AFS.L Regulatory News (AFS)

26 Mar 2007 07:03

Amiad Filtration Systems Ltd26 March 2007 26 March 2007 Amiad Filtration Systems Ltd. ("Amiad" or "the Company") Results for the Twelve Months to 31 December 2006 Amiad, a producer and global supplier of water filters and filtration systems for the industrial & municipal and the irrigation markets, announces its full year results to 31 December 2006. Financial Highlights • Turnover rose 4% in line with market expectations to $44.1m (2005: $42.4m)• Operating income was $4.6m (2005: $4.9m) reflecting increased investment in sales and marketing after the IPO• Profit before tax was $3.7m (2005: $4.1m)• Net Profit $3.0m (2005: $2.9m)• Cash from operations amounted to $1.3m (2005: loss of $0.3m)• Gross margins were maintained at the 50% level• Basic and fully diluted earnings per share were 15 cents• A final dividend for 2006 of 4.47 cents (USD) per share Operational Highlights • Excellent progress made in China and Australia• Selected as prime contractor for sewage treatment project in Israel, one of the largest systems of its type in Israel• First water treatment project delivered in Russia and initiated sales into India• Highest ever introduction of line modifications and new products• Continued weakness in the US Dollar and the higher cost of materials has put pressure on margins and expenses Commenting on the results, Yossi Katz, Chief Executive of Amiad, said: "In 2006,the Company continued to build on its solid foundations for future growth andthe strong finish to the year has carried on into 2007. Order levels have beenstrong since the beginning of 2007, leading to a higher current order backlogcompared to the corresponding period last year. "With the introduction of a record number of line modifications and new products in response to our customers' demands and our penetration into high-growth territories such as China and India gives the Company confidence in delivering further gradual sales growth in 2007." Enquiries: Amiad Filtration Systems Ltd.Yossi Katz, +44 20 7929 8989 on the day and Chief Executive Officer +972 4 690 9500 thereafterItamar Eder, Chief Financial Officer Corfin CommunicationsHarry Chathli, Neil Thapar + 44 20 7929 8989 Operational Review The Board of Amiad is pleased to report a year of growth, albeit a modest one.Revenues for the full year 2006 were $44.1m compared to $42.4m in 2005. Theresults reflect laying of solid foundations after the Company's admission on AIMin December 2005 and positioning the Company for the future. Amiad is a producer and global supplier of water filters and filtration systemsfor the industrial & municipal markets and the irrigation markets. The earlypart of 2006 was impacted by a slowdown in the irrigation use associated withfarming patterns mainly in Spain, USA and Africa. In Israel, the Company wasselected as a prime contractor for the treatment of sewage for the Municipalityof Ra'anana. This contract was Amiad's biggest project of its kind, enablingsewage to be turned into a resource for irrigation, thereby reducing consumptionof clean water. At the time of its IPO, the Company stated that some of the proceeds from theassociated fundraising would be used to increase sales and marketing activitiesand penetrate high growth territories. During the year Amiad strengthened itsproduct portfolio with the introduction of a range of new products, such as anAutomatic Disk Filters for irrigation market and Micro-Fiber Filters aimed atgeneral water treatment. In addition the Company continued to expand its globalpresence in key markets including Australia, China, Japan, Singapore and the USA. The benefits of a broader product range and greater expansion into newterritories was felt during the latter part of the year resulting in a strongfinish to 2006. In China, the Company achieved double-digit growth in 2006, including thesuccessful supply of the first phase of a project worth approximately $400,000for sewage treatment for the "Olympic Village" in Beijing. In the second phase,additional orders of similar magnitude and purpose have also recently beenreceived and are expected to be supplied during 2007. The Company also delivered its first water treatment project in Russia andinitiated sales into India during the second half of the year through the supplyof water-treatment systems to remove iron from drinking water. Sales from Amiad's new thread filter product increased during 2006 and havecontinued to attract interest from customers globally. Additionally, Amiad hasseen a significant interest in its filters for the pre-filtration of membranesystems, including for desalination projects. In South America, the Company has seen good growth in products supplied to theoil and gas industries in Brazil and it currently has orders for three differentnew projects there. The Company also strengthened its senior management with the appointment of anew Vice President of Business Development who will be focusing on new areas ofbusiness development and mergers & acquisitions. Amiad currently sells its products worldwide to over 70 countries across theAmericas, Africa, Europe, Asia and Australasia. Financial review The Company increased its revenues by 4% to $44.1 million (2005: $42.4m), profit before tax was $3.7 million (2005: $4.1m) and net profit $3.0m (2005: $2.9m). Basic and fully diluted earnings per share was 15 cents. The gross margin was maintained at 50%, approximately the same as in 2005.Operating income was down slightly to $4.6m (2005: $4.9m) reflecting theincreased investment in sales and marketing to help build for the future. Net cash and cash equivalents balance as of 31 December 2006 amounted to $6.1m. Cash from operations for the full year improved to $1.3m compared with a $0.3m loss in 2005. R&DIn 2006, Amiad introduced a record number of line modifications and new products including the introduction of Micro-Fiber Technology at Japan's City Water Exhibition. The Company also introduced a new automatic disc-filter mainly for the irrigation market and a new electric dosing-pump. DividendThe Directors are recommending a final dividend for 2006 of 4.47 cents (USD) per share which will be paid on 18 May 2007 to members on the register on 18 April 2007. Shares will be marked ex-dividend on 18 April 2007. This is in addition to the interim dividend paid of 2.385 cents (USD) making the total for the year 6.855 cents (USD). Outlook In 2006, the Company continued to build on its solid foundations for future growth and the strong finish to the year has carried on into 2007. Order levels have been strong since the beginning of 2007, leading to a higher current order backlog compared to the corresponding period last year. Demand for the Company's innovative automatic thread filter technology continues to gain acceptance in key markets and look set to achieve significant growth in the current year albeit from a small base. The continued weakness in the US Dollar and the higher cost of materials has put pressure on margins and expenses. With the introduction of a record number of line modifications and new products in response to our customers' demands and our penetration into high-growth territories such as China and India gives the Company confidence in delivering further gradual sales growth in 2007. AMIAD FILTRATION SYSTEMS LTD. CONSOLIDATED BALANCE SHEETS 31 December 2006 2005 $ in thousands A s s e t s CURRENT ASSETS:Cash and cash equivalents 4,217 7,692Financial assets at fair value through profitand loss 1,869 4Accounts receivable and accruals: Trade 16,871 14,467 Other 1,009 1,250Inventories 10,470 8,210Income Tax assets 431 - T o t a l current assets 34,867 31,623 NON-CURRENT ASSETS:Loan to a related party 685 411Severance pay assets 1,872 2,157Long-term receivables 105 94Property and equipment 2,973 2,613Intangible assets 2,403 2,618Deferred income tax assets 1,225 1,128 T o t a l non-current assets 9,263 9,021 T o t a l assets 44,130 40,644 31 December 2006 2005 $ in thousands Liabilities and shareholders' equityCURRENT LIABILITIES:Short-term credit and loans from bank and other 7,532 6,348Accounts payable and provisions: Trade 7,862 5,833 Other 3,111 2,579Income tax liability 488 870 T o t a l current liabilities 18,993 15,630NON-CURRENT LIABILITIES:Loans from banks and other(net of current maturities) 2,786 3,601Severance pay obligations 1,909 2,118Deferred income tax liabilities 542 629 T o t a l non-current liabilities 5,237 6,348 T o t a l liabilities 24,230 21,978 SHAREHOLDERS' EQUITY Capital and reserves attributable toequity holders of the Company: Share capital 2,291 2,291Capital reserves 12,797 12,797Currency translation reserve 164 123Retained earnings 4,303 3,190 19,555 18,401MINORITY INTEREST 345 265 T o t a l shareholders' equity 19,900 18,666 T o t a l liabilities and shareholders' equity 44,130 40,644 AMIAD FILTRATION SYSTEMS LTD. CONSOLIDATED INCOME STATEMENTS Year ended 31 December 2006 2005 $ in thousands except per share data Revenue 44,076 42,406Cost of sales 22,097 21,139Gross profit 21,979 21,267Selling and marketing costs 11,455 10,571Administrative and general expenses 5,590 5,471Amortization of other assets 339 340Other losses 4 1Operating profit 4,591 4,884Finance costs 864 822Profit before income taxes 3,727 4,062Income tax expenses 736 1,151Profit for the year 2,991 2,911Attributable to:Equity holders of the Company 2,875 2,943Minority interest 116 (32) 2,991 2,911 $Earnings per share attributable to the equityholders of the Company during the period(See note 18):Basic 0.152 0.200Diluted 0.150 0.200 AMIAD FILTRATION SYSTEMS LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Attributable to equity holders of the Company Total Currency share- Share Capital Perpetual translation Retained Minority holders' capital reserve debenture reserve earnings Total interest equity $ in thousandsBALANCE AT 1 JANUARY2005 1,497 1,020 2,871 39 2,872 8,299 238 8,537 CHANGESDURING THE YEARENDED 31DECEMBER2005: Currencytranslationdifferences - - - 84 - 84 - 84 Profit forthe year - - - - 2,943 2,943 (32) 2,911 Totalrecognisedprofit for2005 - - - 84 2,943 3,027 (32) 2,995 Netproceedsfromissuance of sharesin IPO 545 8,730 - - - 9,275 - 9,275 Deferredtaxesin respect of IPO costs - 621 - - - 621 - 621 Interest onperpetualdebenture - - - - (81) (81) - (81) Exchangedifferenceson perpetualdebenture - - (196) - 196 - - - Conversionof perpetualdebenture - 2,675 (2,675) - - - - - Dividend($0.2 per share) - - - - (2,804) (2,804) - (2,804) Dividend tominority - - - - - - (36) (36) Changes inminorityinterestupon thesales ofInvestmentin a company - - - - - - 95 95 Issuance ofbonus shares 249 (249) - - - - - - Share-basedpayment -Value ofemployeeservices - - - - 64 64 - 64 BALANCE AT31 DECEMBER 2005 2,291 12,797 - 123 3,190 18,401 265 18,666 CHANGESDURING THEYEARENDED 31DECEMBER2006: Currencytranslationdifferences - - - 41 - 41 - 41 Profit forthe year - - - - 2,875 2,875 16 2,991 Totalrecognisedprofit for2006 - - - 41 2,875 2,916 116 3,032 Dividend($0.1 per share) - - - - (1,905) (1,905) - (1,905) Dividend tominority - - - - - - (36) (36) Share-basedpayment -Value ofemployeeservices - - - - 143 143 - 143 BALANCE AT31 DECEMBER 2006 2,291 12,797 - 164 4,303 19,555 345 19,900 AMIAD FILTRATION SYSTEMS LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS Notes Year ended 31 December 2006 2005 $ in thousandsCASH FLOWS FROM OPERATING ACTIVITIES:Cash generated from (used in) operations 19 3,805 2,157Interest paid (633) (823)Income taxes paid (1,833) (1,643)Net cash generated from (used in) operatingactivities 1,339 (309) CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment (1,080) (1,041)Purchase of intangible assets (124) (44)Investment grants received 79 113Disposal of (investment in) marketablesecurities, net (1,853) 300Acquisition of company included accordingto the proportionate consolidation method - (517)Increase in cash resulting from transition tofull consolidation of a company previously includedaccording to the proportionate consolidationmethod - 8Proceeds from sale of property and equipment 62 41Proceeds from the sale of a subsidiary - 50Long-term loan granted to a related party andothers (328) (284)Collection of long-term loan granted to arelated party 85 268Net cash used in investing activities (3,159) (1,106) CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of shares in IPO - 9,275Dividends paid to the minority interest (36) (36)Dividends paid to equity holders of theparent (1,905) (2,804)Interest on perpetual debenture - (135)Receipt of long-term loans and otherliabilities 1,075 1,964Repayments of long term loans (1,872) (1,928)Short-term credit from banks, net 1,092 840Net cash generated from (used in) financingactivities (1,646) 7,176Effect of exchange rate changes on cash andcash equivalents (9) (73) NET INCREASE (DECREASE) IN CASH AND CASHEQUIVALENTS (3,475) 5,688 CASH AND CASH EQUIVALENTS AT BEGINNINGOF THE YEAR 7,692 2,004 CASH AND CASH EQUIVALENTS ATEND OF THE PERIOD 4,217 7,692 AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL INFORMATION: a. The Company was incorporated in Israel in June 1997. On 5 December, 2005, thecompany's shares were admitted to trading on the AIM, a market operated by theLondon Stock Exchange. Concurrently, the Company completed an initial publicoffering (IPO) of its shares. The principal shareholders of the Company areKibbutz Amiad ("the Kibbutz"), through a company controlled by the Kibbutz,A.M.S.I. Investments Ltd. ("AMSI") which owns 52.68% of the Company'soutstanding shares, and the Atoka group which owns 14.1% of the Company'soutstanding shares. b. The Group is a producer and global supplier of water filters and filtrationsystems used in the industrial & municipal market and the irrigation market. c. On 30 June, 1998, the Company entered into an agreement with the Kibbutz and with the limited partnership, Amiad Filtration Systems ("the partnership") in which the Kibbutz is the general partner ("the purchase agreement") whereby all of the partnership's business activities, assets, including goodwill and intellectual property, but excluding property rights (lease rights and/or ownership to land and buildings) were transferred to the Company in effect as from 1 January, 1998 ("the transfer date"). All of the partnership's liabilities were also transferred to the Company as of the transfer date, except for certain guarantees and charges that remained in the partnership. The transfer of the above assets and liabilities was carried out at noconsideration in accordance with the regulations of the Israeli EconomySettlements Regulations (Legislation Amendments) Tax Reliefs Relating toAssistance Arrangements with Farmers, 1990. According to these regulations, for income tax purposes, the cost of transferredassets, the respective accumulated depreciation and their purchase date shall beas in the transferring partnership. d. Definitions: The Company - Amiad Filtration Systems Ltd. The Group - The Company and its subsidiaries. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The principal accounting policies applied in the preparation of theseconsolidated financial statement, are set out below. These policies have beenconsistently applied to all the years presented, unless otherwise stated. a. Basis of preparation The consolidated financial statements of the Group have been prepared inaccordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared under the historicalcost convention as modified by the revaluation of severance pay assets. The preparation of financial statements in conformity with IFRS requires the useof certain critical accounting estimates. It also requires management toexercise its judgement in the process of applying the Company's accountingpolicies. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): 1. Amendments to published standards effective in 2006: • IAS 19 (Amendment), Employee Benefits, is mandatory for the Group's accounting periods beginning on or after 1 January 2006. It introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Group does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment only impacts the format and extent of disclosures presented in the accounts. • IAS 21 (Amendment), Net Investment in a Foreign Operation (effective from 1 January 2006). This amendment requires exchange differences arising on all monetary items that form part of an entity's net investment in a foreign operation to be recognized initially in a separate component of equity in the consolidated financial statements. This amendment has no significant impact on the Group's financial statements. 2. Standards, amendments and interpretations effective in 2006 but not relevant The following standards, amendments and interpretations are mandatory foraccounting periods beginning on or after 1 January 2006 but are not relevant tothe Group's operations: • IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions; • IAS 39 (Amendment), The Fair Value Option; • IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts; • IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources; • IFRS 6, Exploration for and Evaluation of Mineral Resources; • IFRIC 4, Determining whether an Arrangement contains a Lease; • IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds; • IFRIC 6, Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment; AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): 3. Standards and interpretations to existing standards that are not yeteffective and have not been early adopted by the Group The following interpretations to existing standards have been published that aremandatory for the Group's accounting periods beginning on or after 1 May 2006 orlater periods but that the Group has not early adopted: • IFRS 7, Financial Instruments: Disclosures, and the complementary Amendment to IAS 1, Presentation of Financial Statements - Capital Disclosures (effective from 1 January 2007). IFRS 7 introduces new disclosures relating to financial instruments. • IFRS 8 Operating Segments (effective from 1 January 2009) sets out requirements for disclosure of information about an entity's operating segments and also about the entity's products and services, the geographical areas in which it operates, and its major customers. The IFRS requires an entity to report financial and descriptive informationabout its reportable segments. Reportable segments are operating segments oraggregations of operating segments that meet specified criteria. Operatingsegments are components of an entity about which separate financial informationis available that is evaluated regularly by the chief operating decision makerin deciding how to allocate resources and in assessing performance. Generally,financial information is required to be reported on the same basis as is usedinternally for evaluating operating segment performance and deciding how toallocate resources to operating segments. IFRS 8 replaces IAS 14, Segment Reporting, achieving convergence with SFAS 131,Disclosures About Segments of an Enterprise and related Information, except forminor differences. Management is currently assessing the impact of IFRS 8 on the Group's segmentdisclosure. • IFRIC 9, Reassessment of embedded derivatives (effective from 1 January 2007). IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. As none of the group entities have changed the terms of their contracts, IFRIC 9 is not relevant to the Group's operations. • IFRIC 10, Interim Financial Reporting and Impairment (effective from 1 January 2006). IFRIC 10 prohibits the impairment losses recognised in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The adoption of this standard does not expected to have material impact on the Group's accounts. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): 4. Interpretations to existing standards that are not yet effective andnot relevant for the Group's operations The following interpretations to existing standards have been published that aremandatory for the Group's accounting periods beginning on or after 1 May 2006 orlater periods but are not relevant for the Group's operations: • IFRIC 7, Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies (effective from 1 January 2007). • IFRIC 11, IFRS 2 - Group and treasury share transactions (effective from 1 January 2008). • IFRIC 12, Service concession arrangements (effective from 1 January 2008). b. Functional currency Items included in the financial statements of each of the Group entities aremeasured using the currency of the primary economic environment in which theentity operates ("the functional currency"). The Company's audit's subsidiariesfunctional currency (except in Australia, China and France - see c below) is theU.S. dollar. Foreign currency transactions are translated into the functional currency usingexchange rates prevailing at the dates of the transactions. Foreign exchangegains and losses resulting from the settlement of such transactions and from thetranslation at year-end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement. c. Group companies The functional currency of the subsidiary in Australia is the Australian dollar("AUD").The functional currency of the subsidiary in France is the EURO.The functional currency of the jointly controlled entity in China is the ChineseRMB. The results and financial position of those Group entities that have afunctional currency different from the presentation currency are translated intothe presentation currency as follows: 1) Assets and liabilities for each balance sheet presented are translated at theclosing rate at that balance sheet date; 2) Income and expenses for each income statement are translated at averageexchange rates; and 3) All resulting exchange differences are recognised as a separate component ofequity. On consolidation, exchange differences arising from the translation of the netinvestment in foreign operations, are taken to shareholders' equity. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): d. Principles of consolidation Subsidiaries are all entities over which the Group has the power to govern thefinancial and operating policies generally accompanying a shareholding of morethan one half of the voting rights. Subsidiaries are fully consolidated from thedate on which they are incorporated and they will be deconsolidated from thedate that control ceases. Intercompany balances and transactions between Group companies included inconsolidation have been eliminated. All intercompany transactions between theGroup companies are conducted at cost. Where necessary, accounting policies of subsidiaries have been changed to ensureconsistency with the policies adopted by the Group. e. Proportionately consolidated companies There is a contractual agreements for joint control of the company YixingTaixing Environtec Co.Ltd, held 50%, with the other venturers. Accordingly, itis accounted for by the proportionate consolidation method. Under this method,the company combines its share of the assets, liabilities, revenues, andexpenses of the jointly controlled entity with similar line items in theconsolidated financial statements. f. Financial assets at fair value through profit and loss Marketable securities held for trading are stated at quoted market prices atbalance sheet date. Changes in their value are included in other gain (losses),net in the statement of income. g. Property and equipment: 1) All property and equipment (including leasehold improvements) are stated athistorical cost, less accumulated depreciation, impairment and investmentgrants. Historical cost includes expenditure that is directly attributable tothe acquisition of the items. Repairs and maintenance are charged to the income statement during the period inwhich they are incurred. 2) The assets are depreciated using the straight-line method over theirestimated useful lives. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): Annual rates of depreciation are as follows: %Machinery and equipment 6 - 20 (mainly 10%)Office furniture and equipment, computersand peripheral equipment 7 - 33 (mainly 33%)Motor vehicles 15 - 20 (mainly15%)Leasehold improvements Over the term of the lease The assets' residual values and useful lives are reviewed, and adjusted ifappropriate, at each balance sheet date.An asset's carrying amount is written down immediately to its recoverable amountif the asset's carrying amount is greater than its estimated recoverable amount(note 2(i)).Leasehold improvements (fixtures) in buildings under operating leases aredepreciated using the straight-line method over the term of the lease, which isshorter than the estimated useful lives of the improvements. 3) Gains and losses on disposals are determined by comparing proceeds with thecarrying amount. These gains and losses are included in the income statement. h. Intangible assets Other assets comprise know-how, customer relationships and goodwill. Most ofthese assets were acquired in connection with the acquisition of Filtration Ltd.In a business combination in 2000. The fair value of these assets (other thangoodwill) was based on an independent valuation. Following initial recognition,the cost model is applied to these assets.The periods of amortization of these assets are as follows: Know-how - amortized over a period of 10 years, using the straight-line method. Customer relationships - amortized over the estimated lives of the customerrelationship (10 years), taking into account the scope of sales to acquired customers. Goodwill is presented in the consolidated balance sheets, and represents theexcess of the cost of acquisition of an investment in a subsidiary over thecompany's share in the fair value of the subsidiary's identifiable assets(including intangible assets), net of the fair value of its identifiableliabilities (net of related taxes), at the date of acquisition. Goodwill on acquisition is measured at cost being the excess of the cost of thebusiness combination over the fair value of net assets acquired. Goodwill is notamortized commencing from 1 January, 2002, and is measured at cost less anyaccumulated impairment losses. Goodwill is reviewed for impairment annually ormore frequently if events or changes in circumstances indicate that the carryingvalue may be impaired. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): i. Impairment of non-financial assets Assets that are subject to depreciation are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount may not berecoverable. An impairment loss is recognised for the amount by which theasset's carrying amount exceeds its recoverable amount. The recoverable amountis the higher of an asset's fair value less costs to sell and its value in use.For the purposes of assessing impairment, assets are grouped at the lowestlevels for which there are separately identifiable cash flows (cash-generatingunits). j. Inventories Inventories - are stated at the lower of cost and net realizable value. Cost isdetermined as follows: Raw materials, auxiliary materials and packing materials - on the "first-infirst-out" basis. Work in progress - on the basis of average cost including materials, labour andother direct and indirect manufacturing costs. Finished products - on the basis of average cost including materials, labour andother direct and indirect manufacturing costs. Purchased products - on the "first-in, first-out" basis. k. Trade receivables Trade receivables are recognised initially at fair value and subsequentlymeasured at amortised cost and where applicable, with exchange differences, lessprovision for impairment. A provision for impairment of trade receivables isestablished when there is objective evidence that the Group will not be able tocollect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtorwill enter bankruptcy or financial reorganisation, and default or delinquency inpayments are considered indicators that the trade receivable is impaired. Impaired account is principally determined in respect of specific debts whosecollection, in the opinion of the Company's management, is uncollectible. Theamount of the provision is recognised in the income statement within'administrative and general expenses'. Subsequent recoveries of amountspreviously written off are credited against administrative and general costs inthe income statement. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): L. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks and other short-term highly liquid investments with original maturities ofthree months or less. m. Deferred income tax Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. However,the deferred income tax is not accounted for, if it arises from initialrecognition of an asset or liability in a transaction other than a businesscombination that at the time of the transaction affects neither the accountingnor taxable profit. Upon distribution of dividends from tax-exempt income of "approved enterprises",the amount distributed will be subject to tax at the rate that would have beenapplicable had the company not been exempted from payment thereof. The amount ofthe related tax is charged as an expense in the income statements. Deferred income tax is determined using tax rates (and laws) that have beenenacted or substantially enacted by the balance sheet date and are expected toapply when the related deferred income tax asset is realised or the deferredincome tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable thatfuture taxable profit will be available against which the temporary differencescan be utilised. Deferred income tax on temporary differences arising on investments insubsidiaries and in the event the distribution of earnings by investees asdividends are not provided, since the Group controls the timing of the reversalof the temporary difference and it is probable that the temporary differencewill not reverse in the foreseeable future. Deferred income tax assets and deferred income tax liabilities are offset onlyif they relate to the same taxable entity and that entity has a legallyenforceable right to offset those assets against the liabilities. n. Employee benefits: 1. Severance pay obligations Labour laws and agreements in Israel and abroad require companies in the Groupto pay a certain multiple of monthly pay as severance benefits to employees whoare dismissed, resign or retire from their employment. The severance payobligation is accounted for as a defined benefit plan. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): The liability recognised in the balance sheet in respect of severance pay is thepresent value of the defined benefit obligation at the balance sheet date,together with adjustments for unrecognised actuarial gains or losses. Theobligation is measured annually by independent actuaries using the projectedunit credit method. The present value of the obligation is determined bydiscounting the estimated future cash outflows using interest rates ofgovernment bonds that are denominated in the currency in which the benefits willbe paid, and that have terms to maturity approximating to the terms of therelated severance pay obligations. The Group purchases insurance policies and contributes to severance pay funds tomanage its exposure to the severance pay obligation. The rights to reimbursementunder insurance policies are recognised as severance pay assets when it isvirtually certain that the insurance company will reimburse some or all of theexpenditure required to settle the severance pay obligation. The severance payassets from severance pay funds are stated at fair value through the incomestatements. 2) Vacation and recreation pay Under Israeli law, each employee is entitled to vacation days and recreationpay, both computed on an annual basis. The entitlement is based on the length ofthe employment period. The Group recognises a liability and an expense forvacation and recreation pay, based on the entitlement of each employee. 3) Profit-sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit sharingbased on a formula that takes into consideration the profit attributable to theCompany's shareholders after certain adjustments. The Group recognises aprovision where contractually obliged or where there is a past practice that hascreated a constructive obligation. 4) Share-based payment transactions Employees (including senior executives) of the Group receive remuneration in theform of share-based payment transactions, whereby employees render services asconsideration for equity instruments (equity-settled transactions). The cost of equity-settled transactions is measured by reference to the fairvalue at the grant date using an option-pricing model. The cost of equity-settled transactions is recognized, together with acorresponding increase in equity, over the vesting period. The cumulativeexpense, recognized at each reporting date until the vesting date, reflects theextent to which the vesting period has expired and the Company's best estimateof the number of equity instruments that will ultimately vest. No expense isrecognized for amounts that do not ultimately vest. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): o. Revenue recognition policy Revenue comprises the fair value of the consideration received or receivable forthe sale of goods in the ordinary course of the Group's activities. Revenue isshown, net of value-added tax, returns, rebates and discounts and aftereliminating sales within the Group. Revenue is recognised as follows: 1. Sales of goods Sales of goods are recognised when a group entity has delivered products to thecustomer and there is no unfulfilled obligation that could affect the customer'sacceptance of the products. Delivery does not occur until the risks ofobsolescence and loss have been transferred to the customer, and either thecustomer has accepted the products in accordance with the sales contract, theacceptance provisions have lapsed, or the Group has objective evidence that allcriteria for acceptance have been satisfied. 2. Contract work performed When the outcome of a contract cannot be estimated reliably, contract revenue isrecognised only to the extent of contract costs incurred that are likely to berecoverable. When the outcome of a construction contract can be estimatedreliably and it is probable that the contract will be profitable, contractrevenue is recognised over the period of the contract. When it is probable thattotal contract costs will exceed total contract revenue, the expected loss isrecognised as an expense immediately. p. Leases Leases in which a significant portion of the risks and rewards of ownership areretained by the lessor are classified as operating leases. Payments made underoperating leases are charged to the income statement on a straight-line basisover the period of the lease. q. Share capital Ordinary shares are classified as equity. Incremental costs directlyattributable to the issue of new shares or options are shown in equity as adeduction, net of tax, from the proceeds. r. Dividend distribution Dividend distribution to the company's shareholders is recognised as a liabilityin the Group's financial statements in the period in which the dividends areapproved by the Company's shareholders. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): s. Trade payables Trade payables are recognised initially at fair value and subsequently measuredat amortised cost using the effective interest method. t. Basic and diluted earnings per share (a) Basic Basic earnings per share is calculated by dividing the profit attributable toequity holders of the Company by the weighted average number of the issued andoutstanding ordinary shares during the year with the addition of issuable sharesresulting from the employee share purchase plans. (b) Diluted Diluted earnings per share is calculated by adjusting the weighted averagenumber of ordinary shares issued and outstanding to assume conversion of alldilutive potential ordinary shares, being employee share options under the 2005plan. For employee share options, a calculation is made of the number of sharesthat could have been acquired at fair value based on the monetary value of thesubscription rights attached to outstanding share options. The number of sharescalculated as above is compared with the number of shares that would have beenissued assuming the exercise of the share options. u. Government grants Royalty-bearing grants from the Government of Israel for funding approvedresearch projects and for participation in export marketing expenses arerecognised at the time the Company is entitled to such grants. Such grants arerecorded as a liability when repayment is probable. Non-royalty-bearing grants from the Government of Israel for purchases of fixedassets, in accordance with the Law for the Encouragement of Capital Investments,1959 were deducted from the respective purchased assets. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): •. Exchange rates and linkage basis Monetary assets and liabilities, denominated in currencies other then U.S.dollar, are translated using exchange rates in effect at balance sheet date. Monetary assets and liabilities linked to the Israeli consumer price index("CPI") are presented according to the relevant index for each linked asset orliability. Below are Data regarding the exchange rates of certain currencies in relation tothe U.S. dollar and data regarding the CPI: Exchange rate Exchange rate Exchange rate CPI* of one Euro of one of one NIS Australian Dollar At end of year: 2006 0.759 1.265 0.237 109.90 2005 0.845 1.363 0.217 110.00 2004 0.733 1.283 0.232 107.44Increase (decrease)during the year: 2006 (10.18%) (7.19%) 9.22% (0.01%) 2005 15.28% 6.24% (6.47%) 2.38% * Based on the index for the month ending on each balance sheet date, on the basis of 2000 average = 100. w. Derivatives financial instruments Derivatives are initially recognized at fair value on the date a derivativecontract is entered into. The derivative instruments do not qualify for hedgeaccounting and are accounted for at fair value through profit or loss. Changesin the fair value of these derivative instruments that do not qualify for hedgeaccounting are recognized immediately in the income statement within financecosts - net. AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 18 - EARNINGS PER SHARE: Data regarding the earning per share: Year ended 31 December 2006 2005 $ in thousands Weighted average number of Ordinary sharesoutstanding (in thousands) Basic:Number of shares in the beginning of the period 18,873 5,743Effect of split and bonus shares - 8,084Effect of issuance of shares in IPO - 420Number of shares used for calculation of earningsper share -basic 18,873 14,247 Diluted:Number of shares used for calculation of earningsper share -basic 18,873 14,247Adjustments for share options 309 -Number of shares used for calculation of earningsper share -diluted 19,182 14,247 Net income attributable to equity holders of the parent 2,875 2,943Less - interest on perpetual debenture - (81) 2,875 2,862 Basic earnings per share (in U.S. dollars) 0.152 0.200Diluted earnings per share (in U.S. dollars) 0.150 0.200 AMIAD FILTRATION SYSTEMS LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 19 - CASH FLOWS FROM OPERATING ACTIVITIES: Year ended 31 December 2006 2005 $ in thousandsProfit for the year from continuing operations 2,991 2,911 (a) Adjustments to reconcile net income to net cashUsed in operating activities:Depreciation 941 980Interest paid 633 823Income taxes paid 1,833 1,643Share based payment 143 64Deferred income taxes, net (184) 107Accrued severance pay, net 76 (72)Exchange rate differences on liabilities tobanks and other long-term liabilities 69 61Gain from marketable securities (12) -Loss on sale of fixed assets and others 14 66Exchange rate differences on loans to relatedparty and others (48) 22 6,456 6,605Changes in working capital:Increase in accounts receivable:Trade (2,261) (3,068)Other (187) (59)Increase (Decrease) in accounts payable:Trade 1,802 (392)Other 131 (1,096)Decrease (increase) in inventories (2,136) 167 (2,651) (4,448)Cash generated from operations 3,805 2,157 (b) Acquisition of company included according tothe proportionate consolidation methodWorking capital (excluding cash and cashequivalents) (321)Intangible assets (42)Fixed assets, net (229)Long-term receivables 75Cash out flow (517) (c) proceeds from the sale of a subsidiaryWorking capital (excluding cash and cashequivalents) (476)Fixed assets, net 526Cash in flow 50 (d) Increase in cash resulting from transition to fullconsolidation of a company previously included according tothe proportionate consolidation methodWorking capital (excluding cash and cash equivalents) 121Fixed assets, net (113)Cash in flow 8Non-cash transaction - grant receivablesregarding the purchase of Fixed assets 64 81 This information is provided by RNS The company news service from the London Stock Exchange