AFS.L Regulatory News (AFS)

26 Mar 2008 07:01

Amiad Filtration Systems Ltd26 March 2008 26 March 2008 Amiad Filtration Systems Ltd. ("Amiad" or "the Company") Results for the year ended 31 December 2007 Amiad, a producer and global supplier of water filters and filtration systems for the industrial & municipal and the irrigation markets, is pleased to announce its full year results to 31 December 2007. Financial Highlights• Turnover rose 29% to US$57.0m (2006: US$44.1m)• Operating income of US$6.3m (2006: US$4.6m)• Profit before tax of US$5.9m (2006: US$3.7m)• Net Profit of US$4.8m (2006: US$3.0m)• Cash from operations amounted to US$6.3m (2006: US$3.9m)• Gross margin reduced to 47.4% (2006: 49.9%) as a result of weak US Dollar and higher raw material prices• Basic and fully diluted earnings per share of 24.1 US cents (2006: 15.0 US cents per share)• Final dividend for 2007 of 4.8 US cents per share (final dividend 2006: 4.47 US cents per share), making a total dividend for the year of 7.8 US cents per share (2006: 6.855 US cents per share) Operational Highlights• Sales growth in all main territories• Revenues for Europe increased by approximately 50% year-on-year primarily led by increased penetration into Eastern Europe and Russia• Sales in North America and Australia increased by approximately 30% and 40%, respectively• New range of automatic microfiber filters continued to gain traction and increased its contribution to group sales• Increased demand for products in the irrigation segment due to climate change initiatives and investment in bio-fuel energy• Entered first quarter 2008 with a robust order book• Margins continue to be impacted by the weak US Dollar and higher raw materials prices Commenting on the results, Rami Treger, Chief Executive of Amiad, said: "TheCompany has entered 2008 with a backlog substantially higher than it did at thecorresponding time in 2007. The Company plans to continue increasing its salesand marketing efforts globally and believes that global investment in waterfiltration and treatment systems will continue to grow, driven by the tighteningin environmental and public health standards, as well as rising demand for cleanwater. We believe that Amiad is well positioned to benefit from these trends andto continue to deliver shareholder value." Enquiries: Amiad Filtration Systems Ltd. Rami Treger, Chief Executive Officer +44 20 7977 0020 on the day and Itamar Eder, Chief Financial Officer +972 4 690 9500 thereafter Corfin Communications Harry Chathli, Neil Thapar, Clare Perks + 44 20 7977 0020 Operational Review The Board of Amiad is pleased to report a year of good growth, ahead of marketexpectations. Revenues for the full year increased by 29% to US$57.0m, comparedto US$44.1m in 2006, reflecting Amiad's increasing penetration of the waterfiltration market globally. Amiad is a producer and global supplier of water filters and filtration systemsfor the industrial & municipal and irrigation markets. The market for Amiad'sproducts continued to expand during 2007 and, accordingly, the Company increasedits sales and marketing efforts globally. With greater global investments inwater infrastructure, the Company benefited from increased investment in themunicipality area (waste water, desalination and potable water) due to stricterrestrictions and regulations being introduced worldwide, as well as solid growthin the irrigation segment. The Company saw growth in all of its main territories, particularly in Europe,Australia and North America, as well as East Asia, including China. Amiad nowsells its products in over 70 countries across the Americas, Africa, Europe,Asia and Australasia through a network of distributors and its own subsidiaries. In Europe, there was a 50% growth in sales of Amiad's filters compared to 2006,primarily due to continued penetration into Eastern Europe and Russia. For theCity of Ramenskoe, the Company was involved in a project to remove iron fromwater to produce potable water for the city. This led to three more substantialprojects in Russia. In the industrial sector, it also received orders for thefirst time in Kazakhstan and Ukraine to provide filtered water for use in thesteel industry. Earlier in the year, Amiad entered into a contract with Bulmers,the UK cider producing company, to install water filters at their productionfacility. In North America, Amiad had sales growth of approximately 30%. In the secondhalf of 2007, it won a substantial specialist project for the provision of cleanwater for liquid gas storage. The Company installed filtration system forsurface water for irrigation in the Bonita Bay area and an industrialapplication for river water use in the cooling process of a power generatingstation in Oklahoma. Its technology was also employed to produce potable waterat a central hospital in Virginia when the city water supply contaminants causeddifficulties with the hospital water systems, contributing to an increasedfrequency in replacing cartridge filters and maintenance calls. Sales into East Asia grew by approximately 5% in 2007 year-on-year. However, inthe second half of 2007, the Company achieved growth of approximately 25%compared with the second half of 2006 and growth of approximately 35% comparedwith the first half of 2007, led by the supply of filters to the oil and gasindustry. In Australia, the Company saw growth in water treatment for membraneactivity. The Company saw growth in all its product lines, including in its new range ofmicrofiber filters primarily as a result of projects in Russia, Ireland andAustralia. Additionally, Amiad has seen a significant interest in its filtersfor the pre-filtration of membrane systems, including for desalination projects.One of these systems was used to convert sea water into potable water at theDavis Research Station in Antarctica. Also, the Irrigation segment saw good growth in 2007 in all the main territoriesas Amiad's products were used to counteract natural events such as droughts aswell as increased planting of crops such as corn, sugarcane and soya beans inresponse to the growing demand for alternative fuel sources. Financial Review In 2007, the Company increased its revenues by 29% to US$57.0m (2006: US$44.1m), profit before tax was US$5.9m (2006: US$3.7m) and net profit was US$4.8m (2006: US$3.0m). In 2007, basic and fully diluted earnings per share were 24.1 US cents per share (2006: 15.0 US cents per share). In 2007, the gross margin was 47.4% (2006: 49.9%). As previously stated, thecontinued rise in raw material costs and the increasing weakness of the USDollar are putting pressures on margins and profits. In 2007, operating income was US$6.3m (2006: $4.6m) reflecting also theincreased investment in sales and marketing. Net cash and cash equivalents balance as of 31 December 2007 amounted to US$6.2m (2006: US$ 6.1m). Cash from operations for the full year improved to $6.3m, compared with US$3.9m in 2006. Management In July 2007, it was announced that Rami Treger would succeed Yosef Katz as CEO and, since his appointment, Rami has successfully integrated into the Company. Dividend The Directors are recommending a final dividend for 2007 of 4.8 US cents per share (final dividend for 2006: 4.47 US cents per share) with an ex-dividend date of 23 April 2008, a record date of 25 April 2008 and a payment date of 23 May 2008. This is in addition to the interim dividend of 3.0 US cents (2006: 2.385 US cents per share), making a total dividend for the year of 7.8 US cents per share (2006: 6.855 US cents per share). Outlook Looking ahead, the Company has entered 2008 with a backlog substantially higherthan it did at the corresponding time in 2007. The Company plans to continueincreasing its sales and marketing efforts globally and believes that globalinvestment in water filtration and treatment systems will continue to grow,driven by the tightening in environmental and public health standards, as wellas rising demand for clean water. Although, margins continue to be impacted bythe weak US Dollar and higher raw materials prices, the Company's managementbelieves that Amiad is well positioned to benefit from these trends and tocontinue to deliver shareholder value. CONSOLIDATED BALANCE SHEETS 31 December 2007 2006 $ in thousands Assets CURRENT ASSETS:Cash and cash equivalents 4,060 4,217Financial assets at fair value throughprofit or loss 2,112 1,869Accounts receivable and accruals:Trade 17,858 16,871Other 1,126 1,009Inventories 15,955 10,470Current income tax assets 1,695 431Total current assets 42,806 34,867 NON-CURRENT ASSETS:Loan to a related party 703 685Severance pay fund 196Long-term receivables 158 105Property and equipment 3,051 * 2,617Intangible assets 3,815 * 2,759Deferred income tax assets 1,409 1,225Total non-current assets 9,332 7,391Total assets 52,138 42,258 *Reclassified 31 December 2007 2006 $ in thousands Liabilities and equity CURRENT LIABILITIES:Short-term credit and borrowings from bank 8,674 7,532Accounts payable and accruals:Trade 12,028 7,862Other 5,313 3,111Current income tax liability 398 488Total current liabilities 26,413 18,993 NON-CURRENT LIABILITIES:Borrowings from banks and others(net of current maturities) 2,202 2,786Severance pay obligations - *37Deferred income tax liabilities 477 542Total non-current liabilities 2,679 3,365Total liabilities 29,092 22,358 EQUITY Capital and reserves attributable toequity holders of the Company: Share capital 2,291 2,291Capital reserves 12,797 12,797Currency translation reserve 360 164Retained earnings 7,559 4,303 23,007 19,555MINORITY INTEREST 39 345 Total equity 23,046 19,900Total liabilities and equity 52,138 42,258 *Reclassified CONSOLIDATED INCOME STATEMENTS Year ended 31 December 2007 2006 $ in thousands except per share data Revenue 56,955 44,076Cost of sales 29,986 22,097Gross profit 26,969 21,979Selling and marketing costs 13,844 11,455Administrative and general expenses 6,451 *5,581Amortization of intangible assets 372 * 348Other losses- net 4Operating profit 6,302 4,591Finance income 610 357Finance costs (1,009) (1,221)Finance cost- net 399 864 Profit before income taxes 5,903 3,727Income tax expenses 1,139 736 Profit for the year 4,764 2,991 Attributable to: Equity holders of the Company 4,582 2,875Minority interest 182 116 4,764 2,991 *Reclassified $Earnings per share attributable to theequityholders of the Company during the year(See note 21):Basic 0.243 0.152Diluted 0.241 0.150 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Attributable to equity holders of the Company Currency Number Share Capital Translation of shares capital reserve reserve $ in thousandsBALANCE AT 1 JANUARY 2006 18,872,723 2,291 12,797 123 CHANGES DURING THE YEARENDED 31 DECEMBER 2006:Currency translation differences - - - 41Profit for the year - - - -Total recognised profit for 2006 - - - 41Dividend ($0.1 per share) - - - -Dividend to minority - - - -Share-based payment - Value of employee services - - -BALANCE AT 31 DECEMBER 2006 18,872,723 2,291 12,797 164CHANGES DURING THE YEARENDED 31 DECEMBER 2007:Currency translation differences - - - 196Profit for the year - - -Total recognised profit for 2007 - - - 196Dividend ($ 0.07 per share) - - -Purchase of treasury stocks by a - - - -subsidiary,see note 16b(4)bShare-based payment - Value of employee services - - - -BALANCE AT 31 DECEMBER 2007 18,872,723 2,291 12,797 360 Retained Total Minority Total earnings interest equity $ in thousandsBALANCE AT 1 JANUARY 2006 3,190 18,401 265 18,666 CHANGES DURING THE YEARENDED 31 DECEMBER 2006:Currency translation differences - 41 - 41Profit for the year 2,875 2,875 116 2,991Total recognised profit for 2006 2,875 2,916 116 3,032Dividend ($0.1 per share) (1,905) (1,905) - (1,905)Dividend to minority - - (36) (36)Share-based payment - Value of 143 143 - 143employee servicesBALANCE AT 31 DECEMBER 2006 4,303 19,555 345 19,900CHANGES DURING THE YEARENDED 31 DECEMBER 2007:Currency translation differences 196 196Profit for the year 4,582 4,582 182 4,764Total recognised profit for 2007 4,582 4,778 182 4,960Dividend ($ 0.07 per share) (1,410) (1,410) (1,410)Purchase of treasury stocks by a - - (488) (488)subsidiary,see note 16b(4)bShare-based payment - Value of employee services 84 84 - 84BALANCE AT 31 DECEMBER 2007 7,559 23,007 39 23,046 AMIAD FILTRATION SYSTEMS LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended 31 December Note 2007 2006 $ in thousandsCASH FLOWS FROM OPERATING ACTIVITIES:Cash generated from operations 22 6,312 *3,884Interest paid (722) (633)Income taxes paid (2,029) (1,833)Net cash generated from operating activities 3,561 1,418 CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment (1,254) *(794)Purchase of intangible assets (599) *(489)Investment grants received 169 79Investment in financial assets at fair valuethrough profit or loss, net (50) (1,853)Proceeds from sale of property and equipment 154 62Long-term loan granted to a related party and others (53) (328)Collection of long-term loan granted to a related 47 85Net cash used in investing activities (1,586) (3,238) CASH FLOWS FROM FINANCING ACTIVITIES:Dividends paid to minority interests (36)Dividends paid to equity holders of the Company (1,410) (1,905)Receipt of long-term borrowings and other liabilities 1,316 1,075 Purchase of treasury stocks by a subsidiary 16b (1,317)Repayments of long term borrowings (2,126) (1,872)Short-term borrowings from banks, net 1,354 1,092Net cash used in financing activities (2,183) (1,646) EXCHANGE GAIN (LOSSES) ON CASH AND CASHEQUIVALENTS 51 (9)NET DECREASE IN CASH AND CASH EQUIVALENTS (157) (3,475)CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,217 7,692CASH AND CASH EQUIVALENTS AT END OF YEAR 4,060 4,217 *Reclassified NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL INFORMATION: a. Amiad Filtration Systems Ltd. (hereafter -the Company) and its subsidiaries(together- the Group) is a producer and global supplier of water filters andfiltration systems used in the industrial & municipal market and the irrigationmarket. b. The Company was incorporated in Israel in June 1997. The address of itsregistered office is Kibbutz Amiad, Israel.The Company is traded on the Alternative Investment Market in London (AIM), apart of the London Stock Exchange since December 2005.The principal shareholders of the Company are Kibbutz Amiad ("the Kibbutz"),directly and through a Company controlled by the Kibbutz, A.M.S.I. InvestmentsLtd. ("AMSI") which owns 53.85% of the Company's outstanding shares, and theAtoka Group which owns 23.06% of the Company's outstanding shares. c. On 30 June, 1998, the Company entered into an agreement ("thepurchase agreement") with the Kibbutz and with the limited partnership, AmiadFiltration Systems ("the Partnership") in which the Kibbutz is the generalpartner whereby all of the Partnership's business activities, assets, includinggoodwill and intellectual property, but excluding property rights (lease rightsand/or ownership to land and buildings) were transferred to the Company ineffect as from 1 January, 1998 ("the transfer date"). All of the Partnership'sliabilities were also transferred to the Company as of the transfer date, exceptfor 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. 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 through 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 financial assets and financialliabilities at fair value through profit and loss.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. The areas involving a higher degree of judgement or complexity, orareas where assumptions and estimates are significant to the consolidatedfinancial statements, are disclosed in note 3. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): 1.Standards and interpretations effective in 2007: • IFRS 7, 'Financial instruments: Disclosures', and the complementary amendment to IAS 1, 'Presentation of financial statements - Capital disclosures', introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Group's financial instruments, or the disclosures relating to taxation and trade and other payables. • IFRIC 8, 'Scope of IFRS 2', requires consideration of transactions involving the issuance of equity instruments, where the identifiable consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. This standard does not have any impact on the Group's financial statements. • IFRIC 10, 'Interim financial reporting and impairment', prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Group's financial statements. 2.Standards and interpretations effective in 2007 but not relevant The following standards and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2007 but they are not relevant to the Group's operations:• IFRS 4, 'Insurance contracts'; • IFRIC 7, 'Applying the restatement approach under IAS 29, Financial reporting in hyper-inflationary economies'; and • IFRIC 9, 'Re-assessment of embedded derivatives'. 3.Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group The following standards, amendments and interpretations to existing standardshave been published and are mandatory for the Group's accounting periodsbeginning on or after 1 January 2008 or later periods, but the Group has notearly adopted them: • IFRIC 11, 'IFRS 2 - Group and treasury share transactions' (effective from 1 January 2008). IFRIC 11 provides guidance on whether share-based transactions involving treasury shares or involving Group entities (for example, options over a parent's shares) should be accounted for as equity-settled or cash settled share-based payment transactions in the stand-alone accounts of the parent and Group companies. This interpretation is not expected to have an impact on the Group's financial statement. • IAS 23 (Amendment), 'Borrowing costs' (effective from 1 January 2009). It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will beremoved. The Group will apply IAS 23 (Amended) from 1 January 2009 but is currently not applicable to the Group as there are no qualifying assets. • IFRS 8, 'Operating segments ' (effective from 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, 'Disclosures about segments of an enterprise and related information'. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from 1 January 2009. The standard is not expected to impact the segment reporting of the Company. • IAS 1 (Revised) Presentation of Financial Statements (effective 1 January 2009). IAS 1 ( Revised) replaces IAS 1(Amended 2005), it sets overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. IAS 1 (Revised) requires that all owner changes in equity should be presented in the statement of changes in equity, separately from non-owner changes in equity it also changed the titles of the financial statements. • IFRS 3 (Revised) Business Combinations (effective 1 January 2010). IFRS 3 (Revised) replaces IFRS 3. IFRS 3 (Revised) establishes principles and requirements for how an acquirer: (a) recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; (b) recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. • IAS 27 (Amendment) - Consolidated and Separate Financial Statements (effective 1 January 2010). The amendments to the Standard relate, primarily, to accounting fornon-controlling interests and the loss of control of a subsidiary.The most significant changes of IFRS 3 (Revised) and IAS 27 (Amended) are: - IFRS 3 (Revised) applies also to business combinations involving only mutual entities and to business combinations achieved by contract alone; - The definition of a business has been amended; - Transaction costs incurred by the acquirer in connection with the business combination do not form part of the business combination transaction; - Acquisitions of additional non-controlling equity interests after the business combination are accounted for as equity transactions; - Disposals of equity interests while retaining control are accounted for as equity transactions; • IFRIC 14, 'IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction' (effective from 1 January 2008). • IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Group will apply IFRIC 14 from 1 January 2008, but it is not expected to have any impact on the Group's accounts. • IFRIC 13, 'Customer loyalty programmes' (effective from 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The Group will apply IFRIC 13 from 1 July 2008, but it is not expected to have any impact on the Group's accounts. • IAS 32 (Amendment) 'Financial instruments presentation' and IAS 1 (Amendment) 'Presentation of financial statements' (effective from 1 January 2009). These refer particularly to the distinction between equity and debt in accounting for Company capital to which cancellation rights are attached (puttable financial instruments). Puttable financial instruments previously had to be classified as a liability, whereas in the future such cancellable instruments are to be classified as a equity in certain circumstances. The amendments are to be applied for the first time for annual periods beginning on or after 1 January 2009. The Group is currently evaluating the impact these amendments may have on the Group's accounts. 4.Interpretations to existing standard that are not yet effective and not relevant for the Group's operations The following interpretation to an existing standard that has been published andare mandatory for the Group's accounting periods beginning on or after 1 January2008 but are not relevant for the Group's operations-IFRIC 12, 'Service concession arrangements' (effective from 1 January 2008).IFRIC 12 applies to contractual arrangements whereby a private sector operatorparticipates in the development, financing, operation and maintenance ofinfrastructure for public sector services. IFRIC 12 is not relevant to theGroup's operations. b.Foreign currency translation: 1.Functional and presentation 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 consolidated financialstatements are presented in U.S. dollar, which is the Company's functional andpresentation currency. 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. 2. 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 (none of which hasthe currency of hyperinflationary economy) that have a functional currencydifferent from the presentation currency are translated into the presentationcurrency as follows: a) Assets and liabilities for each balance sheet presented are translated at the closing rate at that balance sheet date; b) Income and expenses for each income statement are translated at average exchange rates; and c) All resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the netinvestment in foreign operations, are taken to equity.When foreign operations is partially disposed or sold, exchange differences thatwere recorded in equity are recognised in the income statement as part of gainon loss or sale. Goodwill and fair value adjustments arising on acquisition of foreign entity aretreated as assets and liabilities of foreign entity and translated at theclosing rate. c. Principles of consolidation (1) SubsidiariesSubsidiaries 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 thevoting rights. Subsidiaries are fully consolidated from thedate on which control is transferred to the Group. They are de-consolidated fromthe date that control ceases. The purchase method of accounting is used to account for the acquisition ofsubsidiaries by the Group. The cost of an acquisition is measured as the fairvalue of the assets given, equity instruments issued and liabilities incurred orassumed at the date of exchange, plus costs directly attributable to theacquisition. Identifiable assets acquired and liabilities and contingentliabilities assumed in a business combination are measured initially at theirfair values at the acquisition date, irrespective of the extent of any minorityinterest. The excess of the cost of acquisition over the fair value of theGroup's share of the identifiable net assets acquired is recorded as goodwill.If the cost of acquisition is less than the fair value of the net assets of thesubsidiary acquired, the difference is recognised directly in the incomestatement. Inter-Company transactions, balances and unrealized gains on transactionsbetween Group companies are eliminated. Unrealized losses are also eliminatedbut considered an impairment indicator of the asset transferred. Accountingpolicies of subsidiaries have been changed where necessary to ensure consistencywith the policies adopted by the Group. (2) Transactions and minority interestsThe Group applies a policy of treating transactions with minority interests astransactions with parties external to the Group. Disposals to minority interestsresult in gains and losses for the Group that are recorded in the incomestatement. Purchases from minority interests result in goodwill, being thedifference between any consideration paid and the relevant share acquired of thecarrying value of net assets of the subsidiary. d. Proportionately consolidated companies There is a contractual agreements for joint control of the Company YixingTaixing Environtec Co.Ltd (hereafter- Yixing Taixing), held 50%, with the otherventurers. Accordingly, it is accounted for by the proportionate consolidationmethod. Under this method, the Company combines its share of the assets,liabilities, revenues, and expenses of the jointly controlled entity withsimilar line items in the consolidated financial statements. e. Property and equipment: 1) All property and equipment (including leasehold improvements) are stated at historical cost, less accumulated depreciation, impairment and investment grants. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Repairs and maintenance are charged to the income statement during the period in which they are incurred.2) The assets are depreciated using the straight-line method over their estimated useful lives. Annual rates of depreciation are as follows: %Machinery and equipment 7 - 20Office furniture and equipment 7 - 20Computers and peripheral equipment 20 - 33Motor vehicles 15 - 20Leasehold 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(g)). 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,within other (losses) gain. f. Intangible assets 1) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiaryat the date of acquisition. Goodwill on acquisition of subsidiaries is includedin 'intangible assets'. Separately recognised goodwill is tested annually forimpairment and carried at cost less accumulated impairment losses. Impairmentlosses on goodwill are not reversed.Goodwill is allocated to cash-generating units that is not larger then anoperating segment for the purpose of impairment testing. The allocation is madeto those cash-generating units or Groups of cash-generating units that areexpected to benefit from the business combination in which the goodwill arose. 2) Customer relations and know-how Acquired customer relations and know-how are shown at historical cost. Customerrelations and know-how have finite useful life and are carried at cost lessaccumulated amortisation. Amortisation is calculated using the straight linemethod. (10 years). 3) Computer software and licences Acquired computer software and licences are capitalised on the basis of thecosts incurred to acquire and bring to use the specific software. These costsare amortised over their estimated useful lives (three to five years). g. Impairment of non-financial assets Assets that have an indefinite useful life for example goodwill are not subjectto amortisation and are tested annually for impairment.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).Non financial assets other than goodwill that suffered impairment are reviewedfor possible reversal of the impairment at each reporting date. h. 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. Net realizable value is the estimated selling price in the ordinary course ofbusiness less applicable variable selling expenses. i. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets heldfor trading. A financial asset is classified in this category if acquiredprincipally for the purpose of selling in the short-term. Assets in thiscategory are classified as current assets. Gains or losses arising from changes in the fair value of the 'financial assetsat fair value through profit or loss' category are presented in the incomestatement in the period in which they arise. j. Derivative financial instruments Foreign currencies derivatives are initially recognized at fair value on thedate a derivative contract is entered into and are subsequently accounted atfair value through profit or Loss. Changes in the fair value in any of thesederivative instruments are recognized immediately in the income statement within'finance income/loss'. k. Trade receivables Trade receivables are recognised initially at fair value and subsequentlymeasured at amortised cost less provision for impairment. A provision forimpairment of trade receivables is made when there is objective evidence thatthe Group will not be able to collect all amounts due according to the originalterms 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 (note 3(c)). The amount of the provision is recognised in the income statement within'administrative and general expenses'. When a trade receivable is uncollectibleit is written of against the allowance account for trade receivables. Subsequentrecoveries of amounts previously written off are credited against administrativeand general costs in the income statement. 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. Current and deferred income tax The current income tax charge is calculated on the basis of the tax laws enactedor substantively enacted at the balance sheet date in the countries where theGroup's subsidiaries operate and generate taxable income. Managementperiodically evaluates positions taken in tax returns with respect to situationsin which applicable tax regulation is subject to interpretation and establishesprovisions where appropriate on the basis of amounts expected to be paid to thetax authorities. 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. As stated in note 19(c), upon distribution of dividends from tax-exempt incomeof "approved enterprises", the amount distributed will be subject to tax at therate that would have been applicable had the Company not been exempted frompayment thereof. The amount of the related tax is charged as an expense in theincome 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 realized 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. 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 lessthe fair value of plan assets, together with adjustments for unrecognizedactuarial gains or losses. The obligation is measured annually by independentactuaries using the projected unit credit method. The present value of theobligation is determined by discounting the estimated future cash outflows usinginterest rates of government bonds that are denominated in the currency in whichthe benefits will be paid, and that have terms to maturity approximating to theterms of the related 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 recognizes a liability and an expense forvacation and recreation pay, based on the entitlement of each employee. 3) Profit-sharing and bonus plans The Group recognizes 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 recognizes aprovision where contractually obliged or where there is a past practice that hascreated a constructive obligation. 4) Share-based compensation 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 fair value of the employee services received in exchange for these grant ofthe share options is recognised as an expense. The total amount to be expensedover the vesting period is determined by reference to the fair value of theoptions granted excluding the impact of any non-market vesting conditions.Non-market vesting conditions are included in assumptions about the number ofoptions that are expected to vest. At each balance sheet date, the entityrevises its estimates of the number of options that are expected to vest. Itrecognises the impact of the revision of original estimates, if any, in theincome statements, and a corresponding adjustment to shareholders' equity overthe remaining vesting period. Cancellations or settlements are accounted for as an accelerations of vesting.As a result the Company recognises immediately the amount that otherwise wouldhave been recognised for services received over the remainder of the vestingperiod. The proceeds received, net of any direct costs, are credited to share capital(nominal value) and share premium when the options are exercised. Fair value of cash-settled awards is measured on the grant-date, and any portionof a periodic expense computed as above is recorded periodically and recognizedas a liability in the Group's balance sheet. The accumulated liability isremeasured at each balance sheet date, until the said liability is settled.Changes in the amount of the liability are carried to statements of income. o. Revenue recognition 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 Contract costs are recognized when incurred.When the outcome of a construction contract cannot be estimated reliably,contract revenue is recognized only to the extent of contract costs incurredthat are likely to be recoverable. When the outcome of a construction contract can be estimated reliably and it isprobable that the contract will be profitable, contract revenue is recognisedover the period of the contract. When it is probable that total contract costswill exceed total contract revenue, the expected loss is recognised as anexpense immediately. The Group uses the 'percentage-of-completion method' to determine theappropriate amount to recognise in a given period. The stage of completion ismeasured by reference to the contract costs incurred up to the balance sheetdate as a percentage of total estimated costs for each contract.The Group presents as an asset the gross amount due from customers for contractwork for all contracts in progress for which costs incurred plus recognisedprofits (less recognised losses) exceed progress billings. Progress billings notyet paid by customers and retention are included within 'trade and otherreceivables'. 3. Interest income Interest income is recognized on time proportion basis, using the effectiveinterest method. p. Operating lease 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. Borrowings Borrowings from banks and others are recognised initially at fair value, net oftransaction costs incurred, and subsequently stated at amortised cost. Anydifference between proceeds (net of transaction costs) and the redemption valueis recognised in the income statement over the period of the instrument, usingthe effective interest method. Borrowings are classified as current liabilitiesunless the Group has an unconditional right to defer settlement of the liabilityfor at least 12 month after the balance sheet date. r. 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. s. 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. t. Trade payables Trade payables are recognised initially at fair value and subsequently measuredat amortised cost using the effective interest method. u. 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 ordinary sharesin issue during the year. (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. v. 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. w. 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 Exchange rate Exchange rate of one of one rate of one CPI* Euro Australian NIS DollarAt end of year:2007 1.471 0.878 0.260 113.63 2006 1.317 0.790 0.237 109.90 2005 1.183 0.734 0.217 110.00 Increase(decrease)during the year: 2007 11.69% 11.14% 9.70% 3.39% 2006 11.33% 7.63% 9.22% (0.01%) * Based on the index for the month ending on each balancesheet date, on the basis of 2000 average = 100. NOTE 3 - CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances.The Group makes estimates and assumptions concerning the future. The resultingaccounting estimates will, by definition, seldom equal the related actualresults. The estimates and assumptions that have a significant risk of causing amaterial adjustment to the carrying amounts of assets and liabilities within thenext financial year are discussed below: a. Severance pay benefits The present value of the severance pay obligations depends on a number offactors that are determined on an actuarial basis using a number of assumptions.The assumptions used in determining the net cost (income) for severance payinclude the expected long-term rate of return on the relevant severance payassets and the discount rate. Any changes in these assumptions will impact thecarrying amount of severance pay assets and obligations. The expected return on the severance pay assets assumption is determined on auniform basis, taking into consideration long-term historical returns. The Group determines the appropriate discount rate at the end of each year. Thisinterest rate is to be used in determining the present value of estimated futurecash outflows expected to be required to settle the pension obligations. Themarkets in high-quality corporate bonds are not sufficiently liquid in order touse them in determining the discount rate. In determining the appropriatediscount rate, the Group considers the interest rates of government bonds thatare denominated in the currency in which the benefits will be paid, and thathave terms to maturity approximating the terms of the related pension liability. Other key assumptions for pension obligations such as future salary increasesare based on current rates of wage inflation. b. Income and deferred tax assets The Group is subject to income taxes in several jurisdictions. Significantjudgement is required in determining the worldwide provision for income taxes.There are many transactions and calculations for which the ultimate taxdetermination is uncertain during the ordinary course of business. The Grouprecognizes liabilities for anticipated tax audit issues based on estimates ofwhether additional taxes will be due. Where the final tax outcome of thesematters is different from the amounts that were initially recorded, suchdifferences will impact the income tax and deferred tax provisions in the periodin which such determination is made.The Group recognizes deferred tax assets and liabilities based on thedifferences between the financial statement carrying amounts and the tax basesof assets and liabilities. The Group regularly reviews its deferred tax assetsfor recoverability, based on historical taxable income, projected future taxableincome, the expected timing of the reversals of existing temporary differencesand the implementation of tax planning strategies. If the Group is unable togenerate sufficient future taxable income in certain tax jurisdictions, or ifthere is a material change in the actual effective tax rates or time periodwithin which the underlying temporary differences become taxable or deductible,the Group could be required to eliminate a portion of the deferred tax assets,resulting in an increase in its effective tax rate and an adverse impact onoperating results. c. Provision for impairment of receivables The Group follows the guidance of IAS 39 (revised 2004) on determining whether atrade receivable is impaired. This determination requires significant judgement.In making this judgement, the Group evaluates, among other factors, the ageinganalysis of the balances, historical bad debts, repayment patterns, thefinancial health and the near-term business outlook of the customer and industrytrends. d. Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, inaccordance with the accounting policy stated in Note 2(f)(1). e. Inventory Valuation Inventory, which is a material part of the Group's total assets, is valued atthe lower of cost and net realizable value. Raw materials and purchased productsare determined on the "first-in first-out" basis. Work in progress and finishedproducts determined on basis of average cost. If actual market prices forfinished products prove less favorable than those projected by management,inventory write-downs may be required. Inventory is written down for estimatedobsolescence based upon assumptions about future demand and market conditions.Likewise, favorable future demand and market conditions could positively impactfuture operating results in inventory that has been written down is sold. NOTE 16 - CONTINGENT LIABILITIES AND COMMITMENTS: a. Commitments: 1) Employee incentive plan- On 27 July 2007, the board of directors approved a bonus scheme (hereafter "theBonus Scheme"), which will be available to staff members and senior management,including three members of the board of directors. a. Senior Management - The Bonus Scheme will be in operation in relation tofinancial year ending 31 December 2007 which will pay a bonus to seniormanagement by reference to their monthly salary. The level of bonus payable willbe depended on the achievement of targets as set out in the Bonus Scheme. Themaximum total bonus liability for the Company is NIS 600,000(approx $ 156,000).Any bonus shall be paid following Board of directors approval of the 2007financial statement in March 2008. If any member of senior management is notemployed by the Company for the whole of the bonus Year or is not employed atthe bonus payment date, the payment of any bonus to that individual shall besubject to the absolute discretion of the Chairman and/or CEO of the Company. b. Staff members - a discretionary Bonus Scheme will be in operation in relationto the financial year ending 31 December 2007 which will provide a bonus poolfor staff members to recognize their contribution to the success of thebusiness. The level of bonus payable will be depended on the achievement oftargets as set out in the Bonus Scheme. The total amount of the bonus for thestaff will be calculated as a bonus pool, the amount in the pool depends on theachievement of the targets. The maximum bonus pool is NIS 900,000 (approx234,000$).A portion of the bonus pool may be paid to the Kibbutz subject to the formulathat is presented in the bonus scheme.The Company recorded a provision in the amount of 292 thousand $ in respect ofthis bonus plan. 2) The Group has lease agreements in respect of motor vehicles, which terminate between 2008 and 2010. The estimated annual lease payments are $ 340 thousand. 3) According to a lease agreement between the Company and the Kibbutz, the Company pays the Kibbutz $ 32.5 thousand per month for the rental of its offices and plant. The rent is reviewed every three years (see also Note 23c). On 1 January, 2007, the Company, entered an additional agreement with the Kibbutz, for the rent of an additional building. The lease payments for the additional building amount to $ 1.9 thousand per month. Certain subsidiaries have lease contracts for various periods with estimated monthly lease payments of $ 52 thousand. 4) The future aggregate minimum lease payments under non-cancellable operating lease agreements subsequent to the balance sheet date are as follows: 31 December 2007 2006 $ in thousands Not later than 1 year 1,301 1,059Later than 1 year and not later than 5 years 1,935 2,211Later than 5 years 1,136 1,460 4,372 4,730 Operating lease expenses for 2007 were $1,299 (2006: $1,101). 5) As for other agreements with the Kibbutz, see Note 23. b. Contingent liabilities: 1) According to the purchase agreement (see Note 1(c)), the Company agreed to indemnify the Partnership and the Kibbutz for any claim filed against them in connection with the transferred activity up to the date of transfer. This liability does not pertain to tax liabilities that may apply to the Kibbutz in respect of the Partnership's operation, including the transfer of its assets to the Company and in respect of payments claimed from the Kibbutz due to claims as to the existence of employee-employer relationships between the Company and the Kibbutz members employed by the Company. Further, the Company has undertaken to assume all of the liabilities inconnection with investment grants that the Partnership received from the Stateof Israel up to the date of transfer under the Law for the Encouragement ofCapital Investments, 1959.The receipt of grants by the Partnership, as above, and the receipt of othergrants by the Company, is conditional upon the fulfillment of the conditions ofthe letters of approval. In the event of failure to comply with the conditionsof the approval, the amount of the grants may be required to be refunded,including interest and linkage differences from the date of receipt. AsCollateral for the fulfillment of the conditions relating to the receipt ofinvestment grants, the Company recorded floating charges on all of its assets infavor of the State of Israel. The Company's management believes that as of thedate of the approval of the financial statements, the Company is meeting theconditions of the letters of approval. 2) The Group is contingently liable in respect of performance guarantees provided by banks to customers in the amount of 262$ thousand at 31 December, 2007 (556 $ thousand at 31 December 2006). 3) The Company and a subsidiary participate in programs sponsored by the Israeli Government for the support of research and development activities. The Company and its subsidiary obtained grants from the Office of the Chief Scientist in the Israeli Ministry of Industry, Trade and Labor ("the OCS") The Company and the subsidiary are obligated to pay royalties to the OCSamounting to 2% of the sales of the products and other related revenuesgenerated from such projects, up to an amount equal to 100% of grants received,linked to the exchange rate of the U.S. dollar. The Israeli Government awarded a subsidiary grants for participation in foreignmarketing expenses, for which the subsidiary is obligated to pay royalties atthe rate of 3% of the increase in export sales in relation to the base year, upto the amount of the grants received, linked to the U.S. dollar. As of 31 December, 2007, the Company and the subsidiary had recorded a liabilityfor grants received in the amount of $244 thousand. The Company and thesubsidiary have an outstanding contingent obligation to pay royalties in theamount of $451 thousand, in respect of projects for which there is a reasonableassurance that part or all of the grants received will not be repaid. TheCompany and the subsidiary will record this obligation as a liability if factsand circumstances would require the Company and the subsidiary to revise upwardstheir estimates of future sales. 4) a. In March 2006, a claim was filed in the supreme court of Victoria against the subsidiary in Australia, Amiad Australia PTY Ltd. (hereafter - the subsidiary) as well as 8 other defendants (together, the Parties) for damages allegedly caused by inducing certain people who were then employed by the claimant to breach their employment and other duties to the claimant, and otherwise interfered with their employment contracts. In May 2007, the claimant filed an Amended Statement of Claim which altered thenature of the claim and increased the quantum of the claim against thesubsidiary and the other defendant. On March 6 2008 a settlement agreement was signed between the claimant and theparties. According to the settlement agreement Plastro Irrigation Systems Ltd.(hereafter- Plastro, one of the defendants) will pay, or cause its subsidiary inAustralia, Plastro Asia Pacific Pty Ltd, to pay a final amount of AUD $2,000,000 plus GSP to the claimant. Based on its agreement with Plastro, as of February 26 2008, the Company willpay Plastro AUD$ 100,000, as participation in the settlement agreement. The Company included in its accounts a provision in this respect. b. In August 2007, Amiad USA, Inc (hereafter "Amiad USA") received a draftcomplaint from counsel for Yitzhak Orlans, the former President and director ofAmiad USA, Inc (here after "Orlans"). The draft complaint alleges agediscrimination, disability discrimination, employment discrimination, wrongfultermination and further alleges various other violations of the California LaborCode and the California Business & Professions Code in connection with thetermination of Mr. Orlans employment with Amiad USA, Inc. The draft complaintindicates that Mr. Orlans is seeking damages in excess of USD$2,625,000 as wellas unspecified amounts of non-economic damages, punitive damages and attorneys'fees and costs. In November 2007 Amiad USA and Orlans signed a settlement agreement. Accordingto the settlement agreement, the parties agree that: Amiad USA shall pay Orlans an amount of $80,000 less all applicableemployment-related withholding taxes and deductions as a payment of a lump-sumretirement package. In addition, Amiad USA shall redeem Orlans shares in Amiad USA for an aggregateprice of $1,317,000. As a result of the purchase of the shares from Orlans by Amiad USA the Companyholds the entire outstanting share capital of Amiad USA and it recorded adecrease in minority interest in the amount of $488 thousand and additionalgoodwill in the amount of $ 829 thousand. NOTE 17 - SHAREHOLDERS' EQUITY: a. Composed of ordinary shares of NIS 0.5 par value, as follows: Number of shares 31 December 2007 2006 Authorized 20,000,000 20,000,000Issued and fully paid * 18,872,723 18,872,723 * The shares are quoted on the London Stock Exchange Alternative Market (AIM),as of 31 December, 2007 at GBP 2 per ordinary share of NIS 0.5 par value. b. Share options: 1) On 12 August 2005, the Company granted to three senior employees, thechairman of the board of directors and to the Kibbutz options to purchase386,682, 154,674 and 77,336 Ordinary Shares, respectively. The options to thesenior employees were granted in the framework of the Company's option plan thatwas submitted to the Israeli Tax Authorities, in accordance with the provisionsof Section 102 to the Israeli Income Tax Ordinance and the remaining optionswere granted under the provisions of section 3(i) of the Income Tax Ordinance.Under section 102, the grantee's income will be taxed at a reduced tax rate of25% and the Company will not be allowed to deduct the corresponding expense fortax purposes with the exception of the work-income benefit component, if any,determined on the grant date.The options vest over a period of four years (except in the case of the CEOwhere the period is three years) and have an exercise price of $ 1.53 per share.The options will be held during the vesting period by a trustee and will bereleased in accordance with the terms of the option plan. Unexercised optionsexpire 10 years after date of grant. The weighted average fair value of the options as at the grant date is $0.49 pershare, and was estimated using a binomial option pricing model based on thefollowing significant data and assumptions: Share price - $1.53; exercise price- $ 1.53, expected volatility - 38.4%; risk-free interest rate - 4.4%, expected dividends - 0% and expected average life of options 4 years.The volatility measured at the standard deviation of expected share price returns is based on the historical volatility of similar listed entities. 2) On 19 April 2007, following a request made by the Company, the senioremployees and the chairman of the board of directors gave written notice to theCompany of their waiver, with immediate effect, of 21,874 and 8,751 optionsrespectively granted to them by the Company.At the same time, the Company received written notice from Kibbutz Amiad of itswaiver, with immediate effect, of its right to options granted to it by theCompany over 77,336 ordinary shares.As a result of the cancellation of such options, the Company recognized anamount of $50 thousand, in respect of options not yet vested. 3) On 19 April 2007, the board of directors resolved to grant options over72,961 ordinary shares under the 2005 options plan to a director of the Company,at an exercise price of $ 1.53 per ordinary share (being the same price as theexercise price for the options previously granted to the Kibbutz and all otheroption holders), such options vest over a period of two years and one month.Unexercised options expire eight years and one month after date of grant. Theactual grant date of the above option was 26 Jun 2007 following the approval ofthe grant at the Company's annual general meeting on such date. The weighted average fair value of the options at the grant date is $1.19 pershare, and was estimated using a binomial option pricing model based on thefollowing significant data and assumptions: Share price - $2.5; exercise price -$ 1.53, expected volatility - 39 %; risk-free interest rate - 4.6%, expecteddividends - 1.3% and an expected life of options eight years and one month.The volatility measured at the standard deviation of expected share pricereturns is based on the historical volatility of the Company. 4) In 2007 the CEO of the Company resigned and terminated his employment withthe Company. As a result 54,722 options, with vesting period of 11 August 2008,were forfeited. 5) On 5 July, 2007 the Company entered into an employment agreement with a newCEO in respect of his employment as of 1 august 2007. On 5 July, 2007 the Company granted to the new CEO, under 2005 option plan,options to purchase 54,722 ordinary shares of the Company at an exercise priceof GBP 1.355 (2.74$) per ordinary share, such option vest over a period of threeyears and 11 months. Unexercised options expire tan years after date of grant. The weighted average fair value of the options as at the grant date is $1.06 pershare, and was estimated using a binomial option pricing model based on thefollowing significant data and assumptions: Share price - $2.73; exercise price- $ 2.74, expected volatility - 39.79%; risk-free interest rate - 4.44%,expected dividends - 1.38% and expected average life of options 6 years.The volatility measured at the standard deviation of expected share pricereturns is based on the historical volatility of the .As to phantom bonus granted to the new CEO see note 18. 6) The expense recognized in respect of equity grants in the 12-month periodended 31 December 2007 is $ 84 thousand (in the year ended in 31 December 2006 $143 thousand). Movements in the number of potential shares to be issued under outstandingaverage exercise prices in respect to equity grants are as follows: 2007 2006 Exercise Number Exercise Number of price per of potential price per potential share shares share Shares At 1 January $ 1.532 618,692 $ 1.532 618,692 Granted $ 2.05 127,683 - Forfeited* $ 1.532 (162,683) -At 31 December 583,692 618,692 As of 31 December 2007, out of the 583,693 outstanding potential shares to beissued, 188,783 options (2006- 116,006) are exercisable. Below are the number of outstanding potential shares to be issued in respect toequity grants, having the following expiry dates and exercise prices as of 31December 2007 and 2006. *Including sum of 107,961 potential shares that had been wavered. Expiry date Exercise Number of potential shares price 2007 2006 11 August 2015: $ 1.532 528,970 618,6925 September 2017: $ 2.74 54,722 583,692 618,692 e. The Company's board of Directors has adopted a dividend policy, pursuant towhich the Company, subject to future performance and funding requirements, willdistribute annual dividends of up to 50% of the net income in the calendar year. On 4 May, and 1 November 2006, the Company distributed dividends to itsshareholders in the amount of NIS 6,553 thousand, NIS 1,967 thousand,respectively (total $ 1,905 thousand).On 17 May, 2007 and 22 October, 2007 the company distributed dividends to itsshareholders in the amount of NIS 3,337 thousand, NIS 2,275 (total $1,410thousand) NOTE 18 - PHANTOM BONUS: On 5 July 2007, the Company entered into an employment agreement with a new CEOin respect of his employment as of 1 August 2007. Pursuant to the terms of theagreement the CEO is entitled to receive a cash phantom bonus which will becalculated based of the changes in the average price of the Company's ordinaryshare for the 2 years period ended in August 2009. The bonus will be paid onAugust 2009, provided that the CEO is employed by the Company at the such date. The fair value of the phantom bonus as of 31 December 2007 is $110 thousand, andwas estimated using a Monte Carlo option pricing model based on the followingsignificant data and assumptions: Share price - $1.987; exercise price - $ 0,expected volatility - 39.79%; risk-free interest rate - 4.44%, and expectedaverage life of options 1.59 years. The volatility measured at the standard deviation of expected share pricereturns is based on the historical volatility of the Company. The expense recognized in respect of the phantom bonus in the 12-month periodended 31 December 2007 is $23 thousand. The Company recorded a respectiveliability in the amount of $23 thousand. NOTE 21 - EARNINGS PER SHARE: Data regarding the earning per share: Year ended 31 December 2007 2006 $ in thousandsWeighted average number of Ordinarysharesoutstanding (in thousands)Basic:Number of shares in the beginning of the period 18,873 18,873Number of shares used for calculation of earningsper share -basic 18,873 18,873Diluted:Number of shares used for calculation of earningsper share -basic 18,873 18,873Adjustments for share options 151 309Number of shares used for calculation of earningsper share -diluted 19,024 19,182Net income attributable to equity holders of the parent 4,582 2,875Basic earnings per share (in U.S.dollars) 0.243 0.152Diluted earnings per share (in U.S.dollars) 0.241 0.150 NOTE 22 - CASH FLOWS FROM OPERATING ACTIVITIES: Year ended 31 December 2007 2006 $ in thousands Profit for the year 4,764 2,991(a) Adjustments to reconcile net income to net cashused in operating activities:Depreciation, and impairment amortization 1,017 941Interest paid 722 633Income taxes paid 2,029 1,833Share based payment 84 143Deferred income taxes, net (249) (184)Accrued severance pay, net (233) 76Exchange rate differences on borrowings 12 69Gain from marketable securities (193) (12)Loss (gain) on sale of fixed assets (3) 14Exchange rate differences on loans to relatedparty and others (70) (48) 7,880 6,456 Changes in working capital:Increase in accounts receivable:Trade (607) (2,261)Other (1,476) *(108)Increase in accounts payable:Trade 3,684 1,802Other 2,059 131Increase in inventories (5,228) (2,136) (1,568) (2,572)Cash generated from operations 6,312 3,884Non-cash transaction - grant receivablesregarding the purchase of Fixed assets (55) 139 *Reclassified This information is provided by RNS The company news service from the London Stock Exchange