As of December 31, 2007, no impairment losses were identified.

  2. Impairment of investments in other companies:

  The Company generally evaluates the fair value of its investments in each reporting period and whenever changes in circumstances or occurrence of other events indicate a decline in value that is other than temporary.

  The evaluation of the fair value takes into consideration, among others, estimates and valuations of the investments, the conditions of the industry in which the portfolio company is operating, the portfolio company’s business condition, off- market transactions in the portfolio company’s securities, prices of equity transactions in the portfolio company and additional information that the portfolio company presents to its board of directors (if the Company is represented on the board) or to its shareholders.

  As of December 31, 2007, no impairment losses were identified.

  j. Deferred taxes:

  1. As of January 1, 2005, the Group applies Accounting Standard No. 19, “Taxes on Income” (“the Standard”). The Standard prescribes the principles for recognition, measurement, presentation and disclosures of taxes on income and deferred taxes in the financial statements.

  Deferred taxes are computed in respect of temporary differences between the amounts included in the financial statements and the amounts allowable for tax purposes, other than a limited number of exceptions described in the Standard.

C - 18



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  j. Deferred taxes (cont.):

  Deferred tax balances are measured using the enacted tax rates expected to be in effect when the differences are expected to reverse, based on the applicable tax laws at balance sheet date. The amount for deferred taxes in the statement of income represents the changes in said balances during the reported year.

  2. Taxes that would apply in the event of the sale of investments in investees have not been taken into account in computing the deferred taxes, as long as it is probable that the sale of the investments is not expected in the foreseeable future.

  Similarly, deferred taxes that would apply in the event of distribution of earnings by investees as dividends have not been taken into account in computing the deferred taxes, since it is the Company’s policy not to initiate distribution of dividends that involves an additional tax liability.

  k. Revenue recognition:

  Revenues are recognized in the income statement when they can be measured reliably, the economic benefits associated with the transaction are expected to flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenues are measured at the fair value of the consideration in the transaction less commercial rebates, volume discounts and returns.

  Revenues from sale of goods:

  Revenues from sale of goods are recognized once all the significant risks and rewards of ownership of the goods have been transferred to the buyer, the seller no longer retains continuing managerial involvement to the degree usually associated with ownership and no longer retains effective control over the goods sold.

  l. Customer discounts:

  Current customer discounts are recognized in the financial statements upon receipt and are deducted from sales revenues.

  Customer discounts given at the end of the year and in respect of which the customer is not obligated to comply with certain targets, are recognized in the financial statements as the purchases which entitle the customer to said discounts are made.

  Customer discounts for which the customer is required to meet certain targets, such as a minimum amount of annual purchases (either quantitative or monetary), an increase in purchases compared to previous periods, etc. are recognized in the financial statements in proportion to the purchases made by the customer during the year that qualify for the target, provided that it is expected that the targets will be achieved and the amount of the discount can be reasonably estimated. The estimate as to meeting the targets is based, among others, on past experience, on the Company’s relationship with the customers and on the expected amount of purchases by the customers in the remaining period.

C - 19



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  m. Supplier discounts:

  Current supplier discounts are recognized in the financial statements upon receipt and are deducted from cost of sales.

  Supplier discounts received at the end of the year and in respect of which the Company is not obligated to comply with certain targets, are recognized in the financial statements as the purchases which entitle the Company to said discounts are made.

  Supplier discounts for which the Company is required to meet certain targets, such as a minimum amount of annual purchases (either quantitative or monetary), an increase in purchases compared to previous periods, etc. are recognized in the financial statements in proportion to the purchases made by the Company during the year that qualify for the target, provided that it is expected that the targets will be achieved and the amount of the discount can be reasonably estimated. The estimate as to meeting the targets is based, among others, on past experience, on the Company’s relationship with the suppliers and on the expected amount of purchases from the suppliers in the remaining period.

  n. Exchange rates and linkage basis:

  1. Assets and liabilities in or linked to foreign currency are presented according to the representative exchange rates published by the Bank of Israel at balance sheet date.

  2. Assets and liabilities linked to the Israeli CPI are presented according to the relevant index for each linked asset or liability.

  Below are data about the exchange rates of the U.S. dollar and the Israeli CPI:

As of
Representative
exchange rate of
U.S. dollar

Israeli CPI
for December

NIS
Points (*)
 
December 31, 2007      3.846    191.1  
December 31, 2006    4.225    184.9  
December 31, 2005    4.603    185.1  

Change during the year ended
%
%
 
December 31, 2007      (8.97 )  3.4  
December 31, 2006    (8.21 )  (0.1 )
December 31, 2005    6.85    2.4  

  (*) The index on an average basis of 1993 = 100.

C - 20



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  o. Hedging activities:

  Cash flow hedges

  At December 31, 2007, the Company forward exchange contracts designated as hedges of expected future purchases of raw materials from suppliers in U.S. dollar for which the Company has firm commitments. The forward exchange contracts are being used to hedge the foreign currency risk of the firm commitments.

  The cash flow hedges of the expected future purchases in 2008 were assessed to be highly effective and as at December 31, 2007, a unrealized loss of NIS 537 thousands and deferred tax asset of NIS 145 thousand were included in equity as a net amount of NIS 392 in respect of these contracts, see note 10.

  p. Earnings (loss) per share:

  Earnings per share are computed based on the number of Ordinary shares. Basic earnings per share only include shares that are actually outstanding during the period. Dilutive potential Ordinary shares (such as convertible debentures and warrants) are only included in the computation of diluted earnings per share. Convertible securities that have been converted during the period are included in diluted earnings per share only until the conversion date and starting from that date in basic earnings per share. The investor’s share of earnings of an investee is included based on the earnings per share of the investee multiplied by the number of shares held by the investor.

  q. Financial instruments:

  As of January 1, 2006, the Company applies Accounting Standard No. 22 regarding financial instruments: disclosure and presentation ("The Standard").

  Company shares held by the Company and by subsidiaries are carried at cost and presented as a deduction from shareholders’ equity (“treasury shares”).

  r. Use of estimates for 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 and disclosure of contingent assets and liabilities in the financial statements and the amounts of revenues and expenses during the reported years. Actual results could differ from those estimates.

  s. Fair value of financial instruments:

  The carrying amount of cash and cash equivalents, trade receivables, other accounts receivable, short and long-term credit from banks and others, trade payables and other accounts payable approximate their fair value.

C - 21



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  t. Presentation of transactions between the Company and the controlling shareholder therein:

  As of January 1, 2007, the Company applies the provisions of Accounting Standard No. 23, “Accounting Treatment of Transactions between an Entity and its Controlling Shareholder” of the Israel Accounting Standards Board (“the Standard”). The Standard is applicable, among others, to transactions involving the transfer of assets, the assumption of liabilities, indemnification, and the waiver of loans between a company and its controlling shareholder and between companies under common control that occur subsequent to January 1, 2007 as well as to a loan granted or received from the controlling shareholder prior to January 1, 2007.

  The Standard is not applicable to business combinations involving companies under common control. According to a decision promulgated by the Israel Securities Authority, as of January 1, 2007, business combinations involving entities controlled by the same shareholder will be accounted for similar to a pooling of interests and not based on the use of fair values. In cases of transactions that have the characteristics of shareholders’ investments, the Standard may also apply to transactions with non-controlling shareholders in their capacity as shareholders.

  The Standard provides that the assets and liabilities involved in a transaction between a company and its controlling shareholder or between companies under common control be recognized at their fair value on the date of the transaction. The difference between the fair value and the consideration stipulated in the transaction is to be recorded in shareholders’ equity, net of any tax effect. A charge to equity essentially constitutes a dividend, consequently resulting in a reduction in retained earnings. A credit to equity essentially constitutes an investment by shareholders and, consequently, is presented as a separate component of shareholders’ equity, “Capital reserve from transactions with a controlling shareholder”. If the company is not wholly owned by the controlling shareholder, the minority’s share of the difference, whether a charge or credit, is to be recorded in “minority interest” in the statement of income. The amount recorded in shareholders’ equity will not be transferred to the statement of income, even if in subsequent periods, the items that were the subject of the transactions are derecognized from the financial statements.

  An intangible asset with no active market (as defined in Accounting Standard No. 30), which is transferred to a company from its controlling shareholder, is to be measured at the carrying value in the controlling shareholder’s books of account and the difference between the consideration and the carrying value is to be recorded in shareholders’equity, net of any tax effect.

  A loan without a fixed maturity is to be considered as if it had been granted or received for a period of one year. Consequently, its fair value will be determined annually based on the present value of the expected cash flows from the loan, discounted at the interest rate applicable to the Company for each year.

  The initial adoption of the standard had no material effect on the financial statements.

C - 22



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  u. Disclosure of the effects of new Accounting Standards in the period prior to their adoption/Disclosure of the effects of a new Accounting Standard in the period prior to its adoption:

  Disclosure of the effects of new Accounting Standards in the period prior to their adoption/Disclosure of the effects of a new Accounting Standard in the period prior to its adoption (cont.):

  Accounting Standard No. 29 - Adoption of International Financial Reporting Standards (IFRS):

  In July 2006, the Israel Accounting Standards Board published Accounting Standard No. 29, “Adoption of International Financial Reporting Standards (IFRS)”(“Accounting Standard No. 29”).

  International Financial Reporting Standards comprise standards and interpretations adopted by the International Accounting Standards Board, and include:

  a) International Financial Reporting Standards (IFRS)

  b) International Accounting Standards (IAS)

  c) Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and by its predecessor, the Standing Interpretations Committee (SIC).

  The Company will first present its financial position and operating results pursuant to IFRS in its interim financial statements as of March 31, 2008, with a date of transition to IFRS as of January 1, 2007 (“the transition date”). For purposes of the transition, the Company will adopt the provisions of IFRS 1, “First-time Adoption of International Financial Reporting Standards” (“IFRS 1”).

  Pursuant to Accounting Standard No. 29 and FAQ 6 of the Israel Securities Authority, the Company presents an opening balance sheet as of January 1, 2007, a balance sheet as of December 31, 2007 and an income statement for the year then ended, prepared in accordance with IFRS. The Company also presents reconciliations between the amounts reported under generally accepted accounting policies in Israel (“Israeli GAAP”) and amounts reported under IFRS on the transition date, as of December 31, 2007 and for the year then ended, as detailed in Note 23.

  v. Reclassification

  Certain amounts from prior years have been reclassified to conform to the current period presentation.

  The reclassification had no effect on previously reported net loss, shareholders’ equity or cash flows.

C - 23



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3: TRADE RECEIVABLES, NET

The Company
Consolidated
December 31,
December 31,
Convenience
Translation
(Note 2a)
December 31,

2006
2007
2006
2007
2007
Reported NIS
U.S. $
(In thousands)
 
Open accounts (*)      (**)124,352    138,232    (**)141,222  160,547    41,744  
Notes receivable    23,227    25,502    24,449    27,243    7,083  





   
     147,579    163,734    165,671    187,790    48,827  
Less - allowance for doubtful  
   debts    2,345    2,587    2,395    2,637    687  





   
     145,234  161,147    163,276  185,153    48,140  






  (*) For balances with shareholders and other related parties, see Note 19b.
  (**) Reclassified.

NOTE 4: OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

The Company
Consolidated
December 31,
December 31,
Convenience
Translation
(Note 2a)
December 31,

2006
2007
2006
2007
2007
Reported NIS
U.S. $
(In thousands)
                      
Employees    127    135    127    135    35  
Government authorities    673    754    673    754    196  
Deferred income taxes (*)    -    -    500    -    -  
Prepaid expenses and Other receivables    1,505    1,002    2,274    1,657    431  





   
     2,305    1,891    3,574    2,546    662  






  (*) See Note 18f.

C - 24



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5: INVENTORIES

 

The Company
Consolidated
December 31,
December 31,
Convenience
Translation
(Note 2a)
December 31,

2006
2007
2006
2007
2007
Reported NIS
U.S. $
(In thousands)
 
a.
 
Raw materials      34,694    32,720    38,837    38,231    9,941  
Supplies and packaging  
   materials    1,860 (*)  2,560    2,448 (*)  3,220    837  
Work in progress    1,172    940    1,172    940    244  
Finished products    14,375    6,449    15,468    7,258    1,887  





   
     52,101    42,669    57,925    49,649    12,909  
Raw materials in transit    14,000    5,500    14,000    5,500    1,430  





   
     66,101    48,169    71,925    55,149    14,339  






  (*) Reclassified-see note 2 g(1).

  b. For the year ended December 31, 2007 – Inventory impairment was recorded in the cost of sales in the amount of NIS 200,000.

NOTE 6: INVESTMENT IN SUBSIDIARY AND AFFILIATED COMPANY

  The movement in the investment during 2006 and 2007:

The Company (**)
Consolidated (*)
December 31,
December 31,
Convenience
Translation
(Note 2a)
December 31,

2006
2007
2006
2007
2007
Reported NIS
U.S. $
(In thousands)
 
Balance at the beginning of                        
   the year     37,667    44,142    8,913    8,368    2,175  
   
Movement during the year:  
 Equity in earnings (losses)    6,475    2,452    (545 )  10    3  
 Dividend    -    (11,000 )        -    -  





   
Balance at the end of the year     44,142    35,594    8,368    8,378    2,178  






  (*) The investment is in CD Packing Systems Ltd. (See note 1 b).
  (**) The investment is in CD Packing Systems Ltd. and in Tri-Wall Ltd.

C - 25



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7: PROPERTY AND EQUIPMENT, NET

  a. Composition:

  CONSOLIDATED

Land and
Buildings(***)

Machinery
and
equipment
(**)

Motor
vehicles
and
forklifts

Office
furniture
and
equipment

Leasehold
Improvements

Spare parts,
die print/cut
and pallets (****)

Total
Convenience
translation
(Note 2a)

Reported NIS
Total U.S. $
(In thousands)
 
Cost:                                    
  Balance as of January 1, 2007    5,343    340,040 (*)  5,976    21,803    10,143    13,435 (*)  396,740 (*)  103,156 (*)
  Additions during the year    24    3,839 (*)  952    1,442    322    2,920    9,499 (*)  2,470  
Disposals during the year    -    1,973    608    20    -    -    2,601    676  








   
Balance at December 31, 2007    5,367    341,906    6,320    23,225    10,465    16,355    403,638    104,950  








   
Accumulated depreciation:  
  Balance as of January 1, 2007    4,825    270,361    5,126    18,230    7,682    5,600 (*)  311,824    81,077 (*)
  Additions during the year    46    17,212    352    847    663    2,800    21,920    5,699  
  Disposals during the year    -    1,973    568    19    -    -    2,560    666  








   
Balance at December 31, 2007    4,871    285,600    4,910    19,058    8,345    8,400    331,184    86,111  








   
Depreciated cost at December 31, 2007    496    56,306    1,410    4,167    2,120    7,955    72,454    18,839  








   
Depreciated cost at December 31, 2006    518    69,679 (*)  850    3,573    2,461    7,835 (*)  84,916 (*)  22,079 (*)









  (*) Reclassified Intangible assets-see note 8.
  (**) Net of investment grant amounting to reported NIS 50,000 ($ 12,000) and reported NIS 210,000 as of December 31, 2006 and 2005, respectively.
  (***) Owned by the Group.
  (****) Reclassified spare parts, die print/cut and pallets.

  b. As for charges, see Note 16.

  c. Depreciation expenses amounted to reported NIS 21,920,000 ($ 5,699,000) reported NIS 20,178,000 and reported NIS 21,165,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

C - 26



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7: PROPERTY AND EQUIPMENT, NET

  a. Composition:

  THE COMPANY

Machinery
and
equipment
(**)

Motor
vehicles
and
forklifts

Office
furniture
and
equipment

Leasehold
Improvements

Spare parts, die print/cut and pallets (***)
Total
Reported NIS
(In thousands)
 
Cost:                            
  Balance as of January 1, 2007    314,442    5,126    20,473    4,406    13,555 (*)  358,002 (*)
  Additions during the year    2,941    952    1,384    250    2,800    8,328  
Disposals during the year    1,514    447    -    -    -    1,961  






   
Balance at December 31, 2007    315,869    5,631    21,857    4,656    16,356    364,369  






   
Accumulated depreciation:  
  Balance as of January 1, 2007    249,382    5,072    17,023    2,867    5,600 (*)  279,944  
  Additions during the year    16,220    352    678    358    2,800    20,408  
  Disposals during the year    1,514    407    -    -    -    1,921  






   
Balance at December 31, 2007    224,008    5,017    17,701    3,226    8,400    298,431  






   
Depreciated cost at December 31, 2007    51,781    614    4,158    1,430    7,955    65,938  






   
Depreciated cost at December 31, 2006    64,362 (*)  842    3,365    1,534    7,955 (*)  78,058  







  (*) Reclassified Intangible assets-see note 8.
  (**) Net of investment grant amounting to reported NIS 50,000 ($ 12,000) and reported NIS 210,000 as of December 31, 2006 and 2005, respectively.
  (***) Reclassified spare parts, die print/cut and pallets.

  b. As for charges, see Note 16.

  c. Depreciation expenses amounted to reported NIS 21,920,000 ($ 5,699,000) reported NIS 20,178,000 and reported NIS 21,165,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

C - 27



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 INTANGIBLE ASSETS

  ERP Assimilation:

  The Company and Consolidated

Costs
December 31,

Convenience
Translation (Note 2a)
December 31,

2007
2007
Reported NIS
U.S. $
In thousands
 
Costs:            
   
Balance as of January 1, 2007    1,997    519  
   
Additions during the year    130    34  


   
Balance as of December 31, 2007    2,127    553  



NOTE 9 SHORT-TERM CREDIT FROM BANKS

  a. Composition:

  The Company and Consolidated

Weighted interest rate
Unlinked
Convenience
Translation
(Note 2a)

December 31,
December 31,
December 31,
2006
2007
2006
2007
2007
%
Reported NIS
U.S. $
In thousands
 
Overdrafts      7.6    6.9    10    7    2  
   
Short-term credit from  
  banks    6.0    5.5    7,635    16,896    4,393  



               7,645    16,903    4,395  




  b. As of December 31, 2007, the Group had authorized credit lines from several banks in the amount of reported NIS 3,000,000 ($ 780,000), which bear interest at the average rate of Prime +1.46%.

  c. As for charges to collateralize part of the short-term loans and credit, see Note 16.

C - 28



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 TRADE PAYABLES

The Company
Consolidated
December 31,
December 31,
Convenience
Translation
(Note 2a)
December 31,
2007

2006
2007
2006
2007
Reported NIS
U.S. $
(In thousands)
 
Trade payables (*)      87,276    80,232    93,081    86,579    22,512  
Notes payable    463    813    463    844    219  





   
     87,729    81,045    93,544    87,423    22,731  






  (*) For balances with shareholders and other related parties see note 19a.

NOTE 11 OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The Company
Consolidated
December 31,
December 31,
Convenience
Translation
(Note 2a)
December 31,
2007

2006
2007
2006
2007
Reported NIS
U.S. $
(In thousands)
 
Related company (*)      15,234    2,299    2,299    2,299    598  
Liabilities to employees  
and payroll accruals    8,690    8,050    12,011    11,769    3,060  
Government authorities    1,385    1,385    1,830    1,899    494  
Provision for tax    -    3,963    -    3,993    1,038  
Accrued expenses    782    873    1,027    1,337    348  
Derivative    -    537    -    537    140  
Other    152    273    228    327    85  





 
     26,243 (**)  17,463    17,395 (**)  22,161    5,762  






  (*) See Note 19a.
  (**) Reclassified.

C - 29



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12: LONG-TERM LOANS FROM BANKS

  a. Composition of long-term loans from banks.

  The Company and Consolidated

Convenience
Translation
(Note 2a)

December 31,
December 31,
2007

2006
2007
Reported NIS
U.S. $
(In thousands)
 
Banks      72,381    74,978    19,495  
Less - current maturities    24,211    25,602    6,657  



     48,170    49,376    12,838  




  As to pledges to secure these liabilities, see Note 16.

  b. The loans are classified by linkage terms and interest rates as follows:

  The Company and Consolidated

Weighted
interest rate

Convenience
Translation
(Note 2a)

December 31,
December 31,
December 31,
2006
2007
2006
2007
2007
%
Reported NIS
U.S. $
(In thousands)
 
Unlinked      6.2    5.75    60,567    52,405    13,626  
Linked to Israeli CPI    4.1    4.27    11,814    22,573    5,869  



   
               72,381    74,978    19,495  




C - 30



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12: LONG-TERM LOANS FROM BANKS (CONT.)

  c. Repayment dates subsequent to the balance sheet date are as follows:

  The Company and Consolidated

December 31,
Convenience
translation
(Note 2a)
December 31,
2007

2006
2007
Reported NIS
U.S. $
(In thousands)
 
First year (current maturities)      24,211    25,602    6,657  



   
Second year    19,851    19,380    5,038  
Third year    13,572    15,406    4,006  
Fourth year    9,418    11,941    3,105  
Fifth year    5,329    2,649    689  



   
     48,170    49,376    12,838  



   
     72,381    74,978    19,495  




NOTE 13: FINANCIAL INSTRUMENTS

  The Group’s activities expose it to various financial risks, such as credit risk and exchange rate risks. The Company’s comprehensive risk management program is focused on transactions to reduce to a minimum the possible negative effects on the Company’s financial performance.

  a. Credit risk

  Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables.

  Concentrations of credit risk with respect to trade receivables are limited due to the large number of entities comprising the Group’s customer base and their dispersion across many different industries. The Group performs ongoing credit evaluations of its debtors. In management’s estimations, the allowance for doubtful debts adequately covers anticipated losses in respect of its accounts receivable credits risks. Commencing January 1, 2005 the company has insured its trade receivables credit in a risk insurance which is limited to certain conditions.

  The Group’s cash and cash equivalents(no material) are invested in deposits in major Israeli banks. Management believes that the financial institutions that hold the Group investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.

C - 31



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13: FINANCIAL INSTRUMENTS (CONT.)

  b. Foreign currency exchange risk

  The Company enters into call forwards contracts to hedge certain of its balance sheet exposure against changes in foreign currency exchange rates. Such exposure is a result of the portion of the Company’s liabilities being denominated in currencies other than NIS(mainly in USD). Management’s policy is to hedge projected transactions of raw materials import in U.S$ for the next year.

  Total nominal amount of the open contracts is $25,120 thousand as of December 31, 2007.

  Unrealized loss net after taxes recorded in 2007 was 392 thousands NIS and the derivative was 537 thousands NIS that was recorded in Other Account Payables.

  All of the call forwards contracts are due until November 28, 2008.

  c. Interest rate risk

  The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt obligations with floating interest rates. The Company’s exposure is to variable cash flows as a result of interest changes.

C - 32



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13: FINANCIAL INSTRUMENTS (CONT.)

  d. Linkage terms of monetary balances

  Consolidated

December 31, 2006
December 31, 2007
Linked to
the Israeli
Consumer
Price Index

In or
linked to
foreign
Currency(*)

Unlinked
Total
Linked to
the Israeli
Consumer
Price Index

In or
linked to
foreign
Currency(*)

Unlinked
Total
Reported NIS (In thousands)
 
Assets:                                    
Cash and cash equivalents    -    509    1,311    1,820    -    92    2,430    2,522  
Trade receivables    -    722    162,554    163,276    -    1,600    183,553    185,153  
Other accounts receivable and prepaid expenses    673    -    2,901    3,574    754    -    1,792    2,546  
Long-term accounts receivables    -    -    311    311    -    -    141    141  








     673    1,231    164,695    166,599    754    1,692    187,916    190,362  








Liabilities:   
Short-term credit from banks and others    -    -    7,645    7,645    -    -    16,903    16,903  
Trade payables    -    64,199    29,345    93,544    -    29,774    57,649    87,423  
Other accounts payable and accrued expenses    -    -    17,395    17,395    -    -    22,161    22,161  
Long-term loans from banks (including current  
   maturities)    11,814    -    60,567    72,381    22,573    -    52,405    74,978  








     11,814    64,199    112,570    188,583    22,573    29,774    149,118    201,465  








  The Company

December 31, 2006
December 31, 2007
Linked to
the Israeli
Consumer
Price Index

In or
linked to
foreign
Currency(*)

Unlinked
Total
Linked to
the Israeli
Consumer
Price Index

In or
linked to
foreign
Currency(*)

Unlinked
Total
Reported NIS (In thousands)
 
Assets:                                    
Cash and cash equivalents    -    348    5    353    -    92    1,655    1,747  
Trade receivables    -    722    144,512    145,234    -    908    160,239    161,147  
Other accounts receivable and prepaid expenses    673    -    1,632    2,305    754    -    1,137    1,891  
Long-term accounts receivables    -    -    311    311    -    -    141    141  








     673    1,070    146,460    148,203    754    1,000    163,172    164,926  








Liabilities:   
Short-term credit from banks and others    -    -    7,645    7,645    -    -    16,903    16,903  
Trade payables    -    64,199    25,530    87,729    -    29,659    51,386    81,045  
Other accounts payable and accrued expenses    -    -    26,243    26,243    -    -    17,463    17,463  
Long-term loans from banks (including current  
   maturities)    11,814    -    60,567    72,381    22,573    -    52,405    74,978  








     11,814    64,199    119,985    193,998    22,573    29,659    138,157    190,389  









  (*) mainly U.S Dollars.

C - 33



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13: FINANCIAL INSTRUMENTS (CONT.)

  d. Linkage terms of monetary balances (cont.)

Consolidated
December 31, 2007
Linked to
the Israeli
Consumer
Price Index

In or
linked to
foreign
Currency(*)

Unlinked
Total
Convenience translation into U.S. $ (Note 2a)
(In thousands)
 
Assets:                    
Cash and cash equivalents    -    24    632    656  
Trade receivables    -    416    47,724    48,140  
Other accounts receivable and prepaid expenses    196    -    466    662  
Long-term accounts receivables    -    -    37    37  




     196    440    48,859    49,495  




Liabilities:   
Short-term credit from banks and others    -    -    4,395    4,395  
Trade payables    -    7,742    14,989    22,731  
Other accounts payable and accrued expenses    -    -    5,762    5,762  
Long-term loans from banks (including current  
   maturities)    5,869    -    13,626    19,495  




     5,869    7,742    38,772    52,383  





  (*) Mainly U.S. Dollars

NOTE 14: ACCRUED SEVERANCE PAY, NET

  a. Severance pay and retirement grants:

  Under Israeli law and valid labor agreements, the companies of the Group are required to make severance or current pension payments in addition to retirement grants to dismissed employees and to employees leaving employment under certain other circumstances.

  These liabilities are covered by regular deposits with severance pay, pension funds and by the balance sheet accrual.

  Employees dismissed before attaining retirement age are entitled to severance pay computed on the basis of their most recent salary. As for part of the Group’s employees – in the event that the amounts accumulated in the pension fund are insufficient to cover the severance pay computed as above – the Company and its subsidiary are to supplement the difference.

  The companies’ employees are participants in a pension fund to which the companies make current monthly payments. The deposits relieve the companies of their severance pay liability regarding their portions deposits. The pension fund is external and independent of the Group.

  Amounts deposited in severance pay funds, and related liabilities are not reflected in the balance sheet since the funds are not under the control of the Group.

C - 34



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 14: ACCRUED SEVERANCE PAY, NET (CONT.)

  b. The amounts funded for compensation are deposited in some Central Funds for Compensation and with provident funds in the name of the employees. The amounts funded may be withdrawn provided that the provisions of the severance pay law are fulfilled.

  c. Below are the amounts for accrued severance pay.

The Company
Consolidated
December 31,
December 31,
Convenience
Translation
(Note 2a)
December 31,
2007

2006
2007
2006
2007
Reported NIS
U.S. $
(In thousands)
 
Severance pay      7,344    6,413    10,333    9,673    2,515  
Less - amounts funded    7,656  6,315    10,466    9,375    2,438  





   
     (312 )  98    (133 )  298    77  






NOTE 15: CONTINGENT LIABILITIES AND COMMITMENTS

  a. An investee of a shareholder, who is also a supplier of raw materials, has a right of first refusal regarding the sale of part of the purchases of the Group’s raw materials for a period of ten years commencing October, 1998, which automatically renewed in October, 2007 for five years commencing October, 2008. The Group purchases raw materials from the investee of a shareholder in the ordinary course of business (see Note 19c. with respect to purchases from shareholders).

  b. The facilities that include offices and warehouses of the Group are rented under operating leases for various periods ending in 2016. Future minimum rental commitments under the non-cancelable leases are most linked to the Israeli CPI in effect as of balance sheet date, as follows:

The Company
Consolidated
Convenience
translation
(Note 2a)
U.S. $

Reported NIS
(In thousands)
 
For the years ending December 31,                
   
2008     12,320    13,357    3,473  
2009     12,152    13,075    3,400  
2010     10,976    10,976    2,854  
2011     64,060    64,060    16,656  



     99,510    101,468    26,383  




C - 35



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15: CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)

  b. Consolidated:

  Rent expenses amounted to approximately reported NIS 13,339,000 (3,468,279$) NIS 13,513,000 and NIS 13,815,000 for the years ended December 31, 2007, 2006 and 2005, respectively

  The Company:

  Rent expenses amounted to approximately reported NIS 12,247,000 ($3,184,347) NIS 12,337,000 and NIS 11,746,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

  c. The Company leases motor vehicles and motor forklifts under long-term operating lease agreements. The lease agreements expire on various dates ending in 2007 – 2012. The following is a schedule of future minimum lease payments under these agreements which are linked to the Israeli CPI and to the Euro in effect of balance sheet date, as follows:

The Company
Consolidated
Convenience
translation
(Note 2a)
U.S. $

Reported NIS
(In thousands)
 
For the years ending December 31,                
   
2008     1,976    2,308    600  
2009     1,483    1,723    448  
2010     822    1,006    261  
2011     406    461    120  



     4,687    5,499    1,430  




  d. At the end of September 2007, the Company received a demand from the municipality of Netanya for a payment in the amount of NIS 1,840 thousand (including interest and linkage differences of NIS 663 thousand) based on a reassessment of real estate taxes for 2000-2007, in respect of the Company’s manufacturing plant in Netanya. The Company submitted an objection to the demand, which objection the municipality has rejected. The Company has filed an appeal on the rejection. The Company’s management believes, based on the opinion of its legal advisors, that there is likelihood that the municipality will succeed in its demand. The financial statements include a provision for damage that management believes is sufficient in these circumstances.

C - 36



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16: CHARGES (ASSETS PLEDGED)

  a. As collateral for the Group’s liabilities to banks and to the State of Israel, a fixed charge was placed, in an unlimited amount, on any unpaid share capital, equipment, machinery, insurance rights and the shares of Tri-Wall, and a floating charge was placed on all the other properties of the Group’s plants and the assets.

  b. Liabilities secured by pledges are as follows:

  The Company and Consolidated

Convenience
translation
(Note 2a)

December 31,
December 31,
2007

2006
2007
Reported NIS
U.S. $
In thousands
 
Short-term loans and credit      7,645    16,903    4,395  
Long-term liabilities including current  
   maturities    72,381    74,978    19,495  



   
     80,026    91,881    23,890  




NOTE 17: SHARE CAPITAL

  a.

December 31, 2007
December 31, 2006
Authorized
Issued and
Outstanding (*)

Authorized
Issued and
Outstanding (*)

Number of shares
 
Ordinary shares of NIS                    
  1 par value each    10,000,000    1,739,937    10,000,000    2,400,187  





  (*) As of December 31, 2006 and 2007, the Company’s treasury shares are 119,813 and 780,063, respectively, of the Ordinary shares at a cost of NIS 4,258,000 and NIS 27,565,000 which is shown as a deduction in shareholders’ equity.

  The Ordinary shares confer upon their holders the right to participate and vote in the general meetings, the right to receive dividends and the right to a share in excess of assets upon liquidation of the Company.

C - 37



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 17: SHARE CAPITAL (CON.)


b. 1. In its meeting dated March 5, 2007, the Company’s Board of Directors resolved to purchase 522,350 shares held by Ampal and 137,900 shares held by Shenhav family. In addition, the transaction to purchase the shares of Ampal was ratified in the general meeting held on April 15, 2007.

  2. In May, Ampal and the Shenhav family transferred all their shares held to the Company.

  3. Following the consummation of these transactions, the new holding percentages are American Israeli Paper Mills Ltd. (“AIPM”) 36.2%, Kraft group 49.6% and the public holds 14.2%.

  c. Dividends:

  Dividends declared on the Ordinary shares will be paid in NIS. Dividends paid to shareholders outside Israel will be converted into dollars, on the basis of the exchange rate prevailing at the date of payment.

NOTE 18: TAXES ON INCOME

  a. The laws applicable to the Group companies:

  Income Tax (Inflationary Adjustments) Law, 1985:

  According to the law, the results for tax purposes are measured based on the changes in the Israeli CPI.

  The Law for the Encouragement of Capital Investments, 1959 (“the Law”):

  According to the law, the companies are entitled to various tax benefits by virtue of the “approved enterprise” status granted to part of their enterprises, defined by this law. The principal benefit is:

  In 1997, the production facilities of the Company’s subsidiary, Tri-wall, have been granted the status of an “approved enterprise” under the Law of the Encouragement of Capital Investments, 1959. Tri-wall has elected the alternative benefits, waiving grants in return for tax exemption. In accordance with this Law, the income from the approved enterprise will be exempt from tax for a period of two years and for the remaining benefit period will be subject to a reduced tax rate of 25%. The total benefit period is for ten years, commencing with the first year in which taxable income is generated, but limited to twelve years from commencement of production or fourteen years from the date of approval, whichever is earlier (“benefit period”).

  During 2003, Tri-Wall received final approval of implementation of the investment program.

  Due to the losses for tax purposes incurred by the Parent Company, the tax benefit period for the approved enterprise program has not yet commenced.

C - 38



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18: TAXES ON INCOME (CONT.)

  a. The laws applicable to the Group companies (cont.):

  If dividends are distributed out of tax exempt profits, the Company will then become liable for tax and the rate applicable from its profits of the approved enterprise in the year in which the income is earned, as if it had not chosen the alternative track of benefits. The Company’s policy is not to distribute dividends out of these profits.

  Conditions for the entitlements to the benefits:

  The above benefits are conditional upon the fulfillment of the conditions stipulated by the Law, regulations published there under and the letters of approval for the specific investment in the approved enterprises. In the event of failure to comply with these conditions, the benefits may be cancelled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. The management believes that the Companies are meeting the afore-mentioned conditions.

  b. The Law for the Encouragement of Industry (“Taxation”), 1969:

  The Company and its subsidiary are “industrial companies”, as defined by this law. Accordingly by virtue of regulations published, the companies have claimed, a deduction for accelerated depreciation on equipment used in industrial activity, as determined in the regulations effective under the Inflationary Law.

  The Company and Tri-Wall are being assessed together for tax purposes

  c. Capital gains/losses:

  Pursuant to the provisions of the Law for Amendment of the Income Tax Ordinance (No. 132), 2003, (“the reform law”), tax at a reduced rate of 25% will apply on capital gains accrued after January 1, 2003, instead of the regular tax rate. In case of the sale of properties purchased before the adoption of the reform law, the reduced tax rate will apply only to the portion of the profit which accrued after the adoption of the law, as computed according to the law. Further, the reform law states that capital losses carried forward for tax purposes may be offset against capital gains for an indefinite period. The reform law also provides for the possibility to offset capital losses from sales of properties outside Israel against capital gains in Israel.

  d. Changes in the tax laws applicable to the Company:

  In February 2008, the “Knesset” (Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Starting 2008, the results for tax purposes will be measured in nominal values, excluding certain adjustments for changes in the Consumer Price Index carried out in the period up to December 31, 2007. The amended law includes, inter alia, the elimination of the inflationary additions and deductions and the additional deduction for depreciation starting 2008.

  e. Tax assessments:

  The Company and Tri-Wall had Final tax assessments up to and including the 2003 tax year.

  f. Tax rates applicable to the income of the Group companies:

  In June 2004, an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004 was passed by the “Knesset” (Israeli parliament) and on July 25, 2005, another law was passed, the amendment to the Income Tax Ordinance (No. 147) 2005, according to which the corporate tax rate is to be progressively reduced to the following tax rates: 2004 – 35%, 2005 – 34%, 2006 – 31%,2007-29%, 2008 – 27%, 2009 – 26%, 2010 and thereafter – 25%.

C - 39



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18: TAXES ON INCOME (CONT.)

  g. Deferred taxes:

  1. Significant components of the Company and its subsidiaries deferred tax liabilities and assets are as follows:

The Company
Consolidated
December 31,
December 31,
Convenience
Translation
(Note 2a)
December 31,
2007

2006
2007
2006
2007
Reported NIS
U.S. $
(In thousands)
 
Deferred tax assets:                        
   Cumulative other  
     comprehensive income    -    145    -    145    38  
   Tax loss carry forward    4,588    -    4,589    -    -  
   Provision for employee  
     rights    1,160    1,014    1,705    1,600    417  
   Allowance for doubtful debts    680    698    693    712    185  





   
Net deferred tax assets    6,428    1,857    6,987    2,457    640  
   
Deferred tax liabilities:  
   Depreciable property and  
     equipment    (15,224 )  (8,031 )  (15,823 )  (9,071 )  (2,359 )





   
Net deferred tax liabilities    (8,796 )  (6,174 )  (8,836 )  (6,614 )  (1,719 )






  (*) Deferred taxes computed at weighted tax rate of approximately 27%.

C - 40



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18: TAXES ON INCOME (CONT.)

  g. Deferred taxes (cont.):

  2. Deferred income taxes are presented in the balance sheet as follows:

The Company
Consolidated
December 31,
December 31,
Convenience
Translation
(Note 2a)
December 31,
2007

2006
2007
2006
2007
Reported NIS
U.S. $
(In thousands)
 
In other accounts receivable                        
   and prepaid expenses    -    -    500    -    -  
As long-term liabilities    (8,796 )  (6,174 )  (9,336 )  (6,614 )  (1,719 )





   
     (8,796 )  (6,174 )  (8,836 )  (6,614 )  (1,719 )






  h. The movement in deferred taxes during 2007:

  Consolidated:

Reported
NIS
in thousands

 
Balance at the beginning of the year      (8,836 )
Deferred taxes resulting from cumulative other comprehensive income    145  
   
Income taxes resulting from changes in deferred taxes    2,077  

   
Balance at the end of the year     (6,614 )


  The movement in deferred taxes during 2007:

  The Company:

Reported
NIS
in thousands

 
Balance at the beginning of the year      (8,796 )
Deferred taxes resulting from cumulative other comprehensive  
income    145  
   
Income taxes resulting from changes in deferred taxes    2,477  

   
Balance at the end of the year     (6,174 )


C - 41



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18: TAXES ON INCOME (CONT.)

  i. Income tax reconciliation:

  The reconciliation of the theoretical tax expense assuming all income is taxed at the statutory rate, applicable to corporate tax in Israel and the actual tax expense is as follows:

  Consolidated:

Convenience
Translation
(Note 2a)

Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
In thousands
 
Income before taxes on income      1,044    14,738    9,679    2,516  




   
Theoretical tax expense computed at the  
   Israeli statutory tax rate: 2005 - 34% ,  
   2006 - 31%, 2007 - 29%    355    4,569    2,807    730  
   
Increase (decrease) in income taxes  
   resulting from:  
   
Tax adjustments in respect of inflation in  
   Israel and others    (521 )  -    (290 )  -  
   
Adjustment of deferred tax due to change in  
   tax rate    (660 )  -    -    -  
   
Non-deductible expenses (tax exempt income)  
   and others, net    86    (232 )  41    (65 )
   
Adjustment to other income with low tax  
   rate or tax exempt income    -    (940 )  -    -  
   
Increase (decrease) in tax expense due to  
   reduced tax rates in companies which  
   were granted approved enterprise status    (7 )  -    -    -  
   
Depreciation of capital lease from previous  
   years    (642 )  (642 )  (642 )  (167 )




   
Actual taxes on income    (1,389 )  2,755    1,916    498  





C - 42



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18: TAXES ON INCOME (CONT.)

  i. Income tax reconciliation (cont):

  The Company:

Year ended December 31,
2005
2006
2007
Reported NIS
In thousands
 
Income before taxes on income (loss)      (4,027 )  5,973    6,807  



   
Theoretical tax expense computed at the Israeli statutory tax  
   rate: 2005 - 34% , 2006 - 31%, 2007 - 29%    (1,369 )  1,852    1,974  
   
Increase (decrease) in income taxes resulting from:  
   
Tax adjustments in respect of inflation in Israel and others    (143 )  -    (290 )
   
Adjustment of deferred tax due to change in tax rate    -    -    -  
   
Non-deductible expenses (tax exempt income) and others, net    (222 )  (200 )  -  
   
Adjustment to other income with low tax rate or tax exempt income    -    -    -  
   
Increase (decrease) in tax expense due to reduced tax rates in  
   companies which were granted approved enterprise status    -    -    -  
   
Depreciation of capital lease from previous years    (642 )  (642 )  (642 )



   
Actual taxes on income    (2,376 )  1,010    1,486  




C - 43



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18: TAXES ON INCOME (CONT.)

  j. Taxes on income (tax benefit) included in the statements of operations:

  Consolidated

Convenience
Translation
(Note 2a)

Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
In thousands
 
Deferred income taxes, net      (880 )  2,591    (2,077 )  (540 )
Current taxes    151    164    3,993    1,038  
Adjustment    (660 )  -  




     (1,389 )  2,755    1,916    498  





  The Company

Year ended December 31,
2005
2006
2007
Reported NIS
In thousands

 
Deferred income taxes, net      2,376    1,010    (2,477 )
Current taxes    -    -    3,963  



     2,376    1,010    1,486  




NOTE 19: TRANSACTIONS AND BALANCES WITH RELATED PARTIES

  a. Current liabilities to related parties:

  Consolidated

Convenience
translation
(Note 2a)

December 31,
December 31,
2007

2006
2007
Linkage terms
Interest rate
Reported NIS
U.S $
(In thousands)
 
1. Trade payables:                            
Shareholder   U.S. $   Interest free    50,644    18,039    4,690  
    Unlinked   Interest free    -    26,772    6,961  
Related companies  
   of a shareholder   Unlinked   Interest free    -    104    27  
   
2. Other accounts  
    payable and  
    accrued expenses:  
   
 Related companies   Unlinked   Interest prime    12,935    2,299    598  

C - 44



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 19: TRANSACTIONS AND BALANCES WITH RELATED PARTIES (CONT.)

  a. Current liabilities to related parties:

  The Company

  Convenience
translation
(Note 2a)

  December 31,
December 31,
2007

    Linkage
terms

Interest
rate

2006
2007
    Reported NIS
U.S. $
(In thousands)
 
    1.       Trade payables:                             
       Shareholder    U.S.$    Interest free    50,644    18,039    4,690  
            Unlinked    Interest free    -    26,772    6,961  
  2.     Other accounts                           
         payable and                           
         accrued expenses:                           
 
       Related companies                         
         of a shareholder    Unlinked    Interest prime    12,935    2,299    598  

  b. Current receivables from related parties:

  Consolidated and the Company:

Convenience
translation
(Note 2a)

December 31,
December 31,
2007

  Linkage
terms

Interest
rate

2006
2007

  Reported NIS
U.S. $
(In thousands)
 
  Trade receivables:                               
 
Related parties Unlinked   Interest free    5,486    9,998    2,600  
Related parties Unlinked   Interest free    -    2,928    761  

C - 45



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 19: TRANSACTIONS AND BALANCES WITH RELATED PARTIES (CONT.)

  c. Transactions with related parties:

  The Company sells to, shareholders, investees of a shareholder and purchases raw materials from investees of a shareholder and shareholders. The terms of these transactions do not differ materially from similar transactions with third parties. The sales, purchases and other transactions are as follows:

  Convenience
translation
(Note 2a)

  Investees of
a shareholder

Shareholders
Total
Total
  Reported NIS
U.S. $
(In thousands)
 
In 2007:                        
 
Expenses:  
   Purchases of raw materials    2,204    148,245    150,449    39,118  
   Financing    -    (983 )  (983 )  (256 )




 
       2,204    147,262    149,466    38,862  




 
Sales    23,622    5,620    29,242    7,603  





C - 46



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 19: TRANSACTIONS AND BALANCES WITH RELATED PARTIES (CONT.)

  d. Transactions with related parties (cont.):

  Investees of
a shareholder

Shareholders
Total
  Reported NIS
  (In thousands)
 
  In 2006:                   
Expenses:                 
   Purchases of raw materials    79,173    73,748    152,291  
   Financing    (1,020 )  (1,766 )  (2,786 )



        78,153    71,982    150,135  



                  
Sales    17,071    5,252    22,323  




  Investees of
a shareholder

Shareholders
Total
  Reported NIS
  (In thousands)
 
  In 2005:                   
Expenses:                 
   Purchases of raw materials    59,946    71,683    131,629  
   Financing    1,452    760    2,212  



         61,398    72,443    133,841  



   
Sales    9,855    4,465    14,320  




NOTE 20: SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS

  a. Cost of revenues:

  Consolidated:

        Convenience
Translation
(Note 2a)

  Year ended
December 31,
2007
U.S. $

  Year ended December 31,
2005
2006
2007
Reported NIS
  (In thousands)
 
Raw Materials      251,647    256,079    291,924    75,903  
Salaries, wages and employee benefits    57,803    55,482    57,507    14,952  
Subcontracted work    3,673    1,342    1,399    364  
Other manufacturing costs    38,542 (*)  36,768 (*)  36,558    9,505  
Depreciation    20,062 (*)  19,445 (*)  21,121    5,492  




      371,727    369,116    408,509    106,216  
   
Decrease (increase) in work in progress    (644 )  618    232    60  
Decrease (increase) in finished products    (2,910 )  (930 )  8,210    2,136  




      368,173    368,804    416,951    108,412  





  (*) Reclassified see note 2(g)1

C - 47



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 20: SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS (CONT.)

  a. Cost of revenues:

  The Company:

  Year ended December 31,
2005
2006
2007
  Reported NIS
  (In thousands)
 
Raw Materials      210,537    224,680    257,839  
Salaries, wages and employee benefits    38,240    40,472    42,120  
Subcontracted work    2,233    1,450    1,544  
Other manufacturing costs(*)    30,912    32,818    32,989  
Depreciation(*)    16,972    18,232    19,729  
 


     298,894    317,652    354,221  
Decrease (increase) in work in progress    (295 )  618    232  
   
Decrease (increase) in finished products    (2,638 )  (540 )  7,926  



     295,961    317,730    362,379  




  (*) Reclassified see note 2(g)1

  b. Selling and marketing expenses:

  Consolidated:

Convenience
Translation
(Note 2a)

  Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
  (In thousands)
 
Salaries and employee benefits      5,938    6,302    6,335    1,647  
Advertising expenses    162    160    240    62  
Depreciation    132    33    60    16  
Transportation and other    15,112    16,865    17,550    4,563  




      21,344    23,360    24,185    6,288  





C - 48



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 20: SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS (CONT.)

  b. Selling and marketing expenses (cont.):

  The Company:

  Year ended December 31,
2005
2006
2007
  Reported NIS
  (In thousands)
 
  Salaries and employee benefits      2,877    3,848    3,924  
Advertising expenses    66    111    183  
Depreciation    96    22    -  
Transportation and other    13,570    16,444    17,057  



 
      16,609    20,425    21,164  




  c. General and administrative expenses:

  Consolidated:

Convenience
Translation
(Note 2a)

  Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
  (In thousands)
 
  Salaries and employee benefits      9,670    9,199    9,029    2,348  
Depreciation    971    700    739    192  
Office maintenance and other expenses (**)    7,035    6,550    6,853    1,782  




   
     17,676    16,449    16,621    4,322  




   
(**) Including doubtful and bad debts expenses.    95    310    242    63  





  As for purchases from major suppliers (related parties), see Note 19c.

C - 49



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 20: SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS (CONT.)

  c. General and administrative expenses (cont.):

  The Company:

  Year ended December 31,
2005
2006
2007
Reported NIS
  (in thousands)
 
  Salaries and employee benefits      6,599    6,953    6,663  
Depreciation    842    650    679  
Office maintenance and other expenses (**)    5,633    5,542    5,953  



   
     13,074    13,145    13,295  



   
(**) Including doubtful and bad debts expenses.    83    310    242  




  As for purchases from major suppliers (related parties), see Note 19c.

  d. Financial expenses, net:

  Consolidated:

Convenience
Translation
(Note 2a)

  Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
  (In thousands)
 
  Financial expenses:                        
   Interest expenses and                      
     exchange differentials and                      
     bank charges:                      
   On short-term credit    4,098    1,518    1,055    274  
   On long-term loans    3,322    3,648    5,057    1,315  




   
            7,420    5,166    6,112    1,589  




Financial income:  
   Interest income and  
      exchange differentials    (50 )  (3,304 )  (1,783 )  (463 )




   
                 7,370    1,862    4,329    1,126  





C - 50



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 20: SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS (CONT.)

  d. Financial expenses, net:

  The Company:

  Year ended December 31,
2005
2006
2007
  Reported NIS
  (in thousands)
 
  Financial expenses:                   
   Interest expenses and exchange differentials and                 
     bank charges:  
   On short-term credit    4,721    1,471    1,448  
   On long-term loans    3,323    3,648    5,507  



   
     8,044    5,119    6,505  



Financial income:  
   Interest income and exchange differentials    (221 )  (2,462 )  (1,783 )



   
             7,823    2,657    4,722  




  e. Other income, net:

  Consolidated:

Convenience
Translation
(Note 2a)

  Year ended December 31,
Year ended
December 31,
2007

2005
2006
2007
Reported NIS
U.S. $
  (In thousands)
 
  Capital gain on sale of property and equipment      272    5,307    235    61  
   
Management fees from subsidiary    -    -    102    27  




   
     272    5,307    337    88  





  In January 2006, the Company’s Subsidiary-“Tri-Wall” sold to a third party real estate in Netanya in consideration of NIS 4.9 million (net of expenses), resulting in a gain before taxes of approximately NIS 4.8 million to the subsidiary (gain after taxes- NIS 4 million).

C - 51



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 20: SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS (CONT.)

  e. Other income, net (cont.):

  The Company:

  Year ended December 31,
  2005
2006
2007
  Reported NIS
  (in thousands)
Capital gain on sale of property and equipment      224    98    178  
   
Management fees    2,160    2,142    1,967  



   
        2,384    2,240    2,145  




C - 52



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 21: OPERATING SEGMENTS DATA

  The Company operates in three operating segments, the manufacturing of shipping containers, corrugated cardboard panels and other types of paper consumer packaging, (see Note 1a. for a brief description of the Company’s business) and follows the requirements of Accounting Standard No. 11 Segment Reporting. Starting from January 1, 2006, the Company operates in two operating segments: manufacturing of shipping containers and packaging wooden pallets and boxes as a result of transaction mentioned in note 1 b.

  Year ended December 31, 2005
Shipping
containers

Consumer
packaging
products

Tri-Wall
packaging
wooden
pallets
and boxes

Eliminations
Total
Reported NIS (In thousands)
 
  Revenues:                             
Sales to external customers    315,541    32,590    67,204    -    415,335  
Intersegment sales    11,515    1,345    4,358    (17,218 )  -  





   
Total revenues    327,056    33,935    71,562    (17,218 )  415,335  





   
Segments operating income    1,412    (435 )  7,165         8,142  



 
   
Financial income (expenses),net    (7,823 )  93    360         (7,370 )



   
Other income, net                        272  
Tax benefit                        1,389  
Minority interest in losses                           
  of a subsidiary                        14  
       
   
Net income                        2,447  
       
   
Assets and liabilities:                           
   
Segments assets    251,356    24,672    34,423         310,451  



 
   
Total assets                        310,451  
       
   
Segments liabilities    166,095    7,570    12,205         185,870  



 
   
Total liabilities                        185,870  
       
   
Capital investments (*)    21,053    121    870         22,044  



 
 
Depreciation (*)    17,871    1,925    1,369         21,165  



 

  (*)Reclassified-see note 2 g(1).

C - 53



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 21: OPERATING SEGMENTS DATA (CONT.)

  Year ended December 31, 2006
Shipping
containers

Tri-Wall
packaging
wooden
pallets
and boxes

Eliminations
Total
Reported NIS (In thousands)
 
  Revenues:                        
   
Sales to external customers    349,440    70,466    -    419,906  
Intersegment sales    8,250    3,701    (11,951 )  -  




   
Total revenues    357,690    74,167    (11,951 )  419,906  




   
Segments operating income    6,390    4,903    -    11,293  


 
   
Financial income (expenses),                      
  net    (1,986 )  124    -    (1,862 )


   
Other income, net                   5,307  
Taxes on income                   (2,755 )
Equity in losses of an                      
  affiliated company                   (545 )
     
   
Net income                   11,438  
     
   
Assets and liabilities:                      
   
Segments assets    297,203    36,735         333,938  


 
   
Total assets                   333,938  
     
   
Segments liabilities    187,298    10,621         197,919  


 
   
Total liabilities                   197,919  
     
   
Capital investments (*)    16,214    3,421         19,635  


 
   
Depreciation (*)    18,904    1,274         20,178  


 

  (*) Reclassified-see note 2 g(1).

C - 54



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 21: OPERATING SEGMENTS DATA (CONT.)

  Year ended December 31, 2007
Shipping
containers

Tri-Wall
packaging
wooden
pallets
and boxes

Eliminations
Total
Convenience
translation
(note 2a)

  Reported NIS (In thousands)
U.S. $
 
  Revenues:                        
   
Sales to external customers    398,089    73,339    -    471,428    122,576  
Inter-segment sales    8,133    1,981    (10,114 )  -    -  





   
Total revenues    406,222    75,320    (10,114 )  471,428    122,576  





   
Segments operating income    9,384    4,287    -    13,671    3,554  


     
   
Financial income (expenses), net    (4,722 )  393    -    (4,329 )  (1,126 )


     
Other income, net                   337    88  
Taxes on income                   (1,916 )  (498 )
Equity in earnings of an                           
  affiliated company                   10    3  
     

   
Net income                   7,773    2,021  
     

Assets and liabilities:  
   
Segments assets    284,741    43,729         328,470    85,404  


 

   
Total assets                   328,470    85,404  
     

   
Segments liabilities    196,160    12,217         208,377    54,180  


 

   
Total liabilities                   208,377    54,180  
     

   
Capital investments    8,458    1,171         9,629    2,503  


 

   
Depreciation    20,408    1,512         21,920    5,699  


 


  For each of the years ended December 31, 2005, 2006 and 2007 more than 90% of the Company’s revenues were derived from customers located in Israel.

  All long-lived assets are located in Israel.

C - 55



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 22: DISCLOSURE REGARDING THE ADOPTION OF IFRS

  Starting January 2008, the Company will adopt IFRS in its financial statements effective January 1, 2007.

  Pursuant to the provisions of Accounting Standard No. 29 and FAQ 6 of the Israel Securities Authority, the Company presents an opening balance sheet as of January 1, 2007, a balance sheet as of December 31, 2007 and an income statement for the year then ended, prepared in accordance with IFRS. The Company also presents reconciliations between reporting according to generally accepted accounting principles in Israel (“Israeli GAAP”) and reporting according to IFRS as of January 1, 2007 (the transition date), as of December 31, 2007 and for the year then ended.

  According to IFRS 1, the adoption of IFRS in the opening balance sheet as of the transition date will be done retrospectively.

  a. Reconciliation of balance sheets from Israeli GAAP to IFRS:

  Consolidated:

    January 1, 2007
December 31, 2007
Israeli
GAAP

Effect of
transition
to IFRS

IFRS
Israeli
GAAP

Effect of
transition
to IFRS

IFRS
  Note
NIS in thousands
                               
 ASSETS                                     
    
 CURRENT ASSETS:                                     
   Cash and cash                                     
     equivalents         1,820    -    1,820    2,522    -    2,522  
   Trade receivables         163,276    -    163,276    185,153    -    185,153  
   Other accounts                                     
     receivable    d    3,574    (500 )  3,074    2,546    -    2,546  
   Inventories         71,925    -    71,925    55,149    -    55,149  
 





      
             240,595    (500 )  240,095    245,370    -    245,370  
 





      
 NON-CURRENT ASSETS:                                     
   Accounts receivables         311    -    311    141    -    141  
   Severance pay fund,net    1e    133    1,330    1,463    -    623    623  
   Investment in                                    
     affiliated company    3d    8,368    363    8,731    8,378    273    8,651  
   Fixed assets, net         84,916    -    84,916    72,454    -    72,454  
     Intangible assets         1,997    -    1,997    2,127    -    2,127  
 





           
                  95,725    (807 )  97,418    83,100    896    83,996  
 





          
Total assets          336,320    1,193    337,513    328,470    896    329,366  
 






C - 56



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 22: DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  a. Reconciliation of balance sheets from Israeli GAAP to IFRS (cont.):

  Consolidated:

January 1, 2007
December 31, 2007
Israeli
GAAP

Effect
of
transition
to IFRS

IFRS
Israeli
GAAP

Effect
of
transition
to IFRS

IFRS
Note
NIS in thousands
 
LIABILITIES AND EQUITY                                
   
 CURRENT LIABILITIES:  
   Credit from banks and  
     others         31,856    -    31,856    42,505    -    42,505  
   Trade payables         93,544    -    93,544    87,423    -    87,423  
   Other accounts payable  
     and accrued expenses    3e    17,395    (550 )  16,845    22,161    (441 )  21,720  






   
          142,795    (550 )  142,245    152,089    (441 )  151,648  






   
 NON-CURRENT LIABILITIES:  
   Loans from banks and  
     others         48,170    -    48,170    49,376    -    49,376  
   Employee benefit  
     liabilities         -    -    -    298    (298 )  -  
   Deferred taxes    2e    9,336    20    9,356    6,614    345    6,959  






   
          57,506    20    57,526    56,288    47    56,335  






   
Total liabilities          200,301    (530 )  199,771    208,377    (394 )  207,983  






   
 EQUITY:  
   Issued capital         23,716    -    23,716    23,716    -    23,716  
   Share premium         45,413    -    45,413    45,413    -    45,413  
   Other comprehensive  
     income         -    -    -    (392 )  -    (392 )
   Retained earnings    c    71,148    1,723    72,871    78,921    1,290    80,211  
   Less - treasury shares         (4,258 )  -    (4,258 )  (27,565 )  -    (27,565 )






   
 Total equity          336,320    1,193    337,513    328,470    896    329,336  







C - 57



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 22: DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  a. Reconciliation of balance sheets from Israeli GAAP to IFRS (cont.):

  The Company:

January 1, 2007
December 31, 2007
Israeli
GAAP

Effect
of
transition
to IFRS

IFRS
Israeli
GAAP

Effect
of
transition
to IFRS

IFRS
Note
NIS in thousands
 
 ASSETS                                
   
 CURRENT ASSETS:  
   Cash and cash  
     equivalents         353    -    353    1,747    -    1,747  
   Trade receivables         145,234    -    145,234    161,147    -    161,147  
   Other accounts  
     receivable         2,305    -    2,305    1,891    -    1,891  
   Inventories         66,101    -    66,101    48,169    -    48,169  






   
          213,993    -    213,993    212,954    -    212,954  






   
 NON-CURRENT ASSETS:  
   Accounts receivables         311    -    311    141    -    141  
   Severance pay fund,  
     net    1e    312    880    1,192    -    403    403  
   Investment in  
     affiliated company    3d    44,142    693    44,835    35,594    583    36,177  
   Fixed assets, net         78,058    -    78,058    65,938    -    65,938  
     Intangible assets         1,997    -    1,997    2,127    -    2,127  






   
          124,820    1,573    126,393    103,800    986    104,786  






   
Total assets          338,813    1,573    340,386    316,754    986    317,740  







C - 58



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 22: DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  a. Reconciliation of balance sheets from Israeli GAAP to IFRS (cont.):

  The Company:

January 1, 2007
December 31, 2007
Israeli
GAAP

Effect
of
transition
to IFRS

IFRS
Israeli
GAAP

Effect
of
transition
to IFRS

IFRS
Note
NIS in thousands
 
LIABILITIES AND EQUITY                                
   
 CURRENT LIABILITIES:  
   Credit from banks and  
     others         31,856    -    31,856    42,505    -    42,505  
   Trade payables         87,729    -    87,729    81,045    -    81,045  
   Other accounts payable  
     and accrued expenses    3e    26,243    (550 )  25,693    17,463    (441 )  17,022  






   
          145,828    (550 )  145,278    141,013    (441 )  140,572  






   
 NON-CURRENT LIABILITIES:  
   Loans from banks and  
     others         48,170    -    48,170    49,376    -    49,376  
   Employee benefit  
     liabilities         -    -    -    98    (98 )  -  
   Deferred taxes    2e    9,796    400    10,196    6,174    235    6,409  






   
          56,966    400    57,366    55,648    137    55,785  






   
Total liabilities          202,794    (150 )  202,644    196,661    (304 )  16,357  






   
 EQUITY:  
   Issued capital         23,716    -    23,716    23,716    -    23,716  
   Share premium         45,413    -    45,413    45,413    -    45,413  
   Other comprehensive  
     income         -    -    -    (392 )  -    (392 )
   Retained earnings    c    71,148    1,723    72,871    78,921    1,290    80,211  
   Less - treasury shares         (4,258 )  -    (4,258 )  27,565    -    27,565  






   
 Total equity          136,019    1,573    137,592    120,093    986    121,079  







C - 59



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 22: DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  b. Reconciliation of profit and loss from Israeli GAAP to IFRS:

  Consolidated:

Year ended December 31, 2007
Israeli
GAAP

Effect of
transition
to IFRS

IFRS
Note
NIS in thousands (except per share data)
 
Revenues from sales      j    471,428    102    471,530  



   
Total revenues          471,428    102    471,530  



   
Cost of sales         416,951    (1,362 )  415,589  



   
Total cost of sales          416,951    (1,362 )  415,589  



   
Gross profit         54,477    1,464    55,941  
   
Selling and marketing expenses         24,185    -    24,185  
General and administrative expenses  
Other expenses         16,621    -    16,621  



   
Operating income         13,671    1,464    15,135  
   
Other income, net         337    (102 )  235  
Financial income    f    -    (1,783 )  (1,783 )
Financial expenses         4,329    1,783    6,112  



   
Income before taxes on income         9,679    1,362    11,061  
Taxes on income (tax benefit)         1,916    345    2,261  



   
Income after taxes on income         7,763    1,017    8,780  
Equity in earnings (losses) of  
   affiliates, net         10    273    283  



   
Net income (loss)         7,773    1,290    9,063  




C - 60



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 22: DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  b. Reconciliation of profit and loss from Israeli GAAP to IFRS (cont.):

  The Company:

Year ended December 31, 2007
Israeli
GAAP

Effect of
transition
to IFRS

IFRS
Note
NIS in thousands (except per share data)
 
Revenues from sales      j    406,222    102    406,324  



   
Total revenues          406,222    102    406,324  



   
Cost of sales         362,379    (1,162 )  361,217  



   
Total cost of sales          362,379    (1,162 )  361,217  



   
Gross profit         43,843    1,264    48,107  
   
Selling and marketing expenses         21,164    -    21,164  
General and administrative expenses         13,295         13,295  
Other expenses         -    -    -  



   
Operating income         9,384    1,264    10,648  
   
Other income, net         2,145    (102 )  2,043  
Financial income    f    -    (1,783 )  (1,783 )
Financial expenses         4,722    1,783    6,505  



   
Income before taxes on income         6,807    1,162    6,919  
Taxes on income (tax benefit)         1,486    455    1,941  



   
Income after taxes on income         5,321    707    6,028  
Equity in earnings (losses) of  
   affiliates, net         2,452    583    3,035  



   
Net income (loss)         7,773    1,290    9,063  




C - 61



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 22: DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  c. Reconciliation of the statements of change in shareholders' equity from Israeli GAAP to IFRS

NIS in thousand
Note
 
1. Retained earnings            
Retained earnings at December 31, 2007 according to ISGAAP    78,921       
Employee benefit liabilities    686    e2  
Social security costs    331    e3  
Affiliate company    273    e1  

Retained earning at f December 31, 2007 according to IFRS    80,211       

   
Retained earning at January 1, 2007 according to ISGAAP    71,148       
Employee benefit liabilities    948       
Social security costs    412       
Affiliate company    363       

Retained earning at f December 31, 2007 according to IFRS    72,871       


  d. Deferred taxes:

  According to Israeli GAAP, deferred taxes in a total of approximately NIS 500 thousand were presented in current assets under other accounts receivable. Upon the transition to IFRS and according to IAS 12, “Income Taxes”, the balances of deferred taxes are presented in long-term investments and liabilities, respectively.

  e. Employee benefits:

  According to Israeli GAAP, the severance pay liability is measured based on the employee’s last monthly salary multiplied by the number of employment years at each balance sheet date using the shut down method and severance pay funds are measured at their redemption values at each balance sheet date.

  1. According to IAS 19, “Employee Benefits”, the Company’s and affiliates benefit plan is considered a Defined benefit plan and requires it to present the severance pay liability on an actuarial basis. The actuarial calculation takes into consideration future salary increases and the percentage of employee retirement based on the evaluation of payment timing.

  The employee benefit plan assets are measured at fair value.

  The actuarial Liabilities were based on Governments bonds interest, because the Company believes that there is no wide market for Concerns’ bonds in Israel.

  The capitalization interest issue is being examined and it might be decided that the proper capitalization interest in Israel should be based on Concerns’ bonds.

  If this decision will be taken the numbers that were calculated and considered in this note will be effected due to calculations based on higher interest rate. It will cause a decrease in the actuarial Liabilities in the one hand and increase in the current finance expenses related to actuarial Liabilities on the other hand.

  2. Upon the transition to IFRS, the balance of accrued severance pay has decreased by approximately NIS 859 thousand, the employee benefit and remuneration plan assets have decreased by approximately NIS 1,361 thousand and the deferred tax reserve has increased by approximately NIS 560 thousand in such a manner that the net difference between the net liability as of December 31, 2007 amounts to a decrease of approximately NIS 1,660 thousand (net of income taxes of approximately NIS 560 thousand).

  3. Employees provision for vacation is differed in IFRS since according to ISGAAP social security cost part of the provision.

C - 62



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 22: DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  f. Financial income and expenses:

  According to Israeli GAAP, financial income and expenses, net are presented in the income statement. According to IFRS, financial should be disclosed separately from financial expenses in the income statement and accordingly, the Company recorded financial expenses of approximately NIS 6,112 thousand and financial income of approximately NIS 1,783 thousand for the year ended December 31, 2007.

  g. According to ISGAAP all other income are recorded in the net income, whereas in the IFRS only capital gain should be recorded in the net income.

NOTE 23: SUBSEQUENT EVENTS

  a. In April 2008, The Company decided to file a law suit against a certain supplier as a result of his failure to provide the Company an ERP system. The Company, based on its legal counsel opinion, believes that all direct costs paid to the supplier, in the amount of NIS 1,706 thousands will be returned in a very high probability, and all indirect costs have decent chances to be repaid. As a result in the Company recorded a long term receivable in the amount of NIS 1,706 thousands, regarding the direct amount to be receivable in the law suit, and impairment of intangible asset in the amount of NIS 2,127 thousands in the financial statement of March 31, 2008.

  b. In April 2008, as a result of a fire in the Company’s Ashkelon site, 11 machines and inventory burned down completely including the site facility. The Company estimates the damages in approximately. $1.5 million. The Company is insured against all risks of physical loss or damage. The sum of all losses or damages includes also any delays penalties element of loss. The Company’s insurance policy includes a self – participation in the amount of $ 175 thousands.

C - 63



CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


LIST OF SUBSIDIARY & AFFILIATED

Ownership Control
Name of company
As of December 31, 2006
 
Subsidiary:            
   
Tri-Wall Containers (Israel) Ltd.    100 %  100 %
   
Affiliated:   
   
Frenkel-C.D.    27.85 %  27.85 %

Inactive companies:

Plaro Container Systems (1989) Ltd.
Tri-Wall Pallets (1973) Ltd.

C - 64



 

 

 

 

(DELOITTE LOGO)

 

Brightman Almagor
Haifa Office
5 Ma’aleh Hashichrur St.
Haifa, 33284
Israel

 

 

 

Date:
Our ref:   

June 22, 2008
435682

 

Tel:    +972 (4) 860 7373
Fax:   +972 (4) 867 2528
info-haifa@deloitte.co.il
www.deloitte.com

 

 

 

 

To:

Mondi Business Paper Hadera Ltd.
Hadera

 

Gentlemen,

Re:     US GAAP Adjustments Report as of December 31, 2007

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, 2007 and 2006 and for the three years ended December 31, 2007 (“the Report”). The Report, which is enclosed herewith, marked by our Firm’s identification seal, is Company’s management 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 audits provide a reasonable basis for our opinion.

In our opinion, the Report referred to above present fairly, in all material respects, the material differences between generally accepted accounting principles in Israel and generally accepted accounting principles in the United States of America as of December 31, 2007 and 2006 and for each of the three years ended December 31, 2007.

Sincerely,

Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu

 

 

Audit Ÿ Tax Ÿ Consulting Ÿ Financial Advisory Ÿ

A member firm of
Deloitte Touche Tohmatsu





Mondi Business Paper Hadera Ltd.

US GAAP Adjustments Report
As of December 31, 2007

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.

Relevant Recent accounting pronouncements by the FASB

 

 

 

1.

SFAS No. 157 - Fair Value Measurements

 

 

 

 

 

In September 2006, the Financial Accounting Standards’ Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis.

 

 

 

 

The Company does not expect the adoption will have material impact on its consolidated financial statements.

 

 

 

2.

SFAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities

 

 

 

 

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The provisions of SFAS No. 159 are effective for the Company beginning January 1, 2008.

 

 

 

 

The Company does not expect the adoption of SFAS No. 159 will have an impact on its consolidated financial statements.

1



Mondi Business Paper Hadera Ltd.

US GAAP Adjustments Report
As of December 31, 2007

 

 

 

 

3.

SFAS No. 141 (revised 2007) - Business Combinations

 

 

 

 

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited.

 

 

 

 

 

The Company does not expect the adoption of SFAS No. 141 will have significant impact on its consolidated financial statement

 

 

 

 

4.

SFAS No. 160 – Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.

 

 

 

 

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.

 

 

 

 

 

The Company does not expect the adoption of SFAS No. 160 will have significant impact on its consolidated financial statement

2



Mondi Business Paper Hadera Ltd.

US GAAP Adjustments Report
As of December 31, 2007

 

 

 

 

 

B.

Goodwill

 

 

 

 

 

According to Israeli GAAP, until December 31, 2005, goodwill is amortized over the expected estimated economic life of the asset acquired. Commencing January 1, 2006 goodwill shall not be amortized but rather will be examined for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

According to US GAAP (SFAS 142), commencing January 2002 goodwill is not amortized but rather is reviewed annually (or more frequently if impairment indicators arise) for impairment.

 

 

 

 

C.

Basis of Measurement - Adjusted NIS vis-a-vis Nominal NIS

 

 

 

 

 

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 for reporting purposes, commencing in 1994, it would implement the rules relating to economies no longer considered hyper- inflationary 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 E below.

 

 

 

 

 

 

As to the discontinuance of the adjustment of the financial statements under Israeli GAAP, to the exchange rate of the dollar as from January 2004, see Note 2A to the financial statements.

 

 

 

 

 

D.

Selected Balance Sheet Items


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007

 

 

 

 


 

 

 

 

 

 

 

 

 

 

As per US

 

 

 

 

As reported

 

Adjustment

 

GAAP

 

 

 

 


 


 


 

 

 

 

NIS in thousands

 

 

 

 


 

 

 

 

 

 

 

Other assets - Goodwill

 

 

3,177

 

 

2,301

 

 

5,478

 

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

107,281

 

 

(2,238

)

 

105,043

 

 

 

 



 



 



 

3



Mondi Business Paper Hadera Ltd.

US GAAP Adjustments Report
As of December 31, 2007

 

 

D.

Selected Balance Sheet Items (Cont)


 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2006

 

 


 

 

As reported

 

Adjustment

 

As per US
GAAP

 

 


 


 


 

 

NIS in thousands

 

 


 

 

 

 

 

 

 

 

 

 

   Other assets - Goodwill

 

 

3,177

 

 

2,301

 

 

5,478

 

 



 



 



   Shareholders’ equity

 

 

88,062

 

 

(1,785

)

 

86,277

 

 



 



 




 

 

E.

Selected Statements of Operation Items


 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 


 

 

 

2007

 

2006

 

2005

 

 

 


 


 


 

 

 

NIS in thousands

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) under Israeli GAAP

 

 

18,290

 

 

(7,719

)

 

(3,406

)

Effect of material differences between Israeli GAAP and US GAAP:

 

 

 

 

 

 

 

 

 

 

Change in basis of measurement from adjusted NIS to nominal NIS

 

 

200

 

 

140

 

 

188

 

Amortization of goodwill

 

 

-

 

 

-

 

 

623

 

Deferred taxes

 

 

276

 

 

(207

)

 

(216

)

 

 



 



 



 

Net income (loss) under US GAAP

 

 

18,766

 

 

(7,786

)

 

(2,811

)

 

 



 



 



 


 

 

F.

Changes in Shareholders’ Equity in Accordance with US GAAP


 

 

 

 

 

 

 

 

 

 

 

 

 

NIS in thousands

 

 

 


 

 

 

2007

 

2006

 

2005

 

 

 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity under US GAAP as of January 1,

 

 

86,277

 

 

94,063

 

 

96,874

 

Net income (loss) for the year under US GAAP

 

 

18,766

 

 

(7,786

)

 

(2,811

)

 

 



 



 



 

Shareholders’ equity under US GAAP as of December 31,

 

 

105,043

 

 

86,277

 

 

94,063

 

 

 



 



 



 


 

 

 

-s- David Muhlgay

-s- A. Solel

-s- Z. Livnat




David Muhlgay

A. Solel

Z. Livnat

Financial Director

General Manager

Vice Chairman

 

 

of the Board of Directors

4



(DELOITTE LOGO)

 

 

 

 

 

 

Brightman Almagor Zohar
5 Ma’aleh Hashichrur St.
Haifa 33284
P.O.B. 5648
Haifa 31055
Israel

 

 

 

 

 

Tel:  +972 (4) 860 7333
Fax:  +972 (4) 867 2528
info-haifa@deloitte.co.il
www.deloitte.co.il


 

 

 

 

Date:
Our ref:

June 22, 2008
435644

 

 

 

 

 

 

To:

Hogla–kimberly Ltd.
Ramla

 

Gentlemen,

Re:     US GAAP Adjustments Report as of December 31, 2007

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, 2007 and 2006 and for each of the three years ended December 31, 2007 (“the Report”). The Report, which is enclosed herewith, marked by our Firm’s identification seal, is Company’s management responsibility.

We conducted our audits 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 audits provide a reasonable basis for our opinion.

In our opinion, the Report referred to above present fairly, in all material respects, the material differences between generally accepted accounting principles in Israel and generally accepted accounting principles in the United States of America as of December 31, 2007 and 2006 and for each of the three years ended December 31, 2007.

Sincerely,

-s- Brightman Almagor & Co.

Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu

 

 

Audit Ÿ Tax Ÿ Consulting Ÿ Financial Advisory Ÿ

Member of
Deloitte Touche Tohmatsu




Hogla-Kimberly Ltd.

US GAAP Adjustments Report
As of December 31,  2007

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. 157 - Fair Value Measurements

 

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis.

 

 

 

 

 

The Company does not expect the adoption will have material impact on its consolidated financial statements.

 

 

 

 

2.

SFAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities

 

 

In February 2007, the FASB issued SFAS No. 159. “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The provisions of SFAS No. 159 are effective for the Company beginning January 1, 2008.

 

 

 

 

 

The Company does not expect the adoption of SFAS No. 159 will have an impact on its consolidated financial statements.

 

 

 

 

3.

SFAS No. 141 (revised 2007) - Business Combinations

 

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited.

 

 

 

 

 

The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on its consolidated results of operations and financial condition.

1



Hogla-Kimberly Ltd.

US GAAP Adjustments Report
As of December 31, 2007

A.     Recent accounting pronouncements by the FASB (Cont.)

 

 

 

 

4.

SFAS No. 160 – Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.

 

 

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.

 

 

 

 

 

The Company does not expect the adoption of SFAS No. 160 will have significant impact on its consolidated financial statement.

B.      Goodwill

 

 

 

According to Israeli GAAP, until December 31, 2005, goodwill is amortized over the expected estimated economic life of the asset acquired. Commencing January 1, 2006 goodwill shall not be amortized but rather will be examined for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

 

 

 

According to US GAAP (SFAS 142), commencing January 2002 goodwill is not amortized but rather is reviewed annually (or more frequently if impairment indicators arise) for impairment.

C.       Basis of Measurement - Adjusted NIS vis-a-vis Nominal NIS

 

 

 

Through December 31, 1992, 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 for reporting purposes, commencing in 1993, it would implement the rules relating to economies no longer considered hyper-inflationary in accordance with U.S. GAAP.

 

 

 

Under those rules:


 

1)

 

 

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 1993 are the balances presented in the Company’s balance sheet at December 31, 1992;

 

 

 

 

3)

Transactions performed from January 1, 1993 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.

2



Hogla-Kimberly Ltd.

US GAAP Adjustments Report
As of December 31, 2007

C.       Basis of Measurement - Adjusted NIS vis-a-vis Nominal NIS (Cont.)

 

 

 

 

As to the effect of application of these rules – see F below.

 

 

 

 

As to the discontinuance of the adjustment of the financial statements under Israeli GAAP, to the exchange rate of the dollar as from January 2004, see Note 2A to the financial statements.

D.       Leasehold rights from the Israel Land Administration Authority (ILAA)

 

 

 

 

Under Israeli GAAP, land lease rights from the ILAA are accounted for as fixed assets, and not depreciated.

 

 

 

 

Under US GAAP, in accordance with SFAS 13 “Accounting for Leases”, leases involving real estate can be accounted for as capital lease only when (a) the lease transfers ownership of the property to the lessee by the end of the lease term or (b) the lease contains a bargain purchase option. Since none of the above-mentioned terms is met, leasehold rights are accounted for as an operating lease. The leasehold rights are amortized over the period of the initial option plus the renewal option period.

E.       Selected Balance Sheet Items

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007

 

 

 


 

 

 

As
Reported

 

Adjustment

 

As per
US GAAP

 

 

 


 


 


 

 

 

NIS in thousands

 

 

 


 

 

 

 

 

 

 

 

 

Assets - Land

 

 

4,485

 

 

(3,240

)

 

1,245

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

Other assets - Goodwill

 

 

24,495

 

 

11,441

 

 

35,936

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

405,143

 

 

5,523

 

 

410,667

 

 

 



 



 



 


 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2006

 

 

 


 

 

 

As
Reported

 

Adjustment

 

As per
US GAAP

 

 

 


 


 


 

 

 

NIS in thousands

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

Assets - Land

 

 

4,485

 

 

(3,161

)

 

1,324

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

Other assets - Goodwill

 

 

22,338

 

 

11,441

 

 

33,779

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

430,765

 

 

3,698

 

 

434,463

 

 

 



 



 



 

3



Hogla-Kimberly Ltd.

US GAAP Adjustments Report
As of December 31, 2007

 

 

F.

Selected Statements of Operation Items


 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

 


 

 

 

2007

 

2006

 

2005

 

 

 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) under Israeli GAAP

 

 

(31,985

)

 

(10,671

)

 

43,276

 

 

 

 

 

 

 

 

 

 

 

 

Effect of material differences between Israeli GAAP and US GAAP:

 

 

 

 

 

 

 

 

 

 

 

Change in basis of measurement from adjusted NIS to nominal NIS

 

 

835

 

 

755

 

 

1,080

 

 

Leasehold rights

 

 

(79

)

 

(1,502

)

 

-

 

 

Rediscount of accounts receivables and payables according to IFRS

 

 

727

 

 

-

 

 

-

 

 

Amortization of goodwill

 

 

-

 

 

-

 

 

2,850

 

 

Deferred taxes

 

 

169

 

 

4,265

 

 

(3,987

)

 

 



 



 



 

 

Net income (loss) under US GAAP

 

 

(30,333

)

 

(7,153

)

 

43,219

)

 

 



 



 



 


 

 

G.

Changes in Shareholders’ Equity in Accordance with US GAAP


 

 

 

 

 

 

 

NIS in thousands

 

 

 


 

 

Shareholders’ equity under US GAAP as of January 1, 2005

 

 

436,113

 

Changes during 2005:

 

 

 

 

Dividend paid

 

 

(43,619

)

Translation adjustments

 

 

4,398

 

Net income for the year under US GAAP

 

 

43,219

 

 

 


 

Shareholders’ equity under US GAAP as of December 31, 2005

 

 

440,111

 

 

 

 

 

 

Changes during 2006:

 

 

 

 

Dividend paid

 

 

(34,000

)

Translation adjustments

 

 

(15,011

)

Shares issued

 

 

50,592

 

Changes in fair value of financial instruments

 

 

(76

)

Loss for the year under US GAAP

 

 

(7,153

)

 

 


 

Shareholders’ equity under US GAAP as of December 31, 2006

 

 

434,463

 

 

 

 

 

 

Changes during 2007:

 

 

 

 

Translation adjustments

 

 

7,810

 

Changes in fair value of financial instruments

 

 

(1,273

)

Loss for the year under US GAAP

 

 

(30,333

)

 

 


 

Shareholders’ equity under US GAAP as of December 31, 2007

 

 

410,667

 

 

 


 

 


 

 

 

 

 

 

-s- A. Schor

 

-s- O. Argov

 

 


 


 

 

A. Schor

 

O. Argov

 

 

Chief Executive Officer

 

Chief Financial Officer

 

4



 

 

 

 

 

 

 

ERNST & YOUNG LOGO

Kost Forer Gabbay & Kasierer

 

Phone:

972-4-8654000

 

2 Pal-Yam St.

 

 

Fax:

972-3-5633434

 

Haifa 33095, Israel

 

 

 

 


 

 

 

Haifa, March 3, 2008

 

 

To:

Carmel Container Systems Ltd.

 

P.O.Box 5034

 

Caesarea

 

 

Re: Reconciliation report from Israeli GAAP to US GAAP for the year ended December 31, 2007

 

 

We have audited the information in the reconciliation report (“the report”) of Carmel Container Systems Ltd. (“the Company”) which indicate the differences for the year ended December 31, 2007 from accounting principles generally accepted in Israel (Israeli GAAP) to accounting principles generally accepted in the United states (US GAAP), which is attached and stamped with our firm’s stamp for purpose of identification. The report is the responsibility of the Company’s management. Our responsibility is to express an opinion on the report based on our audit.

 

 

We conducted our audit in accordance with generally accepted auditing standards and 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 report is free of material misstatement. Our audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the report. An audit also includes assessing the accounting, principles used and significant estimates made by 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 information set forth in the report presents fairly, in all material respects, the material differences between Israeli GAAP and U.S. GAAP.


 

 

 

Sincerely yours,

 

 

 

-s- KOST FORER GABBAY & KASIERER

 

KOST FORER GABBAY & KASIERER

 

A Member of Ernst & Young Global

 

 

 

 



 

 

 

 

 

 

 

(ERNST & YOUNG LOGO)

 

§

Kost Forer Gabbay & Kasierer
2 Pal-Yam St.
Haifa 33095, Israel

 

§

Phone: 972-4-8654000
Fax:     972-3-5633434

Haifa, March 3, 2008

 

 

To:

Frenkel - CD Ltd.

 

Caesarea

Re: Reconciliation report from Israeli GAAP to US GAAP for the year ended December 31, 2007

We have audited the information in the reconciliation report (“the report”) of Frenkel CD Ltd. (“the Company”) which indicate the differences for the year ended December 31, 2007 from accounting principles generally accepted in Israel (Israeli GAAP) to accounting principles generally accepted in the United states (US GAAP), which is attached and stamped with our firm’s stamp for purpose of identification. The report is the responsibility of the Company’s management. Our responsibility is to express an opinion on the report based on our audit.

We conducted our audit in accordance with generally accepted auditing standards and 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 report is free of material misstatement. Our audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the report. An audit also includes assessing the accounting, principles used and significant estimates made by 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 information set forth in the report presents fairly, in all material respects, the material differences between Israeli GAAP and U.S. GAAP.

 

 

 

Sincerely yours,

 

-s- KOST FORER GABBAY & KASIERER

 

KOST FORER GABBAY & KASIERER

 

A Member of Ernst & Young Global




 

 

 

 

 

 

 

(ERNST & YOUNG LOGO)

 

§

Kost Forer Gabbay & Kasierer
2 pal-yam St.
Haifa 33095, Israel

 

§

Phone: 972-4-8654000
Fax:     972-3-5633438

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

FRENKEL - CD LTD.

          We have audited the accompanying consolidated balance sheets of Frenkel-CD Ltd. (“the Company”) and its subsidiaries as of December 31, 2007 and 2006, and the related statements of operations, changes in shareholders’ equity and cash flows of the Company - for each of the two years in the period ended December 31, 2007. 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.

          The financial statements of the Company for the year ended December 31, 2005 and the related statements of operations, changes in shareholders’ equity and cash flows for the year then ended were audited by other auditors whose report dated March 6, 2006, expressed an unqualified opinion on those statements.

          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 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 management, and 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations, changes in shareholder’s equity and cash flows for each of the two years in the period ended December 31, 2007, in conformity with generally accepted accounting principles in Israel.

          As described in Note 2, the financial statements referred to above are presented in reported amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.

 

 

 

 

 

-s- KOST FORER GABBAY & KASIERER

Haifa, Israel,

 

KOST FORER GABBAY & KASIERER

March 3, 2008

 

A Member of Ernst & Young Global



(PRICEWATERHOUSECOOPERS LOGO)

 

 

 

 

 


Kesselman & Kesselman
Certified Public Accountants (Israel)
Trade Tower, 25 Hamered Street
Tel Aviv 68125 Israel
P.O. Box 452 Tel Aviv 61003 Israel
Telephone +972-3-7954555
Facsimile +972-3-7954556

Report of Independent Registered Public Accounting Firm

To the shareholders of

C.D. PACKGING SYSTEMS LTD.

We have audited the balance sheets of C.D. Packaging Systems ltd. (hereafter - the Company) and the consolidated financial statements of the Company and its consolidated subsidiary: balance sheets as of December 31, 2005 and 2004 and statements of income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. 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 auditing standards generally accepted in Israel including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973 and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 provide a fair basis for our opinion.

In our opinion, the aforementioned financial statements present fairly, in all material respects, the financial position - of the Company and consolidated - as of December 31, 2005 and 2004 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, 2005, in conformity with accounting principles generally accepted (“GAAP”) in Israel.

As applicable to these financial statements Israeli GAAP and U.S. GAAP are practically identical in all material respects, except for differences which are explained in note 12.

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 general purchasing power of the Israeli currency, through that date, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.

 

 

Haifa
   March 6, 2006

(SIGNATURE)

Kesselman & Kesselman is a member of PricewaterhouseCoopers International Limited, a company limited by guarantee registered in England and Wales